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Project Report - Working Capital Management

Our WORKING CAPITAL - Meaning of Working Capital
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Capital required for a business can be classified under two main categories via,
Home 1) Fixed Capital
2) Working Capital
HR Every business needs funds for two purposes for its establishment and to carry out
Project its day- to-day operations. Long terms funds are required to create production facilities
Report through purchase of fixed assets such as p&m, land, building, furniture, etc.
Investments in these assets represent that part of firm’s capital which is blocked on
Marketin permanent or fixed basis and is called fixed capital. Funds are also needed for short-
g
Projects term purposes for the purchase of raw material, payment of wages and other day – to-
day expenses etc.
Finance These funds are known as working capital. In simple words, working capital
Projects refers to that part of the firm’s capital which is required for financing short- term or
current assets such as cash, marketable securities, debtors & inventories. Funds, thus,
invested in current assts keep revolving fast and are being constantly converted in to
cash and this cash flows out again in exchange for other current assets. Hence, it is also
known as revolving or circulating capital or short term capital.
CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital
2. Net working capital
The gross working capital is the capital invested in the total current assets
of the enterprises current assets are those
Assets which can convert in to cash within a short period normally one
accounting year.
CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories of stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods
6. Temporary investment of surplus funds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.

In a narrow sense, the term working capital refers to the net working.
Net working capital is the excess of current assets over current
liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS – CURRENT
LIABILITIES.
Net working capital can be positive or negative. When the current
assets exceeds the current liabilities are more than the current assets.
Current liabilities are those liabilities, which are intended to be paid in
the ordinary course of business within a short period of normally one
 accounting year out of the current assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraft.
5. Provision for taxation , if it does not amt. to app. Of profit.
6. Bills payable.
7. Sundry creditors.
The gross working capital concept is financial or going concern concept whereas net
working capital is an accounting concept of working capital. Both the concepts have
their own merits.
The gross concept is sometimes preferred to the concept of working capital for the
following reasons:
1. It enables the enterprise to provide correct amount of
working capital at correct time.
2. Every management is more interested in total current assets
with which it has to operate then the source from where it is
made available.
3. It take into consideration of the fact every increase in the
funds of the enterprise would increase its working capital.
4. This concept is also useful in determining the rate of return
on investments in working capital. The net working capital
concept, however, is also important for following reasons:
• It is qualitative concept, which indicates the firm’s ability to
meet to its operating expenses and short-term liabilities.
• IT indicates the margin of protection available to the short
term creditors.
• It is an indicator of the financial soundness of enterprises.
• It suggests the need of financing a part of working capital
 requirement out of the permanent sources of funds.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o On the basis of concept.
o On the basis of time.

On the basis of concept working capital can be classified as gross

working capital and net working capital. On the basis of time, working
capital may be classified as:
 Permanent or fixed working capital.
 Temporary or variable working capital
PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of current
assets. Every firm has to maintain a minimum level of raw material, work- in-process,
finished goods and cash balance. This minimum level of current assts is called
permanent or fixed working capital as this part of working is permanently blocked in
current assets. As the business grow the requirements of working capital also increases
due to increase in current assets.
TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is

required to meet the seasonal demands and some special exigencies. Variable working
capital can further be classified as seasonal working capital and special working
capital. The capital required to meet the seasonal need of the enterprise is called
seasonal working capital. Special working capital is that part of working capital which
is required to meet special exigencies such as launching of extensive marketing for
conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that is
required for short periods and cannot be permanently employed gainfully in the
business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING
CAPITAL
 SOLVENCY OF THE BUSINESS: Adequate working capital
helps in maintaining the solvency of the business by providing
uninterrupted of production.
 Goodwill: Sufficient amount of working capital enables a firm to
make prompt payments and makes and maintain the goodwill.
 Easy loans: Adequate working capital leads to high solvency and
credit standing can arrange loans from banks and other on easy and
favorable terms.
 Cash Discounts: Adequate working capital also enables a
concern to avail cash discounts on the purchases and hence reduces cost.
 Regular Supply of Raw Material: Sufficient working capital
ensures regular supply of raw material and continuous production.
 Regular Payment Of Salaries, Wages And Other Day
TO Day Commitments: It leads to the satisfaction of the
employees and raises the morale of its employees, increases their
efficiency, reduces wastage and costs and enhances production and
profits.
 Exploitation Of Favorable Market Conditions: If a
firm is having adequate working capital then it can exploit the favorable
market conditions such as purchasing its requirements in bulk when the
prices are lower and holdings its inventories for higher prices.
 Ability To Face Crises: A concern can face the situation during
the depression.
 Quick And Regular Return On Investments: Sufficient
working capital enables a concern to pay quick and regular of dividends
to its investors and gains confidence of the investors and can raise more
funds in future.
 High Morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall efficiency in
a business.
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 n 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.
There are others factors also influence the need of working capital in a
business.
FACTORS DETERMINING THE WORKING CAPITAL
REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of

