PROJECT REPORT ON
WORKING CAPITAL
SEMESTER- IV
ACADEMIC YEAR:2016-17
SUBMITTED BY
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF MASTER DEGREE
OF COMMERCE
MISS. CHITRA VELMURUGAN
ROLL NO: 25
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CERTIFICATE
This is to certify that the project report on WORKING CAPITAL is bonafide record of project worked done
by MISS. CHITRA VELMURUGAN submitted in partual fulfillment of the requirement of the award of the
Master of Commerce Degree University of Mumbai during the period of his/her study in the academic year
2016-17
INTERNAL EXAMINER:
EXTERNAL EXAMINER:
Principal
Mrs.Mary Vimochana
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DECLARATION
COMMERCE studying in M.COM.PART-II (Semester IV) hereby declare that I have completed this
project report on WORKING CAPITAL and has not been submitted to any other University or
Institute for the award of any degree, diploma etc. The information is submitted to me is true and
Date .
(Chitra velmurugan)
Place Bhandup,Mumbai.
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ACKNOWLEDGEMENT
The satisfaction, which accompanies the successful completion of the project, is incomplete without
the mention of a few names. We take this opportunity to acknowledge the efforts of the many
individuals who helped us make this project possible.
We would like to express our sincere gratitude to our Prof. Rajiv Mishra for giving us an opportunity
to work under her esteemed guidance which helped us to improve upon our lacunae during the
project research. We are very grateful to her for providing us with every possible opportunity &
freedom to learn and explore. We are deeply indebted to her for her suggestions, constant inspiration
and encouragement.
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CONTENT
SR TOPIC PAGE
NO. NO.
1 MEANING OF WORKING CAPITAL 2
CAPITAL
5 FACTORS DETERMINING THE WORKING CAPITAL 10
7 BIBLIOGRAPHY 29
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Working 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.
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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.
2) Bills receivables
3) Sundry debtors
a. Raw material
b. Work in process
d. Finished goods
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7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.
Net working capital can be positive or negative. When the current assets exceeds the
current liabilities are more than the current assets. Current liabilities are those
liabilities, which are intended to be paid in the ordinary course of business within a
short period of normally one accounting year out of the current assts or the income
business.
3. Dividends payable.
4. Bank overdraft.
6. Bills payable.
7. Sundry creditors.
The gross working capital concept is financial or going concern concept whereas net working
capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the following
reasons:
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3. It take into consideration of the fact every increase in the funds of the
enterprise would increase its working capital.
On the basis of concept working capital can be classified as gross working capital and
net working capital. On the basis of time, working capital may be classified as:
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Permanent or fixed working capital is minimum amount which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has
to maintain a minimum level of raw material, work- in-process, finished goods and cash balance.
This minimum level of current assts is called permanent or fixed working capital as this part of
working is permanently blocked in current assets. As the business grow the requirements of
working capital also increases due to increase in current assets.
Temporary or variable working capital is the amount of working capital which is required to
meet the seasonal demands and some special exigencies. Variable working capital can further be
classified as seasonal working capital and special working capital. The capital required to meet
the seasonal need of the enterprise is called seasonal working capital.
Easy loans: Adequate working capital leads to high solvency and credit standing can
arrange loans from banks and other on easy and favorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.
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Commitments: It leads to the satisfaction of the employees and raises the morale of
its employees, increases their efficiency, reduces wastage and costs and enhances
production and profits.
Ability To Face Crises: A concern can face the situation during the depression.
Every business concern should have adequate amount of working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate nor
shortages of working capital. Both excess as well as short working capital positions are bad
for any business. However, it is the inadequate working capital which is more dangerous
from the point of view of the firm.
CAPITAL
1. Excessive working capital means ideal funds which earn no profit for
the firm and business cannot earn the required rate of return on its
investments.
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6. Due to lower rate of return n investments, the values of shares may also
fall.
Every business needs some amounts of working capital. The need for working capital arises due
to the time gap between production and realization of cash from sales. There is an operating
cycle involved in sales and realization of cash. There are time gaps in purchase of raw material
and production; production and sales; and realization of cash.
To maintain the inventories of the raw material, work-in-progress, stores and spares and
finished stock.
For studying the need of working capital in a business, one has to study the business under
varying circumstances such as a new concern requires a lot of funds to meet its initial
requirements such as promotion and formation etc. These expenses are called preliminary
expenses and are capitalized. The amount needed for working capital depends upon the size
of the company and ambitions of its promoters. Greater the size of the business unit,
generally larger will be the requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and expensing of
the business till it gains maturity. At maturity the amount of working capital required is called
normal working capital.
There are others factors also influence the need of working capital in a business.
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DEBTORS
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8. CREDIT POLICY: A concern that purchases its requirements on credit and sales
its product / services on cash requires lesser amt. of working capital and vice-versa.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more
earning capacity than other due to quality of their products, monopoly conditions, etc.
Such firms may generate cash profits from operations and contribute to their working
capital. The dividend policy also affects the requirement of working capital. A firm
maintaining a steady high rate of cash dividend irrespective of its profits needs
working capital than the firm that retains larger part of its profits and does not pay so
high rate of cash dividend.
