Executive Summary

Title of the study:The study of working capital management

As a part of curriculum, every student studying MBA has to undertake a project
on a particular subject assigned to him/her. Accordingly I have been assigned the project
work on the study of working capital management in Working Capital in MPPKVVCL
.Decisions relating to working capital (Current assets-Current liabilities) and short term financing
are known as working capital management. It involves the relationship between a firms shortterm assets and its short term liabilities. The goal of working capital management is to ensure
that the firm is able to continue its operation and that it has sufficient cash flow to satisfy both
maturing short term debt and upcoming operational expenses. Working capital is used in BCM
private ltd., for the following purpose:-Raw material, work in progress, finished goods,
inventories, sundry debtors, and day to ycash requirements. The MPPKVVCL private ltd.,
keep certain funds which is automaticallyavailable to finance the current assets requirements.
Ratio Analysis has been Carried out using Financial Information for last five accounting
years i.e. from 2015 to 2016 Ratios like Working capital Turnover Ratio, Quick
Ratio, Current Ratio, Inventory Turnover Ratio, Debtor Turnover Ratio, Creditors turnover
ratio have also been analyzed. A Statement of Changes in Working Capital has
also been analyzed. at MPPKVVCL., the working capital management has shown increase in
the period of study. This shows working capital is managed effectively and all the other
departments are working in perfect co-ordination to ensure the progress of
MPPKVVCL private ltd., but I have given some Suggestions to MPPKVVCL on the basis of my
Project Study.

Concept
The capital which is needed for the regular operation of business is called working capital.
Working capital is also called circulating capital or revolving capital or short-term capital.
Working capital is used for regular business activities like for the purchase of raw materials, for
the payment of wages, payment of rent and of other expenses.

Concept Of Working Capital

Generally, there are two concepts of working capital i.e. gross concept and net concept.

Gross Concept Of Working Capital

According to gross concept, working capital refers to all the current assets and represents the
amount of funds invested in current assets. Thus, gross working capital is the capital invested in
current assets. Current assets are those assets which can be converted into cash within the shorttime period.
Gross Working Capital = Total current assets
In this way, gross working capital refers to the firm's investment in current assets. Gross working
capital represents total of current assets which includes cash in hand, cash at bank, inventory,
prepaid expenses, bills receivable etc.

Net Concept Of Working Capital

According to the net concept, working capital is the excess of current assets over current
liabilities. In other words, the difference between current assets and current liabilities is called
net working capital.
Net Working Capital = Current Assets - Current liabilities
In this way, net working capital is the difference of current assets and current liabilities.

COMPANY PROFILE
Who we are
Since we set up shop in 1989, weve been driven by one single, purposeful goalinvesting in the smallest dream. A loan every minute, a million lives touched every year;
as of Dec'12 we manage assets worth over Rs.160 billion, for us it is just a beginning.
Over 80% of our 270+ branches are in semi-urban and rural India; our family of 7000+
Magmaites, and our 24+ years experience in underwriting has enabled us to extend
support to the masses that have been excluded by the traditional financial systems.
Commercial vehicles are a large segment of our business, representing more than 28% of
our disbursals. From within our 21 operating states, we drew nearly Rs. 2,076 crore in the
commercial vehicle segment. We work directly with manufacturers, dealers and
marketing directors at TATA, Eicher and Ashok Leyland to bring the highest standards in
the industry even to the smallest businesses.
Financial Summary
Magma's overall business increased to Rs 10,387 crores in FY13, up by 40% over FY 12
on the back of disbursement growth and acquisition of portfolio. Assets under
Management of the company as on 31 March 2013 was recorded at Rs 18, 378 crores, up
38% over closing AUM of FY12.
The company registered a Net Interest Spread (NIS) of 4.91% in FY 13 against 3.40%
registered in FY 12.
The company registered a 58% growth in revenue for FY13 to Rs 1701.5 crores. In the
backdrop of a 151 bps increase in spreads, the company registered a PAT of Rs 144.9
crores for FY13 highest ever to date.
Magma has started 3 new businesses including Gold Loans and General Insurance this
year which in a few months into important;text-decoration:underline !
important;color:#0000FF !important">operations, have performed well. Magma's

acquisition of GE Moneys Mortgage business was also an important milestone in FY13.

Magma has opened 75 new branches in FY13 to ramp up its distribution network
significantly.

