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“WORKING CAPITAL OF HCL”
NAME: Ms. JEENAL N. RATHOD
CLASS: M.COM PART – II ACCOUNTS (SEM IV)
UNIVERSITY OF MUMBAI
PROJECTED GUIDE: Mrs. Dr. LIPI
GHANSHYAMDAS SARAF GIRL‟S COLLEGE,
AFFILLIATED TO UNIVERSITY OF MUMBAI
REACCREDITED BY NAAC WITH “A” GRADE
DURGADEVI SARAF JUNIOR COLLEGE
( ARTS & COMMERCE)
S.V.ROAD MALAD (W)
MUMBAI – 400064
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Ghanshyamdas Saraf College
Affiliated to University of Mumbai
REACCREDITED BY NAAC WITH „A‟ GRADE
R. S. Campus, S. V. Road,
Malad (W), Mumbai: 400 064
I Prof. REKHA BHATIA here by certify that Ms. Jeenal Navratana
Rathod a student of Ghanshyamdas Saraf College of M.COM
PART II ACCOUNT (Semester IV) has completed Project on
“WORKING CAPITAL OF HCL” in the Academic year
Thus information submitted is true and Original to the best of my
External Examiner: Principal:
Project Co-ordinator: College Seal:
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I take this opportunity to thank the UNIVERSITY OF MUMBAI
for giving me a chance to do this Project.
I express my sincere gratitude to the Principal Mrs. Sujata
Karmarkar, course co-ordinator and Guide Prof. Mrs. Dr. Lipi
Bhattacharya, our librarian and other teachers for their constant
support and helping me for completing the project.
I am also grateful to my friends for giving support in my project.
Lastly, I would like to thank each and every person who helped me
in completing the project especially MY PARENTS.
Date: Signature of the Student :
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I Miss JEENAL NAVARATNA RATHOD a student of
Ghanshyamdas Saraf College of Arts and Commerce, Malad (W)
M.COM PART II ACCOUNT (Semester IV) hereby declare that I
have completed project on “WORKING CAPITAL OF
HCL” in the academic Year 2013-2014. This information
submitted is true and original to best of my Knowledge.
Date : Signature of the Student:
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Sr. No TITLE Page.
1.1 Executive Summary (Preface) 7
1.2 Objectives of the Study 8
2.1 HCL Company Overview 9-10
2.2 Introduction to HCL Career Development Centre 11
3.1 Introduction to Working Capital 12-14
3.2 Types Of Working Capital 15-24
3.3 Importance of Working Capital 25-28
3.4 Factors Determining Working Capital 29-30
3.5 Need and Objectives of Working Capital 31-33
3.6 Principle of Working Capital Management/Policy 34
3.7 Forecasting/Estimation of Working Capital Requirement 35-41
4.1 Performa of Working Capital Estimating 42-43
4.2 Working capital financing policies 44-45
4.3 Conclusion 46
4.4 Findings 47-48
4.5 Questionnaire of working capital 49-51
4.6 Bibliography 52
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Working capital management refers to the administration of all aspects
of current assets, namely cash, marketable securities, debtors and stock
(inventories) and current liabilities. The financial manager must
determine levels and composition of current assets. He must see that
right sources are tapped to finance current assets, and that current
liabilities are paid in time. He must see that right sources are tapped to
finance current assets, and that current liabilities are paid in time. There
are many aspects of working capital management, which make it an
important function of the financial manager:
• Time: working capital management requires much of the financial
• Investment: working capital represents a large portion of the total
investments in assets.
• Significance: working capital management has great significance for all
firms but it is very critical for small firms.
• Growth: the need for working capital is directly related to the firm‟s
growth. Investment in current assets represents a very significant portion
of the total investment in assets.
Working capital management is critical for all firms. A small firm may
not have much investment in fixed assets, but it has to invest to in
current assets. Small firms in India face a severe problem of collecting
their debtors. Banks have their own policies to assess the working
capital of the firm to finance them with the shortage. Bank of
Maharashtra adopts certain method for financing their customer‟s
working capital requirements. It may, thus, be concluded that all
precautions should be taken for the effective and efficient management
of working capital. The finance manager should pay regular attention to
the levels of current assets and the financing of current assets.
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1.2 OBJECTIVES OF THE STUDY:
Since working capital management is one of the most important aspects
of finance, it enables to study in-depth the methods involved in it; so that
as a student of finance it gives me a chance to study the financial
perspectives of the industry. It offers scope to understand various aspects
of finance and all these aspects are reflected in this report. The
estimation of required working capital differs from organization to
organization. So doing this project in an industry will help in
knowing more about the working capital, its preparation and execution.
The study has the following
1. To see whether the working capital in “HCL”
is an effective one.
2. To find out the extent of the need and adequacy of the working capital
of the firm.
3. To evaluate or analyze the organizational financial discipline and
4. To find out the variance attained in related to projected and actual figure.
5. To see the liquidity position of the company.
6. To see the changes in the working capital.
7. To see the components of working capital is properly maintained.
8. To determine the requirements of working capital.
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2.1 COMPANY OVERVIEW:
Hindustan Computers Limited
Hindustan Computers Limited, also known as HCL Enterprise, is one of
India's largest electronics, computing and information Technology
Company. Based in Noida, near Delhi, the company comprises two
publicly listed Indian companies, HCL Technologies and HCL Info
HCL was founded in 1976 by Shiv Nadar, Ajay Chowdhry and four of
their colleagues. HCL was focused on addressing the IT hardware
market in India for the first two decades of its existence with some
sporadic activity in the global market. In 1981, HCL seeded a company
focused on addressing the computer training industry, NIIT, though it
has currently divested its stake in the company. In 1991, HP took
minority stake in the company (26%) and the company was known as
HCL HP for the five years of the joint venture. On termination of the
joint venture in 1996, HCL became an enterprise which comprises HCL
Technologies (to address the global IT services market) and HCL
Infosystems (to address the Indian and APAC IT hardware market).
HCL has since then operated as a holding company.
HCL Technologies is a global IT Services company headquartered in
Noida, a suburb of Delhi, India led by Mr Vineet Nayar, HCL
Technologies, along with its subsidiaries, had consolidated revenues of
US$ 5 billion, as of 2010, and employed more than 60,000 workers.
