WORKING CAPITAL-2

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Project Report - Working Capital Management
WORKING CAPITAL
Meaning of Working Capital
Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital
Every business needs funds for two purposes for its establishment and to carry
out its day- to-day operations. Long terms funds are required to create production
facilities through purchase of fixed assets such asplant &machinery, land, building,
furniture, etc. Investments in these assets represent that part of firm’s capital which
is blocked on permanent or fixed basis and is called fixed capital. Funds are also
needed for short-term purposes for the purchase of raw material, payment of wages
and other day – to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers
to that part of the firm’s capital which is required for financing short- term or
current assets such as cash, marketable securities, debtors & inventories. Funds,
thus, invested in current assts keep revolving fast and are being constantly
converted in to cash and this cash flows out again in exchange for other current
assets. Hence, it is also known as revolving or circulating capital or short term
capital.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1. Gross working capital
2. Net working capital
The gross working capital is the capital invested in the total current assets of the
enterprises current assets are those

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Assets which can convert in to cash within a short period normally one
accounting year.
CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories of stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods
6. Temporary investment of surplus funds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.
In a narrow sense, the term working capital refers to the net working. Net
working capital is the excess of current assets over current liability, or,
say:
NET WORKING CAPITAL = CURRENT ASSETS – CURRENT
LIABILITIES.
Net working capital can be positive or negative. When the current assets
exceeds the current liabilities are more than the current assets. Current
liabilities are those liabilities, which are intended to be paid in the ordinary

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course of business within a short period of normally one accounting year
out of the current assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraft.
5. Provision for taxation , if it does not amt. to app. Of profit.
6. Bills payable.
7. Sundry creditors.
The gross working capital concept is financial or going concern concept whereas
net working capital is an accounting concept of working capital. Both the concepts
have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the
following reasons:
1. It enables the enterprise to provide correct amount of working capital at
correct time.
2. Every management is more interested in total current assets with which
it has to operate then the source from where it is made available.
3. It take into consideration of the fact every increase in the funds of the
enterprise would increase its working capital.
4. This concept is also useful in determining the rate of return on
investments in working capital. The net working capital concept,
however, is also important for following reasons:
 It is qualitative concept, which indicates the firm’s ability to meet
to its operating expenses and short-term liabilities.

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 IT indicates the margin of protection available to the short term
creditors.
 It is an indicator of the financial soundness of enterprises.
 It suggests the need of financing a part of working capital
requirement out of the permanent sources of funds.
CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified in to ways:
 On the basis of concept.
 On the basis of time.
On the basis of concept working capital can be classified as gross working
capital and net working capital. On the basis of time, working capital may
be classified as:
 Permanent or fixed working capital.
 Temporary or variable working capital
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed working capital is minimum amount which is required to
ensure effective utilization of fixed facilities and for maintaining the circulation of
current assets. Every firm has to maintain a minimum level of raw material, work-
in-process, finished goods and cash balance. This minimum level of current assts is
called permanent or fixed working capital as this part of working is permanently
blocked in current assets. As the business grow the requirements of working capital
also increases due to increase in current assets.
TEMPORARY OR VARIABLE WORKING CAPITAL
Temporary or variable working capital is the amount of working capital which is
required to meet the seasonal demands and some special exigencies. Variable
working capital can further be classified as seasonal working capital and special
working capital. The capital required to meet the seasonal need of the enterprise is
called seasonal working capital. Special working capital is that part of working

