WORKING CAPITAL MANAGEMENT

Introduction Meaning Objective of Working Capital Gross Working Capital and Net Working Capital Types of Working capital Determinants of Working Capital

Introduction:
Working Capital Management:
Working Capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. Working capital refers to that part of firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors, and inventories. In other words working capital is the amount of funds necessary to cover the cost of operating the firm.

Meaning:
Working Capital means the funds (i.e. capital) available and used for day to day operation (i.e. working) of an enterprise. It consists broadly of that portion of assets of a business which are used in or related to its current operations. It refers to funds which are used during an accounting period to generate a current income of type which is consistent with major purpose of a firm existence. Working Capital Management is concerned with the problems arise in attempting to manage the current assets (such as cash, marketable securities, cash receivables and inventory etc.), the current liabilities (such as account payable, bank overdraft, and outstanding expenses etc.) and the interrelation that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one accounting year without undergoing a diminution in value and without the disrupting the operation of the firm.

Objective:
As already observed, the objective of the firm is to maximize the shareholders wealth. In its endeavour to do so, a firm should earn sufficient return from their operations. Earning a steady amount of profit requires successful bid activity but the completed projects cannot be realized instantaneously. So there is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against the project done. Therefore sufficient working capital is necessary to sustain bidding activity. Technically this is called operating cycle. Also ARSS is doing projects alone and joint venture basis. Sometimes ARSS incurred the whole cost in a project and the payment would due by its joint venture company/ companies. So there is need of working capital. The company is diversifying its business from railway and road sector to other sectors like irrigation, aviation, marine, jetty etc. So for diversifying its business, there should be a sufficient working capital.

Gross Working Capital and Net Working Capital:

There are two concepts of Working Capital

1. Gross Working Capital:

Gross Working capital refers to the firms investment in current assets.

2. Net Working Capital:

Net Working Capital refers to the difference between the current assets and current liabilities. Current Liabilities are those claims of outsiders which are expected to mature for payment within an accounting year. It can be positive or negative. A positive net working capital will arise when current assets exceeds current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. The two concept of working capital gross and net- are not exclusive; rather they have equal significance from management viewpoint. Efficient working capital requires that firm should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries. Net working capital is necessary because the cash outflows and inflows coincide. The cash outflows are however difficult to predict. The more predictable the cash inflows are the less net working capital will be required.

Types of working capital:

The operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed. To explain this, the continuing need of current assets a destination should be drawn between permanent and temporary working capital.

1) Permanent Working Capital:

The need for current assets arises because of the cash cycle. To carry on business there is always minimum level of current assets which is constantly required by a firm to carry on its business operations. Permanent or fixed working capital is the minimum level of current assets. It is permanent in the same way as the firms fixed assets are. Depending upon the changes in production and sales, the need of working capital, over and above permanent working capital, will fluctuate. For example, extra inventory of finished goods will have to be maintained to support the peak periods of sales, and investment in debtors (receivable) may also increase during such period. On the other hand, investment in raw material, work in progress and finished goods will fail if the market is slack.

Amount of Working Capital

Temporary or Fluctuating

Figure .: Permanent and temporary working capital

2) Fluctuating or Variable Working Capital:

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

Amount of fluctuating Working Capital

Temporary or

Permanent

Figure: Permanent and Temporary Working capital

Determinants of Working Capital:

There are no determined factors which influences the working capital requirements. A large no of factors, each having a different importance influence working capital needs of firms. The importance of factors also changes for a firm over of time. Therefore an analysis of relevant factors should be made in order to determine total investment in working capital. The following are the few factors which generally influences the working capital requirement of firms. 1. Nature of Business Working capital requirement of a firm are basically influenced by the nature of its business. Trading and financial firms have a very small amount of fixed assets, but require large sum money to be invested in working capital. In contrast public utility services like railways, infrastructure oriented projects etc there requirement of working capital is less. 2. Length of production cycle

In some business like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished goods itself is quite high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need of working capital is high. 3. Size and growth of business In very small company the working capital requirement is quite high due to high overhead, higher buying and selling cost etc. but if the business starts growing, the working capital requirement may positively affect by the increasing size. 4. Business/ Trade cycle If the company is operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw materials, may increase the production and sales to take the benefits of favorable market, due to increase in the sales, there may more and more amounts of funds blocked in stock in stock and debtors etc. similarly in the case of depression also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary stack without getting sold, the receivable may not recovered in time etc. this is the case of ARSS Infrastructure Projects Limited. 5. Profitability The profitability of the business may be vary in each and every individual case, which in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extent that they earned in cash may be used to meet the working capital requirements of the company.

Research Methodology

Introduction Types of Research Methodology Objective of study Scope and limitation of the study

Introduction:
Research is the systematic process of collecting and analyzing information (data) in order to increase our understanding of the phenomenon about which we are concerned or interested. Research is systemic quest of undiscovered knowledge. Therefore the discovery and creation of knowledge is the heart of the research. It is a never ending process: discoveries and creations lead to new discoveries and new creation.

Types of Data Collection:

1) Primary Data Collection:
The primary is collected first times. Primary Data is collected on the basis of personal interviews, questionnaire etc.

2) Secondary Data Collection:

Secondary data are those data which is already collected and stored. Secondary data can easily get from the Annual Reports, Journals etc. of the company. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, books, Internet etc. This project has a limited primary data collection based on the interview of the General Manger, Finance and other concerned member of finance department. But primary data collection has certain limitation (confidential data information). Secondary data is gathered from the annual reports, Red Herring Prospectus, and Internet. The aim of data collection is

to gain familiarity and to achieve new insights into the Working Capital Management of the company.
Project is based on 1) Annual Report of 2004-05 2) Annual Report of 2005-06 3) Annual Report of 2006-07 4) Annual Report of 2007-08 5) Annual Report of 2008-09 6) Annual Report of 2009-10

Objective of the Study:

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

1. To study the working capital management of ARSS Infrastructure Projects Limited; 2. To study the optimum level of current assets and current liabilities of the company; 3. To study the liquidity position through various working capital related ratios; 4. To study the working capital components such as receivables accounts, cash management, Inventory position; 5. To study the way and means of working capital finance of the ARSS Infrastructure Projects Limited; 6. To estimate the working capital requirement of ARSS Infrastructure Projects Limited; 7. To study the operating and cash cycle of the company;

Scope of the Study:

The scope of the study is identified after and during the study of the project. The study of the working capital is totally based on the trend analysis ratio analysis working capital leverage etc. and 5years annual reports of the company while other things like competitor analysis, Industry analysis are discussed in the part of company profile.

Limitation of the Study:

1. Limited Data:
This project has completed with annual reports of the company; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality.

2. Limited Period:
This project is totally based on 6 years annual reports. Conclusion and recommendation are based on such limited data. The trend of last six years may or may not reflect the real working capital position of the company.

3. Limited Area:
It was difficult to collect all the competitors and their financial information. Recent industry figures were also difficult to get.

