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A project report on impact of current assets on working capital

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A project report on impact of current assets on working capital

A project report on impact of current assets on working capital

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  • 1. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) ContentsSl. No. Titles Page No. I Chapter 1  Introduction 3  Literature Review 37  Statement of the Problem 39 39  Purpose of the Study 39  Scope of the study 40  Objectives of the Study II Chapter 2  Organization Profile 41  Organization Chart 50  Data Collection Method 52 III Chapter 3  Results & discussion with Charts & graphs 53  Findings 77  Suggestions 78 79  Conclusions IV Chapter 4  Appendix 80  Bibliography 80  Joining Report 81 82  Weekly Reports Babasabpatilfreepptmba.com 1
  • 2. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Babasabpatilfreepptmba.com 2
  • 3. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)Introduction: - The project is assigned to me “Impact of Current Assets on Working Capital”. AtOilgear Towler Polyhydron Private Limited (OTPL). The various information regardingclassification, determinants, components, sources, arrangement operating cycle have beenalso discussed and aspects relating to the perspective of Oilgear Towler PolyhydronPrivate Limited (OTPL). Ratio Analysis has been carried out using Financial Information for last threeaccounting years i.e. from 2003 to 2005; Ratios like Current Ratio, Working CapitalTurnover Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio have also beenanalyzed. A Statement of Changes in Working Capital has also been analyzed andattached Turnover & Performance of the Company for last three years has also beenanalyzed. Babasabpatilfreepptmba.com 3
  • 4. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Babasabpatilfreepptmba.com 4
  • 5. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)MEANING & DEFINITION OF WORKING CAPITAL: - Working capital in simple terms is the amount of funds, which a company, musthave to finance its day-to-day operation, it can be regarded as part/portion of capital,which is, employed in short operation. Every organization invests their funds in two terms of capital namely, 1. Fixed Capital. 2. Working Capital The amount invested in the assets like Plant and Machinery, Building, Furnitureetc, blocked on permanent basis and is called Fixed Capital Organization not onlyrequires Fixed Capital, but also need of fund to meet day to day operations for short termpurpose, such funds is called Working Capital. A Study of Working Capital is of major part of the external and internal analysisbecause of its close relationship with the current day to day operation of business.Working Capital consists broadly for that position/the assets of a business that are used atrelated current operations and is represented by raw materials, stores, work in process andfinished goods merchandise, note/bill receivable. Babasabpatilfreepptmba.com 5
  • 6. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)Definition of Working Capital: -Genestenberg: - “ Working Capital means Current Assets of a company that are changed in theordinary course of business, from one to another, for ex, from cash to inventories,inventories to receivable, receivable to cash”.Gathman & Dug wall: - “Working Capital as excess of current assets over current liabilities.”Westen & Brigham: - “ Working capital refers to a term investment in short term assets cash, short termsecurities accounts receivables and inventories.”J. Smith: - “ The Sum of the current assets is the working capital of the business.” “WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES”. Babasabpatilfreepptmba.com 6
  • 7. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)Working capital cycle: -IntroductionThe working capital cycle can be defined as: The period of time, which elapses between the point at which, cash begins to beexpended on the production of a product and the collection of cash from a customer The diagram below illustrates the working capital cycle for a manufacturing firm Babasabpatilfreepptmba.com 7
  • 8. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) The upper portion of the diagram above shows in a simplified form the chain ofevents in a manufacturing firm. Each of the boxes in the upper part of the diagram can beseen as a tank through which funds flow. These tanks, which are concerned with day-to-day activities, have funds constantly flowing into and out of them. The chain starts with the firm buying raw materials on credit. In due course this stock will be used in production, work will be carried out on the stock, and it will become part of the firm’s work in progress (WIP) Work will continue on the WIP until it eventually emerges as the finished product As production progresses, labor costs and overheads will need to be met Of course at some stage trade creditors will need to be paid When the finished goods are sold on credit, debtors are increased They will eventually pay, so that cash will be injected into the firmEach of the areas – stocks (raw materials, work in progress and finished goods), tradedebtors, cash (positive or negative) and trade creditors – can be viewed as tanks into andfrom which funds flow. Working capital is clearly not the only aspect of a business that affects the amountof cash: Babasabpatilfreepptmba.com 8
  • 9. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)  The business will have to make payments to government for taxation  Fixed assets will be purchased and sold  Lessors of fixed assets will be paid their rent  Shareholders (existing or new) may provide new funds in the form of cash  Some shares may be redeemed for cash  Dividends may be paid  Long-term loan creditors (existing or new) may provide loan finance, loans will need to be repaid from time to time, and  Interest obligations will have to be met by the business. Unlike movements in the working capital items, most of these ‘non-workingcapital’ cash transactions are not everyday events. Some of them are annual events (e.g.tax payments, lease payments, dividends, interest and, possibly, fixed asset purchases andsales). Others (e.g. new equity and loan finance and redemption of old equity and loanfinance) would typically be rarer events. Babasabpatilfreepptmba.com 9
  • 10. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)COMPONENTS OF WORKING CAPITALThere are two components of Working CapitalA. Current AssetsB. Current LiabilitiesA. Current Assets An asset is termed as current assets when it is acquired either for the purpose ofselling or disposing of after taking some required benefit through the process ofmanufacturing of which constantly changes in form and contributes to transactions takeplace with the operation of the business although such assets does continue for long in thesame form. Components of Current Assets are as follows: Cash & Bank Balance Stock of Raw Material at cost- work in process and Finished Goods. Advanced Recoverable in Cash or kind or kind or for value to be received. Security deposits with electricity board-telephone department balances with customers. Babasabpatilfreepptmba.com 10
  • 11. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Deposits under the company scheme. Prepaid Expenses. Miscellaneous Stores implements goods in transit. Advanced payment of income takes credit certificates. Excise duty and sales tax recoverable. Outstanding debts for a period exceeding six months.CO-RELATION BETWEEN CURRENT ASSETS AND WORKING CAPITAL The working capital is in simple terms is the amount of funds which companymust have to finance its day-to-day operations. The interaction between current assetsand current liability is main theme of theory of working capital. In general terms workingcapital means difference between current assets and current liabilities. The current assets are main source of working capital. It refers to those assets,which can be converted into cash within a year. The current assets are inventories, cashand bank balance, sundry debtors, loans and advances etc Current asset management is one the most important aspect of the overallfinancial management. The efficient management of working capital can determine itsprofitability skill of every financial manager lies in the efficient management requiresmaintaining proper relationship between current asset and current liability. Therefore,planning and control of current asset is he most important function of finance manager. Babasabpatilfreepptmba.com 11
