Finance Project Report – Working Capital Management 2017
WORKING CAPITAL – Meaning of Working Capital
Capital required for a commercial enterprise can be categorized beneath two principal classes via,
1) Fixed Capital
2) Working Capital
Every enterprise wishes finances for two purposes for its establishment and to perform its day- to-day operations. Long phrases funds are required to create manufacturing facilities through buy of constant assets inclusive of p&m, land, constructing, furniture, and many others. Investments in these belongings constitute that part of company’s capital that is blocked on everlasting or fixed basis and is called fixed capital. Funds also are wished for short-time period purposes for the acquisition of raw fabric, fee of wages and different day – to- day expenses and so forth.
These price range are referred to as running capital. In easy phrases, running capital refers to that part of the company’s capital which is required for financing quick- time period or current assets along with cash, marketable securities, borrowers & inventories. Funds, thus, invested in present day assts hold revolving speedy and are being continuously converted in to cash and this cash flows out once more in trade for other current property. Hence, it is also called revolving or circulating capital or short time period capital.
CONCEPT OF WORKING CAPITAL
There are two ideas of running capital:
1. Gross working capital
2. Net operating capital
The gross operating capital is the capital invested inside the general contemporary assets of the organizations modern property are those
Assets which could convert in to cash inside a short duration normally one accounting yr.
CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank
2) Bills receivables
three) Sundry borrowers
four) Short time period loans and advances.
Five) Inventories of stock as:
a. Raw fabric
b. Work in system
c. Stores and spares
d. Finished items
6. Temporary funding of surplus funds.
7. Prepaid expenses
8. Accrued earning.
Nine. Marketable securities.
In a slender experience, the time period working capital refers back to the net working. Net running capital is the excess of contemporary assets over modern-day legal responsibility, or, say:
NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.
Net working capital may be fine or terrible. When the contemporary property exceeds the current liabilities are extra than the present day belongings. Current liabilities are the ones liabilities, which are intended to be paid inside the everyday course of enterprise within a brief duration of commonly one accounting yr out of the cutting-edge assts or the profits business.
CONSTITUENTS OF CURRENT LIABILITIES
1. Accrued or brilliant expenses.
2. Short term loans, advances and deposits.
Three. Dividends payable.
Four. Bank overdraft.
Five. Provision for taxation , if it does not amt. To app. Of earnings.
6. Bills payable.
7. Sundry creditors.
The gross running capital concept is financial or going difficulty idea whereas net operating capital is an accounting concept of operating capital. Both the ideas have their own deserves.
The gross concept is now and again desired to the concept of running capital for the subsequent reasons:
1. It allows the company to offer correct amount of working capital at correct time.
2. Every management is extra interested in overall present day property with which it has to function then the supply from wherein it’s far made available.
Three. It think about of the truth every increase within the finances of the company might increase its operating capital.
Four. This idea is likewise useful in figuring out the charge of return on investments in running capital. The internet running capital idea, but, is likewise crucial for following motives:
· It is qualitative idea, which suggests the company’s potential to meet to its running expenses and brief-time period liabilities.
· IT indicates the margin of safety to be had to the quick term lenders.
· It is an indicator of the economic soundness of firms.
· It shows the want of financing a part of running capital requirement out of the permanent resources of funds.
CLASSIFICATION OF WORKING CAPITAL
Working capital can be labeled in to approaches:
o On the basis of concept.
O On the premise of time.
On the basis of concept working capital may be classified as gross working capital and net operating capital. On the idea of time, operating capital may be labeled as:
Ø Permanent or constant operating capital.
Ø Temporary or variable working capital
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed operating capital is minimal quantity that’s required to make certain effective utilization of fixed facilities and for preserving the circulation of present day assets. Every company has to hold a minimum degree of uncooked cloth, paintings- in-procedure, completed items and coins balance. This minimum stage of modern assts is known as everlasting or fixed operating capital as this a part of running is completely blocked in cutting-edge assets. As the commercial enterprise develop the requirements of operating capital additionally will increase due to boom in contemporary property.
