a report<br />on<br />CODE PLATTER Softwares Ltd<br />Project Report Submitted to the<br />Institute of Professional Excellence and Management in partial fulfillment of the requirements for the award of the Degree of MASTERS IN BUSINESS ADMINISTRATION<br />Affiliated to<br />Uttar Pradesh Technical University, Lucknow<br />914400top<br /> Research Guide Submitted by: <br /> DR CHHAYA TYAGI POONAM YADAV <br /> IPEM, GHAZIABAD MBA-III SEM <br /> Roll No: 0911470071 <br /> <br />DATE OF SUBMISSION: <br />PREFACE<br />Modern organizations are highly complex and dynamic systems. They operate under very turbulent social economic and political environment. They are required to reconcile several incompatible goals. Conflicting roles and divergent interest they are also fraught with the use risk and uncertainties, hence tactful management of such organization to plan to execute guide, coordination and control the performance of people to achieve predetermined goals. Management has to keep the organization vibrant moving and in equilibrium. It has to achieve goal which themselves are changing it is therefore a problem highly complex and ticklish. <br />The working capital management is the process through which we observe day to day operation of the business, whereas the word capital means monetary value of all assets of the business. It is an important part of curriculum of Master Degree in Management, programme is project taken by the students in any business organization, after completion of third trimester of the programmed. <br />The objective of this project is to enable the students to understand the application of the academics in the real business life. I am fully confident that this project will be extremely useful to the management. <br />Acknowledgement is an art, one can write glib stanzas without meaning a word, on the other hand one can make a simple expression of gratitude.”<br />Industrial training is an integral part of any Master of Business Administration program and for that purposes I had joined a company what else can be as good as CODE PLATTER Softwares Ltd, India's premier information enabling company.<br />I take the opportunity to express my gratitude to all of them who in some or other way helped me to accomplish this challenging project in Code Platter Softwares Limited No amount of written expression is sufficient to show my deepest sense of gratitude to them. <br />I am very thankful to External Guide, Mr. Arihant Jain, CEO, CODE PLATTER Softwares Ltd., New Delhi and very grateful to Prof. D C Vashistha and Dr ChhayaTyagi, Faculty of Institute of Professional Excellence and Management for their everlasting support and guidance on the ground of which I have acquired a new field of knowledge. The course structure created for this curriculum has benefited with the inclusion of recent development in the organizational and managerial aspects.<br />Lastly, I am thankful to all the member of CODE PLATTER Softwares, New Delhi which has given me valuable information in the part of my project.<br /> POONAM YADAV <br /> MBA –III SEM <br /> ROLL NO: 0911470071 <br />DECLARATION<br />I, herby declared to the best of my knowledge and belief that the summer training report entitled as "
Working Capital Management"
for CODE PLATTER Softwares Ltd, being submitted to the partial fulfillment of I.P.E.M.GZB, has not substantially the same one, which has already been submitted for “Master Degree In Business Administration” of any other academic qualification at any other university or examination in India. <br /> I, Poonam Yadav hereby declare that all this work purely done by myself on a primary data and it is totally free from any biasness to any individual or any group of people.<br />Place: New Delhi<br />Date: <br /> (POONAM YADAV)<br /><ul><li>TABLE OF CONTENTSTitle Pg. No. PART- 1IntroductionCompany Profile 8Executive Summary Vision Mission StatementPerformanceProducts and Services PART- 2Introduction to Working Capital Management Swot AnalysisObjectives of Study Scope of StudyResearch MethodologyResearch AnalysisPART-3Major findingsConclusionsRecommendationsLimitationsBibliography </li></ul>PART-1<br /> <br />INTRODUCTION<br />TO<br />Code Platter Softwares Ltd. is emerging global IT Solutions Company. Our IT services, enterprise solutions brings high quality, greater efficiency, cost effectiveness and responsiveness to your business and the ability to transform investment to strategic initiatives<br />Company Profile<br />Code Platter is a leading Technology and IT Enterprise. The Code Platter enterprise, founded in 2001, is one of India's original IT garage start ups. Its range of offerings span R&D and Technology Services, Enterprise and Applications Consulting, Remote Infrastructure Management, Outsourcing services, Systems Integration and Distribution of Technology in India. Code Platter has global partnerships with several leading firms, including several IT and Technology majors. <br />Code Platter has built unique strengths in IT applications (custom applications for industry solutions and package implementation), business process outsourcing, while maintaining and extending its leadership in product engineering. Code Platter has also built domain depth through a micro verticalization strategy in industries such as Financial Services, Retail, Media and Entertainment, Life Sciences, and Telecom. Code Platter has created the ability to distribute value across the customer's IT landscape through its well-distributed services portfolio, significant domain strengths, and locally relevant geographic distribution. Code Platter has the widest service portfolio among Indian IT service providers, with each of its services having attained critical mass.Our mature lines of business are R&D and Engineering, Custom Applications, Enterprise Applications. In addition, Code Platter offerings comprising of Business, Technology, Application and Data Transformation – the four broad needs of any enterprise. Our ability to synergistically integrate these service lines across the entire IT landscape creates new zones for value creation.<br />The company has stood by its values and core philosophy. Bonds have been forged with partners to co - create value. Strong inorganic growth is a testimony to the spirit of partnerships. This entrepreneurial and win-win relationship driven culture continues to guide Code Platter in all its endeavors.<br />Code Platter continues to focus on good Corporate Governance, in line with local and global standards. Its primary objective is to create and adhere to a corporate culture of conscience and consciousness, integrity, transparency and accountability for efficient and ethical conduct of business for meeting its obligations. Code Platter follows a thorough and diligent selection process of proactively identifying value-centric acquisition opportunities for long-term strategic growth.<br />Code Platter believe that IT driven business innovation, emergence of new disruptive technologies, business models, and widespread acceptance of global delivery models are some of the transformational forces at work today. Capitalizing on these trends, traditional outsourcers are extending their sourcing focus from cost to innovation, productivity and flexibility, while new segments of outsourcers are seeking new, technology-enabled transformational gains.<br />Everyone’s talking transformation these days but what most of them actually mean is up gradation i.e. business process improvement, or service re-engineering at best. True transformation is revolutionary and directed at core processes, resulting in deep and fundamental change. It doesn’t merely cut costs, or streamline the way a company works – it radically alters market position by building competitive advantage. And Code Platter is uniquely positioned with its perfect blend of onshore presence and offshore economics. <br />Executive Summary<br />Arihant Jain started this venture in 2001 with a vision to make Code Platter a global IT company. He is Head of Technology, Software Architecture and Design. At early stages of company, he has worked as fulltime software developer and taken up challenges to meet client expectations.<br />As CEO, he is actively involved in strategic partnerships and bringing global clients for the company. He leads the company strategy for international and domestic markets for software product development and marketing.<br />Apart from making Code Platter as trusted and ever lasting name in IT Industry, Arihant Jain is also working on the foundation of TechPeeth. TechPeeth is an arm of Code Platter to empower the IT and technical expertise among youth. Arihant Jain aims to make TechPeeth as a global platform for technology innovations.<br />He is a graduate in Electrical Engineering from Delhi College of Engineering.<br />The management of current assets deals with determination, maintenance, control and monitoring the level of all the individual current assets. Current assets are referred to as assets, which can normally be converted into cash within one year therefore investment in current assets should be just adequate no more no less” to the needs of the business. Excessive investments in current assets should be avoided, because it impairs firm’s profitability, as idle investment in current assets and are non-productive and so they can earn nothing, on the other hand inadequate amount of working capital can threaten solvency of the firm, if it fails to meet its current obligations.<br />Thus the working capital is a qualitative concept<br />It indicates the liquidity position of the firm and <br />It suggests the extent to which working capital needs may be financed by permanent source of fund. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligation within the ordinary cycle of business.<br />Vision<br />“Together we create the enterprises of tomorrow”<br />Vision to become the pioneer software development company has lead them to achieve the high client satisfaction. Code Platter since its inception has emerged as one of the fastest growing Offshore Software Development Company, as they have wide range of global clientele from US, UK, Germany, UAE and Australia.<br />Mission<br />"
To provide world-class information technology solutions and services to enable Code Platter’s customers to serve their customers better"
<br />IT ExpertiseCode Platter focuses on latest software technologies enabling our product and services team to meet the challenges in fast moving IT Industry. Their software expertise extends across following technologies:Microsoft.NET, ADO.NET, MSSQL, ASP.NET, VB.NET, C#; VC++ .NET, Visual Basic, C/C++SunJAVA/J2EE, Struts, EJB, MySQL, XML TechnologiesOpen SourceLAMP Technologies, Cake PHP, Joomla , Moodle , osCommerceSAPERP-R/3, ABAP, FICO, CRM, BasisTestingUnit, Functional, Performance, Load, Security etc.<br />ProductsCode Platter since its foundation always focused on developing the industry specific products to automate and enhance the operations in organizations. They have made several custom software products for manufacturing, retail, automobile, FMCG industries. With the expanding reach of web all across the globe , they developed two distinguished products for the internet users.JobGully.comJobGully.com is a differentiated job portal having features like Surveys, Coupons, Polls, Forums etc. The idea behind JobGully.com is to optimize the potential of internet users specifically seeking for employment. They introduced features like surveys, polls, forums in the portal to get the feedback on the recruiters, employee satisfaction and experiences. Some of the highlighted features of JobGully are as follows: Search thousands of Jobs posted by Recruiters. Participate in Daily Polls, Weekly Surveys to earn Gully Scores. Redeem our Gully Scores to get coupons on various offers. <br />BnB4you.com<br />BnB4you.com is an online portal for tourists looking for accommodation under Bed and Breakfast scheme. Tourists can search the accommodation based on its location, reviews, ratings and many more. This portal is designed in keeping 2010 Common Wealth Games in New Delhi. This portal will then later reach to other countries covering the various events and tourist destination to become a one stop resource portal for international and domestic tourists. Some of the features of Bnb4you.com are as follows <br /><ul><li>Search various Countries for famous Tourists Destination.