4. Limited Competitors:
In this project a few important competitors of the company are discussed, rests are left because of compatibility.

Working Capital Level and Analysis

Working Capital Level Working Capital Trend Analysis Current Assets Analysis Current Liability Analysis Changes of Working Capital Operating Cycle Working Capital Leverage

Working Capital Level:

The consideration of the level investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the need of the business firms. Excessive investment in current assets should be avoided because it impairs the firms profitability, as idle investment earns nothing. On the other hand inadequate amount of working capital can be threatened solvency of the firms because of its inability to meet its current obligation. It should be realized that the working capital need of the firms may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance.

(Amount in Rs)
Particulars A) Current Assets Inventories Sundry Debtors Cash & Bank Loans & Advances Total of A 2004-05 58,429,517 1,165,300 19,100,114 48,575,716 127,270,647 2005-06 104,206,335 71,791,868 50,648,882 81,219,576 307,866,661 2006-07 73,298,835 145,136,306 116,425,792 205,984,507 540,845,439 2007-08 622,103,160 653,574,370 373,999,265 506,967,157 2,156,643,952 2008-09 2009-10

1,882,704,940 3,701,088,128 428,533,465 786,122,901 717,214,943 1,095,090,536 557,410,278 1,406,480,936 3,585,863,626 6,988,782,501

B) Current Liabilities Current liabilities 42,632,767 Provision 7,535,964 Total of B 50,168,731 Net W.C. (A-B) 77,101,916

121,648,520 9,823,827 131,472,347

105,763,831 35,261,598 141,025,428

858,935,086 92,135,009 951,070,095 1,205,573,857

1,147,928,616 172,295,570 1,320,224,186 2,265,639,440

1,447,454,152 258,380,043 1,705,834,194 5,282,948,307

176,394,314 399,820,011

Table..: Size of Working Capital

Working Capital Trend Analysis:

In working capital analysis the direction at changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an analyst to make a study about the trend and direction of working capital over a period of time. Such analysis enables as to study the upward and downward trend in current assets and current liabilities and its effect on the working capital position. Analysis of working capital trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds.

Years Net W. C. *W.C. Indices

2004-05 100

2005-06 229

2006-07
399,820,011

2007-08
1,205,573,857

(Amount in Rs) 2008-09 2009-10

2,265,639,440 5,282,948,307

77,101,916 176,394,314

519

1564

2938

6852

Table: Working Capital Size * Working Capital Indices base year 2004-2005 taken as 100

Working Capital Indices

8000 7000 6000 6852

W. C. indices

5000 4000 3000 2000 1000 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 100 229 519 1564 2938

W.C. Indices
Expon. (W.C. Indices)

Years Figure..: Working Capital Indices

Observation:
The net working capital of ARSS Infrastructure Projects Limited is continuously increasing from 2004-05 as the indices shows in the figure. The working capital indices of 2009-10 compared to 2004-05 is as 68 times because the current assets are increasing continuously where as the current liabilities are not as increased as current assets. There is sudden increase in current assets of 2007-08 compared to its previous year i.e. 2.98 times. In 2007-08 the company has taken four projects in road, five projects in railway, one project in irrigation of rupees worth 72686 lacs, 29113 lacs, and 6636 lacs continously. While in 2008-09, the company has taken only three projects of rupees worth 18098 lacs. The no of projects taken in FY 2009-10 are . so the value of current assets increased. However the current liabilities of the company increased only 38.56 crores. In current liability of the company two things are included i.e. sundry creditors and the provisions (taxes, fringe benefit tax, dividend, tax on proposed dividened). The company is bidding for good projects because it has sufficient amount of reserves and surplus as well as inventories that means it is using its long term securities as well as short term securities for its bidding and execution of the projects.

Current Assets:
Total assets are basically classified in two parts as fixed assets and current assets. Fixed assets are in the nature of long term or life time for the organization. Current assets convert in the cash in the period of one year. It means that current assets are liquid assets or assets which can convert in to cash within a year. (Amount in Rs)
Particulars Current Assets Inventories Sundry Debtors Cash & bank Loans & Advances Total C. A. 58,429,517 1,165,300 19,100,114 48,575,716 127,270,647 104,206,335 71,791,868 50,648,882 81,219,576 307,866,661 73,298,835 145,136,306 116,425,792 205,984,507 540,845,439 622,103,160 653,574,370 373,999,265 506,967,157 2,156,643,952 1,882,704,940 428,533,465 717,214,943 557,410,278 3,585,863,626 3,701,088,128 786,122,901 1,095,090,536 1,406,480,936 6,988,782,501 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Table ..: Current Asset size Year C. A. C. A. Indices

2004-05 127,270,647 2005-06 307,866,661 2006-07 540,845,439 2007-08 2008-09 2009-10 2,156,643,952 3,585,863,626 6,988,782,501

100

241.89

424.96

1694.96

2871.51

5491.28

Table..: Current Assets Indices

Current Asset indices

7000 6000 5491.28

C. A. Indices

5000 4000 3000 2000 1000 100 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 241.89 424.96 1694.96 2817.51

C. A. indices
Expon. (C. A. indices)

Year

Figure.: Current Asset Indices

Composition of Current Assets:

Analysis of current assets components enable one to examine in which components the working capital fund has locked. A large tie up of funds in inventories affects the profitability of the business or the major portion of current assets is made up cash alone, the profitability will be .. because cash is non earning assets.

in %
Year Current Assets Inventories Sundry Debtors Cash & bank balances Loans and Advances Total Current Assets 2004-05 45.90 0.92 15.01 38.17 2005-06 33.85 23.32 16.45 26.38 2006-07 13.55 26.83 21.52 38.09 2007-08 28.85 30.31 17.34 23.51 2008-09 52.5 11.95 20.0 15.54 2009-10 52.96 11.25 15.67 20.12

100

100

100

100

100

100

Table : Composition of Current Assets

Current Assets Components

Current Assets Compo. in %
60 50 40 30 20 10 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Inventories Sundry Debtors Cash & bak balances Loans and advances

Year Figure: Current Asset Components

Observation:
The current assets increases as the sales increase. The excess of current assets is always positive for the company but it is not always good. It may adversely affect the profitability of the firm. There are certain investments for which company pay interest. From the table of composition of current assets, there is good amount of inventory available except one year (2006-07). Excess amount of inventory is good for the company because the company is diversifying its business into different sectors and there is no certainty about the projects

(time of the projects) in certain sectors. The loans and advances of the firm are in zigzag way. The loans and advances should be minimum as the high loans create a greater amount of interest. The company was doing well from 2006-07 to 2008-09 as the company had taken four projects in road, five in railway, and one in irrigation. But in 2009-10 it has increased because of the ARSS took good projects. The company is doing better in sundry debtors in previous two years. The company had taken its amount from its debtors. Cash and bank balances is good for all the years.