TEMPORARY OR VARIABLE WORKING CAPITAL
Temporary or variable operating capital is the amount of working capital which is required to fulfill the seasonal needs and some unique exigencies. Variable running capital can in addition be labeled as seasonal running capital and unique operating capital. The capital required to satisfy the seasonal need of the agency is known as seasonal running capital. Special operating capital is that a part of working capital that’s required to meet unique exigencies such as launching of sizeable advertising and marketing for undertaking research, and so forth.
Temporary working capital differs from permanent operating capital inside the sense this is required for brief durations and can not be completely employed gainfully within the commercial enterprise.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
Ø SOLVENCY OF THE BUSINESS: Adequate running capital enables in keeping the solvency of the enterprise by using supplying uninterrupted of production.
Ø Goodwill: Sufficient quantity of operating capital allows a firm to make activate payments and makes and hold the goodwill.
Ø Easy loans: Adequate operating capital leads to high solvency and credit status can arrange loans from banks and different on smooth and favorable terms.
Ø Cash Discounts: Adequate running capital additionally permits a difficulty to avail cash discounts on the purchases and for this reason reduces cost.
Ø Regular Supply of Raw Material: Sufficient running capital ensures everyday deliver of uncooked cloth and continuous manufacturing.
Ø Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It ends in the pleasure of the employees and raises the morale of its employees, will increase their performance, reduces wastage and fees and complements production and income.
Ø Exploitation Of Favorable Market Conditions: If a company is having adequate operating capital then it can exploit the favorable marketplace conditions which includes buying its requirements in bulk when the prices are decrease and holdings its inventories for better prices.
Ø Ability To Face Crises: A situation can face the state of affairs at some point of the despair.
Ø Quick And Regular Return On Investments: Sufficient running capital permits a situation to pay brief and regular of dividends to its investors and profits confidence of the traders and may increase extra finances in future.
Ø High Morale: Adequate running capital brings an environment of securities, confidence, high morale which leads to standard performance in a commercial enterprise.
EXCESS OR INADEQUATE WORKING CAPITAL
Every enterprise subject need to have adequate quantity of running capital to run its enterprise operations. It have to have neither redundant or extra operating capital nor inadequate nor shortages of operating capital. Both extra in addition to quick running capital positions are horrific for any commercial enterprise. However, it’s miles the inadequate running capital that is greater risky from the factor of view of the company.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL
1. Excessive operating capital way best finances which earn no earnings for the company and enterprise can’t earn the desired price of go back on its investments.
2. Redundant operating capital leads to needless purchasing and accumulation of inventories.
3. Excessive operating capital implies immoderate debtors and defective credit policy which causes higher prevalence of bad debts.
4. It can also lessen the overall efficiency of the business.
Five. If a company is having excessive running capital then the relations with banks and other financial organization may not be maintained.
6. Due to decrease fee of return n investments, the values of shares might also fall.
7. The redundant running capital gives rise to speculative transactions
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every enterprise desires some quantities of running capital. The need for operating capital arises because of the time gap between manufacturing and consciousness of coins from income. There is an operating cycle involved in sales and realization of coins. There are time gaps in purchase of uncooked material and production; manufacturing and income; and awareness of coins.
Thus working capital is wanted for the following purposes:
· For the reason of raw fabric, components and spares.
· To pay wages and salaries
· To incur everyday charges and overload charges consisting of office prices.
· To meet the selling prices as packing, advertising, etc.
· To offer credit score centers to the client.
· To maintain the inventories of the raw cloth, work-in-development, shops and spares and completed stock.
For reading the need of working capital in a enterprise, one has to have a look at the commercial enterprise beneath varying situations consisting of a brand new subject calls for a number of price range to satisfy its preliminary requirements consisting of promoting and formation and many others. These charges are called initial prices and are capitalized. The quantity wished for running capital relies upon upon the size of the employer and pursuits of its promoters. Greater the dimensions of the enterprise unit, usually larger can be the requirements of the operating capital.