Find the Reviews, Tariff, and Location of our Accommodation.
Get information about Events all across the globe.</li></ul> Services<br />Of<br /><ul><li>IT ConsultancyTo add value to client businesses, they offer strategic consulting services meeting the enterprise objective of sustainable growth with a competition edge. They suggest latest technology solutions and industry tested practices with their unrivalled expertise.Their industry insight and experience has lead them to structure their consultancy solutions in such a way that reduces operational cost, increases customer satisfaction, adds competitive differentiation, enables transformation to the client business processes and operations. Their key IT consulting services include:Project BasedProject consultancy is a highly specialized field in itself and requires extensive expertise. They cater to a diversified set of businesses for project based consultancy services.They understand the complete business processes of the organizations and help them to implement fast performing and cost effective IT solutions to leverage the growth of the organization. With their years long industry experience we offer innovative and quality project consultancy service. Theirteam of experts provide business analysis, technical guidance, project development, deployment, and offer solutions on all technologies and platform. Not just consultancy, they focus on project performance as well. Their soul aim is the success of the project.Product BasedIf we are looking to start a new product venture they are here to assist us and guide us through out the process .Their consultants will not just guide us in planning and establishing of our new venture, but will find suitable and effective solutions to all our business problems and hindrances through out the process. They do thorough study of the related field which includes market research, customer study, product study, target market research and all other factors influencing the product. After that they provide complete consultancy on product budgeting, design, architecture, technology, programming, testing and release of the product. Their expert team of consultants provides complete support and maintenance to upgrade and further release of the product time to time. Software DevelopmentApplication development at CodePlatter helps organizations be future-oriented, leading and competitive in their business while at the same time being quality oriented and cost effective in their business critical applications.The application development process consists of complete SDLC that includes Requirement Analysis, Technology, Architecture and Design, Development and Unit Testing, and System and Integration Testing of the application.The key application development services include:Custom Application DevelopmentOften, the software application that fits our specific business process simply isn’t available. When packages software solutions aren’t sufficient and flexible enough for our organization, our custom application development services is the best suited solutions for our requirements.Their custom application development process encompasses complete cycle starting from translating business needs into project requirements through implementation and post-production user support. Offshore Application DevelopmentApplication development outsourcing helps clients to workout latest technology upgrades with ever evolving business processes and operations. Their mature offshore delivery model helps organizations achieve cost effectiveness, scalability, quality and on time delivery.They work closely with their customers to ensure them within budget, on time and detect free application development. Their in-house development team works and coordinate in a manner that it delivers the best to clients outsourcing needs.IT Staffing & ResourcingStaff augmentation can help organizations to achieve numerous business goals faster that accelerate the quality and speed of project development, and avoiding the cost and time required for internal training and skill development.They offer their Staff Augmentation services to all major overseas locations with their highly skilled consultants having experience in different verticals. Their key staff augmentation services include:ContractualIt provides flexibility, cost and time saving on consultant cost. Contract to hireIt provides effective consultant for clients and a safe alternative for permanent staffing. Permanent StaffingIt caters long term staffing needs of an organization. Dedicated StaffingIt gives access to one or a team of skilled consultants working exclusive on our projects.Benefits of Manpower OutsourcingNo recruitment hassles for the client company Replacement whenever consultant is on leave or resigns (with prior notice from each side) Reduce overheads, free up resources Minimize capital expenditureFree our executive team from day-to-day process problems Save on manpower and training costs Improve speed and service Provide the best quality services, products and people Avoid the cost of chasing technology Reduce the overall management burden while retaining control of strategic decision making. Enterprise SolutionsAn Enterprise solution enables us to prepare for the future, keep pace with the existing demands, and manage people, processes, and data with the technology.In today’s dynamic and evolving business landscape, enterprise solutions are helping organizations to access and manage real-time information and transaction processes across the various departments with in the organization.Their key Enterprise Solution offerings are:ERP (Enterprise Resource Planning)They provide implementation of CRM, Supply Chain Management and custom ERP development and application customizations services as per the client businesses. their expert consultants work on every phase of project from understanding the requirements, designing the architecture to deployment of the application on.Application Re-engineeringThey offer complete feasibility study and migration solution for existing legacy applications. Their consultants focus on designing such an architecture which reduces the maintenance cost, leverages the application performance and extend flexibility. When their strategically partner with Code Platter, they will add innovation, trust, and reliability in our business operations.</li></ul>Open Projects<br />As a software development group they continuously work with various organizations and NGO to leverage IT and technical education. With their growing experience and expertise, they wanted to add more quality and dedication while sharing their practical knowledge with the aspirants.To fulfil the deep desire to work for community they founded TechPeeth as an independent arm of Code Platter Softwares Limited. TechPeeth is a commitment to expand and share technology and its value to human life.<br />TechPeethTechPeeth is a blend of two words i.e. “Technology” and “Peeth” whereas Peeth is an acronym of School in Hindi language. TechPeeth will have following operations and goals in near future: <br />TechPeeth will focus on imparting IT knowledge to student groups all across India. <br />In long term TechPeeth will cover all technology sectors and engineering domain. <br />Technology Workshops, Seminars and Trainings will be provided to Under Graduate students. <br />Strategic Partnership with Government and Educational Institutions for setting up of TechPeeth labs. <br />Scholarships Programmes for High School, Graduates and Post Graduates students. <br />In a quest to become a global technology incubation centre, they are inviting people from global community to become a part of Techworld.<br />working capital management<br />Working Capital Management<br />1) Introduction<br />Working capital management<br />“Working capital means the part of the total assets of the business that change from one form to another form in the ordinary course of business operations.”<br />Concept of working capital:-<br />The word working capital is made of two words 1.Working and 2. Capital<br />The word working means day to day operation of the business, whereas the word capital means monetary value of all assets of the business.<br />Working capital management is concerned with the problems arise in<br />attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash,marketable securities, account receivable and inventory. Current liabilities warethose liabilities which intended at there inception to be paid in ordinary courseof business, within a year, out of the current assets or earnings of the concern.The basic current liabilities are account payable, bill payable, bank over-draft,and outstanding expenses.<br />The goal of working capital management is to manage the firm’s current assetsand current liabilities in such way that the satisfactory level of working capitalis mentioned. The current should be large enough to cover its current liabilitiesin order to ensure a reasonable margin of the safety.<br />Definition:-<br /><ul><li>According to Guttmann &Dougall-
“Excess of current assets over current liabilities”.
