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1.

1 Introduction of Himson Textile Engineering


Industry Pvt. Ltd.

HIMSON TEXTILE ENGINEERING INDUSTRIES LTD. is the


flagship company of the HIMSON group. Himson started its activities
about 57 years ago with only few looms to manufacture quality fabrics.
Since then the activities lave group from strength to strength. Himson
first concentrated on expansion in the looms shed. Dyeing and finishing
were added further. Further laces and embroidery units were established
as a move toward complementary diversification.
It was so years ago the group ventures into production of
fabrics by setting up few looms with emphasis on quality fabrics. In 70s,
the group with its out going approach started manufacturing synthetic
yarn processing machinery and won the import substitution award.
Success story of the group started with the manufacturing of
up twisting and rewinding machines for the synthetic yarn processing. In
1978, the group collaborated with EARNEST SCRRAGG AND SONS
LTD., U.K to manufacturing draw taxturising in India.
Today, the groups enjoys the celebration with world
renewed companies and have been successful in designed machine with
the support of in house research and technical development facilities at
Surat and Kim in Gujarat.

The growth of the group has been sustained by installing


modern CNG machining center FMS machines shop, modern foundry
and fabrication units, fully equipped R & D with product application
center.

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After establishing itself in India. The company has marched
forward towards export market and has secured order againt global
competition. The products have been exported to

 GERMANY
 U.K
 SINFAPORE
 MALASIYA
 AFRICA
 INDONESIA
 ERAN
 TURKI
 BANGLADESH
 BHUTAN
 SHRILANKA
 CHINA
 NEPAL

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1.2 HISTORY OF THE COMPANY

In the seventies, focus was shifted towards high growth. At


this time the company saw the opportunity for manufacturing synthetic
yarn processing machineries, the market for which large but untapped.
The seeds for this were sown with the commencement of manufacturing
of twisting and rewinding machines and Himson Textile Engineering
Industries Pvt. Ltd. came in to existence.
Since then there has been no turning back and company
came on fast track. But the real momentum to growth was provided in
1978, when Himson tied up with earnest scragg sons Ltd. U.K to
available to manufacture draw texturising machines in India. Than the
strategy was to get the best available technology. From abroad a fund
adopting the same to local requirements. This strategy has been paying
well and has made the company and undisputed leader in synetic yarn
processing machinery. This has been achieved by capturing almost 85%
market share inspite of big competition has been accepted by leading
manufactures by placing large quantity of machine orders. Himson also
enjoys high reputations for in house research and technology
developments. The real success is due to the efficient and promote after
sales service to the customers. Himson has captured more than 70% of
the domestic market share to supply synthetic yarn machinery.
The group’s started with few million has increased to Rs. 4.0
billion in 1989-90 and the turn over of the Himson textile Enf. Ind. Pvt.
Ltd. has increased from Rs. 6.0 million in 1974 to 3.0 billion in 1996-97.
the company manufactures a wide range of yarn processing machinery
from draw texturising machines to draw twisting machines, air texturising
machines, two for one twister for filament yarn, automatic shuttle

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changing looms, rapier looms and high speed circular knitting machines.
Ancillary units manufacturing precision spindles, high quality ceramic
guides/components and heater for DTY/DT machines PU discs, silk yarn
processing machines and jute looms.
Himson has entered into technical collaboration with M/s
Teijin seiji textile machinery co. Ltd. Japan to manufacture high speed
draw texturising machines with energy conserving short heaters and auto
doffing.
The increase in demand from the hosiery sector Himson to
enter into collaboration with M/s camber international of U.K to
manufacture high speed circular knitting machine.
The company has about 1200 employees on its rolls, of
which about 150(13%) are management/executive staff and 150 are
technical staff. The company has also helped to develop about 150
ancillary units owned by qualified engineers. this has helped the company
easily absorb the latest technology and adopt the same to meet the global
requirements

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1.3 “A SUCCESS STORY” OF HIMSON GROUP
(MILESTONES)

Year
1937 Birth of group by weaving activities.
Up to 1950 Steady expansion to a larger area with increase loom age.
1954 Nylon filament weaving.
1955 to 1970 Growth as a leading man made fiber/filament fabric
weaving operations nylon filaments (1966) crimping the
beginning of synthetics yarn processing.
1970 Twisting of filament yarn processing activity with a large
scale introduction of imported up twisting machines for
filament yarn processing.
1974 Manufacturing of twisting & rewinding machinery.
1977 Import substitution award by government of India for
indigenous machinery development.
1978 Collaboration with M/S. EARNEST SCRAGG LTD. U.K.
for manufacturing of crimping/texturing machinery in
India.
1979 First draw twisting machinery delivered to leading
synthetic filament plant.
1982 Himson ceramics in collaboration with unilator ltd. U.K.
1983/84 Collaboration with FADIS S.P.A. Italy for precision cone
winders.
1985/86 Collaboration with KUIE machinery company Ltd., South
Korea for shuttle changing looms.
1987 Collaboration with TEIJIN SEIKI company ltd., Japan for
draws twisting machinery.
1988 In house research and development center at KIM in
Gujarat state.
1989/90 Collaboration with HEATING ELEMENTS Ltd. U.K
heaters for text rinsing and draw twisting.
1996 TIE –UP WITH

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 KORIN MACHINE CO. LTD., South Korea for
rapier shuttle looms.
 CAMBER INTERNATIONAL LTD., U.K. for
high speed circular knitting machines.
 MACKIE INTERNATIONAL LTD. U.K. for lute
weaving machinery.
 M.T.S, S.P.A. Italy to manufacture precision
spindles for TFO and other machines.
 In-house development of TFO for spun and

filament yarns.
 Temco, Germany for friction texturising spindles.
 ISO 9000 award for consistent quality.

1998 Technical collaboration with TEITIN SEIKI CO LTD.


Japan, to manufacture high speed with temperature
heating system draw texturising machines in India.

