WCM - Project Report

8/3/2019 WCM - Project Report

1/25

Project Report - Working Capital Management

WORKING CAPITAL - Meaning of WorkingCapital

Capital required for a business can be classified under two main categories via,

1) Fixed Capital

2)Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations.

Long terms funds are required to create production facilities through purchase of fixed assets such as p&m,

land, building, furniture, etc. Investments in these assets represent that part of firms capital which is

blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term

purposes for the purchase of raw material, payment of wages and other day to- day expenses etc.

These funds are known as working capital. In simple words, working capital refers to that part of the firms

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


2/25

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.


3/25

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 firms 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.


4/25

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 theseasonal 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.

And some special al is the amount of working capital which is required to meet the seasonal sets.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL


5/25

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 adequateworking 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 businessoperations. 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


6/25

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.


7/25

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.


8/25

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


9/25

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.


10/25

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


11/25

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


12/25

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. Theseshould 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


13/25

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


14/25

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 companys 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)


15/25

Year 2006 2007 2008

Quick Assets 44.14 47.43 61.55


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. Companys 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


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


16/25

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 accumulationsand slow moving goods and low profits as compared to total investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK


17/25

2

(Rupees in Crore)

Year 2006 2007 2008

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35Inventory Turnover Ratio 1.5 times 2.8 times 1.75 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 companys 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 days 202 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.


18/25

a) Debtors Turnover Ratio

b) Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtors velocity indicates the number of times the debtors are turned over during a

year. Generally higher the value of debtors 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 times 7.5 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 debtorsturnover, 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


19/25

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 days 49 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 competitors

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


20/25

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 2006-2007 2007-2008

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 2006-2007 2007-2008

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 croresbut in 2007 it has decrease to 1.79. The result of that it disturb the firms manufacturing


21/25

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 2006-2007 2007-2008

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 2006-2007 2007-2008Current 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 2006-2007 2007-2008

Current Liability 27.42 20.58 33.48

Interpretation :


22/25

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 2006-2007 2007-2008

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 eachcomponent, 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


23/25

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


24/25

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 & lossA/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


25/25

Balance Sheet ratios

Composite ratios

WCM - Project Report

Documents

Transcript of WCM - Project Report