According to Park &Gladson-</li></ul>“The excess of current assets of a business (i.e. cash, accounts<br />receivables, inventories) over current items owned to employees and others<br />(such as salaries & wages payable, accounts payable, taxes owned to<br />government)”.<br />Working capital : -<br />Working capital may be regarded as the life blood of business. Working capital is of majorimportance to internal and external analysis because of its close relationship with the current dayto-day operations of a business. Every business needs funds for two purposes.<br /><ul><li>Long term funds are required to create production facilities through purchase of fixed assetssuch as plants, machineries, lands, buildings & etc
Short term funds are required for the purchase of raw materials, payment of wages, and otherday-to-day expenses.It is other wise known as revolving or circulating capitalIt is nothing but the difference between current assets and current liabilities. i.e.</li></ul>Working Capital = Current Asset – Current Liability.<br />Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. Itis also commonly used to purchase inventory, or to make payroll. Capital is also used often bybusinesses to put a down payment down on a piece of commercial real estate. Working capital is<br />essential for any business to succeed. It is becoming increasingly important to have access tomore working capital when we need it.<br />2) Need of working capital management<br />The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales can not convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash,it will be required for purchasing the raw material may be available on credit basis. <br />Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise<br />3)Gross working capital and Net workingcapital’<br />There are two concepts of working capital management<br />1) Gross working capital<br />Gross working capital refers to the firm’s investment I current assets. Currentassets are the assets which can be convert in to cash within year includes cash, short term securities, debtors, bills receivable and inventory.<br />Gross Working Capital = Total of Current Asset<br />2) Net working capital<br />Net working capital refers to the difference between current assets and currentliabilities. Current liabilities are those claims of outsiders which are expected tomature for payment within an accounting year and include creditors, billspayable and outstanding expenses. Net working capital can be positive ornegativeEfficient working capital management requires that firms should operate withsome amount of net working capital, the exact amount varying from firm tofirm and depending, among other things; on the nature of industries.net workingcapital is necessary because the cash outflows and inflows do not coincide.<br />The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required.<br />The concept of working capital was, first evolved by Karl Marx. Marx used the term ‘variable capital’ means outlays for payrolls advanced to workers before the completion of work. He compared this with ‘constant capital’ whichaccording to him is nothing but ‘dead labour’. This ‘variable capital’ is nothingwage fund which remains blocked in terms of financial management, in workin-process along with other operating expenses until it is released through saleof finished goods. Although Marx did not mentioned that workers also gavecredit to the firm by accepting periodical payment of wages which funded aportioned of W.I.P, the concept of working capital, as we understand today wasembedded in his ‘variable capital’.<br />Net Working Capital = Excess of Current Asset over Current Liability<br />Current Assets <br /><ul><li>Cash in hand / at bank
Long-term loans</li></ul>Focusing on management of current assets<br />The gross working capital concept focuses attention on two aspects of current assets management:<br />How to optimize investment in current assets?<br />How should current assets be financed?<br />The considerations of the level of investment in current assets should avoid two danger points- excessive or inadequate investment in current assets. Investment in current assets should be just adequate to the needs of the business firm. Excessive investment in current assets should be avoided because it impairs the firm’s profitability, as idle investment earns nothing. On the other hand, inadequate amount of working capital can threaten solvency of the firm because of its inability to meet its current obligations. It should e realized that the working capital needs of the firm may be fluctuating with changing business activity. The management should be prompt to initiate an action and correct imbalances.<br />Another aspect of the gross working capital points to the need of arranging funds to finance current assets. Whenever a need for working capital funds arises due to the increasing level of business activity or for any other reason, financing arrangement should be made quickly. Similarly, if suddenly, some surplus funds arise they should not be allowed to remain idle, but should be invested in short term securities. Thus, the financial manager should have knowledge of the sources of working capital funds as well as investment avenues where idle funds may temporarily are invested.<br />Focusing on Liquidity management<br />Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute margin or buffer for maturing obligations within the ordinary operating cycle of business. In order to protect their interests, short- term creditors always like a company to maintain current assets at a higher level than current liabilities. However, the quality of current assets should be considered in determining level of current assets vis-à-vis current liabilities. A weak liquidity position possesses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity, and may prove to be harmful for the company’s reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore, prompt and timely action should be taken by management to improve and correct the imbalances in the liquidity position of the firm.<br />For every firm, there is a minimum amount of net working capital, which is permanent. Therefore, a portion of working capital should be financed with permanent sources of funds such as equity share capital, debentures, long-term debt, preference share capital or retained earnings. Management must, therefore, decide the extent to which the current assets should be financed with equity capital or borrowed capital.<br />It may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is no precise way to determine the exact amount of gross or net working capital of a firm. A judicious mix of long and short term finances should be invested in current assets. Since current assets involve cost of funds, they should be put to productive use.<br />BALANCED WORKING CAPITAL POSITION<br />The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous from the firm’s point of view.<br />Excessive working capital means holding costs and idle funds, which earn no profits for the firm. The dangers of excessive working capital are as follows:<br />It results in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, waste, theft and losses increase.<br />It is an indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts results, which adversely affects profits.<br />Excessive working capital makes management complacent which degenerates into managerial inefficiency.<br />Tendencies of accumulating inventories tend to make speculative profits grow. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits.<br />Inadequate working capital is also bad as it not only impairs the firm’s profitability but also results in production interrupts and in efficiencies and sales disruptions. Inadequate working has the following dangers:<br />It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds.<br />It becomes difficult to implement operating plans and achieve the firm’s profit target.<br />Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitments.<br />Fixed assets are not efficiently utilized for the lack of working capital funds<br />Paucity of working capital funds render the firm unable to avail attractive credit opportunities etc.<br />The firm looses its reputation when it is not in a position to honor its short-term obligations. As a result, the firm faces tight credit terms.<br />An enlightened management should, therefore maintain the right amount of working capital on a continuous basis. A firm’s net working capital position is not only important as an index of liquidity but it is also used as a measure of the firm’s risk. Risk in this regard means chances of the firm’s being unable to meet its obligation on due date. The lenders consider a positive net working capital as a measure of safety. All other things being equal, the more the net working capital a firm has, the less likely that it will default in meeting it current financial obligations.<br />Types of working capital<br />The operating cycle creates the need for current assets (working capital).<br />However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital.<br />Gross working capital:- It refers to the firm’s investment in current assets. The sum of the currentassets is the working capital of the business. The sum of the current assets is a quantitative aspect ofworking capital. Which emphasizes more on quantity than its quality, but it fails to reveal the truefinancial position of the firm because every increase in current liabilities will decrease the grossworking capital.<br />Net working capital:- It is the difference between current assets and current liabilities or the excessof total current assets over total current liabilities.<br />1) Permanent working capital<br />The need for current assets arises, as already observed, because of the cash cycle. To carry on business certain minimum level of working capital is necessary on continues and uninterrupted basis. For all practical purpose, thisrequirement will have to be met permanent as with other fixed assets. Thisrequirement refers to as permanent or fixed working capital<br />2) Temporary working capital<br />Any amount over and above the permanent level of working capital is<br />temporary, fluctuating or variable, working capital. This portion of the requiredworking capital is needed to meet fluctuation in demand consequent uponchanges in production and sales as result of seasonal changes<br />. <br />Graph shows that the permanent level is fairly castanet; while temporary<br />working capital is fluctuating in the case of an expanding firm the permanent working capital line may not be horizontal.<br />This may be because of changes in demand for permanent current assets mightbe increasing to support.<br />Factors requiring consideration while estimating working capital.<br /><ul><li>The average credit period expected to be allowed by suppliers.
The length of time for which raw material are to remain in stores before they are issued forproduction.
The length of the production cycle (or) work in process.
The length of sales cycle during which finished goods are to be kept waiting for sales.
