A

Summer Training Report

On

“A STUDY ON WORKING CAPITAL MANAGEMENT IN

POLYPLASTIC”

AT

In partial fulfilment of the requirement for the degree

Master of Business Administration(Session 2018-2020)

Submitted To: Submitted By:

KurukshetraUniversity Shivani
Kurukshetra MBA 3rd.Semester
Univ. RollNo:18017255

SETH JAI PARKASH MUKAND LAL INSTITUTE OF

ENGINEERING & TECHNOLOGY, RADAUR (YAMUNANAGAR)

( Approved by AICTE ,Affiliated to Kurukshetra University ,Kurukshetra)

 Declaration

I, SHIVANI , Roll no. 201848, MBA (Semester 3rd) Students Of The Seth Jai Parkash
Mukand Lal Institute Of Engineering And Technology, Here By Declared that the research
project entitled “A STUDY ON WORKING CAPITAL MANAGEMENT IN
POLYPLASTIC” prepared by me and submitted in The partial fulfilment For The
Requirement Of Degree Of Master Of Business Administration From Kurukshetra
University. This is work done by me and the information provided in study is authentic to
the best of any knowledge. This study has not been submitted to any other instruction or
university for the awards of any other degree.

(SHIVANI)
ACKNOWLEDGMENT

The researcher would like to take this opportunity to express her gratitude to all those great
minds and heart that have touched this project in the path of its success .

The researcher is grateful to management to polyplastic pvt. Ltd Yamuna nagar allowing
her to undergo training in their company providing in their all sort of facilities and all a
learning experience .

The researcher would also like to express her thanks to Dr. Vandana Head department of
management Seth Jai Parkash Mukand Lal Institute of Engineering and Technology
(JMIT) Radaur ,Yamuna nagar for granting permission the research .

The researcher would also be like to express her thanks to Mrs. Anjali grover Assistant
Professor .Department of management , JMIT Radaur , Yamuna nagar for providing
guidance and support in completion of the project . I would like to thank for her valuable
help and crucial role throughput the course.
 PREFACE

In order to achieve positive and concrete result with theoretical concept the exposure to real
life situations existing in corporate world is very much needed. In today’s scenario the
practical knowledge in education especially in professional course is very essential. final
project in MBA course and study content of such s practical knowledge it makes the student
confidential and introduce them about their ability. I have done my final project on topic “A
STUDY ON WORKING CAPITAL MANAGEMENT IN POLYPLASTIC
 TABLE OF CONTENTS

Sr.no Topics Page no

Chapter 1 1.1 Introduction to industry
1.2 Introduction to company
1.3 Introduction to topic
Chapter 2 Literature review

Chapter 3 Research methodology

3.1 Objective of study
3.2 Data collection
3.3 Scope of study
3.4 Significance of study
Chapter 4 Data analysis &
interpretation
Chapter 5 5.1 Findings
5.2 Suggestions
5.3 Limitations of study
5.4 Conclusion
5.5 Bibliography
Chapter 6 Appendix
 List Of Tables

Table No. Table Name Page No.

4.1 Table of Net working capital

4.2 Table of Inventory analysis

4.3 Table of Current assets analysis

4.4 Table of Current liabilities analysis

4.5 Table of Working capital ratio

4.6 Table of Quick ratio

4.7 Table of Current ratio

4.8 Table of Current assets and fixed assets

ratio
4.9 Table of Debt to equity ratio

4.10 Table of Inventory turnover ratio

 List Of Figures

Figure No. Figures Name Page No.

4.1 Figure of Net working capital

4.2 Figure of Inventory analysis

4.3 Figure of Current assets analysis

4.4 Figure of Current liabilities analysis

4.5 Figure of Working capital ratio

4.6 Figure of Quick ratio

4.7 Figure of Current ratio

4.8 Figure of Current assets and fixed assets

ratio
4.9 Figure of Debt to equity ratio

4.10 Figure of Inventory turnover ratio

 CHAPTER-1
INTRODUCTION
 1.3 INTRODUCTION TO TOPIC

INTRODUCTION OF WORKING CAPITAL

The success of the industry largely depends on the effective and efficient management of
finance. The finance manager should have foresight, so that they may prepare the
organisation to face the coming events. The finance manager examines the strength and
weakness of the organisation and appraises the new situation to meet it he works out a
strategy. This strategy makes demands on their business strength in terms of the resources
that are its command where men, material and money.

Working Capital refers to the funds required in the business to carry on its day to day
operating activities e.g. funds required for purchase of raw materials/ stocks, payment of
wages and other day- to-day expenses. Working capital, thus, refers to the amount invested
in current assets like inventory, sundry debtors, cash/bank balances, prepaid expenses etc.
Less the credit facilities availed from the creditors/ suppliers etc. In short, we can say that
working capital is the excess of current assets over the current liabilities.

18
TYPES OF WORKING CAPITAL
On the Basis of Concept

- Gross Working Capital

Gross working capital refers to the total amount invested in current assets.

- Net Working Capital

Net working capital refers to the difference current assets and current liabilities.

Net Working Capital = Current assets - Current liabilities

On the Basis of Time

-Fixed Working Capital

Fixed working capital refers to the minimum level of current assets that is continuously
required by the firm to carry out its normal business operations.

- Variable Working Capital

Variable working capital refers to the extra working capital required over and above the
fixed working capital to meet the seasonal demands.
Nature of working capital

Working capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and t the current liabilities and the inter-
relationship that exists between them. The term current refers to those assets which in the
ordinary course of business can be, or will be converted into cash within one year without
undergoing a diminution in value and without disrupting the operation of the firm. The
major current assets are cash, marketable securities, accounts receivables and inventory.
Current liabilities are those liabilities, which are intended at their inception, to be paid in the
ordinary course of business, within a year out of the current or the earning of the concern.
The basic current liabilities are accounts payable, bills payable, bank overdrafts and
outstanding expense. The goal of working management is to manage the firm’s assets and
liabilities in such a way that a satisfactory level of working capital is maintained. This is
because if the firms cannot maintain a satisfactory level of working capital, it is likely to
become insolvent and may even be forced into bankruptcy. The current assets should be
large enough to cover its current liabilities in order to ensure a reasonable margin of safety.
Each of the short-term sources of financing must be continuously managed to ensure that
they are obtained and used in the way. Interaction between current liabilities is, therefore the
main theme of the management of working capital.
Importance of working capital

1. Smooth running of business

2. Profitability with manage risk

3. Growth and development possibility

4. Smooth payment

5. Increase in goodwill

6. Trade relationship better

7. Others
Excess or inadequate working capital

Every business concern should have adequate amount of working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate nor
shortages of working capital. Both excess as well as short working capital positions are bad
for any business. However, it is the inadequate working capital which is more dangerous
from the point of view of the firm.
Disadvantages of redundant or excessive working capital

1. Excessive working capital means ideal funds which earn no profit for the firm and
business cannot earn the required rate of return on its investments.

2. Redundant working capital leads to unnecessary purchasing and accumulation of

inventories.

3. Excessive working capital implies excessive debtors and defective credit policy which
causes higher incidence of bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations with banks and other
financial institution may not be maintained.

6. Due to lower rate of return on investments, the values of shares may also fall.

7. The redundant working capital gives rise to speculative transactions

Disadvantages of inadequate working capital

Every business needs some amounts of working capital. The need for working capital arises
due to the time gap between production and realization of cash from sales. There is an
operating cycle involved in sales and realization of cash. There are time gaps in purchase of
raw material and production; production and sales; and realization of cash.

Thus, working capital is needed for the following purposes:

• For the purpose of raw material, components and spares.

• To pay wages and salaries

• To incur day-to-day expenses and overload costs such as office expenses.

• To meet the selling costs as packing, advertising, etc.

• To provide credit facilities to the customer.

• To maintain the inventories of the raw material, work-in-progress, stores and spares
and finished stock.

For studying the need of working capital in a business, one has to study the business under
varying circumstances such as a new concern requires a lot of funds to meet its initial
requirements such as promotion and formation etc. These expenses are called preliminary
expenses and are capitalized. The amount needed for working capital depends upon the size
of the company and ambitions of its promoters. Greater the size of the business unit,
generally larger will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and expensing of
the business till it gains maturity. At maturity the amount of working capital required is
called normal working capital.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1. Nature of the business

Working capital requirement of the firm depends upon the nature of its business. A trading
concern, for e.g., needs a very small investment in fixed assets but requires a large sum of
money invested in current assets, particularly in stock in trade.

