aatish doc.docx

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Working capital

A training report submitted in partial fulfillment of the requirement for the degree of

MASTERS OF BUSINESS ADMINISTRATION

(2012-2014)

Submitted to: Submitted by:

Dr. SandeepS.Virdi Atish sharma

Assistant Professor MBA 2ndyear, SE A

!oll"o#: $2%&2'%2(

SCHOOL OF MANAGEMENT STUDIES

PUNJABI UNIVERSITY PATIALA

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ACKNOWLEDGEMENTS

A pro)ect is golden opportunity for learning and self de*elopment# + considered myself is *ery lucky

and onored to a*e so many -onderful people lead me troug in completion of tis pro)ect#

My grateful tanks to Mr# .isal /iman, finance department -o in spite of being e0traordinarily

busy -it is duties, took time out to ear, guide and keep me on te correct pat# + do not kno- -ere

+ -ould a*e been -itout im# + umble 1tank you sir#

Ms# "a*neet 3aur, 4! department monitored my progress and arranged all facilities to make life

easier# + coose tis moment to ackno-ledge er contribution gratefully#

Prof# Suganda Seti -ose patience + a*e probably tested to te limited# Se -as al-ays so

in*ol*ed in te entire process, sared er kno-ledge, and encouraged me to tink# 5ank you dear

madam##

6ast but least tere -ere so many -o sared *aluable information tat elped in te successful

completion of tis pro)ect#

Atis sarma

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DECLARATION

+ Atis Sarma of scool of management studies Pun)abi uni*ersity patiala, ereby declare tat + a*e

completed a summer pro)ect on 7-orking capital management8 in te Academic year 2%$92%$ 5e

information submitted is true and original to te best of my kno-ledge#

Signature of te Student

Atis sarma

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PREFACE

+n todays era of cuttroat competition, Master of Business Administration ;M#B#A< is sure to a*e an

edge o*er teir counterparts MBA education brings its students in direct contact -it te real corporate

-orld troug industrial training# 5e MBA program pro*ides its students -it an in dept study of

*arious managerial acti*ities tat are performed in any organi=ation# A detailed analysis of managerial

acti*ities conducted in *arious departments like production, marketing, finance, uman resources,

e0portimports, credit dept, etc# gi*es te student a conceptual idea of -at tey are e0pected to

manage , o- to manage and o- to obtain te ma0imum output troug minimum inputs and o- to

minimi=e te -astage of resources#

+ a*e undergone my compreensi*e training at 46 A!EE! /E.E6>PME"5 E"5!E# +t is one

of te leading +5 educational centers in te country# + feel great pleasure to present tis report -ork

after my training at 46 A!EE! /E.E6>PME"5 E"5!E tat produced to be golden

opportunity for me by enricing my kno-ledge by comparing my teoretical kno-ledge -it te

managerial skill and application#

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OBJECTIVES OF THE STUDY

Since -orking capital management is one of te most important aspects of finance, it enables to study in

dept te metods in*ol*ed in it? so tat as a student of finance it gi*es me a cance to study te financial

perspecti*es of te industry# +t offers scope to understand *arious aspects of finance and all tese aspects

are reflected in tis report# 5e estimation of re@uired -orking capital differs from organi=ation to

organi=ation# So doing tis pro)ect in an industry -ill elp in kno-ing more about te -orking

capital, its preparation and e0ecution#

5e study as te follo-ing ob)ecti*es:

1. 5o see -eter te -orking capital in 7468

is an effecti*e one#

2.5o find out te e0tent of te need and ade@uacy of te -orking capital of te firm#

3. 5o e*aluate or analy=e te organi=ational financial discipline and fiscal soundness#

4.5o find out te *ariance attained in related to pro)ected and actual figure#

5. 5o see te li@uidity position of te company#

6. 5o see te canges in te -orking capital#

7. 5o see te components of -orking capital is properly maintained#

8. 5o determine te re@uirements of -orking capital#

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EECUTIVE SUMMARY

Working capital management refers to te administration of all aspects of current assets, namely cas,

marketable securities, debtors and stock ;in*entories< and current liabilities# 5e financial manager

must determine le*els and composition of current assets# 4e must see tat rigt sources are tapped to

finance current assets, and tat current liabilities are paid in time# 4e must see tat rigt sources are

tapped to finance current assets, and tat current liabilities are paid in time# 5ere are many aspects of

-orking capital management, -ic make it an important function of te financial manager:

5ime: -orking capital management re@uires muc of te financial managers time#

+n*estment: -orking capital represents a large portion of te total in*estments in assets#

