PROJECT REPORT
ON
WORKING CAPITAL MANAGEMENT
UNDERTAKEN AT:
Sayan vibhag shakari khand Udyog Mandli Ltd.
SUBMITTED BY:
MARTEEN PATEL
(09MBA32)
GUIDED BY:
MR. MANISH PATHAK
MBA PROGRAMME
YEAR-2009-2011
DECLARATION
The project entitled Working Capital Management is
submitted
to
shrimad
Rajchandra
Institute
of
Marteenpatel
(09mba32)
Executive Summary
The number one reason most people look at a Balance sheet is to find out
a company's working capital (or "current") position. It reveals more about
the financial condition of a business than almost any other calculation. It
tells you what would be left if a company raised all of its short term
resources, and used them to pay off its short term liabilities. The more
working capital, the less financial strain a company experiences. By
studying a company's position, you can clearly see if it has the resources
Research Objective:
The main objectives of study aimed as:
RESEARCH DESIGN:
Basically there are 3 types of Research Design.
1. Exploratory Research Design.
2. Descriptive Research Design.
3. Causal Research Design.
The research design for this study is Descriptive Research
Design.
To choose this Descriptive research in Working Capital Management is
that descriptive research has been used to define the characteristics of
the phenomena and to clearly define it.
DATA SOURCES:
The information is collected from secondary data during the project. The
Sources of secondary data are Financial Statement, Cash flow, Internet,
Books Etc.
TABLE OF CONTENTS
Topic
SR.
PAGE NO.
NO.
01
02
03
the
Topic
&
Literature
Review
RESEARCH METHODOLOGY
10
3.1 Objectives
3.2limitations
3.3 Benefits
04
13
05
FINDINGS
40
06
RECOMMENDATIONS
41
BIBLIOGRAPHY
42
Chapter 1
About
The Company
had
been
supplied
by
the
Indian
Sugar
&
General
Products
SUGAR
The sugar which is a Carbo-hydrate is obtained from sugar cane and is
known as Cane Sugar. It contains 99.50% sucrose. Actually cane sugar is
chemically known as Sucrose which is disaccharide. It is soluble in
water. Sucrose is dextrorotatory on hydrolysis which is chemically known
as inversion, it yield a mixture of Glucose and Fructose. Glucose and
Fructose both are monosaccharide and are levorotatory. Sugar is
essential part of human diet hence it comes under essential commodity.
This sugar when heated to 180C yield amorphous brown syrupy
substance called caramel which is used as a colorant in food products
and drinks. The sugar is having multiple uses. It can be used as a row
material in fermentation industry to produce Ethyl Alcohol, Butyl
Alcohol, Glycerin and Citric Acid.
BAGASSE
Bagasse is the residue obtained from crushing cane in the mills. It
contains about 50% moisture and 2% sugar and the balance is fiber. It is
also very commonly used as fuel in boilers in the Sugar Factory. Bagasse
is used as a row material for the production of Cellulose, Furfural, Paper,
Particle board, Cattle feed etc.
MOLASSES
Molasses which is also known as black strap molasses or treacle is a
dark brown viscous liquid obtained as a by-product in processing Cane
Sugar. It contains nearly 45% uncrystallized, fermentable Sugar & some
Sucrose. It is a valued by-product of foreign liquor, as a table syrup and
food flavourant, Ethyl Alcohol, Acetic Acid, Citric Acid, Glycerin and
Yeast. It is also used as food for farm animals and in the manufacture of
several processed tobaccos. It is not economical to crystallized the sugar
from molasses.
RECTIFIED SPIRIT (RS)
It is manufactured by Formation & Distillation of molasses,
As per IS: 323-1959 specification.
(i) Sp. Gravity 0.8171 at 15.6C.
(ii) Percent by volume 94.68 at 15.6C.
It is used for manufacturing of Acetic Acid, Acetone, Oxalic Asid Absolute
Alcohol & other various chemicals.
ABSOLUTE ALCOHOL (ETHANOL)
Future planning:
We are seriously thinking about implementation of COGENERATION
PROJECT and FEASIBILITY REPORT has already been prepared.
Chapter 2
-
tells you what would be left if a company raised all of its short term
resources, and used them to pay off its short term liabilities. The more
working capital, the less financial strain a company experiences. By
studying a company's position, you can clearly see if it has the resources
necessary to expand internally or if it will have to turn to a bank and
take on debt.
