“WORKING CAPITAL”
TO
BARKATULLAH UNIVERSITY
BHOPAL
2008-2010
SUBMITTED BY
BHAWNA SONAIKAR
1
ACKNOWLEDGEMENT
Success is the outcome of diligence & perseverance, I, Bhawna Sonaikar,
to thank the above mentioned persons for their continuous support &
guidance during the project, with out their help my project would have been
a distant dream.
Bhawna Sonaikar
(Projectee)
MBA II SEM
SIST BHOPAL
2
DECLARATION
Technology Bhopal hereby declare that the project report entitled Working
Capital the outcome of my own work and the same has not been submitted
to any University / Institute for the award of any degree or any professional
diploma.
Bhawna Sonaikar
MBA II SEM
SIST, BHOPAL
3
The net working capital of business is its current assets less its current
liabilities.
• Work in Progress
• Finished Goods
• Trade Debtors
• Prepayments
• Cash Balances
• Trade Creditors
• Accruals
• Taxation Payable
• Dividends Payable
day cash flows. It needs enough cash to by wages and salaries as they fall
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due and to pay creditors if it is to keep its workforce and ensure its
short term.
of business in the long term as well. Even a profitable business may fail if
it does not have adequate cash flows to meet its liabilities as tyhey fall a
due. Therefore when business make investment decisions they must not
only consider the financial outlay involved with acquiring the new
machine or the new building etc, but must also take account of the
additional current assets that are usually involved with any expansion of
activity .
Increased sales usually mean that the level of debtor will increase. A
general increase in the firm’s scales of operation tends to imply a need for
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INTRODUCTION OF COMPANY
• Company Details
• Company Overview
Company Details:
Mobile: 09826077201
Email: solidconvey@indiatimes.com
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COMPANY OVERVIEW
Indore, Madhya Pradesh ever since its inception it has be nurtured by the
Under his experienced and motivating headship the company has been
supply in India.
company follow a standard quality control system and maintain strict vigil
the quality of raw materials used at our manufacturing unit. Further the
prevent any sub standard product to reach the hands of the customer. In
addition to it the company take pride to acquire with the fact that the
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TEAM: The company thrives on the mutual efforts of highly committed
experts of their own fields who within the sincere efforts have modeled
our company into and overdriving entity of the market. They have acquired
services accordingly.
In addition to that the market is also spread in the countries such as Gulf,
Middle East, and East Asia. And due to this, the company is an all
Establishment: 1988
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RANGE: The Company manufacturing and offering wide range of
material, the range is known for its high operational efficiency and long
lasting functional services. The range has wide application area that
and many more fields. Beside designing & manufacturing the company has
• Belt Conveyors
• Bucket Elevators
• Screw Conveyors
• Crushers
• Feeders
• Belt feeders
• Control gate
• Roller Conveyors.
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PRODUCTS: Hence described earlier the following products are in the
below mentioned table is a brief description. These are some rollers which
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RESEARCH METHODOLOGY
STATEMENT OF PROJECT
OBJECTIVE OF RESEARCH
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COLLECTION OF DATA:
www.solidconeyor@indiatimes.com
Ratio analysis
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ASSUMPTIONS
All purchases have been taken as credit purchases and all sales have
In the absence of relevant data the data from internet site is taken as
LIMITATIONS
on reasonable assumption.
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THEORY OF WORKING CAPITAL
Capital required for a business can be classifies under two main categories:
• Fixed Capital
• Working Capital
Every business needs funds for two purposes for its establishments and to
carry out day to day operations. Long term funds are required to create
machinery, land and building, furniture etc. Investments in these assets are
fixed basis and is called fixed capital. Funds are also needed for short term
purposes for the purchasing of raw materials, payments 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 firm’s capital which
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There are two concepts of working capital:
There are two interpretation of working capital under the balance sheet
concept:
The term working capital refers to the Gross working capital and represents
the amount of funds invested in current assets . Thus, the gross working
Current assets are those assets which are converted into cash within short
• Bills Receivable
• Sundry Debtors
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Raw Materials
Work in Process
Finished Goods
• Prepaid Expenses
• Accrued Incomes
The term working capital refers to the net working capital. Net working
When the current assets exceed the current liabilities, the working capital is
positive and the negative working capital results when the current liabilities
are more than the current assets. Current liabilities are those liabilities which
period of normally one accounting year of the current assets or the income of
• Bills Payable
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• Sundry Creditors or Account Payable
• Dividends Payable
• Bank Overdraft
converted into cash and these cash flows out again in exchange for
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based upon this operating or working capital cycle of a firm. The
cycle starts with the purchase of raw material and other resources
And ends with the realization of cash from the sales of finished
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Receivable conversion period Raw material storage
(RCP) conversion period (RMSCP)
Finished Goods
Produced
19
The gross operating cycle of a firm is equal to the length of the inventories
Where,
However, a firm may acquire some resources on credit and thus defer
payments for certain period. In that case, net operating cycle period can be
calculated as below:
Net Operating Cycle Period = Gross Operating Cycle Period – Payable Deferral period
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Raw Material Conversion Period = Average Stock of Raw Material.
