A dissertation report on working capital management of arss infrastructure ltd

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A Project report

on

Working capital management of ARSS infrastructure ltd

A project report submitted for the partial fullfillment of

POST GRADUATE DIPLOMA IN MANAGEMENT

Submitted by

HDF SCHOOL OF MANAGEMENT

AT-Naranpur,belagachhia,cuttack

APPROVED BY AICTE

(2009-2011)


CERTIFICATE

This is to satisfy that the summer project work of ………………………………..
Titled Working capital management is an original work and this work has not been
submitted elsewhere in any form. The indebtness to other works/publications has
been duly acknowledged at the relevant places. The project work was carried out
during ……………………. in ARSS infrastructure projects private limited

Date:


ACKNOWLEDGEMENT

It gives me immense pleasure to present this project report on Working Capital
Management carried out at ARSS infrastructure projects Ltd. In partial
fulfillment of post-graduate course of PGDM.

No work can be carried out without the help and guidance of various persons. I
am happy to take this opportunity to express my gratitude to those who have
been helpful to me in completing this project report.

At the outset I would like to thank ……………………… for their valuable
advice and guidance during my project
for timely help concerning various aspects of project. I also thanks to all staff
members of account department for help me to complete the summer internship
program.

I would be failing in my duty if I do not express my deep sense of gratitude to
………….. sir without his guidance it wouldn’t have been possible for me to
complete this project work.

Lastly I would like to thank my parents, friends and well wishers who
encouraged me to do this research work and all those who contributed directly
or indirectly in completing this project to whom I am obligated to.


DECLAIRATION

…………………………. Student of PGDM 2009-2011studying at HDF
school of Management, cuttack,orissa declare that the project work
entitled Working Capital management of ARSS infrastructure Projects
Ltd. was carried by me in the partial fulfillment of PGDM program under
the AICTE .This project was undertaken as a part of academic curriculum
according to the AICTE'S rules and norms and it has not commercial
interest and motive. It is my original work. It is not submitted to any other
organization for anyother purpose.

DATE:

PLACE:


CONTENTS

Chpter No. Particular Page No.

Certificate I
Acknowledgement II
Declairation III
Contents IV
List of tables V
List of Charts VI
1 WORKING CAPITAL MANAGEMENT
1.1 Introduction
1.2 Need of working capital
1.3 Gross W.C and Net W.C
1.4 Types of working capital
1.5 Determinants of W.C
2 RESEARCH METHODOLOGY
2.1 Introduction
2.2 Types of Reserch methodology
2.3 Objective of he study
2.4 Scope and limitation of the study

3 WORKING CAPITAL SIZE AND ANALYSIS
3.1 working capital level
3.2 Working capital trend analysis
3.3 Current assets analysis
3.4 Current liability analysis
3.5 Changes of working capital
3.6 Operating cycle
3.7 Working capital leverage
-4 Working Capital Ratio analysis

5.1 Introduction
5.2 Role of ratio analysis
5.3 Limitations of ratio analysis
5.4 Classifications of ratios
5.5 Efficiency ratio
5.6 Liquidity ratio


5 Working Capital components
5.1 Receivables management
5.2 Inventory management
5.3 Cash management

6 Working Capital Finance and Estimation

6.1 Introduction.
6.2 Sources of working capital finance.
6.3 Working capital loan and interest.
6.4 Estimation of working capital.

7 Conclusions and recomandations
7.1 Conclusion
7.2 Recommendations

8
Appendices

8.1 Bibliography
8.2 Balance sheets


CHAPTER-1
Working capital management

1) Introduction
2) Need of working capital
3) Gross w.c & Net w.c
4) Types of working capital
5) Determinants of working capital


WORKING CAPITAL MANAGEMENT

1.1)Introduction

“More business fails for lack of cash than for want of profit”. Efficient management
of working capital is one of the pre-conditions for the success of an enterprise.
Efficient management of working capital means management of various components
of working capital in such a way that an adequate amount of working capital is
maintained for smooth running of a firm and for fulfilment of twin objectives of
liquidity and profitability. While inadequate amount of working capital impairs the
firm’s liquidity. Holding of excess working capital results in the reduction of the
profitability. But the proper estimation of working capital actually required, is a
difficult task for the management because the amount of working capital varies across
firms over the periods depending upon the nature of business, production cycle, credit
policy, availability of raw material, etc.