Significance: -orking capital management as great significance for all firms but it is *ery critical for

small firms#

ro-t: te need for -orking capital is directly related to te firms gro-t# +n*estment in current

assets represents a *ery significant portion of te total in*estment in assets#

Working capital management is critical for all firms# A small firm may not a*e muc in*estment in

fi0ed assets, but it as to in*est to in current assets# Small firms in +ndia face a se*ere problem ofcollecting teir debtors# Banks a*e teir o-n policies to assess te -orking capital of te firm to

finance tem -it te sortage# Bank of Maarastra adopts certain metod for financing teir

customers -orking capital re@uirements# 5ere are certain recommendations from te committees for

te banks to finance te -orking capital needs of teir clients# +t may, tus, be concluded tat all

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precautions sould be taken for te effecti*e and efficient management of -orking capital# 5e finance

manager sould pay regular attention to te le*els of current assets and te financing of current assets#

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COMPANY OVERVIEW

H!"#$%&'" C*$&+,% L!!&+#

4industan omputers 6imited, also kno-n as 46 Enterprise, is one of +ndiaGs largest electronics,

computing and information 5ecnology ompany# Based in "oida, near /eli, te company comprises

t-o publicly listed +ndian companies, 46 5ecnologies and 46 +nfo systems#

46 -as founded in $(H' by Si* "adar, A)ay o-dry and four of teir colleagues# 46 -as

focused on addressing te +5 ard-are market in +ndia for te first t-o decades of its e0istence -it

some sporadic acti*ity in te global market# +n $(I$, 46 seeded a company focused on addressing te

computer training industry, "++5, toug it as currently di*ested its stake in te company# +n $(($, 4P

took minority stake in te company ;2'J< and te company -as kno-n as 46 4P for te fi*e years

of te )oint *enture# >n termination of te )oint *enture in $((', 46 became an enterprise -ic

comprises 46 5ecnologies ;to address te global +5 ser*ices market< and 46 +nfosystems ;to

address te +ndian and APA +5 ard-are market


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onsumer, 6ife Sciences 4ealtcare, Aerospace /efense, Automoti*e, 5elecom and Media,

Publising and Entertainment, amongst oters# 46s key ser*ices include:

ustom Application Ser*ices

Enterprise Application Ser*ices

Enterprise 5ransformation Ser*ices

+nfrastructure Management

Engineering and !/ Ser*ices

Business Processing outsourcing

T*+

PublicBSE:L%%$H(

BSE:L922I$

I"#$%&, +5 Ser*ices

F$"#+# August $$, $(H'

H+'#$',&+,%/eli metropolitan area

"oida,+ndia

K+ *+*/+

Si* "adar, Counderairman and ief Strategy

>fficer, 46 5ecnologies

!osni "adar,E>46 orp#N$O

A)ai o-dry Counderairman and E>, 46

+nfosystems , .ineet "ayar E>, 46 5ecnologies#

agades-ar attu .ise President of 46#

R+3+"$+ Q SKL#% billion ;2%%(ur .ision is to be a global leader in pro*iding te igest le*el of +5 solutions and ser*ices# We stri*e

to e0ceed our clients e0pectations and create a -orkplace in -ic all employees tri*e in a

collaborati*e en*ironment tat celebrates e0cellence

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Mission:

onduct our business according to te igest standards of onesty and integrity# Pro*ide a le*el of

ser*ice and support tat allo-s our customers to confidently *ie- us as teir preferred solutions

pro*ider

reate a -ork en*ironment tat recogni=es te e0pertise, contributions, and team-ork of our

*alued employees

5o pro*ide inno*ati*e, professional and personali=ed ser*ices to clients, associates and employees#

We sall be sensiti*e to te needs of indi*iduals forming a sub)ect of our inter*ention#

LITERATURE REVIEW

Economic time

nine monts ended Marc 9$, 2%$9, 46 +nfosystems standalone net loss stood at !s

&$#%( crore against a net profit of !s &L#9% crore in te yearago period# 5e companyfollo-s te ulyune fiscal# +ts standalone net sales declined to !s ',''(#LL crore from!s H,H&%#HI crore in te re*ie- period# U5e decline in our re*enues tis @uarter -as

primarily due to a dip in our telecom distribution business as also a stagnant Personalomputer +ndustry -ic impacted our re*enues in tis segment,U 46 +nfosystemsief E0ecuti*e >fficer 4ars itale said in a release#

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Economic time

student in final year of teir medical and engineering courses# 4iPS as selected 46+nfosystems for supplying tese laptops# U/espite our *olumes being lo-, -e are

procuring laptop -it good configuration at *ery lo- price of around !s H,$(% per unit

from 46# Wit ta0es, it -ill cost us around !s H,I%% -ic is less compared to rates at-ic some of te states a*e procured,U Parial said#

