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Projectsformba.blogspot.com                                   A Project report                                           o...
Projectsformba.blogspot.com                                  CERTIFICATEThis is to satisfy that the summer project work of...
Projectsformba.blogspot.com                    ACKNOWLEDGEMENTIt gives me immense pleasure to present this project report ...
Projectsformba.blogspot.com                      DECLAIRATION…………………………. Student of PGDM 2009-2011studying at HDFschool of...
Projectsformba.blogspot.com                            CONTENTSChpter No.                  Particular                     ...
Projectsformba.blogspot.com5                             Working Capital components                          5.1   Receiva...
Projectsformba.blogspot.com                     CHAPTER-1            Working capital management          1)   Introduction...
Projectsformba.blogspot.comWORKING CAPITAL MANAGEMENT      1.1)Introduction“More business fails for lack of cash than for ...
Projectsformba.blogspot.comis mentioned. The current assets should be large enough to cover its current liabilitiesin orde...
Projectsformba.blogspot.com1.3) Gross working capital and Net working capitalThere are two concepts of working capital man...
Projectsformba.blogspot.com1.4) Type of working capitalThe operating cycle creates the need for current assets (working ca...
Projectsformba.blogspot.comdemand for permanent current assets might be increasing to support a rising level ofactivity.1....
Projectsformba.blogspot.commay increase the production and sales to take the benefit of favorable market,due to increase i...
Projectsformba.blogspot.com                       CHAPTER-2                Research Methodology                      1)Int...
Projectsformba.blogspot.com2.1) IntroductionResearch methodology is a way to systematically solve the research problem. It...
Projectsformba.blogspot.comSecondary data easily get those secondary data from records, journals, annualreports of the com...
Projectsformba.blogspot.com2.4) SCOPE & LIMITATIONS OF THE STUDYScope of the studyThe scope of the study is identified aft...
Projectsformba.blogspot.com                                 CHAPTER-IV Working capital level and analysis                 ...
Projectsformba.blogspot.com       earns nothing. On the other hand inadequate amount of working capital can be threatened ...
Projectsformba.blogspot.comYears                    2004-2005 2005-2006 2006-2007 2007-2008                          2008-...
Projectsformba.blogspot.comObservations:The net working capital of ARSS Infrastructure Projects Limited is continuously in...
Projectsformba.blogspot.comCurrentAssetsInventories            58,429,517            104,206,33      73,298,835           ...
Projectsformba.blogspot.comwill be ........... because cash is non earning assets.Particulars     2004-2005       2005-200...
Projectsformba.blogspot.comdiversifying its business into different sectors and there is no certainty about the projects(t...
Projectsformba.blogspot.com                                          Current liability indices              4000          ...
Projectsformba.blogspot.com3.Changes in seasonality in sales activities4. Policy changes:-The second major case of changes...
Projectsformba.blogspot.comObservationThere is a positive working capital which shows the further growth as the company is...
Projectsformba.blogspot.com                                        DEBTORS                                     (RECEIVABLE...
Projectsformba.blogspot.com2009-10 decreased from previous years while raw material inventory increased.The maximum projec...
Projectsformba.blogspot.com                                 % Changes in ROCE Working capital leverage=      % Changes in ...
Projectsformba.blogspot.com            Working Capital Ratio Analysis                              Introduction           ...
Projectsformba.blogspot.comWORKING CAPITAL RATIO ANALYSIS5.1) IntroductionRatio analysis is the powerful tool of financial...
Projectsformba.blogspot.com   2. Normally, the ratios are calculated on the basis of historical financial     statements. ...
Projectsformba.blogspot.com(ii) Inventory Turnover Ratio(iii) Receivable Turnover Ratio(iv)Current Asset Turnover Ratio1) ...
Projectsformba.blogspot.com                                                        W.C TOR             4.5              4 ...
Projectsformba.blogspot.comInventory                    5.75             12.61                    5.9               3.38  ...
Projectsformba.blogspot.comsales will become less. As in 2006-07 the inventory turnover ratio is 12.61 timesso the invento...
Projectsformba.blogspot.comA.C.P.*     2                       22                58                 46               31   ...
Projectsformba.blogspot.comprepaid expenses and short term loans and advances.This ratio includes theefficiency with which...
Projectsformba.blogspot.comsales. The current asset turnover ratio is in haphazard way but comparing to2006-07 the ratio i...
Projectsformba.blogspot.comliabilitiesCurrent ratio 2.99                              2.53               5.11            2...
Projectsformba.blogspot.comInventories, loans and advances) to fulfill its short term liabilities (sundrycreditors, provis...
Projectsformba.blogspot.com                                                          Quick Ratio                     4.5  ...
Projectsformba.blogspot.com                                                 Receivables Management             Inventory M...
Projectsformba.blogspot.comReceivable Management:Introduction:­    45 Projectsformba.blogspot.com
Projectsformba.blogspot.comReceivables or debtors are the one of the most important parts of the current assets which is c...
Projectsformba.blogspot.com                                                          Receivables Indices                  ...
Projectsformba.blogspot.com1. In determining the collectability of debtors and thus, the efficiency ofcollection efforts.2...
Projectsformba.blogspot.comObservationThe average collection period increased from 2004-05 to 2006-07 and then itdecreases...
Projectsformba.blogspot.com   1) To maintain a large amount of inventory for efficient and smooth production;2) To maintai...
Projectsformba.blogspot.com                                                              Inventory indices                ...
Projectsformba.blogspot.comFinished Goods 31.36                                         19.75                          6.5...
Projectsformba.blogspot.comObservation:As the ARSS Infrastructure Projects Limited is a construction company. And it takes...
Projectsformba.blogspot.comWhen the no of days in a year (said as 360) are divided by inventory turnover, days ofinventory...
Projectsformba.blogspot.com    55 Projectsformba.blogspot.com
Projectsformba.blogspot.comCash Management:Cash is common purchasing power or medium of exchange. As such, it forms the mo...
Projectsformba.blogspot.comCash management is concerned with the managing of:(i) Cash flows into and out of the firm,(ii) ...
Projectsformba.blogspot.comopportunities as and when they arise. As the firm can postpone materials‟ purchasing whenthe pr...
Projectsformba.blogspot.com                                                                   Cash&Bank balance indices   ...
Projectsformba.blogspot.comchanges its form to drive „business wheel‟. It is also known as „circulating capital‟ whichmean...
Projectsformba.blogspot.com    61 Projectsformba.blogspot.com
Projectsformba.blogspot.com     Working capital finance and estimation         Introduction         Sources of capital fin...
Projectsformba.blogspot.comIntroduction:Funds available for period of one year or less is called short term finance. In In...
A dissertation report on working capital management of arss infrastructure ltd
A dissertation report on working capital management of arss infrastructure ltd
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  1. 1. Projectsformba.blogspot.com A Project report on Working capital management of ARSS infrastructure ltd A project report submitted for the partial fullfillment of POST GRADUATE DIPLOMA IN MANAGEMENT Submitted by HDF SCHOOL OF MANAGEMENT AT-Naranpur,belagachhia,cuttack APPROVED BY AICTE (2009-2011)
  2. 2. Projectsformba.blogspot.com CERTIFICATEThis is to satisfy that the summer project work of ………………………………..Titled Working capital management is an original work and this work has not beensubmitted elsewhere in any form. The indebtness to other works/publications hasbeen duly acknowledged at the relevant places. The project work was carried outduring ……………………. in ARSS infrastructure projects private limitedDate:
  3. 3. Projectsformba.blogspot.com ACKNOWLEDGEMENTIt gives me immense pleasure to present this project report on Working CapitalManagement carried out at ARSS infrastructure projects Ltd. In partialfulfillment of post-graduate course of PGDM.No work can be carried out without the help and guidance of various persons. Iam happy to take this opportunity to express my gratitude to those who havebeen helpful to me in completing this project report.At the outset I would like to thank ……………………… for their valuableadvice and guidance during my project for timely help concerning various aspects of project. I also thanks to all staffmembers of account department for help me to complete the summer internshipprogram.I would be failing in my duty if I do not express my deep sense of gratitude to………….. sir without his guidance it wouldn’t have been possible for me tocomplete this project work. Lastly I would like to thank my parents, friends and well wishers whoencouraged me to do this research work and all those who contributed directlyor indirectly in completing this project to whom I am obligated to.