1.4 ACHIEVEMENT OF HIMSON


(VARIOUS AWARDS TO THE COMPANY)
 ENGINEERING EXPORT PROMOTION COUNCIL given
the award for regional highest exporter’s trophy in 1998.

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 THE SOUTHEN GUJARAT CHAMBER OF COMMERCE
AND INDUSTRIES given award for outstanding export performance
in engineering industry in 1998-99.
 GOLDEN JUBILEE MEMORIAL TRUST given award for
outstanding export performance in engineering industry 2001-2002.
 F.I.T.E.I given special export award 2001-2002 for
outstanding export performance in synthetic filament fiber yarn
processing machinery. Sector.
 International gold star award for quality given by
international selection of business initiative directions Madrid Spain.

QUALITY POLICY
The quality policy of the Himson engineering industries Ltd.
shall be “To achieve total customer satisfaction by providing very high
standard of products and service by involving every employee.”

1.5 GENERAL INFORMATION ABOUT COMPANY

NUMBER OF PLANTS/UNITS

7
1. Hirala Colony, Ashvanikumar road, Surat.

2. Borasara Machines, Village Kim.

3. Gidc Pandesara, Surat.


4. Gidc Ankleshwar
5. Somnath Ind. Estate, Daman.
6. Borasara Machines, Village Amil, Silvassa.

7. Indo- Nippon Filaments, Karans. Talulo: Mandvi

8. Silvassa Machines, Silvassa.

9. Ambica Textile Engineers, Pandesara.

10. Palod Machines, Palod.

LOCATION OF THE HEAD OFFICE & REGISTERED


OFFICE
Name of the Organization :
Himson Textile Engineering Industries Pvt. Ltd.

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Address:
Hirala Colony,
Asheanikumar road,
Surat. 395008
Gujarat.
Mumbai office:
1101, Raheja centre,
Nariman point,
Mumbai-400-021
India.
Ahemdabad office:
F/5, Abhivruddhi Apartment,
Near Jalvihar society,
Ahemdabad -380014.
India.

DIRECTORS OF THE COMPANY.


1. Shri Surajram H. Bachkaniwala

2. Shri Shantilal H. Bachkaniwala


3. Shri Bhogilal H. Bachkaniwala

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4. Shri Pannala H. Bachkaniwala
5. Shri Rajnikant S. Bachkaniwala
6. Shri Dinesh S. Bachkaniwala

Auditor
M/S. Natvarlal Vepari & Co.
Chartered accounts.
Bankers
Bank of Baroda,
Parsi sheri,
surat.
Company Secretary:
Mr. Pankaj Savalia.
MAJOR CUSTOMERS OF HIMSON TEXTILE.
• Reliance Industries
• Raman Synthetic
• Siyaram Synthetic
• Ashima Synthetic
• Gupta Synthetic
• Garden Silk Mill
• Indorama Synthetics
• Raymond Synthetic
• Alok Industries
• Sanghi Polyesters.
TURNOVER OF THE COMPANY.
YEAR RS. (IN LACS)
1994-95 10980.65
1995-96 15730.25
1996-97 13350.60

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1997-98 11425.50
1998-99 16780.48
1999-00 11524.36
2000-01 11045.50
2001-02 12958.20
2002-03 20376.40
2003-04 19361.44

SILENT FEATURES OF HIMSON GROUP


 Major market share of synthetic filament yarn processing
machinery.
 core strength of well established in house research &
development, experienced team of professional &
manufacturing facilities at Kim Surat.
 state of the art of textile machinery manufacturing

facilities at Kim/surat.
 Product application centre for evaluation.
 Well knit sales network with branch offices at Bombay,
Delhi, Ahemdabad, and Coimbator and with head quarters
at Surat.
 Exports to the different countries of the world. i.e.

Germany, united kingdom, Singapore, Malaysia, Nepal,


Indonesia, Iran, turkey Bangladesh, Bhutan, china, Africa
& Sri Lanka.

INTRODUCTION ABOUT WORKING CAPITAL


MANAGEMENT

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2.1 MEANING OF WORKING CAPITAL

Working capital may be regarded as the lifeblood of a


business. Its effective provision can do much to ensure the success of
business. Its inefficient management can lead not only to loss of profit but
also to the downfall of a business. A study of working capital is of major
importance to internal and external analysis because of its close
relationship with the current day to say operations of a business. Every
business needs funds for two purposes. Long term funds are required to
create production facilities through purchase of fixed assets, such as
plants, machineries, land, buildings etc. funds are also needed for short
term purposes for the purchase of raw materials, and payment of wages
and other day to day expenses etc. these funds are known as working
capital.
in other words, working capital refers to that part of the
firm’s capital which is required for financing short term or current asset,
such as, cash marketable securities, debtors inventories, bills-receivable
etc. the assets of this type are relatively temporary in nature.
unfortunately there is much disagreement among financiers, accountants,
economists and businessmen as to the exact meaning of the term
“working capital” however, working capital is also known as revolving or
circulating capital or short term capital.

2.2 CONCEPT OF WORKING CAPITAL


There are two concepts of working capital gross concept and
net concept. The gross working capital usually referred to as working

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capital, represent investment in current assets such as marketable
securities inventories and bills receivables etc. current assets are those
assets which are normally converted in to cash within one year. The term
“net working capital” represents the difference between current assets and
current liabilities. The net working capital can be positive or negative.
When current assets exceed current liabilities, the net working capital
becomes positive. When current liabilities exceed currents assets, the net
working capital negative.
Working capital is essentially circulating capital brown and
Howard. Who compare the working capital with a river which is always
there but whose water level is constantly changing. An accountant defines
working capital as the difference between current assets and current
liabilities. This is a simplified definition as to how working capital is
circulated.

