1

A PROJECT REPORT
ON
WORKING CAPITAL MANAGEMENT
of Orissa Power Transmission Corporation Limited


Of
A Project Report Submitted in partial fulfillment of the requirements for the award
of the Degree
Master Of Business Administration


Submitted By:

PRADEEP KUMAR SAHOO
Regd No: 23/612/09
Roll No: 10MBA653


Under the Guidance of

I nternal Guide External Guide
Mr. SAMIR MISHRA Mr. MALAYA RANJAN DAS
Faculty of NICE, Talcher Deputy Manager (Finance) OPTCL






DDCE, SAMBALPUR UNIVERSITY
2


EXAMINERS CERTIFICATE

The project report of Pradeep Kumar Sahoo working capital
management Is approved and is acceptable in quality and form.



Internal Examiner External Examiner


3

DECLARATI ON
I Pradeep Kumar Sahoo a student of DDCE, Sambalpur University do
hereby declare that the project report on the topic working capital
management is done on true finding and my original own effort. This project
has not been submitted or published in any institution or anywhere for the
award of any degree.



Pradeep Kumar Sahoo











4


ACKNOWLEDGEMENT

I am thankful to OPTCL .for giving me an opportunity to conduct work in their
esteemed organization. I am honored to take this opportunity to sincerely thank
Mr. Malaya Ranjan Das finance manager OPTCL, who allowed me to work
under such an esteemed organization. I am also thankful to Mr. Malaya
Ranjan Das for expressing his faith & confidence in me by assigning this
internship to me.
I am also grateful to our guide Mr. Samir Mishra, faculty of NICE, Talcher,
whose continued and valuable guidance can never be forgotten by me and
without whom, this study could not have got present shape. I could also not
forget the expert guidance and encouragement that he has shown to me in spite
of his busy schedule.
Lastly I thank all the respondents whose responses played a major role in
completion of this research work and without whose help I couldnt have
completed the project work.


Pradeep Kumar Sahoo

5





CERTIFICATE

This is to certify that Pradeep Kumar Sahoo bearing Regd. No: 23/612/09 and
Roll No. 10MBA653 is a bonafide student of DDCE, Sambalpur University. She
has conducted the project report on Working Capital Management is a
bonafide work done by him as fulfillment of the requirement for the degree of
MBA under DDCE, Sambalpur University. He has worked with all honesty and
sincerity.
I wish him all success in life.


Samir Mishra
(Faculty Guide)

6

ORISSA POWER TRANSMISSION CORPORATION LIMITED
(A Government of Orissa Undertaking)
Regd.Office: Janpath: Bhubaneswar-751022

T TO O W WH HO OM M S SO O E EV VE ER R I IT T M MA AY Y C CO ON NC CE ER RN N
This is to certify that the project titled Working Capital Management is an
original piece of worked done by Pradeep Kumar Sahoo and is submitted in
the partial fulfillment of MASTER OF BUSINESS ADMINISTRATION. This project
has been carried out under my guidance and supervision.
I am pleased to record here that his performance during the project was
extremely satisfactory.
I wish his all Success in future endeavors.


MALAYA RANJAN DAS
Deputy Manager
(Finance) OPTCL

7






CERTIFICATE OF APPROVAL
This is to certify that the Project Report Entitled:
WORKING CAPITAL MANAGEMENT
Submitted by Pradeep Kumar Sahoo (Enr. No 23/612/09), Sambalpur University, Burla towards
partial fulfillment of the requirements for the award of the degree of Master of Business
Administration (MBA) is a bona fide record of the work carried out by him under the able guidance
of Mr. Samir Mishra, Faculty, NICE, Talcher.





(Approval of the center director)
Center Director


8

CONTENTS
Chapter-1
Introduction
Chapter -2
Objectives
Methodology
Scope of the study
Need
Limitations of the study
Chapter-3
Company profile
Chapter-4
Project overview
Meaning & concept
Working capital level
Working capital trend analysis
Current assets analysis
Current liability analysis
Operating cycle
Working capital leverage
Chapter-5
Data Analysis and interpretation
Chapter-6
Findings and Suggestion

Chapter-7
Conclusion
Chapter-8
Bibliography







9
















CHAPTER-1













Introduction:
Research is the systematic process of collecting and analyzing information
(data) in order to increase our understanding of the phenomenon about which
we are concerned or interested.
10

Research is systemic quest of undiscovered knowledge. Therefore the
discovery and creation of knowledge is the heart of the research. It is a never
ending process: discoveries and creations lead to new discoveries and new
creation.



















11







CHAPTER-2








Objective of the study:
Study of the working capital management is important because unless
the working capital is managed effectively, monitored efficiently planed
properly and reviewed periodically at regular intervals to remove bottlenecks if
any the company cannot earn profits and increase its turnover. With this
primary objective of the study, the following further objectives are for a depth
analysis
12

1) To study the working capital management of Orissa power transmission
corporation project limited;
2) To study the optimum level of current assets and current liabilities of the
company;
3) To study the liquidity position through various working capital related
ratios;
4) To study the working capital components such as receivables accounts,
cash management;
5) To study the way and means of working capital finance of the Orissa
power transmission corporation project limited;
6) To estimate the working capital requirement of Orissa power
transmission project limited;
7) To study the operating and cash cycle of the company;