Current Liabilities:
Current liabilities mean the liabilities which have to pay in current year. It includes sundry creditors means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and provision as tax provision. Current liabilities also includes bank overdraft. For some current assets like bank overdrafts and short term loan, company has to pay interest thus the management of current liabilities has importance.
Year C. L. Provision 2004-05 42,632,767 7,535,964 50,168,731 2005-06 121,648,520 9,823,827 131,472,347 2006-07 105,763,831 35,261,598 141,025,428 2007-08 858,935,086 92,135,009 951,070,095 2008-09 1,147,928,616 172,295,570 1,320,224,186 2009-10 1,447,454,152 258,380,043 1,705,834,194

Total C. L.

Table .: Current Liabilities Size Year C. L. Indices 2004-05

50,168,731

2005-06
131,472,347

2006-07
141,025,428

2007-08
951,070,095

2008-09
1,320,224,186

2009-10
1,705,834,194

100

262.06

281.1

1895.7

2631.56

3400.2

Table..: Current Liabilities Indices

Current Liabilities Indices

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 262.06 100 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 281.1 1895.7 2631.56 3400.19

C.L. Indices

current liabilities
Expon. (current liabilities)

Year Figure: Current Liabilities

Observation:
In current liabilities of the company only the sundry creditors and the provision (provision for taxation, fringe benefit tax, dividend and proposed dividend) are included. Current liabilities show continues growth each year except in 2006-07 and 2009-10 because company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm. As a current liability increased in the year 2007-08 by 574.39% it also increased the working capital size in the same year. But company enjoyed over creditors which may include indirect cost of credit terms in future.

Changes in Working Capital:

There are so many reasons for changing the working capital. Also a change of working capital depends upon the industry and the sector in which the company is working. The following are the some factors which can the reasons for changes in Working Capital of ARSS Infrastructure Projects Limited: 1) Political Factors:. (PEST Analysis)

Statement of Changes in Working Capital:

(Comparison with previous Year)

Particulars Current Assets

a)Inventories b)Sundry Debtors c)Cash & Bank balances d)Loans & Advances

2008-09
1,882,704,940 428,533,465 717,214,943 557,410,276

2009-10
3,701,088,128 786,122,901 1,095,090,536 1,406,480,936

Increase
1,818,383,188 357,589,436 377,875,593 849,070,660

Decrease

Total Current Assets Current Liabilities

a)Current Liabilities b)Provision

3,585,863,626
1,147,454,152 172,295,670

6,988,782,501 3,402,918,875
1,147,928,616 258,380,043 474,464 86,084,373

Total Current Liabilities Net Working Capital

1,320,224,186 2,265,639,440

1,705,834,194

38,561,008

5,282,948,306 3,017,308,866

Table.: Changes in Working Capital

Observation:
There is a positive working capital which shows the further growth as the company is expanding its business into other sectors of the construction. The working capital increased due to the following reasons: 1) There is 50% increase in the inventories from previous year because the company is taking new projects in new sectors with good worth. 2) The current liabilities of the firm is very less. 3) The increased total current liabilities is very less compared to the total current assets.

Operating Cycle:
The need of working capital arrived because of time gap between production of goods and their actual realization after sale. This time gap is called Operating Cycle or Working Capital Cycle. The operating cycle of a company is the time duration required to convert resources into inventories and inventories into cash. The operating cycle is the length of time between the companys outlay on raw materials, wages and other expanses and inflow of cash from sales of goods. The continuing flow from cash to suppliers, to inventory, to accounts receivable and back to cash is what is called the operating cycle. Operating cycle is an important concept in management of cash and cash working capital. The operating cycle reveals the time that elapses between outlays of cash and inflow of cash. Quicker the operating cycle less amount of investment in working capital is needed and it

improves profitability. The duration of the operating cycle depends on nature of industries and efficiency in working capital management. The operating cycle which is a continuous process has been shown in the following figure.

The Operating Cycle consists of 3 phases:1. Phase 1 In Phase 1, Cash gets converted into Inventory. This includes purchase of Raw Material, Conversion of Raw Material into Work-in-Progress, Finished Goods and finally the transfer of goods to stock at the end of the manufacturing process. 2. Phase 2

In Phase 2 of the cycle, the Inventory is converted into Receivables as Credit Sales are made to customers. Firms which do not sell on Credit obviously don't have the Phase 2 of the operating Cycle. 3. Phase 3

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

Calculation of operating cycle

To calculate the operating cycle of the company last five year data has been taken. Operating cycle of the ARSS Infrastructure Projects Limited vary year to year as changes in policy of management about credit policy and operating control.

Year 1. Inventory Conversion Period (i) Raw Material (ii) Work in Progress (iii) Finished Goods Total 2.Debtors Collection Period 3.Gross Working Capital Cycle 4. Payment Deferral Period
NET WORKING CAPITAL CYCLE

2005-06 4 31 15 50 22 72 139 67 (-)

2006-07 2 13 3 18 58 76 68 8

2007-08 1 38 1 40 46 86 113 27 (-)

No. of Days 2008-09 2009-10 16 52 4 72 31 103 76 27 102 65 37 21 56 3 80 22

Table ..: Summary of Operating Cycle . *All the stores and spares are included in finished goods. ** Credit Sales of the company is taken as the sundry debtor of the company. *** The credit purchases are taken as the material purchased during subcontracting charges of the company.

Observation:
The inventory conversion period of the company is almost same in financial years from 2005 to 2009 but in the financial year 2009-10 there is sudden increase (double times) from its previous year. Raw Material consumption in 2009-10 decreased from previous years while raw material inventory increased. The maximum projects of the company (with joint venture Company) finished in the May 2010 as NIRAJ-ARSS joint venture total value of the projects 26288 lacs. The company is engaged in bidding of big projects so the company keeps a better raw material inventory in FY 2009-10. Also the company has a vision of taking tenders of good projects in next financial year. ARSS infrastructure Projects Limited is a construction company and its coustomers are the Government of different states, Ministry of Railway, Ministry of Infrastructure and the Government agencies like SAIL, NTPC etc. so there is no any debtors available among its coustomers because the Government or their agencies pays the money instantaneously before/ during or after the project. The companys debtors are joint venture companies. Sometimes the ARSS and its joint venture companies do the project but the company incurres the whole cost. And there is delayed in payment by its joint venture companies. That comes under the debtors collection period. Common sense tells that longer a company has money out, the more risk it is taking. But there is one positive aspect that will boost the confidence among the companies. The company is not purchasing on credit from its supplier. So in credit deferral period the credit purchases taken as a whole sundry creditors. These sundry creditors are for the bank loans, Advances etc. In all the years from 2005 to 2009 the creditors deferral period is 360 days which is good for the company. The company is enjoying the money of its creditors.

In summary, the operating cycle of the company is good in previous financial years while in Financial Year 2009-10 the operating cycle is not good because of the company kept a high raw material inventory.