  4. 4. Projectsformba.blogspot.com DECLAIRATION…………………………. Student of PGDM 2009-2011studying at HDFschool of Management, cuttack,orissa declare that the project workentitled Working Capital management of ARSS infrastructure ProjectsLtd. was carried by me in the partial fulfillment of PGDM program underthe AICTE .This project was undertaken as a part of academic curriculumaccording to the AICTES rules and norms and it has not commercialinterest and motive. It is my original work. It is not submitted to any otherorganization for anyother purpose. DATE: PLACE:
  5. 5. Projectsformba.blogspot.com CONTENTSChpter No. Particular Page No. Certificate I Acknowledgement II Declairation III Contents IV List of tables V List of Charts VI1 WORKING CAPITAL MANAGEMENT 1.1 Introduction 1.2 Need of working capital 1.3 Gross W.C and Net W.C 1.4 Types of working capital 1.5 Determinants of W.C2 RESEARCH METHODOLOGY 2.1 Introduction 2.2 Types of Reserch methodology 2.3 Objective of he study 2.4 Scope and limitation of the study3 WORKING CAPITAL SIZE AND ANALYSIS 3.1 working capital level 3.2 Working capital trend analysis 3.3 Current assets analysis 3.4 Current liability analysis 3.5 Changes of working capital 3.6 Operating cycle 3.7 Working capital leverage-4 Working Capital Ratio analysis 5.1 Introduction 5.2 Role of ratio analysis 5.3 Limitations of ratio analysis 5.4 Classifications of ratios 5.5 Efficiency ratio 5.6 Liquidity ratio
  6. 6. Projectsformba.blogspot.com5 Working Capital components 5.1 Receivables management 5.2 Inventory management 5.3 Cash management6 Working Capital Finance and Estimation 6.1 Introduction. 6.2 Sources of working capital finance. 6.3 Working capital loan and interest. 6.4 Estimation of working capital.7 Conclusions and recomandations 7.1 Conclusion 7.2 Recommendations8 Appendices 8.1 Bibliography 8.2 Balance sheets
  7. 7. Projectsformba.blogspot.com CHAPTER-1 Working capital management 1) Introduction 2) Need of working capital 3) Gross w.c & Net w.c 4) Types of working capital 5) Determinants of working capital
  8. 8. Projectsformba.blogspot.comWORKING CAPITAL MANAGEMENT 1.1)Introduction“More business fails for lack of cash than for want of profit”. Efficient managementof working capital is one of the pre-conditions for the success of an enterprise.Efficient management of working capital means management of various componentsof working capital in such a way that an adequate amount of working capital ismaintained for smooth running of a firm and for fulfilment of twin objectives ofliquidity and profitability. While inadequate amount of working capital impairs thefirm’s liquidity. Holding of excess working capital results in the reduction of theprofitability. But the proper estimation of working capital actually required, is adifficult task for the management because the amount of working capital varies acrossfirms over the periods depending upon the nature of business, production cycle, creditpolicy, availability of raw material, etc.Thus efficient management of working capital is an important indicator of soundhealth of an organisation which requires reduction of unnecessary blocking of capitalin order to bring down the cost of financing.Working capital managementWorking capital management is concerned with the problems arise in attempting tomanage the current assets, the current liabilities and the inter relationship that existbetween them. The term current assets refers to those assets which in ordinary courseof business can be, or, will be, turned in to cash within one year without undergoinga diminution in value and without disrupting the operation of the firm. The majorcurrent assets are cash, marketable securities, account receivable and inventory.Current liabilities ware those liabilities which intended at there inception to be paidin ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses.The goal of working capital management is to manage the firm s current assetsand current liabilities in such way that the satisfactory level of working capital 8 Projectsformba.blogspot.com
  9. 9. Projectsformba.blogspot.comis mentioned. The current assets should be large enough to cover its current liabilitiesin order to ensure a reasonable margin of the safety.Definition:-1. According to Guttmann & Dougall- Excess of current assets over current liabilities .1. According to Park & Gladson- The excess of current assets of a business (i.e. cash, accounts receivables,inventories) over current items owned to employees and others (such as salaries &Wages payable, accounts payable, taxes owned to government) .1.2) Need of working capital managementThe need for working capital gross or current assets cannot be over emphasized. Asalready observed, the objective of financial decision making is to maximize theshareholders wealth. To achieve this, it is necessary to generate sufficient profits canbe earned will naturally depend upon the magnitude of the sales among other thingsbut sales can not convert into cash. There is a need for working capital in the form ofcurrent assets to deal with the problem arising out of lack of immediate realization ofcash against goods sold. Therefore sufficient working capital is necessary to sustainsales activity. Technically this is refers to operating or cash cycle. If the companyhas certain amount of cash, it will be required for purchasing the raw material maybe available on credit basis. Then the company has to spend some amount for labourand factory overhead to convert the raw material in work in progress, and ultimatelyfinished goods. These finished goods convert in to sales on credit basis in the formof sundry debtors. Sundry debtors are converting into cash after expiry of creditperiod. Thus some amount of cash is blocked in raw materials, WIP, finished goods,and sundry debtors and day to day cash requirements. However some part of currentassets may be financed by the current liabilities also. The amount required to beinvested in this current assets is always higher than the funds available from currentliabilities. This is the precise reason why the needs for working capital arise 9 Projectsformba.blogspot.com
  10. 10. Projectsformba.blogspot.com1.3) Gross working capital and Net working capitalThere are two concepts of working capital management1. Gross working capitalGross working capital refers to the firms investment In current assets. Currentassets are the assets which can be convert in to cash within one financial yearincludes cash, short term securities, debtors, bills receivable and inventory.2. Net working capital Net working capital refers to the difference between current assets and currentliabilities. Current liabilities are those claims of outsiders which are expected tomature for payment within an accounting year and include creditors, bills payable andoutstanding expenses. Net working capital can be positive or negative Efficientworking capital management requires that firms should operate with some amountof net working capital, the exact amount varying from firm to firm and depending,among other things; on the nature of industries.net working capital is necessarybecause the cash outflows and inflows do not coincide. The cash outflows resultingfrom payment of current liabilities are relatively predictable. The cash inflow arehowever difficult to predict. The more predictable the cash inflows are, the less networking capital will be required.The concept of working capital was, first evolved by Karl Marx. Marx usedthe term variable capital means outlays for payrolls advanced to workersbefore the completion of work. He compared this with constant capital whichaccording to him is nothing but dead labour . This variable capital is nothingwage fund which remains blocked in terms of financial management, in work-in-process along with other operating expenses until it is released through saleof finished goods. Although Marx did not mentioned that workers also gavecredit to the firm by accepting periodical payment of wages which funded aportioned of W.I.P, the concept of working capital, as we understand todaywas embedded in his variable capital . 10 Projectsformba.blogspot.com
  11. 11. Projectsformba.blogspot.com1.4) Type of working capitalThe operating cycle creates the need for current assets (working capital).However the need does not come to an end after the cycle is completed toexplain this continuing need of current assets a destination should be drawnbetween permanent and temporary working capital.1) Permanent working capital or fixed working capitalThe need for current assets arises, as already observed, because of the cashcycle. To carry on business certain minimum level of working capital isnecessary on continues and uninterrupted basis. For all practical purpose, thisrequirement will have to be met permanent as with other fixed assets. Thisrequirement refers to as permanent or fixed working capital2) Temporary working capital or variable working capital Any amount over andabove the permanent level of working capital is temporary, fluctuating or variable,working capital. This portion of the required working capital is needed to meetfluctuation in demand consequent upon changes in production and sales as result ofseasonal changes A M A O M U O N U T N Temporary or variable working capital T Of Of W O W R O K R I N K I permanent or G N G fixed working capital C A C P A I P T I TIME T TIMEGraph shows that the permanent level is fairly castanet; while temporaryworking capital is fluctuating in the case of an expanding firm the permanentworking capital line may not be horizontal. This may be because of changes in 11 Projectsformba.blogspot.com