Scope of the study:
The scope of the study is identified after and during the study of the
project. The study of the working capital is totally based on the trend analysis
ratio analysis working capital leverage etc. and 5 years annual reports of the
company while other things like competitor analysis, industry analysis are
discussed in the part of company profile.
Research methodology:
Types of data collection:
Primary data collection:
The primary is collected first times. Primary data is collected on the basis of
personal interviews, questionnaire etc.
Secondary data collection:
Secondary data are those data which is already collected and stored. Secondary
data can easily get from the annual reports, journals etc. of the company. It will
save the time, money and efforts to collect the data. Secondary data also made
available through trade magazines, books, internet etc.
This project has a limited primary data collection based on the interview of the
general manager, finance and other concerned member of finance department.
13

But primary data collection has certain limitation (confidential data
information).secondary data is gathered from the annual reports, red herring
prospectus, and internet. the aim of data collection is to gain familiarity and to
achieve new insights into the working capital management of the company.
Project is based on:
Annual report of 2005-06
Annual report of 2006-07
Annual report of 2007-08
Annual report of 2008-09

Limitation of the study:
1. Limited data:
This project has completed with annual reports of the company; it just
constitutes one part of data collection because of confidentiality.
2. Limited period:
This project is totally on 6 years annual reports. Conclusion and
recommendation are on such limited data. The trend of last six years may
or may not reflect the real working capital position of the company.











14






Chapter-3











Company profile:
Brief history of OPTCL:-

Orissa pioneered Power Sector Reform with an objective to unbundle
generation, transmission and distribution and to establish an independent and
transparent Regulatory Commission in order to promote efficiency and
accountability in the Power Sector. The State Government enacted the Orissa
Electricity Reform Act, 1995 which came into force with effect from
01.04.1996. In exercise of power under Section 23 and 24 of the Orissa
Electricity Reform Act, 1995, the State Govt. notified the Orissa Electricity
15

Reform (Transfer of Undertakings, Assets, Liabilities, Proceedings and
Personnel) Scheme Rules 1996. As per the Scheme, the transmission,
distribution activities of the erstwhile OSEB along with the related assets,
liabilities, personnel and proceedings were vested on GRIDCO. Simultaneously
the hydro generation activities of OSEB along with related assets, liabilities,
personnel and proceedings were vested on OHPC. In order to privatize the
distribution functions of electricity in the State, four Distribution Companies
namely Central Electricity Supply Utility of Orissa Limited (CESU), North
Eastern Electricity Supply Company of Orissa Limited (NESCO), Southern
Electricity Supply Company of Orissa Limited (SOUTHCO) & Western
Electricity Supply Company of Orissa Limited (WESCO) were incorporated
under the Companies Act, 1956 as separate corporate entities. During
November 1998 the State Govt. issued the "Orissa Electricity Reform (Transfer
of Assets, Liabilities, Proceedings and Personnel of GRIDCO to Distribution
Companies) Rules 1998" wherein the electricity distribution and retail supply
activities along with the related assets, liabilities, personnel and proceedings
were transferred from GRIDCO to the four Distribution Companies. Through a
process of Internal Competitive Bidding (ICB), the four Distribution Companies
were privatized during 1990. After separation of Distribution business,
GRIDCO left with electricity Transmission and Bulk Supply/Trading activities.
GRIDCO was also declared as the State Transmission Utility and was
discharging the functions of State Load Dispatch Center (SLDC). The Govt. of
India enacted the Electricity Act, 2003 which came into effect from 10th June
2003. Under the provision of the said Act, trading in electricity has been
recognized as a distinct licensed activity, which can only be undertaken by a
licensee to be granted by the appropriate Commission. The Act specifically
prohibits the STU and Transmission Company in the State from engaging in the
business of trading. GRIDCO being a State Transmission Utility was not
permitted to engage itself in the trading in electricity and was required to
segregate its activities in a manner within the Tran tonal period allowed under
the Act that, the entity, which will undertake transmission STU, and SLDC
function would not undertake the activities of Trading and Bulk Supply of
Electricity. Keeping in view the statutory requirement of the Electricity Act for
separation of trading and transmission function in to two separate entities, the
State Govt. incorporated Orissa Power Transmission Corporation Limited
(OPTCL) to take over the transmission, STU / SLDC functions of GRIDCO. In
exercise of the power conferred under Section 39, 131, 133 and 134 of the
16

Electricity Act, 2003, read with Section 23 and 24 of the Orissa Electricity
Reform Act,1995, the State Govt. issued the notification "Orissa Electricity
Reform (Transfer of Transmission and Related Activities) Scheme 2005" on
09.06.2005. The Scheme was made effective from 01.04.2005. By virtue of the
Transfer Scheme, 2005, OPTCL now undertaking the functions of transmission
of electricity in the State of Orissa and has been declared as the State
Transmission Utility. OPTCL is also discharging the functions of SLDC
Started commercial operation from 01.04.2005 only as a Transmission
Licensee. (a deemed Transmission Licensee under Section 14 of
Electricity Act, 2003)
Notified as the State Transmission Utility (STU) by the State Govt. and
discharges the State Load Dispatch functions.
Number of employees as on (10.05.2010) : 3145 Executives-759, Non-
Executives - 2836
Number of posts vacant as on 01.05.2009: 1782 Executives-845, Non-
Executives- 937
Number of Pensioners as on 01.05.2009: 6600
Number of Grid S/S including switching stations 95
Length of EHT lines 10,902.479 Ckt-Kms.