Working capital, being the lifeblood of any organization has a broad
spectrum of importance in running the short term objectives such as
cash management on one hand and decisions pertaining to foreign
exchange activities on the other.
Working capital on the balance sheet is the difference between current
assets and current liabilities. The reason working capital is so important
is because it lets you know the resources management has on hand to
pay day-to-day bills and conduct operations. Some companies, such as
Wal-Mart or other restaurants, can actually have negative working
capital.
Operating a business with a balance in capital management is essential
to every business whether small or large.
much money comes in and how much money goes out, as well how much
money is tucked away must be maintained.
diagram
below
illustrates
the
working
capital
cycle
for
manufacturing firm
The upper portion of the diagram above shows in a simplified form the
chain of events in a manufacturing firm. Each of the boxes in the upper
part of the diagram can be seen as a tank through which funds flow.
These tanks, which are concerned with day-to-day activities, have funds
constantly flowing into and out of them.
Calculating Working Capital:
Working Capital is the easiest of all the balance sheet calculations. Here's
the formula.
Current Assets - Current Liabilities = Working Capital
One of the main advantages of looking at the working capital position is
being able to foresee any financial difficulties that may arise. Even a
business that has billions of dollars in fixed assets will quickly find itself
in bankruptcy court if it can't pay its monthly bills. Under the best
circumstances, poor working capital leads to financial pressure on a
company, increased borrowing, and late payments to creditor - all of
which result in a lower credit rating. A lower credit rating means banks
charge a higher interest rate, which can cost a corporation a lot of money
over time.
The Working Capital is also known as Circulating Capital &
Floating Capital
As From my company(Sayan khand udyog) They make working capital for
continues production for that they have a lot of raw materials, Finished
good, worker salary etc for that necessary of money its call working
capital.
Literature Review
Efficient liquidity management involves planning and controlling current
assets and current liabilities in such a manner that eliminates the risk of
inability to meet due short-term obligations and avoids excessive
investment in these assets. The relation between profitability and
liquidity was examined, as measured by current ratio and cash gap (cash
conversion cycle) on a sample of joint stock companies in Saudi Arabia
using correlation and regression analysis. The study found that the cash
conversion cycle was of more importance as a measure of liquidity than
the current ratio that affects profitability. The size variable was found to
have significant effect on profitability at the industry level (Eljelly, 2004)
Most firms had a large amount of cash invested in working capital. It can
therefore be expected that the way in which working capital is managed
will have a significant impact on profitability of those firms. Using
correlation and regression tests he found a significant negative
relationship between gross operating income and the number of days
accounts receivable, inventories and accounts payable of Belgian firms.
On basis of these results he suggested that managers could create value
for their shareholders by reducing the number of days accounts
receivable and inventories to a reasonable minimum. The negative
relationship between accounts payable and profitability is consistent with
the view that less profitable firms wait longer to pay their bills. (Deloof,
2003)
http://www.bizresearchpapers.com/Kesseven.pdf
http://www.eurojournals.com/irjfe_32_12.pdf
http://www.ariba.com/pdf/solutions/WorkingCapitalMgmtD
atasheet.pdf
http://www.bim.edu/pdf/lead_article/kanna.pdf
Chapter 3
-
RESEARCH
METHODOLOGY
Objective of study:
The information is collected from secondary data during the project. The
Sources of secondary data are Financial Statement, Cash flow, Internet,
Books Etc.
Time period:The time period that has been used is of 2004-05 to 2008-09.
Limitations of the study:
The data of this study has been taken from the company annual
reports only
The firm should manage its current assets in such a way that the
marginal return on investment in these assets is not less than the
cost of capital employed to finance the current assets.
Chapter 4
DATA ANALYSIS
&
INTERPRETATION
Data Analysis :
Operating cycle concept:
A new concept which is gaining more and more important in recent years
is the operating cycle concept of working capital. The operating cycle
refers to the average time elapses between the acquisition of raw
materials and final cash realization.
Cash is used to buy raw material and other stores, so cash is converted
into raw materials and stores inventory. Then the raw materials and
stores are issued to the production department. Wages are paid and
other expenses are incurred in the process and work-in-process comes
into existence. Work-in-process becomes finished goods. Finished goods
are sold to customers on credit. In the course of time, these customer
pay cash for the goods purchased by them. Cash is retrieved and the
cycle is completed.
