Asset Verification & Tagging of Clinical Departments
Working Capital Management
1. 1
A Project Report on
“ANALYSIS ON WORKING CAPITAL MANAGEMENT OF KAPSTON FACILITIES
MANAGEMENT PVT L.T.D”
A Summer Internship Project Report
Submitted to
AURORA’S BUSINESS SCHOOL
In Partial Fulfilment of the summer internship programme of
Post Graduate Diploma in Management (PGDM)
By
Mr. Hareesh.D
DM-10-020
Aurora’s Business School,
Near NIMS, Punjagutta, Hyderabad. - 500 482
3. 3
Certificate
This is to certify that the project work entitled
“ANALYSIS OF WORKING CAPITAL MANAGEMENT OF KAPSTON FACILITIES
MANAGEMENT PVT L.T.D”
is the bona-fide work done by
Mr. D.Hareesh
DM-10-020
As a part of their curriculum of
Post Graduate Diploma in Management (PGDM),
Aurora’s Business School, Hyderabad.
Internal Guide SIP Co-ordinator
Director
5. 5
DECLARATION
This is to inform that I, have completed a project work on “ANALYSIS ON
WORKING CAPITAL MANAGEMENT OF KAPSTON FACILITIES MANAGEMENT
PVT L.T.D” while pursuing PGDM in Aurora’s Business School.
I hereby declare that this project report is the original work carried out by me
as part of my academic course and has not been submitted to any other University or
Institution for the award of any degree or diploma.
Name : D.Hareesh
Roll No. : DM-10-020 Signature
6. 6
ACKNOWLEDGEMENT
I would like to thank everyone who is involved in assisting me in producing
this project report by bringing out creativeness in this project.
I would like to take this opportunity to thank my company guide Mr. Raghava
Rao General Manager(Finance) at Kapston facilities Management PVT LTD.
Project guide Professor Venugopal Rajamanuri Faculty and Mrs. Harika faculty,
Aurora’s Business school, for their undeterred guidance for the completion of the
report.
I would also like to thank M.rVenkat(Assistant Manager) who in spite of his
busy schedule has co-operated with me continuously and indeed, his valuable
contribution and guidance have been certainly indispensable for my project work
My parents need special mention here for their constant support and love in
my life. I also thank my friends and well-wishers who have provided their whole
hearted support to me in this exercise. I believe that this effort has prepared me for
taking up new challenging opportunities in future.
I hope that I can build upon the experience and knowledge that I have gained
and make a valuable contribution towards this industry.
With Regards and Gratitude
Mr D.Hareesh
8. 8
Contents
Introduction........................................................................................................................................................................
Theoretical Background............................................................................................................................................
Industry Analysis.............................................................................................................................................................
Company Analysis..........................................................................................................................................................
Executive Summary:.....................................................................................................................................................
Objective:...............................................................................................................................................................................
Scope.........................................................................................................................................................................................
Methodology......................................................................................................................................................................
Analysis...................................................................................................................................................................................
Conclusion............................................................................................................................................................................
Appendix...............................................................................................................................................................................
Bibliography:......................................................................................................................................................................
9. 9
List of Figures
Fig: 4.0Current assets and Current Liabilities……………………………………..
Fig:4.1Current Ratio……………………………………………………….…….………….
Fig: 4.2 Quick Ratio…………..………..…………………………………...……...........
Fig: 4.3 Net Working capital…..…………………………………………..………...
Fig: 4.4 Working Capital turnover Ratio …………………………………………….…...
Fig: 4.5 Trend Analysis ………………………………………………………………....
Fig: 4.6 Cash to Current Asset Ratio ……………………………………………….
Fig: 4.7 Cash Velocity Ratio …………………………………………….……..…
Fig: 4.8 Debtors turnover Ratio …………………………………………….…..……
Fig: 4.9 Average Payment Period …………………………………………………….…
Fig: 4.10 Average Collection Period Ratio ……………………………………………
10. 10
SUBMITTED BY:
Name of the student
D.HAREESH
Enrolment Number DM-10-020
Elective FINANCE
Mobile Number
8096032816
Email Id hareesh.pgdm201416@gmail.com
Name of the Organization KAPSTON FACILITIES MANAGEMENT PVT
LTD
Address
#1-98/9/3/23, Plot No.12E ,
Jaihind Colony,Madhapur,
Hyderabad – 500081
Mob: +919640656999, 9640504050
(24*7)
Email: info@kapstonfm.com
web: www.kapstonfm.com
Main activity SERVICE
Head of the Organization SRIKANTH SRINIVASAN
Designation MANAGING DIRECTOR
11. 11
Office Phone 9848056999
Company Guide Email Id
raghavarao@kapstonfm.com
Company Guide Mr Raghavarao
Designation Of The Company Guide General Manager-Finance
Reporting Date 13 th
MAY 2015
SIP Topic ANALYSIS ON WORKING CAPITAL
MANAGEMENT
Name of the student
D.HAREESH
Enrolment Number DM-10-020
13. 13
Introduction
WORKING CAPITAL MANAGEMENT OF THE COMPANY
As shown in the above diagram there are only two ways in which cash inflow
happens for an
Operating Cycle in
Manufacturing firm
Cash
Raw
Materials
W I P
Finished
Goods
Debtors SALES
14. 14
Insurance company that is one the premium what the companies collect from the
customers
And second is the return from the investment what the company has made, similarly
on the
Cash outflows would be the pay-outs arising out of death claims and maturity of the
policies
Along with the operating expenses of the company. Since the Insurance Industry is a
service
Industry there is nothing like stock or Inventory all they have is the existing products
of the
Insurance companies in the market and the new products what the insurance
companies
Introduce into the market. This is how the Working Capital cycle of Insurance
industry
Works.