  12. 12. Projectsformba.blogspot.comdemand for permanent current assets might be increasing to support a rising level ofactivity.1.5) Determinants of working capitalThe amount of working capital is depends upon a following factors1. Nature of businessSome businesses are such, due to their very nature, that their requirement offixed capital is more rather than working capital. These businesses sell servicesand not the commodities and that too on cash basis. As such, no founds areblocked in piling inventories and also no funds are blocked in receivables. E.g.public utility services like railways, infrastructure oriented project etc. thererequirement of working capital is less. On the other hand, there are somebusinesses like trading activity, where requirement of fixed capital is less butmore money is blocked in inventories and debtors.2. Length of production cycleIn some business like machine tools industry, the time gap between theacquisition of raw material till the end of final production of finished productsitself is quit high. As such amount may be blocked either in raw material orwork in progress or finished goods or even in debtors. Naturally there need ofworking capital is high.3. Size and growth of businessIn very small company the working capital requirement is quit high due to highoverhead, higher buying and selling cost etc. as such medium size businesspositively has edge over the small companies. But if the business start growingafter certain limit, the working capital requirements may adversely affect by theincreasing size.4. Business/ Trade cycleIf the company is the operating in the time of boom, the working capitalrequirement may be more as the company may like to buy more raw material, 12 Projectsformba.blogspot.com
  13. 13. Projectsformba.blogspot.commay increase the production and sales to take the benefit of favorable market,due to increase in the sales, there may more and more amount of funds blockedin stock and debtors etc. similarly in the case of depressions also, workingcapital may be high as the sales terms of value and quantity may be reducing,there may be unnecessary piling up of stack without getting sold, the receivablemay not be recovered in time etc.5. Terms of purchase and salesSome time due to competition or custom, it may be necessary for the companyto extend more and more credit to customers, as result which more and moreamount is locked up in debtors or bills receivables which increase the workingcapital requirement. On the other hand, in the case of purchase, if the credit isoffered by suppliers of goods and services, a part of working capitalrequirement may be financed by them, but it is necessary to purchase on cashbasis, the working capital requirement will be higher.6. ProfitabilityThe profitability of the business may be vary in each and every individual case,which is in turn its depend on numerous factors, but high profitability willpositively reduce the strain on working capital requirement of the company,because the profits to the extend that they earned in cash may be used to meetthe working capital requirement of the company. 7) Operating efficiencyIf the business is carried on more efficiently, it can operate in profits whichmay reduce the strain on working capital; it may ensure proper utilization ofexisting resources by eliminating the waste and improved coordination etc. 13 Projectsformba.blogspot.com
  14. 14. Projectsformba.blogspot.com CHAPTER-2 Research Methodology 1)Introduction 2)Types of research methodology 3)Objective of the study 4)Scope and limitation of the study 14 Projectsformba.blogspot.com
  15. 15. Projectsformba.blogspot.com2.1) IntroductionResearch methodology is a way to systematically solve the research problem. It maybe understood as a science of studying now research is done systematically. In thatvarious steps, those are generally adopted by a researcher in studying his problemalong with the logic behind them. It is important for research to know not only theresearch method but also know methodology. The procedures by which researcher goabout their work of describing, explaining and predicting phenomenon are calledmethodology. Methods comprise the procedures used for generating, collecting andevaluating data. All this means that it is necessary for the researcher to design hismethodology for his problem as the same may differ from problem to problem.Data collection is important step in any project and success of any project willbe largely depend upon now much accurate you will be able to collect and howmuch time, money and effort will be required to collect that necessary data, thisis also important step.Data collection plays an important role in research work. Without proper dataavailable for analysis you cannot do the research work accurately.2.2) Types of data collectionThere are two types of data collection methods available.1. Primary data collection2. Secondary data collection1) Primary dataThe primary data is that data which is collected fresh or first hand, and for firsttime which is original in nature. Primary data can collect through personalinterview, questionnaire etc. to support the secondary data.2) Secondary data collection methodThe secondary data are those which have already collected and stored. 15 Projectsformba.blogspot.com
  16. 16. Projectsformba.blogspot.comSecondary data easily get those secondary data from records, journals, annualreports of the company etc. It will save the time, money and efforts to collectthe data. Secondary data also made available through trade magazines, balancesheets, books etc.This project is based on primary data collected through personal interview ofhead of account department and other concerned staff member of finance department.But primary data collection had limitations such as matter confidential informationthus project is based on secondary information collected through five years annualreport of the company, supported by various books and internet sides. The datacollection was aimed at study of working capital management of the company.Project is based on 1. Annual report of ARSS 2004-2005 2. Annual report of ARSS 2005-2006 3.Annual report of ARSS 2006-2007 4.Annual report of ARSS 2007-2008 5.Annual report of ARSS 2008-2009 6.Annual report of ARSS 2009-20102.3) OBJECTIVES OF THE STUDYStudy of the working capital management is important because unless the working capital ismanaged effectively, monitored efficiently planed properly and reviewed periodically at regularintervals to remove bottlenecks if any the company can not earn profits and increase its turnover.With this primary objective of the study, the following further objectives are framed for a depthanalysis.1. To study the working capital management of ARSS infrastructure projects private Ltd.2. To study the optimum level of current assets and current liabilities of the company.3. To study the liquidity position through various working capital related ratios.4. To study the working capital components such as receivables accounts, cash management,Inventory position5. To study the way and means of working capital finance of the ARSS infrastructure projects pvt. Ltd. 6. To estimate the working capital requirement of ARSS infrastructure projects pvt.Ltd 7. To study the operating and cash cycle of the company. 16 Projectsformba.blogspot.com
  17. 17. Projectsformba.blogspot.com2.4) SCOPE & LIMITATIONS OF THE STUDYScope of the studyThe scope of the study is identified after and during the study is conducted. The study of workingcapital is based on tools like trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. Further the study is based on last 6 years Annual Reports of ARSS infrastructure projectspvt Ltd.And even factors like competitor s analysis, industry analysis were not considered whilepreparing this project.Limitations of the studyFollowing limitations were encountered while preparing this project:1) Limited data:-This project has completed with annual reports; it just constitutes one part of data collection i.e.secondary. There were limitations for primary data collection because of confidentiality.2) Limited period:-This project is based on five year annual reports. Conclusions and recommendations are based onsuch limited data. The trend of last five year may or may not reflect the real working capitalposition of the company3) Limited area:-Also it was difficult to collect the data regarding the competitors and their financial information.Industry figures were also difficult to get. 17 Projectsformba.blogspot.com
  18. 18. Projectsformba.blogspot.com CHAPTER-IV Working capital level and analysis 1)Working capital level 2)Working capital trend analysis 3)Current assets analysis 4)Current liability analysis 5)Changes of working capital 6)Operating cycle 7)Working capital leverageWorking capital levelThe consideration of the level investment in current assets should avoid two danger pointsexcessive and inadequate investment in current assets. Investment in current assets should bejust adequate, not more or less, to the need of the business firms. Excessive investment incurrent assets should be avoided because it impairs the firm‟s profitability, as idle investment 18 Projectsformba.blogspot.com
