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WORKING CAPITAL MANAGEMENT
With reference to Visakhapatnam Stee Pant
Rashtri!a Ispat Ni"am Limite#
SUBMITTED BY
S.ANITHAMBA (FINANCE)
Roll no:Y12BU20008
Under G!d"n#e o$
Mr.%.&.S.SURYANARAYANA A.G.M (F'A De.)
(&!*"+ Seel %l"n)
$EPARTMENT O% COMMERCE AN$ &'SINESS A$MINISTRATION
AC(AR)A NAGAR*'NA 'NIVERSIT)
NAGAR*'NANAGAR +G'NT'R
FACI,ITATED BY HR DE%ARTMENT
SRI. -.R.M.RA- AGM (HRD) SRI. M.,.S.&ARMA D/.M (HRD)
CERTIFICATE -F DEC,ARATI-N
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I here by declare that this project entitled or!n+ C"!"l
M"n"+e3en " &!4"5""n"3 Seel %l"n is my original work andprepared by me under the Sable guidance and Supervision of
Mr.%.&.S.Sr/"n"r"/"n" A.G.M ( F ' A ) of Visakhapatnam Steel Plant.
I also declare that, I have not submitted this project report to any other
university (or institution for the award of any degree (or diploma.
!ate"
Place"
Signature of the Student
S.#$I%
'eg.$o.)*+*---
CERTIFICATE
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%his is to certify that this project work entitled /0'1I$2 3#PI%#4 5#$#2656$%7"
&!4"5""n"3 Seel %l"n is a bonafide work of S.ANITHA 'eg no" )*+*---
carried out in partial fulfilment for the award of 5aster of +usiness #dministration (8inance
of #3'# $#2#'9$# $IV6'SI% under my Supervision and guidance at
Vishakhapatnam Steel Plant and completed successfully during *:;9$6;*-)* to);#2;
*-)*.Supervision and guidance during the academic year *-));*-)
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I take this opportunity to e=press my heartfelt thanks to my project
guideMr.%.&.S.Sr/"n"r"/"n"(F'A) for his guidance and suggestions during the
progress of my project. I am thankful to the &ISA7HA%ATNAM STEE, %,ANT,
for giving me an opportunity to undertake my project work.
5y special thanks to Mr. -.R.M.RA-,A.G.M(HRD) 'Mr. M.,.S
&ARMA D/.M (HRD) Gro o$ &ISA7HA%ATNAM STEE, %,ANT for his
valuable suggestions and co;operation throughout the project work.
I want e=press my sincere thanks to my 2uide Mr.%.&.S.SURYANARAYANA
A.G.M(F'A)for his constant moral support and valuable guidance in successful
completion of the project work.
8inally I would like to thank other faculty members for their e=tended co;operation >
suggestions which have helped a lot.
4astly, my heartfelt gratitude to my family and friends for their cooperation.
(S.ANITHA)
%REFACE
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This project report is a presentation of my eort to study
the practice of Financial Management in a public sector
enterprise, with reference to Rashtriy aIspat Nigam Limited,isha!hapatnam" The report presents the practical approach in
the subject of Financial Management, mainly in the #eld of
$WORKING CAPITAL MANAGEMENT%" It intends to pro&ide
brief !nowledge of &arious concepts, 'rinciples, approaches,
considerations rele&ant to this #eld" The 'roject Report has
undergone a realistic sur&ey of actual theory and practices in(' although there may be much gap to be bridged"
This report see!s to co&er the topics of Financial
Management, mainly focusing on the aspects li!e wor!ing
capital Management, )ash Management, Recei&ables
Management, In&entory Management etc"
The report has been di&ided into #&e chapters and the
arrangements of topics in &arious chapters ha&e been grouped
according to the analysis of the subject"
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S.$0 I$!6? P#26 $o.
) I$%'0!3%I0$ );@
* I$!S%' P'08I46 )-;*-
< 305P#$ P'08I46 *);A:
A %&60'I%I3#4 8'#56 /0'1 AB;B
: #$#4SIS #$! I$%6'P'6%#%I0$ B@;*
B S55#' S226S%I0$S 8I$!I$2S for 0ccupational
health > safety (0&S#S;)--).
Visakhapatnam e=ports Huality pig iron > steel products to Srilanka,
5yanmar, $epal, 5iddle 6ast, S#, 3hina, and South 6ast #sia. &aving total
manpower of about )B,B--. VSP has envisaged a labour productivity of *B:
tonnes per man year of liHuid steel
B"#+rond
/ith a view to give impetus to industrial growth and to meet the
aspirations of the people from #ndhra Pradesh, 2overnment of India decided to
establish integrated steel plant in public sector at Visakhapatnam. %he
announcement to this effect was made in the parliament on )Cth
april7)@C- by
the then prime minister of India late Smt. Indira 2andhi. %he foundation stone
for the plant was laid by Smt. Indira 2andhi on *-.-).)@C).
#n agreement was signed between governments of India and the
erstwhile SS' on 9une )*th, )@C@ for setting up of an integrated steel plant to
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produce structural > long products on the basis of detailed project report
prepared by 5Ks 5.$. !astur> 3ompany.
%he construction of the plant was started on )st 8ebruary )@*
2overnment of India on )th 8ebruary )@* formed a new company called
'ashtriyaIspat $igam ltd. ('I$4 and transferred the responsibility of
constructing, commissioning > operating the plant at Visakhapatnam from steel
authority of India 4td. to 'I$4.