46 orp buys $$#H$ lak sares of 4

4e said !ico +ndia as tied up -it a inese manufacturer to supply tese tablet andeac unit -ill cost !s ','(( for te state go*ernment# U5ese tablets are commercialmodel and a*e (#H inc multitouc screen# +t -ill a*e S+M slot -ic -ill support

bot 2 and 9 net-ork# Students -ill find latest tecnology features in te tablet,UParial said# nder Fu*a Sucna 3ranti Fo)ana, attisgar go*ernment -ill alsodistribute free laptops to 6 +nfosystems

5e purcase took place on BSE and "SE platforms# Cor te period ended /ecember9$, 2%$2, Si* "adaro-ned 46 orpGs stake in 46 +nfosystems stood at &2#IL percent# 46 orporation is te olding company of 46 5ecnologies and 46+nfosystems# Sares of te company on BSE today rose by $#L2 per cent to settle at !s9(#(L apiece from te pre*ious close#

R+%+',. M+&.#/

46 lobal Systems as a -elldefined model for its outsourced pro)ect de*elopment process using a

combination of onsite, offsite and offsore processes# 5is combination offers ig @uality, cost

effecti*e ser*ice to clients -o also benefit from te significantly lo-er costs of offsore ser*ices

combined -it local pro)ect management#

M+&.# O5 D'&' C(//+-&!("

5e collection is te process of enumeration togeter -it te proper recording of results# 5e

success of an en@uiry is based up on te proper collection of data# 5e data may be classified as

primary and secondary#

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P,!', D'&'

Primary data are tose, -ic are collected for te first time, and tey are original in caracter#

5is study co*ers te en@uiry regarding te in*entory data# nder tis researc te data collected

personally#

S+"#', D'&'

Secondary data are tose tat are already collected by someone for some purpose and are

a*ailable for te present study# 5e co*ers *arious sources of secondary data including publised

and unpublised sources like ne-s papers, publisedbooks, maga=ines etcV,

L!!&'&!"% O5 T.+ S&$#1

Working capital management is an effecti*e tool for management control# 5e follo-ing is te

limitation -ic + obser*ed in 75+ F6ES >C +"/+A 6+M+5E/8#

Since te report is e0clusi*ely made from secondary source of data, te direct

obser*ation is literally impossible#

5ere -as no scope for gatering sufficient financial information as it is

confidential#

/uring te time allotted for te pro)ect te internal audit is going on and tey could not

spare muc time for te detailed discussion on te sub)ect#

5ey temsel*es a*e not maintained te data so accurately but seem to be sufficient

for tepro)ect#

5ese limitations -ere mainly due to te organi=ational setup of te company# 5e companys orporate

>ffice is located at Parrys, -ere all te data are a*ailable? but it is accessible to me#

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A//!'"+%8

Since our inception, our alliances a*e played a critical role in our dri*e for ecosystembased

inno*ation# >ur ser*ice offerings and solutions across industry *erticals are strengtened by alliances

-it global tecnology *endors, customers, and nice solution pro*iders# >ur ecosystem consists ofclose to $%% companies in *arious tecnology areas -it -ic -e form gotomarket alliances,

specialist partnersips for nice tecnologies, and teaming partnersips for specific customers#

P',&"+,!" 7!&. HCL !% ' $&$'// +"+5!!'/ +9*+,!+"+

>ur ecosystem of alliances allo- us to pro*ide bestinclass solutions tat meet our customersG business

re@uirements and elps tem

!educe total cost of o-nersip,

!educe risk of implementation, and

Accelerate time to market#

And 46 elps its alliance partners

enerate incremental re*enue gro-t troug differentiated solutions and ser*ice offerings,

E0tend market and geograpic reac, and

Enance teir product and ser*ice offerings#

46 as in*ested in dedicated alliance partner oEs tat build solution frame-orks and accelerators,

and gets certified in partner products# +n addition, -e in*est in )oint solutions -it partners to create

inno*ati*e solutions for customers#

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5e 46 AMP6+CF frame-ork elps us identify, de*elop, and assess our alliances# >ur strategic

alliances are go*erned and measured at te corporate le*el -it a focus on )oint re*enue, *alue

proposition, and alignment -it our business goals#

HCL C',++, D+3+/*+"& C+"&,+

+ntroduction:

46 areer /e*elopment entre or 6EA!"+" /+.+S+>" is an initiati*e tat enables indi*iduals to

benefit from 46 e0pertise in te space and become +ndustry ready +5 professionals# 46 dominates

te +5 space as a leader# &L,%%% gifted professionals, a colossal S K& Billion turno*er, an international

presence in $H countries, and most importantly a deeprooted commitment to inno*ate, makes it a true

5ecnology iant# 46 A!EE! /E.E6>PME"5 E"5!E career program e@uips a student to

meet emerging industry callenges -it finesse and ease# >pportunities to gro- -it 46 A!EE!