  • 12. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) A study of working of working capital is major part of external and internalanalysis. Because, of its close relationship with current day-to-day operations of business.Working capital consists broadly the assets of business that are used at current operationswhich was represented by raw materials, stores, WIP, and finished goods, merchandise,bills receivable. Etc.Characteristics of Current Assets While managing the working capital bear in mind of two characteristics ofCurrent assets. 1. Short life span. 2. Swift transformation into other assets forms. Current assets a life span, cash balance may be held idle for a week or twoaccounts receivable may have life span of 32 to 60 days and inventories may be need for2 to 60 days. It s depends upon time require in the activities of procurement of,production, sales and collection, and the degree of synchronization among them. Each Current Assets swiftly transform into other asset cash is used for requiringraw materials: raw material are transform in to finished goods, finished goods aregenerally sold on credit are convertible into account receivable and finally accountsreceivable on realization, generate cash. Babasabpatilfreepptmba.com 12
  • 13. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) The short life span of working capital component and they swift transformationfrom one from to another has certain implication. CURRENT ASSETS CYCLE Finished Goods AC Receivable WIP Wages / Factory Raw Materials overhead Suppliers Cash1. Decisions relating to working capital management are repetitive and frequent.2. The difference between profit and present value is insignificant. Babasabpatilfreepptmba.com 13
  • 14. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)3. The close interaction among working capital components implies that efficient management one component cannot undertake without simultaneous consideration of other components. Working capital means assets of the company that are changed in the ordinarycapital of business term to another. For ex, from another as for as from cash toinventories, inventories to debtors and again debtors in to cash where it is collected. Working capital refers to a term investment in short term assets cash; short-termsecurities account receivable and inventories. Current asset management that affects afirm liquidity is at another important finance function. In addition to the management oflong-term assets, Current assets should be managed efficiently for safe guarding the firmagainst the dangerous of liquidity and insolvency. Investment in Current Assets affectsthe firm profitability, liquidity and risk.Current Liabilities: Components of Current Liabilities are as follows: Non-Refundable non-interest bearing advances against subscription to shares. Sundry Creditors for the goods and expenses. Income tax deducted at sources from contractors. Expenses Payable. Babasabpatilfreepptmba.com 14
  • 15. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Amount due to promoter of company. Unclaimed Dividend. Security Deposits. Dealers Deposits. Liabilities for bills discounted.IMPORTANCE OF WORKING CAPITAL: - Working Capital is most important in every organization whether it is a small orbig concern. Therefore it is said that, working capital is the blood and center at abusiness. 1. Adequately Working Capital creates certainty, security and confidence in the minds of the person in the might as well in the minds of creditors and workers. 2. It creates a good credit standing for the firm because credit standing depends upon the ability to pay promptly. A company with adequate working capital is always able to meet C.L. in time. 3. It ensure solvency and stability of the enterprise it also ensures continuity in production and sales. 4. It enables the company to take advantage of cash discount allowed by the suppliers of raw materials or merchandise. 5. It enables the prestige of the company and the morale of its workers because a company with adequately working capital is always able to pay wages and salaries promptly and regularly. Babasabpatilfreepptmba.com 15
  • 16. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 6. It enables the company to procure loans terms banks on easy and competitive terms. 7. In terms of boon it enables the company to meet increasing demand of its product. 8. In the time of depression, it enables the company to overcome the crises successfully. 9. It enables the company to hold up inventory and wait for better marketing opportunities so as to secure higher prices. 10. It enable the company on its business successfully and achieve progress and prosperity,METHODS OF ESTIMATING WORKING CAPITAL: - Conventional Method: - According to the conventional method, cash inflows and outflows are matchedwith each other. Greater emphasis is laid on liquidity and greater importance is attachedto current ratio, liquidity ratio, etc., which pertain to the liquidity of a business. Operating cycle method: In order to understand what gives rise to differences in the amount of timing ofcash flows, we should first know the length of time which is required to convert cash intoresources, resources into final product, the final product into receivables and receivablesback into cash. Babasabpatilfreepptmba.com 16
  • 17. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) CLASSIFICATION OF WORKING CAPITAL Babasabpatilfreepptmba.com 17
  • 18. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)A. On the basics of Concept(a) Net Working Capital: This is the difference between current assets and current liabilities. CurrentLiabilities are those that are expected to mature within an accounting year and includecreditors, bills payable and outstanding expenses. Investment is current assets represent a very significant portion of the totalinvestment in assets. In case of public limited companies in India, current assetsconstitute around 60% of the total capital employed. Therefore the finance managershould attention to working capital management. Working Capital Management is no doubt significant for all firms, but itssignificance is enhanced in cases of small firms. A small firm has more investment incurrent assets than fixed assets and therefore current assets should be efficientlymanaged. The working capital needs increase as the firm grows. As sales grow, the firmneeds to invest more in debtors and inventories. The finance manager should be aware ofsuch needs and finance them quickly. Current Assets can be finance through long-term and short-term sources. Theratio of long-term to short-term source will depend on whether the firm is aggressive of Babasabpatilfreepptmba.com 18
  • 19. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)conservative. It the firm is aggressive then it will finance a part of its permanent currentassets with short-term funds. On the other hand, a conservative firm will finance itspermanent assets and also a part of temporary current assets with long-term financing.(b) Gross Working Capital This refers to the firm’s investment in current assets. Current Assets are the assetswhich can be converted into cash within a short period say, an accounting year. Currentassets include cash, debtors, and bill receivable, short-term securities. etc.A. On the basis of Time a. Permanent Working Capital Permanent Working Capital is permanently locked up in the circulation of currentassets. It covers the minimum amount requested for maintaining the circulation of currentassets. i. Initial Working Capital At its inception and during the formative period of its operations a company musthave enough cash fund to meet its obligations. The need for initial working capital is forevery company to consolidate its position. ii. Regular Working Capital Babasabpatilfreepptmba.com 19
  • 20. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) It refers to the minimum amount of liquid capital required to keep up thecirculation of the capital from the cash inventories to account receivable and fromaccount receivables to back again cash. It consists of adequate cash balance on hand andat bank, adequate stock of raw materials and finished goods and amount of receivables. b. Variable Working Capital It refers to the past of the Working Capital that changes with the volume ofbusiness; it may be divided into two classes. i. Seasonal Working Capital There is many line of business where the volumes of operations are different andhence the amount of working capital varies with seasons. The capital required to meetthe seasonal needs of the enterprise knows as Seasonal Working Capital. ii. Special Working Capital The capital required to meet any special operations such as experiments with newproducts or new techniques of production and making interior advertising campaign etc,is also know as Special Working Capital.B. Other Determinants of Working Capital Babasabpatilfreepptmba.com 20
  • 21. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) In order to manage the Working Capital optimally; on has to give dueconsideration to the factors that influence the amount of Working Capital to bemaintained. SOURCES OF WORKING CAPITAL: - Babasabpatilfreepptmba.com 21