Number of Bays 1597(30th Oct 2010)
ORISSA POWER TRANSMISSION CORPORATION LIMITED
(OPTCL), one of the largest Transmission Utility in the country was
incorporated in March 2004 under the Companies Act, 1956 as a company
wholly owned by the Government of Orissa to undertake the business of
transmission and wheeling of electricity in the State. The registered office of the
Company is situated at Bhubaneswar, the capital of the State of Orissa. Its
projects and field units are spread all over the State.
17

OPTCL became fully operational with effect
from 9th June 2005 consequent upon issue of
Orissa Electricity Reform (Transfer of
Transmission and Related Activities) Scheme,
2005 under the provisions of Electricity Act, 2003
and the Orissa Reforms Act, 1995 by the State
Government for transfer and vesting of
transmission related activities of GRIDCO with OPTCL. The Company has
been designated as the State Transmission Utility in terms of Section 39 of the
Electricity Act, 2003. Presently the Company is carrying on intra state
transmission and wheeling of electricity under a license issued by the Orissa
Electricity Regulatory Commission. The Company is also discharging the
functions of State Load Dispatch Centre. The Company owns Extra High
Voltage Transmission system and operates about 9550.93 ckt kms of
transmission lines at 400 kV, 220 kV, 132 kV levels and 81 nos. of substations
with transformation capacity of MVA. The day-to-day affairs of the Company
are managed by the Managing Director assisted by whole-time Functional
Directors as per the advice of the Board of Directors constituted. They are in
turn assisted by a team of dedicated and experienced professionals in the
various fields.

Mission:
Transmission of power in large quantity with affordable price as per the
expectation of customers, Government of Orissa and OERC
Increase transmission network need based, to meet the demand of the
state in 2025
Develop a portfolio of Intra-State and some
Inter-State transmission assets in national
market including business expansion for
evacuation of power outside the state in
collaboration with PGCIL and others.
Adoption of best construction and O&M
practices supported by system driven processes
enabled by cutting edge IT solution
Diversion of business by providing consultations in the areas of
construction and maintenance services and also in Telecommunication
18

and other emerging areas so as to achieve optimum utilization of assets
for generation of additional revenue
Develop skilled and satisfied human resources, fostering a service-
oriented attitude to its customers/stake holders and becoming empowered
to meet customer need in the changing scenarios.
Building Research and Development wing for adoption of new
technology Discharge the social responsibility with commitment on
Environment protection, Health, Safety, Energy conservation and
community Development.
Achieve excellence in project implementation
Practice higher standard of corporate governance and be financially
sound company.

Objectives:

To effectively operate Transmission lines and Sub-Stations in the State
for evacuation of power from the state generating stations and central
sector so as to feed power to state distribution companies, wheeling of
excess power to needy states, maintenance of the existing lines and sub-
stations to undertake power system improvement by renovation up
gradation and modernization of the transmission network.
Main objects of OPTCL is to carry on the business of transmission and
wheeling of electrical energy in the State and elsewhere for which
purpose to acquire, establish, construct, erect, lay, operate, run, manage,
maintain, enlarge, alter, renovate, modernize extra high voltage, high
voltage, low voltage electrical transmission lines and associated sub-
stations, cables, wires, accumulators plants, motors, meters, apparatus,
computers and materials connected with transmission,
telecommunication and telemeter equipments.
To undertake, for and on behalf of others, erection, operation,
maintenance, management of extra high voltage, high voltage low
voltage lines and associated sub-stations, equipments apparatus, cable
and wires.
As per provisions under Section 39(1) of the Electricity Act 2003, the
functions of OPTCL being a State Transmission Utility (STU) shall be:
To undertake transmission of electricity through intra-state Transmission
System.
To discharge all functions of planning and co-ordination relating to intra-
State transmission system with Central Transmission Utility, State
Governments, Generating Companies, Regional Power Committees,
Authority, Transmission and Distribution Licensees and any other person
notified by the State Government in this behalf.
19

To ensure development of an efficient co-coordinated and economical
system of intra-state transmission lines for smooth flow of electricity
from a generating station of load centers.
To provide non-discriminatory open access to its transmission system for
use by any licensee or generating company or any consumer on payment
of transmission charges-surcharge as may be specified by the State
Commission.
To restore power at earliest possible time through deployment of
Emergency Restoration System in event any natural disasters like cyclone,
flood etc.


Vision:
OPTCL ranks one among the leading Transmission utilities in India.
Transmitting quality, reliable and secured power with minimum transmission
loss at a competitive price.







20




Chapter-4












Working capital management:
Working capital is the life blood and nerve centre of a business. Just as
circulation of blood is essential in the human body for maintaining life, working
21

capital is very essential to maintain the smooth running of a business. No
business can run successfully without an adequate amount of working capital.
Working capital refers to that part of firms capital which is required for
financing short term or current assets such as cash, marketable securities,
debtors, and inventories. In other words working capital is the amount of funds
necessary to cover the cost of operating the firm.
Meaning:
Working capital means the funds (i.e. capital) available and used for day
to day operation (i.e. working) of an enterprise. it consists broadly of that
portion of assets of a business which are used in or related to its current
operations. it refers to funds which are used during an accounting period to
generate a current income of type which is consistent with major purpose of a
firm existence.
Working capital management is concerned with the problems arise in
attempting to manage the current assets (such as cash, marketable securities,
cash receivables and inventory etc.),the current liabilities (such as account
payable, bank overdraft, and outstanding expenses etc.) and the interrelation that
exist between them. the term current assets refers to those assets which in
ordinary course of business can be, or, will be, turned in to cash within one
accounting year without undergoing a diminution in value and without the
disrupting the operation of the firm.
Objective of working capital:
As already observed, the objective of the firm is to maximize the
shareholders wealth. in its Endeavour to do so, a firm should earn sufficient
return from their operations. Earning a steady amount of profit requires
successful bid activity but the completed projects cannot be realized
instantaneously. So there is a need for working capital in the form of current
assets to deal with the problem arising out of lack of immediate realization of
cash against the project done. Therefore sufficient working capital is necessary
to sustain bidding activity. Technically this is called operating cycle.
Gross working capital and net working capital:
There are two concepts of working capital
22