21
Om the basis of concept, working capital is classified as gross working
capital and net working capital. The classification is important from the
Permanent or Temporary or
Gross Working Fixed Working Variable Working
Capital Net Working Capital Capital
Capital
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Regular Reserve Working Special Working
Working Capital Capital Capital
Seasonal Working
Capital
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Permanent or fixed working capital is the minimum amount which is
working capital and special working capital. The capital required to meet the
sense that is required for short periods and cannot be permanently employed
CAPITAL:
Working capital is the life blood and nerve centre of a business . just a
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working capital. The main advantages of maintaining adequate amount of
• Goodwill
• Easy Loans
• Cash discounts
• Ability of crisis
• High morals
The need for working capital cannot be emphasized. Every business needs
some amount of working capital. The need of working capital arises due to
the time gap between production and realization of cash from sales. There is
an operating cycle involved in the sales and realization of cash. There are
time gaps in purchase of raw materials and production, production and sales,
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And sales, and realization of cash, thus , working capital is needed for the
following purposes:
To incur day to day expenses and overhead costs such as fuel, power
of factors such as nature and size of the business, the characteristics of their
operations, the length of production cycle , the rate of stock turnover and the
state of economic situation. However the following are the important factors
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enterprises involve in providing services. The amount required also
the manufacturing sector has its own production policy, some follow
the policy of uniform production even if the demand varies from time
increase considerably during the busy season and decrease during the
chosen project category then one shall need to offer sops like credit,
be low.
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AVABILITY OF RAW MATERIAL: If raw material is readily
available then one need not maintain a large stock of the same thereby
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the need for working capital would be more. At time business needs to
COMPONENTS OF WORKING
CAPITAL BASIS OF VALUATION
Stock of Raw Material Purchase of Raw Material
Stock of Work -in- Process At cost of Market value which is lower
Stock of finished Goods Cost of Production
Debtors Cost of Sales or Sales Value
Cah Working Expenses
Enumerated above for the holding period estimated. The total of all such
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The assessment of the working capital should be accurate even in the case
of small and micro enterprises where business operation is not very large.
We know that working capital has a very close relationship with day-to-day
capital, therefore, can affect the day-to-day operations severely. It may lead
management policy:
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1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY):
Risk here refers to the inability of a firm to meet its obligations as and when
they become due for payment. Larger investment in current Assets with less
thereby decreases the opportunity for gain or loss. On the other hand less
In other words, there is a definite inverse relationship between the risk and
working capital finance have different cost of capital and the degree of risk
involved. Generally, higher and risk however the risk lower is the cost and
lower the risk higher is the cost. A sound working capital management
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3.PRINCIPLE OF EQUITY POSITION: The principle is concerned with
current assets should contribute to the net worth of the firm. The level of
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CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:
capital.
The business may fail to honour its commitment in time thereby adversely
finished goods on cash. In the process it may end up with increasing cost of
purchase and reducing selling price by offering discounts . both the situation
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CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING
CAPITAL:
inventories.
It may lead to offer too liberal credit terms to buyers and very poor
Working Capital is very essential for success of business & therefore needs
effectively. The level of inventory should be such that the total cost of
ordering and holding inventory is the least. Simultaneously stock out costs
stock level reorder level of ordering quantity so that the inventory costs is
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RECEIVABLE MANAGEMENT: Given a choice, every business would
prefer selling its produce on cash basis. However, due to factors like trade
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Cost of bad debts losses
are more then the costs incurred for the receivables and the gap between
control of receivables
Help a great deal in properly managing it. Each business should therefore try
to find out coverage credit extends to its clients using the below given
formula:
requirement. From this it would be possible to find out the average credit
days using the above given formula. A business should continuously try
to monitor the credit days and see that the average. Credit offer to clients
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CASH BUDGET: Cash budget basically incorporates estimates of
future inflow and outflows of cash cover a projected short period of time
1. Cash inflows
2. Cash outflows
The main source for thses flows are given here under:
1. Cash Sales
CASH OUTFLOWS:
1. Cash Purchase
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6. Repayments of Loan etc.