working is very limited in public utility undertakings such as
electricity, water supply and railways because they offer cash sale
only and supply services not products, and no funds are tied up in
inventories and receivables. On the other hand the trading and
financial firms requires less investment in fixed assets but have to
invest large amt. of working capital along with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the

business, greater is the requirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep

production steady by accumulating inventories it will require higher
working capital.
 4. LENTH OF PRDUCTION CYCLE: The longer
the manufacturing time the raw material and other supplies have to
be carried for a longer in the process with progressive increment of
labor and service costs before the final product is obtained. So
working capital is directly proportional to the length of the
manufacturing process.

5. SEASONALS VARIATIONS: Generally, during

the busy season, a firm requires larger working capital than in slack
season.

6. WORKING CAPITAL CYCLE: The speed with

which the working cycle completes one cycle determines the
requirements of working capital. Longer the cycle larger is the
requirement of working capital.

DEBTORS
CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

7. RATE OF STOCK TURNOVER: There is an inverse co-

relationship between the question of working capital and the
velocity or speed with which the sales are affected. A firm having a
high rate of stock turnover wuill needs lower amt. of working capital
as compared to a firm having a low rate of turnover.
8. CREDIT POLICY: A concern that purchases its requirements
on credit and sales its product / services on cash requires lesser amt.
of working capital and vice-versa.
9. BUSINESS CYCLE: In period of boom, when the business is
prosperous, there is need for larger amt. of working capital due to
rise in sales, rise in prices, optimistic expansion of business, etc. On
the contrary in time of depression, the business contracts, sales
 decline, difficulties are faced in collection from debtor and the firm
may have a large amt. of working capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing
concern, we shall require large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some
firms have more earning capacity than other due to quality of their
products, monopoly conditions, etc. Such firms may generate cash
profits from operations and contribute to their working capital. The
dividend policy also affects the requirement of working capital. A
firm maintaining a steady high rate of cash dividend irrespective of
its profits needs working capital than the firm that retains larger part
of its profits and does not pay so high rate of cash dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also
affect the working capital requirements. Generally rise in prices
leads to increase in working capital.
Others FACTORS: These are:

 Operating efficiency.
 Management ability.
 Irregularities of supply.
 Import policy.
 Asset structure.
 Importance of labor.
 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 POLICES 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
1. It concerned with the formulation of policies with regard
to profitability, liquidity and risk.
2. It is concerned with the decision about the composition
and level of current assets.
3. It is concerned with the decision about the composition
and level of current liabilities.

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a

business. Adequate amount of working capital is very much essential
for the smooth running of the business. And the most important part is
the efficient management of working capital in right time. The liquidity
position of the firm is totally effected by the management of working
capital. So, a study of changes in the uses and sources of working
capital is necessary to evaluate the efficiency with which the working
capital is employed in a business. This involves the need of working
capital analysis.
The analysis of working capital can be conducted through a number of
devices, such as:
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting.

1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The
technique of ratio analysis can be employed for measuring short-term
liquidity or working capital position of a firm. The following ratios can
be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the
source from which additional funds were derived and the use to which
these sources were put. The fund flow analysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.
It is an effective management tool to study the changes in financial
position (working capital) business enterprise between beginning and
ending of the financial dates.

3. WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans
and polices to be pursued in the future period time. Working capital
budget as a part of the total budge ting process of a business is prepared
estimating future long term and short term working capital needs and
sources to finance them, and then comparing the budgeted figures with
actual performance for calculating the variances, if any, so that
corrective actions may be taken in future. He objective working capital
budget is to ensure availability of funds as and needed, and to ensure
effective utilization of these resources. The successful implementation
of working capital budget involves the preparing of separate budget for
each element of working capital, such as, cash, inventories and
receivables etc.

ANALYSIS OF SHORT – TERM FINANCIAL POSITION

OR TEST OF LIQUIDITY

The short –term creditors of a company such as suppliers of goods of

credit and commercial banks short-term loans are primarily interested
to know the ability of a firm to meet its obligations in time. The short
term obligations of a firm can be met in time only when it is having
sufficient liquid assets. So to with the confidence of investors,
creditors, the smooth functioning of the firm and the efficient use of
fixed assets the liquid position of the firm must be strong. But a very
high degree of liquidity of the firm being tied – up in current assets.
Therefore, it is important proper balance in regard to the liquidity of
the firm. Two types of ratios can be calculated for measuring short-
term financial position or short-term solvency position of the firm.
1. Liquidity ratios.
2. Current assets movements ‘ratios.

A) LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations

as and when these become due. The short-term obligations are met by
realizing amounts from current, floating or circulating assts. The
current assets should either be liquid or near about liquidity. These
should be convertible in cash for paying obligations of short-term
nature. The sufficiency or insufficiency of current assets should be
assessed by comparing them with short-term liabilities. If current
assets can pay off the current liabilities then the liquidity position is
satisfactory. On the other hand, if the current liabilities cannot be met
out of the current assets then the liquidity position is bad. To measure
the liquidity of a firm, the following ratios can be calculated:
1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of

general liquidity and its most widely used to make the analysis of
short-term financial position or liquidity of a firm. It is defined as the
relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables,
sundry debtors, inventories and work-in-progresses. Current liabilities
include outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid
and has the ability to pay its current obligations in time. On the hand a
low current ratio represents that the liquidity position of the firm is not
good and the firm shall not be able to pay its current liabilities in time.
A ratio equal or near to the rule of thumb of 2:1 i.e. current assets
double the current liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO

(Rupees in crore)
e.g.
Year 2006 2007 2008

Current Assets 81.29 83.12 13,6.57

Current Liabilities 27.42 20.58 33.48

Current Ratio 2.96:1 4.03:1 4.08:1

Interpretation:-
As we know that ideal current ratio for any firm is 2:1. If we see the
current ratio of the company for last three years it has increased from
2006 to 2008. The current ratio of company is more than the ideal
ratio. This depicts that company’s liquidity position is sound. Its
current assets are more than its current liabilities.
2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio.

Quick ratio may be defined as the relationship between quick/liquid
assets and current or liquid liabilities. An asset is said to be liquid if it
can be converted into cash with a short period without loss of value. It
measures the firms’ capacity to pay off current obligations
immediately.
QUICK RATIO = QUICK ASSETS
CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) Debtors.
A high ratio is an indication that the firm is liquid and has the ability
to meet its current liabilities in time and on the other hand a low quick
ratio represents that the firms’ liquidity position is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It is
generally thought that if quick assets are equal to the current liabilities
then the concern may be able to meet its short-term obligations.
However, a firm having high quick ratio may not have a satisfactory
 liquidity position if it has slow paying debtors. On the other hand, a
firm having a low liquidity position if it has fast moving inventories.
CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)

Year 2006 2007 2008

Quick Assets 44.14 47.43 61.55

Current Liabilities 27.42 20.58 33.48

Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

Interpretation :
A quick ratio is an indication that the firm is liquid and has the
ability to meet its current liabilities in time. The ideal quick ratio is
1:1. Company’s quick ratio is more than ideal ratio. This shows
company has no liquidity problem.
3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more

liquid than inventories, yet there may be doubts regarding their
realization into cash immediately or in time. So absolute liquid ratio
should be calculated together with current ratio and acid test ratio so
as to exclude even receivables from the current assets and find out the
absolute liquid assets. Absolute Liquid Assets includes :
ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS
CURRENT LIABILITES
ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g. (Rupees in Crore)