The average period of credit allowed to customers
The amount of cash required to make advance payment</li></ul>Determinants of working capital<br />The amount of working capital is depends upon a following factors<br />1) Nature of business<br />Some businesses are such, due to their very nature, that their requirement offixed capital is more rather than working capital. These businesses sell servicesand not the commodities and that too on cash basis. As such, no founds areblocked in piling inventories and also no funds are blocked in receivables.<br /> E.g.public utility services like railways, infrastructure oriented project etc. thererequirement of working capital is less.On the other hand, there are somebusinesses like trading activity, where requirement of fixed capital is less butmore money is blocked in inventories and debtors.<br />The working capital requirement of the firm is closely related to the nature of its business. A service firm, like an electricity undertaking or a transport corporation, which has a short operating cycle and which sells predominantly on cash basis, has a modest working capital requirement. On the other hand, a manufacturing concern like a machine tools unit, which has a long operating cycle and which sells largely on credit, has a very substantial working capital requirement.<br />2) Length of production cycle<br />In some business like machine tools industry, the time gap between the<br />acquisition of raw material till the end of final production of finished products itself is quit high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need ofworking capital is high.<br />3) Size and growth of business<br />In very small company the working capital requirement is quit high due to highoverhead, higher buying and selling cost etc. as such medium size businesspositively has edge over the small companies. But if the business start growingafter certain limit, the working capital requirements may adversely affect by theincreasing size.<br />4) Business/ Trade cycle<br />If the company is the operating in the time of boom, the working capital<br />requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favorable market,due to increase in the sales, there may more and more amount of funds blockedin stock and debtors etc. similarly in the case of depressions also, workingcapital may be high as the sales terms of value and quantity may be reducing,there may be unnecessary piling up of stack without getting sold, the receivablemay not be recover<br />Different phases of business cycle i.e., boom, recession, recovery etc. also effect the working capital requirement. In case of recession period there is usually dullness in business activities and there will be an opposite effect on the level of wor5king capital requirement. There will be a fall in inventories and cash requirement etc.<br /> 5) Terms of purchase and sales<br />Some time due to competition or custom, it may be necessary for the companyto extend more and more credit to customers, as result which more and moreamount is locked up in debtors or bills receivables which increase the workingcapital requirement. On the other hand, in the case of purchase, if the credit isoffered by suppliers of goods and services, a part of working capitalrequirement may be financed by them, but it is necessary to purchase on cashbasis, the working capital requirement will be higher.<br />The time taken by a supplier of raw materials, goods, etc. after placing an order, also determines the working capital requirement. If goods as soon as or in a short period after placing an order, then the purchaser will not like to maintain a high level of inventory f that good. Otherwise, larger inventories should be kept e.g. in case of imported goods.<br />6) Profitability<br />The profitability of the business may be vary in each and every individual case,which is in turn its depend on numerous factors, but high profitability willpositively reduce the strain on working capital requirement of the company,because the profits to the extent that they earned in cash may be used to meetthe working capital requirement of the company.<br />7) Operating efficiency<br />If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc. It is nothing time taken from the stage when cash is put into the business up to the stage when cash is realized.<br />Thus, the working capital requirement of a firm is determined by a host of factors. Every consideration is to be weighted relatively to determine the working capital requirement.<br />Further, the determination of working capital requirement is not once a whole exercise; rather a continuous review must be made in order to assess the working capital requirement in the changing situation. There are various reasons, which may require the review of the working capital requirement e.g., change in credit policy, change in sales volume, etc.<br />8) Seasonality of operations:<br />Firms, which have marked seasonality in their operations usually, have highly fluctuating working capital requirements. If the operations are smooth and even through out the year the working capital requirement will be constant and will not be affected by the seasonal factors.<br />9) Market conditions:<br />The market competitiveness has an important bearing on the working capital needs of a firm. When the competition is keen, a large inventory of finished goods is required to promptly serve customers who may not be inclined to wait because other manufactures are ready to meet their needs. In view of competitive conditions prevailing in the market the firm may have to offer liberal credit terms to the customers resulting in higher debtors. Thus, the working capital requirements tend to be high because of greater investment in finished goods inventory and account receivables. On the other hand, a monopolistic firm may not require larger working capital. It may ask customer to pay in advance or to wait for some time after placing the order.<br />10) Credit policy:<br />The credit policy means the totality of terms and conditions on which goods are sold and purchased. A firm has to interact with two types of credit policies at a time. One, the credit policy of the supplier of raw materials, goods, etc., and two, the credit policy relating to credit which it extends to its customers. In both the cases, however, the firm while deciding the credit policy has to take care of the credit policy o the market. For example, a firm might be purchasing goods and services on credit terms but selling goods only for cash. The working capital requirement of this firm will be lower than that of a firm, which is purchasing cash but has to sell on credit basis.<br />ISSUES IN WORKING CAPITAL MANAGEMENT<br />Working capital management refers to the administration of all components of working capital – cash, marketable securities, debtors (receivables), and stock (inventories) and creditors (payables). 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.<br />There are many aspects of working capital management which make it an important function of the financial manager.<br />Time. Working capital management requires much of the financial manager’s time.<br />Investment. Working capital represents a large portion of the total investment in assets. Actions should be taken to curtail unnecessary investment in current assets.<br />Criticality. Working capital management has great significance for all firms but it is very critical for small firms. Small firms in India face a severe problem of collecting their dues debtors. Further, the role of current liabilities is more significant in case of small firms, as, unlike large firms, they face difficulties in raising long-term finances.<br />Growth. The need for working capital is directly related to the firm’s growth. As sales grow, the firm needs to invest more in inventories and debtors. Continuous growth in sales may also require additional investment in fixed assets.<br />Liquidity vs. Profitability: Risk-Return Trade-off<br />A large investment in current assets under certainty would mean a low rate of return on investment for the firm, as excess investment in current assets will not earn enough return. A smaller investment in current assets, on the other hand, would mea interrupted production and sales, because of frequent stock-outs and inability to pay creditors in time due to restrictive policy.<br />Given a firm’s technology and production policy, sales and demand conditions, operating efficiency etc., its current assets holdings will depend upon its working capital policy. These policies involve risk-return trade-offs. A conservative policy means lower return and risk, while an aggressive policy produces higher return and risk.<br />The two important aims of the working capital management are: profitability and solvency. Solvency, used in the technical sense, refers to the firm’s continuous ability to meet maturing obligations. If the fir maintains a relatively large investment in current assets, it will have no difficulty in paying claims of creditors when they become due and will be able to fill all sales orders and ensure smooth production. Thus, a liquid firm has less risk of insolvency; that is, it will hardly experience a cash shortage or a stock-out situation. However, there is a cost associated with maintaining a sound liquidity position. A considerable amount of the firm’s will be tied up in current assets, and to the extent this investment is idle, the firm’s profitability will suffer.<br />To have higher profitability, the firm may sacrifice solvency and maintain a relatively low level of current assets. When the firm does so, its profitability will improve as fewer funds are tied up in idle current assets, but its solvency would be threatened and would be exposed to greater risk of cash shortage and stock-outs.<br />ESTIMATING WORKIN CAPITAL NEEDS<br />Current Assets Holding Period. To estimate working capital requirement on the basis of average holding period of current assets and relating them to costs based on the company’s experience in the previous years. This method is essentially based on the operating cycle concept.