Thus efficient management of working capital is an important indicator of sound
health of an organisation which requires reduction of unnecessary blocking of capital
in order to bring down the cost of financing.

Working capital management
Working capital management is concerned with the problems arise in 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 ware those liabilities which intended at there inception to be paid
in ordinary course of business, within a year, out of the current assets or earnings of
the concern. The basic current liabilities are account payable, bill payable, bank over-
draft, and outstanding expenses.
The goal of working capital management is to manage the firm s current assets
and current liabilities in such way that the satisfactory level of working capital
8 Projectsformba.blogspot.com


is mentioned. The current assets should be large enough to cover its current liabilities
in order to ensure a reasonable margin of the safety.

Definition:-
1. According to Guttmann & Dougall-
Excess of current assets over current liabilities .
1. According to Park & Gladson-
The excess of current assets of a business (i.e. cash, accounts receivables,
inventories) over current items owned to employees and others (such as salaries &
Wages payable, accounts payable, taxes owned to government) .
1.2) Need of working capital management
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. 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



1.3) Gross working capital and Net working capital
There are two concepts of working capital management
1. Gross working capital
Gross working capital refers to the firm's investment In current assets. Current
assets are the assets which can be convert in to cash within one financial year
includes cash, short term securities, debtors, bills receivable and inventory.

2. Net working capital
Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors, bills payable and
outstanding expenses. Net working capital can be positive or negative Efficient
working capital management requires that firms should operate with some amount
of net working capital, the exact amount varying from firm to firm and depending,
among other things; on the nature of industries.net working capital is necessary
because the cash outflows and inflows do not coincide. 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.
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 which
according to him is nothing but dead labour . This variable capital is nothing
wage fund which remains blocked in terms of financial management, in work-
in-process along with other operating expenses until it is released through sale
of finished goods. Although Marx did not mentioned that workers also gave
credit to the firm by accepting periodical payment of wages which funded a
portioned of W.I.P, the concept of working capital, as we understand today
was embedded in his variable capital .



1.4) Type of working capital
The operating cycle creates the need for current assets (working capital).
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.
1) Permanent working capital or fixed working capital
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, this
requirement will have to be met permanent as with other fixed assets. This
requirement refers to as permanent or fixed working capital
2) Temporary working capital or variable working capital Any amount over and
above the permanent level of working capital is temporary, fluctuating or variable,
working capital. This portion of the required working capital is needed to meet
fluctuation in demand consequent upon changes in production and sales as result of
seasonal changes

A
M A
O M
U O
N U
T N
Temporary or variable working capital T

Of
Of

W
O W
R O
K R
I
N
K
I permanent or
G N
G
fixed working capital
C
A C
P A
I P
T I
TIME T
TIME

Graph shows that the permanent level is fairly castanet; while temporary
working capital is fluctuating in the case of an expanding firm the permanent
working capital line may not be horizontal. This may be because of changes in


demand for permanent current assets might be increasing to support a rising level of
activity.
1.5) Determinants of working capital

The amount of working capital is depends upon a following factors
1. Nature of business
Some businesses are such, due to their very nature, that their requirement of
fixed capital is more rather than working capital. These businesses sell services
and not the commodities and that too on cash basis. As such, no founds are
blocked in piling inventories and also no funds are blocked in receivables. E.g.
public utility services like railways, infrastructure oriented project etc. there
requirement of working capital is less. On the other hand, there are some
businesses like trading activity, where requirement of fixed capital is less but
more money is blocked in inventories and debtors.
2. Length of production cycle
In some business like machine tools industry, the time gap between the
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 of
working capital is high.

3. Size and growth of business
In very small company the working capital requirement is quit high due to high
overhead, higher buying and selling cost etc. as such medium size business
positively has edge over the small companies. But if the business start growing
after certain limit, the working capital requirements may adversely affect by the
increasing size.

4. Business/ Trade cycle
If the company is the operating in the time of boom, the working capital
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 blocked
in stock and debtors etc. similarly in the case of depressions also, working
capital 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 receivable
may not be recovered in time etc.