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capital which is required to meet special exigencies such as launching of extensive
marketing for conducting research, etc.
Temporary working capital differs from permanent working capital in the sense
that is required for short periods and cannot be permanently employed gainfully in
the business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING
CAPITAL
 SOLVENCY OF THE BUSINESS: Adequate working capital helps
in maintaining the solvency of the business by providing uninterrupted of
production.
 Goodwill: Sufficient amount of working capital enables a firm to make
prompt payments and makes and maintain the goodwill.
 Easy loans: Adequate working capital leads to high solvency and
credit standing can arrange loans from banks and other on easy and
favorable terms.
 Cash Discounts: Adequate working capital also enables a concern to
avail cash discounts on the purchases and hence reduces cost.
 Regular Supply of Raw Material: Sufficient working capital
ensures regular supply of raw material and continuous production.
 Regular Payment Of Salaries, Wages And Other Day
TO Day Commitments: It leads to the satisfaction of the employees
and raises the morale of its employees, increases their efficiency, reduces
wastage and costs and enhances production and profits.
 Exploitation Of Favorable Market Conditions: If a firm is
having adequate working capital then it can exploit the favorable market
conditions such as purchasing its requirements in bulk when the prices are
lower and holdings its inventories for higher prices.
 Ability To Face Crises: A concern can face the situation during the
depression.

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 Quick And Regular Return On Investments: Sufficient
working capital enables a concern to pay quick and regular of dividends to
its investors and gains confidence of the investors and can raise more funds
in future.
 High Morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall efficiency in a
business.
EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate amount of working capital to run
its business operations. It should have neither redundant or excess working
capital nor inadequate nor shortages of working capital. Both excess as well as
short working capital positions are bad for any business. However, it is the
inadequate working capital which is more dangerous from the point of view of
the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE
WORKING CAPITAL
1. Excessive working capital means ideal funds which earn no profit
for the firm and business cannot earn the required rate of return on its
investments.
2. Redundant working capital leads to unnecessary purchasing and
accumulation of inventories.
3. Excessive working capital implies excessive debtors and defective
credit policy which causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with
banks and other financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may
also fall.
7. The redundant working capital gives rise to speculative transactions

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DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working
capital arises due to the time gap between production and realization of cash from
sales. There is an operating cycle involved in sales and realization of cash. There
are time gaps in purchase of raw material and production; production and sales;
and realization of cash.
Thus working capital is needed for the following purposes:
 For the purpose of raw material, components and spares.
 To pay wages and salaries
 To incur day-to-day expenses and overload costs such as office expenses.
 To meet the selling costs as packing, advertising, etc.
 To provide credit facilities to the customer.
 To maintain the inventories of the raw material, work-in-progress, stores
and spares and finished stock.
For studying the need of working capital in a business, one has to study the
business under varying circumstances such as a new concern requires a lot of
funds to meet its initial requirements such as promotion and formation etc.
These expenses are called preliminary expenses and are capitalized. The
amount needed for working capital depends upon the size of the company and
ambitions of its promoters. Greater the size of the business unit, generally
larger will be the requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and
expensing of the business till it gains maturity. At maturity the amount of
working capital required is called normal working capital.
There are others factors also influence the need of working capital in a
business.
FACTORS DETERMINING THE WORKING CAPITAL
REQUIREMENTS

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1. NATURE OF BUSINESS: The requirements of working is
very limited in public utility undertakings such as electricity, water
supply and railways because they offer cash sale only and supply
services not products, and no funds are tied up in inventories and
receivables. On the other hand the trading and financial firms requires
less investment in fixed assets but have to invest large amt. of working
capital along with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the business,
greater is the requirement of working capital.
3. PRODUCTION POLICY: If the policy is to keep production
steady by accumulating inventories it will require higher working capital.
4. LENTH OF PRDUCTION CYCLE: The longer the
manufacturing time the raw material and other supplies have to be
carried for a longer in the process with progressive increment of labor
and service costs before the final product is obtained. So working capital
is directly proportional to the length of the manufacturing process.
5. SEASONALS VARIATIONS: Generally, during the busy
season, a firm requires larger working capital than in slack season.
6. WORKING CAPITAL CYCLE: The speed with which the
working cycle completes one cycle determines the requirements of
working capital. Longer the cycle larger is the requirement of working
capital.
DEBTORS
CASH FINISHED GOODS
RAW MATERIAL WORK IN PROGRESS