2. Scale of operations

Working capital requirement of the firm is closely related to the scale of its operations.
Higher the scale of operations, higher will be the need of working capital.

3. Seasonal variations

Seasonal variations also affect the working capital requirements. Taking an example of Air
Conditioners- its demand reaches a peak during the summer months and drops sharply
during the winter period.

4. Production cycle

The term `production cycle' refers to the time span required for conversion of raw materials
into finished goods. The longer the time span, the larger will be the need of working capital
and vice-versa.

5.credit policy of the firm

Higher the credit sales or higher the credit period allowed by the firm to its customers,
higher will be the book debts and consequently higher will be the need of working capital.

6.Competition

When the competition is tough, the larger inventory of finished goods is essential to serve
the customers without delay, otherwise the customers will move to the other manufacturers.
Further liberal credit terms are usually offered to attract the customers in a highly
competitive market.

7. Business cycles
The term 'business cycle' refers to the ups and downs of an economy. In the period of
economic boom, the sales of products will increase and hence the firm's investment in
inventories will also increase and vice-versa.

8. Operating efficiency

It relates to optimum utilisation of available resources. Management can ensure the effective
utilisation of resources by eliminating the waste etc. This will increase the firm's efficiency
which in turn will reduce the funds required to be blocked into working capital.

9. Price level changes

Changes in the price level also affect the working capital requirements. Generally, the rising
prices will require the firm to maintain larger amount of working capital as more funds will
be required to maintain the same current assets.

10.Availability of raw material

If the raw material is easily available in the market If the raw material is easily available in
the market, the firm can manage with small inventory however, if the availability is
irregular, then the firm, in order to ensure uninterrupted flow of production, would have to
accumulate stocks as and when required. Carrying larger inventory will require a large
amount of working capital.

11.Other factors:

 Operating efficiency.
 Management ability.
 Irregularities of supply.
 Import policy.
 Asset structure.
 Importance of labour.
 Banking facilities, etc
 Management of working capital

Management of working capital is concerned with the problem that arises in attempting to
manage the current assets, current liabilities. The basic goal of working capital management
is to manage the current assets and current liabilities of a firm in such a way that a
satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as
both the situations are bad for any firm. There should be no shortage of funds and also no
working capital should be ideal.

Working capital management of a firm has a great on its probability, liquidity and structural
health of the organization. So, working capital management is three dimensional in nature as

 It concerned with the formulation of policies with regard to profitability, liquidity and risk.
 It is concerned with the decision about the composition and level of current assets.
 It is concerned with the decision about the composition and level of current liabilities.
The working capital cycles

The working capital cycle refers to the minimum amount of time which is required to
convert net current assets and net current liabilities into cash. From a more simplistic
viewpoint, working capital cycle is the amount of time between the payment for goods
supplied and the final receipt of cash accumulated from the sale of the same goods. There
are mainly the following elements of which the working capital cycle is comprised of:
Cash
The cash refers to the funds available for the purchase of goods. Maintaining a healthy level
of liquidity with some buffer is always a best practice. It is extremely important to maintain
a reserve fund which can be utilized when:
There is a shortage of cash inflow for some reason. In the absence of reserve cash, the day to
day business will get hampered.
Some new opportunity springs up. In such a case, the absence of reserve cash will pose a
hindrance.
In case of any contingency, absence of a reserve fund can cripple the company and poses a
threat to the solvency of the firm.
Creditors and Debtors
The creditors refer to the accounts payable. It refers to the amount that has to be paid to
suppliers for the purchase of goods and /or services.
Debtors refer to the account’s receivables. It refers to the amount that is collected for
providing goods and/or services.
Inventory
Inventory refers to the stock in hand. Inventories are an integral component of working
capital and careful planning, and proper investment is necessary to maintain the inventory in
a healthy state of affairs. Management of inventory has two aspects and involves a trade-off
between cost and risk factors. Maintaining a sizable inventory has its accompanying costs
that include locking of funds, increased maintenance and documentation cost and increased
cost of storage. Apart from these things, there is also a chance of damage to the stored
goods. On the other hand, maintaining a small inventory can disrupt the business lifecycle
and can have serious impacts on the delivery schedule. As a result, it is extremely important
to maintain the inventory at optimum levels which can be arrived at after careful analysis
and a bit of experimentation
Properties of healthy working Capital

It is essential for the business to maintain a healthy working capital cycle. The following
points are necessary for the smooth functioning of the working capital cycle:

Sourcing of raw material:

Sourcing of raw material is the beginning point for most businesses. It should be ensured
that the raw materials that are necessary for producing the desired goods are available at all
times. In a healthy working capital cycle, production ideally should never stop because of
the shortage of raw materials.

Production planning:
Production planning is another important aspect that needs to be addressed. It should be
ensured that all the conditions that are necessary for the production to start are met. A
carefully constructed plan needs to be present in order to mitigate the risks and avert
unforeseen issues. Proper planning of production is essential for the production of goods or
services and is one of the basic principles that must be followed to achieve smooth
functioning of the entire production lifecycle.

Selling:
Selling the produced goods as soon as possible is another objective that should be pursued
with utmost urgency. Once the goods are produced and are moved into the inventory, the
focus should be on selling the goods as soon as possible.
Pay-outs and collections:
The accounts receivables need to be collected on time in order to maintain the flow of cash.
It is also extremely important to ensure timely pay-outs to the creditors to ensure smooth
functioning of the business

Liquidity:
Maintaining the liquidity along with some room for adjustments is another important aspect
that needs to be kept in mind for the smooth functioning of the working capital cycle.
 APPROACHES TO WORKING CAPITAL MANAGEMENT

The short-term interest rates are, in most cases, cheaper compared to their long-term
counterparts. This is due to the amount of premium which is higher for short term loans. As
a result, financing the working capital from long-term sources means more cost. However,
the risk factor is higher in case of short-term finances. In case of short-term sources,
fluctuations in refinancing rates are a major cause for concern, and they pose a major threat
to business.
There are mainly three strategies that can be employed in order to manage the working
capital. Each of these strategies takes into consideration the risk and profitability factor and
has its share of pros and cons. The three strategies are:

The Conservative Approach

As the name suggests, the conservative strategy involves low risk and low profitability. In
this strategy, apart from the permanent working capital, the variable working capital is also
financed from the long-term sources. This means an increased cost capital. However, it also
means that the risks of interest rate fluctuations are significantly lower.

The Aggressive Approach

The main goal of this strategy is to maximize profits while taking higher risks. In this
approach, the entire variable working capital, some parts or the entire permanent working
capital and sometimes the fixed assets are funded from short-term sources. This results in
significantly higher risks. The cost capital is significantly decreased in this approach that
maximizes the profit.

The Moderate or the Hedging Approach

This approach involves moderate risks along with moderate profitability. In this approach,
the fixed assets and the permanent working capital are financed from long-term sources
whereas the variable working capital is sourced from the short-terms sources.
 Significance of adequate working capital

 Maintenance of adequate working capital is extremely important because of the following

factors

 Adequate working capital ensures sufficient liquidity that ensures the solvency of the
organisation.

 Working capital ensured prompt and on-time payments to the creditors of the organisation
that helps to build trust and reputation.

 Lenders base their decisions for approving loans based on the credit history of the
organisation. A good credit history can not only help an organisation to get fast approvals
but also can result in reduced interest rates.

 Earning of profits is not a sufficient guarantee that the company can pay dividends in cash.
Adequate working capital ensures that dividends are regularly paid.