/E.E6>PME"5 E"5!E are limitless, catapulting a student to ig le*el controlling positions in

Mega orporate# Wit top 46 professionals as te trainers, customi=ed career programs, ands on

e0perience, state of art infrastructure and -orld class training program te studentGs career grap is

bound to follo- a steep rise#

46 A!EE! /E.E6>PME"5 E"5!E pro*ides specially designed courses in igend soft-are,

ard-are and net-orking integration to groom students into industryready professionals# 46A!EE! /E.E6>PME"5 E"5!E also offers placement support to all teir students -o e0cel in

teir academics and display a remarkable performance during te course#

As te training arm of 46 +nfo systems, 46 A!EE! /E.E6>PME"5 E"5!E carries fort a

legacy of e0cellence spanning across more tan tree decades# 46 A!EE! /E.E6>PME"5

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E"5!E is an initiati*e tat enables indi*iduals and organi=ations to benefit from 46Gs deep

e0pertise in te +5 space#

Among te fastest gro-ing +5 education brands in +ndia, 46 A!EE! /E.E6>PME"5 E"5!E

offers a complete spectrum of @uality training programs on soft-are, ard-are, net-orking as -ell as

global certifications in association -it leading +5 organi=ations -orld-ide#

:$'/!& '& HCL CDC8

UWe sall de*elop and impart +ndustry rele*ant +5 Education to meet te re@uirement of customers,

+ndustry and society by continually updating tecnology content and impro*ing our process

C+,&!5!'&!" 5 $'/!& %&'"#',#%8

U+n its pursuit of e0cellenceU, te company as de*eloped a @uality management system in line -it

ISO ;00182000standards#

B$%!"+%% E9+//+"+ I"!&!'&!3+%8

5e organi=ation follo-s a frame-ork de*eloped by ECXM ;European Coundation for Xuality

Managementrgani=ation policies and strategies are aligned -it ECXM Model# 5e UXuest of

E0cellenceU is taken as a mission -o dri*es te @uality of 5raining /eli*ery and associated ser*ices#

A#3'"&'+ 5 HCL CAREER DEVELOPMENT CENTRE

At 46 A!EE! /E.E6>PME"5 E"5!E, -e pride upon te fact tat our training programspro*ide students -it a sustainable competiti*e edge tat not only elps tem secure te initial

placement but rater remains as an asset trougout t eir career span#

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6earn industry nittygritty from 5op 46 professionals#

ustomi=ed and industry specific career program# 4ands on e0perience#

After 46 A!EE! /E.E6>PME"5 E"5!E certification lea*e beind your placement

-orriesY

HCL CAREER DEVELOPMENT CENTRE A#3'"&'+

46 4eritage8 -46 A!EE! /E.E6>PME"5 E"5!E combines our eritage of e0cellence

-it cuttingedge +5 e0pertise across multiple +5 domains#

+S> (%%$:2%%% ertification: ->ur students sare te benefit of +S> (%%$:2%%% certified training

practices and procedures# Must a*e a attitude and be a self starter# 5e rigt candidate -ill progress really

fast -itin te organi=ation#

uttingEdge ourse-are8 ->ur course-are is designed and de*eloped in consultation -it seasoned

+5 professionals and is continuously updated as per te canging industry trends#

lobal Alliances8 -5roug partnersip -it leading tecnology companies including Microsoft, >racle

and !ed 4at, 46 A!EE! /E.E6>PME"5 E"5!E conducts certification programs in soft-are,

system and net-ork administration offering you a distinct edge in te )ob market#

+nternational !ecognition:-All our training programs is backed by 46 successful brand image tat

is -ell recogni=ed all across te -orld#

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4andson 5raining8 - We place ma)or empasis upon te application and practical training aspect of +5

training to make te students industryready from day one#

Widespread "et-ork:-46 A!EE! /E.E6>PME"5 E"5!E as set up premier +5 5rainingcentres across te geograpy of +ndia and te net-ork is gro-ing at a rapid pace -it ambitious global

e0pansion plans on te an*il#

$%%J Placement !ecord8 - >ur dedicated team of placement professionals offers employment support

troug regular interface -it te industry# A!EE! /E.E6>PME"5 E"5!Eprides upon a $%%J

placement record -it students a*ing been placed in leading organisations in te +5Znon+5 space#