  19. 19. Projectsformba.blogspot.com earns nothing. On the other hand inadequate amount of working capital can be threatened solvency of the firms because of its inability to meet its current obligation. It should be realized that the working capital need of the firms may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance.Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10A) CurrentAssetsInventories 58,429,517 104,206,335 73,298,835 622,103,160 1,882,704,940 3,701,088,128Sundry Debtors 1,165,300 71791868 145,136,306 653,574,370 428,533,465 786122901Cash and Bank 19,100,114 50,648,882 116,425,792 373,999,265 717,214,943 1,095,090536BalancesLoans and 48,575,716 81,219,576 205,984,507 506,967,157 557,410,278 1,406480936AdvancesTotal of A (Gross 127,270,647 307866661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501W.C.)B) CurrentLiabilitiesCurrent liabilities 42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152Provision 7,535,964 9,823,827 35,261,598 92,135,009 172,295,570 258,380,043Total of B 50,168,731 131,472,347 141,025,428 951,070,095 1,320,224,186 1,705,834,194Net W.C. (A-B) 77,101,916 176394314 399,820,011 1,205,573,857 2,265,639,440 5,28,294,8307 Table ........Size of working capital Working Capital Trend Analysis: In working capital analysis the direction at changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an analyst to make a study about the trend and direction of working capital over a period of time. Such analysis enables as to study the upward and downward trend in current assets and current liabilities and its effect on the working capital position. “Analysis of working capital” trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds. WORKING CAPITAL SIZE OF ARSS 19 Projectsformba.blogspot.com
  20. 20. Projectsformba.blogspot.comYears 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Net w.c 77101906 176394314 399820011 1205573857 2265639440 5282948307W.C indices 100 228.78 518.56 1563.61 2938.49 6851.9 Table .........working capital size Working Capital Indices base year 2004-2005 taken as 100 8000 Working capital indices 6851.9 7000 6000 5000 w.c indices 4000 2938.49 3000 2000 1563.61 1000 518.56 100 228.78 0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 working capital indicesyears Exponential Regression for working capital in- dices 20 Projectsformba.blogspot.com
  21. 21. Projectsformba.blogspot.comObservations:The net working capital of ARSS Infrastructure Projects Limited is continuously increasing from2004-05 as the indices shows in the figure. The working capital indices of 2009-10 compared to2004-05 is as 68 times because the current assets are increasing continuously where as the currentliabilities are not as increased as current assets. There is sudden increase in current assets of2007-08 compared to its previous year i.e. 2.98 times. In 2007-08 the company has taken fourprojects in road, five projects in railway, one project in irrigation of rupees worth 72686 lacs, 29113lacs, and 6636 lacs continously. While in 2008-09, the company has taken only three projects ofrupees worth 18098 lacs. The no of projects taken in FY 2009-10 are ....... so the value of currentassets increased. However the current liabilities of the company increased only 38.56 crores. Incurrent liability of the company two things are included i.e. sundry creditors and the provisions(taxes, fringe benefit tax, dividend, tax on proposed dividened). The company is bidding for goodprojects because it has sufficient amount of reserves and surplus as well as inventories that means itis using its long term securities as well as short term securities for it‟s bidding and execution of theprojects.Current asseets:Total assets are basically classified in two parts as fixed assets and current assets. Fixedassets are in the nature of long term or life time for the organization. Current assets convert inthe cash in the period of one year. It means that current assets are liquid assets or assetswhich can convert in to cash within a year.Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10A) 21 Projectsformba.blogspot.com
  22. 22. Projectsformba.blogspot.comCurrentAssetsInventories 58,429,517 104,206,33 73,298,835 622,103,160 1,882,704,940 3,701,088,128 5Sundry 1,165,300 71791868 145,136,306 653,574,370 428,533,465 786122901DebtorsCash and 19,100,114 50,648,882 116,425,792 373,999,265 717,214,943 1,095,090536BankBalancesLoans and 48,575,716 81,219,576 205,984,507 506,967,157 557,410,278 1,406480936AdvancesTotal of A 127,270,647 307866661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501(GrossW.C.)C.A 100 241.89 424.96 1694.96 2817.51 5491.28indices Table........:Current assets size and Current assets indices 6000 Current assets indices 5491.28 5000 4000 C.A indices 3000 2817.51 2000 1694.96 1000 424.96 241.89 100 0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 YearsComposition of current assets in ARSSAnalysis of current assets components enable one to examine in which components theworking capital fund has locked. A large tie up of funds in inventories affects the profitabilityof the business or the major portion of current assets is made up cash alone, the profitability 22 Projectsformba.blogspot.com
  23. 23. Projectsformba.blogspot.comwill be ........... because cash is non earning assets.Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010inventories 45.90% 33.85 13.55 28.85 52.50 52.96Sundry 0.92 23.32 26.83 30.31 11.95 11.25debtorsCash and 15.01 16.45 21.52 17.34 20.00 15.67bank balanceLoans and 38.17 26.38 38.09 23.51 15.54 20.12advancestotal 100 100 100 100 100 100Observation:The current assets increases as the sales increase. The excess of current assets is alwayspositive for the company but it is not always good. It may adversely affect the profitability ofthe firm. There are certain investments for which company pay interest. From the table ofcomposition of current assets, there is good amount of inventory available except one year(2006-07). Excess amount of inventory is good for the company because the company is 23 Projectsformba.blogspot.com
  24. 24. Projectsformba.blogspot.comdiversifying its business into different sectors and there is no certainty about the projects(time of the projects) in certain sectors. The loans and advances of the firm are in zigzag way.The loans and advances should be minimum as the high loans create a greater amount ofinterest. The company was doing well from 2006-07 to 2008-09 as the company had takenfour projects in road, five in railway, and one in irrigation. But in 2009-10 it has increasedbecause of the ARSS took good projects. The company is doing better in sundry debtors inprevious two years. The company had taken its amount from its debtors. Cash and bankbalances is good for all the years.Current liabilitiesCurrent liabilities mean the liabilities which the company have to pay in current financial year. Itincludes sundry creditors means supplier whose payment is due but not paid yet, thus creditorscalled as current liabilities.Current liabilities also include short term loan and provision as taxprovision. Current liabilities also includes bank overdraft. For some current assets like bankoverdrafts and short term loan, company has to pay interest thus the management of currentliabilities has importance current liability sizeparticulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Current 42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152liabilitiesProvision 7,535,964 9,823,827 35,261,598 92,135,009 172,295,570 258,380,043Total of B 50,168,731 131,472,347 141,025,428 951,070,095 1,320,224,186 1,705,834,194Indices of 100 262.06 281.1 1895.7 2631.56 3400.19C.L Table........current liability size and its indices 24 Projectsformba.blogspot.com
  25. 25. Projectsformba.blogspot.com Current liability indices 4000 3500 3000 2500C.L indices C.L indices 2000 Exponential Re- gression for C.L in- 1500 dices 1000 500 0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Years Figure.......Current liability indices Observation In current liabilities of the company only the sundry creditors and the provision (provision for taxation, fringe benefit tax, dividend and proposed dividend) are included. Current liabilities show continues growth each year except in 2006-07 and 2009-10 because company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm. As a current liability increased in the year 2007-08 by 574.39% it also increased the working capital size in the same year. But company enjoyed over creditors which may include indirect cost of credit terms in future. CHANGES IN WORKING CAPITAL Current liabilities show continues growth each year because company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm. As a current liability increase in the year 2006-07 by 35% it reduce the working capital size in the same year. But company enjoyed over creditors which may include indirect cost of credit terms. 4.5)Changes in working capital There are so many reasons to changes in working capital as follow 1. Changes in sales and operating expanses:- The changes in sales and operating expanses may be due to three reasons 1. There may be long run trend of change e.g. The price of row material say oil may constantly raise necessity the holding of large inventory. 2. Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary. 25 Projectsformba.blogspot.com
  26. 26. Projectsformba.blogspot.com3.Changes in seasonality in sales activities4. Policy changes:-The second major case of changes in the level of working capital is because of policy changes initiated by management. The term current assets policy may be defined as the relationship between current assets and sales volume.5. Technology changes:-The third major point if changes in working capital are changes in technology because changes intechnology to install that technology in our business more working capital is requiredA change in operating expanses rise or full will have similar effects on the levels of workingfollowing working capital statement is prepared on the base of balance sheet of last two year.STATEMENT OF CHANGES IN WORKING CAPITALchanges in working capitalparticulars 2008-2009 2009-2010 increase decreaseA)Current assetsinventories 1882704940 3701088128 1818383188Sundry debtors 428533465 786122901 357589436Cash and bank 717214943 1095090536 377875593balancesLoans and 557410278 1406480936 849070658advancesTotal current 3585863626 6988782501 3402918875assetsB)CurrentliabilitiesCurrent liabilities 1147928616 1447454152 299525536provision 172295570 258380043 86084473Total current 1320224186 1705834194 385610008liabilitiesNet working 2265639440 5282948306 3017308866capital 26 Projectsformba.blogspot.com
