working capital management of INDIAN OVERSEAS bANK. completed by sarath nairdoc

INTRODUCTION

1.1. INTRODUCTION

Working capital is the life blood and nerve centre of a business. Just

as circulation of blood is essential for 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 adequate amount of

capital.

In general practice, working capital refers to the excess of current

assets over current liabilities. Management of working capital, therefore is

concerned with the problems that arise in attempting o manage current

assets, current liabilities and inter relationship that exists between them.

Working capital management policies of a firm have great effort on its

profitability, liquidity and structural health of the organization.

IOB Bank is India’s first-rural bank with total assets of Rs.

219648.17 billion at March 31, 2012 and profit after tax Rs. 10.8 Billion for

the year ended March 31, 2012. The Bank has a network of 2010 branches

and about 1000 ATMs in India and presence in 18 counties.

1.2. RATIONALE OF THE STUDY

Fund of working capital and funds management are of immense

significance in the working of any organization. Without a well planned

working capital system, the operation becomes very difficult. Large and

more complex the organization is the more complicated the system

becomes.

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Profit is the most important measures of firm’s performance. An

analysis of effort of various factors on profit is an essential step in the

financial planning and decision making. This analysis can be used to

determine the profit planning process of the firm.

1.3. OBJECTIVES OF THE STUDY

1. To find the liquidity position of IOB Bank.

2. To find out the trend of working capital employed.

3. To find out the long-term solvency position of the organization.

4. To analysis the earning capacity of the organization.

5. To study about the components of funds management or working

capital management such as management of cash, management of

receivable.

6. To make suggestions and recommendations on the basis of the stuffy

to improve the working capital management of the company.

1.4. RESERCH METHODOLOGY

The study is based on both primary data secondary data.

Primary data

Primary data is collected by discussions and interviews with

managers, executives and other informants.

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Secondary data

Secondary data is obtained from annual reports and other published

accounts of the company for a period of five year from 2007-2008 to 2011-

2012. Besides this information has also been collected from various books

and journals, MIS reports and circulars connected with the object.

1.5. EXPECTED CONTRIBUTION FROM THE STUDY

1) This study will help to carry on the day to day operation of the

company successfully and economically adequate Working Capital

every time.

2) Generally more than half of the total capital of the company is

invested in current assets and this study will help to fix an optimum

level of investment in various current assets.

3) Profitability position of the company.

4) This study enables us to determine an optimal mix of short-term

funds in relation to long term capital.

5) Rate of growth of business.

6) Short term financial solvency of the firm.

7) Optimal source of funds with less cost.

8) This study also enables us to study the increase and decrease in the

current assets and current liabilities and its effect on the working

capital position.

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1.6. LIMITATIONS OF THE STUDY

1. This study is mainly based on the company’s annual report.

2. Time is another main constraint in the study and within the time

allowed, it is not possible to analyze in detail all document.

3. The data taken for comparison is only five years.

4. This study is based on a single branch only. But this company has lot

of another branches and head office all over the world.

5. The worked out ratios are compared only with the generally accepted

standard ratios of the previous year.

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PROFILE AND HISTORY OF IOB BANK

2.1 COMPANY PROFILE

IOB Bank is India’s first rural bank with total assets of Rs.

219648.17 billion at March 31, 2012 and profit after tax Rs. 10.8 Billion for

the year ended March 31, 2012. The Bank has a network of 2010 branches

and about 1000 ATMs in India and presence in 18 counties. IOB Bank

offers a wide range of banking products and financial services to corporate

and retail customers through a variety of delivery channels and through its

specialized subsidiaries in the areas of investment banking, life and non-life

insurance, venture capital and assets management.

The Bank currently has subsidiaries in the United Kingdom, Russia

and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri

Lanka, Qatar, and Dubai International Finances Centre and representative

offices in United Arab Emirates, China, South Africa, Bangladesh,

Thailand, Malaysia and Indonesia. Our UK subsidiary has established

branches in Belgium and Germany. IOB Bank’s equity shares are listed in

India on Bombay Stock Exchange and the National Stock Exchange of

India Limited and its American Deposit.

IOB launched retail finance – car loans and loans for consumer

durables.

IOB becomes the first Indian Company to list on the NYSE through

an issue of American Depositary Shares.

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IOB Bank’s pioneer in many fields banking, Insurance and Industry

with the twin objectives of specializing in foreign exchange business

and overseas banking.

IOB Bank enters first three branch in Karaikudi and Chennai in India

and Rangoon in Burma (presently Myanmar) followed by a branch in

Penang.

IOB Bank was one among the first to join Reserve Bank of India’s

negotiated dealing system for security dialing online.

In Pre-nationalization era (1947- 69), IOB expanded its domestic

activities and enlarged its international banking operations.

This led to creation of United Asian Bank Berhad in which IOB had

16.67% of the paid up capital.

The Bank sponsored 3 Regional Rural Banks viz. Puri Gramya Bank,

Pandyan Grama Bank and Dhenkanal Gramya Bank.

The Bank had setup a separate Computer Policy and Planning

Department (CPPD) to implement the programme of

computerizations, to develop software packages on its own and to

impart training to staff members in this field.