The requirement of the operating capital is going on increasing with the increase and expensing of the commercial enterprise until it profits adulthood. At maturity the quantity of working capital required is known as ordinary running capital.
There are others factors also affect the want of working capital in a business.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
1. NATURE OF BUSINESS: The necessities of running may be very restrained in public utility undertakings such as power, water deliver and railways because they provide cash sale simplest and deliver offerings no longer products, and no funds are tied up in inventories and receivables. On the other hand the trading and economic firms calls for much less funding in fixed property however need to invest large amt. Of operating capital together with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the commercial enterprise, more is the requirement of working capital.
Three. PRODUCTION POLICY: If the policy is to keep manufacturing consistent through collecting inventories it will require better running capital.
Four. LENTH OF PRDUCTION CYCLE: The longer the producing time the uncooked fabric and different elements need to be carried for an extended inside the manner with progressive increment of hard work and service costs earlier than the very last product is acquired. So operating capital is immediately proportional to the period of the producing process.
5. SEASONALS VARIATIONS: Generally, throughout the busy season, a company requires large operating capital than in slack season.
6. WORKING CAPITAL CYCLE: The velocity with which the operating cycle completes one cycle determines the requirements of operating capital. Longer the cycle large 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-dating between the query of operating capital and the speed or velocity with which the sales are affected. A company having a excessive fee of inventory turnover wuill desires decrease amt. Of working capital compared to a firm having a low price of turnover.
8. CREDIT POLICY: A problem that purchases its requirements on credit score and sales its product / services on coins requires lesser amt. Of running capital and vice-versa.
9. BUSINESS CYCLE: In period of increase, whilst the business is prosperous, there’s want for larger amt. Of running capital because of upward thrust in sales, upward thrust in costs, optimistic expansion of business, and many others. On the opposite in time of melancholy, the business contracts, sales decline, difficulties are confronted in series from debtor and the company may have a big amt. Of running capital.
10. RATE OF GROWTH OF BUSINESS: In quicker developing subject, we shall require huge amt. Of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some companies have extra earning ability than different because of best in their merchandise, monopoly conditions, and so forth. Such corporations may additionally generate cash income from operations and make a contribution to their running capital. The dividend policy additionally influences the requirement of running capital. A company keeping a constant excessive charge of cash dividend irrespective of its profits needs working capital than the company that keeps larger part of its earnings and does not pay so high rate of coins dividend.
12. PRICE LEVEL CHANGES: Changes in the fee stage additionally affect the running capital necessities. Generally rise in charges results in growth in operating capital.
Others FACTORS: These are:
ü Operating performance.
ü Management ability.
ü Irregularities of supply.
ü Import coverage.
ü Asset structure.
ü Importance of labor.
ü Banking centers, and so on.
MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the trouble that arises in attempting to manage the modern-day property, cutting-edge liabilities. The simple intention of running capital management is to manage the present day property and present day liabilities of a firm in this type of manner that a fine level of operating capital is maintained, i.E. It is neither good enough nor immoderate as both the conditions are bad for any company. There need to be no shortage of budget and also no running capital have to be best. WORKING CAPITAL MANAGEMENT POLICES of a firm has a top notch on its probability, liquidity and structural fitness of the employer. So working capital control is 3 dimensional in nature as
1. It worried with the formula of policies with regard to profitability, liquidity and danger.
2. It is worried with the choice approximately the composition and level of modern property.
3. It is involved with the choice approximately the composition and level of present day liabilities.
WORKING CAPITAL ANALYSIS
As we know running capital is the lifestyles blood and the centre of a business. Adequate amount of running capital may be very an awful lot vital for the smooth strolling of the commercial enterprise. And the most important element is the efficient control of running capital in right time. The liquidity role of the firm is completely effected by way of the management of operating capital. So, a have a look at of modifications inside the makes use of and assets of working capital is vital to evaluate the efficiency with which the operating capital is employed in a commercial enterprise. This includes the want of working capital analysis.