 A firm maintaining adequate working capital can afford to buy raw materials and other
accessories as and when needed. This ensures an uninterrupted flow of production.
Adequate working capital, therefore, contributes to the fuller utilization of resources of the
enterprise
 Methods for estimating the working capital requirement

 There are broadly three methods of estimating or analysing the requirement of working
capital of a company viz. percentage of revenue or sales, regression analysis, and operating
cycle method. Estimating working capital means calculating future working capital. It
should be as accurate as possible because the planning of working capital would be based on
these estimates and bank and other financial institutes finance the working capital needs to
be based on such estimates only.
 Methods of Estimating / Analysing Working Capital Are as Follows

1. Percentage of sales method

 Percentage of sales method is a working capital forecasting method which is based on past
relationship between sales and working capital. Just like technical analysis in the stock
market, it assumes that the history will repeat itself and thus the ratio of working capital to
sales will remain constant. In other words, it assumes that the whole business will move in
tandem with sales.
 Percentage of sales method is the simplest and easiest way of finding future working capital.
First, each component of working capital as a percentage of sales is calculated. Like,
accounts payable are 20 million, and sales are 100 million, accounts payable as a percentage
of sales would be 20%. Secondly, the coming year sales forecast is taken as a base and the
component is calculated as per the percentage. In our instant example, if forecasted sales are
150 million, accounts payable should be 30 million.

2. REGRESSION ANALYSIS METHOD

This statistical estimation tool is utilized by mass for various types of estimation. It tries to
establish trend relationship. We will use it for working capital estimation. This method
expresses the relationship between revenue & working capital in the form of an equation
(Working Capital = Intercept + Slope * Revenue). The slope is the rate of change of
working capital with one-unit change in revenue. Intercept is the point where regression line
and working capital axis meets (Will not go deeper into statistical details). At the end of the
statistical exercise with past revenue and working capital data, we will get an equation like
below:
 Working Capital = -6.34 + 0.46 * Revenue
 To calculate working capital, just put the targeted revenue figure in the above equation, say
200 million dollars.
 Working Capital = -6.34 + 0.46 * 200 = -6.34 + 92 = 85.66 ~ 86 Million Dollar.
 Therefore, we need 86 million dollars of working capital to achieve revenue of 200 million
dollars

3. Operating cycle method

 This is probably the best of the methods because it takes into account the actual business or
industry situation into consideration while giving an estimate of working capital. A general
rule can be stated in this method. Longer the working capital operating cycle, higher would
be the requirement of working capital and vice versa. We would agree to the point also. The
following formula can be used to estimate or calculate the working capital
 Working Capital = Cost of Goods Sold (Estimated) * (No. of Days of Operating Cycle / 365
Days) + Bank and Cash Balance.
 Cash management

Cash is the important current asset for the operations of the business. Cash is the basic input
needed to keep the business running on a continuous basis It is also the ultimate output
expected to be realized by selling the service or product manufactured by the firm. The firm
should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firm’s
operations while excessive cash will simply remain idle, without contributing anything
towards the firm’s profitability. Thus, a major function of the Financial Manager is to
maintain a sound cash position. Cash is the money which a firm can disburse immediately
without any restriction. The term cash includes currency and cheques held by the firm and
balances in its bank accounts. Sometimes near cash items, such as marketable securities or
bank time deposits are also included in cash.

The basic characteristics of near cash assets are that they can readily be converted into cash.
Cash management is concerned with managing of:

i) Cash flows in and out of the firm

ii) ii) Cash flows within the firm
iii) iii) Cash balances held by the firm at a point of time by financing deficit or inverting
surplus cash.
Sales generate cash which has to be disbursed out. The surplus cash has to be invested
while deficit cash has to be borrowed. Cash management seeks to accomplish this cycle at a
minimum cost. At the same time, it also seeks to achieve liquidity and control. Therefore,
the aim of Cash Management is to maintain adequate control over cash position to keep firm
sufficiently liquid and to use excess cash in some profitable way.

The Cash Management is also important because it is difficult to predict cash flows
accurately. Particularly the inflows and that there is no perfect coincidence between the
inflows and outflows of the cash. During some periods cash outflows will exceed cash
inflows because payments for taxes, dividends or seasonal inventory build-up etc. On the
other hand, cash inflows will be more than cash payment because there may be large cash
sales and more debtors’ realization at any point of time. Cash Management is also important
because cash constitutes the smallest portion of the 24 current assets, yet management’s
considerable time is devoted in managing it. An obvious aim of the firm now-a-days is to
manage its cash affairs in such a way as to keep cash balance at a minimum level and to
invest the surplus cash funds in profitable opportunities. In order to resolve the uncertainty
about cash flow prediction and lack of synchronization between cash receipts and payments,
the firm should develop appropriate strategies regarding the following four facets of cash
management.

1.Cash Planning
Cash inflows and cash outflows should be planned to project cash surplus or deficit for each
period of the planning period. Cash budget should prepare for this purpose.
2.Managing the cash flows

The flow of cash should be properly managed. The cash inflows should be accelerated
while, as far as possible decelerating the cash outflows.

3. Optimum cash level

The firm should decide about the appropriate level of cash balances. The cost of excess cash
and danger of cash deficiency should be matched to determine the optimum level of cash
balances.

4. Investing surplus cash

The surplus cash balance should be properly invested to earn profits. The firm should
decide about the division of such cash balance between bank deposits, marketable securities
and inter corporate lending. The ideal Cash Management system will depend on the firm’s
products, organization structure, competition, culture and options available. The task is
complex and decision taken can affect important areas of the firm.
 Functions of Cash Management

Cash Management functions are intimately, interrelated and intertwined Linkage among
different Cash Management functions have led to the adoption of the following methods for
efficient Cash Management:

Use of techniques of cash mobilization to reduce operating requirement of cash.

 Major efforts to increase the precision and reliability of cash forecasting.

 Maximum effort to define and quantify the liquidity reserve needs of the firm.
 Development of explicit alternative sources of liquidity.
 Aggressive search for relatively more productive uses for surplus money assets.
The above approaches involve the following actions which a finance manager has to
perform.

1. To forecast cash inflows and outflows

2. To plan cash requirements

3. To determine the safety level for cash.

4. To monitor safety level for cash

5. To locate the needed funds

6. To regulate cash inflows

7. To regulate cash outflows

8. To determine criteria for investment of excess cash

9. To avail banking facilities and maintain good relations with bankers

Motives for holding cash

There are four primary motives for maintaining cash balances:

1. Transaction motive

2. Precautionary motive

3. Speculative motive

4. Compensating motive

The above approaches involve the following actions which a finance manager has to
perform.

1. To forecast cash inflows and outflows

2. To plan cash requirements

3. To determine the safety level for cash.

4. To monitor safety level for cash

5. To locate the needed funds

6. To regulate cash inflows

7. To regulate cash outflows

8. To determine criteria for investment of excess cash

9. To avail banking facilities and maintain good relations with bankers

1. Transaction motive:

- The transaction motive refers to the holding of cash to meet anticipated obligations whose
timing is not perfectly synchronized with cash receipts. If the receipts of cash and its
disbursements could exactly coincide in the normal course of operations, a firm would not
need cash for transaction purposes. Although a major part of transaction balances is held in
cash, a part may also be in such marketable securities whose maturity conforms to the
timing of the anticipated payments.

2. Precautionary motive
Precautionary motive of holding cash implies the need to hold cash to meet unpredictable
obligations and the cash balance held in reserve for such random and unforeseen
fluctuations in cash flows are called as precautionary balances. Thus, precautionary cash
balance serves to provide a cushion to meet unexpected contingencies. The unexpected cash
needs at short notice may be the result of various reasons as: unexpected

Slowdown in collection of accounts receivable, cancellations of some purchase orders, sharp

increase in cost of raw materials etc. The more unpredictable the cash flows, the larger the
need for such balances. Another factor which has a bearing on the level of precautionary
balances is the availability of short-term credit. Precautionary cash balances are usually held
in the form of marketable securities so that they earn a return.

3. Speculative motive

It refers to the desire of a firm to take advantage of opportunities which present them
unexpected movements and which are typically outside the normal course of business. The
speculative motive represents a positive and aggressive approach. Firms aim to exploit
profitable opportunities and keep cash in reserve to do so. The speculative motive helps

to take advantage of: In opportunity to purchase raw materials at a reduced price on payment
of immediate cash; a chance to speculate on interest rate movements by buying securities
when interest rates are expected to decline; delay purchases of raw materials on the
anticipation of decline in prices; etc.