Raw
material
inventory
Cash
Work in
process
Accounts
Receivables
Finished
goods
365
Average work-in-progress
365
365
For: - 2008-09
For: - 2007-08
1366714664
For: - 2006-07
1590715230
For: - 2005-06
WIPCP
1976201317
For: - 2004-05
WIPCP
Year
RMCP
2008-09
2007-08
2006-07
2005-06
2004-05
179
229
229
184
118
Graph:-
WIPCP
4
7
7
4
4
FGCP
232
277
249
267
296
DCP
39
62
54
38
50
PDP
256
230
229
278
163
Gross
Net
operating
operating
cycle
454
575
539
493
468
cycle
198
345
310
215
305
Interpretation:Here, the company raw material conversion period and finished goods
conversion period is very long because this is a Sugar industry and it will
required long raw material conversion period and finished goods. In work
in progress conversion period conversion period is short compare all
other conversion periods. Also the debtors conversion period is short and
payment deferral period long in all year that good sign for the company.
The net operating cycle is very short in year 2008-09 and it will better for
the company. But in all other years this will very long. They will not more
focusing on debtors conversion period as well as the payment deferral
period. For this reason the company can face this problem. In the year
2008-09 the company can reduce the conversion period its good for the
future also.
and thus, this ratio helps management to maintain the adequate level of
working capital.
Year
Sales
Working capital
sales/working
capital
2008-09
2438938285
670389957
3.64
2007-08
1753453795
646824737
2.71
2006-07
1410902362
553151736
2.55
2005-06
1822335367
569355958
3.20
2004-05
1262783964
548361037
2.30
Graph:-
Interpretation:From the above table we can say that the sale to working capital is quite
high in the recent year. These indicate the company has sufficient net
working capital. The ratio is more or less increase during the last five
years that is the good sign for the company.
Year
2008-09
2007-08
2006-07
2005-06
2004-05
Graph:-
Sales
2438938285
1753453795
1410902362
1822335367
1262783964
Inventory
1780875787
1455440558
1087095575
1444530793
1150743072
sales/inventory
1.37
1.20
1.30
1.26
1.10
Interpretation:Here, we have high inventory turnover ratio. At initial stage it was not
high, but then much improvement and the recent year is high ratio its
good sign for the company.
Sales
2438938285
1753453795
1410902362
1822335367
1262783964
Current assets
2449508004
2017804514
1360130778
1859752438
1340579295
Sales/current assets
1.00
0.87
1.04
0.98
0.94
Interpretation:Here, we show that this ratio is not high in every year but 2008-2009 &
2006-07 ratio is high and this is good for the company. Company will
increase their sales because they good current assets compare to sales.
Year
liabilities
&advances
provisions
current
assets,
& loans
advances/current
liabilities
2008-09
2007-08
2006-07
2005-06
2004-2005
2449508004
2017804514
1360130778
1859752438
1340579295
1779118047
1370979777
806979042
1290396480
792218258
&
&
provisions
1.38
1.47
1.69
1.44
1.69
Graph:-
Interpretation:The ideal current ratio is 2:1. It indicates that current assets double the
current liabilities are considered to be satisfactory. Here, low value of
current ratio. At initial stage it is near to 2:1 but then after it will more
decrease. It is not good for the company.
Year
Current
Inventory
assets,
loans
Current
assets,
&
2008-09
advances
2449508004
2007-08
2006-07
2005-06
2004-05
2017804514
1360130778
1859752438
1340579295
Current
loans liabilities
Quick
& ratio
inventory
668632217
1779118047
0.38
1455440558
1087095575
1444530793
1150743072
562363956
273035203
415221645
189836223
1370979777
806979042
1290396480
792218258
0.41
0.34
0.32
0.24
Graph:-
Interpretation:High quick ratio is an indication that the company has relatively better
position to meet his current obligations in time. Here, high value of quick
ratio that the company has good liquidity position.
Current assets
total
net
assets/current
2008-09
2007-08
3222115022
2743567500
2449508004
2017804514
assets
1.32
1.36
2006-07
2005-06
2004-2005
Graph:-
2085494802
2569982631
2073825075
1360130778
1859752438
1340579295
1.53
1.38
1.55
Interpretation:Here, we see that they have total net assets is more compare to the
current assets. At initial stage the company has low total net assets as
well as current assets but then after it will more increases. It will help
them to effectively use their current assets.