The evaluation of working capital can be carried out through some of devices, consisting of:
1. Ratio analysis.
2. Fund glide analysis.
3. Budgeting.
1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one variety to some other. The method of ratio evaluation can be hired for measuring quick-term liquidity or working capital position of a company. The following ratios can be calculated for those purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
four. Inventory turnover.
Five. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
Eight. Working capital leverage
9. Ratio of cutting-edge liabilities to tangible net worth.
2. FUND FLOW ANALYSIS
Fund float analysis is a technical device particular to the have a look at the supply from which extra finances had been derived and the use to which those assets have been placed. The fund go with the flow analysis consists of:
a. Preparing time table of modifications of running capital
b. Statement of assets and alertness of price range.
It is an effective control tool to observe the adjustments in economic function (running capital) business company between starting and finishing of the monetary dates.
Three. WORKING CAPITAL BUDGET
A finances is a financial and / or quantitative expression of enterprise plans and polices to be pursued inside the future duration time. Working capital budget as part of the full budge ting manner of a commercial enterprise is ready estimating destiny long time and brief time period running capital desires and sources to finance them, after which comparing the budgeted figures with actual performance for calculating the variances, if any, in order that corrective moves can be taken in future. He objective working capital budget is to make certain availability of finances as and wanted, and to ensure powerful utilization of those assets. The a success implementation of running capital price range entails the preparing of separate finances for each detail of running capital, such as, cash, inventories and receivables etc.
ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF LIQUIDITY
The short –term lenders of a agency consisting of suppliers of goods of credit and industrial banks quick-term loans are in the main fascinated to understand the ability of a firm to fulfill its obligations in time. The brief term responsibilities of a firm may be met in time simplest whilst it’s miles having sufficient liquid property. So to with the self belief of buyers, lenders, the smooth functioning of the firm and the efficient use of constant assets the liquid position of the company must be robust. But a completely high degree of liquidity of the firm being tied – up in present day assets. Therefore, it is vital right stability in regard to the liquidity of the company. Two kinds of ratios can be calculated for measuring quick-term monetary position or short-term solvency position of the firm.
1. Liquidity ratios.
2. Current assets moves ‘ratios.
A) LIQUIDITY RATIOS
Liquidity refers to the potential of a firm to satisfy its modern-day obligations as and while these become due. The brief-time period duties are met through knowing amounts from modern, floating or circulating assts. The contemporary assets ought to both be liquid or close to approximately liquidity. These should be convertible in coins for paying obligations of quick-time period nature. The sufficiency or insufficiency of modern-day belongings should be assessed by way of evaluating them with quick-term liabilities. If contemporary assets will pay off the modern-day liabilities then the liquidity role is first-rate. On the alternative hand, if the cutting-edge liabilities cannot be met out of the present day assets then the liquidity role is horrific. To degree the liquidity of a company, the following ratios may be calculated:
1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIO
Current Ratio, additionally known as operating capital ratio is a measure of general liquidity and its maximum widely used to make the evaluation of quick-term financial function or liquidity of a firm. It is defined as the relation between present day assets and modern liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The additives of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets consist of coins, marketable securities, invoice receivables, sundry borrowers, inventories and paintings-in-progresses. Current liabilities consist of tremendous expenses, invoice payable, dividend payable and so on.
A exceedingly excessive cutting-edge ratio is a sign that the company is liquid and has the potential to pay its cutting-edge responsibilities in time. On the hand a low modern-day ratio represents that the liquidity role of the firm isn’t always precise and the firm shall no longer be capable of pay its cutting-edge liabilities in time. A ratio same or close to to the rule of thumb of thumb of 2:1 i.E. Cutting-edge property double the contemporary liabilities is taken into consideration to be exceptional.
CALCULATION OF CURRENT RATIO
(Rupees in crore)
e.G.
Year
2011
2012
2013
Current Assets
eighty one.29
eighty three.12
13,6.57
Current Liabilities
27.42
20.Fifty eight
33.48
Current Ratio
2.Ninety six:1
four.03:1
4.08:1
Interpretation:-
As we recognise that best contemporary ratio for any company is 2:1. If we see the cutting-edge ratio of the organization for last three years it has increased from 2011 to 2013. The contemporary ratio of employer is more than the ideal ratio. This depicts that enterprise’s liquidity position is sound. Its present day belongings are extra than its present day liabilities.