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7. RATE OF STOCK TURNOVER: There is an inverse co-
relationship between the question of working capital and the velocity or
speed with which the sales are affected. A firm having a high rate of
stock turnover wuill needs lower amt. of working capital as compared to
a firm having a low rate of turnover.
8. CREDIT POLICY: A concern that purchases its requirements on
credit and sales its product / services on cash requires lesser amt. of
working capital and vice-versa.
9. BUSINESS CYCLE: In period of boom, when the business is
prosperous, there is need for larger amt. of working capital due to rise in
sales, rise in prices, optimistic expansion of business, etc. On the
contrary in time of depression, the business contracts, sales decline,
difficulties are faced in collection from debtor and the firm may have a
large amt. of working capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing concern,
we shall require large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some
firms have more earning capacity than other due to quality of their
products, monopoly conditions, etc. Such firms may generate cash
profits from operations and contribute to their working capital. The
dividend policy also affects the requirement of working capital. A firm
maintaining a steady high rate of cash dividend irrespective of its profits
needs working capital than the firm that retains larger part of its profits
and does not pay so high rate of cash dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also affect
the working capital requirements. Generally rise in prices leads to
increase in working capital.
Others FACTORS: These are:
 Operating efficiency.
 Management ability.
 Irregularities of supply.

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 Import policy.
 Asset structure.
 Importance of labor.
 Banking facilities, etc.
MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the problem that arises in
attempting to manage the current assets, current liabilities. The basic goal of
working capital management is to manage the current assets and current
liabilities of a firm in such a way that a satisfactory level of working capital
is maintained, i.e. it is neither adequate nor excessive as both the situations
are bad for any firm. There should be no shortage of funds and also no
working capital should be ideal. WORKING CAPITAL MANAGEMENT
POLICES of a firm has a great on its probability, liquidity and structural
health of the organization. So working capital management is three
dimensional in nature as
1. It concerned with the formulation of policies with regard to
profitability, liquidity and risk.
2. It is concerned with the decision about the composition and level of
current assets.
3. It is concerned with the decision about the composition and level of
current liabilities.
WORKING CAPITAL ANALYSIS
As we know working capital is the life blood and the centre of a business.
Adequate amount of working capital is very much essential for the smooth
running of the business. And the most important part is the efficient
management of working capital in right time. The liquidity position of the
firm is totally effected by the management of working capital. So, a study of
changes in the uses and sources of working capital is necessary to evaluate
the efficiency with which the working capital is employed in a business.
This involves the need of working capital analysis.

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The analysis of working capital can be conducted through a number of
devices, such as:
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting.
1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The
technique of ratio analysis can be employed for measuring short-term
liquidity or working capital position of a firm. The following ratios can be
calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.
2. FUND FLOW ANALYSIS
Fund flow analysis is a technical device designated to the study the source
from which additional funds were derived and the use to which these
sources were put. The fund flow analysis consists of:
a. Preparing schedule of changes of working capital

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b. Statement of sources and application of funds.
It is an effective management tool to study the changes in financial position
(working capital) business enterprise between beginning and ending of the
financial dates.
3. WORKING CAPITAL BUDGET
A budget is a financial and / or quantitative expression of business plans and
polices to be pursued in the future period time. Working capital budget as a
part of the total budge ting process of a business is prepared estimating
future long term and short term working capital needs and sources to finance
them, and then comparing the budgeted figures with actual performance for
calculating the variances, if any, so that corrective actions may be taken in
future. He objective working capital budget is to ensure availability of funds
as and needed, and to ensure effective utilization of these resources. The
successful implementation of working capital budget involves the preparing
of separate budget for each element of working capital, such as, cash,
inventories and receivables etc.
ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR
TEST OF LIQUIDITY
The short –term creditors of a company such as suppliers of goods of
credit and commercial banks short-term loans are primarily interested to
know the ability of a firm to meet its obligations in time. The short term
obligations of a firm can be met in time only when it is having sufficient
liquid assets. So to with the confidence of investors, creditors, the smooth
functioning of the firm and the efficient use of fixed assets the liquid
position of the firm must be strong. But a very high degree of liquidity of
the firm being tied – up in current assets. Therefore, it is important proper
balance in regard to the liquidity of the firm. Two types of ratios can be
calculated for measuring short-term financial position or short-term
solvency position of the firm.
1. Liquidity ratios.
2. Current assets movements ‘ratios.
A) LIQUIDITY RATIOS