Year 2006 2007 2008

Absolute Liquid Assets 4.69 1.79 5.06

Current Liabilities 27.42 20.58 33.48

Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :
These ratio shows that company carries a small amount of cash.
But there is nothing to be worried about the lack of cash because
company has reserve, borrowing power & long term investment. In
India, firms have credit limits sanctioned from banks and can easily
draw cash.
B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales

and earn profits. The efficiency with which assets are managed
directly affects the volume of sales. The better the management of
assets, large is the amount of sales and profits. Current assets
movement ratios measure the efficiency with which a firm manages
its resources. These ratios are called turnover ratios because they
indicate the speed with which assets are converted or turned over into
sales. Depending upon the purpose, a number of turnover ratios can be
calculated. These are :
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio
4. Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results if current assets
include high amount of debtors due to slow credit collections and
moreover if the assets include high amount of slow moving inventories.
As both the ratios ignore the movement of current assets, it is important
to calculate the turnover ratio.
1. INVENTORY TURNOVER OR STOCK
TURNOVER RATIO :
Every firm has to maintain a certain amount of inventory of
finished goods so as to meet the requirements of the business.
But the level of inventory should neither be too high nor too
low. Because it is harmful to hold more inventory as some
 amount of capital is blocked in it and some cost is involved in it.
It will therefore be advisable to dispose the inventory as soon as
possible.
INVENTORY TURNOVER RATIO = COST OF GOOD SOLD
AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the
stock is converted into sales. Usually a high inventory ratio
indicates an efficient management of inventory because more
frequently the stocks are sold ; the lesser amount of money is
required to finance the inventory. Where as low inventory
turnover ratio indicates the inefficient management of inventory.
A low inventory turnover implies over investment in inventories,
dull business, poor quality of goods, stock accumulations and
slow moving goods and low profits as compared to total
investment.
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK
2

(Rupees in Crore)

Year 2006 2007 2008

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover Ratio 1.5 times 2.8 1.75 times

times

Interpretation :
These ratio shows how rapidly the inventory is turning into
receivable through sales. In 2007 the company has high inventory
turnover ratio but in 2008 it has reduced to 1.75 times. This shows that
the company’s inventory management technique is less efficient as
compare to last year.
2. INVENTORY CONVERSION PERIOD:
 INVENTORY CONVERSION PERIOD = 365 (net working days)
INVENTORY TURNOVER RATIO
e.g.

Year 2006 2007 2008

Days 365 365 365

Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion Period 243 days 130 202 days

days

Interpretation :
Inventory conversion period shows that how many days
inventories takes to convert from raw material to finished goods. In
the company inventory conversion period is decreasing. This shows
the efficiency of management to convert the inventory into cash.
3. DEBTORS TURNOVER RATIO :
A concern may sell its goods on cash as well as on credit to
increase its sales and a liberal credit policy may result in tying up
substantial funds of a firm in the form of trade debtors. Trade debtors
are expected to be converted into cash within a short period and are
included in current assets. So liquidity position of a concern also
depends upon the quality of trade debtors. Two types of ratio can be
calculated to evaluate the quality of debtors.
a) Debtors Turnover Ratio
b) Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)
AVERAGE DEBTORS
Debtor’s velocity indicates the number of times the debtors are
turned over during a year. Generally higher the value of debtor’s
turnover ratio the more efficient is the management of debtors/sales or
more liquid are the debtors. Whereas a low debtors turnover ratio
 indicates poor management of debtors/sales and less liquid debtors.
This ratio should be compared with ratios of other firms doing the
same business and a trend may be found to make a better
interpretation of the ratio.
AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR
2

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Average Debtors 17.33 18.19 22.50