4. Compensation motive

Yet another motive to hold cash balances is to compensate banks for providing certain
services and loans. Banks provide a variety of services to business firms, such as clearances
of cheques, supply of credit information, transfer of funds, etc. While for some of the
services banks charge a commission of fee for others, they seek indirect compensation.

Usually clients are required to maintain a minimum balance of cash at the bank. Since this
balance cannot be utilized by the firms for transaction purposes, the bank themselves can
use the

amount for services rendered. To be compensated for their services indirectly in the in this
form, they require the clients to always keep a bank balance sufficient to earn a return equal
to the cost of services. Such balances are compensating balances. Compensating balances
are also required by some loan agreements between a bank and its customer.

Cash management objectives

The Basic objective of cash management are twofold:

(a) to meet the cash disbursement needs (payment schedule); and (b) to minimize funds
committed to cash balances. These are conflicting and mutually contradictory and the task
of cash management is to reconcile them.

Meeting the payments schedule: -

A basic objective of the cash management is to meet the payment schedule, i.e. to have
sufficient cash to meet the cash disbursement needs of the firm. The importance of sufficient
cash to meet the payment schedule can hardly be over emphasized.

The advantages of adequate cash are:

(I) it prevents insolvency or bankruptcy arising out of the inability of the firm to meet its

obligations;

(ii) the relationship with the bank is not strained;

(iii) it helps in fostering good relations with trade creditors and suppliers of raw materials,

(iv) as prompt payment may also help their cash management;

(v) it leads to a strong credit rating which enables the firm to purchase goods on favourable
terms and to maintain its line of credit with banks and other sources of credit;

(vi) to take advantage of favourable business opportunities that may be available

periodically; and (vi) finally the firm can meet unanticipated cash expenditure with a
minimum of strain during emergencies, such as strikes, fires or a new marketing campaign
by competitors.

Minimizing funds committed to cash balances: -

The second objective of cash management is to minimize cash balances. In minimizing cash
balances two conflicting aspects have to be reconciled. A high level of cash balance will,
ensure prompt payment together with all the advantages, but it also implies that large funds
will remain idle ultimately results less to the expected. A low level of cash balances, on the
other hand, may mean failure to meet the payment schedule, that aim of cash management
should be to have anoptimal amount of cash balances.

Cash management techniques and process

The following are the basic cash management techniques and process which are helpful in
better cash management: -

Speedy cash collection

In managing cash efficiently, the cash inflow process can be accelerated through systematic
planning and refined techniques. These are two broad approaches to do this which are
narrated as under:

Prompt payment by customer

One way to ensure prompt payment by customer is prompt billing with clearly defined
credit policy. Another and more important technique to encourage prompt payment the by
customer is the practice of offering trade discount/cash discount.

Early conversion of payment into cash

Once the customer has made the payment by writing its cheques in favour of the firm, the
collection can be expedited by prompt

encashment of the cheque. It will be recalled that there is a lack between the time and

cheque is prepared and mailed by the customer and the time funds are included in the cash
reservoir of the firm.

Concentration Banking

In this system of decentralized collection of accounts receivable, large firms which have a
large no.of branches at different places, select some of these which are strategically located
as collection centres for receiving payment for customers. Instead of all the payments being
collected at the head office of the firm, the cheques for a certain geographical area are
collected at a specified local collection centre. Under this arrangement the customers are
required to send their payments at local collection centre covering the area in which they
live and these are deposited in the local account of concerned collection, after meeting local
expenses, if any. Funds beyond a predetermined minimum are transferred daily to a central
or disbursing or concentration bank or account. A concentration banking is one with which
the firm has a major account usually a disbursement account. Hence this arrangement is
referred to as concentration banking.

Lock-Box System

The concentration banking arrangement is instrumental in reducing the time involved in

mailing and collection. But with this system of collection of accounts receivable, processing
for purposes of internal accounting is involved i.e. sometime in elapses before a cheque is
deposited by the local collection centre in its account. The lock-box system takes care of this
kind of problem, apart from effecting economy in mailing and clearance times. Under this
arrangement, firms hire a post office box at important collection centres. The customers are
required to remit payments to lock-box. The local banks of the firm, at respective

places, are authorized to open the box and pick up the remittance received from the
customers. Usually the authorized banks pick up the cheques several time a day and deposit
them in the firm’s account. After crediting the account of the firm, the banks send a deposit
4epo slip along with the list of payments and other enclosures, if any, to the firm by way of
proof and record of the collection.

Slowing disbursements

A basic strategy of cash management is to delay payments as long as possible without

impairing the credit rating/standing of the firm. In fact, slow disbursement represents a
source of funds requiring no interest payments. There are several techniques to delay
payment of accounts payable namely

(1) avoidance of early payments;

(2) centralized disbursements;

(3) floats;

(4) accruals.

Avoidance of early payments

One way to delay payments is to avoid early payments. According to the terms of credit, a
firm is required to make a payment within a stipulated period. It entitles a firm to cash
discounts. If, however payments are delayed beyond the due date, the credit standing may
be adversely affected so that the firms would find it difficult to secure trade credit later. But
if the firm pays its

accounts payable before the due date it has no special advantage. Thus, a firm would be well
advised not to make payments early i.e. before the due date.

Centralized disbursements

Another method to slow down disbursements is to have centralized disbursements. All the
payments should be made by the head office from a centralized disbursement account. Such
an

arrangement would enable a firm to delay payments and conserve cash for several reasons.
Firstly, it involves increase in the transit time. The remittances from the head office to the
customers in distant places would involve more mailing time than a decentralized payment
by a local branch. The second reason for reduction in operating cash requirement is that
since the firm has a centralized bank account, a relatively smaller total cash balance will be
needed. In the case of a decentralized arrangement, a minimum cash balance will have to be
maintained at each branch which will add to a large operating cash balance. Finally,
schedules can be tightly controlled and disbursements made exactly on the right day.

Float
A very important technique of slow disbursements is float. The term float refers to amount
of money tied up in the cheques that have been written, but have yet to be collected and
enchased. Alternatively, float represents the difference between the bank balance and book
balance of cash of a firm. The difference between the balance as shown in the firm’s record
and the actual bank balance is due to transit and processing delays. There is time lag
between the issue of a cheque by the firm and its presentation to its bank by the customer’s
bank for payment. The implication is that although a cheque has been issued cash would be
required later when the cheque resented for encashment. Therefore, a firm can send
remittance although it does not have cash in its bank at the time of issuance of cheque.
Meanwhile, funds can be arranged to make payments when the cheque is presented for
collection after a few days. Float used in this sense is called cheque kitting.

Accruals
Finally, a potential tool for stretching accounts payable is accruals which are defined current
liabilities that represent a service or goods received by a firm but not yet paid for instance,
payroll, i.e. remuneration to employees, who render services in advance and receive
payment later. In a way they extend credit to the firm for a period at the end of which they
are paid, say, a week or month. The longer the period after which payment is made, the
greater the amount of free financing and the smaller the amount of cash balances required.
Thus, less frequent payrolls, i.e. monthly as compared to weekly, are important sources of
accruals. They can be manipulated to slow down disbursements.
 Sources of finance for working capital

The sources of finance for working capital may fall into four categories, namely

1) Bank Finance

2) Commercial Paper

3) Fixed Deposits

4) Inter Corporate Deposits.

The relative importance of these sources from country and from time to time depending on
the environment. In India, the primary sources for financing working capital are trade credit
and short-term bank credit. According to an estimate, both these sources together finance
about three fourth of the working capital requirements of the industry: The above points are
elaborated as below:

1) Bank Finance
It is the primary institutional source for working capital finance. To obtain short- term bank
credit, working capital requirements have to be estimated by the borrowers, and the banks
are approached with the necessary supporting data. The banks determine the maximum
credit based on the margin requirement of the security. The margin represents a percentage
of the value of the asset offered as security by the borrower. The margin is based on the
nature of goods and is laid down by the Reserve Bank of India. It is changed from time to
time to suit the requirements of the banker; the borrower draws funds periodically.