2.3 NATURE OF WORKING CAPITAL

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the nature of working capital is described with the help of
nature of operating cycle of the firm the process of cash or operating
cycle states. when a firm uses cash to purchases raw material and pay for
other manufacturing costs to produce goods. these goods are carried as
inventory for some time till they are sold. when goods are sold either cash
is received or account receivable, are created.
The goal of working capital management is to manage the
firm’s current assets and current liabilities in such a way that a
satisfactory level of working capital is maintained. That is so because if
the firm cannot maintain a satisfactory level of working capital it is likely
to become insolvent and may even be forced into bankruptcy. The current
assets should be large enough to cover its current liabilities in order to
ensure a reasonable margin of safety. Each of the current assets must be
managed efficiently in order to maintain the liquidity of the firm while
not keeping too high a level of any one of them. Each of the short term
sources of financing must be continuously managed to ensure that they
are obtain and used in the best possible way. The interaction between
current assets and current liabilities is therefore, the main them of the
theory of working capital management.

2.4 COMPONENTS OF WORKING CAPITAL

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The term working capital refers to the gross working capital
represents the amount of funds invested working capital and represents
the amount of funds invested in current assets. current assets are those
assets which in the ordinary course of business can be converted into cash
within a short period of normally on accounting year.
Examples of current assets are.
1. Cash and bank balance
2. Short term loans and advances
3. Bills receivables.
4. Sundry debtors
5. Inventories such as
- Raw materials
- Work in progress
- Finished goods
6. Prepaid expenses
7. Accrued incomes
8. Money receivable within 12 months.

In a narrow sense, the term working capital refers to the net


working capital. Net working capital is the excess of current assets over
liabilities

Net Working Capital = Current Assets – Current Liabilities


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.

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2.5 NEED FOR WORKING CAPITAL
The need for working capital or current assets cannot be over
emphasized. The extent to which profits can be earned will naturally
depend among other things, upon the magnitude of the sales. A successful
sales program is, in other words, necessary for earning profits by any
business enterprise. How ever sales do not covert into cash instantly;
there is in charitably a time lag between the sale of goods and the receipt
of cash. There is therefore, a need for working capital in the form of
current assets to deal with the problem arising out of the lack of
immediate realization of cash against goods sold. Therefore, sufficient
working capital is necessary to sustain sales activity. Technically, this is
referred to as the operating or cash cycle. The operating cycle can be suit
to be at the heart of the need for working capital. The continuing flow
from cash suppliers, to inventory, to accounts receivable and back to cash
is what is called the operating cycle. In other words, the term cash cycle
refers to the length of time necessary to complete the following cycle of
events.
1. conversion of cash in to inventory.
2. conversion of inventory in to receivables
3. conversion of receivables into cash.

The operating cycle is a continuous process.

The operating cycle, which is continuous process, is shown in figure.

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If it were possible to complete the sequences
instantaneously, there would be no need for working capital. But since it
is not possible the firm is forced to capital. But since it is not possible the
firm is forced to have current assets. Since cash inflows and out flow do
not match, firms have to necessarily keep cash or invest in short term
securities so that they will be in a position to meet obligations when they
became due. An adequate level of working capital is absolutely necessary
for smooth sales activity which, in turn, enhances the owner’s wealth.

2.6 KINDS (TYPES) OF WORKING CAPITAL


The are two types of working capital.

A). Permanent or Fixed Working Capital.


this component represents the value of the current assets
required on a continuing basis over the entire year, and for several years.

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permanent working capital is the minimum amount of current assets
which is needed to conduct a business even during the dullest season of
the year. this minimum level of current assets is called permanent or fixed
working capital as this part of capital is permanently blocked in current
assets.

Permanent Working Capital Has The Following Characteristics:


1. it is classified on the basis of the time factor.
2. it constantly changes from one assets to another and continues to
remain in the business process.
3. its size increase with the growth of business operations.

B). Temporary or Variable Working Capital.


This component represents a certain amount of fluctuation in
current assets during a short period. These fluctuations are increase or
decrease and are generally cyclical in nature. Additional current assets ate
required at different times during the operating year variable working
capital is the amount of additional current asset required for a short
period. The capital required to meet the seasonal needs of firm is called
seasonal working capital. For example: additional inventory will be
required for meeting the demand during the peak selling periods, and
receivables increase during the period of high sales. when the peak period
is over variables working capital starts decreasing or very little during the
normal period. it is temporarily invested in current assets.

Temporary Working Capital Has the Following Characteristics


1. it is not always gainfully employed, through it may change from
one asset to another, as permanent working capital does.

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2. it is particularly suited to business of a seasonal or cyclical nature.

2.7 WORKING CAPITAL MANAGEMENT – WHAT


FOR?

Management of working capital is an extremely important


area of financial management as current assets reprent more than half of
the total assets of a business organization, does not by itself produce

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revenue or income. Therefore working capital is necessary for utilizing
the productive capacity of fixed capital. For shortage of working capital,
the enterprise would suffer reduction in earnings due to productive
capacity remain unutilized. While, excess working capital leads to extra
cost for want of productive capacity. Thus, the amount of working capital
in every enterprise, whether manufacturing or non manufacturing should
be neither more or less that what is actually required.
An enterprise should maintain optimum amount of working
capital so as to carry on the productive and distributive activities
smoothly. The main objective of working capital management is to
arrange the needed amount of working capital at right time from right
source and for the right period so that a trade off between liquidity and
profitability can be achieved.

2.8 SOURCES OF WORKING CAPITAL


The following is a snapshot of various sources of working
capital available to a firm.

SOURCE OF WORKING CAPITAL

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Long Term Short term
1. Issue of shares
2. Floating debentures
3. Ploughing back of
Internal External
profits
1. Depreciation 1. Trade credit
4. Loans
2. Taxation 2. Credit papers
5. Public deposit
provision 3. Bank credit
3. Accrued 4. Customer’s credit
expenses 5. Government assistance
6. Loans from directors
7. Security of employees

 FINANCING OF LONG TERM WORKING


CAPITAL
1. ISSUE OF SHARE:
issue of share is the most important source for raising the
permanent working capital. shares are of two type equity shores and
preference shares maximum amount of permanent capital should be
raised by the issue of shares.