Now the Banks has 14 STARS centres and one Controlling Centre

for providing this service and in the same year started tapping the

potential of Internet by enabling ABB cardholders in Delhi to pay

their telephone bills by just logging on to MTNL web site and by

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authorising the Bank to debit towards the telephone bills.

Mobile banking under SMS technology was implemented in

Ahmedabad and Baroda.

During May of the year 2007, Indian rating agency ICRA assigned

an 'A1+' rating to the proposed 20 bln rupee certificates of deposit

programme of Indian Overseas Bank, citing the bank's consistent and

measured growth, the improvement in its asset quality through

effective monitoring and collection systems, and improving core

profitability.

During June of the year 2008, IOB launched two new products

namely IOB Gold' and IOB Silver' in savings account and IOB

Classic' and IOB Super' under current account.

IOB have a network of more than one thousand eight hundred

branches all over India located in various metropolitan cities, urban,

suburban and rural areas.

IOB plans to set up banking operations in Malaysia in a joint venture

with two other India-based banks Bank of Baroda and Andhra Bank

with a minimum capital investment of RM320 million (US$100

million).

In year 2000, it came out with a pubic issue of 11,12,00,000 shares

of Rs 10 each for cash at per aggregating Rs 111.20 crores. It also raised Rs

125 corers through bonds issue in year 2001. it gained the rating of AA for

the issue. Being ranked as the best public sector bank in India in 2007, its

key centre now include Singapore, Seoul, Hong Kong, Bangkok and

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Germany.

In 2006 total business of the bank crossed Rs. 1,00,000 crores where

as the total net profit exceeded the same figure in 2007. as of September

2008, there were 1425 branches under Core Banking Solution, 525 branches

under Total Branch Automation and a number of branches linked under

services like NEFT and RTGS. IOB has been upgraded to “BBB” (long

term) rating by Standard and Poor’s third bank in India after SBI and ICICI.

Present Scenario

IOB Bank has its equity shares listed in India on Bombay Stock

Exchange and the National Stock Exchange of India limited. Overseas, its

American Depositary Receipts (ADRs) are listed on the New York Stock

Exchange (NYSE). As of December 31, 2012, IOB Bank is India’s first

rural bank with total assets of Rs. 219648.17 billion at March 31, 2012 and

profit after tax Rs. 10.8 Billion for the year ended March 31, 2012.

Branches and ATMs

The Bank has a network of 2010 branches and about 1000 ATMs in

India and presence in 18 counties. The Bank currently has subsidiaries in

the United Kingdom, Russia and Canada, branches in United States,

Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar, and Dubai International

Finances Centre and representative offices in United Arab Emirates, China,

South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK

subsidiary has established branches in Belgium and Germany.

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2.2 PRODUCT AND SERVICES

Products:

Housing loans

Education loans

Retail loans

Savings account

Services:

NRI accounts

Forex collections services

Agri business consultancy

Personal banking

Corporate banking

E- banking

ATM Services

Trading services

Personal Banking

Deposits

Loans

Cards

Investments

Insurance

Demat Services

Wealth Management

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NRI Banking

Money transfer

Bank account

Investments

Property Solutions

Insurance

Loans

Business Banking

Corporate Net Banking

Cash Management

Trade Services

FX Online

SME Services

Online Taxes

Custodial Services

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THEORETICAL FRAMEWORK

A CRITIAL ANALYSIS OF WORKING CAPITAL MANAGEMENT

OF IOB BANK

3.1 INTRODUCTION

Working capital management involves the relationship between a

firm’s short-term assets and short-term liabilities. The goal of working

capital management is to ensure that a firm is able to continue its operations

and that it has sufficient ability to satisfy both maturing short-term debt and

upcoming operational expenses. The management of working capital

involves, accounts receivable, payable and cash.

Working capital management policies of a firm have great effect on

its profitability, liquidity and structural health of the organization. In this

context, working capital management is three dimensional in nature.

1. Dimension1 is concerned with the formulation of policies with

regard to profitability, risk and liquidity.

2. Dimension2 is concerned with the decisions about the composition

and level of current assets.

3. Dimension3 is concerned with the decision about the composition

and level of current liabilities.

The important financial statements, which are used for working

capital analysis, are final accounts, cash flow and found flow statement etc.

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Final accounts are the important source of information and these have to

be analyzed in detail to know financial position and organization. Final

accounts consist of two parts; one is profit and loss account and the other in

balance sheet.

A balance sheet is a snapshot of a business financial condition at a

specific movement in time, usually at the close of an accounting period. A

balance sheet comprises assets, liabilities, and owners or stockholders

equity. The profit & loss account (P&L) is a report of the company’s profit

on the sale of their service over a trading period, normally one year.

The principle tool of financial analysis is financial ratio. Ratio simply

means one figure expressed in term of another. Ratio analysis is the process

of determining and interpreting the numerical relationship based on

financial statement. Financial ratio analysis is the calculation and

comparison of ratios, which are derived from the information in a

company’s financial statement. The level and historical trends of these

ratios can be used to make inferences about a ratio company’s financial

condition, its operations and attractiveness as an investment.

Another method for analyzing working capital position is fund flow

statement. It represents an analysis changes in the working between two

points of time, along with events causing such changes in working capital is

prepared with the help of its current assets and current liabilities.