Forms of Bank Finance

Working capital advance is provided by the commercial banks in three primary ways:

i) Cash credits/overdrafts
ii) ii) Loans
iii) iii) Purchase/Discount of bills.
In addition to these forms of direct finance, commercial banks help their customers in
obtaining credit from other sources through the letter of credit agreement.

i) Cash credits/overdrafts
Under a cash credit or overdraft agreement, a predetermined limit for borrowing is specified
by the bank. The borrower can draw as often as required, provided the outstanding do not
 exceed the cash credit/overdraft limit. The borrower also enjoys the facility of repaying the
amount fully or partially, as and when he desires. Interest is charged only on the running
balance, and not on the limit sanctioned. A minimum charge may be payable, irrespective of
the level of borrowing, for availing this facility. This form of advance is highly attractive
from the borrower’s point of view because while the borrower has freedom drawing the
amount in instalments as and when required, interest is payable only on the amount actually
outstanding.
ii) Loans
These are advances of fixed amounts, which are credited to the current account of the
borrower or released to him in the form of cash. The borrower is charged with interest on
the entire loan amount, irrespective of how much he withdraws. In this respect this system
differs markedly from the overdraft or the cash credit arrangement wherein interest is
payable only on the amount actually utilized. Loans are supported by a demand promissory
note executed by the borrower. There is often a possibility of renewing the loan.
iii) Purchase/Discount of Bills
bill arises out of a trade transaction. The seller of goods draws the bill on the purchaser. The
bill may be either clean or documentary (a documentary bill is 42 supported by a document
of the title of goods like a railway receipt or a bill of lading) and may be payable on demand
or after absence period which does not exceed 90 days. On acceptance of the bill by the
purchaser, the seller offers it to the bank for discount/purchase. When the bank
discounts/purchases the bill, it releases the funds to the seller. The bank presents the bill to
the purchaser (the acceptor of the bill) on the due date and gets its payment. The Reserve
Bank of India launched the new market scheme in 1970 to encourage the use of bills as an
instrument of credit the objective was to reduce the reliance and the cash credit arrangement
because of its amenability to abuse. The new bill market scheme sought to promote an
active market for bills as a negotiable instrument so that the lending activities of a bank
could be share by other banks. It was envisaged that a bank, when short of funds, would sell
or rediscount the bill that it has purchased or discounted. Likewise, a bank, which has
surplus funds, would invest in bill. Obviously, for such a system to work there has to be a
lender of last resort which can come to the successor of the banking system as a whole. This
role naturally has been assumed by the Reserve Bank of India, which rediscounts the bills of
commercial banks up to a certain limit.
 Security
For working capital advances, commercial banks seek security either in the form of
hypothecation or in the form of pledge.

Hypothecation

Under this agreement the owner of the goods borrows money against the security of
movable property, usually inventories. The owner does not part with the possession of
property. The rights of the lender (hyphenate) depend on the agreement of the lender and the
borrower. Should the borrower default in paying his dues, the lender can file a suit to realize
his dues by sale of the goods hypothecated.

Pledge

In a pledge agreement, the owner of the goods (pledge) deposits the goods with the lender
(pledge) as security for the borrowing. Transfer of possession of goods is a precondition for
pledge. The lender is expected to take reasonable care of goods pledged with him. The
pledge contract gives the lender the right to sell the goods and recover dues, should the
borrower default in paying debt.

2) commercial paper

Commercial paper represents short-term unsecured promissory notes issued by firms, which
enjoy a fairly high credit rating. Generally, large firms with considerable financial strength
are able to issue commercial paper. The important features of commercial paper are as
follows:

 The maturity period of commercial paper mostly ranges from 90 to 150 days.
 Commercial paper is sold at a discount from its face value and redeemed at its face value.
Hence the implicit interest rate is a function of the size of the discount and the period of
maturity.
1. Fixed deposit/public deposit
Many firms, large and small, have solicited unsecured deposits from the public in the recent
years, mainly to finance their working capital requirements. Evaluation Company’s Point of
View — Public deposits offer the following advantages to the company: The procedure for
obtaining public deposits is fairly simple. No restrictive covenants are involved. No
security is offered against public deposits. Hence the mortgage able assets of the firm are
conserved. The post-tax cost is fairly reasonable. The demerits of public deposit are: The
 quantum of funds that can be raised by way of public deposits is limited. The maturity
period is relatively short. Investor’s Point of View — Investors find the following
advantages in public deposit: The rate of interest is higher than several alternative forms of
financial investment. The maturity period is fairly short i.e., one to three years. The
negative features are as follows: There is no security offered by the company. ¾ the interest
on public deposits is not exempt from taxation.

4) inter- corporate deposits

A deposit made by one company with another, normally for a period up to six months, is
referred to as an inter-corporate deposit. Such deposits are usually of three types. They are
as follows:

Call deposits

In theory, a call deposit is withdrawn able by the lender on giving a day notice. In practice,
however, the lender has to wait for at least three days. The interest rate on such deposits
may be around 14 per cent per annum. Three-months Deposits More popular in practice,
these deposits are taken by borrowers to tide over a short-term cash inadequacy that may be
caused by one or more of the following factors: disruption in production, excessive import
of raw material, tax payment, delay in collection, dividend payment and unplanned capital
expenditure. The interest rate on such deposits is around 16 per cent per annum. Six-months
Deposits Normally, lending companies do not extend deposits beyond this time frame. Such
deposits, usually made with first class borrowers, carry an interest rate of around 18 per cent
per annum. Non-fund-based facilities Credit facilities, which do not involve actual
deployment of funds by the banks, but help the obligates to obtain certain facilities from
third parties, are termed as non-fund-based facilities. These facilities include:

 Letter of credit (LC)

 Guarantees
 Co-acceptance of Bills/Deferent payment Guarantees.
1) Letter of Credit

A letter of credit is an arrangement whereby a bank helps its customers to obtain credit from
its (customers) suppliers. When bank opens a letter of credit in favour of its customer for
some specific purchases, the bank undertakes the responsibility to honour the obligation of
its customer, should the customer fail to do so. To illustrate, suppose a bank opens a letter of
credit in favour of A for some purchases that A plans to make from B. if A does not make
payment to B within the credit period offered by B, the bank assumes the liability of A for
the purchases covered by the letter of credit arrangement. Naturally, B would hardly have
any hesitation to extend credit to A when a bank opens a letter of credit in favour of A. It is
clear from the preceding illustration that under a letter of creditarrangement the credit is
provided by the supplier but the risk is assumed by the bank which opens the letter of credit.
Hence,

this is an indirect form of financing as against overdraft, cash credit, loans and bill
purchasing/discounting, which are direct forms of financing. It may be noted here that in
direct financing the bank assumes risk as well as provides finance.

2) Guarantees

A contract of guarantee can be defined as a “contract to perform the promise or discharge

the liability of the third party incise of default”. The guarantee facilities cannot be
sanctioned in isolation. Financial guarantees can be issued by banks only if they are satisfied
that the customer will be in a position to reimburse the bank in case the guarantee is invoked
and the bank is required to make the payment in in terms of guarantee.
CHAPTER-2
LITERATURE
REVIEW
Literature review

Bhattacharyya (1987) stated in his study a comprehensive theory and tool of working
capital management from the system’s point of view. According to this study, capital is
often used to referto capital goods consisting of a great variety of things, namely, machines
of various kinds, plants, houses, tools, raw materials and goods-in-process. A finance
manager of a firm looks for these things on the assets side of the balance sheet. For capital
he turns his attention to the other side of the balance sheet and never commits a mistake. His
purpose is to balance the two sides in such a way that net worth of the firm increases
without increasing the riskiness of the business. This balancing is financing, i.e., financing
the assets of the firm by generating streams of liabilities continuously to match with the
dynamism of the former. The study is an improvement of the concept of Park and Gladson
who were not able to capture the entire techno- financial operating structure of afirm.

Rao and Rao (1991) observe the strong and weak points of conventional techniques of
working capital analysis. The result has been obviously mixed while some of the
conventional techniques which could comprehend the working capital behaviour well;
others failed in doing the job properly. The authors have attempted to evaluate the efficiency
of working capital management with the help of conventional techniques i.e., ratio analysis.
The article concludes prodding future scholars to search for a comprehensive and decisive
yardstick in evaluating the working capital efficiency.