F!"#!"%8

1. /uring my sur*ey -ell asking tat -ic +5 institute do you prefer ten out of $%%

ustomer 9%J said tat tey -ill prefer 46 learning di*ision# 5e reason -ic is gi*en by tem is 46

learning di*ision is one of te good brand in +5 firm by )oining 46 tere placement got secure#

2. As 46 learning di*ision is pro*iding ma)or type of courses -ic + a*e sur*eyed te area of interest

-ic + find out of student more to-ards "A# Wic is one of te ard-are courses te reasons beind

tat is most of te student are mainly concern -it ard-are or tey may be a*ing a degree or diploma in

soft-are -ic is pro*ided by many oter institute#

3. Wen + asked from te student -y tey like 46 learning di*ision ten most of tem ad ans-ered tat

tey -ill get a @uality instead of @uantity in 46 -ic is later on follo-ed by brand name because te

student kno- tat 46 company is kno-n to e*eryone is *ery muc ob*ious tat te courses -ic

pro*ided by 46 -ill be @uality oriented#

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4. /uring my sur*ey related to its a-areness amongst student most of te student replied tey get te

information related to 46 learning di*ision is mainly troug ne-spapers and broacers# As one of te

ne- courses so most of te students are not a-are of tese courses so because of *ery fe- students can able

to kno- about te courses to teir friends#

5. As 46 is pro*iding *arious facilities like discount coupons, Bank loans so -ere asking -ic offer is

beneficial to students most of tem i#e# almost '&J is said tat tey -ill prefer opt for Bank loan instead for

discount and coupon te reason -ic is got is most of tem -ere a*ing te perception tat tey -ill go for

loan it -ill be te responsibility of 46 to pro*ide te )ob#

6. 5e promotion acti*ities of 46 -ere graded as fair by I%J of te students because for its facility of loan

brand name and courses tat is offered#

7. Well + curiously asked for most of te students tat -y tey are coosing te 46 learning di*ision te

ans-er -ic + got *ery muc similar -ic + e0pected most of tem coosing 46 learning di*ision

because 46 a*ing brand and good reputation in te market# 5e marker apart from its @uality and price#

8. ompany -as doing *arious promotional acti*ities like 4and Billing, !oad so-s,

Seminar and area campaign but -ere asking -ic -as te most prefer by te students &$J said tat area

campaign is one of te best -ay to contact -it tem 9LJ -ere agreed for seminar and 29J for 4and

billing tis is so because area campaign te -ay by -ic most of te students -eater e is from college or

scool going or road side one can able to kno- -at e0actly 46 learning di*ision offering tem -ic is

not fulfill by seminar or and billing in a satisfactory position#

9. After asking -ic courses mostly preferred by te students te ans-er -ic + got is ma)ority for sort

term courses -ic is a*ing duration of si0 mont or one year minority -ere asking long term courses

-ic is a*ing duration of t-o year# 5is is so because te ma)ority of students -ic + sur*eyed -eredoing )ob so tey mostly preferred sort term courses o*er -itin si0 mont and one year#

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10.6astly + asked tat -ic timing is mostly suits tem &HJ said tat e*ening is most suitable for tem as +

a*e said earlier tat most of tem doing )ob so tey dont -ant to amper teir )ob for tis course but as

tis course -as really suited to tem tey really -ant to do it as a part time courses#

SWOT A"'/%!% HCL T+."/!+%-

S&,+"&.%8

1. Wide !ange of Products and Ser*ices like Soft-are Ser*ices, +nfrastructure Management -ic

enter into bot large and medium si=e companies#

2. lobal o*erage in countries like #S, Europe, apan etc

3. Strong employees base of up to L%%%%Pa0#

4. Support sales acti*ities by understanding te customer business better#

5. 3eep up to date on -at competition is doing#

6. +ts re*enue as increased from '%#Hbn in 2%%H from $$&bnin2%%( -ic so-s its increasing trend#

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3. 5otal asset turno*er is one of te -eaknesses of 46 as tey a*e al-ays failed to materiali=e its

assets in rigt direction#

4. 6ack of inno*ation and distribution net-ork especially in case of laptops as reflected 46s

-eakness#

O**,&$"!&!+%8

1. Ac@uisitions:46 as already done 9 ma)or ac@uisitions like 6iberta# 5is enables tem to e0pand

and create opportunity for tem to -ide tere spectrum#

2. 3ey opportunities lie in te countries like Eastern Europe and APA ;AsiaPacific !egionpportunity of doing better on return on e@uity from 2$#&2J by beating Satyam ;2'#%IJ*ereads per unit \ !s# 9(

A*erage o*er eads payable \[

So,

>*ereads Payment Period \ A*erage >*ereads Payable ^ 9'% Z 5otal >*ereads

9% \ A*erage >*ereads Payable ^ 9'% Z ;H%%%%^9(*ereads Payable \ 9%^H%%%%^9(Z9'%

\ !s# 2, 2H,L%

I*,&'"+ 5 W,


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R'&! F,$/'% R+%$/& I"&+,*,+&'&!"