  • 22. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)1. Long Term Sources of Working Capital: - The following are the some important of the longterm sources of working capital.A. Issue of Shares: Issuing shares can finance a part of long-term working capital.B. Issue of Debenture: Long Term Working Capital can be collected by the way ofissuing the debentures.C. Retained Profits: Accumulated large profit can also consider as a source of financingthe long-term capital.D. Term Loans: - The mid and term loan above three year are also important source offinancing the long term working capital needs.E. Reserves and Surplus: -These are also useful for financing long-term workingcapital. Babasabpatilfreepptmba.com 22
  • 23. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)SHORT TERM SOURCES OF WORKING CAPITAL: - Duration for this generally do not exceeds one year. Its sources are INTERNAL SHORT TERM SOURCES1. Depreciation Funds: Depreciation Funds created out of the profit is good source forshort-term source of financing working capital.2. Provision for Taxation: Provision made for the companies, can use taxation as asource of working capital during the intermediate period.3. Accrued Expenses: The company executives postpone the payment of certainexpenditures due the date of finalization of account. These accrued expenses are useful asworking capital EXTERNAL SHORT TERM SOURCES.1. Trade Credit: Trade Credits extended by one business unit to the other on thepurchase sale of goods and equipments are very important. Babasabpatilfreepptmba.com 23
  • 24. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)2. Bank Credit: - Commercial banks are providing a greater part of working capital inthe form of over drafts cash credit and short-term loans. 3. Credit Papers: - Bills Payable, promissory notes etc are usefully for working capitalrequirements. 4. Customer Credit: Amount may also be obtained from customer and these amountscan be used for purchasing raw materials, paying expenses etc.5. Financial Corporation: The financial corporation likes IDBI, IFCI, ICICI, etc,advances loans for various types of assistance.6. Government Assistance: State and Central Government, of the country provideshort-term finance industries on easy terms.7. Loan from Directors: - One enterprise can also obtain loan from its directors, officers, M.D. etc Babasabpatilfreepptmba.com 24
  • 25. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)EFFICIENT UTILIZATION OF WORKING CAPITAL MANAGEMENT Well working capital management refers to the administration of all aspects of thecurrent assets and liabilities. It is necessary to get maximum benefit. There is a direct relation between sale and working capital needs. As sale growsthe firm needs capital to invest in inventories and book debts.A) Cash Management: - Cash is required to meet the firm’s transactions and precautionary needs. The firmneeds cash to make payments for acquisition of resources and services, for the normalconsist of the business. It keeps addition funds to meet any emergency situation. Cash Management involves three things. Managing cash flow in and out of the firm. Managing cash flow within the firm. Financing deficit or investing surplus cash. And thus controlling of cash balance at the point of time.B) Inventory Management: - Babasabpatilfreepptmba.com 25
  • 26. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Inventories play very significant role in working capital. It is single most sizableinvestment in working material, indigenous raw material, spares, stock, tools, themaintenance, and goods in progress, stock of packing materials, stationary etc. Tomanage inventories efficiently and effectively answer should be sought from thefollowing questions.  How much should be ordered?  When should be ordered? The aim of inventory management thus should be to avoid excessive andinadequate levels of inventories and to maintain sufficient inventories for the smoothproduction and sales operation.C) Management of Receivables: - Business firm generally sell goods on credit to facilitate sales. When goods aresold on credit finished goods are converted into receivable. Receivable when realizedgenerate cash for forecasting standard ratio of accounts receivables based on analysis ofpart data of two years. Recession’s analysis and making may be appeared.D) Operating Cycle: - Operating Cycle refers to length of time required to complete the series of eventsas stated below in case of manufacturing enterprise, which is cyclical in nature. For a manufacturing firm, cash is spent on acquiring raw materials, which aretransformed in to work in progress. The work in progress is then converted in to finished Babasabpatilfreepptmba.com 26
  • 27. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)goods. Finished goods take the form sales, which may be credit or cash. Credit salesconvert in to sundry debtors, bills receivables, which after some time, gets converted in tocash. This cycle repeats. OPERATING CYCLE OF MANUFACTURING COMPANY Cash Debtors / BR Raw Materials Sales of goods Work in Progress Finished GoodsIMPORTANCE OF OPERATING CYCLE Operating cycle concept is a new concept in working capital management, whichhas been gaining more and more importance in recent years. This concept emphasizes theimportance of time factors in the conversion of raw materials into final product and thenin to sales resulting in cash collection, right from the acquisition of raw materials,normally operating cycle passes through the following stages. 1. Acquisition of raw materials. 2. Work in Progress. Babasabpatilfreepptmba.com 27
  • 28. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 3. Stock of finished goods. 4. Sale and realization of sales proceeds. Operating cycle concept plays an important role in determining the workingcapital requirement of firm. Duration of manufacturing process right from the acquisitionof raw materials till they are sole out after being converted into final products and thecash is realized determines the amount of working capital required. Longer the operatingcycle greater will be the amount of working capital required and shortest operating cyclerequires limited amount of working capital. Therefore, an efficient management shouldtry to reduce the time elapsed in these consecutive stages in operating cycle. Babasabpatilfreepptmba.com 28
  • 29. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)DETERMINANTS OF WORKING CAPITAL: - A firm should plan its operations in such a way that it should have neither toomuch not too of little working capital. The working capital requirement is determined bya wide variety of factors. These factors, however, affect different enterprise differently.They also vary from time to time. In general, the following factors are involved in aproper assessment of the quantum of working capital required. The following are the some important determinants of working capital1. General Nature of Business The working capital requirements of an enterprise are basically related to theconduct of business. Enterprise falls in to some broad categories depending on the natureof their business. For instance, public utilities have certain features which have a bearingon their working capital needs. The two relevant features are, 1. The cash nature of business, that is, cash sale. 2. Sale of services rather than commodities. In a view of these features, they do not maintain big inventories and have, financial enterprise. The nature of their business is such that they have to maintain a sufficient amount of cash, inventories, and book debts.2. Production Cycle Babasabpatilfreepptmba.com 29
  • 30. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Another factors which have a bearing on the quantum of working capital is theproduction cycle. The term “Production or manufacturing cycle” refer to the timeinvolved in the manufacture of goods. It covers the time-span between the procurementof finished goods. Funds have to be necessarily tied up during the process ofmanufacture, necessitating enhanced working capital. In other words, there is some timegap before raw material becomes finished goods. To sustain such activities the need forworking capital is obvious. The longer the time span (i.e. Production Cycle), the largerwill be the tied up fund and, therefore, the larger is the working capital needed and vice-versa.3. Business Cycle The working capital requirements are also determined by the nature of businesscycle. Business fluctuations lead to cyclical and seasonal changes, which, in turn, cause ashift in the working capital position, particularly for temporary working capitalrequirement. The variations in business condition may be in two directions, 1. Upward Phase: - When boom conditions prevail, 2. Downswing Phase: - When economic activity is marked by a decline. During the upswing of business activity, the need for working capital is likely togrow to cover the lag between increased sales and receipt of cash as well as to financepurchase of additional material to cater to the expansion of the level of activity.4. Production Policy Babasabpatilfreepptmba.com 30