2. QUICK RATIO
Quick ratio is a greater rigorous test of liquidity than modern-day ratio. Quick ratio may be defined as the relationship between brief/liquid belongings and current or liquid liabilities. An asset is stated to be liquid if it can be converted into cash with a short duration with out lack of cost. It measures the firms’ capability to repay modern obligations without delay.
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 capacity to meet its modern liabilities in time and alternatively a low quick ratio represents that the firms’ liquidity role isn’t properly.
As a rule of thumb ratio of 1:1 is taken into consideration first-class. It is normally concept that if short assets are identical to the cutting-edge liabilities then the priority may be capable of meet its short-time period duties. However, a company having excessive quick ratio might not have a great liquidity function if it has slow paying borrowers. On the alternative hand, a company having a low liquidity function if it has speedy transferring inventories.
CALCULATION OF QUICK RATIO
e.G. (Rupees in Crore)
Year
2011
2012
2013
Quick Assets
44.14
47.Forty three
sixty one.55
Current Liabilities
27.Forty two
20.58
33.Forty eight
Quick Ratio
1.6 : 1
2.3 : 1
1.Eight : 1
Interpretation :
A short ratio is a sign that the company is liquid and has the ability to fulfill its modern-day liabilities in time. The perfect quick ratio is 1:1. Company’s brief ratio is greater than ideal ratio. This suggests company has no liquidity hassle.
3. ABSOLUTE LIQUID RATIO
Although receivables, borrowers and bills receivable are usually extra liquid than inventories, but there may be doubts regarding their realization into cash immediately or in time. So absolute liquid ratio should be calculated collectively with present day ratio and acid check ratio a good way to exclude even receivables from the modern-day belongings and find out absolutely the liquid property. Absolute Liquid Assets includes :
ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS
CURRENT LIABILITES
ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.
E.G. (Rupees in Crore)
Year
2011
2012
2013
Absolute Liquid Assets
four.69
1.Seventy nine
5.06
Current Liabilities
27.42
20.58
33.48
Absolute Liquid Ratio
.17 : 1
.09 : 1
.15 : 1
Interpretation :
These ratio indicates that employer includes a small sum of money. But there’s nothing to be concerned approximately the dearth of cash because agency has reserve, borrowing electricity & long term investment. In India, corporations have credit limits sanctioned from banks and can without problems draw cash.
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various belongings in commercial enterprise to make sales and earn income. The performance with which property are controlled at once affects the volume of income. The higher the management of belongings, huge is the amount of sales and earnings. Current property movement ratios measure the performance with which a firm manages its sources. These ratios are known as turnover ratios due to the fact they imply the rate with which property are converted or grew to become over into sales. Depending upon the motive, a number of turnover ratios can be calculated. These are :
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio
four. Working Capital Turnover Ratio
The cutting-edge ratio and brief ratio deliver misleading results if present day assets include high amount of debtors due to gradual credit collections and moreover if the assets consist of high quantity of gradual shifting inventories. As each the ratios forget about the motion of current belongings, it is important to calculate the turnover ratio.
1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO :
Every company has to hold a positive amount of inventory of finished items so that you can meet the necessities of the business. But the extent of stock have to neither be too excessive nor too low. Because it is harmful to hold more inventory as some quantity of capital is blocked in it and some price is concerned in it. It will consequently be really helpful to dispose the inventory as soon as feasible.
INVENTORY TURNOVER RATIO = COST OF GOOD SOLD
AVERAGE INVENTORY
Inventory turnover ratio measures the velocity with which the inventory is transformed into income. Usually a high inventory ratio suggests an green management of inventory due to the fact extra often the stocks are offered ; the lesser sum of money is required to finance the stock. Where as low inventory turnover ratio suggests the inefficient control of stock. A low stock turnover implies over investment in inventories, dull commercial enterprise, poor high-quality of products, inventory accumulations and slow transferring items and occasional income as compared to general investment.