Stock

5urno*er

;in dayster -orking capital measures include te follo-ing:

Bad debts e0pressed as a percentage of sales#

ost of bank loans, lines of credit, in*oice discounting etc#

/ebtor concentration degree of dependency on a limited number of customers#>nce ratios a*e been establised for our business, it is important to track tem o*er time and to

compare tem -it ratios for oter comparable businesses or industry sectors#

S!"!5!'"+ O5 W,

+f a proper cas balance is maintained, te business can a*ail te ad*antage of cas discount by paying

cas for te purcase of ra- materials and mercandise# +t -ill result in reducing te cost of

production#

2. I& ,+'&+% ' F++/!" 5 S+$,!& '"# C"5!#+"+8

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5e proprietor or officials or management of a concern are @uite carefree, if tey a*e proper -orking

capital arrangements because tey need not -orry for te payment of business e0penditure or creditors#

Ade@uate -orking capital creates a sense of security, confidence and loyalty, not only trougout te

business itself, but also among its customers, creditors and business associates#

3. @M$%& 5, M'!"&'!"!" S/3+" '"# C"&!"$!" P,#$&!"8

+n order to maintain te sol*ency of te business, it is but essential tat te sufficient amount t of fund

is a*ailable to make all te payments in time as and -en tey are due# Witout ample -orking capital,

production -ill suffer, particularly in te era of cut troat competition, and a business can ne*er

flouris in te absence of ade@uate -orking capital#

4. S$"# G#7!// '"# D+& C'*'!&8

+t is common e0perience of all prudent businessmen tat promptness of payment in business creates

good-ill and increases te debt of te capacity of te business# A firm can raise funds from te market,

purcase goods on credit and borro- sortterm funds from bank, etc# +f te in*estor and borro-ers

are confident tat tey -ill get teir due interest and payment of principal in time#

5. E'% L'"% 5, &.+ B'"n te oter contrary, if -orking capital is sufficient, ample di*idend can be declared and

distributed# +t increases te market *alue of sares#

7. E9*/!&'&!" 5 G# O**,&$"!&8

+n case of ade@uacy of capital in a concern, good opportunities can be e0ploited e#g#, company may

make offseason purcases resulting in substantial sa*ings or it can fetc big supply orders resulting in

good profits#

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8. M++&!" U"%++" C"&!"+"8

/epression soots te demand of -orking capital because sock piling of finised goods become

necessary# ertain oter unseen contingencies e#g#, financial crisis due to ea*y losses, business

oscillations, etc# can easily be o*ercome, if company maintains ade@uate -orking capital#

9. H!. M,'/+8

5e pro*ision of ade@uate -orking capital impro*es te morale of te e0ecuti*e because tey a*e an

en*ironment of certainty, security and confidence, -ic is a great psycological, factor in impro*ing

te o*erall efficiency of te business and of te person -o is at te ell of fairs in te company#

10.I",+'%+# P,#$&!" E55!!+"8

A continuous supply of ra- material, researc programme, inno*ations and tecnical de*elopment and

e0pansion programmes can successfully be carried out if ade@uate -orking capital is maintained in tebusiness# +t -ill increase te production efficiency, -ic -ill, in turn increases te efficiency and

morale of te employees and lo-er costs and create image among te community#

S&,'&+!+% & 3+,+ &.+ *,/+8

Manage -orking capital in*estment or financing suc as

4olding additional cas balances beyond e0pected needs

4olding a reser*e of sort term marketable securities

Arrange for a*ailability of additional sortterm borro-ing capacity

>ne of te -ays to address te problem of fi0ed setup cost may be to old

in*entory#

>ne or combination of te abo*e strategies -ill target te problem

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F'&,% D+&+,!"!" W,

2. Si=e of business

3. Production policies

4. Production cycle

5. redit policy

6. !apidity of turno*er

7. Seasonal fluctuation

8. Price le*el canges

9. >ters factors

1. N'&$,+ 5 &.+ 4$%!"+%%8

Working capital also depends upon te nature of te business# Public utility concerns like rail-ay,

electricity etc# a*e a *ery little need of -orking capital since most of teir transaction are on cas basis#

>n te oter and ordinary manufacturing and trading concerns re@uire sufficient -orking capital,

since tey a*e to in*est substantially in in*entories and debtors#

2. S!+ 5 B$%!"+%%

Si=e of business is anoter influencing factor# As si=e increases, te -orking capital re@uirement is also

more and *ice *ersa#

3. P,#$&!" *(/!-!+%8

5e production policies pursued by te management a*e a significant effect on te re@uirement of