  27. 27. Projectsformba.blogspot.comObservationThere is a positive working capital which shows the further growth as the company isexpanding it‟s business into other sectors of the construction. The working capital increaseddue to the following reasons:1) There is 50% increase in the inventories from previous year because the company is takingnew projects in new sectors with good worth.2) The current liabilities of the firm is very less.3) The increased total current liabilities is very less compared to the total current assets.Operating cycleThe need of working capital arrived because of time gap between production ofgoods and their actual realization after sale. This time gap is called OperatingCycle or Working Capital Cycle . The operating cycle of a company consist oftime period between procurement of inventory and he collection of cash fromreceivables. The operating cycle is the length of time between the companysoutlay on raw materials, wages and other expanses and inflow of cash fromsales of goods. Operating cycle is an important concept in management of cashand management of cash working capital. The operating cycle reveals the timethat elapses between outlays of cash and inflow of cash. Quicker the operatingcycle less amount of investment in working capital is needed and it improves profitability. The duration of the operating cycle depends onnature of industries and efficiency in working capital management. In manufacturing concern ,the working capital cycle/operating cycle startswith the purchase of raw material and ends with the realisation of cash from thesale of finished products.This cycle involves purchase of raw material andstores,its conversion through into stocks of finished goods through work-in-progress with progressive increment of labour and service costs,conversion offinished stock into sales,debtors and receivables and ultimately realisation ofcash and this cycle continues again from cash to purchase 27 Projectsformba.blogspot.com
  28. 28. Projectsformba.blogspot.com DEBTORS (RECEIVABLES) CASH FINISHED GOODS RAW MATERIALS WORK-IN-PROCESS [working capital cycle/operating cycle]The speed with which the working capital completes one cycle determines therequirements of working capital-longer the period of the cycle larger is therquirement of working capitalCalculation of operating cycle of ARSSITEMS 2005-2006 2006-2007 2007-2008 2008-2009 2009-20101.Raw material2.Work-in -progress3.finished goods Total2.Debtors conversion period3.Gross working capital cycle4.Payment deferal periodNET WORKING CAPITALCYCLEObservation:The inventory conversion period of the company is almost same in financialyears from 2005 to 2009 but in the financial year 2009-10 there is suddenincrease (double times) from its previous year. Raw Material consumption in 28 Projectsformba.blogspot.com
  29. 29. Projectsformba.blogspot.com2009-10 decreased from previous years while raw material inventory increased.The maximum projects of the company (with joint ventureCompany) finished inthe May 2010 as NIRAJ-ARSS joint venture total value of the projects26288 lacs. The company is engaged in bidding of big projects so the companykeeps a better raw material inventory in FY 2009-10. Also the company has avision of taking tenders of good projects in next financial year.ARSS infrastructure Projects Limited is a construction company and it‟scoustomers are the Government of different states, Ministry of Railway,Ministry of Infrastructure and the Government agencies like SAIL, NTPC etc.so there is no any debtors available among it‟s coustomers because theGovernment or their agencies pays the money instantaneouslybefore/ during orafter the project. The company‟s debtors are joint venture companies. Sometimes the ARSS andit‟s joint venture companies do the project but the company incurres the wholecost. And there is delayed in payment by it‟s joint venture companies. Thatcomes under the debtors collection period. Common sense tells that longer acompany has money out, the more risk it is taking.But there is one positiveaspect that will boost the confidence among the companies.The company is notpurchasing on credit from it‟s supplier. So in credit deferral period the creditpurchases taken as a whole sundry creditors. These sundry creditors are for thebank loans, Advances etc. In all the years from 2005 to 2009 the creditorsdeferral period is 360 days which is good for the company. The company isenjoying the money of it‟s creditors.WORKING CAPITAL LEVERAGEOne of the important objectives of working capital management is by maintaining theoptimum level of investment in current assets and by reducing the level ofinvestment in current assets and by reducing the level of current liabilities thecompany can minimize the investment in the working capital thereby improvementin return on capital employed is achieved. The term working capital leverage refersto the impact of level of working capital on company s profitability. The workingcapital management should improve the productivity of investment in current assetsand ultimately it will increase the return on capital employed. Higher level ofinvestment in current assets than is actually required means increase in the cost ofInterest charges on short term loans and working capital finance raised from banks etc. and will result in lower return on capital employed and vice versa. Workingcapital leverage measures the responsiveness of ROCE (Return on CapitalEmployed)for changes in current assets. It is measures by applying the following formula, 29 Projectsformba.blogspot.com
  30. 30. Projectsformba.blogspot.com % Changes in ROCE Working capital leverage= % Changes in current assets EBIT Return on capital employed= Total assets The working capital leverage reflects the sensitivity of return on capital employed to changes in level of current assets. Working capital leverage would be less in the case of capital intensive capital employed is same working capital leverage expresses the relation of efficiency of working capital management with the profitability of the company. CALCULATION OF WORKING CAPITAL LEVERAGEYEAR 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010EBIT 17013036 42850664 139926233 378403100 705936654 1210851636Total assets 160749473 299889528 667642027 1983096501 3731842651 7866688809ROCE% 10.58 14.29 20.96 19.08 18.91 15.39%Change in N.A 35.07 46.68 -8.96 -0.89 -18.61ROCECurrent assets 127270647 307866661 540845439 2156643952 3585863626 6988782501%change in N.A -758.09 75.67 298.75 66.27 94.89current assetsWorking capital N.A -0.05 0.62 -0.03 -0.01 -0.20leverage 30 Projectsformba.blogspot.com
  31. 31. Projectsformba.blogspot.com Working Capital Ratio Analysis Introduction Role of ratio analysis Limitations of ratio analysis Classifications of ratio Efficiency ratio Liquidity ratio 31 Projectsformba.blogspot.com
  32. 32. Projectsformba.blogspot.comWORKING CAPITAL RATIO ANALYSIS5.1) IntroductionRatio analysis is the powerful tool of financial statements analysis. A ratio is define asthe indicated quotient of two mathematical expressions and as the relationship between two or more things . The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firms financial performance5.2) Role of ratio analysisRatio analysis helps to appraise the firms in the term of there profitability and efficiency of performance, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available tomanagement to impart the basic functions like planning and control. Ais closely related to the immediately past, ratio calculated on the basis historicalfinancial data may be of good assistance to predict the future. E.g. On the basisof inventory turnover ratio or debtor s turnover ratio in the past, the level ofinventory and debtors can be easily ascertained for any given amount of sales.Similarly, the ratio analysis may be able to locate the point out the various ariaswhich need the management attention in order to improve the situation. E.g.Current ratio which shows a constant decline trend may be indicate the need forfurther introduction of long term finance in order to increase the liquidityposition. As the ratio analysis is concerned with all the aspect of the firmsfinancial analysis liquidity, solvency, activity, profitability and overallperformance, it enables the interested persons to know the financial andoperational characteristics of an organization and take suitable decisions. 5.3)Limitations of ratio analysis 1. The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparison 32 Projectsformba.blogspot.com