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK
2
(Rupees in Crore)
Year
2011
2012
2013
Cost of Goods sold
110.6
103.2
96.Eight
Average Stock
seventy three.Fifty nine
36.Forty two
fifty five.35
Inventory Turnover Ratio
1.5 times
2.8 times
1.75 times
Interpretation :
These ratio shows how swiftly the inventory is turning into receivable thru sales. In 2012 the employer has excessive stock turnover ratio however in 2013 it has decreased to 1.75 times. This indicates that the agency’s inventory control approach is much less efficient as evaluate to remaining yr.
2. INVENTORY CONVERSION PERIOD:
INVENTORY CONVERSION PERIOD = 365 (net operating days)
INVENTORY TURNOVER RATIO
e.G.
Year
2011
2012
2013
Days
365
365
365
Inventory Turnover Ratio
1.5
2.8
1.Eight
Inventory Conversion Period
243 days
a hundred thirty days
202 days
Interpretation :
Inventory conversion period indicates that how many days inventories takes to convert from uncooked material to finished items. In the enterprise inventory conversion duration is lowering. This shows the performance of control to transform the stock into cash.
3. DEBTORS TURNOVER RATIO :
A difficulty may promote its items on coins as well as on credit score to increase its income and a liberal credit coverage may result in tying up full-size funds of a company inside the form of change borrowers. Trade debtors are expected to be transformed into cash inside a quick length and are included in cutting-edge belongings. So liquidity role of a challenge additionally depends upon the exceptional of exchange debtors. Two kinds of ratio can be calculated to assess the pleasant of borrowers.
A) Debtors Turnover Ratio
b) Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)
AVERAGE DEBTORS
Debtor’s pace shows the number of instances the debtors are became over during a year. Generally better the price of debtor’s turnover ratio the extra green is the management of debtors/income or greater liquid are the borrowers. Whereas a low debtors turnover ratio indicates poor control of debtors/income and much less liquid borrowers. This ratio must be in comparison with ratios of different companies doing the equal business and a trend may be discovered to make a higher interpretation of the ratio.
AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR
2
e.G.
Year
2011
2012
2013
Sales
166.Zero
151.Five
169.5
Average Debtors
17.33
18.19
22.50
Debtor Turnover Ratio
nine.6 instances
eight.3 instances
7.5 times
Interpretation :
This ratio suggests the speed with which debtors are being converted or turnover into income. The better the values or turnover into income. The higher the values of debtors turnover, the greater efficient is the management of credit. But in the employer the debtor turnover ratio is reducing yr to yr. This shows that agency isn’t always utilizing its debtors efficiency. Now their credit coverage end up liberal as evaluate to preceding yr.
4. AVERAGE COLLECTION PERIOD :
Average Collection Period = No. Of Working Days
Debtors Turnover Ratio
The average series length ratio represents the common variety of days for which a company has to attend before its receivables are converted into cash. It measures the nice of debtors. Generally, shorter the common series duration the higher is the excellent of debtors as a short series length implies quick price with the aid of borrowers and vice-versa.
Average Collection Period = 365 (Net Working Days)
Debtors Turnover Ratio
Year
2011
2012
2013
Days
365
365
365
Debtor Turnover Ratio
9.6
eight.3
7.Five
Average Collection Period
38 days
44 days
49 days
Interpretation :
The common collection period measures the excellent of debtors and it allows in analyzing the efficiency of series efforts. It also enables to evaluation the credit policy adopted by using corporation. In the company average collection duration growing 12 months to year. It suggests that the company has Liberal Credit coverage. These changes in coverage are due to competitor’s credit policy.
5. WORKING CAPITAL TURNOVER RATIO :
Working capital turnover ratio suggests the speed of usage of net running capital. This ratio suggests the range of instances the running capital is became over inside the course of the 12 months. This ratio measures the efficiency with which the operating capital is used by the firm. A higher ratio shows efficient utilization of operating capital and a low ratio suggests otherwise. But a completely excessive working capital turnover is not a great scenario for any firm.