Not one of our nine products (six products under asset financing business and three new
products launched in FY13) contributes more than 30% of our loan assets. Our presence
across 21 states and union territories ensures that no one state contributes more than 11%
of our disbursements, and diverse customer selection criteria keep our customer base
eclectic. Our business model is resistant to natural fluctuation in the markets that we
cover, and resistant to industry specific economic cycles.

Board of Directors

Topic Description
INTRODUCTION
In financial management, two important decisions are very vital
and crucial. They are decision regarding fixed assets/fixed capital
and decision regarding working capital/current assets. Both are
important and a firm always analyzes their effect to final impact
upon profitability and risk. Fixed capital refers to the funds
invested in such fixed or permanent assets as land, building, and
machinery etc. Whereas working capital refers to the funds locked
up in materials, work in progress, finished goods, receivables, and
cash etc. Thus, in very simple words, working capital may be
defined as capital invested in current assets. Here current
assets are those assets, which can be converted into cash within
a short period of time and the cash received is again invested into
these assets. Thus, it is constantly receiving or circulating. Hence,
working capital is also known as circulating capital or floating
capital .

Capital required for a business can be classified under two main categories via,
1)

Fixed Capital

2)

Working Capital

Every business needs funds for two purposes for its establishment and to carry out its
day- to-day operations. Long terms funds are required to create production facilities through
purchase of fixed assets such as p&m, land, building, furniture, etc. Investments in these assets
represent that part of firms capital which is blocked on permanent or fixed basis and is called
fixed capital. Funds are also needed for short-term purposes for the purchase of raw material,
payment of wages and other day to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to
that part of the firms capital which is required for financing short- term or current assets such
as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts
keep revolving fast and are being constantly converted in to cash and this cash flows out again
in exchange for other current assets. Hence, it is also known as revolving or circulating capital
or short term capital.

There are two concepts of working capital:

1.

Gross working capital

2.

Net working capital

The gross working capital is the capital invested in the total current assets of the
enterprises current assets are those

Assets which can convert in to cash within a short period normally one accounting year.
CONSTITUENTS OF CURRENT ASSETS
1)

Cash in hand and cash at bank

2)

Bills receivables

3)

Sundry debtors

4)

Short term loans and advances.

REQUIREMENT OF WORKING CAPITAL

There are no set rules or formula to determine the working capital requirements of
the firms. A large number of factors influence the working capital need of the firms. All
factors are of different importance and also importance change for the firm over time.
Therefore, an analysis of the relevant factors should be made in order to determine the
total investment in working capital. Generally the following factors influence the working
capital requirements of the firm:

Nature and size of the business

Seasonal fluctuations
Production policy
Taxation
Depreciation policy
Reserve policy
Dividend policy
Credit policy:
Growth and expansion
Price level changes
Operating efficiency
Profit margin and profit appropriation

Structure of Working Capital

The study of structure of working capital is another name for the study of working capital cycle.
In other words, it can be said that the study of structure of working capital is the study of the
elements of current assets viz. inventory, receivable, cash and bank balances and other liquid
resources like short-term or temporary investments. Current liabilities usually comprise bank
borrowings, trade credits, assessed tax and unpaid dividends or any other such things.
The following points mention relating to various elements of working capital deserves:
Inventory Inventory is major item of current assets. The management of inventories raw
material, goods-in-process and finished goods is an important factor in the short-run liquidity
positions and long-term profitability of the company.
Raw material inventories Uncertainties about the future demand for finished goods, together
with the cost of adjusting production to change in demand will cause a financial manager to
desire some level of raw material inventory. In the absence of such inventory, the company could
respond to increased demand for finished goods only by incurring explicit clerical and other
transactions costs of ordinary raw material for processing into finished goods to meet that
demand.
Work-in-process inventory This inventory is built up due to production cycle. Production cycle
is the time-span between introduction of raw material into production and emergence of finished
product at the completion of production cycle. Till the production cycle is completed, the stock
of work-in-process has to be maintained.
Finished goods inventory Finished goods are required for reasons similar to those causing the
company to hold raw materials inventories. Customers demand for finished goods is uncertain
and variable. If a company carries no finished goods inventory, unanticipated increases in
customer demand would require sudden increases in the rate of production to meet the demand.
Such rapid increase in the rate of production may be very expensive to accomplish.
(1) It protects a business form the adverse effects of shrinkage in the values of current assets.