%he plant was dedicated to the nation by the then prime minister of India late
Sri P.V. $arasimha'ao on )st#ugust )@@*.
Te#5nolo+/:
state;of;the;art"
i. C meter tall coke oven batteries with coke dry Huenching.
ii. +ell;less top charging system in blast furnace.
iii. )--J slag granulation at the +8 cast house.iv. Suppressed combustion M4! gas recovery system.
v. )--J continuous casting of liHuid steel.
vi. %empcore and stelmor cooling in 4555 > /'5 respectively.
vii. 6=tensive waste heat recovery systems.
viii. 3omprehensive pollution control measures.
"er 4l/:#n operational water reHuirement of
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Visakhapatnam steel plant is supplying B- 5/ power to #ndhra Pradesh state
electricity board.
M"6or Re4or#e o$ R" M"er!"l
'aw material Source
Iron ore lumps > fines +ailadilla, 5P
+8 lime stone 9aggayyapeta, #P
S5S lime stone 5iddle 6ast
+8 dolomite 5adharam, #P
S5S dolomite 5adharam , #P
5anganese 3hipurupalli, #P+oiler coal %alcher, 0rissa
3oking coal #ustralia
5edium coking coal(533 2idiK swangK rajarappaK kargali.
M"6or n!4
!epartment #nnual
capacity
(L--- %
nits(C mtrs height
Sinter plant :,*:B * sinter machines of
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+last furnace
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tension (&% power at classes of work
regularly.
S"$e/ En+!neer!n+ De"r3en:
Safety engineering department advises and assists the management in the
fulfilment of obligation concerning prevention of accidents and maintaining a
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safe working environment.sed conducts safety campaigns and safety
competitions amongst the employees to promote safety.sed co;ordinates and
liaison with #P factories department.
De4!+n ' En+!neer!n+ De"r3en:
Preparation of drawings, design and specifications for #5' and $on
#5' jobs.
4ayout clearances of various facilities coming in the plant and township.
0peration of consultancy contracts.
M"re!n+ de"r3en:
It has *Ano.of branch sales offices all over India and four regional offices
viF. north; !elhi, South;3hennai, /est; 5umbai, 6ast; 1olkata and
&eadHuarter sales. 5ain activities of marketing are as follows"
3ollecting market feedback and customers reHuirements for the
preparation of annual plan in coordination with works department. Preparation of market policies.
8inalising of long term contracts, 5os, spot sale agreements etc., in
domestic and e=port markets. 'endering after sales services, obtaining
customer feedback and customer relations management.
&!4"5""n"3 4eel l"n ol!#!e4:
H3"n re4or#e ol!#/:
%o realiFe the full potential of employees, the company is committed to"
6nsure functioning of effective communication channels with employees.
6mpower employees for enhancing commitment responsibility and
accountability.
6ncourage teamwork, innovativeness and high achievement oriented.
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Provide systems for maintain transparency, fairness and eHuality in
dealing with employees.
H3"n re4or#e deelo3en:
4eadership training.
%raining in motivation and attitude.
%eam building
Skill training
Induction and orientation
Plant practice lectures
+asic engineering lectures Plant specialiFed training
5anagement development
%oll!on #onrol "nd en!ron3en"l roe#!on:
2enerally integrated steel plant is considered as a major contributor to
environmental pollution as it discharges volume of waste products. 6laborate
measures have been adapted to combat air and water pollution. In order to be
echo friendly, Visakhapatnam steel plant has planted more than < million trees
over an area of
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F!n"n#!"l er$or3"n#e (R4.Cr4) $or "4 $!e /e"r4:
ear 2ross margin 3ash profit $et profit*--C;*--
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6=pand plant capacity to B.< 5% by *-)*;*-)< with the mission to
e=pand further in subseHuent phases as per the corporate plan.
Sustain gross margin to turnover ratio O *:J
+e amongst top : lowest cost liHuid steel producers in the world.
#chieve higher levels of customer satisfaction than competitors.
+e recognised as an e=cellent business organisation by *-)*;*-)
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TAB,E SH-ING C-MMERCIA, %ERF-RMENCE
*
+***
***
-***
.***
/****
/+***
(ales Turno&er
0omestic (ales
12ports
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F!n"n#!"l er$or3"n#e:
Visakhapatnam steel plant had to bear the burnt of huge project cost right
from its day of inception. %his has affected the companyEs bKs due to very high
interest burden. %he company in spite of making operating profit every year had
to report net loss during all financial years. %his is on the other hand resulted in
making VSP to take greater in planning the financial resources.
%he financial performance of VSP for the past to present years is as
follows" ('s.in3rores
Sales 3ross 5arin 3ash Profit $et Profit
)@@@;*--- *@C*.B- *:*.*C ;)*@.@ ;:B).B
*---;*--)
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3+***
*
+***
***
-***
.***
/****
/+***
(ales
)ross Marin
)ash 'ro#t
Net 'ro#t
Sor#e4 o$ $nd4:
VSP raise its working capital from of )- +ankers. %he following are the )-
banks. /here funds for finance are raised
State +ank of India
3anara +ank
30 +ank
+ank of +aroda
#ndhra +ank
State +ank of &yderabad
#llahabad +ank
&S+3
Industrial !evelopment +ank of India ( I!+I
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Indian 0verseas +ank ( I0+
A#5!ee3en4 "nd A"rd4:
%he efforts of VSP have been recogniFed at various forums. Some of the
major awards received by VSP are in the area of energy conservation,
environment protection, safety, Huality, circles, 'ajbhasha. 5o, sports and a
number of awards at the individual level.