  33. 33. Projectsformba.blogspot.com 2. Normally, the ratios are calculated on the basis of historical financial statements. An organization for the purpose of decision making may need the hint regarding the future happiness rather than those in the past. The external analyst has to depend upon the past which may not necessary to reflect financial position and performance in future. 3. The technique of ratio analysis may prove inadequate in some situations if there is differs in opinion regarding the interpretation of certain ratio. 4. As the ratio calculates on the basis of financial statements, the basic limitation which is applicable to the financial statement is equally applicable In case of technique of ratio analysis also i.e. only facts which can be expressed in financial terms are considered by the ratio analysis. 5. The technique of ratio analysis has certain limitations of use in the sense that it only highlights the strong or problem arias, it dose not provide any solution to rectify the problem arias . 6. For the intra firm comparison, the comparison may be false becausedifferent firms use different accounting policies as some firms use LIFO (Last in First out) method while some use FIFO (First inFirst out). Classification of ratio :-Basically on the basis of working capital management it can be characterized intofollowing ratios1) Activity Ratio:Activity ratio is an indicator of how rapidly a firm converts various accounts intocash or sales. The sooner management can convert assets into sales or cash, the moreactively the firm run. This ratio is also called Asset Management Ratio. As the assetsbasically categorized as fixed assets and current assets and again further the currentassets classified according to individual components of current assets viz. Inventories,Sundry Debtor, and receivables etc. The important Activity ratios are as follows(i) Working Capital Turnover Ratio 33 Projectsformba.blogspot.com
  34. 34. Projectsformba.blogspot.com(ii) Inventory Turnover Ratio(iii) Receivable Turnover Ratio(iv)Current Asset Turnover Ratio1) Working Capital Turnover Ratio:A company uses working capital to fund operations and to purchase inventory. Theseoperation and inventory are then converted into sales revenue for the company. Theworking capital turnover ratio is used to analyze the relationship between the cashused to fund operation and sales generated from these operations. In a general sense,the higher the working capital turnover, the better because it means that the companyis generating a lot of sales compared to the cash it uses to fund the sales. SalesWorking Capital Turnover Ratio= Net Working CapitalParticulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010sales 295777455 602467051 1338321101 3136709419 6243752255 10065504283Net W.C 77101916 176394314 399820011 1205573857 2265639443 5282948306W.C TOR 3.83 3.42 3.35 2.60 2.76 1.91 34 Projectsformba.blogspot.com
  35. 35. Projectsformba.blogspot.com W.C TOR 4.5 4 3.83 3.42 3.35 3.5 3 2.76 2.6 2.5 W.C TOR 2 Power regression for 1.5 1.19 1 0.5 0 2004-2005 2006-2007 2008-2009 Years 2005-2006 2007-2008 2009-2010 YearObservationsThe working capital turnover ratio of ARSS declined from 2004-05 to 2009-10,however it increased in 2008-09. The reciprocal of the ratio is 0.26, 0.29, 0.30, 0.38,0.36, and 0.52 continuously. It means that for one rupee of sales, the company needsRs 0.26, 0.29, 0.30,0.38, 0.36, and 0.52. In previous years the company incurred lessmoney for sales while in these years specially in 2009-10 it is unable to take projectsin that amount. The company is increasing its sales by increasing in the net workingcapital.Inventory turnover ratio cost of goods soldInventory TOR = Average inventoryParticulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Cost of 467324486 1119159494 2051226344 422819852 6644038328goods sold 3Average 81317926 88752585 347700997.5 125240406 2791896534inventory 0 35 Projectsformba.blogspot.com
  36. 36. Projectsformba.blogspot.comInventory 5.75 12.61 5.9 3.38 2.38TOR Inventory Turnover Ratio 14 12.61 12 10 Inventory TOR 8 5.75 5.9 Inventory TOR 6 4 3.38 2.38 2 0 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Years Figure.......Inventory Turnover RatioObservation:Inventory turnover ratio basically tells about the efficiency of the firm in takingthe project and to accomplish that. The inventory turnover shows how rapidlythe inventory is turning into receivables through sales. A high inventoryturnover ratio is good because the no of days converting the inventories into the 36 Projectsformba.blogspot.com
  37. 37. Projectsformba.blogspot.comsales will become less. As in 2006-07 the inventory turnover ratio is 12.61 timesso the inventory holding days is only 29 days while from 2007-08 to 2009-10 theinventory turnover ratio decreasing means the no of days in inventory converting isincreasing. This can bad for the organization as this creates unnecessary tie-upof funds,reduced profit, and increasedcosts.3) Debtors Turnover Ratio:A firm sells goods and/ or services for cash and credit. When the firm extendscredits to its coustomers, debtors (Accounts Receivables) are created in thefirm‟s accounts. The liquidity position of the firm depends on the quality ofdebtors to great extent. Gross SalesDebtors Turnover Ratio = Average DebtorsFor an Infrastructure Company like ARSS the gross sales considers as thecontract revenue.The scrap values are not included in Gross Sales because it further comes intosales with other income. Average Debtors calculated by opening plus closingbalance divide by 2.Increasing volume of receivables without a matchingincrease in sales is reflected by a low receivable turnover ratio. It is indicationof slowing down of the collection system or an extend line of credit being allowed bythe customer organization. The latter may be due to the fact that the firm is losing out tocompetition. A credit manager engage in the task of grantingcredit ormonitoring receivable should take the hint from a falling receivable turnoverratiouse his market intelligence to find out the reason behind such failing trend.Debtor turnover indicates the number of times debtors turnover each year.Generally the higher the value of debtor‟s turnover, the more is the managementof credit.Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Gross sales 295777455 602467051 1338321101 3136709419 6243752255 10065504283Average 1632619 36478584 216928175 399355338 541053918 607328183debtorsD.T.R 181.2 16.52 6.17 7.85 11.54 16.57 37 Projectsformba.blogspot.com
  38. 38. Projectsformba.blogspot.comA.C.P.* 2 22 58 46 31 22 Table........Debtor turnover ratio and avarage collection period Debtors Turnover Ratio 18 16.52 16.57 16 14 12 11.54 10 D.T.R 7.85 D.T.R 8 6.17 6 4 2 0 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 YearObservation:Debtors Turnover ratio indicates the no of times debtors turnover each year.Higher the value of debtors turnover, the more efficient is the management ofcredit because the collection period of the debtors will low. Maximum debtorsturnover ratio in all five years is 16.57 in 2009-10. It increases from 2006-07also there is sudden jump in collecting the amount of debtors in 2008-09 and in2009-10. The increased Debtors Turnover Ratio shows the better management in debtors collection (from it‟s joint venture companies).Current Asset Turnover Ratio:Current assets turnover ratio is calculate to know the firms efficiency ofutilizing the current assets .current assets includes the assets like inventories,sundry debtors, bills receivable, cash in hand or bank, marketable securities, 38 Projectsformba.blogspot.com
  39. 39. Projectsformba.blogspot.comprepaid expenses and short term loans and advances.This ratio includes theefficiency with which current assets turn into sales. A higher ratio implies amore efficient use of funds thus high turnover ratio indicate to reduced the lockup of funds in current assets. An analysis of this ratio over a period of timereflects working capital management of a firm. SalesCurrent Asset Turnover Ratio= Current AssetsParticulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Sales 295777455 602467015 1338321101 3136709419 6243752255 10065504283C.A 127270647 307866662 540845439 2156643952 3585863626 6988782501C.A TOR 2.32 1.96 2.47 1.45 1.74 1.44 Table......Current assets Turnover Ratio Current Assets Turnover Ratio 2.5 2.47 2.32 2 1.96 1.74 1.5 1.45 1.44 C.A TOR C.A TOR 1 0.5 0 2005-2006 2007-2008 2009-2010 2004-2005 2006-2007 2008-2009 Years Figure.......Current assets turnover RatioObservation:This ratio is very significant as it shows how fast the current assets turns into 39 Projectsformba.blogspot.com
  40. 40. Projectsformba.blogspot.comsales. The current asset turnover ratio is in haphazard way but comparing to2006-07 the ratio is low in recent years. In previous years the ratio was good.The current asset changes in sales in 155days, 184 days, and 146 dayscontinuously in 2004-05, 2005-06, and 2006-07. While in 2007-08, 2008-09,2009-10 the days are 248 days, 207 days, and 250 days continuously. Theincreasing no of days of current asset turnover ratio because company can maintainhigh level of inventory for upcoming its projects.Current Ratio:The current ratio is a crude and quick measure of the firm‟s liquidity. Thecurrent is calculated by dividing current assets by current liabilities: Current AssetsCurrent Ratio = Current LiabilitiesCurrent assets include cash and those assets which can be converted in to cashwithin a year,such marketable securities, debtors and inventories. Allobligations within a year are include in current liabilities. Current liabilitiesinclude creditors, bills payable accrued expenses, short term bank loan incometax liabilities and long term debt maturing in the current year. Current ratioindicates the availability of current assets in rupees for every rupee of currentliability. This ratio is important as the value of the current assets may decrease orincrease but the value of the current liabilities is always constant. That has to bepaid.Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Current 127270647 307866662 540845439 2156643952 3585863626 6988782501assetsCurrent 42632767 121648520 105763831 858935086 1147928616 1447454152 40 Projectsformba.blogspot.com
  41. 41. Projectsformba.blogspot.comliabilitiesCurrent ratio 2.99 2.53 5.11 2.51 3.12 4.83 Current Ratio 6 5.11 5 4.83 4 Current Ratio 3.12 2.99 3 2.53 2.51 Current Ratio 2 1 0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 YearsObservation:As a conventional rule, a current ratio of 2 to 1 or more is consideredsatisfactory. In all the years the current ratio of ARSS is more than 2. It meansthe company has its short term securities (cash & bank balances, Inventories, 41 Projectsformba.blogspot.com