1. Gross working capital:
Gross working capital refers to the firms investment in current assets.
2. Net working capital:
Net working capital refers to the difference between the current assets
and current liabilities. current liabilities are those claims of outsiders which are
expected to mature for payment within an accounting year. It can be positive or
negative.
Types of working capital:
The operating cycle creates the need for current assets (working capital).
However the need does not come to an end after the cycle is completed. To
explain this, the continuing need of current assets a destination should be drawn
between permanent and temporary working capital.
1) Permanent Working Capital:
The need for current assets arises because of the operating cycle. To carry
on business there is always minimum level of current assets which is constantly
required by a firm to carry on its business operations. Permanent or fixed
working capital is the minimum level of current assets. It is permanent in the
same way as the firms fixed assets are. Depending upon the changes in
production and sales, the need of working capital, over and above permanent
working capital, will fluctuate. For example, extra inventory of finished goods
will have to be maintained to support the peak periods of sales, and investment
in debtors (receivable) may also increase during such period. On the other hand,
investment in raw material, work in progress and finished goods will fail if the
market is slack.


Amount Temporary
of or
Working Fluctuating Capital


23


Permanent
Figure 4.1: Permanent and temporary working capital

2) Fluctuating or Variable Working Capital:
Any amount over and above the permanent level of working capital is
temporary, fluctuating or variable working capital. It is the extra working capital
needed to support the changing production and sales activities of the firm.
From the above figure, it is shown that permanent working capital is stable over
time, while temporary working capital is fluctuating- sometimes increasing and
sometimes decreasing. However the permanent working capital line need not be
horizontal. For a growing firm like ARSS the requirement of working capital is
increasing.
Temporary
Amount or
of Fluctuating
Working
Capital
Permanent

Figure 4.2: Permanent and Temporary Working capital

CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
24

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






IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL:
SOLVENCY OF THE BUSINESS: Adequate working capital helps in
maintaining the solvency of the business by providing uninterrupted of
production.
Goodwill: Sufficient amount of working capital enables a firm to make
prompt payments and makes and maintain the goodwill.
26

Easy loans: Adequate working capital leads to high solvency and
credit standing can arrange loans from banks and other on easy and
favorable terms.
Cash Discounts: Adequate working capital also enables a concern to
avail cash discounts on the purchases and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital ensures
regular supply of raw material and continuous production.
Regular Payment Of Salaries, Wages And Other Day TO Day
Commitments: It leads to the satisfaction of the employees and raises
the morale of its employees, increases their efficiency, reduces wastage
and costs and enhances production and profits.
Exploitation Of Favorable Market Conditions: If a firm is having
adequate working capital then it can exploit the favorable market
conditions such as purchasing its requirements in bulk when the prices
are lower and holdings its inventories for higher prices.
Ability To Face Crises: A concern can face the situation during the
depression.
Quick And Regular Return On Investments: Sufficient working
capital enables a concern to pay quick and regular of dividends to its
investors and gains confidence of the investors and can raise more funds
in future.
High Morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall efficiency in a
business.
EXCESS OR INADEQUATE WORKING CAPITAL:
Every business concern should have adequate amount of working capital
to run its business operations. It should have neither redundant or excess
working capital nor inadequate nor shortages of working capital. Both excess
27

as well as short working capital positions are bad for any business. However,
it is the inadequate working capital which is more dangerous from the point
of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING
CAPITAL:
1. Excessive working capital means ideal funds which earn no profit for
the firm and business cannot earn the required rate of return on its
investments.
2. Redundant working capital leads to unnecessary purchasing and
accumulation of inventories.
3. Excessive working capital implies excessive debtors and defective
credit policy which causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with
banks and other financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may
also fall.
7. The redundant working capital gives rise to speculative transactions
DISADVANTAGES OF INADEQUATE WORKING CAPITAL:
Every business needs some amounts of working capital. The need for
working capital arises due to the time gap between production and realization of
cash from sales. There is an operating cycle involved in sales and realization of
cash. There are time gaps in purchase of raw material and production;
production and sales; and realization of cash.
Thus working capital is needed for the following purposes:
For the purpose of raw material, components and spares.
To pay wages and salaries
28

To incur day-to-day expenses and overload costs such as office
expenses.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customer.
To maintain the inventories of the raw material, work-in-
progress, stores and spares and finished stock.
For studying the need of working capital in a business, one has to study
the business under varying circumstances such as a new concern requires a
lot of funds to meet its initial requirements such as promotion and formation
etc. These expenses are called preliminary expenses and are capitalized. The
amount needed for working capital depends upon the size of the company
and ambitions of its promoters. Greater the size of the business unit,
generally larger will be the requirements of the working capital.
The requirement of the working capital goes on increasing with the
growth and expensing of the business till it gains maturity. At maturity the
amount of working capital required is called normal working capital.
There are others factors also influence the need of working capital in a
business.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS:
1. NATURE OF BUSINESS: The requirements of working is very
limited in public utility undertakings such as electricity, water supply
and railways because they offer cash sale only and supply services not
products, and no funds are tied up in inventories and receivables. On
the other hand the trading and financial firms requires less investment
in fixed assets but have to invest large amt. of working capital along
with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the business,
greater is the requirement of working capital.
29

3. PRODUCTION POLICY: If the policy is to keep production
steady by accumulating inventories it will require higher working
capital.
4. LENTH OF PRDUCTION CYCLE: The longer the
manufacturing time the raw material and other supplies have to be
carried for a longer in the process with progressive increment of labor
and service costs before the final product is obtained. So working
capital is directly proportional to the length of the manufacturing
process.
5. SEASONALS VARIATIONS: Generally, during the busy
season, a firm requires larger working capital than in slack season.
6. WORKING CAPITAL CYCLE: The speed with which the
working cycle completes one cycle determines the requirements of
working capital. Longer the cycle larger is the requirement of working
capital.