Hamlin and David (1991) opine that working capital is necessary input to the production
process and yet is ignored in most economic models of production. The implications of
modelling the time dimension of production, and hence, the working capital requirements of
firms are explored, with the particular stress placed on the competitive advantage gained by
firms that retained flexibility in the time structure of their production. In this article they
have attempted to explore only this most basic role of time in the production process and so
focus is on the implications of explicitly recognizing the need for workingcapital.

Steven and Petersen (1993) throws light on new tests for finance constraints on
investment by emphasising the often-neglected role of working capital as both a use and a
source of funds. The authors believe that working capital is also a source of liquidity that
should be used to smooth fixed investment relative to cash-flow shocks if firms face finance
constraints. They have found that working capital investment is “excessively sensitive” to
cash- flow fluctuations. Besides, when working capital investment is included in a fixed-
investment regression as a use or source of funds, it has a negative coefficient. They
conclude that controlling for the smoothing role of working capital results in a much larger
estimate of the long-run impact of finance constraints than reported in other studies.

Zabid and Rahman (1997) emphasise the basic objective of working capital management
i.e., to arrange the needed working capital funds at the right time, at right cost and from
right source with a view to achieving a trade-off between liquidity and profitability. The
analysis reveals that BTMC had followed an aggressive working capital financing policy
taking the risk of liquidity. There was uninterrupted increasing trend in negative net working
capital throughout the period of the study which suggested that BTMC had exploited the
entire short-term sources available to it without considering the actualneeds.

Habib (1998) points out that when the interest rate is included; money loses its predictive
power on output. The study explicates this finding by using a rational expectations model
where production decisions of firm required debt finance working capital. Working capital
is an important factor and its cost, the rate of interest, affects the supply of goods by firms.
Monetary policy shocks, thus, affect the interest rate and the supply side, and as a result
price and output produced by firms. The model indicates that this can cause the predictive
power of monetary shocks on output to diminish .

Mallick and Debasish (1998) attempt to make an empirical study of AFT Industries Ltd, a
tea producing company in Assam for assessing the impact of working capital on its
profitability during the period 1986-87 to1995-96. The author has explored the co-relation
between ROI and several ratios relating to working capital management. On the whole, this
study of the co- relation between the selected ratios in the area of working capital
management and profitability of the company revealed both negative and positive effects.
Moreover, the WCL of the company recorded a fluctuating trend during the period under
study.

Zabid (1999) throws light on the various aspects of working capital position. He has
evaluated working capital and its components through the use of ratio analysis. For each
aspect of analysis certain ratios are computed and then results are compared with the
standard ratio.
Singaravel, (2000) focuses on the interdependency among working capital, liquidity and
profitability, of which sufficiency of liquidity comes in the first preference followed by
sufficiency of working capital and profitability. The article is an in-depth analysis of
liquidity and its interrelationship with working capital and profitability. As the working
capital, liquidity and profitability are in triangular position, none is dispensable at the
satisfaction of the other. Excess of stock-in-trade over bank over-draft and excess of liquid
assets over current liabilities other than bank over-draft generate working capital for the
business. Alternatively, working capital requirements are made for long-term funds which
affect the profitability.
Batra and Sharma (2002) analyse the working capital position of Goetze (I) Ltd. with the
help of various ratios. They are of the view that the working capital position in the company
is quite satisfactory although they have suggested a few measures for further improvement
in management of working capital, like necessity of greater attention in the inventory
control; active sales department, speedy dispatch of orders and reduction of dependency on
trade creditors.

Batra (2003) gives an overview of working capital and its determinants. According to the
author working capital management involves deciding upon the amount and composition of
current assets and how to finance them. He emphasizes on the hedging approach to finance
current assets. He also adds that a management can use ratio analysis of working capital as a
means of checking upon the efficiency with which working capital is being used in the
enterprises.

Bansal (2004) observes that due to the conservative policy of the corporation I) Short-term
creditors position regarding their claim is threatened due to lack of funds, ii) The company
was not following uniform policy regarding the collection of debtors, and iii) Inefficiency
on the part of the management causes over investment in inventories. As a result, a serious
situation arose due to shortage of working capital. The author warns the corporation that if it
did not plan its cash needs properly, it would be led to bankruptcy.

Pathania (2005) advocates for the bank to concentrate to maximize profitability and make
optimum utilization of cash resources available, while at the same time taking care to
economize cash holding without impairing the overall liquidity requirements of the bank.
For strengthening the financial base of the bank, permanent working capital should be
financed by equity capital or other long-term sources.

Chalam and Manohar (2006) observe that liquidity performance is very low as compared
to the ideal norms. It is suggested that for managing working capital effectively the
operating and other required budgets should be prepared by the respective levels of the
management on short-term as well as long-term basis. It is further suggested that these are
the people concerned who can really influence the process of production activity to such an
extent that there should be optimum utilization of the investment in working capital.
Rao (2007) believes that changes in quantum of working capital are ascertained and
analysed. The author has attempted to find out the causes of the changes in the size of
working capital in the sample companies during the period under study. He found several
causes of changes in working capital, mainly (a) sources of funds and (b) applications of
funds. In the end, the changes in working capital are analysed with the help of the changes
in working capital and funds flow statement.

Chalam and Manohar (2006) observe that liquidity performance is very low as compared
to the ideal norms. It is suggested that for managing working capital effectively the
operating and other required budgets should be prepared by the respective levels of the
management on short-term as well as long-term basis. It is further suggested that these are
the people concerned who can really influence the process of production activity to such an
extent that there should be optimum utilization of the investment in working capital.

Rao (2007) believes that changes in quantum of working capital are ascertained and
analysed. The author has attempted to find out the causes of the changes in the size of
working capital in the sample companies during the period under study. He found several
causes of changes in working capital, mainly (a) sources of funds and (b) applications of
funds. In the end, the changes in working capital are analysed with the help of the changes
in working capital and funds flow statement.

Garg (2008) suggests that working capital should be financed with both the sources – long-
term as well as short-term sources of funds. He further suggests that permanent working
capital should be obtained with the help of long-term sources of finance while variable/
fluctuating working capital should be collected through short-term sources of finance.
Efficient utilization of working capital enhances operating efficiency as well as income of
the units.

Singh (2009) discusses the credit needs of farmers / agriculture sector and then emphasizes
on the need for having a system of working capital finance in agriculture on the lines of the
industry and commerce finance, of course with some changes. He advocates a system which
is equally equipped and appropriate to meet the needs of both the farmers as well as the
bankers. His basic purpose is to strengthen the capital base of the farmers.
Rao and Rao (2010) believes that management of working capital is a continuous process
requiring proper monitoring and studying of the relationship of all variables with constant,
and drawing inferences. This provides proper direction to the managers.

Jain and Yadav (2011) study the corporate practices related to management of working
capital in India, Singapore and Thailand. In this paper the authors have tried to understand the
working capital management and current assets and current liabilities, and their inter-
relationship. Further the authors have shown an aggregative analysis of current assets and
current liabilities in terms of major liquidity ratios. It also states working capital position in
terms of these ratios pertaining to various industries. From the paper one can infer that the
available data in respect of the sample companies from the three countries confirm the wide
inter-industry variations in liquidity ratios. Towards the end, the authors suggest that serious
consideration needs to be given by the respective governments as well as industry groups in
these three countries in order to take corrective measures to take care of and rectify the areas
of concern.

Marc. (2012) presents a picture of how working capital management affects the profitability
of Belgium firms. The writer has made use of empirical analysis for the sample firms. It was
observed that most of the firms have a large amount of cash invested in working capital. It
can, therefore, be deduced that the way in which working capital is managed will have a
significant impact on the profitability of the firms.

Carole and Paul (2012) have stated study to find out the working capital management
routines of a large random sample of small companies in the UK. Considerable variability in
the take-up of eleven working capital management routines was detected. Principal
components analysis and cluster analysis confirmed the identification of four distinct “types”
of companies with regard to the patents of working capital management. While the first three
„types‟ of companies focused upon cash management, stock or debtors’ routines respectively,
the fourth „type‟ was less likely to take-up any working capital management routines. The
objective of the study is to encourage additional research rather than to provide an exhaustive
overview of all the factors associated with the take-up of working capital management
routines by small companies. The results suggest that small companies focus only on areas of
working capital management where they expect to improve marginal returns.
Filbeck and Krueger (2014) base their study on the ratings of working capital management
published in CFO magazines. The findings of the study provide insight into working capital
performance and working capital management, which is explained by macro-economic
factors, interest rates, competition, etc., and their impact on working capital.
CHAPTER-3
Research
methodology
3.1 Research methodology

Research

Research refers to a search for the knowledge. One can also define research as a scientific
and systematic search for pertinent information on a specified topic.