2. FLOATING OF DEBENTURES
a debenture is an instrument issued by the company
acknowledging its debt to its holder. it is also an important source of long

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term working capital. the firm issuing debentures also enjoy a number of
benefits, such as trading on equity, retention of control tax benefits, such
as trading on equity, retention of control, tax benefits etc.

3. PLOUGHING BACK OF PROFIT :


It means the reinvestment by a concern of its surplus earning
in its business. That is a part of the earned profits may be ploughed back
by the firm, in meeting their working capital needs, it is an internal source
of finance and is most suitable.

4. LONG TERM LOANS:


Financial institutions such as, commercial banks, life
insurance Corporation of India, industrial finance corporation of India
etc. provide all types of loans- long term. Medium term and short term
loans. This type finance ordinarily repayable in installments.

5. PUBLIC DEPOSITS
Public deposits are the fixed deposits accepted by a business
enterprise directly from public. Public deposits as a source of finance
have a large number of advantages such as simple and convenient source
of finance. Taxation benefits, inexpensive source of finances etc.

 FINANCING OF SHORT
TERM WORKING CAPITAL
There are two type internal sources and external source.

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A. INTERNAL SOURCE
1) Depreciation Funds: depreciation reserve provides a good source

of funds for working capital.

2) Provision for Taxation: The provision for taxation can also be

used by the concern as sources of working capital during intermittent


periods.

3) Accrued Expenses: The firm can postpone the payment of

expenses for short periods. This constitute as a source of working


capital.

B. EXTERNAL SOURCES

1) Trade Credit: One of the most important forms of short


term finance is the trade credit extended by one business enterprise on
another on the purchase and sale of goods.

2) Credit Papers: in the category of credit papers, bills of


exchange and promissory notes of shorter duration, raying between a
month and six months. these papers can be discounted with a bank.

3) Bank Credit: commercial banks are also principle sources


of working capital. they provide working capital in the form of
overdrafts, cash credit short term loans etc.

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4) Customer’s Credit: advances may also be obtained on
contracts entered into by the enterprise, customers are often asked to
make advance payment in cash in lieu of a contract to purchase.

5) Government Assistance: central and state governments,


sometimes, provide short term finance an easy terms.

6) loans from directors: an enterprise can also obtain loans


from its officers, directors etc. these loans are often obtained at low
rate of intrest.

7) Security Of Employees: if employees are required to make


deposits with employer companies, such deposits are available for
short term working capital.

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2.9 IMPORTANCE OF ADEQUATE WORKING
CAPITAL

A business firm must maintain an adequate level of working


capital in order to run its business smoothly. it is worthy to note that both
excessive and inadequate working capital position are harmful. How ever
out of the two, inadequacy of working capital is more dangerous for a
firm. Excessive working capital results in idle funds on which no profit is
earned. Similarly insufficiency of working capital results in interruptions
of production. this will lead to inefficiencies increase in costs in costs and
reduction of profits.
Working capital is just like the heart of business. if it
becomes weak, the business can hardly prosper and survive. no business
can run successfully without an adequate amount of working capital.
The following are a few advantages of adequate working
capital in business.

1. Cash Discount: adequate working capital enables a firm to avail

cash discount facilities offered to it by the suppliers. the amount of


cash discount reduces the cost of purchases.
2. Goodwill Adequate: adequate working capital enables a firm to

make prompt payment. making prompt payment is a base to create


and maintain goodwill.
3. Credit Worthiness: it enables a firm to operate its business more

efficiently because there is no delay in getting loans from banks


and others on easy and favorable terms.
4. regular Supply of Raw Materials: it permits the carrying of

inventories at a level that would enable a business to serve

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satisfactorily the needs of its customers. That is it ensures regular
supply of raw materials and continues production.
5. Expansion of Markets: a firm winch has adequate working

capital, can create favorable market condition. Thus profits are


increased.
6. Productivity increased: Fixed assets of the firm can not work

without adequate working capital. Because the fate of large scale


investment in fixed assets is largely by manner in which it current
assets are managed.
7. Research programs: No research program, innovation and

technical developments are possible to undertaken without


sufficient amount of working capital.
8. High Morale: adequacy of working capital creates an
environment of security, confidence, high morale etc. and creates
overall efficiency in business.

2.10 DANGER OF INADEQUATE WORKING CAPITAL

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In adequate working capital is also bad and has the following dangers:
1) It may fail to pay its dividend because of non-availability of funds.
2) it cannot buy its requirements in bulk and unable to utilize the
production facilities fully.
3) Operating inefficiencies creep in when it becomes difficult even to
meet day-to-day commitment.
4) Fixed assets aren’t efficiently utilized for the lack of working
capital funds thus the profitability would deteriorate.
5) It may not be able to take advantage of cash discount
6) The firm loses its reputation when it is not in position to honor its
short-term obligation. As a result, the firm faces tight credit terms.
7) Its low liquidity may lead to low profitability. In the same way low
profitability results in low liquidity.
8) Low liquidity position may lead to liquidation of firm. When firm
is unable to meet its debts at maturity, there is an unsound position.

An enlightened management should, therefore maintain a right


amount of Working Capital on continuous basis only them a proper
functioning if business operations will be ensured.

2.11 DANGER OF EXCESSIVE WORKING CAPITAL

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The dangers of excessive Working Capital are as follows:
1) A firm may be tempted to over trade and lose heavily.
2) The situation may lead to unnecessary purchases and accumulation
of inventories. This cause more chances of theft, waste, losses, etc.
3) These arise an imbalance between liquidity and profitability.
4) It means funds are idle when funds are idle, no profit is earned
when it is so, the rate of return on its investments goes down.
5) The situation leads to greater production, which may not have
matching demand.
6) The excess of working capital may lead to carelessness about cost
of production.