HCL offers services including software-led IT solutions, remote
infrastructure management, Engineering and R&D Services and BPO.
The company provides services across industries including Financia
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Services, Retail & Consumer, Life Sciences & Healthcare, Aerospace &
Defense, Automotive, Telecom and Media, Publishing and Entertainment,
amongst others. HCL‟s key services include:
Custom Application Services
Enterprise Application Services
Enterprise Transformation Services
Engineering and R&D Services
Business Processing outsourcing
Industry IT Services
Founded August 11, 1976
Delhi metropolitan area
Shiv Nadar, Founder-Chairman and Chief Strategy
Officer, HCL Technologies
Roshni Nadar, CEO HCL Corp.
Ajai Chowdhry - Founder-Chairman and CEO, HCL
Infosystems , Vineet Nayar - CEO, HCL
Technologies. Jagadeshwar Gattu- Vise President of
Revenue ▲ US$5.0 billion (2009)
Employees 62,000+ (2010)
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2.2 HCL Career Development Centre:
HCL Career Development Centre or LEARNING DIVISION is an
initiative that enables individuals to benefit from HCL expertise in the
space and become Industry ready IT professionals. HCL dominates the
IT space as a leader. 45,000 gifted professionals, a colossal US $4
Billion turnover, an international presence in 17 countries, and most
importantly a deep-rooted commitment to innovate, makes it a true
Technology Giant. HCL CAREER DEVELOPMENT CENTRE career
program equips a student to meet emerging industry challenges with
finesse and ease. Opportunities to grow with HCL CAREER
DEVELOPMENT CENTRE are limitless, catapulting a student to high
level controlling positions in Mega Corporate. With top HCL
professionals as the trainers, customized career programs, hands on
experience, state of art infrastructure and world class training program
the student's career graph is bound to follow a steep rise. HCL
CAREER DEVELOPMENT CENTRE provides specially designed
courses in high-end software, hardware and networking integration to
groom students into industry-ready professionals. HCL CAREER
DEVELOPMENT CENTRE also offers placement support to all their
students who excel in their academics and display a remarkable
performance during the course. Among the fastest growing IT education
brands in India, HCL CAREER DEVELOPMENT CENTRE offers a
complete spectrum of quality training programs on software, hardware,
networking as well as global certifications in association with leading IT
Certification of quality standards:
"In its pursuit of excellence", the company has developed a quality
management system in line with ISO 9001:2000 standards.
Business Excellence Initiatives:
The organization follows a framework developed by EFQM (European
Foundation for Quality Management). Organization policies and strategies
are aligned with EFQM Model. The "Quest of Excellence" is taken as
a mission who drives the quality of Training Delivery and associated
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3.1 Working Capital
In a working capital we focus on short term finance of a company. In
a business we include two terms of finance i.e. short term and long
term finance it lies in the timing of cash flows. Short term financial
decisions typically involve cash inflows and outflows that take place
within a year or less. For examples, short term financial decisions are
involved when a firm orders raw material, pays in cash, and anticipate
selling finished goods within one year for cash. On the other hand,
long term financial decisions are involved when a firm buys a machine
that is expected to reduce operating costs over, says, the next seven
The types of decisions that fall under the general heading of short term
finance are many; to mention a few:
The level of cash the firm should maintain.
The level of short term borrowing to have.
Credit to be extended to customers.
Inventories to be maintained and so on.
Frequently, the term working capital management is used in place of
short term financial decisions and we shall also stick only to this only.
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We start with the types of working capital followed by concept and
application of operating cycle in estimating working capital needs. We
also discuss the factors affecting working capital requirements and the
policy of financing working capital.
Definition of working capital:
Working capital can be defined as the amount of capital required for
the smooth and interrupted functioning of normal business
operations of a company. Working Capital refers to that part of the
firm‟s capital, which is required for financing short-term or current
assets such a cash marketable securities, debtors and inventories. Funds
thus, invested in current assets keep revolving fast and are constantly
converted into cash and this cash flow out again in exchange for other
current assets. Working Capital is also known as revolving or
circulating capital or short-term capital.
In the words of Shubin, “Working capital is the amount of funds
necessary to cover the cost of operating the enterprise”.
According to Genestenberg, “Circulating capital means current
assets of a company that are changed in the ordinary course
of business from one form to another, as for example, from
cash to inventories, inventories to receivables, receivables into
According to J.S. Mill, “The sum of the current assets is the
working capital of a business”.
It is helpful for us, as a business owner, to think of working
capital in terms of five components:
1. Cash and equivalents. This most liquid form of working capital
requires constant supervision. A good cash budgeting and forecasting
system provides answers to key questions such as: Is the cash level
adequate to meet current expenses as they come due? What is the
timing relationship between cash inflow and outflow? When will
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peak cash needs occur? When and how much bank borrowing will
be needed to meet any cash shortfalls? When will repayment be
expected and will the cash flow cover it?
2. Accounts receivable. Many businesses extend credit to their
customers. If you do, is the amount of accounts receivable
reasonable relative to sales? How rapidly are receivables being
collected? Which customers are slow to pay and what should be
done about them?
3. Inventory. Inventory is often as much as 50 percent of a firm's
current assets, so naturally it requires continual scrutiny. Is the
inventory level reasonable compared with sales and the nature of
your business? What's the rate of inventory turnover compared with
other companies in your type of business
4. Accounts payable. Financing by suppliers is common in small
business; it is one of the major sources of funds for entrepreneurs.
Is the amount of money owed suppliers reasonable relative to what
you purchase? What is your firm's payment policy doing to enhance
or detract from your credit rating?
5. Accrued expenses and taxes payable. These are obligations of your
company at any given time and represent a future outflow of cash.
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3.2 Types of working capital:
Basis of concept:-
There are two type of working capital on the basis of concept, namely
gross and net working capital.
Gross working capital is firm‟s total investment in current assets.
Current assets are the assets which can be converted into cash within a
year. For examples cash, short term securities, account receivable, bills
receivable and inventory.