-orking capital of te business# 5e decision about te management regarding automation, etc# -ill also

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a*e its effect on -orking capital# >n case of labor intensi*e industries te -orking capital

re@uirements -ill be more# Wile in te case of igly automatic plant te re@uirement of long term

funds -ill be more#

4. P,#$&!" /+

5e time lapse bet-een feeding of ra- material into te macine and obtaining te finised goods out

from te macine is -at is described as te lengt of manufacturing process# +t is oter-ise kno-n as

con*ersion time# 6onger tis time period, iger is te *olume and *alue of -orkinprogress and

ence iger te re@uirement of -orking capital and *ice *ersa#

5. C,+#!& *(/!-18

A company -ic allo-s liberal credit to its customers may a*e iger sales but -ill need more

-orking capital# A concern tat purcases its re@uirements on credit and sells its productsZser*ices on

cas re@uires less amount of -orking capital#

6. R'*!#!& 5 &$,"(3+,8

A company a*ing ig rate of turno*er -ill need lo-er amount of -orking capital as compared to a

company -ic as a lo-er turno*er#

7. S+'%"'/ 5/$-&$'&!("%8

+n case of seasonal industries like sugar and -oolen te0tiles, teir -orking capital re@uired during te

particular season -ill be iger tan oterperiods#

8. P,!+ /+3+/ -.'"0+%8

anges in te price le*el also affect te -orking capital re@uirements# enerally, te rising prices -ill

re@uire te firm to maintain larger amount of -orking capital as more funds -ill be re@uired to maintain

te same current assets#

5e effect of rising prices may be different for different firms# Some firms may be affected muc

-ile some oters may not be affected at all by te rise inprices#

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9. O&.+, 5'-&(,%8

ertain oter factors suc as operating efficiency, management ability, irregularities of supply,

import policy, asset structure, importance of labour,banking facilities, etc# also influences te re@uirements

of -orking capital#

E9+%% O, I"'#+$'&+ W,

+dle funds, nonprofitable for business, poor !>+#

nnecessary purcasing accumulation of in*entories o*er re@uired le*el#

E0cessi*e debtors and defecti*e credit policy, iger incidence of BZ/#

>*erall inefficiency in te organi=ation#

Wen tere is e0cessi*e -orking capital, redit -ortiness suffers

/ue to lo- rate of return on in*estments, te market *alue of sares may fall

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D!%'#3'"&'+% , D'"+,% 5 I"'#+$'&+ , S.,& W,


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2. 5o pay -ages and salaries#

3. 5o incur day to day e0penses and o*ereads costs suc as fuel, po-er and office e0penses, etc#

4. 5o meet te selling costs as packing, ad*ertising, etc#

5. 5o pro*ide credit facilities to te customers#

6. 5o maintain te in*entories of ra- material, -ork in progress, stores and spares and finised stock#

M'"'++"& O5 W,

production but reduces te in*estment in ra- materials and minimi=es reordering costs and ence

increases cas flo-# Besides tis, te lead times in production sould be lo-ered to reduce Work in

Process ;W+P


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S.,& &+, 5!"'"!"# +dentify te appropriate source of financing, gi*en te cas con*ersion

cycle: te in*entory is ideally financed by credit granted by te supplier? o-e*er, it may be necessary

to utili=e a bank loan;or o*erdraft

$. /imension first is concerned -it te formulation of policies -it regard to profitability, risk

and li@uidity#

$$. /imension second is concerned -it te decision about te composition and le*el of current

assets#

$$$. /imension tird is concerned -it te decision about te composition and le*el of current

liabilities#

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1. 5e goal of -orking capital management is to manage te firms current assets and current

liabilities in suc a -ay tat a satisfactory le*el of -orking capital is maintained, to meet te

sortterm obligations as and -en tey arise#

2. A significant ob)ecti*e of -orking capital management is to ensure sortterm li@uidity and tosee tat profitability is not affected by te -ay current assets and current liabilities are

managed#

3. 5e main teme of -orking capital management is te interaction bet-een te current assets

and te current liabilities and arri*es at te optimum le*el of bot# 5e optimum le*el tus

arri*ed must a*e pro*ision for contingencies#

4. 5radeoff bet-een Profitability and !isk: 5e le*el of a firms "et -orking capital as a

bearing on its profitability as -ell as risk# 5e term profitability used in tis conte0t is measured

by profits after e0penses# 5e term risk is defined as te probability tat a firm -ill become

tecnically insol*ent so tat it -ill not be able to meet its obligations -en tey become due for

payment# 5e risk of becoming tecnically insol*ent is measured using "et Working apital#