Indira PriyadarshiniVriksha5itra award ;)@@*;@< $ehru 5emorial
$ational award for pollution control in )@@*;@< >)@@
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A l"nd 3"r /e"r o$ +ro5:
%he year *--:;*--B saw the company registering then best ever sales turnover
of 's.A* cores a
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%he perceived risks that hindered the industryEs resource mobiliFation efforts
are now being replaced by a general feel good factor. %his will help the industry
significantly. %he turn M around in the industry has come at a very opportune
time.
%he Indian steel industries continue to remain focused on the merging
opportunities in the world market. 3hain is offering great. 0pportunities to the
Indian industry. !espite the massive growth in steel output in 3hina, there will
always be opportunities for the Indian e=porters. %he international business has
to be carried out consistently 6lse the market will be lost at the first sign of a
downturn. %he Indian steel industry has come a long way from the days of
control and strive to remain globally competitive. %his is the age of technology
and we have the reHuisite resources to the lead in take the steel sector.
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B-ARD -F DIRECT-RS
3I'5#$;35;5#$#2I$2
!I'63%0'
Sri. #.P 3&0/#!#'
!I'63%0' ( P6'0$$64 .'.'6!!
!I'63%0' ( 30556'I3#4 %.1.3$!
!I'63%0' ( 0P6'#%I0$S 56S& 3$!'#
!I'63%0' (8I$#$36 P.5#!&S!$
!I'63%0' ( P'0963%S Sri $ S '#0
INDEPENDENT DIRECTORS Sri # P V $ S'5#
Sri & S 3'
Sri S/#'&P#/#$ SI$2&
GOVT. DIRECTORS !r !#4IP SI$2&
Sri.S.5#3&6$!'# $#%$
305P#$ S63'6#%#' P.50$ '#0
'62IS%6'6! 088I36 ADMINISTRATI&E BU,DING
&ISA7HA%ATNAM STEE,
%,ANT
&ISA7HA%ATNAM=1
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%ro$!le o$ &!4"5""n"3 4eel l"n:
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Inrod#!on:
Steel occupies the foremost place among the materials in use today and
pervades all walks of life. #ll key discoveries of human genius, for instance,
Steam 6ngine, 'ailway, means of 3ommunication and 3onnection,
#utomobiles, #ero Plane and 3omputers are in one way or other fastened
together with steel and its sagacious and 5ultifaceted applications.
Steel is versatile material with multitude of useful properties, making it
indispensable for furthering and achieving continual growth of economy be it
3onstruction, manufacturing, infrastructure or consumables. %he level of steel
consumption has long been regarded as an inde= of industrialiFation and
economic maturity attained by a country.
1eeping in view of the importance of steel, the following integrated steel plants
with foreign collaborations were set up in public sector in post independence era
Ine+r"ed 4eel l"n4 !n Ind!":
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STEE, %,ANT C-,,AB-RATI-N
!urgapur Steel Plant +ritain
+hilai Steel Plant 6rstwhile SS'
+okaro Steel Plant 6rstwhile SS'
'ourkela Steel Plant 2ermany
-B>ECTI&ES -F THE STUDY
%o find out working capital position of the company for last five years.
%o identify the liHuidity position in the Visakhapatnam steel plant.
%o study the liHuidity position through various working capital related
ratios.
%o e=amine the policies and procedures of the working capital
management.
%o e=amine the cash management policies and practices.
%o e=amine the utiliFation of current assets and management of inventory
receivables.
%o study and analyse the changes in working capital.
%odraw conclusion and to suggest suitable measures to overcome the
problems and to improve its performance.
NEED F-R THE STUDY
%he study is concerned for the following needs.
/orking capital decides not only liHuidity and solvency but also
operating efficiency of the organiFation.
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%his project is done as a whole entirely. It will give overall view of the
organiFation and it is useful in further e=pansion decision to be taken by
management.
%o study the working capital needs and strength of the organiFation inmeeting and managing working capital of the organiFation.
%his project also useful as it combines the present year data with the
previous year data and thereby it shows the trend analysis, i.e. increasing
or decreasing.
METH-D-,-GY
'esearch methodology is a way to solve the research problems
systematically. 'esearch may be one common parlance referred to as
knowledge. In research methodology we not only talk of the research methods,
but also consider the logic behind the methods we use in the content of our
research study and e=plain why we are using a particular method or techniHue.
&ence in this study various steps that are generally adopted in studying research
problem along with the logic behind them. It is a broad outline of the method
and procedure adopted for the purpose of the study.
!ata collection methods"
%he given below diagram shows the data collection methods
!ata collection
%r!3"r/ d"":
Secondary dataPrimary data
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#ny information which is collected a fresh and for the first time is called
primary data the primary data happen to be original in character. %he
information is gathered from concerned employees and managers of the
financial department have provided the information needed for the study.
Se#ond"r/ d"":
Information which has already been collected by somebody else or some other
agency with definite purpose and which has already been proposed is called
secondary data. %he secondary data for the study have been gathered from the
balance sheets, profit and loss accounts, annual reports and other books and
manuals of the '#S&%'I# ISP#% $I2#5 4%!.
SC-%E -F THE STUDY
#s longer as the accounting practices more or less the same over time,
e=amining trends in raw financial data and financial ratios can draw
meaningful interpretations.