Net working capital, on the other hand, refers to the difference
between current assets and current liabilities. Current liabilities are those
claims of outsiders which are expected to mature for payment within an
accounting year: examples include accounts payable, bills payable and
outstanding expenses.It must be noted that net working capital could be
both positive as well as negative. A positive net working capital will be
arise when current assets exceeds current liabilities. A negative net
working capital occurs when current liabilities are in excess of current
assets. The term working capital is commonly used interchangeably with
net working capital. Working capital is the amount of capital required
for the smooth and interrupted functioning of normal business operations
of a company ranging from the procurement of raw material, converting
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the same into finished products for sale and realizing cash along with
profit from the accounts receivables that arise from sale of finished
goods on credit.
Concept of time:-
Permanent Working capital and
Temporary Working capital.
Permanent Working capital
Permanent working capital refers to the minimum amount of all current
assets that is required at all times to ensure a minimum level of
uninterrupted business operations. Some minimum amount of raw
materials, work-in-progress, bank balance, finished goods etc., a business
has to carry all the time irrespective of the level of manufacturing or
marketing operations. This level of working capital is referred to as
core working capital or core current assets. But the level of core
current assets is not a constant sum at all the times. For a growing
business the permanent working capital will be rising, for a declining
business it will be decreasing and for a stable business it will almost
remain the same with few variations. So, permanent working capital is
perennially needed one though not fixed in volume. This part of the
working capital being a permanent investment needs to be financed
through long-term funds. The permanent working capital can be further
divided into two parts:
Regular working capital
Reserve working capital
It required ensuring circulation of current assets from cash to
inventories, from inventories to receivables and from receivables to cash
and so on. Reserve working capital is the excess amount over the
requirement for regular working capital which may be provided for
contingencies that way arise at unstated period such as strikes, rise in
prices, depression, etc.
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Temporary Working capital
The temporary or varying working capital varies with the volume of
operations. It fluctuates with the scale of operations. This is the
additional working capital required from time to time over and above
the permanent or fixed working capital. During seasons, more
production/sales take place resulting in larger working capital needs. The
reverse is true during off-seasons. As seasons vary, temporary working
capital requirement moves up and down. Temporary working capital can
be financed through short term funds like current liabilities. When the
level of temporary working capital moves up, the business might use
short-term funds and when the level for temporary working capital
recedes, the business may retire its short-term loans. Variable working
capital can be further classified as:
Seasonal working capital
Special working capital
Most of enterprises have to provide additional working capital to meet
the seasonal and special needs. The capital required to meet the
seasonal needs of the enterprise is called seasonal working capital.
Special working capital is that part of working capital which is required
to meet special exigencies such as launching of extensive marketing
campaigns for conducting research etc.
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Both permanent and temporary working capitals are necessary to
facilitate the sales and production process through operating cycle.
Operating cycle and cash cycle:
The primary concerns in working capital management include firms
short run operating and financing activities. For a typical manufacturing
firm, the major short run activities will consist of the following
activities and related decisions:
These activities entail cash inflows and cash outflows; but the cash
flows are both unsynchronized and uncertain. They are unsynchronized
because the payment of cash for raw materials does not take place at
the same time as the receipt of cash from sales of the finished product.
They are uncertain because future sales and costs cannot be precisely
predicted. These give rise to what is called as operating cycles and
• Buy raw material
• Pay for purchases
• Manufacture products
• Sell the product
• Collection for sales
• How much to order
• Whether to borrow or
• Choice of technology
• Whether to extend
credit or to sell on cash
• How to collect
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The entire cycle, from the time the firm acquires inventory to the time
it collects the cash, takes 100 days. This is called the operating cycle.
The operating cycle is the length of time it takes to acquire inventory,
sell it, and collect for it. This cycle has two distinct parts- the time it
takes to acquire and sell the inventory; a 60 day span in our case, is
called the inventory conversion period; and the time it takes to collect
cash for the sales, 40 days in our case; called as accounts receivable
(debtors) conversion period. Thus, operating cycle is just the sum of the
inventory conversion period and accounts receivable conversion periods:
For a typical manufacturing company, the inventory conversion period is
the total time needed for producing and selling the product and
Raw material conversion period.
Work in process conversion period.
Finished goods conversion period.
Cash cycle –
There are number of days that pass before the firm collects cash for
sales, measured from it actually pays for the inventory. Thus, cash
cycle is the difference between the operating cycle and the accounts
For example, the firm does not pay cash for inventory until 30 days
after acquiring it. The intervening 30 days period is called the accounts
payable (creditors) period. Next, though the firm spends cash on 30th
day, it does not collect cash till 100th
day. Somehow, the firm must
arrange to finance the Rs 1000 for 100-30 = 70 days. This period is
called the cash cycle or net operating cycle.
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Determining Operating And Cash Cycle:-
Raw material conversion period:-
Raw material conversion period is the average time period taken to
convert material into work in process.
Annual consumption of raw material component etc.
A. Average daily consumption (A /360)
B. Average stock of raw material = (Opening stock + closingstock)
Raw material storage period (C / B) = n1 days
Conversion / work in progress period:
Work in progress conversion period is the average time taken to
complete the semi finished goods convert work in progress into finished
A. Annual cost of production = opening stock of WIP + consumption
of raw material + other manufacturing Cost Such as wages, salary
+Depreciation – Closing Stock WIP
B. average daily cost of production (A / 360)
C. average stock of WIP = (Opening stock + closing stock)
D. average conversion period (C / B) = n2
Finished goods storage period:
Finished goods conversion period is the average time taken to sell the
A. Annual cost = opening stock of finished goods + cost of
production + Of sales Excise Duty + selling & distribution cost +
general Administration cost+ financial cost – closing stock Of
B. Average daily cost of sales (A / 360)
C. Average stock of finished goods = (Opening stock + closing stock)
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D. Finished goods storage period (C / B) = n3
Average Collection Periods:
It is the average time taken to convert accounts receivables into cash.
A. Annual credit sales of company
B. Average daily credit sales ( A / 360)
C. Average balance of sundry debtors = (opening stock + closing stock)
D. Average collection period C / B = n4
Average Payment Periods:
It is average time taken to convert accounts payable into cash payment.