<br />Ratio of Sales. To estimate working capital requirements as a ratio of sales on the assumption that current change with sales<br />Ratio of Fixed Investment. To estimate working capital requirements as a percentage of fixed investment.<br />POLICIES FOR FINANCING FIXED ASSETS<br />A firm can adopt different financing policies vis-à-vis current assets. Three types of financing may be distinguished:<br />Long-term Financing. The sources of long-term financing include ordinary share capital, preference share capital, debentures, long-term borrowings from financial institutions and reserves and surplus (retained earnings).<br />Short-Term Financing. The short-term financing is obtained for a period less than one year. It is arranged in advance from banks and other surplus of short-term finance in the money market. It includes working capital funds from banks, public deposits, commercial paper, factoring of receivables etc.<br />Spontaneous Financing. It refers to the automatic sources of short-term funds arising in the normal course of a business. Trade (supplier’s) credit and outstanding expenses are examples of spontaneous financing.<br />The real choice of financing current assets, once the spontaneous sources of financing have been fully utilized, is between the long-term and short-term sources of finance.<br />Approaches<br />Depending on the mix of short-term and long-term financing, the approach followed by a company may be referred to as:<br />Matching approach<br />Conservative approach<br />Aggressive approach<br />Matching Approach<br />The firm following matching approach (also known as hedging approach) adopts a financial plan which matches the expected life of the sources of funds raised to finance assets. For e.g., a ten-year loan may be raised to finance a plant with an expected life of ten years. The justification for the exact matching is that, since the purpose of financing is to pay for the assets, the source of financing for short-term assets is expensive, as funds will not be utilized for the full period. Similarly, financing the long-term assets with short-term financing is costly as well as inconvenient as arrangement for the new short-term financing will have to be made on a continuing basis. <br />The above figure illustrated the matching approach over time. The firm’s fixed assets and permanent current assets are financed with long-term funds and as the level of these assets increases, the long-term financing level also increases. The temporary or variable current assets are financed with short-term funds and as their level increases, the level of short-term financing also increases.<br />Conservative approach<br />Under a conservative plan, the firm finances its permanent assets and also a part of temporary currents assets with long-term financing. In the periods when the firm has no need for temporary current assets, the idle long-term funds can be invested in the tradable securities to conserve liquidity. The conservative plan relies heavily on long-term financing and, therefore, the firm has less risk of facing the problem of shortage of funds.<br />The above figure illustrates conservative approach over time. It can be seen that when the firm has no temporary current assets [e.g., at (a) and (b)], the long-term funds released can be invested in marketable securities to build up the liquidity position of the firm.<br />Aggressive approach<br />An aggressive approach policy is said to be followed by the firm when it uses more short-term financing than warranted by the matching plan. The firm finances a part of its permanent current assets with short term financing. The relatively more use of short-term financing makes the firm more risky.<br />WORKING CAPITAL LIMITS<br />FUND BASED CREDIT LIMITS<br /><ul><li>CASH CREDIT/PACKING CREDIT:</li></ul>The cash credit facility is similar to the overdraft arrangement. It is the most poplar method of bank finance for working capital in India. Under the cash credit facility, a borrower is allowed to withdraw funs from the bank up to the cash credit limit. He is not required to borrow the entire sanctioned credit once, rather, he can draw periodically to the extent of his requirement and repay by depositing surplus funds in his cash credit account. Cash credit is sanctioned against the security of current assets. Cash credit is the most flexible arrangement from the borrower’s point of view.<br /><ul><li>DISCOUNTING OF BILLS</li></ul>Under the purchase or discounting of bills, a borrower can obtain credit from a bank against its bills. The bank purchase or discounts the borrower’s bills. He amount provided under this agreement is covered within the overall cash credit or overdraft limit<br />Before purchasing or discounting the bills, the bank satisfies itself as credit worthiness of the drawer. Though, the item “bills purchased” implies that the bank becomes owner of the bill. In practice, bank hold bills as security for the credit. When a bill is discounted, the borrower is paid he discounted amount of the bills, (visa, full amount of bill minus the discount charged by the bank). The bank collects full amount on maturity. The major part of bank borrowings comes through Discounting Bills. On this firm has to pay interest of 12%.<br />NON-FUND BASED<br />LETTER OF CREDIT<br />Commonly used in international trade, the letter o credit is now used in domestic trade as well. A letter of credit, or L/C, is used by a bank on behalf of its customers (buyer) to the seller. As per this document, the bank agrees to honor drafts on it for the supplies made to the customer if the seller fulfills the conditions laid down in the L/C.<br />The L/C serves several useful functions:<br />It virtually eliminates credit risk, if the bank has a good standing.<br />It reduces uncertainty, as the seller knows the conditions that should be fulfilled receive payment.<br />It offers safety to the buyer who wants to ensure that payment is made only in conformity with the conditions of the L/C.<br />Letter of credit is non-fund based source credit that is why it is available at very low rate i.e. 0.5%.<br />BANK GURANTEE<br />Bank Guarantee is very similar to Letter of Credit but it is provided for much longer period compared to letter of credit. Very small portion of working capital is funded by Bank Guarantee.<br />Working capital in terms of five components:<br /><ul><li>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 thecash level adequate to meet current expenses as they come due? What is the timing relationshipbetween cash inflow and outflow? When will peak cash needs occur? When and how much bankborrowing will be needed to meet any cash shortfalls? When will repayment be expected and willthe cash flow cover it?</li></ul>2. Accounts receivable: - Many businesses extend credit to their customers. If you do, is theamount of accounts receivable reasonable relative to sales? How rapidly are receivables beingcollected? Which customers are slow to pay and what should be done about them?<br />3. Inventory: - Inventory is often as much as 50 percent of a firm's current assets, so naturally itrequires continual scrutiny. Is the inventory level reasonable compared with sales and the nature ofyour business? What's the rate of inventory turnover compared with other companies in your type<br />of business?<br />4.Accounts Payable:-Financing by suppliers is common in small business; it is one of the majorsources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative towhat you purchase? What is your firm's payment policy doing to enhance or detract from yourcredit rating?<br />5. Accrued expenses and taxes payable: - These are obligations of your company at any giventime and represent a future outflow of cash.<br /> SWOT ANALYSIS<br />Strengths<br />1. The industry is likely to maintain its growth momentum and continue growing at about 9 – 10% in the foreseeable future.<br />2. Measures initiated by the Government towards public-private partnership for removing bottleneck in the development of infrastructure in the country, augurs well for the industry.<br />3. In the coming few years the demand for the softwares will increase which will be booming news for softwares industries.<br />Weaknesses<br /><ul><li>High capital cost and investment cost for each and every project.
The major concern for the industry are continuous increase in employees salary.
Appreciation of rupees against foreign currencies.
Change in technologies rapidly.</li></ul>Opportunities<br />1. Adequate support from the Government is very essential to promote business activities.<br />2. Increase in the development and sell of softwares at different countries have increased the turnover of the company.<br />3. The modernization, productivity improvement and cost control measures will improve the performance of the industry in times to come.<br />Threats<br /><ul><li>Local assemblers are biggest menace for the company.
Govt. instability has long-term repercussions affecting company’s policies & its growth.
Technological shift as a result of research & development. Daily new technologies are emerging.</li></ul>Concluding the S.W.O.T. analysis in words that prosperity lies ahead for Code Platter. It has to come out with the state of art as well as futuristic technologies to its consumers well before time.<br />PART-2<br /> OBJECTIVES OF THE STUDY<br />Study of the working capital management is important because unless the<br />working capital is managed effectively, monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any the company can not earn profits and increase its turnover. With this primary objective of the study, the following further objectives are framed for a depth analysis.<br /><ul><li>To study the working capital management of Code Platter
To study the optimum level of current assets and current liabilities of the company.
To study the liquidity position through various working capital related ratios.