Debtor Turnover Ratio 9.6 times 8.3 7.5 times

times

Interpretation :
This ratio indicates the speed with which debtors are being
converted or turnover into sales. The higher the values or turnover
into sales. The higher the values of debtors turnover, the more
efficient is the management of credit. But in the company the debtor
turnover ratio is decreasing year to year. This shows that company is
not utilizing its debtors efficiency. Now their credit policy become
liberal as compare to previous year.
4. AVERAGE COLLECTION PERIOD :
Average Collection Period = No. of Working Days
Debtors Turnover Ratio
The average collection period ratio represents the average
number of days for which a firm has to wait before its receivables are
converted into cash. It measures the quality of debtors. Generally,
shorter the average collection period the better is the quality of debtors
as a short collection period implies quick payment by debtors and
vice-versa.
 Average Collection Period = 365 (Net Working Days)
Debtors Turnover Ratio

Year 2006 2007 2008

Days 365 365 365

Debtor Turnover Ratio 9.6 8.3 7.5

Average Collection Period 38 days 44 49 days

days

Interpretation :
The average collection period measures the quality of
debtors and it helps in analyzing the efficiency of collection efforts. It
also helps to analysis the credit policy adopted by company. In the
firm average collection period increasing year to year. It shows that
the firm has Liberal Credit policy. These changes in policy are due to
competitor’s credit policy.
5. WORKING CAPITAL TURNOVER RATIO :
Working capital turnover ratio indicates the velocity of
utilization of net working capital. This ratio indicates the
number of times the working capital is turned over in the
course of the year. This ratio measures the efficiency with
which the working capital is used by the firm. A higher ratio
indicates efficient utilization of working capital and a low ratio
indicates otherwise. But a very high working capital turnover
is not a good situation for any firm.
Working Capital Turnover Ratio = Cost of Sales
Net Working Capital

Working Capital Turnover = Sales

Networking Capital
 e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Networking Capital 53.87 62.52 103.09

Working Capital Turnover 3.08 2.4 1.64

Interpretation :
This ratio indicates low much net working capital requires
for sales. In 2008, the reciprocal of this ratio (1/1.64 = .609) shows
that for sales of Rs. 1 the company requires 60 paisa as working
capital. Thus this ratio is helpful to forecast the working capital
requirement on the basis of sale.
INVENTORIES
(Rs. in Crores)

Year 2005- 2006- 2007-2008

2006 2007

Inventories 37.15 35.69 75.01

Interpretation :
Inventories is a major part of current assets. If any company
wants to manage its working capital efficiency, it has to manage its
inventories efficiently. The graph shows that inventory in 2005-2006
is 45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their current
assets. The company should try to reduce the inventory upto 10% or
20% of current assets.
CASH BNAK BALANCE :
(Rs. in Crores)

Year 2005- 2006- 2007-2008

2006 2007
Cash Bank Balance 4.69 1.79 5.05

Interpretation :
Cash is basic input or component of working capital. Cash is
needed to keep the business running on a continuous basis. So the
organization should have sufficient cash to meet various requirements.
The above graph is indicate that in 2006 the cash is 4.69 crores but in
2007 it has decrease to 1.79. The result of that it disturb the firms
manufacturing operations. In 2008, it is increased upto approx. 5.1%
cash balance. So in 2008, the company has no problem for meeting its
requirement as compare to 2007.
DEBTORS :
(Rs. in Crores)

Year 2005- 2006- 2007-2008

2006 2007

Debtors 17.33 19.05 25.94

Interpretation :
Debtors constitute a substantial portion of total current assets. In
India it constitute one third of current assets. The above graph is
depict that there is increase in debtors. It represents an extension of
credit to customers. The reason for increasing credit is competition
and company liberal credit policy.

CURRENT ASSETS :
(Rs. in Crores)

Year 2005- 2006- 2007-2008

2006 2007

Current Assets 81.29 83.15 136.57

Interpretation :
This graph shows that there is 64% increase in current assets in
 2008. This increase is arise because there is approx. 50% increase in
inventories. Increase in current assets shows the liquidity soundness of
company.

CURRENT LIABILITY :
(Rs. in Crores)

Year 2005- 2006- 2007-2008

2006 2007

Current Liability 27.42 20.58 33.48

Interpretation :
Current liabilities shows company short term debts pay to
outsiders. In 2008 the current liabilities of the company increased. But
still increase in current assets are more than its current liabilities.