The basic goal of working capital management is to mange the

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current assets and current liabilities of a firm in such a way that a

satisfactory level of working capital is maintained ie, neither inadequate nor

excessive. Through this study it is indented to identify present problem

associated with working capital management of IOB Bank and give

valuable suggestions to rectify that problems.

WORKING CAPITAL MANAGEMENT

Nature Of Working Capital

Working Capital Management is concerned with the problem that

arise in attempting to mange the current assets, the current liabilities and the

inter relationship that exists between them. The term current assets refers to

those assets which in the ordinary course of business ca be, or will be,

converted in to cash within one year without undergoing a diminution in

value and without disrupting the operations of the firm. The major current

assets are cash, marketable securities, accounts receivable and inventory.

Current liabilities are those liabilities, which are intended, at their

inspection, to be earnings of the concern. The basic current liabilities are

accounts payable, bills payable, bank over drafts, and outstanding expenses.

The goal of working capital management is to manage the firm’s current

assets and liabilities in such a way that a satisfactory level of working

capital is maintained. This is so because if the firm cannot maintain a

satisfactory level of working capital, it is likely to become insolvent and

may even be forced into bankruptcy. The current assets should be large

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enough to cover its current liabilities in order to ensure a reasonable margin

of safety. Each of the current assets must be managed efficiently in order to

maintain the liquidity of the firm while not keeping too high a level of any

one of them. Each of the short-term sources of financing must be

continuously managed to ensure that they are obtained and used in the best

possible way. The interaction between current assets and current liabilities

is, the main them of the theory of working capital management.

The basic ingredients of the theory of working capital management

may be said to include its definition, need, optimum level of current assets,

the trade-off between profitability and risk which is associated with the

level of current assets and liabilities, financing-mix strategies and so on.

3.2 CONCEPTS AND DEFINITIONS OF WORKING CAPITAL

There are two concepts of working capital: Gross and net working

capital.

The term Gross working capital, also referred to as working capital,

means the total current assets. The term Net working capital can be defined

in two ways:

(i) The most common definition of net working capital

(NWC) is the difference between current assets and current liabilities;

and

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(ii) Alternate definition of NWC is that portion of current

assets which is financed with long-term funds.

1. On the Basic of Concepts

On the basic of concepts working capital can be divided into:

Gross working capital and net working capital.

Gross working capital is represented by the total of current assets and

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

Gross working capital = Total of current assets [Bank accounts, Cash

in hand, Deposits, Loans and advances, Stock in hand, Sundry debtors

etc….]

Net working capital = current assets – current liabilities [Duties and

Taxes, Provisions, Sundry creditors etc….]

2. On the Basic of Periodic

Under this classification, working capital can be classified into

Permanent or fixed working capital and Temporary or Variable working

capital.

(i) Fixed or Permanent working capital

It represents that part of working capital, which is permanently

invested in the current assets to carry out the business smoothly. This

investment in current assets is of permanent nature and will increase as the

size of the business expands.

Examples of such investments are: - investment required maintaining

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the minimum sort of raw material, work – in – progress, finished products,

loose tools etc…

(ii) Variable or Temporary working capital

It changes with the increase or decrease in the volume of business. It

may be divided into Seasonal and Special working capital.

Need for working capital

The need for working capital (gross) or current assets cannot be

overemphasized. Given the objectives of financial decision making to

maximize the shareholder, wealth, it is necessary to generate sufficient

profits. The extent to which profits can be earned will naturally depend,

among other things, upon the magnitude of the sales. A successful sales

programmed is in other words, necessary for earning profits by any business

enterprise. However sales do not convert into cash instantly; there is

invariably a time-lag between the sales of good and the receipts of cash.

There is, therefore, a need for working capital in the form of current assets

to deal with the problem arising out of the

Operating cycle

Lack of immediate realization of cash goods sold. Therefore,

sufficient working capital is necessary to sustain sales activity. Technically,

this is referred to as the operating or cash cycle. The operating cycle can be

said to be at the heart of the need for working capital. ‘The continuing flow

from cash to suppliers, to inventory, to accounts receivable and back into

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cash is called the operating cycle’. In other words, the term cash cycle to the

length of time necessary to complete the following cycle of events:-

1. Conversion of cash into inventory;

2. Conversion of inventory into receivables;

3. Conversion of receivables into cash.

The operating cycle, which is a continuous process, is shown below

Phase 3

Phase 1

Operating Cycle

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CashCash

ReceivablesReceivables

InventoryInventory

Cash Debtors

Raw Material Finished Goods

Working – in Progress

(Receivables)

The speed with which the working capital completes one cycle

determines the requirement of working capital. Longer the period of cycle

larger is the requirement of working capital.

Management of Working Capital

The basic goal of working capital management is to manage the

current assets and current liabilities of a firm is such a way that a

satisfactory level of working capital is maintained. Working capital

management polices of affirm have a great effect on its profitability,

liquidity and structural health of the organization. In this context working

capital management is three dimensional in nature.

Excess or inadequate working capital

Every business concern should have adequate working capital to run

its business operation. It should have excess working capital nor inadequate

working capital both excess as well as short working capital positions are

bad for any business. However, out of two it is the inadequacy of working

capital which is more dangerous from the point of view of the firm.

Disadvantages of excess working capital

Excessive working capital means idle funds which earn which no

profit for the business and hence the business cannot earn a proper

rate of return on its investment.