  • 31. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) The quantum of working capital is also determined by production policy. In caseof certain lines of business, the demand for products is seasonal, that is, they arepurchased during certain months of the year. There are two options to open to suchenterprise: either they confine production only to period when goods are purchased orthey follow a steady production policy throughout the year and product goods at a levelto meet the peak demand. In former case, there are working force and physical facilitieswithout adequate production and sale.5. Credit Policy The credit policy relating to sales and purchases, also affects the working capital.The credit policy influences the requirements of working capital in two ways, 1. Through the credit terms granted by the firm to its customers/buyers of goods. 2. Credit Terms available to the firm from its creditors. 1. The credit terms granted to customers have a bearing on the magnitude ofworking capital by determining the level of book debts. The credit sales result in higherbook debt (receivables). Higher book debts mean more working capital. On the otherhand, if liberal credit terms are available from the suppliers of goods (trade creditors), theneed of working capital is less. The working capital requirements of a business are, thus,affected by the terms purchase and sale, and role given to credit by company in it’sdealing with creditors and debtors. 2. Credit terms fixed by an enterprise are affected by the prevailing trade practicesas well as changing economic conditions. If, for example, competition were keen, therewould pressure to grant generous credit terms. Nevertheless, there is wide scope for Babasabpatilfreepptmba.com 31
  • 32. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)managerial discretion in working out a suitable credit policy relevant to each customerbased on the merits of each case. For instance, liberal credit facilities can be extended onthe basis of credit rating. This will avoid the problem of having excess working capital.6. Growths and Expansion As a company grows, it is logical to expect that a larger amount of workingcapital is required. It is, of course, difficult to determine precisely the relationshipbetween the growth in the volume of business of a company and the increase in itsworking capital. The composition of working capital in a growing company also shiftswith economic circumstance and corporate practices. Other things, being equal, growthindustries require more working capital than those that are static.7. Profit Level The level of profit earned differs from enterprise to enterprise. In general, thenature of the product, hold on the market, quality of management and monopoly powerwould by and large determine the profit earned by a firm. A priori, it can be generalizedthat a firm dealing in a high quality product, having a good marketing arrangement andenjoying monopoly power in the market, is likely to earn high profit and vice-versa.Higher profit margin would improve the prospects of generating more internal fundsthereby contributing to the working capital pool.8. Dividend Policy Babasabpatilfreepptmba.com 32
  • 33. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Another appropriation of profit, which has a bearing on working capital, isdividend payment. The payment of dividend consumes cash resources and, thereby,affects working capital to that extent. Conversely, if the firm does not pay dividend butretains the profits, working capital increase. In theory, a firm should retain profits topreserve cash resources and, at the same time, it must pay dividends to satisfy theexpectations of investors. When profits are relatively small, the choice is betweenretention and payment. The choice must be made after taking in to account all therelevant factors.9. Depreciation Policy Depreciation Policy also exerts an influence on the quantum of working capital.Depreciation charges do not involve any cash outflows. The affect of depreciation policyon working capital is, therefore, indirect. In the first place, depreciation affects the taxliability and retention of profits. Depreciation is allowable expenditure in calculating netprofits. Enhanced rates of depreciation lower the profits and, therefore, the tax liabilityand, thus, more cash profits. Higher depreciation also means lower disposable profits and,therefore, a smaller dividend payment. Thus, cash is preserved. In the second place, theselection of method of depreciation has important financial implication.10. Price level Changes Changes in the price level also affect the requirement of working capital. Risingprices necessitate the use of more funds for maintaining an existing level of activity. For Babasabpatilfreepptmba.com 33
  • 34. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)the same level of current assets, higher cash outlays are required. The effect of risingprices is that a higher amount of working capital needed. However, in the case ofcompanies, which can raise their prices proportionately, there is no serious problemregarding working capital.11. Operating Efficiency The operating efficiency of the management is also an important determinant ofthe level of working capital. The management can contribute to a sound working capitalposition through operating efficiency. Although the management cannot control the risein prices, it can ensure the efficient utilization of resources by eliminating waste,improving co-ordination, and a fuller utilization of existing resources and so on.Efficiency of operations accelerates the pace of cash cycle and improves the workingcapital turnover. It releases the pressure on working capital by improving profitabilityand improving the internal generation of funds. Babasabpatilfreepptmba.com 34
  • 35. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)Techniques of Working Capital Management: - Working Capital management involves deciding upon the amount andcomposition of current asset and how to finance the asset. This decision involves tradeoff between risk and profitability. Working Capital Balances are measured from the financial dates of thecompany’s balance sheet. A study of the causes for changes of working capital that takeplace in the balance from time to time is necessary. These changes can be measured inrupee amount and also in percentage by comparing current assets, current liabilities andworking capital over the given period. The importance tools of Working Capital are,1. Ratio Analysis of Working Capital: - 1. Ratio analysis of working capital. 2. Turnover of working capital Ratio. 3. Current Ratio. 4. Current Debt tangible net worth. 5. Inventory Turnover Ratio. 6. Debtor Turnover Ratio. Babasabpatilfreepptmba.com 35
  • 36. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)2. Funds Flow Analysis of Working Capital: - It is an effective management tool to study how funds have been produced for abusiness and how they have been employed. This technique helps to analyze change inworking capital components between two data. The comparison of current asset andcurrent liability at the beginning and at the end of specific period show changes in suchtype of current assets and resources from which Working Capital has been obtained fundsflow statement contributes materially to the financial aspects.3. Working Capital Budget: - The working capital budget is an important phase of overall financing budgeting.This budgeting should be distinguished from a cash budget that is designed to measure allthe financial repayment of loans, term loan and similar item. On the other hand workingcapital repayment and assure that they are duly provided for. The objective of that budgetis to secure an effective utility of investment.4. Trend Analysis: - A trend analysis indicates the change, which has been taking place from time totime of an individual item of current assets. Assets and utility and net working capital onthe basis of some standards year and its effect on working capital portion. It enablescreative the upward and down ward trend of current assets and current liabilities. Theseare usage measured from review of comprehensive balance sheet of a concern at the endof account year and result is drawn on the basis of trend shown by them. Babasabpatilfreepptmba.com 36