A. Annual credit purchase company
B. Average daily credit purchase ( A / 360 )
C. Average balance sundry creditors = (opening balance +closing balance )
D. Average payment period n5 = C / B
Operating cycle = raw material conversion period + work in progress
conversion period + finished goods conversion period +account
receivable conversion period
Operating Cycle = n1 + n2 + n3 + n4
Cash cycle = raw material conversion period + work in progress
conversion period + finished goods conversion period +account
receivable conversion period – accounts payable conversion period
Cash Cycle = n1 + n2 + n3 + n4 – n5
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Raw material, component etc.
Work in progress
Purchases of raw materials
Custom & excise duties
Selling, administration, financial
Calculate operating cycle ?
Raw Material Storage Period:
A. Annual consumption = opening stock + purchase – closing stock
= 3454.84 +10676.10 – 4095.41 = 10035.53
B. Average daily consumption = 10035.53/36 = 27.88
C. Average stock of raw material = (3454.84+ 4095.41)/ 2 = 3775.125
D. Raw material storage period=3775.125/27.8n1
135.40 = 135
A. Annual cost of production = 56.15 + 10035.53 + 1146.76 +
247.72 -72.50 = 11413.66
B. Average daily cost of production = 11413.66/360 =31.70
C. Average stock of Work in progress = (56.15 + 72.50) / 2 = 64.32
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D. Average conversion period = 64.32/ 31.70
n2 = 2
Finished goods storage period:
A. Annual cost of sales = 637.92 + 11413.66 + 35025.56 + 4557.48
– 1032.7 = 50601.88
B. Average daily Cost of sales = 50601.88 / 360 = 140.56
C. Average stock of Finished goods =(637.92 +1032.74) / 2 =835.33
D. Finished goods Storage period = 835.33/140.56
E. n3 = 5.9 ≈ 6days
Average collection period:
A. Annual credit sales = 54210.65
B. Average daily credit sales = 54210.65 / 360 = 150.59
C. Average balance of Sundry debtors = (756.45 + 1166.32) / 2
=961.38 Average collection period = 961.38/ 150.59 = 6.38 = 6
Average payment period
Annual credit purchase‟s company = 10676.10
Average daily credit purchases = 10676.10/360 = 29.66
Average balance sundry creditors = (2504.18+3084.47)/2 = 2794.32
Average payment period = 2794.32/29.66 = 94.21 = 94 days
Operating cycle = 135 + 2 + 6 + = 149 days
Net operating/ cash cycle = 135 + 2 + 6 + 6 – 94 = 55 days
The firm pays to labor ager a gap of 10 days. The amount could be
calculated in the same way as accounts payable for purchases:
Wages Payment Period= Average Wages Payable * 360/ total wages
10 = Average Wages Payable * 360/ total wages
Average Wages Payable =10* total wages / 360
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Number of toys per year = 70000
Labor cost per unit / toy = Rs.19.5
Average wages payable = ?
So,Wages PaymentPeriod = Average Wages Payable * 360/ Total Wages
10 = Average Wages Payable * 360 / (70000*19.5)
Average Wages Payable = 10 * 70000 * 19.5 / 10 = Rs.37916
One month (30 days), means that overheads are paid after one month.
The amount will be as follows:
Overheads Payment Period = Average Overheads Payable * 360 / Total
30 = Average Overheads Payable * 360 / Total Overhead
Average Overheads Payable = 30* Total Overheads / 360
Number of toys per year = 70000
Overheads per unit = Rs. 39
Average over heads payable = ?
So, Overheads Payment Period = Average Overheads Payable * 360 /
30 = Average Overheads Payable * 360 / (70000*39)
Average Overheads Payable = 30*70000*39/360 = Rs. 2, 27,50
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3.3 Importance of Working Capital Ratios:
Ratio analysis can be used by financial executives to check upon the
efficiency with which working capital is being used in the enterprise.
The following are the important ratios to measure the efficiency of
working capital. The following, easily calculated, ratios are important
measures of working capital utilization.
Ratio Formulas Result Interpretation
Average Stock *
Cost of Goods Sold
= x days On average, you turn
over the value of your
entire stock every x days.
You may need to break
this down into product
groups for effective stock
Obsolete stock, slow
moving lines will extend
overall stock turnover
days. Faster production,
fewer product lines, just
in time ordering will
reduce average days.
Debtors * 365/
= x days It take you on average x
days to collect monies
due to you. If your
official credit terms are
45 day and it takes you
65 days... why?
One or more large or
slow debts can drag out
the average days.
minimize the days.
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Creditors * 365/
Cost of Sales (or
= x days On average, you pay
your suppliers every x
days. If you negotiate
better credit terms this
will increase. If you pay
earlier, say, to get a
discount this will decline.
If you simply defer
paying your suppliers
(without agreement) this
will also increase - but
your reputation, the
quality of service and
any flexibility provided
by your suppliers may
= x times Current Assets are assets
that you can readily turn
in to cash or will do so
within 12 months in the
course of business.
Current Liabilities are
amount you are due to
pay within the coming 12
months. For example, 1.5
times means that you
should be able to lay
your hands on $1.50 for
every $1.00 you owe.
Less than 1 times e.g.
0.75 means that you
could have liquidity
problems and be under
pressure to generate
sufficient cash to meet
Quick Ratio (Total Current
Assets - Inventory)/
= x times Similar to the Current
Ratio but takes account
of the fact that it may
take time to convert
inventory into cash.
A high percentage means
that working capital
needs are high relative to
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Other working capital measures include the following:
Bad debts expressed as a percentage of sales.
Cost of bank loans, lines of credit, invoice discounting etc.
Debtor concentration - degree of dependency on a limited number of
Significance Of Working Capital:
1. Cash Discount: If a proper cash balance is maintained, the business
can avail the advantage of cash discount by paying cash for the
purchase of raw materials and merchandise. It will result in reducing
the cost of production.
2. It creates a Feeling of Security and Confidence: The proprietor
or officials or management of a concern are quite carefree, if they have
proper working capital arrangements because they need not worry for
the payment of business expenditure or creditors. Adequate working
capital creates a sense of security, confidence and loyalty, not only
throughout the business itself, but also among its customers, creditors
and business associates.