DEBTORS

CASH FINISHED GOODS

30

RAW MATERIAL WORK IN PROGRESS

7. RATE OF STOCK TURNOVER: There is an inverse co-relationship
between the question of working capital and the velocity or speed with
which the sales are affected. A firm having a high rate of stock turnover will
needs lower amt. of working capital as compared to a firm having a low rate
of turnover.
8. CREDIT POLICY: A concern that purchases its requirements on
credit and sales its product / services on cash requires lesser amt. of
working capital and vice-versa.
9. BUSINESS CYCLE: In period of boom, when the business is
prosperous, there is need for larger amt. of working capital due to rise
in sales, rise in prices, optimistic expansion of business, etc. On the
contrary in time of depression, the business contracts, sales decline,
difficulties are faced in collection from debtor and the firm may have a
large amt. of working capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we
shall require large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have
more earning capacity than other due to quality of their products,
monopoly conditions, etc. Such firms may generate cash profits from
operations and contribute to their working capital. The dividend policy
also affects the requirement of working capital. A firm maintaining a
steady high rate of cash dividend irrespective of its profits needs
working capital than the firm that retains larger part of its profits and
does not pay so high rate of cash dividend.
31

12. PRICE LEVEL CHANGES: Changes in the price level also affect the
working capital requirements. Generally rise in prices leads to increase
in working capital.
Others FACTORS: These are:
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
Banking facilities, etc.
MANAGEMENT OF WORKING CAPITAL:
Management of working capital is concerned with the problem that arises
in attempting to manage the current assets, current liabilities. The basic goal of
working capital management is to manage the current assets and current
liabilities of a firm in such a way that a satisfactory level of working capital is
maintained, i.e. it is neither adequate nor excessive as both the situations are bad
for any firm. There should be no shortage of funds and also no working capital
should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm
has a great on its probability, liquidity and structural health of the organization.
So working capital management is three dimensional in nature as
1. It concerned with the formulation of policies with regard to
profitability, liquidity and risk.
2. It is concerned with the decision about the composition and level of
current assets.
3. It is concerned with the decision about the composition and level of
current liabilities.
32

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




Working Capital Leverage:
One of the important objectives of working capital management is by
maintaining the optimum level of investment in current assets and by reducing
the level of investment in current liabilities. The company can minimize the
investment in the working capital thereby improvement in return on capital
employed is achieved. The term working capital leverage refers to the impact of
33

level of working capital on companys profitability. The working capital
management should improve the productivity of investment in current assets
and ultimately it will increase the return on capital employed. Higher level of
investment in current assets than is actually required means increase in the cost
of Interest charges on short term loans and working capital finance raised from
banks etc. and will result in lower return on capital employed and vice versa.
Working capital leverage measures the responsiveness of ROCE (Return on
Capital Employed) for changes in current assets.

It is measures by applying the following formula,

% Change in ROCE
Working Capital Leverage=
% Change in Current Assets

EBIT
Return on capital employed=
Total Assets

The working capital leverage reflects the sensitivity of return on capital
employed to changes in level of current assets. Working capital leverage would
be less in the case of capital intensive. Capital employed is same working
capital leverage expresses the relation of efficiency of working capital
management with the profitability of the company.

Introduction:
Ratio analysis is the powerful tool of financial statements analysis. And
the financial analysis is an important part of the business planning process such
as SWOT analysis (Strength, Weakness, Opportunity, Threats). So no business
planning will be successful without the financial analysis and financial analysis
will not be successful without ratio analysis.
34

A ratio is define as the indicated quotient of two mathematical
expressions and as the relationship between two or more things. The
absolute figures reported in the financial statement do not provide meaningful
understanding of the performance and financial position of the firm. Ratio helps
to summaries large quantities of financial data and to make qualitative judgment
of the firms financial performance.
Role of Ratio Analysis:
Ratio Analysis provides further insight about the financial strength and
weakness of the firm. It helps to appraise the firms in the term of their
profitability and efficiency of performance, either individually or in relation to
other firms in same industry. Ratio analysis is one of the best possible
techniques available to management to impart the basic functions like planning
and control. As future is closely related to the immediately past, ratio calculated
on the basis historical financial data may be of good assistance to predict the
future. E.g. On the basis of inventory turnover ratio or debtors turnover ratio in
the past, the level of inventory and debtors can be easily ascertained for any
given amount of sales. Similarly, the ratio analysis may be able to locate the
point out the various arias which need the management attention in order to
improve the situation. E.g. Current ratio which shows a constant decline trend
may be indicate the need for further introduction of long term finance in order
to increase the liquidity position. As the ratio analysis is concerned with all the
aspect of the firms financial analysis liquidity, solvency, activity, profitability
and overall performance, it enables the interested persons to know the financial
and operational characteristics of an organization and take suitable decisions.