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When there is excess working capital is may lead to unnecessary

purchasing and accumulation of inventory causing more chance of

theft waste and loss.

Excessive working capital implies excessive defective credit

policy.

It may result into overall in efficiency in the organization.

When there is excessive working capital relation with banks and

other financial institutions may not maintain.

Due to low rate of return or investment the value of shares may

also decrease.

The excess working capital leads to speculative transactions.

Disadvantage of inadequate working capital

A concern which has inadequate working capital cannot pay its

short-term liabilities in time.

It cannot buy its requirements in bulk and avail of discount.

It becomes difficult to for the firm to exploit favorable market

condition and undertake profitable project to lack or working capital.

The firm cannot pay day to day expenses of its operations and it

creates inefficiencies, increases cost and reduce the profit of

business.

It becomes impossible to utilize efficiently the fixed assets due to

non availability of liquid fund.

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The rate of return on investment also falls with the shortage of

working capital.

3.3 FACTORS DETERMINING WORKING CAPITAL MANAGEMENT

1) Nature or character of the Business

2) Size of Business/Scale of operation

3) Seasonal Variation

4) Working Capital Cycle

5) Credit Policy

6) Business Cycle

7) Rate of growth of business

8) Earning Capacity and Industrial Policy

9) Price Level changes

10) Monetary, Fiscal and Industrial Policies

3.4 TOOLS USED IN WORKING CAPITAL

1) Ratio Analysis

2) Schedule in changes in Working Capital Management

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ANALYSIS AND INTERPRETATION

4.1 BALANCE SHEET ANALYSIS

Analysis Of Balance Sheet

The balance sheet is one of the important depicting the financial

strength of the concern. It shows on the one hand the properties that utilizes

and on other hand the sources of those properties. The balance sheet shows

all assets owned by the concern and all the liabilities and claims it owners

and outsiders.

Balance sheet is prepared as on a certain data not for a period. The

total of all assets must be equal to the total liabilities. Since capital is noting

but the difference between assets and liabilities to others.

Assets can be put in a balance sheet, in two ways-either in the order

of liquidity or in the order of performance. The order of liquidity is

generally used by sole trader, partnership firms and banks.

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SUMMARY OF BALANCE SHEET FIGURES FOR LAST

FIVE YEARS

SOURCE OF FUNDS

(Figures in Crore)

Year

Equity

Share

Capital

Preference Share

Capital

Reserve &

Surplus

Unsecured Loans

Total

2007-2008 544.80 - 4197.90 84325.58 89068.28

2008-2009 544.80 - 5396.59 100115.89 106057.28

2009-2010 544.80 - 5804.18 110794.71 117143.69

2010-2011 618.75 - 7546.19 145228.75 153393.69

2011-2012 797.90 - 9989.40 178434.18 189220.58

The applications and sources of funds analysis can be made on the

basis of data given above; graphical presentation of sources of funds can be

analyzed.

Analysis of the sources of funds

The source of funds comprises an equal proportion Loan funds and

Shareholders funds. The above analysis clearly indicated that the financing

pattern of the patter IOB bank LTD has been during the last 5 year. The

proportion of the shareholders funds over the period was same.

Total amount of unsecured loan availed by the company over the 5

year is more than secured loans. The increased portion of unsecured loan

may not be a burden for the company, since the company is going through

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good business prospectus and continuous level of returns. This company is

maintaining a fixed level of both shareholders funds and loan funds. As the

company is maintaining a fixed proportion of equity, it will ensure a

minimum returns to the equity holders and comparatively more value to the

shares.

Hence IOB bank is one of the companies, which are having adequate

and moderate financing patterns.

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Table 4.1.1

CURRENT LIABILITIES & CURRENT ASSETS

Year Current Liabilities Current Assets

2007-2008 6323.84 2061.29

2008-2009 7258.26 2340.93

2009-2010 3794.90 2917.70

2010-2011 4875.19 4641.08

2011-2012 5672.50 5352.70

GRAPH SHOWS CURRENT ASSETS & CURRENT LABILITIES FOR THE 5 YEARS

Chart 4.1.1

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Current Liabilities for the last 5 year shows a phenomenal growth

during the all the 5 years, which is a similar resemblance of the current

assets analysis. I.e. it means the trend of continuous growth of business

prospects of the company. The breakup of current liabilities indicates that

the three components / unearned interest, sundry creditors, other payable are

also resembles a unique trend to that of the total current liabilities.

The table given above shows that the total current liabilities

increasing during the last 5 years. The above analysis is very accurate

because of the fact that it is tune with the trend of other major variables

under consideration and in the process of analysis.

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ASSETS

Fixed Assets

Fixed assets are those assets, which are employed permanently, or

for a period of more than 6 months normally which regarded as the

fundamental part of the asset base. Plant and Machinery, Land and

Building, Furniture and Fixtures, Motor car etc are considered as fixed

assets. Those assets are meant to increase production capacity of the

business. They are not acquired for sale but are used for a considerable

period of time.

Current Assets

According to Alexander Wall “Current assets are such assets as in

the ordinary and natural courses of business move onward through the

various processes of production, distribution and payment of goods, until

they become cash or its equivalent by which debts may be readily and

immediately paid”. Current assets represent the short term assets like cash

in hand, bank account balance, stock on hire, account receivables etc.