3. „Must‟ for Maintaining Solvency and Continuing Production: In
order to maintain the solvency of the business, it is but essential that
the sufficient amount t of fund is available to make all the payments in
time as and when they are due. Without ample working capital,
production will suffer, particularly in the era of cut throat competition,
and a business can never flourish in the absence of adequate working
4. Sound Goodwill and Debt Capacity: It is common experience of
all prudent businessmen that promptness of payment in business creates
goodwill and increases the debt of the capacity of the business. A firm
can raise funds from the market, purchase goods on credit and borrow
short-term funds from bank, etc. If the investor and borrowers are
confident that they will get their due interest and payment of principal
5. Easy Loans from the Banks: An adequate working capital i.e
excess of current assets over current liabilities helps the company to
borrow unsecured loans from the bank because the excess provides a
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good security to the unsecured loans, Banks favor in granting seasonal
loans, if business has a good credit standing and trade reputation.
6. Distribution of Dividend: If company is short of working capital, it
cannot distribute the good dividend to its shareholders inspite of
sufficient profits. Profits are to be retained in the business to make up
the deficiency of working capital. On the other contrary, if working
capital is sufficient, ample dividend can be declared and distributed. It
increases the market value of shares.
7. Meeting Unseen Contingency: Depression shoots the demand of
working capital because sock piling of finished goods become necessary.
Certain other unseen contingencies e.g., financial crisis due to heavy
losses, business oscillations, etc. can easily be overcome, if company
maintains adequate working capital.
8. Increased Production Efficiency: A continuous supply of raw
material, research programme, innovations and technical development and
expansion programmes can successfully be carried out if adequate
working capital is maintained in the business. It will increase the
production efficiency, which will, in turn increases the efficiency and
morale of the employees and lower costs and create image among the
Strategies to overcome the problem:
• Manage working capital investment or financing such as
• Holding additional cash balances beyond expected needs
• Holding a reserve of short term marketable securities
• Arrange for availability of additional short-term borrowing
• One of the ways to address the problem of fixed set-up cost
may be to hold inventory.
• One or combination of the above strategies will target the
WORKING CAPITAL OF HCL Page 29
3.4 Factors Determining Working Capital:
1. Nature of the Business
2. Size of business
3. Production policies
4. Production cycle
5. Credit policy
6. Rapidity of turnover
7. Seasonal fluctuation
8. Price level changes
9. Others factors
1. Nature of the business: Working capital also depends upon the nature
of the business. Public utility concerns like railway, electricity etc. have a
very little need of working capital since most of their transaction are on
cash basis. On the other hand ordinary manufacturing and trading
concerns require sufficient working capital, since they have to invest
substantially in inventories and debtors.
2. Size of Business: Size of business is another influencing factor. As size
increases, the working capital requirement is also more and vice
3. Production policies: The production policies pursued by the
management have a significant effect on the requirement of working
capital of the business. The decision about the management regarding
a u t o m a t i o n , etc. will also have its effect on working capital
4. Production cycle: The time lapse between feeding of raw material
into the machine and obtaining the finished goods out from the
machine is what is described as the length of manufacturing process.
It is otherwise known as conversion time. Longer this time period,
higher is the volume and value of work-in-progress and hence higher
the requirement of working capital and vice versa.
5. Credit policy: A company which allows liberal credit to its
customers may have higher sales but will need more working
capital. A concern that purchases its requirements on credit and
sells its products/services on cash requires less amount of
WORKING CAPITAL OF HCL Page 30
6. Rapidity of turnover: A company having high rate of turnover will
need lower amount of working capital as compared to a company
which has a lower turnover.
7. Seasonal fluctuations: In case of seasonal industries like sugar
and woollen textiles, their working capital required during the
particular season will be higher than other periods.
8. Price level changes: Changes in the price level also affect the
working capital requirements. Generally, the rising prices will
require the firm to maintain larger amount of working capital as
more funds will be required to maintain the same current assets.
The effect of rising prices may be different for different
firms. Some firms may be affected much while some others
may not be affected at all by the rise in prices.
9. Other factors: Certain other factors such as operating
efficiency, management ability, irregularities of supply, import
policy, asset structure, importance of labour, banking facilities,
etc. Also influences the requirements of working capital.
Disadvantages or Dangers of Inadequate or Short Working Capital -
Can‟t pay off its short-term liabilities in time. Economies of scale are not
Difficult for the firm to exploit favourable market situations
Day-to-day liquidity worsens
Improper utilization the fixed assets and ROA/ROI falls sharply
WORKING CAPITAL OF HCL Page 31
3.5 The need or objects of working capital:
The need for working capital cannot be over emphasized. Every business
needs some amount of working capital. The need for working capital arises
due to the gap between production and realization of cash from sales.
There is an operating cycle involved in the sales and realization of
cash. To pay wages and salaries.
1. To incur day to day expenses and overheads costs such as fuel,
power and office expenses, etc.
2. To meet the selling costs as packing, advertising, etc.
3. To provide credit facilities to the customers.
4. To maintain the inventories of raw material, work in progress, stores
and spares and finished stock.
Management Of Working Capital (WCM):
Management of working capital is concerned with the problems that
arise in attempting to manage the current assets, the current liabilities
and the inter-relationship that exists between them. In other words, it
refers to all aspects of administration of CA and CL. management will
use a combination of policies and techniques for the management of
working capital. The policies aim at managing the current assets
(generally cash and cash equivalents, inventories and debtors) and the
short term financing, such that cash flows and returns are acceptable.
Cash management. Identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows
for uninterrupted production but reduces the investment in raw materials
and minimizes reordering costs - and hence increases cash flow. Besides
this, the lead times in production should be lowered to reduce Work in
Process (WIP) and similarly, the Finished Goods should be kept on as
low level as possible to avoid over production - see Supply chain
management; Just In Time (JIT); Economic order quantity (EOQ);
WORKING CAPITAL OF HCL Page 32
Debtor‟s management. Identify the appropriate credit policy, i.e. credit
terms which will attract customers, such that any impact on cash flows
and the cash conversion cycle will be offset by increased revenue and
hence Return on Capital (or vice versa); see Discounts and allowances.