  • 37. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)Literature Review: - Working Capital management is concerned with the problems that arise inattempting to manage the current assets and current liabilities and the interrelationshipthat exists between them. The term Current Assets refer to those assets, which in the ordinary course ofbusiness can be, or will be converted in to cash within one year without undergoing adiminution in value and without disrupting the operation of the firm. The major currentare cash, marketable securities, accounts receivable and inventory. The term Current Liabilities refer to those liabilities, which are intended at theirinception, to be paid in the ordinary course of business, within a year out of current assetsor earning of the concern. The basic current liabilities are accounts payable, bills payable,banks overdraft and outstanding expenses. The goal of working capital management is to manage the firm’s current assetsand 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 islikely to become insolvent and may even be forced into bankruptcy. The current assetsshould be large enough to cover its current liabilities in order to ensure a reasonable Babasabpatilfreepptmba.com 37
  • 38. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)margin of safety. Each of the current assets must be managed efficiently in order tomaintain the liquidity of the firm while not keeping too high a level of any one of them.A proper balance between Current Assets and Current Liabilities is, therefore, the maintheme of the theory of working capital management. Working Capital refer to that part of total capital which is kept invest in currentassets that are required for regular business operation. In accounting, working capital istaken to mean the difference between Current Assets and Current Liabilities. According to Genestenberg: - “Working Capital means Current Assets of a company that are changed in theordinary course of business, from one to another, for ex, from cash to inventories,inventories to receivable, receivable to cash”. Management Problem The Company wants to study its working capital efficiency where current assets are main constituents of working capital management. The company wants to avoid two dangerous points i.e excessive and inadequate investment in current assets. Investment in Inventories and Debtors should be minimized so that it can maximize its cash and bank balance. Research Problem: - Babasabpatilfreepptmba.com 38
  • 39. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Research Problem is to maximize the company’s cash and bank balance throughthe study of “Impact of Current Assets on Working Capital”. Statement of the Problem: - The study has been undertaken in the organization for the purpose to know thecompany’s working capital management through the study of “Impact of CurrentAssets on Working Capital”. Purpose of the Study:- The Purpose of the Study of working capital in Oilgear Towler PolyhydronPrivate Limited is to analyze the working capital with the help of financial ratios and tocheck how the company is maintaining the working capital. The study should be made on the basis of the followings, 1. Financial Statements. 2. Financial Ratios. Scope of the Study: - The working capital is spread to some important departments in Oilgear TowlerPolyhydron Private Limited. The departments are, Babasabpatilfreepptmba.com 39
  • 40. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 1. Finance Department. 2. Design Department. 3. Production Department. Objective of the Study: - The following are the some importance objective of the study of working capitalmanagement. 1. To analyze the working capital of the organization. 2. To analyze the effect of current assets on working capital. 3. To study financial performance of organization with the help of ratios. 4. To study the working capital and recommend the suitable working capital of the year to the organization. Babasabpatilfreepptmba.com 40
  • 41. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Babasabpatilfreepptmba.com 41
  • 42. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)1. INTRODUCTION: - OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED, (Now popular byits short name OTPL) was formerly known as Polyhydron Systems Private Ltd. Thecompany established in the year 1985. The company, Polyhydron System Private Ltd,was one of the four independently run engineering concern managed by a group ofentrepreneurs well known in the country for their quality products, fair approach tobusiness ethics. The group is known in the country as Polyhydron. Name of the other three companies are, 1. HYLOC HYDROTECTINIC PRIVATE LIMITED. 2. POLYHYDRON PRIVATE LIMITED. 3. SPICA MOUCLD CYLINDERS PRIVATE LIMIED. The oldest company in the group is HYLOC HYDROTECTINIC PRIVATELIMITED, The Company started in 1974 and is engaged in manufacturing completerange of Hydraulic Tubes coupling for metric tubes flanged fitting, shut of valves andneedle valves POLYHYDRON PRIVATE LIMITED. As founded in 1984 and is knownin the country for its modern and sophisticated management techniques and quality Babasabpatilfreepptmba.com 42
  • 43. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)marketed very reasonable price, the company manufacturing Redial Piston Pumps, ReliefValves, and Directional Control Valves. And SPICA MOUCLD CYLINDERSPRIVATE LIMIED, established in Jan –06 for manufacture of Mould Cylinders to beexported to Italy. This company is yet to commence its production.OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED: - From its inspection has been manufacturing OIL HYDRAULIC SYSTEMS &HYDRAULIC ACTUATORS & has later added PISTION type accumulators to its rangeof products.1. COLLABORATION The company entered into a joint venture collaboration agreement with theOILGEAR COMPANY, OILGEAR TOWLER INTERNATIONAL DIVISION, USA inDec 1993. THE OILGEAR COMPANY is a world famous for its Electro-Hydraulic andHydraulics products such as sophisticated pumps, valves and systems and especiallyknown in the technology of world for its contribution to the technology of MetalExtrusion and Metal forming systems. The company also has its subsidiaries in Australia,Canada, France, Germany, Great Britain, Italy, Japan, and Korea & Spain. Participated in following Business Areas Market Oilgear products in the Indian market. Include products like piston, pumps, solenoid valves, prefil valves and cartridge valves. Babasabpatilfreepptmba.com 43
  • 44. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Market Hydraulic and Electro hydraulic and subsystems for presses and machines. Install, commission, and service, Hydraulic and Electro hydraulic systems manufacturing by the Oilgear Company in Asian and South East Asian countries. Assemble, service, repairs and test Oilgear products. Design, manufacturing, sell, Install, repair, and service Hydraulic and Electro hydraulic systems and subsystems, cylinders and other equipment in Asian and South East Asian countries.2. THE CONSTITUTION OF THE COMPANY: -Name OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)Constitution A private limited company registered under companies act 1956 Registered OfficeLocation Plot No 4, R.S. No- 608/2, BEMCIEL UDYAMBAG BELGAUM, 590008 KARNATAKA STATE, INDIA. Phone: - 0831-2441157; Fax: - 0831-2441610Works Plot No 34 & 37B Village Kuttalwadi Babasabpatilfreepptmba.com 44
  • 45. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) P.O. Navage, Belgaum, 590014 (0091)(831) 2411528 (4 lines) (0091)(831) 2411576 otplbgmpl2@oilgear.co.inPhone 91831-2441157, 2441459E-mail otplbgm@sanchearnet.comWorks (0091)(831) 2411528 (4 lines) (0091)(831) 2411576 otplbgmpl2@oilgear.co.in Board of Directors: - Chairman Mr. Robert Drake. Managing Director Mr. V.K.Samant. Director Production Mr. H.D. Kadrolkar. Director Commercial Mr. N. Radhakrishana Rao Director Finance Mr. D.S. Chitnis Director Mr. Srikanth Srinivasan. Collaborators - THE OILGEAR COMPANY OILGEAR TOWLER INTERNATIONAL DIVISION, USA.4. ASSETS: - Babasabpatilfreepptmba.com 45
  • 46. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)4.1) LAND AND BUILDING Land and the site of the registered office – 11054 Sq.ft (1026 Sq.m.) Building and the site of the registered office- 4830 Sq.ft (450 Sq.m.) Land at site of plant 1- 2200 Sq.ft. (204 Sq.m.) Building at site of plant 1- 1622 Sq.ft (51 Sq.m.) Land site of the works 258,100 Sq.ft (23978 Sq.m.) Building Site of the works 25,000 Sq. ft (2322 Sq.m.).4.2) MACHINERY, HANDLING, EQUIPMENT AND TEST RIGS Laths 3 No s Painting Equipment 2 Sets Horizontal Bore 3 No s Electro Static Cleaner 1 No s CNC Machine Center 1 No s Cleaning Machine 2 No s CNC Vertical Machine Center 1 No s Pallet Trucks 2 No s Drilling Machine 3 No s Air Compressors 3 No s Milling Machine 1 No s Prgauge Calibrator 1 No s Surface Machine 2 No s Hardness Tester 1 No s Honing Machine 1 No s Pumps Test Stands 3 No s Hack Saws 2 No s Valve Test Stands 1 No s TIG Welding Set 1 No s Generating Stands 3 No s Flame Cutting Equipments 1 Set Over head Cranes 3 No s Arc Welding Set 2 No s4.3) OFFICE AND EQUIPMENT Communication: - Head Office: - Phone lines 6 Nos. Fax lines 1 No E-mail 1 No Electronic Exchange 10*30 Capacities. Babasabpatilfreepptmba.com 46