The table below shows current assets position of the company for the

last 5 year as available form the balance sheet.

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Table 4.1.2

Year Fixed Assets Current Assets Investment

2007-2008 28919.31 10341.32 28474.71

2008-2009 31715.73 10921.90 31215.44

2009-2010 38174.54 9824.64 37650.56

2010-2011 49131.57 12018.66 48610.45

2011-2012 56168.67 16261.10 55565.88

Total 204109.82 59367.62 201517.04

Chart 4.1.2

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The above analytical figures shows that the resources of the

company are applied mainly on current assets and it is obvious that the ratio

of the current assets increased over the year which means the applications

of funds in productive resources and which is a reason of the productivity of

the company as can be seen from the analysis of balance sheet and profit

and loss account.

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TABLE SHOWING CURRENT ASSETS, CURRENT LIABILITIES

AND NET CURRENT ASSETS

Table 4.1.3

(Figures in Crore)

Year Current AssetsCurrent

LiabilitiesNet Current

Assets

2007-2008 2061.29 6323.84 -4262.55

2008-2009 2340.93 7258.26 -4917.34

2009-2010 2917.70 3794.90 -877.20

2010-2011 4641.08 4875.19 -234.11

2011-2012 5352.70 5672.50 -319.80

Heavy investment in current assets means that the nature of the

industry needs more working capital than usual business ventures. The

outstanding figures of the loans and advances were showing an increasing

trend over the 5 year. The loan gives more liquidity to the company.

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CHANGES IN CURRENT ASSETS / NET WORKING CAPITAL

Table 4.1.4

(Figures in Crore)

YearTotal

Current Assets

Net Working Capital

Changes in TCA

Changes in NWC

2007-2008 2061.29 -4262.55 329.18 635.16

2008-2009 2340.93 -4917.34 279.64 654.78

2009-2010 2917.70 -877.20 576.77 4040.13

2010-2011 4641.08 -234.11 1723.38 643.09

2011-2012 5352.70 -319.80 711.62 85.69

The above figure shows that the changes in the total current assets

for all the years. This depicts increase in total current assets. Changes in

total current assets position as shows indicate that the company was in

continuous growth all five year. The company won to not achieve a position

working capital in the all five year. Because the percentage decrease in

current assets are less than the percentage decrease in current liabilities.

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THE NET WORKING CAPITAL POSITION

An analysis of the last five years net working capital shows that the

company’s working capital position as growing during all the years, and

was in comfortable position. To be accurate net working capital maintained

was almost sufficient with regard to the nature of business and volume of

business transactions that is expected for the forthcoming years also, as can

be seen the figure given above.

The change in Net Working Capital position of the Company shows

that the Net Working Capital was always positive, which means that the Net

Working Capital segment exhibited a phenomenal growth during all the

years expect for the years. The trend is an indicator of the good business

prospects and business growth of the company during most of the years. A

detailed scrutiny of the above figure gives us a picture of the normal

business growth and cordial environment, free from the figures of the last

five years.

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4.2 RATIO ANALYSIS

Ratio Analysis

The term ‘ratio’ simply means one number expressed in term of

another. It describes in mathematical terms the quantitative relationship that

exists between two numbers. Ratio analysis, simply defined, refers to the

analysis and interpretation of financial statement through ratios. Now a day

it is used by all business and industrial concerns in their financial analysis.

Ratios are considered to be the best guides or the efficient execution of

basic managerial functions like planning, forecasting, control etc.

Accounting ratios are relationships expressed in mathematics terms between

which are connected with each other in some manner.

According to Sir Robert Antony, “Ratio is simply nothing but one

number expressed in terms of another”. A ratio is a means of highlighting in

arithmetical terms the relationship between two or more variables in the

basic financial statement such as income statement or Position statement. A

ratio as a financial analysis can be expressed as percentage, fraction or a

stated comparison between numbers. A single figure by itself has no

meaning, but when expressed in terms of related figure will yield significant

inferences.

Uses or Advantages of Ratio Analysis

Simplification of mass of accounting data.

An invaluable aid to management.

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Facilitates better coordination and control.

A tool to assess important characteristics of business.

An effective tool of analysis for intra-firm and inter-firm

comparisons.

Limitations of Ratio Analysis

Limitations of Financial Statements.

No fixed standards.

Qualitative factors are ignored.

Lack of Standards formulae.

It is no substitute for personal judgments.

Problems of price level changes.

Financial statements can be analyzed with the help of Funds

Flow/Cash Flow statements analysis on of balance sheet.

1. ANALYSIS OF LIQUIDITY OR LIQUIDITY RATIOS

Liquidity ratios play a key role in assessing the short-term financial

position of the business. Commercial banks and other short term creditors

are generally interested in such an analysis. However managements can

employ these ratios to ascertain how efficiently they utilize the working

capital in the business. This type of ratios normally indicates the ability of

the business to meet the maturing of current debts, the efficiency.