Short term financing. Identify the appropriate source of financing,
given the cash conversion cycle: the inventory is ideally financed by
credit granted by the supplier; however, it may be necessary to utilize a
bank loan (or overdraft), or to "convert debtors to cash" through
Aims of Working Capital Management:
The goal of working capital management is to manage the firm‟s
current assets and current liabilities in such a way that a satisfactory
level of working capital is maintained, to meet the short-term
obligations as and when they arise.
1. A significant objective of working capital management is to
ensure short-term liquidity and to see that profitability is not
affected by the way current assets and current liabilities are
2. The main theme of working capital management is the interaction
between the current assets and the current liabilities and arrives
at the optimum level of both. The optimum level thus arrived
must have provision for contingencies.
3. Trade-off between Profitability and Risk: The level of a firm‟s
Net working capital has a bearing on its profitability as well as
risk. The term profitability used in this context is measured by
profits after expenses. The term risk is defined as the probability
that a firm will become technically insolvent so that it will not
be able to meet its obligations when they become due for
payment. The risk of becoming technically insolvent is measured
using Net Working Capital. The greater the net working capital,
the more liquid the firm is and therefore the less likelihood of it
WORKING CAPITAL OF HCL Page 33
becoming technically insolvent. The relationship between liquidity,
net working capital and risk is such that if either net working
capital or liquidity increases, the firm's risk decreases.
4. Trade-off: If a firm wants to increase its profits, it must also
increase its risk. Inversely, if it decreases risk, its profitability
too tends to decrease. The trade-off between these variables is
that regardless of how the firm increases its profitability through
the manipulation of working capital, the consequence is a
corresponding increase in risk as measured by the level of Net
5. Apart from the profitability – risk – trade-off, another important
ingredient of the theory of working capital management is
determining the financing mix. Financing mix refers to the
proportion of current assets that would be financed by current
liabilities and by long-term resources.
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3.6Principles of Working Capital Management/Policy:
1. Principle of risk variation:-
Risk here refers to the inability of a firm to meet its obligation as and
when they become due payment. Larger investment in current assets
with less dependence on short term borrowings increase liquidity,
reduces dependence on short term borrowings increases liquidity, reduces
risk and thereby decrease the opportunity for gain or loss. On the other
hand less investment in current assets with dependence on short term
borrowings, reduce liquidity and increase profitability.
2. Principle of cost of capital:-
The various sources of raising working capital finance have different
cost of capital and degree of risk involved. Generally, higher the risk
lower is the cost and lower the risk higher is the cost. A sound
working capital management should always try to achieve a proper
balance between these two.
3. Principle of Equity position:-
This principle is concerned with planning the total investment in
current assets. According to this principle, the amount of working
capital invested in each component should be adequately justified by a
firm‟s equity position. Every rupee invested in current 4assets should
contribute to net worth of the firm. The level of current assets may be
measured with the help of two ratios:
Current assets as a percentage of total assets.
Current assets as a percentage of total sales.
4. Principle of maturity of payment:-
This principle is concerned with planning the sources of finance for
working capital. According to this principle, a firm should make every
effort to relate maturities of payment to its flow of internally generated
funds. Maturity pattern of various current obligations is an important
factor in risk assumptions and risk assessments. Generally, shorter the
maturity schedule of current liabilities in relation to expected cash
inflows, the greater inability to meet its obligations in time.
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2.6 Forecasting / Estimation of Working Capital
“Working capital is the life blood and controlling nerve centre of a
business.” No business can be successfully run without an adequate
amount of working capital. To avoid the shortage of working capital at
once, an estimate of working capital requirements should be made in
advance so that arrangement can be made to procure adequate working
Methods of forecasting working capital requirements-The following
methods are usually followed in forecasting working capital requirements
of a firm:
1. Percentage of sales method:-
This method of estimating working capital requirements is based on the
assumption that the level of working capital for any firm is directly
related to its sales value. If past experience indicates a stable
relationship between the amount of sales and working capital, then this
basis may be used to determine the requirements of working capital for
future period. If sales for the year 2007 amounted to ₨ 30, 00,000 and
working capital required as ₨ 6, 00,000; the requirement of working
capital for the year 2008 on an estimated sales of ₨ 40, 00,000 shall
be ₨ 8,00,000; i.e. 20% of ₨40, 00,000. The individual items of current
assets and current liabilities can also be estimated on the basis of the
past experience as a percentage of sales. This method is simple to
understand and easy to operate but it cannot be applied in all cases
because the direct relationship between sales and working capital may
not be estimated.
Example- the following information has been provided by a company
for the year ended 30.6.2008.
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Liabilities ₨ Assets ₨
Long term loan
Fixed assets less
Cash and bank
Sales for the ended 30.6.2008 amounted to ₨ 10,00,000 and it is
estimated that the same will amount to ₨ 12,00,000 for the year 2008-
09. You are required to estimate the working capital requirements for
the year 2008-09 assuming a linear relationship between sales and
Estimating of working capital requirements
%age to sales
Sales 10,00,000 100 12,00,0
Cash and bank
Total current assets (CA)
Total current liabilities (CL)
Working capital (CA-CL) 1,00,000 10 1,20,00
WORKING CAPITAL OF HCL Page 37
1. Regression analysis method (average relationship between sales
and working capital):-
This method of forecasting working capital requirements is based upon
the statistical technique of estimating or predicting the unknown value
of a dependent variable from the known value of an independent
variable. It is the measure of the average relationship between two or
more variables, i.e.; sales and working capital, in terms of the original
units of data. The relationship between sales and working capital is
represented by equation:
Where, y = working capital (dependent variable)
a = intercept of the least square
b = slope of the regression line
x = sales (independent variables)
For determining the value „a‟ and „b‟ two normal equations are used
which can be solved simultaneously:
Example- The sales and working capital figures of Suvidha ltd. for a
period of 5 years are given as follows:
∑y = na + b∑x
∑xy = a∑x + b∑x2
y = a + bx
WORKING CAPITAL OF HCL Page 38
You are required to forecast the working capital requirements of the
company for the year 2008-09 taking the estimated sales of ₨ 200
The relationship between sales and working capital can be represented
by: y = a + bx
n = 5 ∑x =550 ∑y = 91 ∑xy =
∑y = na + b∑x
∑xy = a∑x + b∑x2
Putting the values in the above equations:
91 = 5a + 550b
10730 = 550a + 66900b
Multiplying equation (1) with 110, we get:
10010 = 550a + 60500b
Subtracting equation (3) equation (2)
720 = 0 + 6400b
b = 0.1125
Putting the value of b in equation (1)
WORKING CAPITAL OF HCL Page 39
91 = 5a + 550 * 0.1125
91 = 5a + 61.875
5a = 29.125
a = 5.825
Now, putting the value of „a‟ and „b‟ in the equation y = a + bx
(where y and x are estimated working capital and estimated sales
y = a + bx
y = 5.825 + 0.1125 * 200
y = 27.825
Thus, when estimated sales for 2008-09 are ₨ 200 lakhs, the amount
of estimated working capital shall be ₨ 27.825 lakhs.