Working Capital Leverage:

One of the important objectives of working capital management is by maintaining the optimum level of investment in current assets and by reducing the level of investment in current liabilities. The company can minimize the investment in the working capital thereby improvement in return on capital employed is achieved. The term working capital leverage refers to the impact of level of working capital on companys profitability. The working capital management should improve the productivity of investment in current assets and ultimately it will increase the return on capital employed. Higher level of investment in current assets than is actually required means increase in the cost of Interest charges on short term loans and working capital finance raised from banks etc. and will result in lower return on capital employed and vice versa. Working capital leverage measures the responsiveness of ROCE (Return on Capital Employed) for changes in current assets. It is measures by applying the following formula,

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

EBIT Return on capital employed= Total Assets

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

Calculation of Working Capital Leverage (W.C.L.):

Particulars EBIT 2005-06 42,850,664 2006-07 139,926,233 2007-08 378,403,100 2008-09 705,936,654 2009-10 1,210,851,636

Total Assets Return on C. E. % ROCE % change C. E. % change in C. A. W.C.L.

299,889,528 0.1428 14.28 25.91 58.66 0.44

667,642,027 0.2095 20.95 31.83 43.07 0.74

1,983,096,501 0.1908 19.08 -9.80 74.92 -0.13

3,731,842,651 0.1891 18.91 -0.89 39.85 -0.22

7,866,688,808 0.1539 15.39 -22.87 48.69 -0.47

*C. E. - Capital Employed **C. A. Current Assets Table..: Working Capital Leverage

Working Capital leverage

1 0.8

0.44

0.6

% Change

0.4 0.2 0 -0.2 -0.4 -0.6

Working Capital leverage

2006-07 2007-08 2008-09 2009-10

-0.74

-0.13 -0.22

Year Figure..: Working Capital Leverage

% Change in Components of Working Capital Leverage

80

60

% ROCE

% Change

40

% Change in ROCE
20 0 2005-06 -20 -40 2006-07 2007-08 2008-09 2009-10

% Change in Current Assets Working Capital Leverage

Year

Observation:
The working capital leverage of the company decreased due to decrease in return on capital employed. The change in capital employed went to the negative. The return on capital employed basically tells about the return on capital assets employed (excluding the liabilities) by the company. The decreasing capital employed shows the inefficiency of the management as the value in total assets is more than the earnings of the company. The investment in current assets as well as the fixed assets both is very high. From year 2005 to 2009 every year the total assets increased more than 50%.

Working Capital Ratio Analysis

Introduction Role of ratio analysis Limitations of ratio analysis Classifications of ratios Efficiency ratio Liquidity ratio

Introduction:
Ratio analysis is the powerful tool of financial statements analysis. And the financial analysis is a important part of the business planning process such as SWOT analysis (Strength, Weakness, Opportunity, Threats. So no business planning will be successful without the financial analysis and financial analysis will not be successful without ratio analysis. A ratio is define as the indicated quotient of two mathematical expressions and as the relationship between two or more things. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firms financial performance.

Role of Ratio Analysis:

Ratio Analysis provides further insight about the financial strength and weakness of the firm. It helps to appraise the firms in the term of their profitability and efficiency of performance, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available to management to impart the basic functions like planning and control. As future is closely related to the immediately past, ratio calculated on the basis historical financial data may be of good assistance to predict the future. E.g. On the basis of inventory turnover ratio or debtors turnover ratio in the past, the level of inventory and debtors can be easily ascertained for any given amount of sales. Similarly, the ratio analysis may be able to locate the point out the various arias which need the management attention in order to improve the situation. E.g. Current ratio which shows a constant decline trend may be indicate the need for further introduction of long term finance in order to increase the liquidity position. As the ratio analysis is concerned with all the aspect of the firms financial analysis liquidity, solvency, activity, profitability and overall performance, it enables the interested persons to know the financial and operational characteristics of an organization and take suitable decisions.

Limitation of Ratio Analysis:

1) The one of the major and basic limitation of the ratio analysis is that it may difficult to find out a basis for comparison. 2) Normally, the ratios are calculated on the basis of historical financial statements. An organization for the purpose of decision making may need the hint regarding the future happiness rather than those in the past. The external analyst has to depend upon the past which may not necessary to reflect financial position and performance in further. 3) The technique of ratio analysis may prove inadequate in some situations if there is differs in opinion regarding the interpretation of certain ratio. 4) As the ratio calculates on the basis of financial statements, the basic limitation which is applicable to the financial statement is equally applicable In case of technique of ratio analysis also i.e. only facts which can be expressed in financial terms are considered by the ratio analysis. 5) The technique of ratio analysis has certain limitations of use in the sense that it only highlights the strong or problem arias; it does not provide any solution to rectify the problem arias.

6) For the intra firm comparison, the comparison may be false because different firms use different accounting policies as some firms use LIFO (Last in First out) method while some use FIFO (First in First out).

Classification of Ratios:
Basically on the basis of working capital management it can be characterized into following ratios

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

1) Working Capital Turnover Ratio:

A company uses working capital to fund operations and to purchase inventory. These operation and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the cash used to fund operation and sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the cash it uses to fund the sales. Sales Working Capital Turnover Ratio= Net Working Capital

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 295,777,455 602,467,051 1,338,321,101 3,136,709,419 6,243,752,255 10,065,504,283 Sales 77,101,916 176,394,314 399,820,011 1,205,573,857 2,265,639,443 5,282,948,306 Net W.C. 3.836 3.415 3.347 2.602 2.756 1.905 W.C.TOR Table: Working Capital Turnover Ratio

W.C.Turnover Ratio
4.5 4

3.836 3.415 3.347 2.602 2.756 1.905

3.5

W.C. TOR

3 2.5 2 1.5 1 0.5 0 2004-05 2005-06 2006-07

W.C.TOR
Expon. (W.C.TOR)

2007-08

2008-09

2009-10

Year

Observation:
The working capital turnover ratio of ARSS declined from 2004-05 to 2009-10, however it increased in 2008-09. The reciprocal of the ratio is 0.26, 0.29, 0.30, 0.38, 0.36, and 0.52 continuously. It means that for one rupee of sales, the company needs Rs 0.26, 0.29, 0.30, 0.38, 0.36, and 0.52. In previous years the company incurred less money for sales while in these years specially in 2009-10 it is unable to take projects in that amount. The company is increasing its sales by increasing in the net working capital.