5e greater te net -orking capital, te more li@uid te firm is and terefore te less likeliood

of it becoming tecnically insol*ent# 5e relationsip bet-een li@uidity, net -orking capital and

risk is suc tat if eiter net -orking capital or li@uidity increases, te firmGs risk decreases#

5. 5radeoff: +f a firm -ants to increase its profits, it must also increase its risk# +n*ersely, if it

decreases risk, its profitability too tends to decrease# 5e tradeoff bet-een tese *ariables is

tat regardless of o- te firm increases its profitability troug te manipulation of -orking

capital, te conse@uence is a corresponding increase in risk as measured by te le*el of "et

-orking capital#

6. Apart from te profitability risk tradeoff, anoter important ingredient of te teory of

-orking capital management is determining te financing mi0# Cinancing mi0 refers to te

proportion of current assets tat -ould be financed by current liabilities and by longterm

resources#

P,!"!*/+% O5 W,


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1. P,!"!*/+ 5 ,!%< 3',!'&!"8-

!isk ere refers to te inability of a firm to meet its obligation as and -en

tey become due payment# 6arger in*estment in current assets -it less dependence on sort term

borro-ings increase li@uidity, reduces dependence on sort term borro-ings increases li@uidity,

reduces risk and tereby decrease te opportunity for gain or loss# >n te oter and less in*estment in

current assets -it dependence on sort term borro-ings, reduce li@uidity and increase profitability#

+n oter -ords, tere is a definite in*erse relationsip bet-een te degree of risk and profitability# A

conser*ati*e management prefers to minimi=e risk by maintaining a iger le*el of current assets or

-orking capital -ile a liberal management assumes greater risk by reducing -orking capital#

4o-e*er, te goal of te management sould be to establis a suitable tradeoff bet-een profitability

and risk#

2. P,!"!*/+ 5 %& 5 '*!&'/8-

5e *arious sources of raising -orking capital finance a*e different cost

of capital and degree of risk in*ol*ed# enerally, iger te risk lo-er is te cost and lo-er te risk

iger is te cost# A sound -orking capital management sould al-ays try to acie*e a proper balance

bet-een tese t-o#

3. P,!"!*/+ 5 E$!& *%!&!"8-

5is principle is concerned -it planning te total in*estment in current

assets# According to tis principle, te amount of -orking capital in*ested in eac component sould

be ade@uately )ustified by a firms e@uity position# E*ery rupee in*ested in current &assets sould

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contribute to net -ort of te firm# 5e le*el of current assets may be measured -it te elp of t-o

ratios:

$. urrent assets as a percentage of total assets#

$$. urrent assets as a percentage of total sales#

Wile deciding about te composition of current assets, te financial manager may consider te

rele*ant industrial a*erages#

4. P,!"!*/+ 5 '&$,!& 5 *'+"&8-

5is principle is concerned -it planning te sources of finance for

-orking capital# According to tis principle, a firm sould make e*ery effort to relate maturities of

payment to its flo- of internally generated funds# Maturity pattern of *arious current obligations is an

important factor in risk assumptions and risk assessments# enerally, sorter te maturity scedule of

current liabilities in relation to e0pected cas inflo-s, te greater inability to meet its obligations in

time#

F,+'%&!" > E%&!'&!" O5 W,

7Working capital is te life blood and controlling ner*e centre of a business#8 "o business can be

successfully run -itout an ade@uate amount of -orking capital# 5o a*oid te sortage of -orking

capital at once, an estimate of -orking capital re@uirements sould be made in ad*ance so tat

arrangement can be made to procure ade@uate -orking capital#

M+&.#% 5 5,+'%&!" 7,

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5e follo-ing metods are usually follo-ed in forecasting -orking capital re@uirements of a firm:

1. Percentage of sales metod

2. !egression analysis metod ;a*erage relationsip bet-een sales and -orking capitalne tird of sales

-ill be for cas and te rest on credit for settlement in te follo-ing mont# E0pense are payable in

te mont in -ic tey are incurred# 5e selling price is fi0ed at I% per unit#

5e numbers of units manufacturing and sold are e0pected to be as under:

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anuary (%%

Cebruary $2%%

Marc $I%%

April 2$%%

May 2$%%

une 2&%%

/ra- up a statement so-ing re@uirements of -orking capital from mont to mont, ignoring te

@uestion of stocks#

Statement So-ing !e@uirement >f Working apital

J'"6

F+6

M',.

A*,!/

M'

J$"+

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Payments:

Materials

Wages

Ci0ed e0penses

.ariable e0penses

!eceipts:

as sales

/ebtors

Working capital re@uired

;paymentsreceipts

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