  • 47. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Works: - Phone lines 6 Nos. Fax line 1 No. E-mail 1 No Electronic Exchange 10*30 Capacities.4.4) DATA PROCESSING Computer ---- 24 Nos. For Design Accountancy Inventory Planning Sales Purchase Administration.5) STAFF: - Sales 7 Engineers + 4 Support Purchase 2 Officers + 3 Support Babasabpatilfreepptmba.com 47
  • 48. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Planning 1 Engineer Design 9 Engineers + 1 Support Accounts and Administrations 6 Officers + 3 Supports Manufacturing 3 Engineers + 40 Supports Servicing 3 Engineers + 4 Support Quality Assurance 1 Engineers + 1 Support6) FACILITIES: - 6.1) In House Design - Designing of mechanical and electro hydraulic systems Auto card 2000 solid works 2001 + Cosmos works. Machining - Metal Cutting Turning Milling Prilling & Tapping Babasabpatilfreepptmba.com 48
  • 49. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Surface Grinding Honing Welding – TIG Welding. ARC Welding Surface Treatment - Cleaning by Kerosene Phosphating Painting. Babasabpatilfreepptmba.com 49
  • 50. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Babasabpatilfreepptmba.com 50
  • 51. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Babasabpatilfreepptmba.com 51
  • 52. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)Methodology adopted and data collection: - The nature of the study was collection analysis and interpretation of workingcapital management in “OTPL” The information about this was gathered throughfollowing sources.• Primary Data: - Primary Data are those, which are collected fresh and for the first time, and thus ithappens to be original in character. The primary sources of data are collected from the financial executives throughpersonal discussion in the light of the set objectives. Along with this, informal discussionwith other, member of the finance.• Secondary Data: - Secondary Data are those have already been collected by someone else and whilealready been passed through statistical process.• Annual Report of the Company.• Annual Accounts of the Company.• Ledger Profit and Loss Account. Babasabpatilfreepptmba.com 52
  • 53. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Babasabpatilfreepptmba.com 53
  • 54. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2003 OTPL Particulars 2002 2003 Increase DecreaseA) Current Assets 1. Inventories. 1,43,29,584 1,82,87,763 39,58,179 --------- 2. S. Debtors 1,47,19,225 1,62,67,703 15,48,478 --------- 3. Cash & Bank Balance 96,70,212 99,24,482 2,54,270 --------- 4. Other C. Assets. 5,04,462 6,83,065 1,78,603 --------- 5. Loans & Advances. 23,58,269 18,000,63 --------- 5,52,206 TOTAL 4,15,81,752 4,69,69,076B) Current Liabilities 1. Current Liabilities 88,76,844 1,27,30,292 -------- 39,53,448 2. Provision 56,67,201 47,89,238 8,77,963 ------------ TOTAL 1,45,44,045 1,76,19,530 Working Capital (A-B) 2,70,37,707 2,93,49,456 68,17,493 45,05,654 Net Increase in Working Capital 23,11,839 23,11,839 GRAND TOTAL 2,93,49,456 2,93,49,456 68,17,493 68,17,493 Babasabpatilfreepptmba.com 54
  • 55. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)INTERPRETATION As we can see in the above year 2002-03, there is an increase in the workingcapital by Rs. 23,11,839. This is because:1. As we can see that there is a great increase in Current Assets as the company is looking to invest more in the inventory of raw material in this year, because of the shortage of raw material in the market, so overall there is increase in the current assets. But in current assets loans and advance are decreased.2. As we can see there is decrease of Rs. 39,53,448 in the liabilities of the company, which is good for the company. But Rs. 8,77,963 increases provisions.3. So from all the above calculation we can see that there is good increase in the working capital. So we can say that company is more likely to increase there inventory because they thinking it for the long term perspective. Babasabpatilfreepptmba.com 55
  • 56. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004 OTPL PVT LTD (Rs. In Thousand) Particulars 2003 2004 Increase DecreaseA) Current Assets 1. Inventories 18,288 34,600 16,312 ------- 2. S. Debtors 16,298 32,122 15,854 ------- 3. Cash & Bank Bal. 9,924 12,492 2,568 ------- 4. Other C. Assets 6,83 9,45 2,62 ------- 5. Loans & Advances 1,806 1,939 1,33 ------- TOTAL 46,969 82,098B) Current Liabilities 1. Current Liabilities 12,830 28,541 ---------- 15,711 2. Provision 4,789 7,664 ---------- 2,875 TOTAL 17,619 36,205 Working Capital (A-B) 29,350 45,893 35,129 18,586 Net Increase in Working Capital 16,543, 16,543 GRAND TOTAL 45,893 45,893 35,129 35,129 Babasabpatilfreepptmba.com 56
  • 57. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)INTERPRETATION In the above table it is seen that, there is an increased in the working capital byRs.16, 543 in the year 2003-04, this is because: -1. As we can see in the above table that in the Current assets are increased, because of increase in inventories, debtors, cash and bank balance, loans and advance and also increase in other current assets.2. As we can see there is overall decrease in current liabilities. Because of current liabilities are decreased by Rs. 15,711 and also provision are also decreased by Rs. 2,875.3. So as the liabilities have decreased this year and there is increase in current assets, so there is increase in working capital. STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004 Babasabpatilfreepptmba.com 57
  • 58. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) OTPL PVT LTD (Rs. In Thousand) Particulars 2004 2005 Increase DecreaseA) Current Assets 1. Inventories 34,600 28,042 -------- 6,558 2. S. Debtors 32,122 47,790 15,668 ------- 3. Cash & Bank Bal 12,492 10,084 -------- 2,408 4. Other C. Assets 9,45 6,056 5,111 ------- 5. Advance to Suppliers ------- 1,215 1,215 ------- 6. Loans & Advances 1,930 1,771 -------- 1,59 TOTAL 82,098 94,958 21,994 9,125B) Current Liabilities 1. Current Liabilities 28,541 26,531 2,210 -------- 2. Advance from customer --------- 9,082 ------ 9,082 3. Provision 7,664 6,778 8,86 ------- TOTAL 36,205 42,191 3,096 9,082 Working Capital (A-B) 45,896 52,767 25,090 18,207 Net Increase in Working Capital 6,874 6,883 GRAND TOTAL 52,767 52,767 25,090 25,090INTERPRETATION Babasabpatilfreepptmba.com 58
  • 59. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) In the above table it is seen that, there is an increased in the working capital byRs.6, 883 in the year 2004-05, this is because: -1. As we can see of the Current Assets side there is decrease in Inventories, cash and bank balance and loans and advances. There is an increased in sundry debtors, other current assets and company also given the advance to supplies by Rs. 1,215. This decrease in Inventory because there is unavailability of their main raw material. Because of the shortage of it in the market.2. Current Liabilities side there has been increased in current liabilities and provisions of Rs. 2,210 and Rs. 8,86 respectively and also company has taken the advance from customers of Rs. 9,082.3. So, looking above calculation we see that working capital of the company is increased, because current assets are more than current liability. Working Capital is increased from Rs. 6,874 to Rs. 6,883. Because in this year company has taken the advance from customer and given advance to suppliers. RATIO ANALYSISMeaning: - Babasabpatilfreepptmba.com 59
  • 60. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Ratio Analysis is a widely used tool of financial analysis. It defined as the systematic use of to interpret the financial statement so that the strength and weakness of a firm well as its historical performance and current financial condition can be determined. This relationship can be expressed1. Percentage says net profits are 25 percent of sales.2. Proportion of numbers (the relationship between net profit and sales is 1:4), these alternative methods of expressing items which are related to each other are, for the purpose of financial analysis, referred to as ration analysis.Types of Ratios Ratio can be classified into following categories, 1. Current Ratios. 2. Net Working Capital Ratios. 3. Total Assets Turnover Ratios. 4. Inventory Turnover Ratios. 5. Fixed Assets Turnover Ratios. 6. Creditors Turnover Ratios. 7. Creditors Collection Period. 8. Debtors Turnover Ratios. 9. Debtors Collection Period. 10. Gross Profit Margin Ratios.MERITS AND DEMERITS OF THE RATIO: - Babasabpatilfreepptmba.com 60