Since all the steel industries operate almost similarly, the analysis of the
financial performance of Visakhapatnam steel plant will certainly help in
comparing the performance of the other industries operating in the same
field and analyFe the overall performance of the steel industry.
%he project helps to understanding the financial analysis works carriedover in the organisations on accounting basis.
,IMITATI-NS -F THE STUDY
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%hough this project is completed successfully a few limitations may be
limitations.
#lthough every effort has been made to study the D/0'1I$2 3#PI%#4
5#$#2656$%7 in detail, in an organiFation of VSP siFe, it is not
possible to make an e=haustive study in a limited duration of A weeks.
#part from the above constraints, one serious limitation of the study is
that it is not possible to reveal some of the financial data owing to the
policies and procedures laid down by VSP. &owever the available data is
analyFed with great effort to get an insight into working capital
management in VSP.
#nd analysis of sub topics is limited to some e=tensions.
%he study is carried basing on the information and documents provided by
the organiFation and based on the interaction with the various employees
of the respective departments.
!ue to lack of time constraint data is collected only five years.
!ue to income ta= problem eliminate the top secretes of the company.
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C(APTER,0T(EORITICAL %RAME WORK
THE-RITICA, FRAME -R7
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/orking capital 5anagement is concerned with the problems that arise in
attempting to manage the current assets, current liabilities and the interrelationship between them. Its operational goal is to manage the current assets
and current liabilities in such away that a satisfactory level of working capital is
maintained. Successful and effective 5anagement of working capital results in
improved rate of returns on the capital invested in short term assets.
C-NCE%TS:
%here are two concepts of working capital
).Gro44 or!n+ #"!"l:
2ross /orking 3apital refers to the companyEs investment in
current assets. 3urrent assets are the assets which can be converted into cash
within an 0perating 3ycle time or within an accounting year i.e., within )*
months. %his includes cash, short term securities, debtors. +ills receivable and
inventory. %his 2ross /orking 3apital concept is also called D6conomist
3oncept7.
%he gross working capital concept focuses attention on two
aspects0f current assets management.
a 0ptimum investment in current assets and
b 8inancing of current assets.
*.Ne or!n+ #"!"l: (NC):
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$et working capital refers to the difference between current assets and
current liabilities. %his $et /orking 3apital concept is also called as
D#ccountants 3oncept7. 3urrent liabilities are the claims of outsiders which aree=pected to mature for payment within an accounting year. $et working capital
concept also covers the Huestion of judicious mi= of long term and short term
funds for financing current assets.
%he level of $/3 has a bearing on the 3ompanyEs Profitability as well as
the risk, in the sense that it affects the ability or otherwise of the firm to meet its
obligations as and when they become due. %herefore, a trade off between
profitability and risk is an important element in evaluation of the level of
$/3.In general, the higher the $/3, the lower the risk and profitability and
vice versa.
or!n+ C"!"l M"n"+e3en Go"l:
%he goal of working capital management is to manage the firmsE3urrent
#ssets and 3urrent 4iabilities in such away that a satisfactory level of working
capital is maintained. %his is so because if the firm cannot maintain a
satisfactory level of working capital, it is likely to become insolvent and may
even be forced into bankruptcy. Sometimes, a 3ompany may have tremendous
potential for profitability in the long run, but may languish due to inadeHuate
liHuidity. %he interaction between current assets and current liabilities therefore,the main theme of the theory of working capital management.
T/e4 o$ or!n+ #"!"l:
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/orking 3apital of any enterprise consists of two parts viF.,
1) %er3"nen or!n+ C"!"l "nd
2) Te3or"r/ or &"r!"9le or!n+ C"!"l.
%er3"nen or!n+ C"!"l:
Some portion of the working capital investment is always locked;up in
the form of raw materials, /ork;in;Progress, 8inished 2oods, +ook !ebts,
5inimum 3ash +alance etc. at any point of time. %his portion is the minimum
level of investment that is reHuired to continue the operations of the business
without any interruption is referred to as the Permanent /orking 3apital
portion. #ccording to the %#$!0$ 3055I%%66 recommendations, a
portion of the 3urrent #ssets are to be financed from the 4ong %erm funds.
Variable /orking 3apital"
%his is also known as circulating of transitory /orking 3apital. %his is the
portion of the total /orking 3apital that is reHuired to take care of the seasonal
fluctuations in the business activity.
!eterminants of /orking 3apital"
%he need of working capital is not always the same it varies from year to
year or even month;to;month depending upon a number of factors. %here is no
set of rules or formulate to determine the working capital needs of the firm.
6ach factor has its own importance and its importance of the factors changes for
a firm over time.
In order to determine the proper amount of working capital of concern, the
following factors should be considered.
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$ature of business.
SiFe of the business unit.
Seasonal variation.
%ime consumed in manufacturing.
%urnover of circulating capital.
$eed to stockpile raw material and finished goods.
2rowth and e=pansion.
+usiness cycle fluctuations.
%erms of purchase and sale.
Pricing level changes.
Inventory turnover.
!ividend policy.
#pproaches of /orking 3apital !etermination"
%here are < well known types of deciding on the Huantum of /orking
3apital reHuirement. %hey are
). &edging #pproach
*. 3onservative #pproach
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In &edging approach, the core current assets are financed through long
term funds and the seasonal and other reHuirements are met from temporary
sources. %his approach is more profitable and more risky. In the case of
3onservative approach, the total reHuirement is met from long term sources and
the reHuirement due to cyclical and unforeseen situations are met from short
term funds. %his approach is less profitable and less risky. +oth these
approaches are two e=tremes. %herefore, the rational approach, L%rade off
#pproachE is followed whereby a trade off between profit and risk is arrived and
that level of $et /orking 3apital is decided.