5. Terms of purchase and sales
Some time due to competition or custom, it may be necessary for the company
to extend more and more credit to customers, as result which more and more
amount is locked up in debtors or bills receivables which increase the working
capital requirement. On the other hand, in the case of purchase, if the credit is
offered by suppliers of goods and services, a part of working capital
requirement may be financed by them, but it is necessary to purchase on cash
basis, the working capital requirement will be higher.
6. Profitability
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 will
positively reduce the strain on working capital requirement of the company,
because the profits to the extend that they earned in cash may be used to meet
the working capital requirement of the company.

7) Operating efficiency
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.



CHAPTER-2

Research Methodology

1)Introduction
2)Types of research methodology
3)Objective of the study
4)Scope and limitation of the study



2.1) Introduction
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. 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.

Data collection plays an important role in research work. Without proper data
available for analysis you cannot do the research work accurately.
2.2) Types of data collection
There are two types of data collection methods available.

1. Primary data collection
2. Secondary data collection

1) Primary data
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.

2) Secondary data collection method
The secondary data are those which have already collected and stored.


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.
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.
Project is based on

1. Annual report of ARSS 2004-2005
2. Annual report of ARSS 2005-2006
3.Annual report of ARSS 2006-2007

2.3) OBJECTIVES OF THE STUDY
Study of the working capital management is important because unless the 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.
1. To study the working capital management of ARSS infrastructure projects private Ltd.
2. To study the optimum level of current assets and current liabilities of the company.
3. To study the liquidity position through various working capital related ratios.
4. To study the working capital components such as receivables accounts, cash management,
Inventory position
5. To study the way and means of working capital finance of the ARSS infrastructure
projects pvt. Ltd.
6. To estimate the working capital requirement of ARSS infrastructure projects pvt.Ltd
7. To study the operating and cash cycle of the company.



2.4) SCOPE & LIMITATIONS OF THE STUDY

Scope of the study
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 last 6 years Annual Reports of ARSS infrastructure projects
pvt Ltd.And even factors like competitor s analysis, industry analysis were not considered while
preparing this project.

Limitations of the study
Following limitations were encountered while preparing this project:

1) Limited data:-
This project has completed with annual reports; it just constitutes one part of data collection i.e.
secondary. There were limitations for primary data collection because of confidentiality.

2) Limited period:-
This project is based on five year annual reports. Conclusions and recommendations are based on
such limited data. The trend of last five year may or may not reflect the real working capital
position of the company

3) Limited area:-
Also it was difficult to collect the data regarding the competitors and their financial information.
Industry figures were also difficult to get.



CHAPTER-IV

Working capital level and analysis

1)Working capital level
2)Working capital trend analysis
3)Current assets analysis
4)Current liability analysis
5)Changes of working capital
6)Operating cycle
7)Working capital leverage

Working capital level

The consideration of the level investment in current assets should avoid two danger points
excessive and inadequate investment in current assets. Investment in current assets should be
just adequate, not more or less, to the need of the business firms. 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 be threatened
solvency of the firms because of its inability to meet its current obligation. It should be
realized that the working capital need of the firms may be fluctuating with changing business
activity. This may cause excess or shortage of working capital frequently. The management
should be prompt to initiate an action and correct imbalance.

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
A) Current
Assets
Inventories 58,429,517 104,206,335 73,298,835 622,103,160 1,882,704,940 3,701,088,128
Sundry Debtors 1,165,300 71791868 145,136,306 653,574,370 428,533,465 786122901
Cash and Bank 19,100,114 50,648,882 116,425,792 373,999,265 717,214,943 1,095,090536
Balances
Loans and 48,575,716 81,219,576 205,984,507 506,967,157 557,410,278 1,406480936
Advances
Total of A (Gross 127,270,647 307866661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501
W.C.)

B) Current
Liabilities
Current liabilities 42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152
Provision 7,535,964 9,823,827 35,261,598 92,135,009 172,295,570 258,380,043
Total of B 50,168,731 131,472,347 141,025,428 951,070,095 1,320,224,186 1,705,834,194

Net W.C. (A-B) 77,101,916 176394314 399,820,011 1,205,573,857 2,265,639,440 5,28,294,8307

Table ........Size of working capital

Working Capital Trend Analysis:
In working capital analysis the direction at changes over a period of time is of crucial
importance. Working capital is one of the important fields of management. It is therefore very
essential for an analyst to make a study about the trend and direction of working capital over
a period of time. Such analysis enables as to study the upward and downward trend in current
assets and current liabilities and its effect on the working capital position.
“Analysis of working capital” trends provide as base to judge whether the practice and
privilege policy of the management with regard to working capital is good enough or an
important is to be made in managing the working capital funds.