2) Inventory Turnover Ratio:

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products. It is calculated by dividing the cost of goods sold by average inventory: Cost of Goods Sold Inventory Turnover ratio = Average Inventory

Particulars
Cost of goods sold Avg. Inventory

2005-06
467,324,486 81,317,926

2006-07
1,119,159,494 88,752,585

2007-08
2,051,226,344 347,700,998

2008-09
4,228,198,523 1,252,404,050

2009-10
6,644,038,328 2,791,896,534

I. T.OR

5.75

12.61

5.90

3.38

2.38

Table .: Inventory Turnover Ratio

Inventory Turnover Ratio

14 12.61

12

I. T. OR

10 8 6 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 5.75

5.9
3.38 2.38

I.T. OR

Year Figure : Inventory Turnover Ratio

Observation:
Inventory turnover ratio basically tells about the efficiency of the firm in taking the project and to accomplish that. The inventory turnover shows how rapidly the inventory is turning into receivables through sales. A high inventory turnover ratio is good because the no of days converting the inventories into the sales will become less. As in 2006-07 the inventory turnover ratio is 12.61 times so the inventory holding days is only 29 days while from 200708 to 2009-10 the inventory turnover ratio decreasing means the no of days in inventory converting is increasing. This can bad for the organization as this creates unnecessary tie-up of funds, reduced profit, and increased costs.

3) Debtors Turnover Ratio:

A firm sells goods and/ or services for cash and credit. When the firm extends credits to its coustomers, debtors (Accounts Receivables) are created in the firms accounts. The liquidity position of the firm depends on the quality of debtors to great extent. Gross Sales Debtors Turnover Ratio = Average Debtors For an Infrastructure Company like ARSS the gross sales considers as the contract revenue. The scrap values are not included in Gross Sales because it further comes into sales with other income. Average Debtors calculated by opening plus closing balance divide by 2. Increasing volume of receivables without a matching increase in sales is reflected by a low receivable turnover ratio. It is indication of slowing down of the collection system or an extend line of credit being allowed by the customer organization. The latter may be due to the fact that the firm is losing out to competition. A credit manager engage in the task of granting credit or monitoring receivable should take the hint from a falling receivable turnover ratio use his market intelligence to find out the reason behind such failing trend.

Debtor turnover indicates the number of times debtors turnover each year. Generally the higher the value of debtors turnover, the more is the management of credit. *in days 2006-07 2007-08 2008-09 2009-10 1,338,321,101 3,136,709,419 6,243,752,255 10,065,504,283 216,928,175 6.17 58 399,355,338 7.85 46 541,053,918 11.54 31 607,328,183 16.57 22

Particulars Gross sales Avg. Debtors D.T.R A. C. P.*

2004-05 295,777,455 1,632,619 181.2 2

2005-06 602,467,051 36,478,584 16.52 22

Table..: Debtor Turnover Ratio and Average Collection Period

DebtorsTurnoverRatio
18 16 14 12 10 8 6 4 2 0

16.52

Debtors Turn Over Ratio

16.57 11.54 7.85 6.17 DTR

2005-06

2006-07

2007-08

2008-09

2009-10

Year Figure.: Debtors Turnover ratio

Observation:
Debtors Turnover ratio indicates the no of times debtors turnover each year. Higher the value of debtors turnover, the more efficient is the management of credit because the collection period of the debtors will low. Maximum debtors turnover ratio in all five years is 16.57 in 2009-10. It increases from 2006-07 also there is sudden jump in collecting the amount of debtors in 2008-09 and in 2009-10. The increased Debtors Turnover Ratio shows the better management in debtors collection (from its joint venture companies).

Current Asset Turnover Ratio:

Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current assets .current assets includes the assets like inventories, sundry debtors, bills receivable, cash

in hand or bank, marketable securities, prepaid expenses and short term loans and advances. This ratio includes the efficiency with which current assets turn into sales. A higher ratio implies a more efficient use of funds thus high turnover ratio indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm. Sales Current Asset Turnover Ratio= Current Assets

Particulars

2004-05 127,270,647

2005-06 307,866,661

2006-07 540,845,439

2007-08 2,156,643,952

2008-09 3,585,863,626

2009-10 6,988,782,501

Sales C. A. C. A. TOR

295,777,455 602,467,051 1,338,321,101 3,136,709,419 6,243,752,255 10,065,504,283 2.32 1.96 2.47 1.45 1.74 1.44

Table : Current Assets Turnover Ratio

Current Asset Turnover Ratio

3 2.5

2.32 1.96

2.47

C. A. TOR

1.5
1 0.5 0 2004-05 2005-06 2006-07

1.45

1.74

1.44 C. A. TOR

2007-08

2008-09

2009-10

Years Figure : Current Asset Turnover Ratio

Observation:
This ratio is very significant as it shows how fast the current assets turns into sales. The current asset turnover ratio is in haphazard way but comparing to 2006-07 the ratio is low in recent years. In previous years the ratio was good. The current asset changes in sales in 155 days, 184 days, and 146 days continuously in 2004-05, 2005-06, and 2006-07. While in 2007-08, 2008-09, 2009-10 the days are 248 days, 207 days, and 250 days continuously. The

increasing no of days of current asset turnover ratio because company can maintain high level of inventory for upcoming its projects.

Liquidity Ratio:
Current Ratio:
The current ratio is a crude and quick measure of the firms liquidity. The current is calculated by dividing current assets by current liabilities: Current Assets Current Ratio = Current Liabilities Current assets include cash and those assets which can be converted in to cash within a year, such marketable securities, debtors and inventories. All obligations within a year are include in current liabilities. Current liabilities include creditors, bills payable accrued expenses, short term bank loan income tax liabilities and long term debt maturing in the current year. Current ratio indicates the availability of current assets in rupees for every rupee of current liability. This ratio is important as the value of the current assets may decrease or increase but the value of the current liabilities is always constant. That has to be paid. Particulars Current Assets Current Liabilities Current Ratio 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

127,270,647 307,866,661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501 42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152

2.99

2.53

5.11

2.51

3.12

4.83

Table : Current Ratio

Current ratio
6 5 5.11 4.83

Current Ratio

4 2.99 3 2 1 0 2004-05 2005-06 2006-07 2007-08 2.53 2.51

3.12

Current ratio

2008-09

2009-10

Year

Figure.: Current Ratio

Observation:
As a conventional rule, a current ratio of 2 to 1 or more is considered satisfactory. In all the years the current ratio of ARSS is more than 2. It means the company has its short term securities (cash & bank balances, Inventories, Inventories, loans and advances) to fulfill its short term liabilities (sundry creditors, provision for taxation). Also the current ratio shows the margin of safety for its creditors. Higher the ratio greater will be the margin of safety.

Quick Ratio:
Quick ratios establish the relationship between quick or liquid assets and liabilities. An asset is liquid if it can be converting in to cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset other assets which are consider to be relatively liquid and include in quick assets are debtors, bills receivable and marketable securities. Inventories are considered as less liquid. Inventory normally required some time for realizing into cash. Their value also is tendency to fluctuate. The quick ratio is found out by dividing quick assets by current liabilities: Current Assets - Inventories Quick Ratio = Current Liabilities Particular C. A. Inventories Quick C. A. C. L. Quick Ratio 2004-05 2005-06 2006-07 73,298,835 2007-08 2008-09 2009-10

127,270,647 307,866,661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501 58,429,517 104,206,335 622,103,160 1,882,704,940 3,701,088,128 858,935,086 1,147,928,616 1,447,454,152 1.79 1.48 2.27 68,841,130 203,660,326 467,546,604 1,534,540,792 1,703,158,686 3,287,694,373 42,632,767 121,648,520 105,763,831 1.61 1.67 4.42

Table .: Quick Ratio

Quick Ratio
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

4.42

Quick Ratio

2.27 1.61 1.67 1.79 1.48 Quick Ratio

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Year

Observation:
The quick ratio of 1 to 1 is considered as satisfactory financial condition. The company has not a very high ratio throughout except one year 2006-07. In 2006-07 the company had high value of cash & bank balances, sundry debtors etc. whereas the sundry creditors and provision were low. High quick ratio will benefit to the company in its bidding activities.