There are two concepts of working capital viz. quantitative and qualitative. The two
concepts can also be defined as gross concept and net concept. According to
quantitative concept, the amount of working capital refers to the ‘total of current
assets’. Smith called current assets as ‘circulating capital’. Current assets are
considered to be the gross working capital. The qualitative concept gives an idea
regarding the source of financing capital. According to qualitative concept, the
amount of working capital refers to “excess of current assets over current liabilities”
and is called net working capital. L.J. Guthmann defined working capital as “the
portion of a firm’s current assets which are financed from long–term funds. “Net
working capital” represents the amount of current assets which would remain if all
current liabilities were paid. Both the concepts of working capital have their own
points of importance. “If the objectives is to measure the size and extent to which
15. 15
current assets are being used, ‘Gross concept’ is useful; whereas in evaluating the
liquidity position of an undertaking ‘Net concept’ becomes pertinent and preferable.
Current Assets – “Current assets have a short life span. These types of assets are
engaged in current operation of a business and normally used for short– term
operations of the firm during an accounting period i.e. within twelve months. The two
important characteristics of such assets are, (i) short life span, and (ii) swift
transformation into other form of assets. Fitzgerald defined current assets as, “cash
and other assets which are expected to be converted in to cash in the ordinary
course of business within one year or within such longer period as constitutes the
normal operating cycle of a business.”
Current Liabilities – The firm creates a Current Liability towards creditors (sellers)
from whom it has purchased raw materials on credit. This liability is also known as
accounts payable and shown in the balance sheet till the payment has been made to
the creditors. The claims or obligations which are normally expected to mature for
payment within an accounting cycle are known as current liabilities. These can be
defined as “those liabilities where liquidation is reasonably expected to require the
use of existing resources properly classifiable as current assets, or the creation of
other current assets, or the creation of other current liabilities.
At one given time both the current assets and current liabilities exist in the business.
The current assets and current liabilities are flowing round in a business like an
electric current. However, “The working capital plays the same role in the business as
the role of heart in human body. Working capital funds are generated and these
funds are circulated in the business. As and when this circulation stops, the business
becomes lifeless. It is because of this reason that the working capital is known as the
circulating capital as it circulates in the business just like blood in the human body.”
16. 16
Gross Working Capital = Total Current Assets
Net Working Capital = Excess of Current Assets over Current Liabilities
Working Capital Deficit = Excess of Current Liabilities over Current Assets.
The Importance of Good Working Capital Management
From a company's point of view, excess working capital means operating
inefficiencies. Money that is tied up in inventory or money that customers still owe to
the company cannot be used to pay off any of the company's obligations. So, if a
company is not operating in the most efficient manner (slow collection) it will show
up as an increase in the working capital. This can be seen by comparing the working
capital from one period to another; slow collection may signal an underlying problem
in the company's operations.
Approaches to Working Capital Management
The objective of working capital management is to maintain the optimum balance of
each of the working capital components. This includes making sure that funds are
held as cash in bank deposits for as long as and in the largest amounts possible,
thereby maximising the interest earned. However, such cash may more appropriately
be "invested" in other assets or in reducing other liabilities.
In recent years there has been an increased focus on Dynamic Discounting as a
means of optimizing Working Capital. This method involves the early payment for
goods and services bought in return for a discounted price. Operated properly, this
can give a significant return on working capital. Working capital management takes
place on two levels:
1. Ratio analysis can be used to monitor overall trends in working capital and to
identify areas requiring closer management
17. 17
2. The individual components of working capital can be effectively managed by
using various techniques and strategies
When considering these techniques and strategies, companies need to recognise
that each department has a unique mix of working capital components. The
emphasis that needs to be placed on each component varies according to
department. For example, some departments have significant inventory levels; others
have little if any inventory. Furthermore, working capital management is not an end
in itself. It is an integral part of the department's overall management. The needs of
efficient working capital management must be considered in relation to other
aspects of the department's financial and non-financial performance.
Horizontal & Trend Analysis
Horizontal or Trend analysis compares two or more year's financial data. It is
facilitated by showing changes between years in both dollar and percentage form
.Showing changes in dollar form helps the analyst focus on key factors that have
affected profitability or financial position. Trend percentage states several years'
financial data in terms of a base year. The base year equals 100%, with all other years
stated in some percentage of this base.
Vertical Analysis
Vertical Analysis is the proportional expression of each item on a financial statement
to the statement total. The results of vertical analysis are presented in the form of
common size statements in which the items within each statement are expressed in
percentages of some common number and always add up to 100. It is conventional
to express items in the profit and loss account as percentages of sales, and balance
18. 18
sheet items as percentage of total shareholders’ funds and liabilities (or of total
assets).
Vertical analysis helps ion making comparisons of companies that differ in size since
the financial statements are expressed in comparable common-size form. Further, a
comparison of common-size statements for several years may reveal important
changes in the components from one year to the next.
Ratio Analysis
Ratio analysis involves establishing a relevant financial relationship between
components of financial statements. It helps in identifying significant relationships
between financial statement items for further investigation. Ratio Analysis is a
powerful tool of financial analysis. A ratio is defined as “the indicated quotient of two
mathematical expressions” and as “the relationship between two or more things”. In
financial analysis, a ratio is used as a benchmark for evaluating the financial position
and performance of the firm. The absolute accounting figures reported in the
financial statements do not provide a meaningful understanding of the performance
and a financial position of the firm. When the net profit figure is relate to the firm’s
investment.
The relationship between two accounting figures, expressed mathematically, is
known as a financial ratio. Ratios help to summarize large quantities of financial data
and to make qualitative judgment about the financial performance. Ratio analysis is
the most widely used method. It is process of establishing and interpreting
quantitative relationship between figures and groups of figures. With the help of
ratios, the financial statements can be analysed more clearly and decisions can be
made more logically. Ratio analysis takes help of Accounting Ratios for judging the
financial health of an enterprise. Financial ratios are used to evaluate profitability,
liquidity, solvency and capital market strength of an enterprise.
19. 19
Liquidity Ratios:
It is extremely essential for any firm to be able to obligations as they become due.