WORKING CAPITAL SIZE OF ARSS



Years 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Net w.c 77101906 176394314 399820011 1205573857 2265639440 5282948307

W.C indices 100 228.78 518.56 1563.61 2938.49 6851.9

Table .........working capital size

Working Capital Indices base year 2004-2005 taken as 100

8000 Working capital indices
6851.9
7000

6000

5000
w.c indices

4000
2938.49
3000

2000 1563.61

1000 518.56
100 228.78

0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
working capital indicesyears
Exponential Regression
for working capital in-
dices



Observations:

The net working capital of ARSS Infrastructure Projects Limited is continuously increasing from
2004-05 as the indices shows in the figure. The working capital indices of 2009-10 compared to
2004-05 is as 68 times because the current assets are increasing continuously where as the current
liabilities are not as increased as current assets. There is sudden increase in current assets of
2007-08 compared to its previous year i.e. 2.98 times. In 2007-08 the company has taken four
projects in road, five projects in railway, one project in irrigation of rupees worth 72686 lacs, 29113
lacs, and 6636 lacs continously. While in 2008-09, the company has taken only three projects of
rupees worth 18098 lacs. The no of projects taken in FY 2009-10 are ....... so the value of current
assets increased. However the current liabilities of the company increased only 38.56 crores. In
current liability of the company two things are included i.e. sundry creditors and the provisions
(taxes, fringe benefit tax, dividend, tax on proposed dividened). The company is bidding for good
projects because it has sufficient amount of reserves and surplus as well as inventories that means it
is using its long term securities as well as short term securities for it‟s bidding and execution of the
projects.

Current asseets:
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.

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
A)


Current
Assets
Inventories 58,429,517 104,206,33 73,298,835 622,103,160 1,882,704,940 3,701,088,128
5
Sundry 1,165,300 71791868 145,136,306 653,574,370 428,533,465 786122901
Debtors
Cash and 19,100,114 50,648,882 116,425,792 373,999,265 717,214,943 1,095,090536
Bank
Balances
Loans and 48,575,716 81,219,576 205,984,507 506,967,157 557,410,278 1,406480936
Advances
Total of A 127,270,647 307866661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501
(Gross
W.C.)
C.A 100 241.89 424.96 1694.96 2817.51 5491.28
indices

Table........:Current assets size and Current assets indices

6000
Current assets indices 5491.28

5000

4000
C.A indices

3000 2817.51

2000 1694.96

1000
424.96
241.89
100
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years

Composition of current assets in ARSS

Analysis of current assets components enable one to examine in which components the
working capital fund has locked. A large tie up of funds in inventories affects the profitability
of the business or the major portion of current assets is made up cash alone, the profitability



will be ........... because cash is non earning assets.

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
inventories 45.90% 33.85 13.55 28.85 52.50 52.96
Sundry 0.92 23.32 26.83 30.31 11.95 11.25
debtors
Cash and 15.01 16.45 21.52 17.34 20.00 15.67
bank balance
Loans and 38.17 26.38 38.09 23.51 15.54 20.12
advances
total 100 100 100 100 100 100

Observation:
The current assets increases as the sales increase. The excess of current assets is always
positive for the company but it is not always good. It may adversely affect the profitability of
the firm. There are certain investments for which company pay interest. From the table of
composition of current assets, there is good amount of inventory available except one year
(2006-07). Excess amount of inventory is good for the company because the company is


diversifying its business into different sectors and there is no certainty about the projects
(time of the projects) in certain sectors. The loans and advances of the firm are in zigzag way.
The loans and advances should be minimum as the high loans create a greater amount of
interest. The company was doing well from 2006-07 to 2008-09 as the company had taken
four projects in road, five in railway, and one in irrigation. But in 2009-10 it has increased
because of the ARSS took good projects. The company is doing better in sundry debtors in
previous two years. The company had taken its amount from its debtors. Cash and bank
balances is good for all the years.