To study the working capital components such as receivables accounts, cash management, Inventory position
To study the way and means of working capital finance of the Code Platter
To estimate the working capital requirement of Code Platter
To study the operating and cash cycle of the company.</li></ul>The basic learning objective behind the study was-<br />•Computation of Working Capital Management<br />•Operating Cycle of the firm<br />•Financial plan estimated for 2007-2008 and projected for 2008-2009<br />•Working capital credit limits<br />•Ratio analysis<br /> SCOPE OF THE STUDY<br />Scope of the study<br />The scope of the study is identified after and during the study is conducted. The study of working capital is based on tools like trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. Further the study is based on last5 years Annual Reports of Code Platter And even factors like competitor’s analysis, industry analysis were not considered while preparing this project.<br />RESEARCH METHODOLOGY <br /> Introduction<br />Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying now research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them.<br />It is important for research to know not only the research method but also know methodology. ”The procedures by which researcher go about their work of describing, explaining and predicting phenomenon are called methodology.”Methods comprise the procedures used for generating, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem. Data collection is important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step.<br />Data collection plays an important role in research work. Without proper data available for analysis you cannot do the research work accurately.<br />Types of data collection<br />There are two types of data collection methods available.<br /><ul><li>Primary data collection
Primary data</li></ul>The primary data is that data which is collected fresh or first hand, and for first time which is original in nature. Primary data can collect through personal interview, questionnaire etc. to support the secondary data.<br /><ul><li>Secondary data collection method</li></ul>The secondary data are those which have already collected and stored.<br />Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheets, books etc.<br />Project is based on<br />This project is based on primary data collected through personal interview of head of account department and other concerned staff member of finance department. But primary data collection had limitations such as matter confidential information thus project is based on secondary information collected through five years annual report of the company, supported by various books and internet sides. The data collection was aimed at study of working capital management of the company<br /><ul><li>Annual report of Code Platter 2002-03
Annual report of Code Platter 2006-07</li></ul>The methodology to be adopted for the project is explained as under:<br /><ul><li>The initial step of the project was studying about the company and then evaluating the financial position of the company on the basis of ratio analysis.,
The project will focus on the study of overall working capital management at the organizations, for which the following study and analysis will be undertaken:
This project is aimed to estimate the operating plan for the year 2007-2008
It will also include the ratio analysis of the financial statement so that the profitability and liquidity trade off can be analyzed.</li></ul> Working Capital Level and Analysis<br /> Working Capital Level<br />The consideration of the level investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Investmentin current assets should be just adequate, not more or less, to the need of thebusiness firms. Excessive investment in current assets should be avoidedbecause it impairs the firm’s profitability, as idle investment earns nothing.<br /> Onthe other hand inadequate amount of working capital can be threatened solvency of the firms because of it’s inability to meet it’s current obligation. Itshould be realized that the working capital need of the firms may be fluctuatingwith changing business activity. This may cause excess or shortage of workingcapital frequently. The management should be prompt to initiate an action andcorrect imbalance<br /> Working Capital Trend Analysis<br />In working capital analysis the direction at changes over a period of time is ofcrucial importance. Working capital is one of the important fields of<br />management. It is therefore very essential for an annalist to make a study aboutthe trend and direction of working capital over a period of time. Such analysisenables as to study the upward and downward trend in current assets and current liabilities and it’s effect on the working capital position.<br />In the words of S.P. Gupta “The term trend is very commonly used in day-todayconversion trend, also called secular or long term need is the basic tendencyof population, sales, income, current assets, and current liabilities to grow ordecline over a period of time”<br />According to R. C. galeziem “The trend is defined as smooth irreversible movement in the series. It can be increasing or decreasing.”<br />Emphasizing the importance of working capital trends, “analysis of working capital trends provide as base tojudge whether the practice and privilege policy of the management with regardto working capital is good enough or an important is to be made in managingthe working capital funds.Further, any one trend by it self is not very informative and thereforecomparison withIllustrated their ideas in these words, “An upwards trends coupled withdownward trend or sells, accompanied by marked increase in plant investmentespecially if the increase in planning investment by fixed interest obligation”<br />Observations<br />It was observed that major source of liquidity problem is the mismatch betweencurrent payments and current receipts from the Comparison of funds flowstatements of Code Platter for five years. It was observed that in the year 2004-05current assets increased by around 29% and current liabilities increased only by19% which affect as working capital increased by 35%. <br />The increase in working capital is close to 67%. While current assets increasedby 66% and current liabilities by 65%. It shows that management is using longterm funds to short term requirements. <br />And inthe year 2007 because current assets gone up by only 12%, current liabilitiesgrown by 35%. This two together pushed down the net working capital to thepresent level. The fall in working capital is a clear indication that the companyis utilizing its short term resources with efficiency.<br />Current assets<br />Total assets are basically classified in two parts as fixed assets and current assets. Fixed assets are in the nature of long term or life time for the organization. Current assets convert in the cash in the period of one year. It means that current assets are liquid assets or assets which can convert in to cash within a year.<br />Observations<br />It was observed that the size of current assets is increasing with increases in thesales. The excess of current assets is showing positive liquidity position of thefirm but it is not always good because excess current assets then required, itmay adversely affects on profitability. Current assets include some fundsinvestments for which company pay interest. The balance of current assets ishighly increased in year 2005-06, because of increase in cash balance. <br />Current assetscomponents show sundry debtors are the major part in current assets it indicatesthat the inefficient collection management. Over investment in the debtoraffects liquidity of firm for that company has raised funds from other sourceslike short term loan which incurred the interest.<br />Current liabilities<br />Current liabilities mean the liabilities which have to pay in current year. It<br />includes sundry creditor’s means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and provision as tax provision. Current liabilities also includesbank overdraft. For some current assets like bank overdrafts and short termloan, company has to pay interest thus the management of current liabilities has importance<br />Observations<br />Current liabilities show continues growth each year because company createsthe credit in the market by good transaction. To get maximum credit fromsupplier which is profitable to the company it reduces the need of workingcapital of firm. As a current liability increase in the year 2006-07 by 35% itreduce the working capital size in the same year. But company enjoyed overcreditors which may include indirect cost of credit terms.<br /> Changes in working capital<br />There are so many reasons to changes in working capital as follow<br />1) Changes in sales and operating expenses:-The changes in sales and operating expenses may be due to three reasons<br />A) There may be long run trend of change e.g. The price of row material<br />say oil may constantly raise necessity the holding of large inventory.<br />B) Cyclical changes in economy dealing to ups and downs in business<br />activity will influence the level of working capital both permanent and<br />temporary.<br />C) Changes in seasonality in sales activities<br />2) Policy changes:-<br />The second major case of changes in the level of working capital is because ofpolicy changes initiated by management. The term current assets policy may bedefined as the relationship between current assets and sales volume.<br />3) Technology changes:-<br />The third major point if changes in working capital are changes in technology because changes in technology to install that technology in our business moreworking capital is required<br />A change in operating expenses rise or full will have similar effects on the<br />levels of working following working capital statement is prepared on the base of balance sheet of last two year.<br /> Operating Cycle<br />The need of working capital arrived because of time gap between production ofgoods and their actual realization after sale. This time gap is called “OperatingCycle” or “Working Capital Cycle”. The operating cycle of a company consistof time period between procurement of inventory and the collection of cashfrom receivables. The operating cycle is the length of time between thecompany’s outlay on raw materials, wages and other expanses and inflow ofcash from sales of goods.<br />Operating cycle is an important concept in management of cash and<br />management of cash working capital. The operating cycle reveals the time thatelapses between outlays of cash and inflow of cash. Quicker the operating cycleless amount of investment in working capital is needed and it improvesprofitability. The duration of the operating cycle depends on nature of industriesand efficiency in working capital management.<br />Calculation of operating cycle<br />To calculate the operating cycle of JISL used last five year data. Operating<br />cycle of the JISL vary year to year as changes in policy of management aboutcredit policy and operating control<br />Observations<br />Operating cycle of Code Platter shows the numbers of day are decreasing in recentyear it is reflect the efficiency of management. Days of operating cycle showsperiod of lack of funds in current assets, if no of day are more than it increasesthe cost of funds as taken from outside of the business.