NET WOKRING CAPITAL :

(Rs. in Crores)

Year 2005- 2006- 2007-2008

2006 2007

Net Working Capital 53.87 62.53 103.09

Interpretation :
Working capital is required to finance day to day operations of a
firm. There should be an optimum level of working capital. It should
not be too less or not too excess. In the company there is increase in
working capital. The increase in working capital arises because the
company has expanded its business.

RESEARCH METHODOLOGY
The methodology, I have adopted for my study is the various tools, which basically
analyze critically financial position of to the organization:
 I. COMMON-SIZE P/L A/C
II. COMMON-SIZE BALANCE SHEET
III. COMPARTIVE P/L A/C
IV. COMPARTIVE BALANCE SHEET
V. TREND ANALYSIS
VI. RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With the
evaluation of each component, the financial position from different angles is tried to be
presented in well and systematic manner. By critical analysis with the help of different
tools, it becomes clear how the financial manager handles the finance matters in
profitable manner in the critical challenging atmosphere, the recommendation are made
which would suggest the organization in formulation of a healthy and strong position
financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and
comparative analysis, the organization would be able to conquer its in efficiencies
and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and consistent
accounting procedure to convey an under-standing of some financial aspects of a
business firm. It may show position at a moment in time, as in the case of balance sheet
or may reveal a series of activities over a given period of time, as in the case of an
income statement. Thus, the term ‘financial statements’ generally refers to the two
statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following objectives of financial statements: -
1. To provide reliable financial information about economic resources and obligation
of a business firm.
2. To provide other needed information about charges in such economic resources and
obligation.
3. To provide reliable information about change in net resources (recourses less
obligations) missing out of business activities.
4. To provide financial information that assets in estimating the learning potential of
the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not
present a final picture a final picture of a concern. The utility of these statements is
dependent upon a number of factors. The analysis and interpretation of these
statements must be done carefully otherwise misleading conclusion may be drawn.
Financial statements suffer from the following limitations: -
1. Financial statements do not given a final picture of the concern. The data given in
these statements is only approximate. The actual value can only be determined when
the business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods, generally
one year, during the life of a concern. The costs and incomes are apportioned to
different periods with a view to determine profits etc. The allocation of expenses and
income depends upon the personal judgment of the accountant. The existence of
contingent assets and liabilities also make the statements imprecise. So financial
statement are at the most interim reports rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give
final and accurate position. The value of fixed assets in the balance sheet neither
represent the value for which fixed assets can be sold nor the amount which will be
required to replace these assets. The balance sheet is prepared on the presumption of a
going concern. The concern is expected to continue in future. So fixed assets are shown
at cost less accumulated deprecation. Moreover, there are certain assets in the balance
sheet which will realize nothing at the time of liquidation but they are shown in the
balance sheets.
4. The financial statements are prepared on the basis of historical costs Or original
costs. The value of assets decreases with the passage of time current price changes are
not taken into account. The statement are not prepared with the keeping in view the
economic conditions. the balance sheet loses the significance of being an index of
current economics realities. Similarly, the profitability shown by the income statements
may be represent the earning capacity of the concern.
5. There are certain factors which have a bearing on the financial position and
operating result of the business but they do not become a part of these statements
because they cannot be measured in monetary terms. The basic limitation of the
traditional financial statements comprising the balance sheet, profit & loss A/c is that
they do not give all the information regarding the financial operation of the firm.
Nevertheless, they provide some extremely useful information to the extent the balance
sheet mirrors the financial position on a particular data in lines of the structure of
assets, liabilities etc. and the profit & loss A/c shows the result of operation during a
certain period in terms revenue obtained and cost incurred during the year. Thus, the
financial position and operation of the firm.

FINANCIAL STATEMENT ANALYSIS

It is the process of identifying the financial strength and weakness of a firm from the
available accounting data and financial statements. The analysis is done
CALCULATIONS OF RATIOS
Ratios are relationship expressed in mathematical terms between figures, which are
connected with each other in some manner.

CLASSIFICATION OF RATIOS
Ratios can be classified in to different categories depending upon the basis of
classification
The traditional classification has been on the basis of the financial statement to which
the determination of ratios belongs.

These are:-
• Profit & Loss account ratios
• Balance Sheet ratios
• Composite ratios
Project Description :
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Pages : 73
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