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12. PRICE LEVEL CHANGES: Changes in the price level also affect the working
capital requirements. Generally rise in prices leads to increase in working capital.
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
Management of working capital is concerned with the problem that arises in attempting
to manage the current assets, current liabilities. The basic goal of working capital
management is to manage the current assets and current liabilities of a firm in such a way
that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor
excessive as both the situations are bad for any firm. There should be no shortage of
funds and also no working capital should be ideal. WORKING CAPITAL
MANAGEMENT POLICES of a firm has a great on its probability, liquidity and
structural health of the organization. So working capital management is three dimensional
in nature as
As we know working capital is the life blood and the centre of a business. Adequate
amount of working capital is very much essential for the smooth running of the business.
And the most important part is the efficient management of working capital in right time.
The liquidity position of the firm is totally effected by the management of working
capital. So, a study of changes in the uses and sources of working capital is necessary to
evaluate the efficiency with which the working capital is employed in a business. This
involves the need of working capital analysis.
The analysis of working capital can be conducted through a number of devices, such as:
1. Ratio analysis.
3. Budgeting.
1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The technique of ratio
analysis can be employed for measuring short-term liquidity or working capital position
of a firm. The following ratios can be calculated for these purposes:
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1. Current ratio.
2. Quick ratio
4. Inventory turnover.
5. Receivables turnover.
Fund flow analysis is a technical device designated to the study the source from which
additional funds were derived and the use to which these sources were put. The fund flow
analysis consists of:
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LIQUIDITY
The short term creditors of a company such as suppliers of goods of credit and
commercial banks short-term loans are primarily interested to know the ability of a firm
to meet its obligations in time. The short term obligations of a firm can be met in time
only when it is having sufficient liquid assets. So to with the confidence of investors,
creditors, the smooth functioning of the firm and the efficient use of fixed assets the
liquid position of the firm must be strong. But a very high degree of liquidity of the
firm being tied up in current assets. Therefore, it is important proper balance in regard
to the liquidity of the firm. Two types of ratios can be calculated for measuring short-
term financial position or short-term solvency position of the firm.
1. Liquidity ratios.
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A) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as and when these
become due. The short-term obligations are met by realizing amounts from current,
floating or circulating assts. The current assets should either be liquid or near about
liquidity. These should be convertible in cash for paying obligations of short-term
nature. The sufficiency or insufficiency of current assets should be assessed by
comparing them with short-term liabilities. If current assets can pay off the current
liabilities then the liquidity position is satisfactory. On the other hand, if the current
liabilities cannot be met out of the current assets then the liquidity position is bad. To
measure the liquidity of a firm, the following ratios can be calculated:
1. CURRENT RATIO
2. QUICK RATIO
1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general liquidity and
its most widely used to make the analysis of short-term financial position or liquidity of
a firm. It is defined as the relation between current assets and current liabilities. Thus,
CURRENT LIABILITES
1) CURRENT ASSETS
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2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry debtors,
inventories and work-in-progresses. Current liabilities include outstanding expenses,
bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability
to pay its current obligations in time. On the hand a low current ratio represents that the
liquidity position of the firm is not good and the firm shall not be able to pay its current
liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets
double the current liabilities is considered to be satisfactory.
(Rupees in crore)
e.g.
Interpretation:-
As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the
company for last three years it has increased from 2003 to 2005. The current ratio of
company is more than the ideal ratio. This depicts that companys liquidity position is
sound. Its current assets are more than its current liabilities.
2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be
defined as the relationship between quick/liquid assets and current or liquid liabilities.
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An asset is said to be liquid if it can be converted into cash with a short period without
loss of value. It measures the firms capacity to pay off current obligations immediately.
CURRENT LIABILITES
1) Marketable Securities
3) Debtors.
A high ratio is an indication that the firm is liquid and has the ability to meet its current
liabilities in time and on the other hand a low quick ratio represents that the firms
liquidity position is not good.
Interpretation :
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A quick ratio is an indication that the firm is liquid and has the ability to meet its
current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more
than ideal ratio. This shows company has no liquidity problem.
Although receivables, debtors and bills receivable are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash immediately
or in time. So absolute liquid ratio should be calculated together with current ratio and
acid test ratio so as to exclude even receivables from the current assets and find out the
absolute liquid assets. Absolute Liquid Assets includes :
CURRENT LIABILITES
Interpretation :
These ratio shows that company carries a small amount of cash. But there is
nothing to be worried about the lack of cash because company has reserve, borrowing
power & long term investment. In India, firms have credit limits sanctioned from banks
and can easily draw cash.
Funds are invested in various assets in business to make sales and earn profits.
The efficiency with which assets are managed directly affects the volume of sales. The
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better the management of assets, large is the amount of sales and profits. Current assets
movement ratios measure the efficiency with which a firm manages its resources. These
ratios are called turnover ratios because they indicate the speed with which assets are
converted or turned over into sales. Depending upon the purpose, a number of turnover
ratios can be calculated. These are :
The current ratio and quick ratio give misleading results if current assets include high
amount of debtors due to slow credit collections and moreover if the assets include high
amount of slow moving inventories. As both the ratios ignore the movement of current
assets, it is important to calculate the turnover ratio.
AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is converted
into sales. Usually a high inventory ratio indicates an efficient management of
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inventory because more frequently the stocks are sold ; the lesser amount of
money is required to finance the inventory. Where as low inventory turnover ratio
indicates the inefficient management of inventory. A low inventory turnover
implies over investment in inventories, dull business, poor quality of goods, stock
accumulations and slow moving goods and low profits as compared to total
investment.
(Rupees in Crore)
Interpretation :
These ratio shows how rapidly the inventory is turning into receivable through
sales. In 2004 the company has high inventory turnover ratio but in 2005 it has reduced
to 1.75 times. This shows that the companys inventory management technique is less
efficient as compare to last year.
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Interpretation :
Inventory conversion period shows that how many days inventories takes to
convert from raw material to finished goods. In the company inventory conversion
period is decreasing. This shows the efficiency of management to convert the inventory
into cash.
A concern may sell its goods on cash as well as on credit to increase its sales and
a liberal credit policy may result in tying up substantial funds of a firm in the form of
trade debtors. Trade debtors are expected to be converted into cash within a short period
and are included in current assets. So liquidity position of a concern also depends upon
the quality of trade debtors. Two types of ratio can be calculated to evaluate the quality
of debtors.
AVERAGE DEBTORS
Debtors velocity indicates the number of times the debtors are turned over during
a year. Generally higher the value of debtors turnover ratio the more efficient is the
management of debtors/sales or more liquid are the debtors. Whereas a low debtors
turnover ratio indicates poor management of debtors/sales and less liquid debtors. This
ratio should be compared with ratios of other firms doing the same business and a trend
may be found to make a better interpretation of the ratio.
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e.g.
Interpretation :
This ratio indicates the speed with which debtors are being converted or turnover
into sales. The higher the values or turnover into sales. The higher the values of debtors
turnover, the more efficient is the management of credit. But in the company the debtor
turnover ratio is decreasing year to year. This shows that company is not utilizing its
debtors efficiency. Now their credit policy become liberal as compare to previous year.
The average collection period ratio represents the average number of days for
which a firm has to wait before its receivables are converted into cash. It measures the
quality of debtors. Generally, shorter the average collection period the better is the
quality of debtors as a short collection period implies quick payment by debtors and
vice-versa.
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Interpretation :
The average collection period measures the quality of debtors and it helps
in analyzing the efficiency of collection efforts. It also helps to analysis the credit
policy adopted by company. In the firm average collection period increasing year to
year. It shows that the firm has Liberal Credit policy. These changes in policy are due to
competitors credit policy.
Networking Capital
e.g.
Interpretation :
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This ratio indicates low much net working capital requires for sales. In
2005, the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the
company requires 60 paisa as working capital. Thus this ratio is helpful to forecast the
working capital requirement on the basis of sale.
INVENTORIES
(Rs. in Crores)
Interpretation :
Inventories is a major part of current assets. If any company wants to manage its
working capital efficiency, it has to manage its inventories efficiently. The graph shows
that inventory in 2002-2003 is 45%, in 2003-2004 is 43% and in 2004-2005 is 54% of .
(Rs. in Crores)
Interpretation :
Cash is basic input or component of working capital. Cash is needed to keep the
business running on a continuous basis. So the organization should have sufficient cash
to meet various requirements. The above graph is indicate that in 2003 the cash is 4.69
crores but in 2004 it has decrease to 1.79. The result of that it disturb the firms
manufacturing operations. In 2005, it is increased upto approx. 5.1% cash balance. So
in 2005, the company has no problem for meeting its requirement as compare to 2004.
DEBTORS :
(Rs. in Crores)
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Interpretation :
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CURRENT ASSETS :
(Rs. in Crores)
Interpretation :
This graph shows that there is 64% increase in current assets in 2005. This increase
is arise because there is approx. 50% increase in inventories. Increase in current assets
shows the liquidity soundness of company.
CURRENT LIABILITY :
(Rs. in Crores)
Interpretation :
Current liabilities shows company short term debts pay to outsiders. In 2005 the
current liabilities of the company increased. But still increase in current assets are more
than its current liabilities.
(Rs. in Crores)
Interpretation :
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Working capital is required to finance day to day operations of a firm. There should
be an optimum level of working capital. It should not be too less or not too excess. In
the company there is increase in working capital. The increase in working capital arises
because the company has expanded its business.
RESEARCH METHODOLOGY
The methodology, I have adopted for my study is the various tools, which basically analyze
critically financial position of to the organization:
V. TREND ANALYSIS
The above parameters are used for critical analysis of financial position. With the evaluation of
each component, the financial position from different angles is tried to be presented in well and
systematic manner. By critical analysis with the help of different tools, it becomes clear how the
financial manager handles the finance matters in profitable manner in the critical challenging
atmosphere, the recommendation are made which would suggest the organization in formulation
of a healthy and strong position financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and comparative
analysis, the organization would be able to conquer its in efficiencies and makes the desired
changes.
BIBLIOGRAPHY
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