Limitation of Ratio Analysis:
1) The one of the major and basic limitation of the ratio analysis is that it may
difficult to find out a basis for comparison.
2) Normally, the ratios are calculated on the basis of historical financial
statements. An organization for the purpose of decision making may need the
hint regarding the future happiness rather than those in the past. The external
35

analyst has to depend upon the past which may not necessary to reflect financial
position and performance in further.
3) The technique of ratio analysis may prove inadequate in some situations if
there is differs in opinion regarding the interpretation of certain ratio.
4) As the ratio calculates on the basis of financial statements, the basic
limitation which is applicable to the financial statement is equally applicable In
case of technique of ratio analysis also i.e. only facts which can be expressed in
financial terms are considered by the ratio analysis.
5) The technique of ratio analysis has certain limitations of use in the sense that
it only highlights the strong or problem arias; it does not provide any solution to
rectify the problem arias.
6) For the intra firm comparison, the comparison may be false because different
firms use different accounting policies as some firms use LIFO (Last in First
out) method while some use FIFO (First in First out).
Classification of Ratios:
Basically on the basis of working capital management it can be
characterized into following ratios

1) Activity Ratio:
Activity ratio is an indicator of how rapidly a firm converts various
accounts into cash or sales. The sooner management can convert assets into
sales or cash, the more actively the firm run. This ratio is also called Asset
Management Ratio. As the assets basically categorized as fixed assets and
current assets and again further the current assets classified according to
individual components of current assets viz. Inventories, Sundry Debtor, and
receivables etc. The important Activity ratios are as follows
(i) Working Capital Turnover Ratio
(ii) Inventory Turnover Ratio
(iii) Receivable Turnover Ratio
(iv) Current Asset Turnover Ratio
36


Receivable Management:
Introduction:
Receivables or debtors are the one of the most important parts of the
current assets which is created if the company sells the finished goods to the
customer but not receive the cash for the same immediately. Trade credit arises
when firm sells its products and services on credit and does not receive cash
immediately. It is essential marketing tool, acting as bridge for the movement of
goods through production and distribution stages to customers. Trade credit
creates receivables or book debts which the firm is expected to collect in the
near future. The receivables include three characteristics:

1) It involves element of risk which should be carefully analysis.
2) It is based on economic value. To the buyer, the economic value in goods or
services passes immediately at the time of sale, while seller expects an
equivalent value to be received later on.
3) It implies futurity. The cash payment for goods or serves received by the
buyer will be made by him in a future period.

Objective of Receivable Management:
The sales of goods on credit basis are an essential part of the modern
competitive economic system. The credit sales are generally made up on
account in the sense that there are formal acknowledgements of debt obligation
through a financial instrument. As a marketing tool, they are intended to
promote sales and there by profit. However extension of credit involves risk and
cost, management should weigh the benefit as well as cost to determine the goal
of receivable management. Thus the objective of receivable management is to
promote sales and profit. In further funding of receivables is less than the cost
of funds raised to finance that additional credit.

Inventory Management:
37

In financial view, inventory is defined as the sum of the value of raw
material and supplies, including spares, semi-processed material or work in
progress and finished goods. The nature of inventory is largely depending upon
the type of operation carried on. A firm neglecting the management of
inventories will be jeopardizing its long term profitability and may fail
ultimately. It is possible to reduce the inventory to a certain level without
affecting production and sales, by using simple inventory planning and
controlling technique. The reduction in excessive inventories carries a
favourable impact on the companys profitability. Maintaining inventories
involves tying up of the companys funds and incurrence of storage and
handling cost. There are three components: Raw material, Work in progress;
and finished goods involved in inventory management.

Objective of Inventory Management:
In the case of Inventory Management, the firm is faced with the problem
of meeting two conflicting needs:
1) To maintain a large amount of inventory for efficient and smooth production;
2) To maintain a minimum amount of inventory for increasing the profitability;
But the firms avoid both the cases. In the first case, the firms avoid
overinvestment because of (a) unnecessary tie-up of the firms funds and loss of
profits (b) excess carrying cost (c) risk of liquidity. Another danger of holding
excess inventories is deterioration of the inventories. Maintaining a minimum
level of inventories is also dangerous. The consequences of under-investment in
inventories are: (a) production hold-ups (b) failure to deliver commitments. So
the aim of inventory management is:

(1) To ensure a continuous supply of raw material to facilitate uninterrupted
work;
(2) To maintain a sufficient stock of the raw material in period of short supply
and overprices;
(3) To maintain sufficient finished goods inventory for maintaining the projects
and for completing, and efficient customer service;
(4) To maintain the carrying cost and time;
38

(5) To control investment in inventories and keep at optimum level;
Cash Management:
Cash is common purchasing power or medium of exchange. As such, it
forms the most important component of working capital. The term cash with
reference to cash management is used in two senses, in narrow sense it is used
broadly to cover cash and generally accepted equivalent of cash such as
cheques, draft and demand deposits in banks. The broader view of cash includes
near cash items, such as marketable securities or bank time deposits. The basic
characteristic of near-cash assets is that they can readily be converted into cash.
They also provide short term investment outlet for excess and are also useful for
meeting planned outflow of funds. Irrespective of the form in which it is held, a
distinguishing feature of cash as assets is that it has no earning power. Company
have to always maintain the cash balance to fulfill the dally requirement of
expenses. There are four primary motives for maintain the cash as follow:
Cash management is concerned with the managing of:
(i) Cash flows into and out of the firm,
(ii) Cash flows within the firm, and
(iii) Cash balances held by the firm at a point of the time by financing deficit or
investing surplus cash.
Particulars 2005-06 2006-07 2007-08 2008-09
Cashand bank
balances
186,925,346 648,276,812 490,881,183 907,019,750
Indices 100 346.81 262.60 485.23

39



Motives for Holding Cash:
The firms need to hold cash may be attributed to the following two
motives:

Transaction Motive:
The transactions motive requires a firm to hold cash to conduct its
business in the ordinary course. The firm needs cash primarily to make
payments, for purchases, wages and salaries, operating expenses, taxes,
dividends etc. There should be a proper channel between the cash inflow and
cash outflow in the firm. For periods when cash payments exceed cash receipts,
the firm should maintain some cash balance to be able to make required
payments. Usually the firm maintains such accounts to meet anticipated
payments whose timings is not perfectly matched with cash receipts.
The Precautionary Motive:
The precautionary motive is the need to hold cash to meet contingencies
in the future. It helps in the future. The precautionary amount of cash depends
upon the predictability of cash flows. If cash flows are predicted with accuracy,
less cash will be maintained for emergency. If the firm is able to borrow at short
0
100
200
300
400
500
600
2005-06 2006-07 2007-08 2008-09
Cash and Bank Balances Indices
Cash and Bank Balances Indices
40

notice there will less need for precautionary balance. Generally the
precautionary balance held in marketable securities and relatively less in cash.
Advantage of Cash Management:
Cash does not enter in to the profit and loss account of an enterprise,
hence cash is neither profit nor losses but without cash, profit remains
meaningless for an enterprise owner.
1. A sufficient of cash can keep an unsuccessful firm going despite losses;
2. An efficient cash management through a relevant and timely cash budget may
enable a firm to obtain optimum working capital and ease the strains of cash
shortage, fascinating temporary investment of cash and providing funds normal
growth;
3. Cash management involves balance sheet changes and other cash flow that do
not appear in the profit and loss account such as capital expenditure;
Cash Cycle:
One of the distinguishing features of the fund employed as working
capital is that constantly changes its form to drive business wheel. It is also
known as circulating capital which means current assets of the company,
which are changed in ordinary course of business from one form to another, as
for example, from cash to inventories, inventories to receivables and receivables
to cash. The cash conversion cycle is also known as the net operating cycle

Figure : Cash Cycle:
41

Basically cash management strategies are essentially related to the cash cycle
together with the cash turnover. The cash cycle refers to the process by which
cash is used to purchase the row material from which are produced goods,
which are then send to the customer, who later pay bills. The cash turnover
means the number of time firms cash is used during each year.
Operating Cycle:
The need of working capital arrived because of time gap between
production of goods and their actual realization after sale. This time gap is
called Operating Cycle or Working Capital Cycle. The operating Cycle of a
company is the time duration required to convert resources into inventories and
inventories into cash. The operating cycle is the length of time between the
companys outlay on raw materials, wages and other expanses and inflow of
cash from sales of goods.

Operating cycle is an important concept in management of cash and working
capital. The operating cycle reveals the time that elapses between outlays of
cash and inflow of cash. Quicker the operating cycle less amount of investment
in working capital is needed and it improves profitability. The duration of the
operating cycle depends on nature of industries and efficiency in working
capital management.

The operating cycle which is a continuous process has been shown in the
following figure;

Figure 6.1: Cash Conversion Cycle

42

The Operating Cycle consists of 3 phases:

1. Phase 1:
In Phase 1, Cash gets converted into Inventory. This includes purchase of
Raw Material, Conversion of Raw Material into Work-in-Progress, Finished
Goods and finally the transfer of goods to stock at the end of the manufacturing
process.

2. Phase 2:
In Phase 2 of the cycle, the Inventory is converted into Receivables as
Credit Sales are made to customers. Firms which do not sell on Credit obviously
don't have the Phase 2 of the operating Cycle.

3. Phase 3:
The Last Phase i.e. Phase 3 of the Operating Cycle, represents the stage
when Receivables are collected. This phase completes the operating cycle.
Thus, the firm has moved from cash to inventory, to receivables and to cash
again.












43












Chapter-4










44

Current assets:-
It means the assets that are either in the form of cash or cash equivalents or can be
converted into cash or cash equivalent in a short time.
particulars 2005-06 2006-07 2007-08 2008-09
Current assets 3,393,430 3,215,026,429 3,106,119,303 6,306,313,319
Indices 100 94,742.67 91,533.32 185,838.90


Current liability:-
It means liabilities repayable in the short time .
Particular 2005-06 2006-07 2007-08 2008-09
Current liability 2,475,281,762 2,508,012,516 3,359,686,508 7,304,056,872
indices 100 101.32 135.72 295.07


0
50000
100000
150000
200000
2005-06 2006-07 2007-08 2008-09
Current assets
Current assets
0
50
100
150
200
250
300
350
2005-06 2006-07 2007-08 2008-09
Current liability
Current liability
45

Current ratio:-
Current ratio is a relationship of current assets to current liabilities. the ratio computed to
assess the short-term financial position of the enterprise. It means current ratio is an indicator
of the enterprises ability to meet its short-term obligations.
current assets
Current ratio= --------------------------
current liabilities
Particular 2005-06 2006-07 2007-08 2008-09
Current assets 3,393,430,595 3,215,026,429 3,106,119,303 6,306,313,319
Current liability 2,475,281,762 2,508,012,516 3,359,686,508 7,304,056,872
Current ratio 1.370 1.281 0.924 0.863


Debt-equity ratio:
The debt-equity ratio is computed to ascertain soundness of the long-term
financial policies of the firm. This ratio expresses a relationship between debt
(external equities) and the equity (internal equities).debt means long-term loans,
i.e., debenture, loans long-term) from financial institutions. Equity means
shareholders funds, i.e., preference share capital, equity share capital, reserves
less losses and fictitious assets like preliminary expenses. The ratio is
ascertained as follows:
debt (long-term loans)
Debt-equity ratio = (shareholders funds)-----------------
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2005-06 2006-07 2007-08 2008-09
Current ratio
Current ratio
46

equity
particulars 2005-06 2006-07 2007-08 2008-09
debt 15,647,026,352 15,249,418,023 14,152,916,008 13,116,597,207
equity 5,370,170,319 5,743,878,990 5,969,062,657 6,362,931,826
Debt-equity ratio 2.913 2.654 2.371 2.061