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Liquidity refers to the ability of a firm to meet its current obligations as
and when these become due. The short-term obligations are met by
realizing amounts from current, floating or circulating assts. The current
assets should either be liquid or near about liquidity. These should be
convertible in cash for paying obligations of short-term nature. The
sufficiency or insufficiency of current assets should be assessed by
comparing them with short-term liabilities. If current assets can pay off the
current liabilities then the liquidity position is satisfactory. On the other
hand, if the current liabilities cannot be met out of the current assets then
the liquidity position is bad. To measure the liquidity of a firm, the
following ratios can be calculated:
1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general
liquidity and its most widely used to make the analysis of short-term
financial position or liquidity of a firm. It is defined as the relation
between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry
debtors, inventories and work-in-progresses. Current liabilities include
outstanding expenses, bill payable, dividend payable etc.

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A relatively high current ratio is an indication that the firm is liquid and
has the ability to pay its current obligations in time. On the hand a low
current ratio represents that the liquidity position of the firm is not good
and the firm shall not be able to pay its current liabilities in time. A ratio
equal or near to the rule of thumb of 2:1 i.e. current assets double the
current liabilities is considered to be satisfactory.
CALCULATION OF CURRENT RATIO
(Rupees in crore)
e.g.
Year 2006 2007 2008
Current Assets 81.29 83.12 13,6.57
Current Liabilities 27.42 20.58 33.48
Current Ratio 2.96:1 4.03:1 4.08:1
Interpretation:-
As we know that ideal current ratio for any firm is 2:1. If we see the
current ratio of the company for last three years it has increased from 2006
to 2008. The current ratio of company is more than the ideal ratio. This
depicts that company’s liquidity position is sound. Its current assets are
more than its current liabilities.
2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick
ratio may be defined as the relationship between quick/liquid assets and
current or liquid liabilities. An asset is said to be liquid if it can be
converted into cash with a short period without loss of value. It measures
the firms’ capacity to pay off current obligations immediately.
QUICK RATIO = QUICK ASSETS
CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities

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2) Cash in hand and Cash at bank.
3) Debtors.
A high ratio is an indication that the firm is liquid and has the ability to
meet its current liabilities in time and on the other hand a low quick ratio
represents that the firms’ liquidity position is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally
thought that if quick assets are equal to the current liabilities then the
concern may be able to meet its short-term obligations. However, a firm
having high quick ratio may not have a satisfactory liquidity position if it
has slow paying debtors. On the other hand, a firm having a low liquidity
position if it has fast moving inventories.
CALCULATION OF QUICK RATIO
(Rupees in Crore)
e.g.
Year 2006 2007 2008
Quick Assets 44.14 47.43 61.55
Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1
Interpretation :
A quick ratio is an indication that the firm is liquid and has the ability
to meet its current liabilities in time. The ideal quick ratio is 1:1.
Company’s quick ratio is more than ideal ratio. This shows company has
no liquidity problem.
3. ABSOLUTE LIQUID RATIO
Although receivables, debtors and bills receivable are generally more
liquid than inventories, yet there may be doubts regarding their realization
into cash immediately or in time. So absolute liquid ratio should be

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calculated together with current ratio and acid test ratio so as to exclude
even receivables from the current assets and find out the absolute liquid
assets. Absolute Liquid Assets includes :
ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS
CURRENT LIABILITES
ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.
e.g. (Rupees in Crore)
Year 2006 2007 2008
Absolute Liquid Assets 4.69 1.79 5.06
Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1
Interpretation :
These ratio shows that company carries a small amount of cash. But
there is nothing to be worried about the lack of cash because company has
reserve, borrowing power & long term investment. In India, firms have
credit limits sanctioned from banks and can easily draw cash.
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and
earn profits. The efficiency with which assets are managed directly affects
the volume of sales. The better the management of assets, large is the
amount of sales and profits. Current assets movement ratios measure the
efficiency with which a firm manages its resources. These ratios are called
turnover ratios because they indicate the speed with which assets are
converted or turned over into sales. Depending upon the purpose, a
number of turnover ratios can be calculated. These are :
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio

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4. Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results if current assets
include high amount of debtors due to slow credit collections and moreover
if the assets include high amount of slow moving inventories. As both the
ratios ignore the movement of current assets, it is important to calculate the
turnover ratio.
1. INVENTORY TURNOVER OR STOCK TURNOVER
RATIO :
Every firm has to maintain a certain amount of inventory of finished
goods so as to meet the requirements of the business. But the level of
inventory should neither be too high nor too low. Because it is
harmful to hold more inventory as some amount of capital is blocked
in it and some cost is involved in it. It will therefore be advisable to
dispose the inventory as soon as possible.
INVENTORY TURNOVER RATIO = COST OF GOOD SOLD
AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is
converted into sales. Usually a high inventory ratio indicates an
efficient management of inventory because more frequently the
stocks are sold ; the lesser amount of money is required to finance the
inventory. Where as low inventory turnover ratio indicates the
inefficient management of inventory. A low inventory turnover
implies over investment in inventories, dull business, poor quality of
goods, stock accumulations and slow moving goods and low profits
as compared to total investment.
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK
2
(Rupees in Crore)

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Year 2006 2007 2008
Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times
Interpretation :
These ratio shows how rapidly the inventory is turning into receivable
through sales. In 2007 the company has high inventory turnover ratio but
in 2008 it has reduced to 1.75 times. This shows that the company’s
inventory management technique is less efficient as compare to last year.
2. INVENTORY CONVERSION PERIOD:
INVENTORY CONVERSION PERIOD = 365 (net working days)
INVENTORY TURNOVER RATIO
e.g.
Year 2006 2007 2008
Days 365 365 365
Inventory Turnover Ratio 1.5 2.8 1.8
Inventory Conversion Period 243 days 130 days 202 days
Interpretation :
Inventory conversion period shows that how many days inventories
takes to convert from raw material to finished goods. In the company
inventory conversion period is decreasing. This shows the efficiency of
management to convert the inventory into cash.
3. DEBTORS TURNOVER RATIO :
A concern may sell its goods on cash as well as on credit to increase
its sales and a liberal credit policy may result in tying up substantial funds
of a firm in the form of trade debtors. Trade debtors are expected to be
converted into cash within a short period and are included in current
assets. So liquidity position of a concern also depends upon the quality of

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trade debtors. Two types of ratio can be calculated to evaluate the quality
of debtors.
a) Debtors Turnover Ratio
b) Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)
AVERAGE DEBTORS
Debtor’s velocity indicates the number of times the debtors are turned
over during a year. Generally higher the value of debtor’s turnover ratio
the more efficient is the management of debtors/sales or more liquid are
the debtors. Whereas a low debtors turnover ratio indicates poor
management of debtors/sales and less liquid debtors. This ratio should be
compared with ratios of other firms doing the same business and a trend
may be found to make a better interpretation of the ratio.
AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR
2
e.g.
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Average Debtors 17.33 18.19 22.50
Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times
Interpretation :
This ratio indicates the speed with which debtors are being converted
or turnover into sales. The higher the values or turnover into sales. The
higher the values of debtors turnover, the more efficient is the
management of credit. But in the company the debtor turnover ratio is
decreasing year to year. This shows that company is not utilizing its
debtors efficiency. Now their credit policy become liberal as compare to
previous year.
4. AVERAGE COLLECTION PERIOD :