  42. 42. Projectsformba.blogspot.comInventories, loans and advances) to fulfill its short term liabilities (sundrycreditors, provision for taxation). Also the current ratio shows the margin ofsafety for it‟s creditors. Higher the ratio greater will be the margin of safety.Quick Ratio:Quick ratios establish the relationship between quick or liquid assets andliabilities. An asset is liquid if it can be converting in to cash immediately orreasonably soon without a loss of value. Cash is the most liquid asset otherassets which are consider to be relatively liquid and include in quick assets aredebtors, bills receivable and marketable securities. Inventories are considered asless liquid. Inventory normally required some time for realizing into cash.Their value also is tendency to fluctuate. The quick ratio is found out bydividing quick assetsby current liabilities:- Current Assets - InventoriesQuick Ratio = Current LiabilitiesParticulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010C.A 127270647 307866662 540845439 2156643952 3585863626 6988782501Inventories 58429517 104206335 73298835 622103160 1882704940 3701088121Quick C.A 68841130 203660 326 467546604 1534540792 1703158686 3287694373C.L 42632767 121648520 105763831 858935086 1147928616 1447454152Quick ratio 1.61 1.67 4.42 1.79 1.48 2.27 Table.......Quick Ratio 42 Projectsformba.blogspot.com
  43. 43. Projectsformba.blogspot.com Quick Ratio 4.5 4.42 4 3.5 3 Quick Ratio 2.5 2.27 Quick Ratio 2 1.79 1.61 1.67 1.5 1.48 1 0.5 0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Years Figure.......Current RatioObservation:The quick ratio of 1 to 1 is considered as satisfactory financial condition. Thecompany has not a very high ratio throughout except one year 2006-07. In2006-07 the company had high value of cash & bank balances, sundry debtorsetc. whereas the sundry creditors andprovision were compairatively low. Highquick ratio will benefit to the company in its bidding activities i.e It shows the financial strength of the company.  Working Capital Management  Components 43 Projectsformba.blogspot.com
  44. 44. Projectsformba.blogspot.com                                     Receivables Management Inventory Management Cash Management 44 Projectsformba.blogspot.com
  45. 45. Projectsformba.blogspot.comReceivable Management:Introduction:­ 45 Projectsformba.blogspot.com
  46. 46. Projectsformba.blogspot.comReceivables or debtors are the one of the most important parts of the current assets which is createdif the company sells the finished goods to the customer but not receive the cash for the sameimmediately. Trade credit arises when firm sells its products and services on credit and dose notreceive cash immediately. It is essential marketing tool, acting as bridge for the movement of goodsthrough production and distribution stages to customers. Trade credit creates receivables or bookdebts which the firm is expected to collect in the near future. The receivables include threecharacteristics: 1) It involve element of risk which should be analyse carefully. 2) It is based on economic value. To the buyer, the economic valuein goods or services passes immediately at the time of sale, while seller expects an equivalent valueto be received later on. 3) It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period.Objective of Receivable Management:The sales of goods on credit basis are an essential part of the modern competitive economic system.The credit sales are generally made up on account in the sense that there are formalacknowledgements of debt obligation through a financial instrument. As a marketing tool,they areintended to promote sales and there by profit. However extension of credit involvesrisk and cost, management should weigh the benefit as well as cost to determine the goal ofreceivable management. Thus the objective of receivable management is to promote sales and profituntil that point is reached where the return on investment in further funding of receivables is lessthan the cost of funds raised to finance that additional credit.Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Sundry Debtor 71791868 145136306 653574370 428533465 786122901Indices 100 202 910 597 1095 Table..........Size Of Receivables 46 Projectsformba.blogspot.com
  47. 47. Projectsformba.blogspot.com Receivables Indices 1200 1095 1000 910 Receivables Indices 800 600 597 Receivables Indices 400 202 200 100 0 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Years Figure.......Receivables IndicesAverage Collection Period:The average collection period measures the quality of debtors since it indicatethe speed of their collection. The shorter the average collection period, thebetter the quality of the debtors since a short collection period implies theprompt payment by debtors. The average collection period should be compared against the firm‟s credit terms and policy judges itscredit and collection efficiency. The collection period ratio thus helps an analystin two respects: 47 Projectsformba.blogspot.com
  48. 48. Projectsformba.blogspot.com1. In determining the collectability of debtors and thus, the efficiency ofcollection efforts.2. In ascertaining the firm‟s comparative strength and advantages related to itscredit policy and performance. The debtor‟s turnover ratio can be transformed in to the number of days ofholding of debtors:-Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Gross sales 295777455 602467051 1338321101 3136709419 6243752255 10065504283Avg.Debtors 1632619 36478584 216928175 399355338 541053918 607328183D.T.R 181.17 16.52 6.17 7.85 11.54 16.57A.C.P* 2 22 58 46 31 22 Table.............Average collection period Average collection period(In days) 300 258 250 Average collection period 200 150 average collection period 100 46 50 31 22 22 2 0 2005-2006 2007-2008 2009-2010 2004-2005 2006-2007 2008-2009 years 48 Projectsformba.blogspot.com
  49. 49. Projectsformba.blogspot.comObservationThe average collection period increased from 2004-05 to 2006-07 and then itdecreases from 2006-07 to 2009-10. The increasing average collection period showsthe inefficiency of the management in collecting the debtors money while thedecreasing average collection period shows the efficient management and bettercredit policy. The reason behind average collection period is high due to debtorsturnover ratio is low. In 2006-07 the company had taken a no of projects but thecompany did projects alone. So there is no chance of debting in 2006-07. While in2007-08 the company had taken 10 projects on the joint venture basis. Company‟sshare is 100% in those projects. In 2008-09 and 2009-10 the company has taken 3and 5 projects on the joint venture basis so there is case of debting.Inventory Management:In financial view, inventory defined as the sum of the value of raw material andsupplies,including spares, semi-processed material or work in progress and finishedgoods. The nature of inventory is largely depending upon the type of operationcarried on. A firm neglecting the management of inventories will be jeopardizing itslong term profitability and may fail ultimately. It is possible to reduce the inventory toa certain level without affecting production and sales, by using simple inventoryplanning and controlling technique. The reduction in “excessive” inventories carries afavourable impact on the company‟s profitability. Maintaining inventories involvestying up of the company‟s funds and incurrence of storage and handling cost. Thereare three components: Raw material, Work in progress; and finished goods involvedin inventory management.Objective of Inventory Management:In the case of Inventory Management, the firm is faced with the problem of meetingtwo conflicting needs: 49 Projectsformba.blogspot.com
  50. 50. Projectsformba.blogspot.com 1) To maintain a large amount of inventory for efficient and smooth production;2) To maintain a minimum amount of inventory for increasing the profitability;But the firms avoid both the cases. In the first case, the firms avoid overinvestmentbecause of:-(a) unnecessary tie-up of the firm‟s funds and loss of profits (b) excess carrying cost(c)risk of liquidity. Another danger of holding excess inventories is deterioration ofthe inventories. Maintaining a minimum level of inventories is also dangerous. Theconsequences of under-investment in inventories are: (a) production hold-ups (b)failure to deliver commitments. So the aim of inventory management is: (1) To ensure a continuous supply of raw material to facilitate uninterrupted production;(2) To maintain a sufficient stock of the raw material in period of short supply andoverprices;(3) To maintain sufficient finished goods inventory for smooth sales operation, andefficient customer service; (4) To maintain the carrying cost and time; (5) To control investment in inventories and keep at optimum level;Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Raw 1803094 1517210 10008237 255489710 464589560materialsW.I.P 69724520 57300640 560122560 1512045660 2523687458Finished 32678721 14480985 40523740 81715450 651456230GoodsStores and 0 0 11448623 33454120 61354880sparesTotal 104206335 73298835 622103160 1882704940 3701088128Indices 100 70.34 597.o 1806.7 3551.7 Table.......Size of inventory 50 Projectsformba.blogspot.com
  51. 51. Projectsformba.blogspot.com Inventory indices 4000 3551.7 3500 3000 Inventory indices 2500 2000 1806.7 Inventory indices 1500 1000 597 500 100 70.34 0 2005-5006 2006-2007 2007-2008 2008-2009 2009-2010 Years Figure........Inventory indicesInventory Components:The firm‟s inventory consist following components (i) Raw material (ii) Work- in-progress (iii) Finished goodsTo analyze the level of raw material inventory and work in progress inventory held by thefirm on an average it is necessary to examine the efficiency with which the firm converts rawmaterial inventory and work in progress into finished goods.Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Raw Material 1.73 2.07 1.6 13.57 12.55W.I.P 66.91 78.17 90.03 80.31 68.18 51 Projectsformba.blogspot.com