Liquidity ratios measure the ability of the firm to meet its current obligation
(liabilities). In fact analysis of liquidity need the preparation of cash budgets and cash
and fund flow statements; but liquidity ratios, by establishing a relationship between
cash other current assets to current obligation, provide a quick measures of liquidity.
A firm should ensure that it does not suffer from lack of liquidity, and also that it
does not have excess of liquidity. The failure of a company to meet its obligations
due to lack of sufficient liquidity, will result in a poor credit worthiness, loss of
creditors‟ confidence, or even in legal tangles resulting in closure of the company. A
very high degree of liquidity is also bad; idle assets earn nothing. Therefore, it is
necessary to strike a proper balance between high liquidity and lack of liquidity.
The most common ratios, which indicate the extent of liquidity, are:
1. Current ratio
2. Quick ratio
3. Other ratios( cash ratio, interval measure and net working capital ratios)
20. 20
Theoretical Background
Working Capital Management:
Working capital management is also one of the important parts of the
financial management. It is concerned with short-term finance of the business
concern which is a closely related trade between profitability and liquidity. The trend
Working capital over time is studied to check whether they are improving or
deteriorating. Ratios are also compared to see how they stack up, and to get an idea
of comparative valuations.
Ratio analysis is a cornerstone of financial statements.
Ratio analysis can be done for manufacturing companies and service companies.
KAPSTON FACILITIES MANGEMENT PVT LTD is a service based company.
We are going to calculate Current Ratio, Quick Ratio, Net Working capital Ratio,
Working Capital turnover Ratio, Trend Analysis, Cash to Current Asset Ratio, Cash
Velocity Ratio, Debtors turnover Ratio, Average Payment Period and Average Collection
Period Ratio .
a) Current asset: A balance sheet account that represents the value of all assets
that are reasonably expected to be converted into cash within one year in the
normal course of business. Current assets include cash, accounts receivable,
inventory, marketable securities, prepaid expenses and other liquid assets that
can be readily converted to cash
CA = Current asset / Current Liabilities
b) Quick Ratio: An indicator of a company’s short-term liquidity. The quick ratio
measures a company’s ability to meet its short-term obligations with its most
liquid assets.
21. 21
QR = (cash and equivalents + marketable securities + accounts receivable) /
current liabilities
c) Net Working capital Ratio: A measure of both a company's efficiency and its
short-term financial health. The working capital is calculated as: The working
capital ratio indicates whether a company has enough short term assets to
cover its short term debt.
Net Working capital=(Current Assets/Current Liabilities)
d) Working Capital turnover Ratio: A measurement comparing the depletion of
working capital to the generation of sales over a given period. This provides
some useful information as to how effectively a company is using its working
capital to generate sales.
e) Trend analysis: A trend analysis is a method of analysis that allows traders
to predict what will happen with a stock in the future. Trend analysis is based
on historical data about the stock's performance given the overall trends of
the market and particular indicators within the market.
f) Cash to Current Asset Ratio: Also known as the cash ratio, the cash asset
ratio compares the dollar amount of highly liquid assets (such as cash and
marketable securities) for every one dollar of short-term liabilities. This figure
is used to measure a firm's liquidity or its ability to pay its short-term
obligations.
Cash to current Asset Ratio=
22. 22
g) Cash Velocity Ratio: this ratio explains the utilization of cash in generation of
sales
Higher velocity is desirable but it effects the short term liquidity of the firm
Cash Velocity Ratio=
h) Debtors turnover Ratio: This is otherwise called as accounts receivable
turnover ratio . Selling goods on credit is a marketing tool When the form
extends credit to its customers ,debtors are created and those are expected to
be converted into cash with in a short period .Debtors are an important
constituent of the current asserts and the quality of debtors to a great extent
determine the firms liquidity
Debtors Turn over Ratio=Sales/Average book debtors
i) Average Payment Period: This ratio indicates how fast the company is
recovering debts form the debtors higher the collection period higher the
working capital needed
Average payment period=
j) Average Collection Period Ratio: This ratio indicates how fast the company is
recovering debts form the debtors higher the collection period higher the
working capital needed
Average Collection period =
23. 23
CONCEPT OF WORKING CAPITAL
Working Capital may be classified in two ways
a) Concept based working capital
b) Time based working capital
24. 24
1. Gross Working Capital: It refers to the firm’s investment in total current
or circulating assets.
2. Net Working Capital: The term “Net Working Capital” has been defined
in two different ways:
i. It is the excess of current assets over current liabilities. This is, as a matter
of fact, the most commonly accepted definition. Some people define it as
only the difference between current assets and current liabilities. The
former seems to be a better definition as compared to the latter.
ii. It is that portion of a firm’s current assets which is financed by long-term
funds.
3. Negative Working Capital: This situation occurs when the current
liabilities exceed the current assets. It is an indication of crisis to the firm.
BASIS OF
CONCEPT
BASIS OF
TIME
Gross
Working
Capital
Net
Working
Capital
Permanent
/ Fixed
WC
Temporary
/ Variable
WC
Regular
WC
Reserve
WC
Special
WC
Seasonal
WC
25. 25
4. Permanent Working Capital: This refers to that minimum amount of
investment in all current assets which is required at all times to carry out
minimum level of business activities. In other words, it represents the current
assets required on a continuing basis over the entire year. Tandon Committee
has referred to this type of working capital as “Core current assets”.
The following are the characteristics of this type of working capital:
1. Amount of permanent working capital remains in the business in one form or
another. This is particularly important from the point of view of financing. The
suppliers of such working capital should not expect its return during the life-time of
the firm.
2. It also grows with the size of the business. In other words, greater the size of the
business, greater is the amount of such working capital and vice versa
3. Permanent working capital is permanently needed for the business and therefore it
should be financed out of long-term funds.
5. Temporary Working Capital: The amount of such working capital keeps
on fluctuating from time to time on the basis of business activities. In other
words, it represents additional current assets required at different times
during the operating year. For example, extra inventory has to be maintained
to support sales during peak sales period. Similarly, receivable also increase
and must be financed during period of high sales. On the other hand
investment in inventories, receivables, etc., will decrease in periods of
depression. Suppliers of temporary working capital can expect its return
26. 26
during off season when it is not required by the firm. Hence, temporary
working capital is generally financed from short term sources of finance such
as bank credit.