WORKING CAPITAL ANALYSIS

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Introduction: -
It has already been discussed that working capital acts as lifeblood
to an organization. The Himson group of Industry mainly producing
textile machineries at lowest possible cost so that they are enable to sale it
in profitable manner. As major sale is on credit basis and not on cash
mode, working capital is of immense significance for efficiently carried
out its day-to-day operation. In the absence of proper and effective
management of working capital, it would be difficult to achieve the basic
objective of its operational efficiency.
For the efficient management of Working Capital, analyses of
working capital of company through:
 Inventory management
 Receivable management
 Cash management
 Ratio analysis

All these are analyzed subsequently in this part.

1.1 WORKING CAPITAL ASSEMBLY

(Figures in thousands)
YEARS
Particulars 2001-02 2002-03 2003-04
Current Assets

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1) Inventories 3,50,615 5,04,596 2,65,267
2) Sundry Debtors 3,69,429 3,21,324 3,66,005
3) Cash & Bank Balance 1,24,547 2,31,670 4,22,065
4) Loans & Advances 2,24,777 2,32,705 2,67,447
5) Other current Assets 17,358 37,502 11,629
Total Current Assets (A) 10,86,726 13,27,797 13,32,413
Current Liabilities
1) Current Liabilities 4,55,039 5,28,285 4,43,705
2) Provision 4,413 28,413 64,000
Total Current Liabilities 4,59,452 5,56,698 5,07,705
(B)

Net Working Capital (A-B) 5,19,724 7,71,099 8,24,705

1.2 GROSS WORKING CAPITAL


The gross working capital concept is financial or going concerned
concept and deals with the problems of managing individual current
assets in short tern.
The amount of gross working capital during last three years is
given in following table. base year 2000-01

(Rs. in thousands)
Year Gross W.C. (Rs.) Growth (%)
2001-02 10,86,726 16.94
2002-03 13,27,797 22.18

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2003-04 13,32,413 22.25

Gross W.C

1086726 1327797 1332413


1500000
W orking 1000000
Ca pita l (Rs)
500000

0
2001-02 2002-03 2003-04

Gross W.C. (Rs.) Year

1.3 NET WORKING CAPITAL


The net working capital concept is an accounting concept and deals
with management of net value of current assets in long the run. Net
Working Capital is difference between current assets and current
liabilities. This ration measure firm’s potential reservoir funds relate to
net assets.

Net working capital ratio = Net working capital


Net assets
(Rs. in thousands)

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Year Net W.C. (Rs.) Net Assets (Rs.) Ratio (in times)
2001-02 5,19,724 11,12,781 0.47
2002-03 7,71,099 12,15,699 0.63
2003-04 9,78,454 12,43,090 0.79

R a tio (in tim e s )


0 .7 9
0 .8 0 .6 3
0 .4 7
N e t W o r k i n g0 .6
C a p i ta l 0 .4
0 .2
0
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4

R a tio ( in tim e s ) Year

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1.4 CALCULATION OF OPERATING CYCLE OF COMPANY
Operating cycle of a company computed with the help of following
formula: -
O=R+W+F+D-C
R= Raw material storage period
Average Stock of Raw material
=
Average raw material consumption per day

Year 2001-02
1,20,933.5
=
2,349.31
= 52 days.
Year 2002-03
2,75,028
=
4,044.83
= 68 days.
Year 2003-04
2,70,740
=
4,019.51
= 67 days.

W= Work-in-progress period
Average Work-in-progress inventory
=
Average cost of production per day
Year 2001-02

33
1,91,456
=
2,807.08
= 68 days.
Year 2002-03
1,25,521
=
4,658.33
= 27 days.
Year 2003-04
91,030
=
4,720.81
= 19 days.

F= Finished Stock Storage period


Average finished stock inventory
= -----------------------------------------------
Average cost of goods sold per day
Year 2001-02
13,283
= ---------------
2,294.75
= 6 days.
Year 2002-03
12,514.5
= ------------
3,350.13
= 4 days.

34
Year 2003-04
13,042
= ------------
4,757
= 3 days.

D= Debtors collection period


Average debtors
= ----------------------------------
Average credit sales per day
Year 2001-02
3,35,007.5
= ---------------
3,465.99
= 97 days.
Year 2002-03
3,45,376.5
= ------------
6,150.48
= 56 days.
Year 2003-04
3,49,937
= ------------
6,096.62
= 57 days.

C= Creditors payment period


Average creditors
= -------------------------------------------
Average credit purchase per day

35
Year 2001-02
3,01,568
= ---------------
2,147.15
= 140 days.
Year 2002-03
3,71,553
= ------------
3,441.96
= 108 days.
Year 2003-04
3,70,896.5
= ------------
3,942.89
= 94 days.
Operating Cycle
(Figure in Days)
YEARS
Particulars 2001-02 2002-03 2003-04
Inventory Storage period
Raw material 52 68 67
Work-in-progress 68 27 19
Finished Stock 06 04 03
Debtor Collection Period 97 56 57
Total (A) 223 155 146
Creditors Payment Period (B) 140 108 94
Operating Cycle Period (A-B) 83 47 52

Operating Cycle Period


Year Operating Cycle Period
2001-02 83

36
2002-03 47
2003-04 52

O p e ra tin g C y c le P e rio d
83
100
80 52
47
Da ys 6 0
40
20
0
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4
O p e ra tin g C ycle
Pe rio d
Ye a r

Conclusion : - the period required to convert the raw material in to cash


i.e. operation cycle period was 83 days in 2001-02 and it was only 47
days in 2002-03 which means the conversion of raw material in cash is
very fast which is really good for any company but in 2003-04 there is 52
days required for the same so there is need to control the operating cycle
of the company.

1.5 MANAGEMENT OF INVENTORY

The term inventory refers to the stockpile of the products a


firm is offering for sale and the components that make up the product. In

37
other words, inventory is composed of assets that will be sold in future in
the normal course of business operations. The assets which firms store as
inventory in anticipation of needs for (i) raw materials, (ii) work in
progress (iii) finished goods.