%ro9le34 o$ !n"de
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D"n+er o$ e;#e44!e or!n+ #"!"l:
# firm may be tempted to over trade and lose heavily.
nable to e=tract benefits of customers credit.
%he situation may lead to unnecessary purchases and accumulation of
inventories. %his cause more chances of theft, waste, losses etc.
%here arises an imbalance between liHuidity and profitability.
6=cessive working capital means funds are idle.
%he situation leads to greater production, which may not be having
matching demand.
%he e=cess of working capital leads to carelessness about cost of
production.
R"!o4 o 3e"4re 5e e$$!#!en#/ o$ or!n+ #"!"l:
3urrent 'atio" 3urrent assetsK3urrent liabilities.
uick 'atio" (current assets M Inventories K3urrent liabilities.
Sales to cash" Sales during a period K #verage cash balance.
#verage collection period" !ebtors dividend by annual credit sales and
the resulting figure multiplied by
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or!n+ #"!"l %ol!#/:
/orking capital management policies have a great effect on firmQs profitability,
liHuidity and its structural health. # finance manager should therefore, chalk out
appropriate working capital policies in respect of each component of working
capital so as to ensure high profitability, proper liHuidity and sound structural
health of the organiFation.
In order to achieve this objective the financial manager has
toperform basically following two functions.
). 6stimating the amount of working capital.
*. Sources from which these funds have to be raised.
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3omponents of working capital"
%ARTA: Crren A44e4
". Inenor!e4:
'aw material
/ork in progress
8inished goods
9.Tr"de de9or4:
4oans and advances
Investment (short term
3ash bank balances
%ARTB: Crren l!"9!l!!e4:
Sndr/ #red!or4
%rade #dvances
+orrowings
3ommercial banks
Provisions 3urrent
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-er"!n+ #/#le or #!r#l"!n+ #"45 $or3":
/orking 3apital refers to that part of firmEs capital which is reHuired for
financing short term or current assets such as cash, marketable securities, debtors
and inventories. 8unds thus invested in current assets keep revolving fast and
being constantly converted into cash and these cash flows out again in e=change
for other current assets. &ence it is also known as revolving or circulating capital.
%he circular flow concept of working capital is based upon this operating or
working capital cycle of a firm.
'eceivable conversion 'a'aw materials conversion period
period ('3P ('5S3P
3ash received form
!ebtors and paid to suppliers
4f raw materials
Sales of finished 'aw materials
2oods introduced into process
8inished 2oods
Produced
8inished goods conversion workin process Period (823P3onversion
period
(/IP3P
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On the 1asis of concept On the 1asis of time
Net Workin" capitaPermanent or 23e# 4orkin" capita
Capita
Temporar! or 5aria1e 4orkin" cap
Capita
Gross Workin" capita
or!n+ #"!"l 3"/ 9e #l"44!$!ed !n o "/4:
0n the basis of concept
0n the basis of time
0n the basis of concept, working capital is classified as gross
working capital and net working capital. %he classification is important from the
point of view of the financial manager.
0n the basis of time, working capital may be classified as"
Permanent or 8i=ed working capital
%emporary or Variable working capital
Reser5e
Workin" Re"6ar
Kin#s of Workin" Capita
Specia Workin"
CapitaSeasona
Workin"
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1. %er3"nen or $!;ed or!n+ #"!"l:
Permanent or fi=ed working capital is the minimum amount which is
reHuired to ensure effective utiliFation of fi=ed facilities and for maintaining the
circulation of current assets. %here is always a minimum level of current assets
which is continuously reHuired by the enterprises to carry out its normal
business operations.
2. Te3or"r/ or "r!"9le or!n+ #"!"l:
%emporary or variable working capital is the amount of working capital which
is reHuired to meet the seasonal demands and some special e=igencies.Varibles
working capital can be further classified as second working capital and special
working capital. %he capital reHuired to meet the seasonal needs of the
enterprises is called the seasonal working capital.
%emporary working capital differs from permanent working capital in the sense
that is reHuired for short periods and cannot be permanently employed gainfully
in the business.
T5e need or o96e#4 o$ or!n+ #"!"l:
%he need for working capital cannot be emphasiFed. 6very business
needs some amount of working capital. %he need of working capital arises due
to the time gap between production and realiFation of cash from sales. %here is
an operating cycle involved in the sales and realiFation of cash. %here are time
gaps in purchase of raw materials and production, production and sales,
#nd sales, and realiFation of cash, thus , working capital is needed for the
following purposes"
8or the purchase of raw materials , components and spaces
%o pay wages and salaries
%o incur day to day e=penses and overhead costs such as fuel, power and
office e=penses etc.
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%o meet the selling costs as packing, advertising etc.
%o provide credit facilities to the customers.
%o maintain the inventories of raw materials, work Min; progress, stores
and spares and finished stock.
8actors determining the working capital reHuirement"
%he working capital reHuirements of a concern depend upon a large number of
factors such as nature and siFe of the business, the characteristics of their
operations, the length of production cycle , the rate of stock turnover and the stateof economic situation. &owever the following are the important factors generally
influencing the working capital reHuirements.
N"re or #5"r"#er!4!#4 o$ " 94!ne44:
%he nature and the working capital reHuirement of enterprises are interlinked.