(2) It is possible to pay all the current obligations promptly and to take advantage of cash
discounts.
(3) It ensures, to a greater extent, the maintenance of a companys credit standing and provides
for such emergencies as strikes, floods, fires etc.
(4) It permits the carrying of inventories at a level that would enable a business to serve
satisfactorily the needs of its customers.
(5)` It enables a company to extend favourable credit terms to its customers.
(6) It enables a company to operate its business more efficiently because there is no delay in
obtaining materials, etc., because of credit difficulties.

Benefits
Here are some basic advantages of Working Capital
Management
Working Capital Importance
Working capital indicates how well you positioned your company to meet its near-term cash
needs. When your company has significantly more cash on hand or receivables that readily
convert to cash than you have debt principal payments or payments to vendors, your risk of
ceasing operations due to an inability to pay your bills plummets. Working capital financing
can eliminate any gap between cash flowing into operations and cash flowing out.

Speed and Flexibility

One advantage of working capital financing is that most eligible companies can obtain shortterm loans, including accounts receivable credit lines, inventory loans or bank lines of credit,
in a short period of time. The loan amounts are typically a fraction of revenues and are tied
to assets that quickly convert to cash. Working capital financing is generally flexible, with
varying interest rates and repayment terms. This flexibility can help companies with
seasonal or periodic fluctuations smooth out cash flow.

Short-Term Options
Accounts receivable credit lines and factoring, which occurs when your company sells its
receivables to a third party at a discount, directly tie to your company's accounts
receivables. As your company's revenues and associated receivables grow, the credit line
increases. As your company needs more money, these working capital options make those
funds available. These also provide a viable choice for smaller or newer companies without
the operational history or balance sheet strength to qualify for a bank term loan or
unsecured line of credit.

Medium-Term Options
Your company can also finance working capital with a term loan. Short-term working capital
financing addresses cyclical needs throughout the fiscal year. Mid-term working capital
financing provides the funds to purchase additional inventory and generate the receivables
that increase working capital. For companies with growth prospects over the next few years,
this option provides access to a steady stream of capital to cover gaps created by growthrelated expenses.

Drawbacks

Disadvantages of Working Capital Loans

You need to consider repayment. Yes, you actually have to repay the loan. This is usually a
given when you borrow money. As with any type of loan, your sole obligation to the lender is to
make your payments. Unfortunately even if your business fails, you will still have to make these
payments. And if you are forced into bankruptcy, your lenders will have claim to repayment
before any equity investors.
Some collateral is required. Many working capital loans will require some degree of security for
the lender. In todays economy a bank would like some assurance that you will pay them back. A
secured loan is one in which collateral is received in exchange for funding. The guarantee may
be something like a factory, home, inventory or even jewelry. These items can also be given as a
guarantee even if there are existing mortgages on them. Although the amount of collateral for a
loan of working capital may vary with banks, most typically look at information such as credit
rating and other small business loan information to see your credit repayment history.
There are higher interest rates. Because unsecured working capital loans are more risky for
lenders, they usually include higher interest rates than secured business loans. This will mean
that your business will pay more over the life of the loan than it would have paid for a secured
loan of the same amount. Higher interest rates also cause the individual loan payments to be

higher and sometimes more difficult to afford. Finally, unsecured business loans are harder to
qualify for. If your business has a poor or nonexistent credit history, the lender may not approve
your application.
There are potential impacts to your credit rating. It might seem like a good idea to keep taking
out loans when your small business needs money, but each loan will be noted on your credit
rating. And the more you borrow, the higher the risk to the lender, and the higher interest rate
youll pay. Also, slow payment and no payment will be direct hits to your credit rating, so be
sure you will be able to pay back any money you borrow.
There are short terms. Yes, this is both a benefit and a disadvantage based on your business
needs. A major disadvantage of getting funds from this type of loan is the fact that the funding is
only intended for short-term solutions. These loans will not suffice for long-term business goals
or comprehensive business projects that will need higher investments with longer repayment
terms.
Banks will sometimes loan short-term money to small businesses to enable them to get off the
ground and grow. Working capital loans are a great way for businesses like yours to generate
capital and start focusing on business growth. To get anywhere in the world of business it is
important to have capital on hand to cover marketing cost, payroll, and any other financial
expenses that occur within your business. Rather than exhausting all of your finances to meet
your financial needs use a working capital business loan to keep money in your businesses
pocket as well as meeting your needs with cash to spare