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4.2.1 CURRENT RATIO

Current Ratio = Current Assets / Current Liabilities

Current Ratios may be defined as the ratio of current assets to current

liabilities. It is also known as Working Capital Ratio or 2:1 Ratio. It shows

the relationship between the total current assets and total current liabilities,

expressed as formulae given below:

Table 4.2.1

Current Ratio


LiabilitiesCurrent Ratio

2007-2008 2061.29 6323.84 0.325955432

2008-2009 2340.93 7258.26 0.322519446

2009-2010 2917.70 3794.90 0.768847664

2010-2011 4641.08 4875.19 0.951979307

2011-2012 5352.70 5672.50 0.943622741

Interpretation

The Current Ratio of is said to be unfavorable in all the five years.

This shows the liquidity position of the organization. So the company’s

overall position for the past five years is said to be unfavorable.

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Chart 4.2.1

35

Current Ratio

0

0.2

0.4

0.6

0.8

1

2007-08 2008-09 2009-10 2010-11 2011-12

Year

Rat

io Quick Ratio

4.2.2 Cash Ratio

The cash ratio shows the cash positions with respect to meet current

liabilities Cash Ratio is found by the following method

Cash Ratio = Cash / Current Liabilities

Table 4.2.2

CASH RATIO

Year CashCurrent

LiabilitiesCash Ratio

2007-2008 10341.32 6323.84 1.64

2008-2009 10921.90 7258.26 1.50

2009-2010 9824.64 3794.90 2.59

2010-2011 12018.66 4875.19 2.47

2011-2012 16261.10 5672.50 2.87

Interpretation

The ratio of 0.75:1 is considered as the favorable cash ratio. The cash

ratio of the firm is considered as unfavorable. The overall trend shows

improvement in cash position of the company with respect to meet their

current liabilities.

36

Chart 4.2.2

37

4.2.3 Debt-Equity Ratio

The term Debt-Equity is used to describe the relationship between

debentures and long term loans to equity share capital, preference share

capital and reserves and surplus.

It shows the relationship between debt securities and share holders

funds of an organization.

Debt-Equity Ratio = Total Long-term debt / Equity Shareholders Fund

Table 4.2.3

DEBT-EQUITY RATIO

YearShare Holder

FundTotal Long Term Debts

Debt-Equity Ratio

2007-2008 4856.67 90679.23 18.67

2008-2009 7150.96 106664.17 14.91

2009-2010 7524.58 119776.91 15.91

2010-2011 9324.93 164584.15 17.64

2011-2012 11927.66 202048.03 16.93

Interpretation

The standard ratio of 1:1 is considered to be good but the company

did not maintain their shareholder funds in a proper way in all the five year.

The overall ratio for the five years shows an improvement in the debt equity

position.

38

Chart 4.2.3

39

4.2.4 Capital Gearing Ratio

Capital gearing ratio shows the relation between fixed interest

bearing securities and non fixed interest bearing securities. Fixed interest

bearing securities include debentures, preference share capital and long

term loans. Non fixed interest bearing securities include the equity share

capital, reserves and surplus etc.

Capital Gearing Ratio = Fixed interest bearing securities / Non fixed interest bearing securities

Table 4.2.4CAPITAL GEARING RATIO

YearFixed Interest

Bearing Securities

Non Fixed Interest Bearing

Securities

Capital Gearing Ratio

2007-2008 6353.65 4742.701.33966

2008-2009 6548.28 5941.391.10214

2009-2010 8982.20 6348.981.41474

2010-2011 19355.40 8164.942.37055

2011-2012 23613.85 10786.402.18922

Interpretation

In the year 2007-2008 the capital gearing ratio is 1.34 and it

increasing in the next four year 2008-2012.

40

Chart 4.2.4

41

4.2.5 Return on Total Assets Ratio

Return on total assets shows the relation between the net profit after

interest and tax to total assets.

Return on total assets = Net profit after interest and tax / Total assets

Table 4.2.5

RETURN ON TOTAL ASSETS RATIO

Year EBIT Total AssetsReturn on total

assets

2007-2008 1724.62 101859.73 1.693132

2008-2009 2088.65 121073.40 1.725110

2009-2010 1043.57 131096.40 0.976032

2010-2011 1824.76 178784.27 1.020649

2011-2012 1889.86 219648.17 0.860403

Interpretation

In the year 2007-2008 the return on total assets ratio is 1.69. the ratio

is maintain by the organization till 2011-2012.

42

Chart 4.2.5

43

4.2.6 Fixed Assets Turnover Ratio

Fixed assets turnover ratio shows the relationship between net fixed

assets after depreciation with net sales.

Fixed Assets Turnover Ratio =

Table 4.2.6

FIXED ASSETS TURNOVER RATIO

Year Fixed Assets Net EarningsFixed Assets

Turnover Ratio

2007-2008 28919.31 7986.25 0.276

2008-2009 31715.73 9641.40 0.303

2009-2010 38174.54 10245.77 0.268

2010-2011 49131.57 12101.47 0.246

2011-2012 56168.67 17897.08 0.318

Interpretation

In the year 2007-2008 the fixed assets turnover ratio is 0.28 and it

gradually increased and reached at 0.32 in the year 2011-2012 and shows

the better and efficient utilization of fixed assets.

44

Chart 4.2.6

45

4.2.7 Return on Capital Employed

The profits are related to total capital employed. The capital

employed refers to long term funds supplied by the lenders and owners of

the firm. The capital employed is equal to concurrent liabilities plus

owners’ equity. Alternatively it is equivalent to net working capital plus

fixed assets. The higher the ratio the more efficient is the use of capital

employed.