  52. 52. Projectsformba.blogspot.comFinished Goods 31.36 19.75 6.51 4.34 17.6Stores&Spares 0 0 1.84 1.78 1.66Total(%) 100 100 100 100 100 Table........Inventory components(%) 100 90.03 90 80.31 78.17 80 68.18 70 66.91 60 Raw Material 50 W.I.P Finished Goods 40 Stores&Spares 31.36 30 19.75 20 17.6 13.57 12.55 10 6.51 4.34 1.73 2.07 1.6 1.84 1.78 1.66 0 0 0 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Figure......Inventory components in % 100 90.03 90 80.31 78.17 80 68.18 70 66.91 60 50 40 31.36 30 19.75 17.6 20 52 Projectsformba.blogspot.com 13.57 12.55 10 6.51 4.34 1.73 2.07 1.84 1.6 1.78 1.66 0 0 0 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
  53. 53. Projectsformba.blogspot.comObservation:As the ARSS Infrastructure Projects Limited is a construction company. And it takes projectof different segment in construction sector like road, railway, irrigation, aviation, marine,jetty etc. The company‟s inventory work in progress is very high in terms of cash as well asin terms of % and it increases year by year. The company is taking a no of projects whichcompletes in more than one year because of season factor.The company did not concern about the stores and spares in the period of 2005 and 2006. Butas the stores and spares plays a important role in the construction industry examples forequipments. So from 2007 onwards the company made a certain account in the inventories. In2008-09 the recession was happening. The company was unable to good projects because ofthe downturn in the industry. As mentioned earlier the company had taken only three projectsin the railway segment in 2008-09. So the raw material remained high and the finished goodsremained low.Inventory Holding Period:The reciprocal of inventory turnover gives average inventory holding in percentage term. 53 Projectsformba.blogspot.com
  54. 54. Projectsformba.blogspot.comWhen the no of days in a year (said as 360) are divided by inventory turnover, days ofinventory holding (DIH) can obtain 360 DIH = Inventory TurnoverTo examine the efficiency of the firm (how the firm converts raw material into work inprocess and work-in-process into finished goods), raw material inventory and work in processinventory should be known. The raw material inventory should be related to materialsconsumed, and work-in-process to the cost of production. Material consumedRaw Material Inventory Turnover = Avg. Raw Material Inventory Cost of ProductionWork-in-Process Inventory Turnover = Avg. work-in-process inventory 54 Projectsformba.blogspot.com
  55. 55. Projectsformba.blogspot.com 55 Projectsformba.blogspot.com
  56. 56. Projectsformba.blogspot.comCash Management:Cash is common purchasing power or medium of exchange. As such, it forms the mostimportant component of working capital. The term cash with reference to cash managementis used in two senses, in narrow sense it is used broadly to cover cash and generally acceptedequivalent of cash such as cheques, draft and demand deposits in banks. The broader view ofcash includes near cash items, such as marketable securities or bank time deposits. The basiccharacteristic of near-cash assets is that they can readily be converted into cash. They alsoprovide short term investment outlet for excess and are also useful for meeting plannedoutflow of funds. Irrespective of the form in which it is held, a distinguishing feature of cashas assets is that it has no earning power. Company have to always maintain the cash balanceto fulfill the dally requirement of expenses. There are four primary motives for maintain thecash as follow: 56 Projectsformba.blogspot.com
  57. 57. Projectsformba.blogspot.comCash management is concerned with the managing of:(i) Cash flows into and out of the firm,(ii) Cash flows within the firm, and(iii) Cash balances held by the firm at a point of the time by financing deficit or investingsurplus cash.Motives for Holding Cash:The firm‟s need to hold cash may be attributed to the following three motives:Transaction Motive:The transactions motive requires a firm to hold cash to conduct its business in the ordinarycourse. The firm needs cash primarily to make payments, for purchases, wages and salaries,operating expenses, taxes, dividends etc. There should be a proper channel between the cashinflow and cash outflow in the firm. For periods when cash payments exceed cash receipts,the firm should maintain some cash balance to be able to make required payments. Usuallythe firm maintains such accounts to meet anticipated payments whose timings is not perfectlymatched with cash receipts.The Precautionary Motive:The precautionary motive is the need to hold cash to meet contingencies in the future. It helpsin the future. The precautionary amount of cash depends upon the predictability of cashflows. If cash flows are predicted with accuracy, less cash will be maintained for emergency.If the firm is able to borrow at short notice there will less need for precautionary balance.Generally the precautionary balance held in marketable securities and relatively less in cash.The speculative Motive:The speculative motive relates to the holding of cash for investing in profit making 57 Projectsformba.blogspot.com
  58. 58. Projectsformba.blogspot.comopportunities as and when they arise. As the firm can postpone materials‟ purchasing whenthe price of materials is high. And make purchase in future when the price of materials falls.The primary motives to hold cash and marketable securities are: the transactions and theprecautionary motives.Advantage of Cash Management:Cash does not enter in to the profit and loss account of an enterprise, hence cash is neitherprofit nor losses but without cash, profit remains meaningless for an enterprise owner.1. A sufficient of cash can keep an unsuccessful firm going despite losses;2. An efficient cash management through a relevant and timely cash budget may enable afirm to obtain optimum working capital and ease the strains of cash shortage, fascinatingtemporary investment of cash and providing funds normal growth;3. Cash management involves balance sheet changes and other cash flow that do not appearin the profit and loss account such as capital expenditure;Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Cash &Bank 19100114 50648882 116425792 373999265 717214943 1095090536balanceIndices 100 265.18 609.55 1958.09 3755.02 5733.42 Table.........Cash&Bank balance Indices 58 Projectsformba.blogspot.com
  59. 59. Projectsformba.blogspot.com Cash&Bank balance indices 6000 5733.42 Cash&Bank balance indices 5000 4000 3755.02 3000 Indices 2000 1958.09 1000 609.55 265.18 100 0 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Years Figure.........Cash & Bank balance indicesObservation:The cash and bank balances of ARSS was continuously increasing from 2005-06 to 2009-10.The reason of increasing cash and bank balances was the increasing no of projects with theirvalue. The company entered into new areas and earned increasing profits. There was a sharpincrease in cash and bank balances in 2007-08 from it‟s previous year (i.e. 212.23%increase). There was increase due to 10 projects of railway, road, irrigation taken.Cash Cycle:One of the distinguishing features of the fund employed as working capital is that constantly 59 Projectsformba.blogspot.com
  60. 60. Projectsformba.blogspot.comchanges its form to drive „business wheel‟. It is also known as „circulating capital‟ whichmeans current assets of the company, which are changed in ordinary course of business fromone form to another, as for example, from cash to inventories, inventories to receivables andreceivables to cash. 60 Projectsformba.blogspot.com
  61. 61. Projectsformba.blogspot.com 61 Projectsformba.blogspot.com
  62. 62. Projectsformba.blogspot.com Working capital finance and estimation Introduction Sources of capital finance Working capital loan and interest Estimation of working capital 62 Projectsformba.blogspot.com
  63. 63. Projectsformba.blogspot.comIntroduction:Funds available for period of one year or less is called short term finance. In India short termfinance are used as working capital finance. Two most significant short term sources offinance for working capital are trade credit and bank borrowing. Trade credit ratio of currentassets is about 40%, it is indicated by Reserve Bank of India data that trade credit has grownfaster than the growth in sales. Bank borrowing is the next source of working capital finance.The relative importance of this varies from time to time depending on the prevailingenvironment. In India the primary source of working capital financing are trade credit andshort term bank credit. After determine the level of working capital, a firm has to considerhow it will finance. Following are sources of working capital finance.Sources of Working Capital Finance:1) Trade credit 2) Bank Finance1) Trade credit:Trade credit refers to the credit that a customer gets from suppliers of goods in the normalcourse of business. The deferral of payment in short term financing is called trade credit. It ismajor source of financing for firm. Particularly small firms are heavily depend on trade creditas a source of finance since they find it difficult to raised funds from banks or other sourcesin the capital market. Trade credit is mostly an informal arrangement, and it granted on anopen account basis. 63 Projectsformba.blogspot.com

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