/hile a manufacturing industry has a long cycle of operation of the working
capital, the same would be short in an enterprises involve in providing services.
%he amount reHuired also varies as per the nature, an enterprises involved in
production would reHuired more working capital then a service sector
enterprise.
M"n$"#re rod#!on ol!#/:
6ach enterprises in the manufacturing sector has its own production policy,
some follow the policy of uniform production even if the demand varies from
time to time and other may follow the principles of demand based production inwhich production is based on the demand during the particular phase of time.
#ccordingly the working capital reHuirements vary for both of them.
-er"!on4:
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%he reHuirement of working capital fluctuates for seasonal business. %he
working capital needs of such business may increase considerably during the
busy season and decrease during the
M"re #ond!!on:
If there is a high competition in the chosen project category then
one shall need to offer sops like credit, immediate delivery of goods etc for
which the working capital reHuirement will be high. 0therwise if there is no
competition or less competition in the market then the working capital
reHuirements will be low.
A"!l"9!l!/ o$ r" 3"er!"l:
If raw material is readily available then one need not maintain a
large stock of the same thereby reducing the working capital investment in the
raw material stock . 0n other hand if raw material is not readily available then a
large inventory stocks need to be maintained, there by calling for substantial
investment in the same.
Gro5 "nd e;"n4!on:
2rowth and 6=pansions in the volume of business result in
enhancement of the working capital reHuirements. #s business growth and
e=pands it needs a larger amount of the working capital. $ormally the needs for
increased working capital funds processed growth in business activities.
%r!#e leel #5"n+e4:2enerally raising price level reHuire a higher investment in the working capital.
/ith increasing prices, the same levels of current assets needs enhanced
investments.
M"n$"#r!n+ #/#le:
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%he manufacturing cycle starts with the purchase of raw material and is
completed with the production of finished goods. If the manufacturing cycle
involves a longer period the need for working capital would be more. #t time
business needs to estimate the reHuirement of working capital in advance for
proper control and management. %he factors discussed above influence the
Huantum of working capital in the business. %he assessment of the working
capital reHuirement is made keeping this factor in view.
6ach constituent of the working capital is valued on the basis of valuation
6numerated above for the holding period estimated. %he total of all such
valuation becomes the total estimated working capital reHuirement.
Principles of working capital management policy"
C-M%-NENTS -F -R7ING
CA%ITA, BASIS -F &A,UATI-N
Stock of 'aw 5aterial Purchase of 'aw 5aterial
Stock of /ork ;in; Process
#t cost of 5arket value which is
lower
Stock of finished 2oods 3ost of Production
!ebtors 3ost of Sales or Sales Value
3ash /orking 6=penses
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%he following are the general principles of a sound working
3apital management policy.
1. %r!n#!le o$ r!4 "r!"!on (#rren "44e4 ol!#/):
'isk here refers to the inability of a firm to meet its obligations as and when
they become due for payment. 4arger investment in current #ssets with less
dependence on short term borrowings, increase liHuidity, reduces risk and
thereby decreases the opportunity for gain or loss. 0n the other hand less
investments in current assets with greater dependence on short term borrowings,
reduces liHuidity and increase profitability. In other words there is a definite
inverse relationship between the degree of risk and profitability.
2. %r!n#!le4 o$ #o4 o$ #"!"l:
PRINCIPLES O% WORKING CAPITAL MANAGEMNT POLIC)
PRINCIPLES O%
RISK
PRINCIPLES O%
COST O%
PRINCIPLES O%
E7'IT)
PRINCIPLES O%
MAT'RIT) O%
PA)MENTS
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%he various source of raising working capital finance have
different cost of capital and the degree of risk involved. 2enerally, higher and
risk however the risk lower is the cost and lower the risk higher is the cost. #
sound working capital management should always try to achieve a properbalance between these two.
=. %r!n#!le o$ e
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CASH MANAGEMENT
Me"n!n+ o$ #"45:
%he term LcashE is used in two senses. In a narrower sense it includes currency
notes, cheHues, bank drafts held by a firm with it and the demand deposits held
by it in banks. In a broader sense it also includes near cash assets such as
marketable securities and time deposits with bank.
%he main reason for a firm to hold cash is to meet the needs of day;to;day
transactions and to protect the firm against uncertainties characteriFing its cash
flows. /hile cash serves these functions, it is an idle resource which has an
opportunity cost. %he liHuidity provided by cash holding is at the e=pense of
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profits sacrificed foregoing alternative opportunities. &ence, the finance
manager should carefully plan and control cash.
3ash is the one of the current assets of a business. It is needed at all times
to keep the business going. # business concern should always keep sufficient
cash for meeting its obligations. #ny shortage of cash will hamper the
operations of a concern and any e=cess of it will be unproductive. 3ash is the
most unproductive of all the assets.
3ash itself doesnEt produce goods and services. It is used as a medium to
acHuire other assets. It is the other asset, which is used in manufacturing goods
or providing services. %he ideal cash can be deposited in bank to earn interest. #
business has to keep reHuired cash for meeting various needs. %he assets
acHuired by the cash again help the business in producing cash. %he goods
manufactured are sold to acHuire cash. %he firm will have to maintain a criticallevel of cash. If at a time it doesnEt have sufficient cash with it, it will have to
borrow from the market for reaching reHuired level.
%here remains gap between cash inflows and outflows. Sometimes cash
receipts are more than cash payments. It is called surplus. Sometimes cash
payments are more than cash receipts. %his is called as deficiency. # financial
manager tries to synchronise cash inflows and cash outflows. Perfect
synchroniFation of receipts and payments of cash is only an ideal situation.