6. Regular working capital: minimum level of working capital required to
circulate from one form to another: from cash to inventory, inventory to
receivables, receivables to cash, and so on
7. Reserve working capital: permanent working capital in excess of regular
working capital. Reserve working capital arises from such contingencies as
union strikes, recession, etc.
27. 27
Principles of Working Capital:
The financial manager must keep in mind the following principles of working
capital management:
1. Principle of Optimization: The level of working capital must be so kept
that the rate of return on investment is optimized. In other words, the working
capital should be maintained at an optimum. This is the point at which the
increase in cost due to decline in working capital is equal to the increase in the
gain associated with it. According to the principle of optimization, the should be
such that each rupee invested adds to its net value. In other words capital should
be invested in each component of working capital as long as the equity position
of firm increases.”
2. Principle of Risk Variation: This principle is based on the assumption
that the rate of return on investment is linked with degree of risk in the
business. Risk here refers to the inability of firm to maintain sufficient current
assets to pay its obligations. If working capital is varied relative to sales, the
amount of risk that a firm assumes is also varied and the opportunity for gain or
loss is increased. In other words, there is a definite relationship between the
degree of risk and the rate of return. As a firm assumes more risk, the
opportunity for gain or loss increases. As the level of working capital relative to
sales decreases, the degree of risk increases. When the degree of risk increases,
the opportunity for gain and loss also increases. Thus, if the level of working
capital goes up, amount of risk goes down, and vice-versa, the opportunity for
gain is like-wise adversely affected.
28. 28
3. Principle of Cost of Capital: Each source of working capital has
different cost of capital. The degree of risk also differs from one source to
another. The type of capital used to finance working capital directly affects the
amount of risk that a firm assumes as well as the opportunity for gain or loss and
cost of capital. A firm should raise capital in such a manner that a balance is
maintained between risk and profit.
4. Principle of Maturity of Payment: This principle states that the
working capital should be so raised from different sources that the firm is able to
repay them on maturity out of its inflows of funds. Otherwise the firm would fail
to repay on maturity and ultimately, it would find itself into liquidation though it
is earning huge profits. This implies that the firm’s ability to repay its short-term
debts depends not on its earnings but on the flow of cash into it.
5. Principle of Equity Position: 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 the working capital should
contribute to the net worth of the firm.
29. 29
Security and House Keeping COMPANIES IN Hyderabad
1) Tirumalaa Management Solutions in Banjara Hills
2) Tirumalaa Management Solutions in Banjara Hills
3) Ruhee Facility Services in Banjara Hills
4) Sainaudyog in Secunderabad
5) Vastlaya facilities and services Secunderabad
6) Kapston Facilities Management PVT LTD
7) Cristal Facilities and Services Hyderabad
30. 30
Company Analysis
COMPANY INTRODUCTION:
KAPSTON Facilities Management Pvt. Ltd. (KFM) manages
properties/facilities to the best of its capability and to the satisfaction of clients in
and around Andhra Pradesh. Our highly qualified and professional team in property
and facility management services enhance value and preserve asset life of property
through simple yet powerful tools in day to day operations. We constantly raise our
standards and practices to develop and share cost savings initiatives that create value
for our clients. We are known for our expertise in enhancing asset value and reduce
costs, without compromising on quality.
KFM has strong backup team for strong and relative training programs at various levels. The
training program covers the following areas;
1. In-office training on company and is working
2. General training on respective areas
3. On-job-training (OJT) at various levels
4. Based on the client’s requirement, working conditions, policies and procedures, an
employee handbook is prepared and shared with the client. The handbook is considered to
be the Bible to be followed by our employees.
31. 31
Services of Kapston facilities management PVT LTD:
1. Security services
2. House Keeping services
3. Engineering services
Security services:
This Manual is issued in accordance with process and procedures adopted by the
facility management company. 24 Hours Control Room
1. All Field Officers will be provided with mobile phones.
2. Senior Night Patrolling Officer will carry out regular night checking.
3. Provision of additional staff at short notice as and when required
4. Immediate response on calls.
5. Separate & direct communication system to major & important units.
6. Our Security Managers will be in regular touch with the clients to solve their
Security problems if any.
7. Action Plan during Riots & strikes.
House Keeping Services:
Total Solutions Office Support Services meet administrative and other requirements.
We deliver everything from mailroom services to reception and planning internal
32. 32
moves, depending upon specific individual requirements.
Customer Services
1. Reception
2. Visitor handling
3. Conference Facilities
4. Back Office
5. Telephone and EPABX services
Engineering services:
Total Solutions services include wear and tear care. Daily repairs and maintenance of
property are conducted to keep the company premises attractive and safe to work
in. This includes both preventive maintenance and on call services. We use
customized software to schedule, plan and track maintenance schedules.
1. General electrical work
2. Plumbing and carpentry services
3. Office and safety equipment maintenance
.
33. 33
Vision mission of KAPSTON FACILITIES MANAGEMENT PVT
LTD:
Vision: To be a world-class provider of facility management services, renowned for
its great people, our great service and great results.
Mission: KFM is committed and dedicated to consistently deliver high standards of
facility management services in the most efficient way, and to make our valuable
customers satisfied.
34. 34
Organization structure of the Kapston Facilities
Management PVT LTD:
Kapston has line structure as its Organizational structure. Features of
line organization are:
In line structure, authority flows from the top level to lower levels through
various managerial positions. There is vertical flow of authority and
responsibility.
There are many levels of management depending upon the scale of business
and decision-making ability of managers. Each level of management has equal
rights.
There is unity of command. Every person is accountable to his immediate
boss.
35. 35
There is limit on subordinates under one manager. A manager has control
only over
Objective and need for the study
Many companies are running through losses and several internal and external affairs.
The study is done to improve the efficiency of working capital management.