<br /> Working capital leverage<br />One of the important objectives of working capital management is by<br />maintaining the optimum level of investment in current assets and by reducingthe level of investment in current assets and by reducing the level of currentliabilities the company can minimize the investment in the working capitalthereby improvement in return on capital employed is achieved. The termworking capital leverage refers to the impact of level of working capital oncompany’s profitability. <br />The working capital management should improve theproductivity of investment in current assets and ultimately it will increase thereturn on capital employed. Higher level of investment in current assets than isactually required means increase in the cost of Interest charges on short termloans and working capital finance raised from banks etc. and will result inlower return on capital employed and vice versa. Working capital leveragemeasures the responsiveness of ROCE (Return on Capital Employed) forchanges in current assets. It is measures by applying the following formula,<br />Working capital leverage= % Changes in ROCE<br /> ______________________<br /> % Changes in current assets<br />Return on capital employed= EBIT<br /> _____________<br /> Total assets<br />The working capital leverage reflects the sensitivity of return on capital<br />employed to changes in level of current assets. Working capital leverage wouldbe less in the case of capital intensive capital employed is same working capitalleverage expresses the relation of efficiency of working capital managementwith the profitability of the company.<br />Observations<br />When investment in current assets is more than requirement that<br />increases the cost of funds raised from short term sources may be bank loans,<br />which affected on profitability of the Code Platter .<br /> LOANS AND ADVANCES ANALYSIS<br />Loans and Advances here refers to any to amount given to different parties, company, employeesfor a specific period of time and in return they will be liable to make timely repayment of thatamount in addition to interest on that loan.<br />Observations<br />If we analyze the table and the chart we can see that it follows an increasing trend which is a goodsign for the company. We can see that from the year 2006 to 2007 it increased more than double.<br />We can see that the increase of 145% and 55% in 06-07 and 07-08 respectively from previousyear.<br />Working Capital Ratio analysis<br /> Introduction<br />Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as “the indicated quotient of two mathematical expressions” and as “therelationship between two or more things”. The absolute figures reported in thefinancial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries largequantities of financial data and to make qualitative judgment of the firm’sfinancial performance<br /> Role of ratio analysis<br />Ratio analysis helps to appraise the firms in the term of there profitability and efficiency of performance, either individually or in relation to other firms insame industry. Ratio analysis is one of the best possible techniques available tomanagement to impart the basic functions like planning and control. As futureis closely related to the immediately past, ratio calculated on the basis historicalfinancial data may be of good assistance to predict the future. E.g. On the basisof inventory turnover ratio or debtor’s turnover ratio in the past, the level ofinventory and debtors can be easily ascertained for any given amount of sales.<br />Similarly, the ratio analysis may be able to locate the point out the various ariaswhich need the management attention in order to improve the situation. E.g.Current ratio which shows a constant decline trend may be indicate the need forfurther introduction of long term finance in order to increase the liquidityposition. As the ratio analysis is concerned with all the aspect of the firm’sfinancial analysis liquidity, solvency, activity, profitability and overallperformance, it enables the interested persons to know the financial andoperational characteristics of an organization and take suitable decisions.<br /> Limitations of ratio analysis<br />1) The basic limitation of ratio analysis is that it may be difficult to find a<br />basis for making the comparison<br />2) Normally, the ratios are calculated on the basis of historical financial<br />statements. An organization for the purpose of decision making may<br />need the hint regarding the future happiness rather than those in the past.<br />The external analyst has to depend upon the past which may not<br />necessary to reflect financial position and performance in future.<br />3) The technique of ratio analysis may prove inadequate in some situations if there is differs in opinion regarding the interpretation of certain ratio.<br />4) As the ratio calculates on the basis of financial statements, the basic<br />limitation which is applicable to the financial statement is equally<br />applicable In case of technique of ratio analysis also i.e. only facts which<br />can be expressed in financial terms are considered by the ratio analysis.<br />5) The technique of ratio analysis has certain limitations of use in the sense that it only highlights the strong or problem arias, it dose not provide any solution to rectify the problem arias<br /> Classification of working capital ratio<br />Working capital ratio means ratios which are related with the working capital management e.g. current assets, current liabilities, liquidity, profitability and risk turnoff etc. these ratio are classified as follows<br />1) Efficiency ratio<br />The ratios compounded under this group indicate the efficiency of the<br />organization to use the various kinds of assets by converting them the form ofsale. This ratio also called as activity ratio or assets management ratio. As theassets basically categorized as fixed assets and current assets and the currentassets further classified according to individual components of current assetsviz. investment and receivables or debtors or as net current assets, the importantof efficiency ratio as follow<br />1) Working capital turnover ratio<br />2) Inventory turnover ratio<br />3) Receivable turnover ratio<br />4) Current assets turnover ratio<br />2) Liquidity ratio<br />The ratios compounded under this group indicate the short term position of theorganization and also indicate the efficiency with which the working capital isbeing used. The most important ratio under this group is follows<br />1. Current ratio<br />2. Quick ratio<br />3. Absolute liquid ratio<br />Efficiency ratio<br />1) Working capital turnover ratio<br />It signifies that for an amount of sales, a relative amount of working capital isneeded. If any increase in sales contemplated working capital should be adequate and thus this ratio helps management to maintain the adequate level ofworking capital. The ratio measures the efficiency with which the workingcapital is being used by a firm. It may thus compute net working capitalturnover by dividing sales by working capital.<br /> Sales<br />Working capital turnover ratio =___________________ <br /> Net working capital<br />Objective.<br /><ul><li>A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company.
The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations.
In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.
A high, or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales.
As such, higher this ratio, the better will be the situation. However, a very high ratio may indicate overtrading – the working capital being meager for the scale of operations.</li></ul>Observations<br />High working capital ratio indicates the capability of the organization to<br />achieve maximum sales with the minimum investment in working capital.<br />Company’s working capital ratio shows mostly more than two, except for the year 2005-06 because of excess of cash balance in current assets which occurred due to encashment of deposits. In the year 2007 the ratio was around 3, it indicates that the capability of the company to achieve maximum sales withthe minimum investment in working capital.<br />2) Inventory turnover ratio<br />Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products. It is calculated by dividing the cost of good sold by average inventory:<br /> Cost of goods sold<br />Inventory TOR=_________________________<br /> Average inventory<br />The average inventory is the average of opening and closing balance of<br />inventory in a manufacturing company like Code Platter inventory of finished goods isused to calculate inventory turnover ratio<br />Observations<br />It was observed that Inventory turnover ratio indicates maximum sales achievedwith the minimum investment in the inventory. As such, the general rule highinventory turnover is desirable but high inventory turnover ratio may notnecessary indicates the profitable situation. An organization, in order to achievea large sales volume may sometime sacrifice on profit, inventory ratio may notresult into high amount of profit.<br />3) Receivable turnover ratio<br />The derivation of this ratio is made in following way<br />Receivable turnover ratio = Gross sales <br /> ______________________<br /> Average account receivables<br />Gross sales are inclusive of excise duty and scrap sales because both may enterin to receivables by credit sales. Average receivable calculate by opening plusclosing balance divide by 2. Increasing volume of receivables without amatching increase in sales is reflected by a low receivable turnover ratio. It isindication of slowing down of the collection system or an extend line of creditbeing allowed by the customer organization.<br /> The latter may be due to the factthat the firm is loosing out to competition. A credit manager engage in the taskof granting credit or monitoring receivable should take the hint from a fallingreceivable turnover ratio use his market intelligence to find out the reasonbehind such failing trend.<br />Debtor turnover indicates the number of times debtors turnover each year. Generally the higher the value of debtor’s turnover, the more is the<br />management of credit.<br />Debtor’s turnover ratio = 365 days<br /> _________________________<br /> Receivable turnover ratio<br />Observations<br />It was observed from receivable turnover ratio that receivables turned aroundthe sales were less than 4 times. The actual collection period was more thannormal collection period allowed to customer. It concludes that over investmentin the debtors which adversely affect on requirement of the working capitalfinance and cost of such finance.<br />4) Current assets turnover ratio<br />Current assets turnover ratio is calculate to know the firms efficiency of<br />utilizing the current assets .current assets includes the assets like inventories,sundry debtors, bills receivable, cash in hand or bank, marketable securities,prepaid expenses and short term loans and advances. This ratio includes theefficiency with which current assets turn into sales. A higher ratio implies amore efficient use of funds thus high turnover ratio indicate to reduced the lockup of funds in current assets. An analysis of this ratio over a period of timereflects working capital management of a firm.<br />Current assets TOR= Sales<br /> __________________<br /> Current assets<br />Objective.<br />A high Assets turnover ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in assets. It indicates that the assets are turned over in the form of sales more number of times such, higher the ratio, better will be the situation.<br /> Liquidity ratio<br />1) Current ratio<br />The current is calculated by dividing current assets by current liabilities:<br />Current ratio = Current asset<br /> _________________<br /> Current liabilities<br />Current assets include cash and those assets which can be converted in to cash within a year, such marketable securities, debtors and inventories. All obligations within a year are include in current liabilities. Current liabilities include creditors, bills payable accrued expenses, short term bank loan incometax liabilities and long term debt maturing in the current year. Current ratioindicates the availability of current assets in rupees for every rupee of currentliability.<br />Objective.<br /><ul><li>The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities with its short-term assets.
The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point.
While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash.
An acceptable current ratio varies by industry. For most industrial companies 1.5 is an acceptable CR. A standard CR for a healthy business is close to 2.