Redman and Mory defines as a “systematized effort to gain new knowledge”. In short, the
search of knowledge through objective and systematic method of finding solution to a
problem is research.

Methodology

Methodology for study refers to the techniques and methods used in order to find out the
problem.

Research Design

Research Design is an arrangement of conditions for collection and analysis of data in a

manner that aims to combine relevance to the research purpose with economy on procedure.
The research problem having been formulated in clear-cut term helps the researcher to
prepare a research design.

There are basically five type of research:

 Descriptive research
 Applied vs. Fundamental
 Quantitative vs. Qualitative
 Conceptual vs. empirical
 Some other type of research

The present study is based on Descriptive research . The data was collected through
secondary sources .The data collected was utilized for calculating performance evaluation
and based on that, interpretations were made.

Source of secondary data:

1. Most of the calculations were made on the balance sheet of the company provided
statement.
2. Referring standard text and refer books collected some of the information regarding
theoretical aspects.
3. Secondary data collected from the record like b/s, income statement and necessary
records and websites.
3.2OBJECTIVES OF STUDY
 To study the various components of working capital
 To measure the financial soundness of the company by analysing various ratio.
 To know the liquidity and profitability position of the Company.
 To Analyse out the working capital position of the company for the financial year
2016-17 and 2017-18.
 To suggest ways for better management and control of working capital in the
organisation.
 DATA SOURCES AND COLLECTION METHOD
The following source have been sought for the preparation report:

 Secondary sources like reports on working capital provided by the company .

 The data was gathered through the company’s website.
 A detailed study on the actual working process of the company is also done through
direct interaction with the employees and by timely studying the happening at the
company.

SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The main scope
of the study is to check the management of working capital (current assets and current
liabilities)

Working Capital Management is a huge area by itself in the area of Finance. In evaluating the
working capital management of this company, limited parameters have been used. They are:

 Ratio Analysis
 Approach followed in utilizing the resources.
 Variance Analysis
 CHAPTER-4
DATA ANALYSIS
&
INTERPRETATION
 Working capital position analysis in polyplastics group of industries .In this calculated the net
working capital ,current assets and current liabilities and Several ratios calculated from the
accounting date, can be grouped into various classes according to financial activity or function to be
evaluated.

NET WORKING CAPITAL (CURRENT ASSETS –CURRENT LIABILITIES)

Table 4.1

YEAR 2017-18 (In Lakhs) 2016-17 (In Lakhs)

CURRENT ASSETS
Inventories 605.53 189.99
Trade receivable 7.96 374.66
Cash and bank balance 161.52 374.66
Short term loans and advances 4,431.33 130.66
Other current assists 0.17 52.42
1,218.33 1,122.40
Total current assets
CURRENT LIABILITIES
Short term borrowing 228.17 174.68
Trade payables 122.31 30.47
Other current assets 284.14 97.87
Polyplastics ind.(I) ltd 238.85 -
Total current liabilities 873.48 303.03

NET WORKING CAPITAL 344.84 819.36

 Figure 4.1

900.00

800.00

700.00

600.00

500.00
Series 1
400.00 Series 2

300.00

200.00

100.00

0.00
2017-18 2016-17

Source :-Table No 4.1

DATA INTERPRETATION

It is seen from chart that If the anlysis of two years working capital position of the
company,out that company has sufficent working capital to meets its short term liabilities,it is
good indicatore for the company ,but if we compare between two years i.e.2017-2018 and
2016-2017 it can be seen that there is more sufficient net working capital in2016- 2017 i.e .
Rs 819.36 lakh than in 2017-2018 i.e. Rs 344.84 lakh
  INVENTORY ANALYSIS
Inventory means stock of three things:-

1. Row materials
2. Semi finished goods
3. Finished goods

Position of inventory in polyplastic industries private limited.

Table-4.2
YEAR 2017-2018 (In Lakhs) 2016-2017 (In Lakhs)
INVENTORY 605.53 189.99

ANALYSIS THROUGH CHART

Figure 4.2

700.00

600.00

500.00

400.00 Series 1
Series 2
300.00
Series 3

200.00

100.00

0.00
2017-18 2016-17

Source:- Table No 4.2

INTERPRETATION
It is seen from chart analysing of two-year data, we are looking increasing pattern in
inventories. we can see that inventories are increased from Rs 189.99lakh in2016- 2017 to
605.53.00 in2017- 2018By seeing this pattern, we can say that the company is managing the
inventory according to the sale.
  CURRENT ASSESTS ANALYSIS

Position of current assets in Polyplastics industries private limited.

TABLE 4.3
Year 2017-2018 (In Lakhs) 2016-2017 (In Lakhs)
Current assets 1,218.33 1,122.40

ANALYSIS THROUGH CHART

Figure 4.3

1,240.00

1,220.00

1,200.00

1,180.00

1,160.00
Series 1
1,140.00 Series 2
1,120.00

1,100.00

1,080.00

1,060.00
2017-18 2016-17

Source :- Table No4.3

INTERPRETATION
If we analyse the above table then we can see that total current assets increased from the last
year. So, it is to be known that in2016- 2017 current assets were Rs1,122.40and in 2017-
2018 Rs. 1,218.33
  CURRENT LIABILITIES ANALYSIS

Position of current assets in Polyplastics industries private limited.

Table No 4.4
YEAR 2017-2018 (In Lakhs) 2016-2017 (In Lakhs)
CURRENT LIABILITIES 873.48 303.03

ANALYSIS THROUGH CHART

Figure 4.4

1,000.00

900.00

800.00

700.00

600.00

500.00 Series 1
Series 2
400.00

300.00

200.00

100.00

0.00
2017-18 2016-17

Source :- Table No 4.4

INTERPRETATION
If we analyse the above table then we can see that current liabilities are slightly more in 2018
as compared to 2017. This is liability for company so this should be less, when company have
minimum liabilities it creates a better goodwill in market. High current liabilities indicate that
company is using credit facilities by creditors.
 WORKING CAPITAL RATIOS AND ITS INTERPRETATION

Ratios which are calculated are as follows:

 Working capital ratio
 Quick ratio
 Current ratio
 CA to FA ratio
 Debt to equity ratio
 Inventory turnover ratio
  Position of working capital ratio in polyplastics industries pvt. ltd.

Working capital ratio = inventory + receivable – payable

sales

Table No 4.5
YEAR 2017-2018 2016-2017
WORKING CAPITAL 35.5 48.8
RATIO

ANALYSIS THROUGH CHART

Figure 4.5

Source:- Table No 4.5

INTERPRETATION
This ratio indicates whether the investments in current assets or net current assets (i.e.
working capital) have been properly utilized. Higher are the ratio lower is the investment in
working capital and higher is the profitability. But too high ratio indicates over trading. This
ratio is an important indicator about the working capital position. Now if we analyse here that
the working capital ratio is being same for two years.
  Position of Quick ratio in polyplastics industries pvt. ltd.

Quick ratio: Total Current assets – Inventories

Total Current Liabilities
Table No 4.6
YEAR 2017-18 2016-17
QUICK RATIO 2.15 3.07

ANALYSIS THROGH CHART

Figure 4.6

3.5

2.5

2
Series 1
1.5 Series 2

0.5

0
2017-18 2016-17

Source :- Table No 4.6

INTERPRETATION

It is the ratio between quick liquid assets and quick liabilities. The normal value for such ratio
is taken to be 1:1. It is used as an assessment tool for testing the liquidity position of the firm.
By analyzing the two years data it can be said that its position is not good & stable.
  Position of Current ratio in polyplastics industries pvt. ltd.