Current liabilities

Current liabilities mean the liabilities which the company have to pay in current financial year. It
includes sundry creditors 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 includes bank overdraft. For some current assets like bank
overdrafts and short term loan, company has to pay interest thus the management of current
liabilities has importance

current liability size

particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Current 42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152
liabilities
Provision 7,535,964 9,823,827 35,261,598 92,135,009 172,295,570 258,380,043
Total of B 50,168,731 131,472,347 141,025,428 951,070,095 1,320,224,186 1,705,834,194
Indices of 100 262.06 281.1 1895.7 2631.56 3400.19
C.L
Table........current liability size and its indices



Current liability indices
4000

3500

3000

2500
C.L indices

C.L indices
2000 Exponential Re-
gression for C.L in-
1500 dices
1000

500

0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years

Figure.......Current liability indices

Observation
In current liabilities of the company only the sundry creditors and the provision (provision for
taxation, fringe benefit tax, dividend and proposed dividend) are included. Current liabilities
show continues growth each year except in 2006-07 and 2009-10 because company creates
the credit in the market by good transaction. To get maximum credit from supplier which is
profitable to the company it reduces the need of working capital of firm. As a current liability
increased in the year 2007-08 by 574.39% it also increased the working capital size in the
same year. But company enjoyed over creditors which may include indirect cost of credit
terms in future.

CHANGES IN WORKING CAPITAL

Current liabilities show continues growth each year because company creates the credit in the
market by good transaction. To get maximum credit from supplier which is profitable to the
company it reduces the need of working capital of firm. As a current liability increase in the year
2006-07 by 35% it reduce the working capital size in the same year. But company enjoyed over
creditors which may include indirect cost of credit terms.

4.5)Changes in working capital

There are so many reasons to changes in working capital as follow
1. Changes in sales and operating expanses:-

The changes in sales and operating expanses may be due to three reasons

1. There may be long run trend of change e.g. The price of row material
say oil may constantly raise necessity the holding of large inventory.

2. Cyclical changes in economy dealing to ups and downs in business
activity will influence the level of working capital both permanent and
temporary.



3.Changes in seasonality in sales activities

4. Policy changes:-
The second major case of changes in the level of working capital is because of policy changes
initiated by management. The term current assets policy may be defined as the relationship
between current assets and sales volume.

5. Technology changes:-
The third major point if changes in working capital are changes in technology because changes in
technology to install that technology in our business more working capital is required
A change in operating expanses rise or full will have similar effects on the levels of working
following working capital statement is prepared on the base of balance sheet of last two year.

STATEMENT OF CHANGES IN WORKING CAPITAL
changes in working capital
particulars 2008-2009 2009-2010 increase decrease
A)Current assets
inventories 1882704940 3701088128 1818383188
Sundry debtors 428533465 786122901 357589436
Cash and bank 717214943 1095090536 377875593
balances
Loans and 557410278 1406480936 849070658
advances
Total current 3585863626 6988782501 3402918875
assets

B)Current
liabilities
Current liabilities 1147928616 1447454152 299525536
provision 172295570 258380043 86084473
Total current 1320224186 1705834194 385610008
liabilities

Net working 2265639440 5282948306 3017308866
capital



Observation

There is a positive working capital which shows the further growth as the company is
expanding it‟s business into other sectors of the construction. The working capital increased
due to the following reasons:
1) There is 50% increase in the inventories from previous year because the company is taking
new projects in new sectors with good worth.
2) The current liabilities of the firm is very less.
3) The increased total current liabilities is very less compared to the total current assets.

Operating cycle
The need of working capital arrived because of time gap between production of
goods and their actual realization after sale. This time gap is called Operating
Cycle or Working Capital Cycle . The operating cycle of a company consist of
time period between procurement of inventory and he collection of cash from
receivables. The operating cycle is the length of time between the company's
outlay on raw materials, wages and other expanses and inflow of cash from
sales of goods. Operating cycle is an important concept in management of cash
and management of cash working capital. The operating cycle reveals the time
that elapses between outlays of cash and inflow of cash. Quicker the operating
cycle less amount of investment in working capital is needed
and it improves profitability. The duration of the operating cycle depends on
nature of industries and efficiency in working capital management.