Role In Business
Proper management of working capital is essential to a companys fundamental financial
health and operational success as a business. A hallmark of good business management is the
ability to utilize working capital management to maintain a solid balance between growth,
profitability and liquidity.
A business uses working capital in its daily operations; working capital is the difference between
a business' current assets and current liabilities or debts. Working capital serves as a metric for
how efficiently a company is operating and how financially stable it is in the short-term. The
working capital ratio, which divides current assets by current liabilities, indicates whether a
company has adequate cash flow to cover short-term debts and expenses.
Importance of Working Capital in an orginazation

Working capital is a daily necessity for businesses, as they require a regular amount of cash to
make routine payments, cover unexpected costs and purchase basic materials used in production
of goods. Working capital is an easily understandable concept, as it is linked to an
individuals cost of living and, thus, can be understood in a more personal way. Individuals need
to collect money they are owed and maintain a certain amount on a daily basis to cover day-today expenses, bills and other regular expenditures.
Working capital is a prevalent metric for the efficiency, liquidity and overall health of a
company. It is a reflection of the results of various company activities, including revenue
collection, debt management, inventory management and payments to suppliers. This is because
it includes inventory, accounts payable and receivable, cash, portions of debt due within the
period of a year and other short-term accounts.
The needs for working capital vary from industry to industry, and they can even vary among
similar companies. This is due to several factors, including differences in collection and payment
policies, the timing of asset purchases, the likelihood of a company writing off some of its pastdue accounts receivable, and in some instances, capital-raising efforts a company is undertaking.

When a company does not have enough working capital to cover its obligations,
financial insolvency can result and lead to legal troubles, liquidation of assets and
potential bankruptcy. Thus, it is vital to all businesses to have adequate management of working
capital.
Working capital management is essentially an accounting strategy with a focus on the
maintenance of a sufficient balance between a companys current assets and liabilities. An
effective working capital management system allows businesses to not only cover their financial
obligations, but it is also a way to help companies boost their earnings. Managing working
capital means managing inventories, cash, accounts payable and accounts receivable. An
efficient working capital management system often uses key performance ratios, such as the
working capital ratio, the inventory turnover ratio and the collection ratio, to help identify areas
that require focus in order to maintain liquidity and profitability.

Current Scenario
In todays world Working capital management involves the relationship between a firm's
short-term assets and its short-term liabilities. The goal of working capital management is to
ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both
maturing short-term debt and upcoming operational expenses. The management of working
capital involves managing inventories, accounts receivable and payable, and cash.
Working capital is the single best method of determining the position of a company, or
how well that company may be doing. When all is said and done, the company's working capital
is what makes it profitable or not profitable. The more working capital a company has the better
that company is doing, financially. Many potential investors and others in the public sphere will
scrutinize a balance sheet to find the working capital calculation of a company.
According to many sources, the working capital calculation is the simplest to perform.
Simply subtract the short-term liabilities of a company from the current assets. What you are left
with is the working capital of the company. All short-term liabilities must be accounted for, as
well as all current assets. This is not as simple as just counting the available cash on hand. The
working capital of a company is a requires a vast working capital calculation to find the exact
amount of working capital. That said why is a working capital calculation so important.
Knowing the amount of working capital a company has is vital to many aspects. The
working capital calculation will tell the company, as well as the investors, exactly how well the
company is doing. In addition, the company's working capital constitutes the amount used for
purchasing new equipment, new stocks and much more. Working capital is the single most
important aspect of a company, whether you are judging performance or speculating on
expanding the company. Without the required working capital and knowledge of how to perform
a working capital calculation, it may be impossible for a business to grow and prosper. Having
the right amount of working capital is the only way in which a company can advance

Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-term assets
and its short-term liabilities. The goal of Working capital management is to ensure that the firm
is able to continue its operations and that it has sufficient cash flow to satisfy both maturing
short-term debt and upcoming operational expenses.

Future Prospects
In particular, Swiss companies identity huge potential for future improvements in
WCM in digitization and in the range of trends together referred to by the term
Industry 4.0. Invoices are more and more frequently issued electronically (e-bills),
while orders are increasingly placed digitally via online catalogues (e-procurement).
And exchanges with customers are also becoming more and more digital (ecommerce). Within inventory management in particular, the Internet of things and
big data, i.e. the analysis of large data sets, are opening up further interesting
opportunities. Predictive analytics the identification of patterns in the available
data sources and the prediction of future events based on such patterns is
simplifying and improving demand forecasts. This in turn can lead to a reduction in
safety stocks and specifically save money. Despite the recognized benefits,
digitization and Industry 4.0 are so far only being implemented tentatively. Many
companies still balk at the complexity associated with the changeover, as well as
the high IT costs.