Inventory as a current assets, differ from other current assets


because only financial managers are not involved. Rather, all the
functional areas finance, marketing, production, and purchasing are
involved, the views concerning the appropriate level of inventory would
differ among the different functional areas. The job of the financial
manger is to reconcile the conflicting viewpoint of the various functional
areas regarding the appropriate inventory levels in order to fulfill the
various maximizing the owner’s wealth. Thus inventory management,
like the management of other current assets, should be related to the
overall objective of the firm.

There are at least three motives for holding inventories.

(1) To facilitate smooth production and sales operation


(Transaction motive)
(2) To guard against the risk of unpredictable changes in usage
rate and delivery time (Precautionary Motive)
(3) To take advantage of price fluctuations. (Speculative
Motive)
Inventories represent investment of a firms funds and that is why
management of inventory is necessary for the maximization of the value
of the firm. The firm should therefore consider (a) Costs (b) Return (c)
Risk Factors in establishing its inventory policy.

38
 EVALUATION OF INVENTORY MANAGEMENT PERFORMANCE:
Ratio analysis has been used for making evaluation of Inventory
management performance. As the raw material used in the company is
pig iron, proper planning and handling is required for the purpose of
achieving the right quality of output.
The ratios for last three years have been worked out and compared.
The various figures are given in the table.

INVENTORY MANAGEMENT IN HIMSON PVT LTD.


(Rs. in thousand)
ITEM 2001-02 2002-03 2003-04
(1) Average Inventory 3,31,822.5 4,27,605.5 3,84,934.5
(2) Total Current Assets 10,86,729 13,27,797 13,32,413
(3) Cost of Good Sold 10,89,825 17,73,887 14,79,371

a) Inventory to Gross
0.30 0.32 0.29
Working Capital (1/2)
b) Inventory Turnover (3/1) 3.28 4.15 3.84
c) Inventory Conversion
111 88 95
Period (365/b) days
(Table 6)

39
In v e n to ry tu rn o v e r R a tio
5 4 .1 5 3 .8 4
4 3 .2 8
R a tio (in3
tim e s ) 2
1
0
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4

R a tio
Year

In v e n to ry c o n v e rs io n p e rio d (3 6 5 /b ) d a y
150
111
88 95
N o . o f1 0 0
days 50

0
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 - 0 4

N o . o f da y s
Year

40
3.6 MANAGEMENT OF RECEIVABLE
The term receivable is defined as ‘debt owed to the firm by
customers arising from sale of goods or services in the ordinary course of
business’ when a firm makes and ordinary sale of goods or services and
does not receive payment, the firm grants trade credit and creates
accounts receivable which could be collected in future. Receivable
management is also called trade credit management. Thus accounts
receivable represent an extension of credit to customers, allowing them a
reasonable of time which to pay for goods received.
When firm sell goods for cash, payments are received immediately
and therefore no receivables are created. However when a firm sells
goods or services on credit, payments are received only at a future date
and receivables are created. It is an essential marketing tool in modern
business trade. Credit creates receivables, which the firm is expected to
collect in near future. A firm grants credit to its customers so that its sales
are its customers so that its sales are not lost to competitors.
The objective of receivables management is ‘to promote sales and
profit until that point is reached where the return on investment in future
funding receivable is less than the cost of funds raised to finance that
additional credit.
Account receivable constitutes a significant portion of the total
current assets of the business after inventories. The receivables arising
out of credit has three characteristics.
I. It involves an element of risk, which should be carefully analyzed.
II. It is based on economic value. To the buyer, the economic value
goods or services pass immediately at the time of sale, white the
seller expects an equivalent value to be received later on.

41
III. It implies futurity. The customers from whom receivables have to
collected in future are called debtors and represents the firm’s
claim or asset.
 DEBTORS TURN-OVER RATIO: -
This is also called “Debtors velocity” or “Receivable Turnover”. A
firm sells goods on credit and cash basis. When firm extends credit to its
customers, book debts are created in firms A/c debtors expected to
converted in to cash over short period and thus included in current assets.
It is used to measure liquidity of the receivables or to find out period
over, which receivables remain uncollected.
Receivable turnover Ratio
Total Sales
= -----------------------
Average Debtors
Debt collection period
365
= ------------------------------------
Receivable turnover ratio

Receivable Management in Company


Year Sales Avg. Debtors Ratio Collection
Period
2001-02 12,47,759 3,35,007.5 3.72 98
2002-03 22,39,011 3,45,376.5 6.48 56
2003-04 22,14,657 3,49,937 6.32 58

42
R e c ie v a b le T u r n o v e r R a tio
8 6 .4 8 6 .3 2
6 3 .7 2
R a tio4
2
0
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4

R a t io Year

D e b t c o lle c t io n P e r io d

100
98
80 56 58
60
No. of D a4y0 s
20
0
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4

C o lle c t io n P e rio d
Year

43
3.7 MANAGEMENT OF CASH: -
Cash in the important current assets for the operations of the
business. Cash is the basic input needed to keep the business running on
continuos basis, it is also the ultimate output expected to be realized by
selling the service or product manufactured by the firm. The firm should
keep sufficient cash, neither more or less. Cash shortage will disrupt the
firm’s manufacturing operation while excessive cash will simply remain
idle, without contributing anything towards firm’s profitability. Thus, a
major function of the financial managers is to maintain a sound financial
position.
Cash management involves following four factors: -
I. Ascertainment of the minimum cash balance and controlling the
levels of cash.
II. Controlling cash in flows
III. Controlling cash outflows
IV. Optimum interment of surplus cash.
Cash is required to meet a firms transactions and precautionary
needs. A firm needs cash to make payment for acquisition of resources
and services for the normal conduct of business. It keeps additional funds
to meet any emergency situation. Some firms maintain cash for taking
advantages of speculative changes in price of input and output.

 EVALUATION OF CASH MANAGEMENT PERFORMANCE: -


The following ratios have been used to evaluate different aspects of
cash management.
(1) Cash to Current Assets Ratio.
(2) Cash turnover Ration.
(3) Average age of Cash.