2. Cash forecasting method:-
This method of estimating working capital requirements involves
forecasting of cash receipts and disbursements during a future period of
time. Cash forecast will include all possible sources from which cash
will be received and the channels in which payments are to be made so
that a consolidated cash position is determined.
This method is similar to the preparation of a cash budget. The excess
of receipts over payments represents surplus of cash and the excess of
payments over receipts causes deficit of cash or the amount of working
capital required. The following example explains the cash forecasting
method of estimating working capital requirements.
Examples- Texas manufacturing company Ltd. is to start production on
1 January 2009. The prime cost of a unit is expected to be ₨ 40 out
of which ₨ 16 is for materials and ₨ 24 for labor. In addition,
variable expense per unit are expected to be ₨ 8 and fixed expense
per month ₨ 30000. Payment for material is to be made in the month
following the purchases. One third of sales will be for cash and the
rest on credit for settlement in the following month. Expense are
payable in the month in which they are incurred. The selling price is
fixed at ₨ 80 per unit.The numbers of units manufacturing and sold
are expected to be as under:
WORKING CAPITAL OF HCL Page 40
Draw up a statement showing requirements of working capital from
month to month, ignoring the question of stocks.
Statement Showing Requirement Of Working Capital
WORKING CAPITAL OF HCL Page 41
As payment for material is made in the month following the purchase,
there is no payment for material in January. In February, material
payment is calculated as 900 * 16 = ₨14400 and in the same manner
for other months.
Cash sales are calculated as:
For January 900 „80‟1/3 = ₨24000 and in the same manner for other
Receipts from debtors are calculated as:
For Jan. – Nil because cash from debtors is collected in the
month following the sales.
For Feb. – 900‟80‟2/3 = ₨ 48000
For March – 1200‟80‟2/3 = ₨ 64000, and so on.
Factors requiring consideration while estimating working
The estimating of working capital requirement is not an easy task and
large numbers of factors have to be considered before starting this
exercise. For a manufacturing organization, the following factors have to
be taken into consideration while making an estimate of working capital
Factors to be considered-
• Total costs incurred on materials, wages and overheads
• The length of time for which raw materials remain in stores before
they are issued to production.
• The length of the production cycle or WIP, i.e., the time taken for
conversion of RM into FG.
• The length of the Sales Cycle during which FG are to be kept
waiting for sales.
• The average period of credit allowed to customers.
• The amount of cash required to pay day-to-day expenses of the
• The amount of cash required for advance payments if any.
• The average period of credit to be allowed by suppliers.
• Time – lag in the payment of wages and other overheads
• The average amount of advance received, if any
WORKING CAPITAL OF HCL Page 42
4.1 Performa - Working Capital Estimates:
2. Manufacturing concern –
WORKING CAPITAL OF HCL Page 43
3. Columnar form:
An alternative preformed for estimating of working capital requirements
in columnar form given below:
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4.2WORKING CAPITAL FINANCING POLICIES:-
A growing firm can be thought of as having a total assets requirement
consisting of the current assets and long term assets and long term
assets for its efficient operations. It seldom happens that net working
capital goes to zero. As discussed earlier, companies have some
permanent working capital, which is the net working capital on hand at
the low point of the business cycle. Then, as sales increase, net
working capital must be increased, and this addition is the temporary
part of net working capital. The manner in which the permanent and
temporary portions of net working capital are financed is called as
working capital financing policies.
1. Maturity Matching/ Self-Liquidating Approach:-
Maturity matching means to match asset and liability maturities. This
strategy minimizes the risk that the firm will be unable to pay off its
maturing obligations. To illustrate, suppose a company arises a one year
loan to and uses the funds obtained to build and equip a plant.
Obviously, cash flow from the plant (that is profits and depreciation)
would not be enough to pay off the loan at the end of only one year,
therefore the firm would be force to renew the loan. As a limiting
case, the company could try to match exactly the maturity of all of its
assets and liabilities. For example, inventory expected to be sold in 30
days could be financed with a 30 days bank loan; and a 20 year
building could be financed with a 20 year mortgage and so on. In
simple words, the source of finance use has same maturity as the life
of the assets for which the financing has been done. The policy looks
quite useful as it minimizes the wastage of funds. However, the risk
that this policy entails is that if the cash from the assets do not take
place on time, the firm would not be able to pay back and forced into
renewal situation. The cost of funds for the renewal case could be
unattractive, and might it the profit of the company.
WORKING CAPITAL OF HCL Page 45
2. Aggressive Approach:-
a relatively aggressive company finances all of its long term assets and
a part of permanent net working capital with long term assets and rest
permanent working capital with short term debt. The term „relatively‟
has been used because there can be different degrees of aggressiveness.
For example, the dashed line in panel „b‟ could have been drawn below
the line showing long term assets, indicating that all of the permanent
net working capital even some part of long term assets have been
financed with short term debt; this would be a highly aggressive
position, and the firm would be very much exposed to dangers from
rising interest rates as well as to loan renewal problems. However,
because short term debt is generally cheaper than long term debt, some
companies are ready to sacrifice safety for the chance of better profit.