3ash management has assured importance because it is the most significant
of all the current assets. It is reHuired to meet business obligations and it is
unproductive when not used. It is deals with the following.
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") C"45 %l"nn!n+:
3ash planning is a techniHue to plan and control the use of cash. #
projected cash flow statement may be prepared, based on the present business
operations and anticipated future activities. %he cash inflows from various
sources may be anticipated > cash outflows will determine the possible uses of
cash.
9) C"45 $ore#"44 "nd 9d+e!n+:
# cash budget is the most important device for the control of receipts and
payment of cash. # cash budget is an estimate of cash receipts. It is an analysis
of flow of cash in a business over a future, short or long period of time. It is a
forecast of e=pected cash intake and outlay. %he short;term forecasts can bemade with the help of cash flow projections. %he long;term cash forecasts are
also essential for proper cash planning. %hese estimates may be for three, four,
five or more years.
") Re#e!4 "nd d!49r4e3en4 3e5od.
9) A "d64ed ne !n#o3e 3e5od.
-96e#!e4:
%o meet cash disbursement need as per the payment schedule.
tiliFation of cash effectively.
%o minimiFe amount locked up as cash balances.
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Mo!e $or 5old!n+ #"45:
%here are four motives for holding cash
%ransaction motive
Speculative motive
3ompensation motive
Precautionary motive
Tr"n4"#!on 3o!e: # firm enters into a variety of business
transactions resulting in both inflows and outflows.
Se#l"!e Mo!e:
# firm keeps cash balance to take advantage of une=pected
opportunities, typically outside the normal course of the business such
motive is therefore is purely speculative motive.
Co3en4"!on 3o!e:+anks provide certain services to their clients free of charge. %hey
therefore, usually reHuire clients to keep to minimum cash balance with them
which keep them to earn interest and they compensate them for the free services
so provided.
%re#"!on"r/ Mo!e:
# firm keeps cash balance to meet une=pected cash needs arising out of
une=pected contingencies.
C"45 3"n"+e3en 9"4!# ro9le34:
3ash is the life blood of a business firm, it is needed to acHuire supplies,
sources eHuipment, and other assets used in generating the products and service
provided by the firm. It is also needed to pay wages and salaries to workers and
managers, ta=es to governments, interest and principal to creditors, and
dividends to shareholders.
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C"45 4/4e3:
%he cash system of a firm is the mechanism that provides the linkage between
cash flows.
6lements of a cash management system"
Re#e!"9le4 3"n"+e3en:2iven a choice, every business would prefer selling its produce on cash
basis. &owever, due to factors like trade policies, prevailing marketing
conditions, etc., businesses are compelled to sell their goods on credit. In certain
circumstances, a business may deliberately e=tend credit as a strategy of
increasing sales. 6=tending credit means creating a current asset in the form of
!ebtors or #ccounts receivables. Investment in this type of current assets needs
proper and effective management as it gives rise to costs such as"
") Co4 o$ #"rr/!n+ re#e!"9le
9) Co4 o$ de9 lo44e4
%hus the objective of any management policy pertaining to accounts
receivables would be to ensure that the benefits arising due to the receivables
)"'"
0eposit)"R"
)"R"
Loc! bo2
ban! +
)"'"
)"'"
0isbursemen0eposit)"R )oncentrati
on ban! )"'")"R"
)"'"0isbursemen
)"R"
Loc! bo2
ban! +)"'"
)"R"
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are more than the cost incurred for receivables and the gap between benefit and
cost increases resulting in increased profits. 6ffective control of receivables
helps a great deal in properly managing it. 6ach business should, therefore try tofind out an average credit e=tended to its client using the below given formula
%otal amount of receivables
Aer"+e #red! e;ended
#verage credit sales per day
6ach business should project e=pected sales and e=pected investment in
receivables based on various factors, which influences the working capital
reHuirement. 8rom this it would be possible to find out the average credit days
using the above seven formula. 0therwise of investment in the working capital
would increase and as a result activities may get sHueeFed. %his may lead to
cash crisis.
Sor#e4 o$ or!n+ #"!"l $nd4:
'I$4 raise its working capital multiple banking which includes
State bank of India, State bank of &yderabad, +ank of +aroda, 3anara
bank, 30 bank, #ndhra bank, PS+, IndusIndbank.etc.
In 'I$4 working capital reHuirement is assessed by
8i=ing the target production for the year
Preparation of +udget (in 'upees
/orking capital reHuirement are prepared taking into account
Previous two years actual
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Projected for the ne=t two years
%ro#edre $or ro#re3en o$ $nd4:
'I$4 applies a 3redit 5onitoring #nd #ppraisal (35# 'eport (a 8orty
pages document consists of historical data about the company and profit and
loss account, balance sheet, current assets, current liabilities, working capital
assessment, fund flows etc., State +ank of India subscribes the ma=imum
working capital limit (up to e=tent of
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# letter of credit is a document typically issued by a bank or financial
institution, which authoriFes the recipient of the letter (the RcustomerR of the
bank to draw amounts of money up to a specified total, consistent with anyterms and conditions set forth in the letter. %his usually occurs where the banks
customer seeks to assure a seller (the RbeneficiaryR that it will receive payment
for any goods it sells to the customer.