Working Capital Turnover Ratio = Cost of Sales
Net Working Capital
Working Capital Turnover = Sales
Networking Capital
e.G.
Year
2011
2012
2013
Sales
166.Zero
151.Five
169.5
Networking Capital
53.87
sixty two.Fifty two
103.09
Working Capital Turnover
3.08
2.4
1.64
Interpretation :
This ratio shows low a great deal net running capital requires for income. In 2013, the reciprocal of this ratio (1/1.Sixty four = .609) suggests that for sales of Rs. 1 the company calls for 60 paisa as running capital. Thus this ratio is useful to forecast the running capital requirement on the basis of sale.
INVENTORIES
(Rs. In Crores)
Year
2010-2011
2011-2012
2012-2013
Inventories
37.15
35.Sixty nine
seventy five.01
Interpretation :
Inventories is a primary part of cutting-edge belongings. If any company desires to manipulate its working capital performance, it has to manage its inventories correctly. The graph shows that inventory in 2010-2011 is forty five%, in 2011-2012 is forty three% and in 2012-2013 is fifty four% in their modern property. The company must try to lessen the inventory upto 10% or 20% of modern belongings.
CASH BNAK BALANCE :
(Rs. In Crores)
Year
2010-2011
2011-2012
2012-2013
Cash Bank Balance
4.69
1.Seventy nine
five.05
Interpretation :
Cash is basic input or component of running capital. Cash is needed to hold the business running on a non-stop foundation. So the corporation ought to have sufficient coins to fulfill numerous necessities. The above graph is suggest that during 2011 the cash is 4.69 crores however in 2012 it has decrease to 1.Seventy nine. The result of that it disturb the companies production operations. In 2013, it’s miles increased upto approx. Five.1% coins stability. So in 2013, the enterprise has no hassle for meeting its requirement as examine to 2012.
DEBTORS :
(Rs. In Crores)
Year
2010-2011
2011-2012
2012-2013
Debtors
17.33
19.05
25.Ninety four
Interpretation :
Debtors constitute a enormous part of general modern-day assets. In India it represent one 1/3 of modern-day assets. The above graph is depict that there is growth in debtors. It represents an extension of credit to clients. The cause for growing credit score is opposition and business enterprise liberal credit score coverage.
CURRENT ASSETS :
(Rs. In Crores)
Year
2010-2011
2011-2012
2012-2013
Current Assets
81.29
eighty three.15
136.57
Interpretation :
This graph suggests that there’s 64% boom in cutting-edge assets in 2013. This boom is stand up due to the fact there may be approx. 50% increase in inventories. Increase in cutting-edge belongings suggests the liquidity soundness of organization.
CURRENT LIABILITY :
(Rs. In Crores)
Year
2010-2011
2011-2012
2012-2013
Current Liability
27.Forty two
20.Fifty eight
33.Forty eight
Interpretation :
Current liabilities indicates organization brief time period debts pay to outsiders. In 2013 the contemporary liabilities of the employer increased. But still growth in modern property are extra than its present day liabilities.
NET WOKRING CAPITAL :
(Rs. In Crores)
Year
2010-2011
2011-2012
2012-2013
Net Working Capital
53.87
sixty two.Fifty three
103.09
Interpretation :
Working capital is needed to finance everyday operations of a company. There should be an most fulfilling stage of working capital. It must not be too much less or no longer too excess. In the employer there’s growth in working capital. The boom in running capital arises due to the fact the corporation has multiplied its commercial enterprise.
RESEARCH METHODOLOGY
The method, I have adopted for my examine is the various tools, which essentially analyze significantly economic function of to the organisation:
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 vital analysis of economic function. With the assessment of each aspect, the financial position from one-of-a-kind angles is tried to be offered in nicely and systematic way. By crucial evaluation with the assist of different equipment, it becomes clean how the financial manager handles the finance topics in worthwhile manner inside the crucial hard ecosystem, the recommendation are made which would advise the company in components of a healthful and strong role financially with proper control device.