The need to study the various sources of working capital management
To identify the problems regarding working capital management.
1. To study concept of working capital & components of working capital.
CEO/CFO/COO
HOD
Zonal
Manager
Regional
Manager
Branch
Manager
Senior
Manager
Relationship
Manager
36. 36
2. To study change of working capital.
3. To analyse profitability, liquidity & working capital position of the company.
With the reference to :
1. Management of cash and securities
2. Management of accounts receivables
3. Management of inventory
4. Working capital financing
Scope
The scope of the present study has been limited interns of period of study as well as
sources and nature of data. The period covered by the study extends over 4 years
from F.Y 2011-15. .
37. 37
The limitations of this study are as follows:
1. The study is mainly on secondary data. It is cone mostly on the basis of
and published financial documents, like balance sheet, profit and loss
account and other related journals, magazines and books etc.
2. The study follows with specific tools financial ratio analysis.
3. The lack of sufficient time and resources is another limitation of the study.
The study is fully based on the student’s financial resources and is to be
completed within limited time. The report has taken only 4-years data.
4. The study is limited from the point of view of submission on partial
fulfilment of the requirement for the Post Graduate Diploma in
Management (PGDM).
38. 38
Analysis & Interpretation
For analysis and interpretation data from the last five years have been
used in the comparative form to know the financial position of the
company. Balance Sheet and Profit Loss Statements have been used to
compare past performance
39. 39
Methodology
1. The ratios that were used include: calculate Current Ratio, Quick Ratio, Net
Working capital Ratio, Working Capital turnover Ratio, Trend Analysis, Cash to
Current Asset Ratio, Cash Velocity Ratio, Debtors turnover Ratio, Average
Payment Period and Average Collection Period Ratio.
2. The report referred to secondary data sources such as the company’s financial
statements, annual reports and website ect.
Current Ratio, Quick Ratio, Net Working capital Ratio, Working Capital turnover
Ratio, Trend Analysis, Cash to Current Asset Ratio, Cash Velocity Ratio, Debtors
turnover Ratio, Average Payment Period and Average Collection Period Ratio .
40. 40
WORKING CAPITAL and Financing of WCM
Working capital management is also one of the important parts of the financial
management. It is concerned with short-term finance of the business concern which
is a closely related trade between profitability and liquidity. Efficient working capital
management leads to improve the operating performance of the business concern
and it helps to meet the short term liquidity. Hence, study of working capital
management is not only an important part of financial management but also is
overall management of the business concern. Working capital is described as the
capital which is not fixed but the more common uses of the working capital is to
consider it as the difference between the book value of current assets and current
liabilities.
MEANING OF WORKING CAPITAL
Capital of the concern may be divided into two major headings. Fixed capital means
that capital, which is used for long-term investment of the business concern. For
example, purchase of permanent assets. Normally it consists of non-recurring in
nature. Working Capital is another part of the capital which is needed for meeting
day to day requirement of the business concern. For example, payment to creditors,
salary paid to workers, purchase of raw materials etc., normally it consists of recurring
41. 41
in nature. It can be easily converted into cash. Hence, it is also known as short-term
capital.
DETERMINANTS OF WORKING CAPITAL :
The factors influencing the working capital decisions of a firm may be classified as
two groups, such as internal factors and external factors. The internal factors
includes, nature of business size of business, firm’s product policy, credit policy,
dividend policy, and access to money and capital markets, growth and expansion of
business etc. The external factors include business fluctuations, changes in the
technology, infrastructural facilities, import policy and the taxation policy etc. These
factors are discussed in brief in the following lines.
I. Internal Factors
1. Nature and size of the business
The working capital requirements of a firm are basically influenced by the nature and
size of the business. Size may be measured in terms of the scale of operations. A firm
with larger scale of operations will need more working capital than a small firm.
Similarly, the nature of the business - influence the working capital decisions. Trading
and financial firms have less investment in fixed assets. But require a large sum of
money to be invested in working capital. Retail stores, business units require larger
amount of working capital, where as, public utilities need less working capital and
more funds to invest in fixed assets.
42. 42
2. Firm’s production policy
The firm’s production policy (manufacturing cycle) is an important factor to decide
the working capital requirement of a firm. The production cycle starts with the
purchase and use of raw material and completes with the production of finished
goods. On the other hand production policy is uniform production policy or seasonal
production policy etc., also influences the working capital decisions. Larger the
manufacturing cycle and uniform production policy – larger will be the requirement
of working capital. The working capital requirement will be higher with varying
production schedules in accordance with the changing demand.
3. Firm’s credit policy
The credit policy of a firm influences credit policy of working capital. A firm following
liberal credit policy to all customers require funds. On the other hand, the firm
adopting strict credit policy and grant credit facilities to few potential customers will
require less amount of working capital.
4. Availability of credit
The working capital requirements of a firm are also affected by credit terms granted
by its suppliers – i.e. creditors. A firm will need less working capital if liberal credit
terms are available to it. Similarly, the availability of credit from banks also influences
the working capital needs of the firm. A firm, which can get bank credit easily on
favorable conditions will be operated with less working capital than a firm without
such a facility.
5. Growth and expansion of business
Working capital requirement of a business firm tend to increase in correspondence
with growth in sales volume and fixed assets. A growing firm may need funds to
invest in fixed assets in order to sustain its growing production and sales. This will, in
43. 43
turn, increase investment in current assets to support increased scale of operations.
Thus, a growing firm needs additional funds continuously.
6. Profit margin and dividend policy
The magnitude of working capital in a firm is dependent upon its profit margin and
dividend policy. A high net profit margin contributes towards the working capital
pool. To the extent the net profit has been earned in cash, it becomes a source of
working capital. This depends upon the dividend policy of the firm. Distribution of
high proportion of profits in the form of cash dividends results in a drain on cash
resources and thus reduces company’s working capital to that extent. The working
capital position of the firm is strengthened if the management follows conservative
dividend policy and vice versa.