  • 61. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)Merits of the Ratio: - The following are the some important merits of the ratio 1. Ratio Analysis reflects the working efficiency of a concern. 2. Since, ratio analysis relates the financial health of a concern, insurance other financial institution relay on them while judging loan application and in taking vital investment decision. 3. It helps in establishing trends since the result are preparing plans for the future. 4. It is helpful in forecasting likely events in future.Demerits of the Ratio: - The following are the some important demerits of the ratio. 1. The striking aspect of ratio analysis is the absence of an explicit theoretical structure; different methods of collection are adopted by different concerns. 2. For concert analysis inside information must be known by the analyst since most concern report to portray of easy picture of the financial attachments. 3. Change in the basis of accounting may pose difficulty in analysis ratios between one period1. Current Ratios: - Babasabpatilfreepptmba.com 61
  • 62. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) It can be calculated as current assets divided by current liabilities. The currentratio measures the relative ability of a company to pay its short-term debts. The ratio isused to reveal how well a company could meet a sudden demand to pay off its short-termcreditors. Formulas, Current Ratio = Current Assets Current Liabilities Particulars 2002-2003 2003-2004 2004-2005 Current Assets 4,69,69,00 8,20,98,000 9,49,58,000 0 Current Liabilities 1,76,19,00 3,62,05,000 4,21,91,000 0 Current Ratio 2.66 2.26 2.25 Babasabpatilfreepptmba.com 62
  • 63. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Current Ratio 2.8 2.6 Ratios 2.4 Current Ratio 2.2 2 2002-2003 2003-2004 2004-2005 YearsInterpretation: - As a conventional rule, a current ratio of 2:1 or more considered satisfactory. TheOTPL Company, has current ratio is 2.66:1; therefore, it may be interpretated to besatisfactory company. The current ratio represents a margin of safety for creditors. Thehigher the current ratio, the greater the margin of safety, so, there has been increased inthe ratio during 2002-2003, when compared with 2003-2004 and 2004-2005. So, largerthe amount of current assets in relation to current liabilities, the more the firm’s ability tomeet its current obligation. Firm with less than 2:1, current ratio may be doing well,while firm with 2:1 or even higher current ratio may be struggling to meet theirobligations. This is so because, if Rs.2 is your Current Assets and Rs.1 is Your CurrentLiabilities. Thus Current Ratio shown is 2:1, which is an Ideal Ratio.2. Quick Ratio It establishes a relationship between quick or liquid, assets and current liabilities.An asset is liquid if it can be converted in to cash immediately or reasonably soonwithout a loss of value. Cash is most liquid assets. Other assets, which are considered to Babasabpatilfreepptmba.com 63
  • 64. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)be relatively liquid and included in the quick assets, are debtors, and bills receivable andmarketable securities. Inventories are considered to be less liquid, inventories normallyrequires some time for realizing in to cash; their value also has a tendency to fluctuate. Formula Quick Ratio = Current Assets – Inventories Current Liabilities Quick Ratio Particulars 2002-2003 2003-2004 2004-2005 Current Assets 2 4,69,69,000 8,20,98,000 9,49,58,000 (-) Inventory 1,82,88,000 3,46,00,000 2,80,42,000 1.5 Total 2,86,81,000 4,74,98,000 6,69,16,000 Ratios (/) Current Liabilities 1 1,76,19,000 3,62,05,000 Quick Ratio 4,21,91,000 Quick Ratio 1.62 1.31 1.58 0.5 0 2002-2003 2003-2004 2004-2005 YearsInterpretation: - Generally a quick ratio is 1:1 is considered to represent a satisfactory currentfinancial condition. In the year 2002-03 quick ratio was 1.62 and there has beendecreased in the year compared to 2003-04 and 2004-05. The high ratio indicates that all debtors may not be quick and cash may beimmediately needed to pay operating expenses. It should be noted that inventories are notabsolutely non-liquid to a measurable extent inventories are available to meet current Babasabpatilfreepptmba.com 64
  • 65. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)obligations. So the company can suffer from shortage of funds. On the other hand, acompany with low ratio in the year 2003-04 and 204-05, indicates that quick ratio mayreally be prospering and paying its current obligation in time if it has been turning overits inventories efficiently.3. Total Assets Turnover Ratio: - The Total assets turnover ratio in addition to, or instead the net current assets,This ratio shows the firm’s ability in generating sale from all the financial resourcecommitted to total assets Formula, Total Assets Turnover Ratio = Net Sales Total Assets Particulars 2002-2003 2003-2004 2004-2005 Net Sales 5,73,73,000 10,86,60,000 10,70,00,000 Total Assets 2,69,95,000 2,57,87,000 2,52,21,000 Total Assets Turnover Ratio 2.12 4.21 4.24 Babasabpatilfreepptmba.com 65
  • 66. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Total Assets Turnover Ratio 5 4 Ratios 3 Total Assets 2 Turnover Ratio 1 0 2002-2003 2003-2004 2004-2005 YearsInterpretation: - There has been increased in the year 2004-05, when compared to 2002-2003 and2003-2004. And high ratio indicates that in the year 2004-05, that ratio shows the firm’sability in generating sales from all financial resources.4. Inventory Turnover Ratio: - It indicate the efficiently of the firm in producing the selling its product. The ratioindicates how fast inventory is sold. A high ratio is good from viewpoint of liquidity andvice versa. A low ratio would signify that inventory does not sell and stay on the shelf orin warehouse for a long time. Inventory Turnover Ratio = Net Sales Inventory Particulars 2002-2003 2003-2004 2004-2005 Net Sales 5,73,73,000 10,86,60,000 10,70,00,000 Inventory 1,82,88,000 3,46,00,000 2,80,42,000 Inventory Turnover Ratio 3.13 3.14 3.81 Babasabpatilfreepptmba.com 66
  • 67. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Inventory Turnover Ratio 5 4 Ratios 3 Inventory Turnover 2 Ratio 1 0 2002-2003 2003-2004 2004-2005 YearsInterpretation: - There has been increased in the ratio in the year 2004 –2005, when comparedwith 2002-2003 and 2003-2004. In the year 2004-2005, indicates high ratio, it means,Inventory turnover ratio implies good inventory management and very high ratio calls fora careful analysis. It may indicate under investment in inventory. While a Low ratioindicate in the year 2002-2003, that, it may be result in use of inferior quality of goodsand over investment in sales in the 2003-2004.4. Fixed Assets Turnover Ratio: - Fixed Assets Turnover Ratio measures Sales per rupees investment in FixedAssets. It measures the efficiency of fixed assets employed in the organization. Highdegree of ratio indicates high efficiency of assets utilization vice-versa. Fixed Assets Turnover Ratio = Net Sales Fixed Assets Babasabpatilfreepptmba.com 67
  • 68. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Particulars 2002-2003 2003-2004 2004-2005 Net Sales 5,73,73,000 10,86,60,000 10,70,00,000 Fixed Assets 3,69,41,000 3,72,38,000 3,83,06,000 Fixed Assets Turnover Ratio 1.55 2.91 2.79 Fixed Assets Turnover Ratio 4 3 Ratios Fixed Assets 2 Turnover Ratio 1 0 2002-2003 2003-2004 2004-2005 YearsInterpretation: - Babasabpatilfreepptmba.com 68
  • 69. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) There has been increased in the ratio during 2002-2003 and 2004-2005, whencompared with 2003-2004. A low ratio in the year 2002-2003 indicates in efficiency useof assets, and the next two years (2003-2004 and 2004-2005) shows high ratio, whichmeans that increasing efficiency of fixed assets employed in the organization. One of thecautions to be kept in the mind is when fixed assets are old and substantially depreciatedthe ratio tenders to be high, because, the denominator of the ratio will be low.5. Creditors Turnover Ratio: - It is the ratio between the Sales and Creditors or Net Credit Purchase and averageamount of creditors. It is an important tool of analysis as a firm can maintain minimumamount of Current Assets, as credit from suppliers is easily available. Creditor Turnover Ratio = Net Sales Creditors Particulars 2002-2003 2003-2004 2004-2005 Net Sales 5,73,73,000 10,86,60,000 10,70,00,000 Creditors 1,28,30,000 2,85,41,000 2,63,31,000Creditors Turnover Ratio 4.47 3.80 4.06 Babasabpatilfreepptmba.com 69
  • 70. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Creditors Turnover Ratio 5 4.5 Ratios 4 Creditors Turnover Ratio 3.5 3 2002-2003 2003-2004 2004-2005 YearsInterpretation: - In the year 2002-2003, there was been increased when compared to 203-2004 and2004-2005. In the year 2002-2003 indicate high ratio means the sales of the year verylow as compared to 2003-2004 and 2004-2005 and also creditors are low as compared to2003-2004 and 2004-2005.6. Creditors Collection Period: - This ratio is the difference between Days and Creditors turnover ratios.Formula,Creditors Collection Period = Days Creditors Turnover Ratio Babasabpatilfreepptmba.com 70