I surely wish, through the assessment of numerous percent, ratios and comparative analysis, the enterprise might be able to overcome its in efficiencies and makes the preferred modifications.
ANALYSIS OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Financial announcement is a group of information organized according to logical and steady accounting procedure to deliver an underneath-standing of some financial components of a business company. It may additionally display role at a moment in time, as in the case of stability sheet or may also monitor a series of sports over a given time frame, as in the case of an profits assertion. Thus, the term ‘economic statements’ generally refers to the 2 statements
(1) The position statement or Balance sheet.
(2) The earnings statement or the income and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following goals of economic statements: –
1. To offer dependable economic records about financial assets and responsibility of a business firm.
2. To offer other wished facts approximately prices in such economic resources and duty.
3. To provide dependable records about trade in net assets (recourses much less duties) lacking out of business activities.
Four. To offer economic information that assets in estimating the mastering capability of the enterprise.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though economic statements are applicable and beneficial for a concern, nevertheless they do no longer gift a very last photograph a final image of a difficulty. The software of these statements is dependent upon quite a number of factors. The analysis and interpretation of these statements have to be executed cautiously otherwise misleading conclusion may be drawn.
Financial statements suffer from the subsequent obstacles: –
1. Financial statements do not given a very last image of the concern. The records given in those statements is handiest approximate. The actual value can only be determined while the business is sold or liquidated.
2. Financial statements had been organized for distinctive accounting durations, typically three hundred and sixty five days, at some stage in the lifestyles of a challenge. The fees and earning are apportioned to special durations to be able to decide profits and so forth. The allocation of costs and income depends upon the personal judgment of the accountant. The life of contingent assets and liabilities also make the statements obscure. So economic announcement are at the maximum intervening time reports in preference to the final picture of the company.
Three. The economic statements are expressed in financial fee, in order that they appear to give final and accurate role. The value of constant property in the balance sheet neither constitute the value for which constant assets can be sold nor the quantity in an effort to be required to update those belongings. The balance sheet is prepared at the presumption of a going subject. The concern is predicted to retain in destiny. So constant assets are shown at fee much less collected deprecation. Moreover, there are sure belongings in the balance sheet with the intention to recognise not anything at the time of liquidation however they may be proven inside the stability sheets.
4. The financial statements are prepared on the premise of historic prices Or original expenses. The price of assets decreases with the passage of time modern fee adjustments are not taken into consideration. The announcement are not organized with the keeping in view the economic situations. The balance sheet loses the importance of being an index of current economics realities. Similarly, the profitability proven by way of the profits statements may be constitute the incomes capacity of the concern.
Five. There are sure factors which have a bearing at the monetary function and running result of the business however they do now not grow to be part of those statements due to the fact they can not be measured in financial terms. The primary difficulty of the traditional financial statements comprising the stability sheet, profit & loss A/c is they do now not provide all the data regarding the financial operation of the company. Nevertheless, they offer some extremely beneficial information to the quantity the stability sheet mirrors the economic role on a selected data in traces of the structure of property, liabilities and so on. And the profit & loss A/c indicates the end result of operation for the duration of a certain duration in terms sales received and cost incurred all through the yr. Thus, the monetary position and operation of the firm.
FINANCIAL STATEMENT ANALYSIS
It is the process of figuring out the financial strength and weakness of a firm from the available accounting data and economic statements. The evaluation is accomplished
CALCULATIONS OF RATIOS
Ratios are relationship expressed in mathematical terms between figures, which might be related with every different in a few manner.
CLASSIFICATION OF RATIOS
Ratios can be categorized in to extraordinary classes relying upon the idea of type
The conventional classification has been on the premise of the economic declaration to which the determination of ratios belongs.
These are:-
· Profit & Loss account ratios
· Balance Sheet ratios
· Composite ratios
Project Description :
Title : Project Report on Working Capital Management
Pages : seventy three
Description : Project Report on Working Capital Management, Working capital evaluation, Working Capital Management – Meaning & Concept, operating capital Classification, Importance, Advantages and Disadvantages of Working Capital, Factors determining the running capital necessities & Ratio Analysis