WORKING MANAGEMENT CAPITAL COMPONENTS

Receivables Management Inventory Management Cash Management

Receivable Management:
Introduction:
Receivables or debtors are the one of the most important parts of the current assets which is created if the company sells the finished goods to the customer but not receive the cash for the same immediately. Trade credit arises when firm sells its products and services on credit and dose not receive cash immediately. It is essential marketing tool, acting as bridge for the movement of goods through production and distribution stages to customers. Trade credit creates receivables or book debts which the firm is expected to collect in the near future. The receivables include three characteristics: 1) It involve element of risk which should be carefully analysis. 2) It is based on economic value. To the buyer, the economic value in goods or services passes immediately at the time of sale, while seller expects an equivalent value to be received later on. 3) It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period.

Objective of Receivable Management:

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

Particulars

2005-06

2006-07

2007-08

2008-09

2009-10

Sundry Debtor Indices

71,791,868 100

145,136,306 202

653,574,370 910

428,533,465 597

786,122,901 1095

Table .: Size of Receivable

Receivables Indices
1200

1095

Receivables Indices

1000

910
800 600 400

597 Indices 202 100

2005-06 2006-07 2007-08 2008-09 2009-10

200 0

Year

Average Collection Period:

The average collection period measures the quality of debtors since it indicate the speed of their collection. The shorter the average collection period, the better the quality of the debtors since a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firms credit terms and policy judges its credit and collection efficiency. The collection period ratio thus helps an analyst in two respects: 1. In determining the collectability of debtors and thus, the efficiency of collection efforts. 2. In ascertaining the firms comparative strength and advantages related to its credit policy and performance. The debtors turnover ratio can be transformed in to the number of days of holding of debtors: *in days 2005-06 2006-07 2007-08 2008-09 2009-10 602,467,051 1,338,321,101 3,136,709,419 6,243,752,255 10,065,504,283 36,478,584 216,928,175 399,355,338 541,053,918 607,328,183 16.52 6.17 7.85 11.54 16.57 22 58 46 31 22

Particulars 2004-05 Gross sales 295,777,455 Avg. Debtors 1,632,619 D.T.R 181.2 *A. C.P. 2

Table..: Average Collection Period

Average Collection Period(in days)

70

Average Collection Period

60 50 40

58 46

31
30 20 10 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

22

22

Acp

Year

Observation:
The average collection period increased from 2004-05 to 2006-07 and then it decreases from 2006-07 to 2009-10. The increasing average collection period shows the inefficiency of the management in collecting the debtors money while the decreasing average collection period shows the efficient management and better credit policy. The reason behind average collection period is high due to debtors turnover ratio is low. In 2006-07 the company had taken a no of projects but the company did projects alone. So there is no chance of debting in 2006-07. While in 2007-08 the company had taken 10 projects on the joint venture basis. Companys share is 100% in those projects. In 2008-09 and 2009-10 the company has taken 3 and 5 projects on the joint venture basis so there is case of debting.

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

Objective of Inventory Management:

In the case of Inventory Management, the firm is faced with the problem of meeting two conflicting needs: 1) To maintain a large amount of inventory for efficient and smooth production; 2) To maintain a minimum amount of inventory for increasing the profitability; But the firms avoid both the cases. In the first case, the firms avoid overinvestment because of (a) unnecessary tie-up of the firms funds and loss of profits (b) excess carrying cost (c) risk of liquidity. Another danger of holding excess inventories is deterioration of the inventories. Maintaining a minimum level of inventories is also dangerous. The consequences of under-investment in inventories are: (a) production hold-ups (b) failure to deliver commitments. So the aim of inventory management is: (1) To ensure a continuous supply of raw material to facilitate uninterrupted production; (2) To maintain a sufficient stock of the raw material in period of short supply and overprices; (3) To maintain sufficient finished goods inventory for smooth sales operation, and efficient customer service; (4) To maintain the carrying cost and time; (5) To control investment in inventories and keep at optimum level;

Particulars Inventories Raw Materials W.I.P. Finished Goods Stores and Spares Total Indices

2005-06 1,803,094 69,724,520 32,678,721 0 104,206,335 100

2006-07 1,517,210 57,300,640 14,480,985 0 73,298,835 70.34

2007-08 10,008,237 560,122,560 40,523,740 11,448,623 622,103,160 597.0

2008-09 255,489,710 1,512,045,660 81,715,450 33,454,120 1,882,704,940 1806.70

2009-10 464,589,560 2,523,687,458 651,456,230 61,354,880 3,701,088,128 3551.70

Table ..: Size of Inventories *Year 2005-06 is taken as base year for comparison of indices.

Inventories Indices
4500 4000 3551.7

Inventory Indics

3500 3000 2500

2000
1500 1000 500 0 2005-06 2006-07 2007-08 100 70.34 597

1806.7

Indices Expon. (Indices)

2008-09

2009-10

Year Figure .: Inventory Indices

Inventory Components:
The firms inventory consist following components (i) Raw material (ii) Work- in-progress (iii) Finished goods To analyze the level of raw material inventory and work in progress inventory held by the firm on an average it is necessary to examine the efficiency with which the firm converts raw material inventory and work in progress into finished goods. * in % Particulars 2005-06 2006-07 2007-08 2008-09 2009-10 Components of Inventory 1.73 2.06 1.60 13.57 12.55 Raw Material 66.91 78.17 90.03 80.31 68.18 W.I.P. 31.36 19.75 6.51 4.34 17.60 Finished Goods 0 0 1.84 1.78 1.66 Stores & spares 100 100 100 100 100 Total as % Table ..: Components of Inventory

Inventory Components
100 90 80 70 60 50 40 30 20 10 0 2005-06 2006-07 2007-08 2008-09 2009-10

Inventory Components

Raw Material W.I.P. Finished Goods Stores And Spares

Year Figure .: Inventory Components

Observation:
As the ARSS Infrastructure Projects Limited is a construction company. And it takes project of different segment in construction sector like road, railway, irrigation, aviation, marine, jetty etc. The companys inventory work in progress is very high in terms of cash as well as in terms of % and it increases year by year. The company is taking a no of projects which completes in more than one year because of season factor. The company did not concern about the stores and spares in the period of 2005 and 2006. But as the stores and spares plays a important role in the construction industry examples for equipments. So from 2007 onwards the company made a certain account in the inventories. In 2008-09 the recession was happening. The company was unable to good projects because of the downturn in the industry. As mentioned earlier the company had taken only three projects in the railway segment in 2008-09. So the raw material remained high and the finished goods remained low.