Return on capital Employed =

Table 4.2.7

RETURN ON CAPITAL EMPLOYED

Year EBITTotal Capital

EmployedReturn Capital

Employed

2007-2008 1724.62 89068.28 1.936

2008-2009 2088.65 106057.28 1.969

2009-2010 1043.57 117143.69 0.890

2010-2011 1824.76 153393.69 1.189

2011-2012 1889.86 189220.57 0.998

Interpretation

All the five year 2007-2008 to 2011-2012 the Return capital

employed is maintain a steady rate.

46

Chart 4.2.7

47

4.2.8 Current Liability To Total Liability Ratio

Formula to find out current Liability to Total Liability is

Current Liabilities / Total Liabilities

Table 4.2.8

CURRENT LIABILITY TO TOTAL LIABILITY RATIO

Year Total LiabilitiesCurrent

Liabilities

Current Liability to

Total Liability ratio

2007-2008 95535.90 6323.84 0.066

2008-2009 113815.14 7258.26 0.063

2009-2010 127301.50 3794.90 0.298

2010-2011 173909.09 4875.19 0.028

2011-2012 213975.68 5672.50 0.026

Interpretation

The current liability to total liability ratio is maintained a steady ratio

throughout the five year. This shows the portion of current liability in total

liability. The current liabilities are paid out of within a short period of time.

The overall long term liabilities of the organization is said to be very high.

48

Chart 4.2.8

49

4.2.9 Current Assets To Total Assets Ratio

The formula used to find out Current Assets to Total Assets Ratio is

Current Assets / Total Assets

Table 4.2.9

CURRENT ASSETS TO TOTAL ASSETS RATIO

Year Total Assets Current AssetsCurrent Assets to Total Assets

ratio

2007-2008 101859.73 2061.29 0.020

2008-2009 121073.40 2340.93 0.019

2009-2010 131096.40 2917.70 0.022

2010-2011 178784.27 4641.08 0.025

2011-2012 219648.17 5352.70 0.024

Interpretation

The current asset to total asset ratio is maintained a steady ratio

throughout the whole five year 2007-2008 to 2011-2012. This ratio shows

the portion of current assets in the total assets. The amount of current assets

to total assets are said to be very low.

50

Chart 4.2.9

51

0

0.005

0.01

0.015

0.02

0.025

Ratio

2007-08 2008-09 2009-10 2010-11 2011-12

Year

Current Assets To Total Assets Ratio

Current Assets To TotalAssets Ratio

4.2.10 Operating Profit Ratio

Every enterprise has a typical operating ratio. Operating ratio

indicates the operating efficiency of the company. It depicts the cost picture

or the debit aspect of the profit margin higher the operating ratio, given a

level of sales, lower will be the profit margin or the net profit ratio.

Operating Profit / Net Earnings X 100

Table 4.2.10

OPERATING PROFIT RATIO

YearOperating

ProfitNet Earnings

Operating Profit Ratio

2007-2008 6136.11 7986.25 76.83

2008-2009 7130.29 9641.40 73.95

2009-2010 6995.79 10245.77 68.28

2010-2011 8342.73 12101.47 68.94

2011-2012 12497.58 17897.08 69.83

Interpretation

In the year 2007-2008 operating profit ratio is favorable than

compare to another year, in the year 2007-2008 it reach 76.83 and other

years comparatively low, but it is increased in the year 2011-2012 it reach

69.83.

52

Chart 4.2.10

53

4.2.11 Net Profit Ratio

Net Profit ratio measures the rate of net margin earned on sales. The

profit is usually only the operating income i.e., income from non-trading

assets and expenses, which do not relate to trading of manufacturing are not

included, the higher the ratio, the better it is.

Net Profit Ratio =

Table 4.2.11

NET PROFIT RATIO

Year Net Profit Net Earnings Net Profit Ratio

2007-2008 1202.34 7986.25 15.06

2008-2009 1325.79 9641.40 13.75

2009-2010 706.96 10245.77 6.90

2010-2011 1072.54 12101.47 8.86

2011-2012 1050.13 17897.08 5.87

Interpretation

In the year 2007-2008 the net profit ratio is in a favorable position

that is 15.06 but it is gradually deceased and in the year 2011-2012 it reach

5.87 it shows a decrease in trend.

54

Chart 4.2.11

55

PRESENT WORKING CAPITAL POSITION AND POLICIES

Table 4.2.12


LiabilitiesNet Current

Assets

2007-2008 2061.29 6323.84 -4262.55

2008-2009 2340.93 7258.26 -4917.34

2009-2010 2917.70 3794.90 -877.20

2010-2011 4641.08 4875.19 -234.11

2011-2012 5352.70 5672.50 -319.80

CURRENT ASSETS AND CURRENT LIABILITIES

56

Chart 4.2.12

57

4.3 COMPARITIVE STUDY OF WORKING CAPITAL

MANAGEMENT

Schedule of change in working capital 2008-2009

Particulars 2008 2009 Increase Decrease

Current Assets

Loans & Advances and other current assets

Current Liabilities

C.A – C.