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Average Collection Period = No. of Working Days
Debtors Turnover Ratio
The average collection period ratio represents the average number of
days for which a firm has to wait before its receivables are converted into
cash. It measures the quality of debtors. Generally, shorter the average
collection period the better is the quality of debtors as a short collection
period implies quick payment by debtors and vice-versa.
Average Collection Period = 365 (Net Working Days)
Debtors Turnover Ratio
Year 2006 2007 2008
Days 365 365 365
Debtor Turnover Ratio 9.6 8.3 7.5
Average Collection Period 38 days 44 days 49 days
Interpretation :
The average collection period measures the quality of debtors
and it helps in analyzing the efficiency of collection efforts. It also helps to
analysis the credit policy adopted by company. In the firm average
collection period increasing year to year. It shows that the firm has Liberal
Credit policy. These changes in policy are due to competitor’s credit
policy.
5. WORKING CAPITAL TURNOVER RATIO :
Working capital turnover ratio indicates the velocity of utilization of
net working capital. This ratio indicates the number of times the
working capital is turned over in the course of the year. This ratio
measures the efficiency with which the working capital is used by
the firm. A higher ratio indicates efficient utilization of working
capital and a low ratio indicates otherwise. But a very high working
capital turnover is not a good situation for any firm.
Working Capital Turnover Ratio = Cost of Sales

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Net Working Capital
Working Capital Turnover = Sales
Networking Capital
e.g.
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Networking Capital 53.87 62.52 103.09
Working Capital Turnover 3.08 2.4 1.64
Interpretation :
This ratio indicates low much net working capital requires for
sales. In 2008, the reciprocal of this ratio (1/1.64 = .609) shows that for
sales of Rs. 1 the company requires 60 paisa as working capital. Thus this
ratio is helpful to forecast the working capital requirement on the basis of
sale.
INVENTORIES
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Inventories 37.15 35.69 75.01
Interpretation :
Inventories is a major part of current assets. If any company wants to
manage its working capital efficiency, it has to manage its inventories
efficiently. The graph shows that inventory in 2005-2006 is 45%, in 2006-
2007 is 43% and in 2007-2008 is 54% of their current assets. The
company should try to reduce the inventory upto 10% or 20% of current
assets.
CASH BANK BALANCE :

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(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Cash Bank Balance 4.69 1.79 5.05
Interpretation :
Cash is basic input or component of working capital. Cash is needed
to keep the business running on a continuous basis. So the organization
should have sufficient cash to meet various requirements. The above graph
is indicate that in 2006 the cash is 4.69 crores but in 2007 it has decrease
to 1.79. The result of that it disturb the firms manufacturing operations. In
2008, it is increased upto approx. 5.1% cash balance. So in 2008, the
company has no problem for meeting its requirement as compare to 2007.
DEBTORS :
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Debtors 17.33 19.05 25.94
Interpretation :
Debtors constitute a substantial portion of total current assets. In India
it constitute one third of current assets. The above graph is depict that
there is increase in debtors. It represents an extension of credit to
customers. The reason for increasing credit is competition and company
liberal credit policy.
CURRENT ASSETS :
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Current Assets 81.29 83.15 136.57
Interpretation :

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This graph shows that there is 64% increase in current assets in 2008.
This increase is arise because there is approx. 50% increase in inventories.
Increase in current assets shows the liquidity soundness of company.
CURRENT LIABILITY :
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Current Liability 27.42 20.58 33.48
Interpretation :
Current liabilities shows company short term debts pay to outsiders. In
2008 the current liabilities of the company increased. But still increase in
current assets are more than its current liabilities.
NET WOKRING CAPITAL :
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Net Working Capital 53.87 62.53 103.09
Interpretation :
Working capital is required to finance day to day operations of a firm.
There should be an optimum level of working capital. It should not be too
less or not too excess. In the company there is increase in working capital.
The increase in working capital arises because the company has expanded
its business.
RESEARCH METHODOLOGY
The methodology, I have adopted for my study is the various tools, which basically
analyze critically financial position of to the organization:
I. COMMON-SIZE P/L A/C