7. Operating efficiency of the firm
Operating efficiency means the optimum utilisation of a firm’s resources at minimum
cost. If a firm successfully controls operating cost, it will be able to improve net profit
margin which,
Will, in turn, release greater funds for working capital purposes.
8. Co-ordinating activities in firm
The working capital requirements of a firm are depend upon the co-ordination
between production and distribution activities. The greater and effective the co-
ordinations, the pressure on the working capital will be minimized. In the absence of
co-ordination, demand for working capital is reduced.
44. 44
II. External Factors
1. Business fluctuations
Most firms experience fluctuations in demand for their products and services. These
business variations affect the working capital requirements. When there is an upward
swing in the economy, sales will increase, correspondingly, the firm’s investment in
inventories and book debts will also increase. Under boom, additional investment in
fixed assets may be made by some firms to increase their productive capacity. This
act of the firm will require additional funds. On the other hand when, there is a
decline in economy, sales will come down and consequently the conditions, the firm
try to reduce their short-term borrowings. Similarly the seasonal fluctuations may
also affect the requirement of working capital of a firm.
2. Changes in the technology
The technological changes and developments in the area of production can have
immediate effects on the need for working capital. If the firm wish to install a new
machine in the place of old system, the new system can utilize less expensive raw
materials, the inventory needs
may be reduced there by working capital needs.
3. Import policy
Import policy of the Government may also effect the levels of working capital of a
firm since they have to arrange funds for importing goods at specified times.
4. Infrastructural facilities
45. 45
The firms may require additional funds to maintain the levels of inventory and other
current assets, when there is a good infrastructural facility in the company like
transportation and communications.
5. Taxation policy
The tax policies of the Government will influence the working capital decisions. If the
Government follows regressive taxation policy, i.e. imposing heavy tax burdens on
business firms, they are left with very little profits for distribution and retention
purpose. Consequently the firm has to borrow additional funds to meet their
increased working capital needs. When there is a liberalized tax policy, the pressure
on working capital requirement is minimized. Thus the working capital requirements
of a firm are influenced by the internal and external factors.
WORKING CAPITAL FINANCE
Working capital finance is defined as the capital of a business that is used in
its day-to-day trading operations, calculated as the current assets minus the
current liabilities. For many companies, this is wholly comprised of trade
debtors (that is, bills outstanding) and trade creditors (bills the company in
question has yet to pay). There are a number of short term and long
term sources of working capital financing.
46. 46
Short Term Sources
1. Installment Credit
2. Invoice Discounting
3. Income received in advance
4. Advances received from customers
5. Bank Overdraft
6. Commercial Papers
7. Trade Finance
8. Letter of Credit
Long term sources
1. Equity Capital
2. Debentures
3. Loan from financial institution
47. 47
Analysis
Fig: 4.0Current assets and Current Liabilities.
Years 2011-12 2012-13 2013-14 2014-15
current assets 21019401.77 99850484.8 70775842.5 98333593.39
current liabilities 14310578.29 14079714.14 65154132.29 71454527
Current ratio:
0
20000000
40000000
60000000
80000000
100000000
120000000
2011-12 2012-13 2013-14 2014-15
current assets
current liabilities
48. 48
CR = Current asset / Current Liabilities.
years 2011-12 2012-13 2013-14 2014-15
current assets 21019401.77 99850484.8 70775842.5 98333593.39
current
liabilities
14310578.29 14079714.14 65154132.29 71454527
CURRENT
RATIO
1.468801703 7.091797732 1.086283249 1.376170237
Fig: 4.1 Current Ratio
The Current Ratio shows an increasing trend, which is a positive sign of the
company toward its financial growth. This is good news for the investors and even
for the policy holders.
1.468801703
7.091797732
1.086283249
1.376170237
0
1
2
3
4
5
6
7
8
2011-12 2012-13 2013-14 2014-15
CURRENT RATIO
49. 49
Quick Ratio:
QR = {Current Asset – Inventory’s} / Current Liabilities.
Years 2011-12 2012-13 2013-14 2014-15
QA 18583900.77 60698717.75 84924974.81 85471928.81
CL 14310578.29 14079714 65124132 71454527
Quick Ratio 1.298612844 4.311076045 1.304047704 1.1961
‘INR
Fig : 4.2 Quick Ratio
0
1
2
3
4
5
2011-12
2012-13
2013-14
2014-15
AxisTitle
2011-12 2012-13 2013-14 2014-15
Quick Ratio 1.298612844 4.311076045 1.304047704 1.196172341
Quick Ratio
50. 50
As we can clearly see that the ratios are showing an increasing trend which
shows the efforts of the company to grow up.
Net working Capital :
Net working capital = Current Assets-Current Liabilities
Fig: 4.3 Net working capital
Fig: 4.3 Net working capital
Years 2011-12 2012-13 2013-14 2014-15
current
assets
21019401.77 99850484.8 70775842.5 98333593.39
current
liabilities
14310578.29 14079714.14 65154132.29 71454527
NWC=CA-
CL
6708823.48 85770770.66 5621710.21 26879066
51. 51
This shows the company is able to pay its short term debts promptly on time and
maintaining adequate working capital.
Working capital turnover ratio Ratio:
Working Capital turnover Ratio=sales/net working capital
Years 2011-12 13-Dec 13-14 14-15
sales 10514131 193783434 2787695791 4126977510
Net WC 6708823 85770771 642634289 911881407
0
10000000
20000000
30000000
40000000
50000000
60000000
70000000
80000000
90000000
100000000
2011-12 2012-13 2013-14 2014-15
NWC=CA-CL
NWC=CA-
CL
52. 52
Wc turnover
ratio
1.567209479 2.259317851 4.337919465 4.525783154
Fig: 4.4 Working Capital turnover Ratio
As we can see that the Working Capital turnover Ratio of the company is
increasing it shows the company is utilising good amount of working capital The
Company has high ratio in the year 2014-15. And the remaining year’s working
capital ratio is satisfactory
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2011-12 13-Dec 13-14 14-15
Wc turnover ratio
Wc turnover ratio
53. 53
Trend Analysis of working capital:
Trend analysis=present yr networking capital-previous year net working
capital/previous year net working capital
Years 2011-12 2012-13 2013-14 2014-15
NWC=CA-CL 6708823.48 85770770.66 5621710.21 26879066
trend analysis 100% 1178.477082 -93.44565734 378.1297041
Fig: 4.5 Trend Analysis of working capital
The trend shows there is an increase of working capital in the year 2012-13 and
its been decreased to the year 2013-14.