3. Conservative Approach:-
permanent net working capital, meaning that long term sources have
been employed to finance all permanent assets and also to meet some
of the temporary requirements. The peak requirements could be met out
of small amount of short term debt; but it also finances a part of the
seasonal needs by putting the money in marketable securities. This
approach, as the name suggests, is a very safe, conservative working
capital financing policy as there is no risk of going out of liquidity.
However, since long term debt is normally costlier, investments in cash
and marketable securities are zero net present value investments at best,
the safety comes at the cost of lower profits.
WORKING CAPITAL OF HCL Page 46
Hindustan Computers Limited, also known as HCL Enterprise, is
one of India's largest electronics, computing and information
HCL Career Development Centre or LEARNING DIVISION is an
initiative that enables individuals to benefit from HCL expertise in
the space and become Industry ready IT professionals. HCL
dominates the IT space as a leader.
Any change in the working capital will have an effect on a
business's cash flows. A positive change in working capital
indicates that the business has paid out cash, for example in
purchasing or converting inventory, paying creditors etc. Hence, an
increase in working capital will have a negative effect on the
business's cash holding. However, a negative change in working
capital indicates lower funds to pay off short term liabilities
(current liabilities), which may have bad repercussions to the future
WORKING CAPITAL OF HCL Page 47
1. During my survey well asking that which IT institute do you prefer
then out of 100 Customer 30% said that they will prefer HCL
learning division. The reason which is given by them is HCL
learning division is one of the good brand in IT firm & by joining
HCL there placement got secure.
2. As HCL learning division is providing major type of courses which
I have surveyed the area of interest which I find out of student
more towards CCNA. Which is one of the hardware courses the
reasons behind that is most of the student are mainly concern with
hardware or they may be having a degree or diploma in software
which is provided by many other institute. of quantity in HCL
which is later on followed by brand name because the student know
that HCL company is known to everyone & is very much obvious
that the courses which provided by HCL will be quality oriented.
When I asked from the student why they like HCL learning division
then most of them had answered that they will get a quality instead
3. During my survey related to its awareness amongst student most of
the student replied they get the information related to HCL learning
division is mainly through newspapers and broachers. As one of the
new courses so most of the students are not aware of these courses
so because of very few students can able to know about the courses
to their friends.
4. As HCL is providing various facilities like discount coupons, Bank
loans so where asking which offer is beneficial to students most of
them i.e. almost 64% is said that they will prefer opt for Bank loan
instead for discount and coupon the reason which is got is most of
them were having the perception that they will go for loan it will
be the responsibility of HCL to provide the job.
5. The promotion activities of HCL were graded as fair by 80% of the
students because for its facility of loan brand name and courses that
WORKING CAPITAL OF HCL Page 48
6. Well I curiously asked for most of the students that why they are
choosing the HCL learning division the answer which I got very
much similar which I expected most of them choosing HCL learning
division because HCL having brand and good reputation in the
market. The marker apart from its quality and price.
7. Company was doing various promotional activities like Hand Billing,
Road shows, Seminar and area campaign but where asking which
was the most prefer by the students 41% said that area campaign is
one of the best way to contact with them 35% were agreed for
seminar and 23% for Hand billing this is so because area campaign
the way by which most of the students weather he is from college
or school going or road side one can able to know what exactly
HCL learning division offering them which is not fulfil by seminar
or hand billing in a satisfactory position.
8. After asking which courses mostly preferred by the students the
answer which I got is majority for short term courses which is
having duration of six month or one year minority were asking long
term courses which is having duration of two year. This is so
because the majority of students which I surveyed were doing job
so they mostly preferred short term courses over within six month
and one year.
Lastly I asked that which timing is mostly suits them 47% said that
evening is most suitable for them as I have said earlier that most of
them doing job so they don‟t want to hamper their job for this course
but as this course was really suited to them they really want to do it
as a part time courses.
WORKING CAPITAL OF HCL Page 49
4.5 WORKING CAPITAL QUESTIONNAIRE:
This questionnaire is to be used entirely for the purpose of conducting
a study. The information provided by you shall be kept confident. I
therefore shall appreciate your cooperation for being frank an expressive
in your answers.
Name: - Age: -
Income level: - Occupation:
1. To financial analysts, "working capital" means the same thing as
o Total Assets
o Fixed assets
o Current assets
o Current assets minus current liabilities
2. The amount of current assets required to meet a firm's long-term
minimum needs is referred to as __________ working capital.
3. The amount of current assets that varies with seasonal requirements
is referred to as __________ working capital.
WORKING CAPITAL OF HCL Page 50
4. To financial analysts, "net working capital" means the same thing as
o Total assets
o Fixed assets
o Current assets
o Current assets minus current liabilities
5. Companies may adopt an aggressive or a conservative working
capital policy. An aggressive policy means that a company
o Holds high levels of cash and inventories
o Has a low level of flexibility
o Faces a low level of risk
o Expects a lower level of profitability
6. Given the following information, what is the cash conversion cycle
in days of PP plc?
Costs of goods sold 200
o 78.8 days
o 125.6 days
o 60.2 days
o 170.0 days
WORKING CAPITAL OF HCL Page 51
7. Which of the following would be consistent with a hedging
(maturity matching) approach to financing working capital?
o Financing short term needs with short term funds
o Financing short term needs with long term debt
o Financing seasonal needs with long term funds
o Financing some long term needs with short term funds
8. Having defined working capital as current assets, it can be further
classified according to __________.
o Financing method and time
o Rate of return and financing method
o Time and rate of return
o Components and time
9. Varies inversely with profitability.
10. Ideally, which of the following types of assets should be financed
with long-term financing?
o Fixed assets only
o Fixed assets and temporary current assets
o Fixed assets and permanent current assets
o Temporary and permanent current assets.
WORKING CAPITAL OF HCL Page 52
BOOK NAME AUTHOR NAME
FINANCIAL MANAGEMENT Shahs K. Gupta & R.K. Sharma
FINANCIAL MANAGEMENT I.M. Pandey
ACCOUNTING FOR MANAGEMENT T. Ramachandran
MANAGEMENT ACCOUNTING R.S.N. Pillai & Bagavathi
FINANCIAL MANAGEMENT Navdeep Aggerwal