MONTHS
PARTICULARS JANUARY FERBUARY MARCH
Estimated cash inflows
………………………………
………………………………….
I. Total cash inflows
Estimated cash outflows
……………………………..
…………………………..
II. Total cash outflows
III. Opening cash balances
IV. Add/deduct surplus/deflictduring the month ( I-
II)
V. Closing cash balances (III -IV)
VI. Minimum level of cash balance
VII. Estimated excess or short fall of cash (V-VI)
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DATA ANALYSIS
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INVENTORIES
INVENTORIES
25000
20000
stock in trade
15000 work in progress
raw materials
10000 stores and spare parts
Total Inventories
5000
0
FY 05-06 FY 06-07 FY 07-08
Reasons:
used in the checking the machinery & the newly installed production
capacity.
The debtors are increasing heavily in the financial year 06-07 because of a
sales boom that has accounted for huge accounts receivables increase.
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DEBTORS AND AVERAGE RECEIVABLES
16000
14000
12000
10000
8000 Debtors
6000
4000
2000
0
FY 05-06 FY 06-07 FY 07-08
Cash and bank balance as per the balance sheet it is seen to be increasing but
attributed to the fact that balance sheet figures carry additional cash balance
well. Thus the actual figures are distorted because the money from FCCB
issue has to be returned and it is a kind of long term loan which the company
has sought for expansion purpose. As a result to find the actual outlay of
cash the unutilized money has been subtracted. Also we should take note of
the fact that the FCCB money can only be used for expansion purpose and
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C AS H & B AN K B ALAN C E
5225.01
FY 07-08
8042.12
FY 06-07 Cash & B ank balanc es
1027.1
FY 05-06
Loans & advances are increasing on the part of increased advances that are
given to pile up inventory when the company went for the expansion mode
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LOANS AND ADVANCES
FY 05-06
17%
FY 07-08 FY 05-06
44% FY 06-07
FY 07-08
FY 06-07
39%
CURRENT ASSETS includes cash & those assets which can be easily
converted into cash within a short period generally one year such as
progress, prepaid expenses etc .The total current assets are the sum of below
contingency i.e.
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CURRENT ASSETS
FY 05-06
22%
FY 07-08
46%
FY06-07
32%
throughout the period from 2005-08 are shown in the pie-chart .it is evident
from the table that the current assets in United engineering Services has
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CURRENT LAIBILITIES
These are those obligations which are payable within a short period of
generally one year and includes outstanding expenses, bills payable, sundry
creditors, accrued expenses, bank overdraft, short term advances, income tax
payable.
1500
sundry deposits
1000
500 advances from
0 customers
FY 05-06 FY06-07 FY 07-08 interest accrued but not
due on loan
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NET CURRENT LAIBILITIES
6000
5000
4000
2000
1000
0
FY 05-06 FY06-07 FY 07-08
throughout the period from 2005-2008 are shown in the table. It is evident
from the table that it shows increasing trends in the year 2005 to 2008. It
shows that the United Engineering Services has stability in trends of Current
Liabilities.
(FY 05-06) to 18 Cr (FY 06-07) to 12 Cr (FY 07-08). The main reason for
the increase in can be attributed to the heavy purchase of the inventory for
stocking it up for trial run & use before the expansion mode.
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Creditors for capital expenditure seem to be decreasing over the three years
i.e. from 18Cr (FY 05-06) to 12 Cr (FY 06-07) which is in sync with the
fact that the expansion work that has been in process and all preparations for
1600
1400
1200
1000 Creditors for capital
800 expenditure
600
400
200
0
FY 05-06 FY06-07 FY 07-08
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RATIO ANALYSIS
FY 06-
FY 05-06 07 FY 07-08
47163.7
Current assets 29843.52 2 61410.49
current liabilities 7611.44 6597.95 7459.4
14530.4
quick assets 12759.32 6 20880.64
quick liabilities 7611.44 6597.95 7459.4
Net turnover (sales) 45503 52527.1 81786.93
40565.7
working capital 22232.08 7 53951.09
average inventory (average of opening & 14476.4
closing stock of year) 8594.615 65 22666.83
47018.3
cost of goods sold = cost of sales 37398 1 67855.4
124436.
total assets 87666 12 138465.6
total annual expenses -(depreciation +debt 27364.0
expenses) 37313.16 6 23898.65
63633.3
average gross income 97754.89 7 51858
PROFIT before interest and taxes 5998 8120.16 14612.92
Total interest 747.8 2653.75 5214.77
Net Profit after tax (NPAT) 4115 3893.37 7383.56
106917.
capital employed (FA+CA-CL ) 89529.68 71 111772.7
113515.