Debtors
Sales
debtors/sales
Debtors/sales
365
2008-09
2007-08
2006-07
2005-06
2004-05
262596083
298660656
209700417
189330540
171597551
2438938285
1753453795
1410902362
1822335367
1262783964
0.11
0.17
0.15
0.10
0.14
40.15
62.17
54.25
37.92
49.60
Graph:-
Interpretation:From the above chart we can say that debtor collection period is law in
every year. In the recent year the collection period is very law is good sign
for the company.
payment mean that the operation of the company are being financed
interest free by suppliers funds.
Year
Creditors
2008-09
1610752600
2007-08
862881412
2006-07
711624188
2005-06
1229460744
2004-05
482556373
Graph:-
purchases
2296966648
1366714664
1133227589
1616608043
1077456025
creditors/purchases
creditors/purchases
0.70
0.63
0.63
0.76
0.45
365
255.96
230.44
229.21
278.00
163.47
Interpretation:Here we can say that the credit payment period is quite high in the
recent year. That indicate good image of company. The period is more or
less increase during the last five year that good sign for the the company.
and
vice
versa.
Working
capital
leverage
means
the
Current assets
Total assets
Change
in Working
2449508004
2017804514
1360130778
1859752438
1340579295
3222115022
2743567500
2085494802
2569982631
2073825075
431703490
657673736
499621660
519173143
_
leverage
0.88
0.97
0.86
0.91
_
Interpretation:Here, we see that the ratio is high in last five years that is not good for
the company so they can try to reduce it. The main reason is that they
have more current assets.
2007-08
2008-09
Sales
(Actual)
1753453795
(Estimates)
2438938285
Current assets:
Inventories
1455440558
2024421577.89
Receivables
298660656
415417224.12
263703300
366793853.39
Total (A)
2017804514
2806632655.4
Current liabilities(b):
1370979777
1906942216.33
899690439.07
(B)
Item
2008-09
2009-10
Sales
(Actual)
2438938285
(Estimates)
3100000000
Inventories
1780875787
2263573036.51
Receivables
262596083
333771404.655
406036134
516090145.913
Total (A)
2449508004
3113434587.07
2261338870.11
852095716.96
Current assets:
(B)
Interpretation:-
Sales
243
175
Current assets
244
201
2006-07
141
136
2005-06
182
185
2004-05
126
134
Estimates the working capital requirements for the year 2009-10, if the
anticipated sale is Rs. 310 Crore.
Sales(x)
Current
xy
X2
2008-09
243
assets(y)
244
59292
59049
2007-08
175
201
35175
30625
2006-07
141
136
19176
19881
2005-06
182
185
33670
33124
2004-05
126
134
16884
15876
N=5
x=867
y=900
xy=164197
x2=158555
Year
y = na + bx
900=5a + 867b (1)
xy = ax + bx2
164197 = 867a + 158555b. (2)
Solving equations (1) and (2), we get
a = 8.33
b = 0.99
The relationship between sales and current assets can now be expressed
as follows:
Y = a +bX
Y = 8.33 + 0.99(310)
Y = Rs. 315.23 Crore
Interpretation:-
We also find out the working capital requirement using this method.
Here, we find the estimates requirement of working capital for the year
2009-10. It will get the working capital requirement for next year.
Methods
(1) Percentage of sales method
(2) Regression analysis method
646824737.00 (2007-08)
899690439.07 (2008-09)
646824737.00 (2007-08)
306820000.00(2008-09)
670389957.00 (2008-09)
852095716.96 (2009-10)
670389957.00 (2008-09)
315230000.00 (2009-10)
Conclusion:From these two methods we select that which one is better. Here
percentage sales method give the requirement of working capital is
852.09 crore and the regression analysis method give the working capital
requirement is 315.23 crore.
Therefore we can say that the percentage sales method is better for find
out the estimated working capital requirement compare to regression
analysis method.
Chapter 5
-
Finding
FINDINGS
In operating cycle in 2004-05 is 305 and in 2008-09 is 198 means
the company has improvement in operating cycle.
Current ratio standard from 2:1, Current ratio has declined from
1.69:1 in 2004-05 to 1.38:1 in 2008-09 but this is not good they
can more improvement on it.
Debtor Conversion period in 2004-05 is 50 and 2008-09 is 40 its
good sign for the company.
Credit Conversion period in 2004-05 is 163 and 2008-09 is 256
means very high is good sign for the company.
Chapter 6
-
RECOMMENDATIONS
RECOMENDATION
BIBLIOGRAPHY
Annual report of the company
Book :
Website :
www.sayansugar.com