Inventory Holding Period:

The reciprocal of inventory turnover gives average inventory holding in percentage term. When the no of days in a year (said as 360) are divided by inventory turnover, days of inventory holding (DIH) can obtain 360 DIH = Inventory Turnover

To examine the efficiency of the firm (how the firm converts raw material into work in process and work-in-process into finished goods), raw material inventory and work in process inventory should be known. The raw material inventory should be related to materials consumed, and work-in-process to the cost of production.

Material consumed Raw Material Inventory Turnover = Avg. Raw Material Inventory

Cost of Production Work-in-Process Inventory Turnover = Avg. work-in-process inventory

Particulars I. T. R. D.I.H. Material consumed Avg. Raw Material R. M. I. TOR R. M. I.H. Cost of production Avg. WIP Inventory W.I.P. TOR WIP I. H.

2005-06 5.75 63 318,633,733 901,547 353.42 1 500,003,207 64,077,019 7.80 46

2006-07 12.61 29 557,143,422 3,320,304 167.80 2 1,100,961,758 63,512,580 17.33 21

2007-08 5.90 61 2,712,158,285 5,762,724 470.63 1 2,077,269,099 308,711,600 6.73 54

2008-09 2009-10 3.38 2.38 107 151 5,189,605,087 8,173,704,857 132,748,974 360,039,635 39.09 22.70 9 16 4,269,390,233 7,213,779,108 1,036,084,110 2,017,866,569 4.12 3.57 87 101

Table ..: Raw Material Holding Period and Work in Progress Inventory holding Period

Inventory Turnover Ratio

14

Inventory Turnover Ratio

12.61

12 10 8 6 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 5.75 5.9 3.38 2.38

ITR

Year Figure ..: Inventory Turnover Ratio

Inventory Holding Period: Holding Periods (in Days)

151 107 87 63 61 54 16

101

Days of Inventory Holding Raw Material Holding Period

WIP HoldingPeriod

46
29 1 2005-06 2 2006-07 21 1

9 2008-09

2007-08

2009-10

Year

Observation:
From 2006-07 the no of inventory holding days are increasing. Days of inventory holding means the no of days taken to change raw material into work in progress and work in progress to finished goods. The inventory holding days are increasing from 2006 to 2009 because Raw Material holding Period as well as the Work in progress holding period is increasing. The company is engaged in different segment of the construction industry and days for each project in different segment are not same. Also the other factors like season factor, availability of the projects etc. also influence days of inventory holding. In 2006-07 the no of days of inventory holding, raw material holding period, WIP holding period are low due to there are many small projects completed.

Cash Management:
Cash is common purchasing power or medium of exchange. As such, it forms the most important component of working capital. The term cash with reference to cash management is used in two senses, in narrow sense it is used broadly to cover cash and generally accepted equivalent of cash such as cheques, draft and demand deposits in banks. The broader view of cash includes near cash items, such as marketable securities or bank time deposits. The basic characteristic of near-cash assets is that they can readily be converted into cash. They also provide short term investment outlet for excess and are also useful for meeting planned outflow of funds. Irrespective of the form in which it is held, a distinguishing feature of cash as assets is that it has no earning power. Company have to always maintain the cash balance to fulfill the dally requirement of expenses. There are four primary motives for maintain the cash as follow: Cash management is concerned with the managing of:

(i) Cash flows into and out of the firm, (ii) Cash flows within the firm, and (iii) Cash balances held by the firm at a point of the time by financing deficit or investing surplus cash.

Motives for Holding Cash:

The firms need to hold cash may be attributed to the following three motives:

Transaction Motive:
The transactions motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments, for purchases, wages and salaries, operating expenses, taxes, dividends etc. There should be a proper channel between the cash inflow and cash outflow in the firm. For periods when cash payments exceed cash receipts, the firm should maintain some cash balance to be able to make required payments. Usually the firm maintains such accounts to meet anticipated payments whose timings is not perfectly matched with cash receipts.

The Precautionary Motive:

The precautionary motive is the need to hold cash to meet contingencies in the future. It helps in the future. The precautionary amount of cash depends upon the predictability of cash flows. If cash flows are predicted with accuracy, less cash will be maintained for emergency. If the firm is able to borrow at short notice there will less need for precautionary balance. Generally the precautionary balance held in marketable securities and relatively less in cash.

The speculative Motive:

The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise. As the firm can postpone materials purchasing when the price of materials is high. And make purchase in future when the price of materials falls. The primary motives to hold cash and marketable securities are: the transactions and the precautionary motives.

Advantage of Cash Management:

Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither profit nor losses but without cash, profit remains meaningless for an enterprise owner. 1. A sufficient of cash can keep an unsuccessful firm going despite losses; 2. An efficient cash management through a relevant and timely cash budget may enable a firm to obtain optimum working capital and ease the strains of cash shortage, fascinating temporary investment of cash and providing funds normal growth;

3. Cash management involves balance sheet changes and other cash flow that do not appear in the profit and loss account such as capital expenditure;

Particulars Cash & bank balances Indices

2004-05
19,100,114

2005-06
50,648,882

2006-07
116,425,792

2007-08
373,999,265

2008-09
717,214,943

2009-10
1,095,090,536

100

265.17

609.55

1958.09

3755.02

5733.42

Table : Cash and Bank Balances Indices

Cash & Bank balances Indices

Cash & Bank Balances indices
7000 6000 5000 4000 3000 2000 1000 0 2005-06 2006-07 2007-08 2008-09 2009-10

5733.42

1958.09 100

indices
Expon. (indices)

265.17

609.55

Year

Table . : Size and Indices of Cash

Observation:
The cash and bank balances of ARSS was continuously increasing from 2005-06 to 2009-10. The reason of increasing cash and bank balances was the increasing no of projects with their value. The company entered into new areas and earned increasing profits. There was a sharp increase in cash and bank balances in 2007-08 from its previous year (i.e. 212.23% increase). There was increase due to 10 projects of railway, road, irrigation taken.

Cash Cycle:
One of the distinguishing features of the fund employed as working capital is that constantly changes its form to drive business wheel. It is also known as circulating capital which means current assets of the company, which are changed in ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables and receivables to cash.

Figure : Cash Trading Cycle Basically cash management strategies are essentially related to the cash cycle together with the cash turnover. The cash cycle refers to the process by which cash is used to purchase the row material from which are produced goods, which are then send to the customer, who later pay bills. The cash turnover means the number of time firms cash is used during each year. *in days 2009-10
151

Particulars I. H. P. A. R. P. Less A. P. P. Cash Cycle

2005-06
63

2006-07
29

2007-08
61

2008-09
107

22

58

46

31

22

Observation:

Investopedia explains Cash Conversion Cycle - CCC Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery. This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company's bottom line.