44
The figures of cash and Bank Balance, total current assets and
current liabilities for the year 2001-02to 2003-04 are given in the table.
Cash Management in Himson Pvt. Ltd.
(Rs. In ‘000’s)
ITEM 2001-02 2002-03 2003-04
(1) Cash & Bank Balance 1,24,547 2,31,670 4,22,065
(2) Total Current Assets 10,86,729 13,27,797 13,32,413
(3) Total Current Liabilities 4,55,039 5,28,285 4,43,705
Ratio (%)
a) Cash to Current Asset
11.46 17.45 31.68
Ratio (1/2)
b) Cash Turnover Ratio (3/1) 3.65 2.28 1.05
c) Average age of cash
100 160 348
(365/b) days

C ash T u rn o ver R atio


3.65
4
2.28
3
R atio 2 1.05
1
0
2001-02 2002-03 2003-04
Cas h Turnov er Ratio Year

45
A v e r a g e a g e o f c a s h (in d a y s )
348
400
300 160
N o . o f D2a0y0 100

100
0
2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4
A v e ra g e a g e o f c a s h Year

3.8 ANALYSIS THROUGH WORKING CAPITAL RATIOS

46
A study of the causes of changes in uses and sources of Working
Capital is necessary to observe that whether working capital is serving the
purpose for which it has been created or not. In this technique, for each
aspect of analysis certain ratios are computed and then results are
compared with standard ratio or industry average.
The ratio analysis provides guides and clues especially in sporting
trends towards better or poorer performance and in finding out significant
deviation for any average or relatively applicable standards.

The following are the important ratios to measure the efficiency of


working capital: -
1. Ratios relating to liquidity of working capital: -
Liquidity ratios are used to measure the ability of firm to pay its
maturing obligation in time. This ratio helpful for both short-term
creditors and internal management of the firm. The following are types of
ratios relating to liquidity of working capital.

A. Current Ratio: -
It is most common measure for measuring liquidity. It is also called
“Working Capital Ratio.” It expresses relationship between current assets
& current liabilities.

Current Assets
Current Ratio = ----------------------
Current Liabilities

47
(Rs. in ‘000’s)
Year Current Assets Current Liabilities Ratio (times)
2001-02 10,86,726 4,55,039 2.39:1
2002-03 13,27,797 5,28,285 2.51:1
2003-04 13,32,413 4,43,705 3.00:1
The acceptable norms for this ratio is 2:1 considering this it can be
said that company has maintained sound ratio over three year

B. Quick Ratio: -
It is also known as liquid ratio or acid test ration. It is a relation
between quick assets and quick liabilities. It more useful in knowing the
liquidity of firm than current ratio.
Quick Assets
Quick Ratio = ----------------------
Current Liabilities
A quick asset means current assets excluding stock and prepaid
expenses.
(Rs. in ‘000’s)
Year Quick Assets Current Liabilities Ratio (times)
2001-02 7,36,111 4,55,039 1.62
2002-03 8,23,201 5,28,285 1.56
2003-04 11,31,566 4,43,705 2.55
The acceptable norms for this ratio is 1:1 but the company as
already maintained it above the norms, which indicate sound financial
position.

2. Composition of Gross working capital: -


The structure of gross working capital is evaluated by finding out
the ratio of each component of current assets with the total current assets.

48
These ratios indicate in which components of current assets, excess funds
have been invested to that extent.

Component 2001-02 2002-03 2003-04


Inventories 0.32 0.38 0.10
Sundry Debtors 0.34 0.24 0.28
Cash & Bank Balance 0.11 0.17 0.32
Loans & Advances 0.21 0.17 0.10
Other Current Assets 0.02 0.03 0.01
Total 100 100 100

3. Ratios relating to Circulation or Productivity of Working


Capital: -
This ratio highlighted the efficiency with which working capital is
being utilized. It is commonly used to know turnover of working capital
and the turnover of its components to indicate the efficiency of working
capital management.
A. Circulation of Gross Working Capital: -
This method is used to examine the effectiveness of gross working
capital. It is circulated as:
Net Sales
= -----------------------------
Total Gross W. C.

(Rs. in ‘000’s)
Year Net Sales Total Gross W.C. Ratio (times)
2001-02 12,65,731 10,86,726 1.16
2002-03 19,82,176 13,27,797 1.49
2003-04 19,36,144 13,32,413 1.39

49
This ratio tells us the relative efficiency with which the business
organization utilizes the short-term resources to generate output.

B. Circulation of Net Working Capital: -


This method used to measure the effectiveness of net working
capital is to divide net sales by net working capital. The ratio is computed
as follows: -
Net Sales
= ------------
Net W.C.

(Rs. in ‘000’s)
Year Sales Net Working Capital Ratio (times)
2001-02 12,65,731 5,19,724 2.44
2002-03 19,57,339 7,71,099 2.53
2003-04 19,36,144 8,24,708 2.39

This ratio tells whether there is an improvement in the utilization of


net working capital or not.

4. Other Ratio: -
A. Cash Position Ratio: -
This ratio is variation of quick ratio. It measures the relationship
between cash and near cash it’s on the one had, and immediately
maturing obligations on the other. The inventory and debtors are
excluded from current assets, to calculate this ratio.

Cash + Marketable Securities


Cash Position Raito = -----------------------------------

50
Current Liabilities
(Rs. in ‘000’s)
Year Cash Current Liabilities Ratio (times)
2001-02 1,24,547 4,55,039 0.28
2002-03 2,31,670 5,28,285 0.44
2003-04 4,22,065 4,43,705 0.95

Generally 0.25:1 ratio is recommended to ensure liquidity.


From the above calculation it is cleared that return on fixed assets
increasing year by year, it means that company is able to earn higher
return on investment in business than the investment made in the outside
deposit.