  • 71. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Particulars 2002-2003 2003-2004 2004-2005 Days 365 365 365Creditors Turnover Ratio 4.47 3.80 4.06Creditors Collection Period 81.65 96.05 89.90 Creditors Collection Period 150 100 Ratios Creditors Collection 50 Period 0 2002-2003 2003-2004 2004-2005 YearsInterpretation: - In the year 2002-2003, there was increase when compared to 2003-2004 and2004-2005. The high ratio of 2002-2003 indicates that the sales of the year is very low ascompared to 2003-2004 and 2004-2005, and also creditors are low as compared to ascompared to 2003-2004 and 2004-2005. While low ratio in the year 2003-2004 indicatesthat creditors are high as compared to other year.7. Debtors Turnover Ratio: - Babasabpatilfreepptmba.com 71
  • 72. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) It indicate the how many times debtors turnover each year. Generally, the higherthe ratio of debtor’s turnover, the more efficient is the management of credit. The ratiomeasured how will reveal the days of debts to be colleted. Debtors Turnover Ratio= Net Sales Debtors Particulars 2002-2003 2003-2004 2004-2005 Net Sales 5,73,73,000 10,86,60,000 10,70,00,000 Debtors 1,62,68,000 3,21,22,000 4,77,90,000Debtors Turnover Ratio 3.52 3.38 2.23 Debtors Turnover Ratio 4 3 Ratios Debtors Turnover 2 Ratio 1 0 2002-2003 2003-2004 2004-2005 YearsInterpretations: - Babasabpatilfreepptmba.com 72
  • 73. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) There has been increased debtor in the year 2002-2003 as compared to 2003-204and 2004-2005, high ratio indicates of shorter time gap between credit sales and cashcollation. A low ratio shows that debts are not being colleted rapidly. So, the standardnorms this high ratio reveals that company has quite efficient management of debtors. Inthe year 2000 & 2003 are showing equal turnover ratio.8. Debtors Payment Period: - The debtor’s payment period is mainly related to how many days’ debtors havetaken to complete a period and how much is debtor’s turnover ratio.Debtors Payment Period = Days Debtors Turnover Ratio Particulars 2002-2003 2003-2004 2004-2005 Days 365 365 365Debtors Turnover Ratio 3.52 3.38 2.23Debtors Collection Period 103.69 107.98 163.67 Babasabpatilfreepptmba.com 73
  • 74. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Debtors Collection Period 200 150 Ratios 100 Debtors Collection Period 50 0 2002- 2003- 2004- 2003 2004 2005 YearsInterpretation: - The shorter the collection period is better quality of debtors. Since, a shortcollection period implies that prompt payment by debtors. In collection period havingsome increase and decrease. So, we can find out that there is no uniformity in the debtor’scollection period of the year.8. Gross Profit Margin Ratio: - Gross Profit Margin Ratio is the result of relationship between price, sales,volume and cost. A change in gross profit margin can be due to changes in any of thesefactors. It represents the limit of beyond which fall in sales price are outside and tolerancelimit. Gross Profit Margin Ratio = Gross Profit Net Sales Babasabpatilfreepptmba.com 74
  • 75. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Particulars 2002-2003 2003-2004 2004-2005 Gross Profit 7,26,000 1,42,88,000 1,86,54,000 Net Sales 5,73,73,000 10,86,60,000 10,70,00,000 Gross Profit Margin Ratio 1.26 13.14 17.43 Gross Profit Margin Ratio 20 15 Ratios Gross Profit Margin 10 Ratio 5 0 2002-2003 2003-2004 2004-2005 YearsInterpretation: - There has been increased in the year 2004-2005 as compared to 2002-2003 and2003-2004. The high ratio indicates that the company should earn a sufficient profit oneach rupee of sales. While low ratio indicate that in the year 2002-2003 that the companywill be meeting the operations expenses and no returns will be available to the owners.And also high ratio indicate that a good management indicate that cost of production ofthe firm is relatively low, it may also indicate higher the sales price without acorresponding increase in the cost of the goods. CONSOLIDATED STATEMENT OF THE RATIOS FOR THREE YEARS Babasabpatilfreepptmba.com 75
  • 76. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)Sl. No Particulars 2002-2003 2003-2004 2004-2005 1. Current Ratio 2.66 2.26 2.25 2. Quick Ratio 1.62 1.31 1.58 3. Total Assets Turnover Ratio 2.12 4.21 4.24 4. Inventory Turnover Ratio 3.13 3.14 3.81 5. Fixed Assets Turnover Ratio 1.55 2.91 2.79 6. Creditors Turnover Ratio 4.47 3.80 4.06 7. Creditors Collection Period 81.65 96.05 89.90 8. Debtors Turnover Ratio 3.52 3.38 2.23 9. Debtors Collection Period 103.69 107.98 163.67 10. Gross Profit Margin Ratio 1.265 13.14 17.43 Gross Profit Consolidated Statement of Ratios Margin Ratio Debtors 300 Collection 250 Period 200 Debtors Ratios 150 Turnover Ratio 100 50 Creditors 0 Collection 2002- 2003- 2004- Period 2003 2004 2005 Creditors Turnover Ratio Years Fixed Assets Turnover Ratio FINDING AND SUGGESTIONS Inventory Turnover RatioFindings: - Total Assets Turnover Ratio Quick Ratio1. Current Ratio of OTPL Company shows the solvency of the firm ability to repay its Current Ratio liabilities. As ratio is decline to 2.66. It shows that company is in solvency state. Current assets are should always be twice of current liabilities. Babasabpatilfreepptmba.com 76
  • 77. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)2. In a comparative statement of Balance Sheet, debtors were 1,47,19,000 in the year 2002-2003, and it has increased to 3,21,22,000 and 4,77,90,000 in the last two years. Because increased in credit sales.3. Total assets turnover ratio shows the ability to convert all its assets incurring fixed assets to sales. As per the ratio calculated in the year 2002-2003 it was 2.12, which was low ratio means firm is able to convert its total assets quickly into funds as per the company ratio the firm is able to convert it assets because the ratio are higher between 4.24 to 2.12, which was low ratio.4. Inventory Turnover Ratio is increased from 3.13 to 3.81 in the year 2002-2003 and 2004-2005 respectively. It shows company has maintained good inventory policy.5. Gross profit margin ratio shows that increasing year to year. It shows that company should earn a sufficient profit on each rupee of cash.Suggestions: - The working capital including all its related aspects is managed quite well byOTPL. The finance department is carrying out its responsibilities efficiently. The entiredepartments are collectively working hard for the progress of OTPL. Babasabpatilfreepptmba.com 77
  • 78. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) The following are the suggestions.1. In a comparative Balance Sheet Debtors are increased from year to year (1,47,19,000 to 4,77,90,00). Even though debtors are increased which is favorable enough for the company. But should take care while dealing against the loss due to doubtful and bad debt.2. The company net sale is very low in the year 2002-2003 Rs 5,73,73,000, as compared to 2003-2004 Rs. 10,86,60,000. So, the company should manage its current assets, which effects on production and ultimately on sales.3. The Current Ratio of the company is decreased from 2.66 to 2.55 in the last three- year (2003 to 2005). So, the current ratio should be maintained by the company in such a way that the ratio does not follow below 2:1.4. Company should give minimum payment time to get prompt payment by debtors. Conclusion Babasabpatilfreepptmba.com 78
  • 79. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Working capital may be regarded as lifeblood of a business. It’s effectiveprovision can do much to ensure the success of a business, while it’s inefficientmanagement can lead not only to loss of profits but also to the ultimate down fall of whatotherwise might be considered as a promising concern. A study of working capital is ofmajor importance to internal and external analysis because of its close relationship withthe current day to day operations of a business.1. Here, I conclude that Changes in the financial year is showing increase in the working capital, because company maintains its working capital properly in the year 2003 to 2005.2. According to my calculation Current Assets main part of, the working capital of the business. According to all Ratios, It shows that company maintains its ratio is very well. So, In the year 2004-2005 company showing better position in the working capital. Babasabpatilfreepptmba.com 79
  • 80. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Babasabpatilfreepptmba.com 80
  • 81. “Impact of Current Assets on Working Capital”. ATOILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) BIBLOGRAPHY• Financial Management by books used from which I have taken help for the theory part of the study:  M.V. Khan & P.K. Jain  I.M. Pandey• I have also used the trial balance of Oilgear Towler Polyhydron Private Limited (OTPL). Those are from the year 2003-2005. Which provide by the official at Belgaum Works.• I have meet with the different people at the Administrative Department at Oilgear Towler Polyhydron Private Limited (OTPL). As also took their views and information for my Study.• I have also took the help form the company site www.oilgear.co.in Babasabpatilfreepptmba.com 81