investment (FA+CA) 97141.12 66 119232.1
66351.9
Fixed assets 67297.6 4 57821.59
LIQUIDITY RATIOS
CURRENT RATIO
Current ratio is defined as the relationship between current assets and current
the analysis of short term financial position of a firm. Current ratio is the
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ratio of current assets to current liabilities. A relatively higher ratio is an
indication that the firm is liquid and has the ability to pay its current
obligations on time. On the other hand a low current ratio indicates that the
Liquidity position of the firm is not good and shall not be able to pay its
liabilities:
Current Liabilities
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CURRENT RATIO
20%
43% FY 2005-2006
FY 2006-2007
FY2007-2008
37%
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QUICK ASSETS
QUICK
FIANANCIAL YEAR LIABILITITES CURRENT LAIBILITIES QUICK RATIO
FY 2005-2006 12759.32 7611.44 1.67
FY 2006-2007 14530.46 6597.95 2.2
FY2007-2008 20880.64 7459.4 2.78
liquidity than the current ratio. The term liquidity refers to the ability of the
firm to pay short term obligations as and when they become due. Quick ratio
include all the current assets excluding inventories & prepaid expenses.
Liquid liabilities mean all liabilities excluding bank overdraft. Inventories &
prepaid expenses are not termed as liquid assets because they cannot be
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QUICK RATIO
25%
42% FY 2005-2006
FY 2006-2007
FY2007-2008
33%
While interpreting the figures of both the above ratios we should keep in
result it is bound to have higher current ratio and quick ratio as compared to
other industries.
The sharp rise of current ratio from 20% (FY 05-06) to 37% (FY 06-07) to
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b. Higher prepaid expenses related to advances given so as to pile up the
inventory so that when the inventory is needed for trial run, it’s
available.
An important point to note here is that an excess of cash balance arising out
of idle money coming out of FCCB issue expense has been deducted as
Engineering Services as it hardly varies from 25% (FY 06-07) to 33% (FY
EFFICIENCY RATIO
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SALES TO WORKING CAPITAL RATIO
This ratio is computed by dividing working capital by sales. This ratio helps
& thus this ratio helps management to maintain the adequate level of
working capital
2.046727
2.5 1.515946
1.29486264
2
1.5
1
0.5
0
FY 05-06 FY 06-07 FY07-08
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CURRENT SCENERIO INTERPRETATION
As seen from the above table the ratio has decreased from 2 (FY 05-06)
to 1.29 in (FY 06-07) and then increased to 1.5 (FY 07-08). This ratio is
again indicative of the fact that the year in which the expansion took
place the sales did not match up with the scale of expansion. Otherwise it
would have remained intact and not decreased. The slight increase from
1.29 to 1.51 is indicative of the fact that the full impact of expansion is
receivables through sales. The higher the inventory turnover ratio (also
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INVENTORY TURNOVER RATIO
FY07-08
FY 05-06
0 1 2 3 4 5
The stock velocity is decreasing subsequently from 4.35 (FY 06-07) to 2.99
Partly the reason for the fall can be attributed to stocking up of inventory
for the trail run & using them in testing the expansion mode machinery.
This ratio is indicated by sales upon current assets. This ratio indicates the
efficiency with which the current assets turn into sales & higher current
assets turnover ratio implies by & large a more efficient use of funds in
current assets. Thus, a high turnover rate indicates reduced lock up of funds
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in current assets. An analysis of this ratio over a period reflects working
1.6 1.52472
1.4 1.331807
1.2 1.11371834
1
0.8 current assets turnover
ratio
0.6
0.4
0.2
0
FY 05-06 FY 06-07 FY07-08
The ratio is slightly decreasing from 1.52 (FY 05-06) to 1.11 (FY 06-07)
& then increasing to 1.33 (FY 07-08) which shows that sales increase is
United Engineering Services . The reason can be well attributed to the piling
up of trial stock and not full use of the expanded production capacity.
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OPERATING RATIOS
Working ratio
WORKING RATIO
58
WORKING RATIO
FY07-08 0.460848
FY 05-06 0.381701
The ratio consistently has been below 1 which means company can very
well take out its operating costs, though the margin of comfort is slightly
Services
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COCLUSION
business concern should have adequate working capital to run its business
means the concern will get dramatic improvement in their sales volume and
also in business. Working capital policies of a firm have a great effect on its
Every concern should adopt some new tread management strategies that will
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Good management of working capital is part of good finance management
United Engineering Services is also using “SAP” 6.0 versions which is very
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BIBLOGRAPHY
R.K. Sharma.
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FINDING AND SUGGESTION
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