However, a blind comparison of actual current ratio with the standard current ratio may lead to unrealistic conclusions. A very high ratio indicates idleness of funds, poor investment policies of the management and poor inventory control, while a lower ratio indicates lack of liquidity and shortage of working capital. </li></ul>Observations<br />The current ratio indicates the availability of funds to payment of current<br />liabilities in the form of current assets. A higher ratio indicates that there weresufficient assets available with the organization which can be converted in cash,without any reduction in the value. As ideal current ratio is 2:1, where currentratio of the firm is more than 2:1, it indicates the unnecessarily investment inthe current assets in the form of debtor and cash balance. Ratio is higher in theyear 2005-06 where cash balance is more than requirement which came throughencashment of deposits of funds.<br />CODEPLATTER is in a better position to meet its short term obligations as can be seen by a highcurrent ratio. This is mainly due to high proportion of Loans& Advances and a significantly low proportion of Debtors.<br />2) Quick ratio<br />Quick ratios establish the relationship between quick or liquid assets and<br />liabilities. An asset is liquid if it can be converting in to cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset .other assets which are consider to be relatively liquid and include in quick assets aredebtors and bills receivable and marketable securities. Inventories are considered as less liquid. Inventory normally required some time for realizinginto cash. Their value also be tendency to fluctuate. The quick ratiois found outby dividing quick assets by current liabilities<br />Quick ratio = Current asset – Inventory<br /> _____________________<br /> Current liabilities<br />Objective.<br /><ul><li>The ratio of current assets less inventories to total current liabilities. This ratio is the most stringent measure of how well the company is covering its short-termobligations, since the ratio only considers that part of current assets which can be turned into cash immediately (thus the exclusion of inventories).
The ratio tells creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice. also called acid-test ratio.
The current ratio does not indicate adequately the ability of the enterprise to discharge the current liabilities as and when they fall due. Liquid ratio is considered as a refinement of current ratio as non-liquid portion of current assets is eliminated to calculate the liquid assets. Thus it is a better indicator of liquidity.
A quick ratio of 1:1 is considered standard and ideal, since for every rupee of current liabilities, there is a rupee of quick assets. A decline in the liquid ratio indicates over-trading, which, if serious, may land the company in difficulties.</li></ul>Observations<br />Quick ratio indicates that the company has sufficient liquid balance for the<br />payment of current liabilities. The liquid ratio of 1:1 is suppose to be standardor ideal but here ratio is more than 1:1 over the period of time, it indicates thatthe firm maintains the over liquid assets than actual requirement of such assets.<br />3) Absolute liquid ratio<br />Even though debtors and bills receivables are considered as more liquid then inventories, it can not be converted in to cash immediately or in time. Thereforewhile calculation of absolute liquid ratio only the absolute liquid assets as likecash in hand cash at bank, short term marketable securities are taken in toconsideration to measure the ability of the company in meeting short termfinancial obligation. It calculates by absolute assets dividing by currentliabilities.<br />Absolute liquid ratio = Absolute liquid assets<br /> ___________________<br /> Current liabilities<br />Observations<br />Absolute liquid ratio indicates the availability of cash with company is<br />sufficient because company also has other current assets to support current liabilities of the company. In the year 2005-06 absolute liquid ratio increased because of company carry more cash balance, as a cash balance is ideal assetscompany has to take control on such availability of funds which is affect oncost of the funds.<br />PROFITABILITY RATIOS<br />Profit as compared to the capital employed indicated profitability of the concern. A measure of ‘profitability’ is the overall measure of efficiency. The different profitability ratios are as follows:<br />Net Profit ratio<br />The Net profit ratio establishes the relationship between net profit and net sales, expressed in percentage form.<br />Net Profit is derived by deducting administrative and marketing expenses, finance charges and making adjustments for non-operating expenses and incomes.<br />Computation. This ratio is calculated as follows:<br />Net Profit ratio = Net Profit after taxes x 100<br /> Net Sales<br />Objective.<br />The net profit ratio determines the overall efficiency of the business. It indicates that proportion of sales available to the owners after the consideration of all types of expenses and costs – either operating or non-operating or normal or abnormal.<br />A high net profit indicates profitability of the business. Hence, higher the ratio, the better the business is.<br />RETURN ON INVESTMENT<br />The ratios computed in this group indicate the relationship between the profits of a firm and investment in the firm. There can be three ways in which the term ‘investment’ may be interpreted, i.e., Assets, Capital Employed and Shareholder’s Funds. As such, there can be three broad classifications of ROI:<br />Return on Assets (ROA)<br />Computation: This ratio is calculated as:<br /> ROA = EBIT<br /> Average Total Assets<br />Objective<br /><ul><li>An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.
The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income.
The higher the ROA number, the better, because the company is earning more money on less investment.</li></ul>Return on Capital Employed (ROCE)<br />Computation: The ratio is calculated as:<br />Profit Before Interest & Taxes x 100<br /> Average Capital employed<br />Objective<br />It is used in finance as a measure of the returns that a company is realising from its capital employed. <br />It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital.<br />ROCE measures the profitability of the capital employed in the business. A high ROCE indicates a better and profitable use of long-term funds of owners and creditors. As such, a high ROCE will always be preferred.<br />Importance of Working Capital Ratios<br />Ratio analysis can be used by financial executives to check upon the efficiency with which workingcapital is being used in the enterprise. The following are the important ratios to measure theefficiency of working capital. The following, easily calculated, ratios are important measures of<br />working capital utilization.<br /> Working Capital ManagementComponents<br /> Receivables Management<br />Receivables or debtors are the one of the most important parts of the currentassets which is created if the company sells the finished goods to the customerbut not receive the cash for the same immediately. Trade credit arises whenfirm sells its products and services on credit and dose not receive cashimmediately. It is essential marketing tool, acting as bridge for the movement ofgoods through production and distributiostages to customers. Trade creditcreates receivables or book debts which the firm is expected to collect in thenear future. <br />The receivables include three characteristics<br />1) It involve element of risk which should be carefully analysis.<br />2) It is based on economic value. To the buyer, the economic value in goods orservices passes immediately at the time of sale, while seller expects an equivalent value to be received later on<br />3) It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period.<br />Objective of receivable management<br />The sales of goods on credit basis are an essential part of the modern<br />competitive economic system. The credit sales are generally made up on<br />account in the sense that there are formal acknowledgements of debt obligationthrough a financial instrument. As a marketing tool, they are intended topromote sales and there by profit. However extension of credit involves riskand cost, management should weigh the benefit as well as cost to determine thegoal of receivable management. Thus the objective of receivable managementis to promote sales and profit until that point is reached where the return oninvestment in further funding of receivables isless .than the cost of funds raisedto finance that additional credit<br />Average collection period<br />The average collection period measures the quality of debtors since it indicatethe speed of their collection. The shorter the average collection period, thebetter the quality of the debtors since a short collection period implies theprompt payment by debtors. The average collection period should be comparedagainst the firm’s credit terms and policy judges its credit and collectionefficiency. The collection period ratio thus helps an analyst in two respects.In determining the collectability of debtors and thus, the efficiency ofCollection efforts.In ascertaining the firm’s comparative strength and advantages related toits credit policy and performance.The debtor’s turnover ratio can be transformed in to the number of days ofholding of debtors.<br />Observations<br />The size of receivables are staidly increasing it indicates that the company wasallowing more credit year to year, but it was not bad signal because as receivables were supporting to the increase in the sales. Average collection period are reducing to present situation, but as compare with the normal collection period allowed to customer by Code Platter of 90 day’s , it was clear that thecompany required to increase our efficiency of collection of receivables. Allthe above factors directly or indirectly affects in the debtors turnover ratio,current ratio and working capital ratio. For effective management of credit, thefirm should lay down clear cut guidelines and procedure for granting credit toindividual customers and collecting individual accounts should involvefollowing steps: <br />(1) Credit information <br />(2) Credit investigation<br />(3) Credit limits<br />(4) Collection procedure.<br /> Management of Cash<br />Cash is common purchasing power or medium of exchange. As such, it forms the most important component of working capital. The term cash with referenceto cash management is used in two senses, in narrow sense it is used broadly tocover cash and generally accepted equivalent of cash such as cheques, draft anddemand deposits in banks. The broader view of cash also induce hear- cashassets, such as marketable sense as marketable securities and time deposits inbanks. <br />The main characteristics of this deposits that they can be really sold andconvert in to cash in short term. They also provide short term investment outletfor excess and are also useful for meeting planned outflow of funds. We employthe term cash management in the broader sense. Irrespective of the form inwhich it is held, a distinguishing feature of cash as assets is that it was noearning power. Company have to always maintain the cash balance to fulfill thedally requirement of expenses. There are four primary motive for maintain the cash as follow<br />Motive of holding cash<br />There are four motives for holding cash as follow<br />1) Transaction motive<br />2) Precautionary motive<br />3) Speculative motive<br />4) Compensating motive<br />Transaction motive<br />Cash balance i