Working Capital

2061.29

6323.84

4262.55

654.78

2340.93

7258.26

4917.33

279.64

654.78

934.42

4917.33 4917.33 934.42 934.42

Interpretation

In 2008 the current assets is 2061.29 and in 2009 it is 2340.93 so

current assets is increased by 279.64. And the current liability in 2008 is

6323.84 and in 2009 it is 7258.26 and it is increased by 934.42. Total

working capital increased by 654.78 because of increase in current liability

is more than current assets.

58


Particulars 2009 2010 Increase DecreaseCurrent Assets


Current Liabilities

C.A – C.L

Working Capital

2340.93

7258.26

4917.33

2917.70

3794.90

877.20

4040.13

576.77

3463.36

4040.13

4917.33 4917.33 4040.13 4040.13

Interpretation




working capital decreased by 4040.13 because of increase in current

liability is more than current assets.

59


Particulars 2010 2011 Increase DecreaseCurrent Assets

Loans & Advances and

other current assets

Current Liabilities

C.A – C.L

Working Capital

2917.70

3794.90

877.20

4641.08

4875.19

234.11

643.09

1723.38

1080.29

643.09

877.20 877.20 1723.38 1723.38

Interpretation




working capital decreased by 643.09 because of increase in current liability

is more than current assets.

60


Particulars 2011 2012 Increase Decrease

Current Assets


Current Liabilities

C.A – C.L

Working Capital

4641.08

4875.19

234.11

85.69

5352.70

5672.50

319.80

711.62

85.69

797.31

319.80 319.80 797.31 797.31

Interpretation




working capital increased by 85.69 because of increase in current liability is

more than current assets.

61

FINDINGS, SUGGESTIONS AND CONCLUSION

5.1 FINDINGS

The Current Ratio of the company is said to be unfavorable in all the

five years but in last year the ratio reached at least nearer to the

standard ratio. This shows the liquidity position of the organization.

So the company’s liquidity position is not at all favorable in all the

five years.

The company wants to achieve the standard Quick Ratio. The ratio is

at most favorable.

The cash ratio of the firm is not considered as good. The five year

the ratio shows a good management of cash. The overall trend shows

improvement in cash position of the company with respect to meet

their current liabilities.

Debt-Equity ratio of the organization is not constructive. The

standard ratio of 1:1 is considered to be good but the company didn’t

maintain their shareholders funds in a proper way.

Fixed Assets Turnover Ratio is directly related with the effective

utilization of fixed assets. A high ratio is said to be favorable,

organization wants to maintain a poor ratio.

The company’s working capital is not favorable in all the five years.

62

Operating Profit Ratio of the company is satisfactory. The company

gained a high amount of profit in the year 2011-2012. The Operating

Profit Ratio of the company shows the level of operating expenses. A

lower operating ratio is preferable by the organization because it

shows a higher operating profit.

The Net Profit Ratio of the company is not satisfactory.

As per the capital gearing ratio the portfolio of fixed interest bearing

securities are more than the non fixed interest bearing securities. This

means the excess of outsider ‘funds over owners’ fund. It shows the

long-term solvency position of the organization and it is said to be

favorable.

Return on capital employed shows the earning capacity of the

organization. In 2011-12 the ratio shows a poor figure that means

unconstructive earning by the company in that year.

5.2 SUGGESTIONS

The company must try to increase their current ratio by reducing

their short term liabilities

The organization must maintain a proper cash management.

The company can raise their funds through issuing non fixed interest

securities to public so that organization can increase long-term

solvency position.

63

By investing more funds in current assets or reducing the level of

current liabilities the organization can achieve favorable working

capital position.

The net profit of the organization should be increased by reducing

the cost of operation.

The Return on investment such as return on capital employed and

return on assets should be increased along with the net earning so

that the company’s overall profitability will be increased.

The organization should give priority to liquidity, solvency and

profitability so that they improve their operations.

5.3 CONCULSION

The regular educational prospectus provides only the theoretical

knowledge to the students but these kinds of project works are very helpful

to them for acquiring knowledge regarding the operation, functions of a

business unit about how an organization is working capital is the life blood

and nerve centre of a business. Since the topic is finance, the collections of

data are much related to the secondary sources.

The study of working capital management provides the researcher

with a lot of knowledge regarding how an organization collects the funds

from various sources and its effective utilization. The ratio analysis is very

helpful to obtain the liquidity and solvency position of an organization. In

general practice, working capital refers to the excess of current assets over

64

current liabilities. Management of working capital therefore is concerned

with the problem that arises in attempting to manage current assets, current

liabilities and inter relationship that exists between them. Working capital

management policies of a firm have great effort on its profitability, liquidity

and structural health of the organization.

65

BIBLIOGRAPHY

BOOKS

V.K.Bhalla, “Working Capital Management”, Anmol Publications

Pvt.Ltd New Delhi, 9th edition 2008.

C.R.Kothari, “Research Methodology”, Viswaprakashan Publication,

New Delhi, 1990.

Prasanna Chandra, “Financial Management”, Tata Mc Graw Hill

Publishing Co, Ltd, New Delhi, 1997.

WEBSITES

www.iobbank.com

JOURNAL

Annual Report of the IOB Bank.

66

http://www.iobbank.com/

Documents

working capital management of INDIAN OVERSEAS bANK. completed by sarath nairdoc