In manufacturing concern ,the working capital cycle/operating cycle starts
with the purchase of raw material and ends with the realisation of cash from the
sale of finished products.This cycle involves purchase of raw material and
stores,its conversion through into stocks of finished goods through work-in-
progress with progressive increment of labour and service costs,conversion of
finished stock into sales,debtors and receivables and ultimately realisation of
cash and this cycle continues again from cash to purchase



DEBTORS
(RECEIVABLES)

CASH FINISHED GOODS

RAW MATERIALS WORK-IN-PROCESS

[working capital cycle/operating cycle]

The speed with which the working capital completes one cycle determines the
requirements of working capital-longer the period of the cycle larger is the
rquirement of working capital

Calculation of operating cycle of ARSS

ITEMS 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
1.Raw material
2.Work-in -progress
3.finished goods
Total
2.Debtors conversion period
3.Gross working capital cycle
4.Payment deferal period
NET WORKING CAPITAL
CYCLE

Observation:

The inventory conversion period of the company is almost same in financial
years from 2005 to 2009 but in the financial year 2009-10 there is sudden
increase (double times) from its previous year. Raw Material consumption in


2009-10 decreased from previous years while raw material inventory increased.
The maximum projects of the company (with joint ventureCompany) finished in
the May 2010 as NIRAJ-ARSS joint venture total value of the projects
26288 lacs. The company is engaged in bidding of big projects so the company
keeps a better raw material inventory in FY 2009-10. Also the company has a
vision of taking tenders of good projects in next financial year.
ARSS infrastructure Projects Limited is a construction company and it‟s
coustomers are the Government of different states, Ministry of Railway,
Ministry of Infrastructure and the Government agencies like SAIL, NTPC etc.
so there is no any debtors available among it‟s coustomers because the
Government or their agencies pays the money instantaneouslybefore/ during or
after the project.
The company‟s debtors are joint venture companies. Sometimes the ARSS and
it‟s joint venture companies do the project but the company incurres the whole
cost. And there is delayed in payment by it‟s joint venture companies. That
comes under the debtors collection period. Common sense tells that longer a
company has money out, the more risk it is taking.But there is one positive
aspect that will boost the confidence among the companies.The company is not
purchasing on credit from it‟s supplier. So in credit deferral period the credit
purchases taken as a whole sundry creditors. These sundry creditors are for the
bank loans, Advances etc. In all the years from 2005 to 2009 the creditors
deferral period is 360 days which is good for the company. The company is
enjoying the money of it‟s creditors.

WORKING CAPITAL LEVERAGE

One of the important objectives of working capital management is by maintaining the
optimum level of investment in current assets and by reducing the level of
investment in current assets and by reducing the level of current liabilities the
company can minimize the investment in the working capital thereby improvement
in return on capital employed is achieved. The term working capital leverage refers
to the impact of level of working capital on company s profitability. The working
capital management should improve the productivity of investment in current assets
and ultimately it will increase the return on capital employed. Higher level of
investment in current assets than is actually required means increase in the cost of
Interest charges on short term loans and working capital finance raised from banks
etc. and will result in lower return on capital employed and vice versa. Working
capital leverage measures the responsiveness of ROCE (Return on CapitalEmployed)
for changes in current assets. It is measures by applying the following formula,



% Changes in ROCE
Working capital leverage= % Changes in current assets

EBIT
Return on capital employed=
Total assets

The working capital leverage reflects the sensitivity of return on capital employed to
changes in level of current assets. Working capital leverage would be less in the case
of capital intensive capital employed is same working capital leverage expresses the
relation of efficiency of working capital management with the profitability of the
company.