-20000%
0%
20000%
40000%
60000%
80000%
100000%
120000%
140000%
2011-12 2012-13 2013-14 2014-15
trend analysis
trend analysis
54. 54
Management of Cash and Marketable Securities
Cash management is one of the key areas of working capital management. Cash
is the most liquid current assets. Cash is the common denominator to which all
current assets can be reduced because the other major liquid assets, i.e.
receivable and inventory get eventually
Converted into cash. This underlines the importance of cash management. The
term “Cash” with reference to management of cash is used in two ways. In a
narrow sense cash refers to coins, currency, cheques, drafts and deposits in
banks. Cash is one of the most important components of current assets. Every
firm should have adequate cash, neither more nor less. Inadequate cash will lead
to production interruptions, while excessive cash remains idle and will impair
profitability. Hence, the need for cash management. The cash management
assumes significance for the following reasons.
55. 55
Motives
Motives or desires for holding cash refer to various purposes. The purpose may be
different from person to person and situation to situation. There are four important
motives to hold cash.
a. Transactions motive - This motive refers to the holding of cash, to meet
routine cash requirements in the ordinary course of business. A firm enters into a
number of transactions which requires cash payment. But the cash inflows and cash
outflows do not perfectly synchronise. Sometimes, cash receipts are more than
payments while at other times payments exceed receipts. The firm must have to
maintain sufficient (funds) cash balance if the payments are more than receipts. Thus,
the transactions motive refers to the holding of cash to meet expected obligations
whose timing is not perfectly matched with cash receipts
b. Precautionary motive - Apart from the non-synchronisation of expected cash
receipts and payments in the ordinary course of business, a firm may be failed to pay
cash for unexpected contingencies. For example, strikes, sudden increase in cost of
raw materials etc. Cash held to meet these unforeseen situations is known as
precautionary cash balance and it provides a caution against them. The amount of
cash balance under precautionary motive is influenced by two factors i.e.
predictability of cash flows and the availability of short term credit. The more
unpredictable the cash flows, the greater the need for such cash balances and vice
versa. If the firm can borrow at short-notice, it will need a relatively small balance to
meet contingencies and vice versa. Usually precautionary cash balances are invested
in marketable securities so that they contribute something to profitability.
56. 56
c. Speculative motive - Sometimes firms would like to hold cash in order to
exploit, the profitable opportunities as and when they arise. This motive is called as
speculative motive. For example, if the firm expects that the material prices will fall, it
can delay the purchases and make purchases in future when price actually declines.
Similarly, with the hope of buying securities when the interest rate is expected to
decline, the firm will hold cash. By and large, firms rarely hold cash for speculative
purposes.
d. Compensation motive - This motive to hold cash balances is to compensate
banks and other financial institutes for providing certain services and loans. Banks
provide a variety of services to business firms like clearance of cheques, drafts,
transfer of funds etc. Banks charge a commission or fee for their services to the
customers as indirect compensation. Customers are required to maintain a minimum
cash balance at the bank. This balance cannot be used for transaction purposes.
Banks can utilise the balances to earn a return to compensate their cost of services to
the customers. Such balances are compensating balances.
Analysis on Management of cash and marketable securities
Cash to current asset Ratio:
Cash to current asset Ratio = current assets/cash and bank bal
57. 57
years 2011-12 2012-13 2013-14 2014-15
Cash &bank
balances
454355 28116816 3682475 22480962
Current
Assets
21019401 99850485 70775842 983335934
Cash to CA 1.52 .6 1.06 4.42
Fig: 4.6 Cash to current asset Ratio
Cash to current Asset ratio indicates what % of current assets are in the form of cash. It
should kept as low as possible .
The above table represents the % of cash and bank bal to current assets and are lower
than 5% which is satisfactory.
Cash velocity Ratio:
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2011-12 2012-13 2013-14 2014-15
Cash to CA
Cash to CA
58. 58
Cash velocity ratio=sales/cash and bank bal
Years 2011-12 2012-13 2013-14 2014-15
Cash
&bank
bal
454355 2811685 3682475 22480962
sales 105141318 173783434 278936579 412697715
cash
velocity
ratio
231.4078595 61.80757588 75.74703942 18.3576536
Fig: 4.7 Cash velocity Ratio
This ratio explains the utilization of cash in generation of sales
0
50000000
100000000
150000000
200000000
250000000
300000000
350000000
400000000
450000000
2011-12 2012-13 2013-14 2014-15
Cash &bank bal
sales
cash velocity ratio
59. 59
Higher velocity is desirable but it affects the short term liquidity of the firm
Management of Receivables
Receivables mean the book debts or debtors and these arise, if the goods are sold on
credit. Debtors form about 30% of current assets in India. Debt involves an element
of risk and bad debts also. Hence, it calls for careful analysis and proper
management. The goal of receivables management is to maximize the value of the
firm by achieving a trade off between risk and profitability. For this purpose, a
finance manager has:
a. to obtain optimum (non-maximum) value of sales;
b. to control the cost of receivables, cost of collection, administrative expenses, bad
debts and opportunity cost of funds blocked in the receivables.
60. 60
c. to maintain the debtors at minimum according to the credit policy offered to
customers.
d. to offer cash discounts suitably depending on the cost of receivables, bank rate of
interest and opportunity cost of funds blocked in the receivables.