In simple terms, a letter of credit could be said to document a bank
customers line of credit, and any terms associated with its use of that line of
credit. 4etters of credit are most commonly used in association with long;
distance and international commercial transactions.
%"/"9le4 3"n"+e3en:
5anagement of accounts payable is as much important as the
management of such accounts receivable. &owever there is a basic difference
between the approaches adopted by the finance manager in both the cases. %he
underlying objective in such case of accounts receivables is to ma=imiFe the
acceleration of collection process while in case of accounts payable it is to slow
down the payments process as much as possible. %he delay in payments of
accounts payable may result in saving of some interests costs but proves very
costly to the firm in the form of loss of credit in the market. %he financemanager therefore has to ensure that the payments to the credits are made at the
stipulated time period after obtaining the best credit term possible.
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Conrol o$ "##on4 "/"9le:
3omputing the average age of payable can be calculated by any of the following
methods. 5onths or days in the period K #ccounts payable turnover T 3redit
purchase in the period K #verage accounts payable.
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)67'T1R3
7N7L8(I( 9 INT1R'R1T7TI4N
DATA ANA,YSIS AND INTER%RETATI-N
Crren r"!o:
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%he current ratio is an indication of a firmEs market liHuidity
and ability to meet creditorEs demands. #cceptable current ratios vary from
industry to industry. If a companyEs current liabilities e=ceed current assets (the
current ratio is below ), then company may have problems meeting its shortterm obligations. If the current ratio is too high, then the company may not be
efficiently using its current assets or its short term financing facilities. %his may
also indicate problems in working capital management.
Crren r"!o:current assets K current liabilities
Crren "44e4:
ears Inventory sundry
debtors
cashKbank
balance
other
current
assets
loans and
advances
%otal
*--B;-C )*-
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*--C;- )B)-.): ):).AC
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from these operations. In a general sense, the higher the working capital turn
over, the better because it means that the company is generating a lot of sales
compared to the money uses to fund the sales.
i.e. working capital T (current assets; current 4iabilities
/orking capital turnover ratio T net salesK working capital
TAB,E SH-ING -R7ING CA%ITA, TURN-&ER RATI-
Sales /orking capital 'atio
*--B;-C C@
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2006-07 2007-08 2008-09 2009-10 2010-11
0
0.5
1
1.5
2
2.5
3
3.5
ratio
Inerre"!on:
%he working capital is increasing year by year. %he company will utiliFes
firms funds, so company is growing in level of assets.
Ne or!n+ #"!"l r"!o:
%his ratio is calculated by dividing net working capital by net assets. %hedifference between current assets and current liabilities e=cluding short term
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borrowings is called net working capital or net assets. $et working capital
sometimes used as a measure of firms liHuidity. &owever measure the firmEs
potential reservoir of funds.
Ne or!n+ #"!"l r"!o: $et working capital K net assets
TAB,E SH-ING NET -R7ING RATI-
ears $et working
capital
$et assets $et working capital ratio
*--B;-C
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2006-07 2007-08 2008-09 2009-10 2010-11
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
ratio
Inerre"!on:
%he net working capital is decreasing year by year. +ut the net assets
are increasing year by year. So the company liHuidity position is good
!# r"!o
In finance the #cid;test or Huick ratio measures the ability of a company
to use its near cash or Huick assets to e=tinguish or retire its current liabilities
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immediately. uick assets include those current assets that presumably can be
Huickly converted to cash at close to their book values. # company with a Huick
ratio of less than I can not currently pay back its current liabilities.
!# r"!o T Huick assets K current liabilities
ears uick assets 3urrent liabilities uick ratio
*--B;-C @*AA.B *)-A.
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2006-072007-082008-092009-102010-11
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
quick ratio
Inerre"!on:
%he ideal ratio is )") therefore, the company has to recogniFe the importance of
liHuidity and tries to increase or utiliFe the Huick assets properly.
DEBT-RS TURN-&ER RATI-
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# firm sells goods for cash and credit. 3redit is used marketing tool by a
number of companies. /hen the firm e=tends credits to its customers, debtors
(accounts receivables are created in the firmsQ accounts. %he debtors aree=pected to be converted into cash over a short period and, therefore, are
included in current assets. %he liHuidity position of the firm depends on the
Huality of debtors to a greater e=tent. !ebtors turnover ratio indicates the
velocity of debt collection of a firm. n simple wards it indicates the number of
times average debtors are turned over during a year.
Sales
!ebtors %urnover 'atio T ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
!ebtors
Ye"r S"le4 De9or4
De9or 4? rnoer R"!o
*--B;-C @):-.:C *)B.- A*.*-*--C;- )-A
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DEBT-RS TURN-&ER RATI-
+**-3*: +**:3*. +**.3*; +**;3/* +*/*3//*
+***
***
-***
.***
/****
/+***
/***
;/
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S"e3en o$ #5"n+e4 !n or!n+ #"!"l RIN, 200200(!n#rore4)
Particulars
*--B
5arch
*--C
5arch Increase !ecrease
Crren A44e4
Inventories )*).
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Particulars
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Particulars
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Particulars
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Particulars
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)67'T1R3- FIN0IN@( 9 (A@@1TI4N(
8I$!I$2S #$! S226S%I0$S
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!uring the period of study it is observed that the amount of working
capital has been continuously increasing year by year due to the
continuous increase in the value of inventories and cash balance.
&owever, the overall performance of the company during the period of
study is much satisfactory.
%he company has already accumulated funds e=cess of 's. )@:< crore
and can look forward to bigger investment in building up capacity to B.
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