CALCULATION OF WORKING CAPITAL LEVERAGE
YEAR 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
EBIT 17013036 42850664 139926233 378403100 705936654 1210851636
Total assets 160749473 299889528 667642027 1983096501 3731842651 7866688809
ROCE% 10.58 14.29 20.96 19.08 18.91 15.39
%Change in N.A 35.07 46.68 -8.96 -0.89 -18.61
ROCE
Current assets 127270647 307866661 540845439 2156643952 3585863626 6988782501
%change in N.A -758.09 75.67 298.75 66.27 94.89
current assets
Working capital N.A -0.05 0.62 -0.03 -0.01 -0.20
leverage



Working Capital Ratio Analysis

Introduction
Role of ratio analysis
Limitations of ratio analysis
Classifications of ratio
Efficiency ratio
Liquidity ratio



WORKING CAPITAL RATIO ANALYSIS

5.1) Introduction
Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as
the indicated quotient of two mathematical expressions and as the relationship
between two or more things . The absolute figures reported in the financial statement
do not provide meaningful understanding of the performance and financial position
of the firm. Ratio helps to summaries large quantities of financial data and to make
qualitative judgment of the firms financial performance

5.2) Role of ratio analysis
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 in same
industry. Ratio analysis is one of the best possible techniques available to
management to impart the basic functions like planning and control. A
is closely related to the immediately past, ratio calculated on the basis historical
financial data may be of good assistance to predict the future. E.g. On the basis
of inventory turnover ratio or debtor s turnover ratio in the past, the level of
inventory and debtors can be easily ascertained for any given amount of sales.
Similarly, the ratio analysis may be able to locate the point out the various arias
which 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 for
further introduction of long term finance in order to increase the liquidity
position. As the ratio analysis is concerned with all the aspect of the firm's
financial analysis liquidity, solvency, activity, profitability and overall
performance, it enables the interested persons to know the financial and
operational characteristics of an organization and take suitable decisions.

5.3)Limitations of ratio analysis

1. The basic limitation of ratio analysis is that it may be difficult to find a

basis for making the comparison


2. Normally, the ratios are calculated on the basis of historical financial
statements. An organization for the purpose of decision making may
need the hint regarding the future happiness rather than those in the past.
The external analyst has to depend upon the past which may not
necessary to reflect financial position and performance in future.

3. The technique of ratio analysis may prove inadequate in some situations
if there is differs in opinion regarding the interpretation of certain ratio.

4. As the ratio calculates on the basis of financial statements, the basic
limitation which is applicable to the financial statement is equally
applicable In case of technique of ratio analysis also i.e. only facts which
can be expressed in financial terms are considered by the ratio analysis.

5. The technique of ratio analysis has certain limitations of use in the sense
that it only highlights the strong or problem arias, it dose not provide any
solution to rectify the problem arias .

6. For the intra firm comparison, the comparison may be false because
different firms use different accounting policies as some firms use
LIFO (Last in First out) method while some use FIFO (First inFirst out).

Classification of ratio :-

Basically on the basis of working capital management it can be characterized into
following ratios

1) Activity Ratio:

Activity ratio is an indicator of how rapidly a firm converts various accounts into
cash or sales. The sooner management can convert assets into sales or cash, the more
actively the firm run. This ratio is also called Asset Management Ratio. As the assets
basically categorized as fixed assets and current assets and again further the current
assets classified according to individual components of current assets viz. Inventories,
Sundry Debtor, and receivables etc. The important Activity ratios are as follows

(i) Working Capital Turnover Ratio


(ii) Inventory Turnover Ratio

(iii) Receivable Turnover Ratio

(iv)Current Asset Turnover Ratio

1) Working Capital Turnover Ratio:

A company uses working capital to fund operations and to purchase inventory. These
operation and inventory are then converted into sales revenue for the company. The
working capital turnover ratio is used to analyze the relationship between the cash
used to fund operation and sales generated from these operations. In a general sense,
the higher the working capital turnover, the better because it means that the company
is generating a lot of sales compared to the cash it uses to fund the sales.

Sales

Working Capital Turnover Ratio=

Net Working Capital

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
sales 295777455 602467051 1338321101 3136709419 6243752255 10065504283
Net W.C 77101916 176394314 399820011 1205573857 2265639443 5282948306
W.C TOR 3.83 3.42 3.35 2.60 2.76 1.91



W.C TOR
4.5
4 3.83

3.42 3.35
3.5
3 2.76
2.6
2.5
W.C TOR

2
Power regression for
1.5 1.19

1
0.5
0
2004-2005 2006-2007 2008-2009
Years 2005-2006 2007-2008 2009-2010
Year

Observations
The working capital turnover ratio of ARSS declined from 2004-05 to 2009-10,
however it increased in 2008-09. The reciprocal of the ratio is 0.26, 0.29, 0.30, 0.38,
0.36, and 0.52 continuously. It means that for one rupee of sales, the company needs
Rs 0.26, 0.29, 0.30,0.38, 0.36, and 0.52. In previous years the company incurred less
money for sales while in these years specially in 2009-10 it is unable to take projects
in that amount. The company is increasing its sales by increasing in the net working
capital.