Benefits of Maintaining Receivables
a. Increase in Sales - Except a few monopolistic firms, most of the firms are
required to sell goods on credit, either because of trade customers or other
conditions. The sales can further be increased by liberalizing the credit terms. This
will attract more customers to the firm resulting in higher sales and growth of the
firm.
b. Increase in Profits - Increase in sales will help the firm
(i) To easily recover the fixed expenses and attaining the break-even level, and
(ii) Increase the operating profit of the firm. In a normal situation, there is a positive
relation between the sales volume and the profit.
c. Extra Profit - Sometimes, the firms make the credit sales at a price which is
higher than the usual cash selling price. This brings an opportunity to the firm to
make extra profit over and above the normal profit.
61. 61
Debtors turnover ratio :
Debtors turn over ratio =sales/avg book debtors
Fig: 4.8 Debtors turn over ratio
years 2011-12 2012-13 2013-14 2014-15
sales 105141318.7 173783434.4 278936579.5 412697751
debtors(average
book debtors )
18129544.45 26191300 57016542 82622878
debtors ratio 5.799446258 6.635158789 4.892204432 4.99495734
This is otherwise called as accounts receivable turnover ratio . Selling goods
on credit is a marketing tool When the form extends credit to its customers ,debtors
are created and those are expected to be converted into cash with in a short period
0
1
2
3
4
5
6
7
2011-12 2012-13 2013-14 2014-15
debtors ratio
debtors ratio
62. 62
.Debtors are an important constituent of the current asserts and the quality of
debtors to a great extent determine the firms liquidity
Average Collection Period:
Average Collection Period=debtors/sales/365
‘INR
years 2011-12 2012-13 2013-14 2014-15
sales 105141318.7 173783434.4 278936579.5 412697751
debtors(average
book debtors )
18129544.45 26191300 57016542 82622878
avg coll period 62.93704326 55.00998719 74.60849298 73.073697
Fig: 4.9 Average Coll Period
63. 63
This ratio indicates how fast the company is recovering debts form the debtors
higher the collection period higher the working capital needed .in the year 2013-14
was the highest average collection period while in the year 2012-13 its lower which is
good to the company.
Average payment period :
Average payment period = creditors/purchases/365
Fig: 4.10 Renewal Expense Ratio
years 2011-12 2012-13 2013-14 2014-15
accounts
payable
3924912 1025670 3703563 5666899
purchases 52619740 3981366 6415649 43312275
0
10
20
30
40
50
60
70
80
2011-12 2012-13 2013-14 2014-15
avg coll period
avg coll period
64. 64
avg payement
period
27.2253888 94.0304283 210.7036241 47.75593374
Average payment should be as long as possible by the company. As the ratio
is fluxuating company should try harder to increase the period. The company must
try harder to improve the average payment period.
0
50
100
150
200
250
2011-12 2012-13 2013-14 2014-15
Avg payement period
avg payement period
65. 65
Ratio’s and Trend of KAPSTON FACILITIES MANAGEMENT PVT LTD:
S.No Ratio's 2011-12 2012-13 2013-14 Trend Cause
1 CURRENT
RATIO
1.46880
1703
7.09179
7732
1.08628
3249
Drastic
Increase
Due to increase in asset
over liabilities
2 quick ratio 1.29861
2844
1.95774
5382
0.93161
7328
Drastic
Increase
Due to increase in asset
over liabilities
3 NWC=CA-
CL
6708823
.48
8577077
0.66
5621710
.21
Drastic
Increase
Due to increase in asset
over liabilities
4 WC
turnover
ratio
1.56720
9479
2.25931
7851
4.33791
9465
Wc
turnover
ratio
Due to increased working
capital utilisation.
5 trend analysis 100% 1178.4770
82
-
93.445657
34
trend
analysis
Due to Income from
investments
6 Cash to CA 1.52 .6 1.06 Drastic
Increase
Due to Income from
investments
7 debtors
ratio
5.79944
6258
6.63515
8789
4.89220
4432
debtors
ratio
it determines the great
extent firms liquidity
8 Average
collection
period
62.9370
4326
55.0099
8719
74.6084
9298
Decreasin
g
Increasing on every
financial year
9 average
payment
period
27.2253
888
94.0304
283
210.703
6241
avg
payment
period
Increasing on every
financial year
66. 66
Kapston facilities facilities management is out performing on many
parameters, such as, Cash Ratio, Quick ratio. It has performed spectacularly well.
Recovering from negative figures in 2011-2012 this is a complete turnaround for the
company. At the same time it could be success of its lower in it current Ratio for
which its future increase. However the loss ratio registered as subsequently increases.
67. 67
Conclusion
1. The current assets and current liabilities of the firm are increasing on yearly
basis this shows that the firm has expanded its business and working capital.
2. The current ratio of the company is not satisfactory the Ratio is not 2:1.
3. The percentage to cash to current assets is normal during the years.
4. The average collection period of company is less than 100 days the company
is maintaining good collection period.
5. And the average payment period is also good for the company for late
payments.
6. Acid test ratio on the other hand is more than the normal standard of 1:1
7. The firm’s ability to meet the current liabilities by cash and bank balances.
8. % of cash and bank balance to current assets and are lower than 5% which is
satisfactory for kapston facilities management pvt ltd.
9. Assets turnover ratio measures how efficiently the assets are employed. Assets
turnover ratio indicates the efficiency of both fixed and current assets in
generating sales.
10. The company has higher working capital turnover ratio and its been utilizing
its working capital efficiently.
11. High current assets to sales ratio imply by and large a more efficient use of
funds. The company has to improve its sales.
68. 68
BIBLIOGRAPHY
1. Principles of Managerial Finance- Lawrence J. Gitman
2. Financial Accounting- R. Narayan swami
3. http://www.kapstonFm.com
4. http://www.theequitydesk.com
5. http://www.dnaindia.com/money/report_belgian-insurer-ageas-to-exit-idbi-
federal_1703359
6. http://en.wikipedia.org/wiki/Working_capital_management#Working_capital
7.
http://www.investopedia.com/search/default.aspx?q=working%20capital#axzz222mc
hMcn
8. http://www.thehackettgroup.com/casestudies/cytec/