Proprietary ratio:-
The objective of computing the proprietary ratio is to establish the
relationship between proprietors funds and total assets. Proprietors fund means
share capital plus reserves and surplus, both of capital and revenue nature. Loss
if any is deducted. Amounts payable to others are not added. This ratio shows
the extent to which the shareholders own the business. The difference between
this ratio and 100 represents the ratio of total liabilities to total assets. It is
computed as follows:
Proprietors funds or shareholders funds
Proprietary ratio = _________________________________
Total assets

particulars 2005-06 2006-07 2007-08 2008-09
Proprietors
fund
5,370,170,319 5,743,878,990 5,969,062,657 6,362,931,826
Total
assets
14,361,184,83
6
14,638,350,54
9
15,491,380,32
1
19,021,381,34
6
Proprietar
y ratio
0.373 0.392 0.385 0.334

0
0.5
1
1.5
2
2.5
3
3.5
2005-06 2006-07 2007-08 2008-09
Debt & Equity ratio
Debt & Equity ratio
47



Working capital turnover ratio:-
This ratio indicates the number of times a unit invested in working capital
produces sale. in other words, this ratio indicates whether the working capital
has been effectively utilized or not in making sales. Working capital is
computed by deducting current liabilities from the current assets. in fact, in the
short run, it is the current assets and current liabilities which play a major role.
A careful handling of the short term assets and funds will mean a reduction in
the amount of capital employed thereby improving turnover. The ratio is
calculated as follows:
Net Sales
Working capital turnover ratio = -------------------------
Working capital

particulars 2005-06 2006-07 2007-08 2008-09
Net sales 3,620,758,281 3,553,494,401 3,997,558,798 6,789,295,427
Working
capital
918,148,833 707,013,913 (253,567,205) (997,743,553)
Working
capital turns
over ratio.
3.943 5.026 (15.765) (6.804)

0.3
0.32
0.34
0.36
0.38
0.4
2005-06 2006-07 2007-08 2008-09
Proprietary ratio
Proprietary ratio
48




Gross profit ratio:-
This ratio establishes relationship of gross profit on sales to net sales of a firm, which is
calculated in percentage. Gross profit is what is revealed by the trading account. it results
from the difference between net sales and cost of goods sold without taking into account
expenses charged to the profit and loss account.
Gross profit
Gross profit ratio = --------------------- 100
net sales
particulars 2005-06 2006-07 2007-08 2008-09
Gross profit 3,823,634,150 3,722,105,951 4,279,661,969 7,157,742,510
Net sales 3,620,758,281 3,553,494,401 3,997,558,798 6,789,295,427
Gross profit
ratio
105.60 100 107.05 105.42




-20
-15
-10
-5
0
5
10
2005-06 2006-07 2007-08 2008-09
Working capital turn over ratio
Working capital turn over ratio
96
98
100
102
104
106
108
2005-06 2006-07 2007-08 2008-09
Gross profit ratio
Gross profit ratio
49

Net profit ratio:-
Net profit ratio shows the percentage of net profit earned on the sales.net profit is computed
by deducting all direct costs, i.e., cost of goods sold and indirect costs, i.e., administrative and
marketing expenses, finance charges and making adjustments for non-operating expenses
from net sales and adding non-operating incomes.
Net profit
Net profit ratio = -------------------------- 100
net sales
particulars 2005-06 2006-07 2007-08 2008-09
Net profit 2,949,500,504 2,409,575,518 3,485,474,327 6,375,907,985
Net sales 3,620,758,281 3,553,494,401 3,997,558,798 6,789,295,427
Net profit ratio 81.46 67.80 87.19 93.91










0
10
20
30
40
50
60
70
80
90
100
2005-06 2006-07 2007-08 2008-09
Net profit ratio
Net profit ratio
50

Conclusion:
Working capital management is important aspect of financial
management. The study of working capital management of optcl ltd. has
revealed that the current ratio was as per the standard industrial practice but the
liquidity position of the company showed an increasing trend. The study has
been conducted on working capital ratio analysis working capital components
which helped the company to manage its working capital efficiently and
effectively.
1-working capital of the company was increasing and showing positive working
capital per year. It shows good liquidity position. Positive working capital
indicates that company has the ability of payments of payments of short terms
liabilities.
2-the liquidity ratio of the company is in excellent position as the current assets
and the quick current assets both are very high. The company can pay its current
liabilities and quick current liabilities and quick current liabilities and quick
current liabilities.
3-gross profit ratio and net profit ratio shows the company earns much more
profit and its finical position is good.
1-Shashi k gupta and R.k Sharma management accounting, kalyani
publishers, New Delhi.
2-chandra, prasanna,(1984),financial management, Tata McGraw hill
publishing company, new Delhi.
3-lal, iawahar and srivastava, seema,(2003),financial accounting,s.chand and
company ltd,new Delhi.
4-rustagi,r.p,(2008),finical management of Indian financial institution:,
Himalaya publishing house, new Delhi.
5-jain,s.p and K.L narang, ,(2003),corporate accounting,kalyani publishers,
new Delhi.
6-sharma and gupta,(1991),management accounting, kalyani publishers. New
Delhi.
51


BI BLIOGRAPHY
References
Web sites
Www.optcl.com
Www.google.com
Www, investopedia.com
Www.wekipedia.com
Www.oerc.com