Current ratio: total current assets

total current liabilities
Table No 4.7

YEAR 2017-18 2016-17

CURRENT RATIO 1.39 3.7

ANALYSIS THROUGH CHART

Figure 4.7

3.5

2.5

2 Series 1
Series 2
1.5

0.5

0
2017-18 2016-17 Category 4

Source :- Table No 4.7

INTERPRETATION

This ratio reflects that company has sufficient current assets to pay its current liabilities in
previous year which reflects good liquidity position of the company as compared to current
year
  Position of current asset to fixed asset in Polyplastics industries
private limited.
CA to FA ratio: current assets
fixed assets

Table No 4.8
YEAR 2017-18 2016-17
CA to FA RATIO 8.765810396 4.808961515
ANALYSIS THROUGH CHART

Figure 4.8

10
9
8
7
6
5 Series 1
4 Series 2
3
2
1
0
2017-18 2016-17

Source :- Table No 4.8

INTERPRETATION
This ratio differs from industry to industry. The increase in the ratio means that trading is
slack or mechanization has been used. A decline in the ratio means that debtors and stocks
are increased too much or fixed assets are more intensively used. If current assets increase
with the corresponding increase in profit it will show that the business is expanding.

Assuming a constant level of fixed assets, a higher CA/FA ratio indicated a conservative
current assets policy and a lower CA/FA ratio means an aggressive current assets policy
assuming other factors to be constant. A conservative policy i.e. higher CA/FA ratio implies
greater liquidity and lower risk: while an aggressive policy i.e. lower CA/FA ratio indicates

higher risk and poor liquidity. Now if we analyse the two-year data, we find the CA TO FA
Ration in decreasing pattern.
  Position of debt to equity ratio in Polyplastics industries private
limited

Debt equity ratio= Debt/Equity

Table No 4.9

YEAR 2017-18 2016-17

DEBT TO EQUITY 1.89 0.65
RATIO

ANALYSIS THROUGH CHART

Figure4.9

1.8

1.6

1.4

1.2

1 Series 1
Series 2
0.8

0.6

0.4

0.2

0
2017-18 2016-17

Source :- Table No 4.9

INTERPRETATION

By having the graph, it is easily interpreted about the debt to equity ratio of the company. It is
comparatively less than in 2016-17 in 2017-18
  Position of inventory turnover ratio in Polyplastics industries private
limited

Stock turnover ratio: average stock * 365

cost of goods sold

Table NO 4.10

YEAR 2017-18 2016-17

INVENTORY 2.28460176 5.759323813
TURNOVER RATIO

ANALYSIS THROUGH CHART

Figure 4.10

4 INVENTORY
column 1
3
column 2
2

0
2017-18 2016-17

Source :- Table No 4.10

INTERPRETATION
This ratio tells the story by which stock is converted into sales. By analysing the two-year
data, it seen that it follows an uneven trend. We see that it is reduced. Company should have
to reduce the inventory conversion period in order to reduce the cost
CHAPTER-5
FINDINGS
&
CONCLUSION
5.1 MAJOR FINDINGS

 The working capital of the company is decreasing in the year 2018 of the comparison of
the year 2017.
 The current assets of the company are increasing in the year 2018 of the comparison of
the year 2017.
 The current liabilities of the company are increasing in the year 2018 of the
comparison of the year 2017.
 The working capital ratio is constant.
 The current assets and fixed assets ratio of the company are increasing in the year 2018
of the comparison of the year 2017.
 The Quick ratio of the company are decreasing in the year 2018 of the comparison of
the year 2017
 The Debt and equity ratio of the company are increasing in the year 2018 of the
comparison of the year 2017
 By inventory turnover ratio we can conclude that polyplastic is taking a little bit more
time to process or complete its work as compare to last year.
5.2 SUGGESTIONS

The management of working capital plays a vital role in running a successful business. So,
things should go with a proper understanding for managing cash, receivables and inventory.

Polyplastics industries private limited is managing its working capital in a good manner, but
still there is some scope for improvement in its management. This can help the company in
raising its profit level by making less investment in accounts receivables and stocks etc. This
will ultimately improve the efficiency of its operations.

 The company should keep more current assets such as cash & bank balances short-
term investment to meet its decrease liabilities. By that the company can able to have
a better liquidity position.
 The company has to take necessary steps to establish working capital management
(which maintains adequate working required for the business). In the increasing view
of increasing current liabilities and less allocations of resources towards working
capital. As of now, the company has maintained good financial position by controlling
the current liabilities and other expenses.
 The business runs successfully with adequate amount of the working capital but the
company should see to it that the cash should not be tied up in excessive amount of
working capital.
 Holding of excessive and insufficient stock must be avoided as it creates a burden on
the cash resources of a business and results in lost sales, delays for customers, etc
respectively.
5.3 LIMITATIONS OF THE STUDY

1. Time:
The time of around two months was too short to study as wide subject like Financial
Analysis.

2. Confidential Information:
The executives were hesitant to reveal complete information since it was confidential
and sensitive too.

3. Busy Schedule of Concerned Executives:

The concerned executives were having very busy schedule still they gave me an
opportunity to work.

4. Outcome of Result:
There could be some errors, data collection, data interpretation, and even the
environment plays an important role in the outcome of the results.
 5.4 CONCLUSION

The study on working capital management was conducted in polyplastic Pvt Ltd. To analyse
the financial position of the company. The company's Financial position is analysed by using
the tool of annual reports from 2016-2017 to 2017-2018.

The Financial Status of polyplastic pvt ltd. Is good in last year the inventory turnover has
increases, this is good sign for the company. The company’s liquidity position is very good
with regard to the investment in current assets there are adequate funds invested in it. Care
should be taken by the company not to make further investment in current assets, as it would
block the funds, which could otherwise be effectively utilized for some productive purpose.
On the company is moving forward with excellent management.

Further the company performance and efficiency can be improved by above mentioned
points in the suggestions
 5.5 BIBLIOGRAPHY
The of data is also collected from the books:
 Gupta, Shashi K, Management Accounting; Kalyani Publishers, Edition 2003 ISBN
9788127203849, 8127203840
 Kothari, C.R., Research Methodology; Wishwa Parkashan, Edition 2004 ISBN13:
97822424881
 Moyer, R. C., Mcguigan, J. R., &Kretlow, W. J. (2003). Contemporary Financial
Management (Ninth Ed.). United States of America: Thomson. ISBN-13: 978-128519884,
 ISBN-10: 9781285198842, ISBN-13: 978-1285198842, ISBN-10: 9781285198842
 Annual General Report of the company
 Documents & files of polyplastic PVT.LTD. yamunanager

website ----
- www.polyplastics.co.in
- www.scribd.com
- http//www.areaserchguide.com
- http/en.m.wikipedia.org
- http/www.emeraldinsight.com
- https://www.lendingkart.com/working-capital-
management/?campaignid=7120132539&adgroupid=77141365141&utm
_source=GoogleAdWords&utm_campaign=DynamicSearch
APPENDIX
Measures to Improve Working Capital Management at
SATHESYNTHETICS:
The essence of effective working capital management is proper cash flow forecasting. This
should take into account the impact of unforeseen events, market cycles, loss of a prime
customer and actions by competitors. So, the effect of unforeseen demands of working capital
should be factored by company. This was one of its reasons for the variation of its revised
working capital projection from the earlier projection.

It pays to have contingency plans to tide over unexpected events. While market- leaders can
manage uncertainly better, even other companies must have risk- management procedures.
These must be based on objective and realistic view of the role of working capital.

Addressing the issue of working capital on a corporate-wide basis has certain advantages.
Cash generated at one location can well be utilized at another. For this to happen, information
access, efficient banking channels, good linkages between production and billing, internal
systems to move cash and good treasury practices should be in place.

An innovative approach, combining operational and financial skills and an all -encompassing
view of the company’s operations will help in identifying and implementing strategies that
generate short-term cash. This can be achieved by having the right set of executives who are
responsible for setting targets and performance levels. They could be then held accountable
for delivering, encouraged to be enterprising and to act as change agents.

Effective dispute management is important procedures in relation to customers will go a long

way in freeing up cash otherwise locked in due to disputes. It will also improve customer
service and free up time for legitimate activities like sales, order entry and cash collection.
Overall, efficiency will increase due to operating costs.

Working capital management is an important yardstick to measure a company operational

and financial efficiency. This aspect must form part of the strategic and operational thinking.
Efforts should constantly be made to improve the working capital position. This will yield
greater efficiencies and improve customer satisfaction.