Working Capital Finance and Estimation

Introduction Sources of Capital Finance Working Capital loan and Interest Estimation of Working Capital

Introduction:
Funds available for period of one year or less is called short term finance. In India short term finance are used as working capital finance. Two most significant short term sources of finance for working capital are trade credit and bank borrowing. Trade credit ratio of current assets is about 40%, it is indicated by Reserve Bank of India data that trade credit has grown faster than the growth in sales. Bank borrowing is the next source of working capital finance. The relative importance of this varies from time to time depending on the prevailing environment. In India the primary source of working capital financing are trade credit and short term bank credit. After determine the level of working capital, a firm has to consider how it will finance. Following are sources of working capital finance.

Sources of Working Capital Finance: 155

1) Trade credit 2) Bank Finance

1) Trade credit:
Trade credit refers to the credit that a customer gets from suppliers of goods in the normal course of business. The deferral of payment in short term financing is called trade credit. It is major source of financing for firm. Particularly small firms are heavily depend on trade credit as a source of finance since they find it difficult to raised funds from banks or other sources in the capital market. Trade credit is mostly an informal arrangement, and it granted on an open account basis. For ARSS infrastructure Projects Limited the sundry creditors are the trade credit finance which is shown in the balance sheet of the firm.

2) Bank finance:
Banks are main institutional source of working capital finance in India. After trade credit, bank credit is the most important source of financing working capital in India. A banks considers firms contract revenue and services and desirable levels of current assets in determining its working capital requirements. The amount approved by bank for the firms working capital is called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking system. In practice banks do not lend 100% credit limit; they deduct margin money. There are two types of loans involved as bank finance in ARSS Infrastructure Projects Limited. 1) Secured loans in which the term loan, working capital loan; and loan from NBFCs. The working capital loan is secured by way of mortgages of land and building and hypothecation of plant and machinery, stock and book debts. 2) Unsecured loans in which the loans from banks and from others are included.

Particular W. C. loan Interest

2005-06 14.34 1.64

2006-07 23.04 2.89

2007-08 48.33 7.34

*Amount in Crores 2008-09 2009-10 139.06 23.99 288.54 46.39

Table .. : Working capital loan and Interest

W. C. Loan (in crore)

350

Working Capital Loan

300 250 200 150 100 50 0

288.54

139.06 W. C. Loan 14.34 23.04 48.33 Expon. (W. C. Loan)

2005-06

2006-07

2007-08

2008-09

2009-10

Year

Figure : Working Capital loan

Interest (in Crores)

60 50

46.39

Interest

40 30 20 10

23.99

Interest Expon. (Interest)

7.34 1.64 2.89

2006-07 2007-08 2008-09 2009-10

0 2005-06

Year

Figure .: Interest

Observation:
ARSS Infrastructure Projects Limited has taken huge working capital loan to fulfill the requirement of working capital, thus company had paid huge amount of interest on working capital loan. As the working capital loan increases, the interest amount also increases. However the increase of interest is not in the same proportion as the working capital loan.

Estimation of Working Capital Loan:

After considering the various factors affecting the working capital needs, it is necessary to forecast the working capital requirements. For this purpose, first of all estimate of all current assets should be made, these should be followed by the estimation of all current liabilities. Difference between the estimated current assets and estimated current liabilities will represent the working capital requirements. The estimation of working capital requirement of ARSS Infrastructure Projects ltd is based on few assumptions which are discussed as follows: 1) Inventory holding Periods will decrease and become 60 days instead of present 151 days. 2) Debtor collection Period remains same as 22 days because it will boost the confidence with its joint venture companies. 3) Cash & Bank balance of the company is in better position. There is not necessity to further increase because cash and bank balance is a nonearning asset. 4) Loans and Advances of the company should increase because the companys bidding process depends on this. However more loan and advances affects to the company in the form of interest. As it will increase by 50% (estimated). 5) Current Liabilities and provision will increase by 40%.

Particular Current Assets Inventories (Holding Period 60 days) 40% Sundry Debtor (collection period 22 days) 30% Cash & bank Balances 10% Loans & Advances Total Current Assets Current Liabilities & Provisions Current Liabilities 40% Provision 40% Total Current Liabilities Net Working Capital (estimated)

2010-11 (estimated) 5,181,523,379 1,021,959,771 1,204,599,590 2,109,721,404 9,517,804,144

2,026,435,813 3,617,320,602 2,388,167,873 7,129,636,271

Observation:
ARSS infrastructure Company Projects Limited is an emerging company in the construction industry. It has a reputed name in the field of construction. The company is diversifying its business into new arena of industry like irrigation, jetty, aviation, marine etc.

The construction projects are awarded through competitive bidding process to bidders with certain eligibility requirement and financial strength of the company. The company bid for projects both as a standalone basis as well as through major specific joint ventures. So the company requires a sufficient amount of working capital to bid for the projects. The company has large amount of inventories available which will definitely benefit for the company in future. Companys debtor collection period is 22 days (approximately) which shows the efficient management of the company. The borrowings are continuously increasing which can harm the company.

CONCLUSION AND RECOMMENDATION

Recommendation Conclusion Bibliography

Conclusion:
Working capital management is important aspect of financial management. The study of working capital management of ARSS Infrastructure Projects ltd. has revealed that the current ratio was as per the standard industrial practice but the liquidity position of the company showed an increasing trend. The study has been conducted on working capital ratio analysis, working capital leverage, working capital components which helped the company to manage its working capital efficiently and effectively. Working capital of the company was increasing and showing positive working capital per year. It shows good liquidity position. Positive working capital indicates that company has the ability of payments of short terms liabilities. Current assets are more than current liabilities indicate that company used long term funds for short term requirement, where long term funds are most costly then short term funds. The company has very high amount of inventories as 370.10 crore in the year 2010. It means that companys efficiency in bidding is very less. The inventory holding period of the company is continuously increasing because of the increase in the work in progress conversion period. The company takes three month in changing raw materials into finished goods. The working capital leverage is in negative from previous three years of the company which shows the inefficiency of the management as the return on capital employed is very less compared to its total asset employed. The liquidity ratio of the company is in excellent position as the current assets and the quick current assets both are very high. The company can pay its current liabilities and quick current liabilities. The current asset turnover ratio of the years 2007-08, 2008-09, 2009-10 are low. It means that companys ability to put its current assets into sales are very low.

Recommendation:
Recommendation can be use by the firm for the betterment increased of the firm after study and analysis of project report on study and analysis of working capital. I would like to recommend; Company should maintain its current assets for meeting its short term obligation.

Suggestions:

The following suggestions are only for the beneficiary of the company. These are totally based according to my point of view after examine the project; Company should reduce the inventory holding period with use of zero inventory concepts.