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II. COMMON-SIZE BALANCE SHEET
III. COMPARTIVE P/L A/C
IV. COMPARTIVE BALANCE SHEET
V. TREND ANALYSIS
VI. RATIO ANALYSIS
The above parameters are used for critical analysis of financial position. With the
evaluation of each component, the financial position from different angles is tried
to be presented in well and systematic manner. By critical analysis with the help of
different tools, it becomes clear how the financial manager handles the finance
matters in profitable manner in the critical challenging atmosphere, the
recommendation are made which would suggest the organization in formulation of
a healthy and strong position financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and
comparative analysis, the organization would be able to conquer its in
efficiencies and makes the desired changes.
ANALYSIS OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and
consistent accounting procedure to convey an under-standing of some financial
aspects of a business firm. It may show position at a moment in time, as in the case
of balance sheet or may reveal a series of activities over a given period of time, as
in the case of an income statement. Thus, the term ‘financial statements’ generally
refers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following objectives of financial statements: -
1. To provide reliable financial information about economic resources and
obligation of a business firm.

25 | P a g e
2. To provide other needed information about charges in such economic resources
and obligation.
3. To provide reliable information about change in net resources (recourses less
obligations) missing out of business activities.
4. To provide financial information that assets in estimating the learning potential
of the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not
present a final picture a final picture of a concern. The utility of these statements is
dependent upon a number of factors. The analysis and interpretation of these
statements must be done carefully otherwise misleading conclusion may be drawn.
Financial statements suffer from the following limitations: -
1. Financial statements do not given a final picture of the concern. The data given
in these statements is only approximate. The actual value can only be determined
when the business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods,
generally one year, during the life of a concern. The costs and incomes are
apportioned to different periods with a view to determine profits etc. The allocation
of expenses and income depends upon the personal judgment of the accountant.
The existence of contingent assets and liabilities also make the statements
imprecise. So financial statement are at the most interim reports rather than the
final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give
final and accurate position. The value of fixed assets in the balance sheet neither
represent the value for which fixed assets can be sold nor the amount which will be
required to replace these assets. The balance sheet is prepared on the presumption
of a going concern. The concern is expected to continue in future. So fixed assets
are shown at cost less accumulated deprecation. Moreover, there are certain assets
in the balance sheet which will realize nothing at the time of liquidation but they
are shown in the balance sheets.
4. The financial statements are prepared on the basis of historical costs Or original
costs. The value of assets decreases with the passage of time current price changes
are not taken into account. The statement are not prepared with the keeping in view
the economic conditions. the balance sheet loses the significance of being an index
of current economics realities. Similarly, the profitability shown by the income
statements may be represent the earning capacity of the concern.

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5. There are certain factors which have a bearing on the financial position and
operating result of the business but they do not become a part of these statements
because they cannot be measured in monetary terms. The basic limitation of the
traditional financial statements comprising the balance sheet, profit & loss A/c is
that they do not give all the information regarding the financial operation of the
firm. Nevertheless, they provide some extremely useful information to the extent
the balance sheet mirrors the financial position on a particular data in lines of the
structure of assets, liabilities etc. and the profit & loss A/c shows the result of
operation during a certain period in terms revenue obtained and cost incurred
during the year. Thus, the financial position and operation of the firm.
FINANCIAL STATEMENT ANALYSIS
It is the process of identifying the financial strength and weakness of a firm from the
available accounting data and financial statements. The analysis is done
CALCULATIONS OF RATIOS
Ratios are relationship expressed in mathematical terms between figures, which are
connected with each other in some manner.
CLASSIFICATION OF RATIOS
Ratios can be classified in to different categories depending upon the basis of
classification
The traditional classification has been on the basis of the financial statement to
which the determination of ratios belongs.
These are:-
 Profit & Loss account ratios
 Balance Sheet ratios
 Composite ratios
Project Description :
Title : Project Report on Working Capital Management

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Description : Project Report on Working Capital Management, Working capital
analysis, Working Capital Management - Meaning & Concept, working capital
Classification, Importance, Advantages and Disadvantages of Working Capital,
Factors determining the working capital requirements & Ratio Analysis

WORKING CAPITAL-2

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