B. Current Liabilities to Total Assets Ratio: -


This ratio shows the relationship between current liability and total
assets [Net Fixed Assets + Investment + Current Assets]
It is calculated as: -
Current Liabilities
= ----------------------
Total Assets

(Rs. in ‘000’s)
Year Current Liabilities Total Assets Ratio (times)
2001-02 4,55,039 15,72,233 0.29
2002-03 5,28,285 17,72,397 0.30
2003-04 4,43,705 17,50,789 0.25

C. Current Assets to Total Assets Ratio: -


This ratio brings out the percentage of current assets to total net
assets of the business. This ratio indicates the extent of liquidity nature of

51
assets required in comparison with total net assets. The formal for ratio is
given below.
Current Assets
= ----------------------
Total Assets

(Rs. in ‘000’s)
Year Current Assets Total Assets Ratio (times)
2001-02 10,86,726 15,72,233 0.69
2002-03 13,27,797 17,72,397 0.75
2003-04 13,32,413 17,50,789 0.76

D. Working capital turnover ratio


Cost of sales
Working capital turnover ratio = -----------------------------------
Net working capital

Year Cost of sales Net W.C Ratio


2001-02 12,65,731 6,27,274 2.02
2002-03 19,57,339 7,71,099 2.54
2003-04 19,36,144 9,78,454 1.98

During the year 2001-02 and 2002-03 there is higher W.C


turn over ratio in compare to 2003-04 so that we can say that there is high
profit with low investment in working capital.

52
OBJECTIVE OF THE STUDY

The following are the main objective of study: -

 To study the different source of working capital


 To study about working capital financing
 To study the operating cycle of the company.
 To study the different ratio relating to working capital.
 To study the financial position of the company.
 To know how to manage receivable, inventory & cash.
 To know how to manage current assets and current liabilities so
that satisfactory level of working capital is maintained.

53
 To know the need of working capital and its way to use.

FINDINGS

 Gross Working Capital: -

Gross working capital of the company i.e. current assets is


increasing over the period of last three year. it was Rs. 1086726 in
2001-02 and increased to 1332413 in 2003-04 so there is increased of
Rs. 245687 thousand.

 Net Working Capital:

54
The average ratio for the net working capital is 0.63 for the
period under study. it means there is a reserve of Rs. 63 on an average
from net assets of Rs. 100
 Operating Cycle:

The operating cycle period i.e. conversion of raw material in


to cash is 83 days in 2001-02 but in 2005 it is 52 days which is good
for the any company.
 Inventory to Gross Working Capital Ratio:

This ratio is increasing as compared to 2001-02 from 0.3 to


0.32 in 2001-02 and 2002-03 i.e. 0.29 in 2003-04. It shows that form
improved its inventory management.
 Inventory Turnover: -

This ratio is increased from 3.28 in 2001-02 to 3.84. So it


can be said that company has take steps to increase the inventory turn
over ratio.

 Inventory Conversion Period: -

It refers to the period when manufacturing unit takes to clear


lots of stock. This ratio is decreasing as compared to year 2001-02
from 111 days to 95 days in 2003-04 the ratio is increasing as
compared to 2002-03 from 88 days. To 95 days in 2003-04.

 Debtors Turnover Ratio: -

This ratio shows period of which receivable unselective. the


ratio is 3.72 in 2001-02 but in 2003-04. it is increased to 6.32. so there

55
should be required to take appropriate steps to reduce the collection
period though sales increase.
 Debt Collection Period: -

It is the time period required by company to recollect its


payment the debt collection is 58 days in 2003-04 which indicate the
speedy collection of debt. it was 98 days in 2001-02
 Cash to Current Asset Ratio: -

This ratio indicates the extent to which the current assets are
represented by cash bank balance. There is an increase in the ratio
over three years. It was increased by 5.49% in 2002-03 compared to
2001-02. It was increased by 14.23% in 2003-04 as compared to 2003-
04.
 Cash Turnover Ratio: -

It indicates number of times cash is flowed out for payment


to creditors. This ratio is contiounsly decreasing over three years
which indicating there is idel cash balance it was decrease from 3.65
in 2001-02 to 1.08 in 2003-04.

 Average Age of Cash: -

The period for which cash remain used. There is continuous


increase in period. it means there is lack of cash management i.e. it is
increase by188 day in 2003-04 from 100 days in 2001-02.

 Current Ratio: -

current ration is an index of the firm’s financial stability. in a


sound business current ratio of 2:1 is considered as an idol one. the

56
current ratio of the company remained between 2.39 to 3.00 during
last three year which means company has no sufficient liquidity to
meet short term obligation.
 Quick Acid Test Ratio

The acceptable norms for this ration are 1:1 for any business.
The liquid ratio of the company is 2.55 in 2003-04 which is harmful to
the company.
 Circulation of Net Working Capital
This ratio shows decreasing trend from 2.44 in 2001-02 to
2.35 in 2003-04, which means there is required for an improvement in
utilization of net working capital during the period.

SUGGESTION

Through out the analysis of working capital ratios, I would


like to give some suggestion to the company that might be helpful to the
company in improving management of working capital.
 The company should give more
importance to inventory management and try to reduce

57
inventory to gross working capital ratio. This will help in
reducing inventory costs.
 The company should rise additional
funds in business rather than investing in fixed deposit because
company can able to earn higher rate of return on investment in
fixed assets as compare to fixed deposit.
 The gross working capital is increasing
over three years a but the major proportion of current assets
comprise of cash & bank balance in current year. The company
should try to reduce much more investment in cash & bank
balances & try to invest in inventory.
 There is an decrease in debt collection
period over three years and at present in 2003-04 it is near by
two months which is as per textile industry norm but this is
possible due to increase in debtors turnover ratio. So that the
company should try to increase. This ratio as much as possible.
 The current ratio of the company is
increasing over the period of three years. The company should
required to maintain a efficient level of liquidity position & try
to achieve acceptable norms i.e. 2:1.
BIBLIOGRAPHY

 Financial Management
By Khan & Jain (Author)
Tata McGrawhill (Publisher)

 Management Accounting
By Bhagwati & Pillai (Author)
Himalaya (Publisher)

58
 Working Capital Management
By P. Mohanrao & Alok K. Pramanik (Author)
Deep & Deep (Publisher)

 Annual Report of the company

59