Inventory turnover ratio
cost of goods sold
Inventory TOR =
Average inventory

Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Cost of 467324486 1119159494 2051226344 422819852 6644038328
goods sold 3
Average 81317926 88752585 347700997.5 125240406 2791896534
inventory 0



Inventory 5.75 12.61 5.9 3.38 2.38
TOR

Inventory Turnover Ratio
14
12.61

12

10
Inventory TOR

8

5.75 5.9 Inventory TOR
6

4 3.38
2.38

2

0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years

Figure.......Inventory Turnover Ratio

Observation:

Inventory turnover ratio basically tells about the efficiency of the firm in taking
the project and to accomplish that. The inventory turnover shows how rapidly
the inventory is turning into receivables through sales. A high inventory
turnover ratio is good because the no of days converting the inventories into the


sales will become less. As in 2006-07 the inventory turnover ratio is 12.61 times
so the inventory holding days is only 29 days while from 2007-08 to 2009-10 the
inventory turnover ratio decreasing means the no of days in inventory converting is
increasing. This can bad for the organization as this creates unnecessary tie-up
of funds,reduced profit, and increasedcosts.

3) Debtors Turnover Ratio:

A firm sells goods and/ or services for cash and credit. When the firm extends
credits to its coustomers, debtors (Accounts Receivables) are created in the
firm‟s accounts. The liquidity position of the firm depends on the quality of
debtors to great extent.

Gross Sales

Debtors Turnover Ratio =
Average Debtors

For an Infrastructure Company like ARSS the gross sales considers as the
contract revenue.
The scrap values are not included in Gross Sales because it further comes into
sales with other income. Average Debtors calculated by opening plus closing
balance divide by 2.Increasing volume of receivables without a matching
increase in sales is reflected by a low receivable turnover ratio. It is indication
of slowing down of the collection system or an extend line of credit being allowed by
the customer organization. The latter may be due to the fact that the firm is losing out to
competition. A credit manager engage in the task of grantingcredit or
monitoring receivable should take the hint from a falling receivable turnover
ratiouse his market intelligence to find out the reason behind such failing trend.
Debtor turnover indicates the number of times debtors turnover each year.
Generally the higher the value of debtor‟s turnover, the more is the management
of credit.

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Gross sales 295777455 602467051 1338321101 3136709419 6243752255 10065504283
Average 1632619 36478584 216928175 399355338 541053918 607328183
debtors
D.T.R 181.2 16.52 6.17 7.85 11.54 16.57



A.C.P.* 2 22 58 46 31 22

Table........Debtor turnover ratio and avarage collection period

Debtors Turnover Ratio
18
16.52 16.57
16

14

12 11.54

10
D.T.R

7.85
D.T.R
8
6.17
6

4

2

0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Year

Observation:
Debtors Turnover ratio indicates the no of times debtors turnover each year.
Higher the value of debtors turnover, the more efficient is the management of
credit because the collection period of the debtors will low. Maximum debtors
turnover ratio in all five years is 16.57 in 2009-10. It increases from 2006-07
also there is sudden jump in collecting the amount of debtors in 2008-09 and in
2009-10. The increased Debtors Turnover Ratio shows the better
management in debtors collection (from it‟s joint venture companies).

Current Asset Turnover Ratio:

Current assets turnover ratio is calculate to know the firms efficiency of
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 the
efficiency with which current assets turn into sales. A higher ratio implies a
more efficient use of funds thus high turnover ratio indicate to reduced the lock
up of funds in current assets. An analysis of this ratio over a period of time
reflects working capital management of a firm.

Sales

Current Asset Turnover Ratio=

Current Assets

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Sales 295777455 602467015 1338321101 3136709419 6243752255 10065504283
C.A 127270647 307866662 540845439 2156643952 3585863626 6988782501
C.A TOR 2.32 1.96 2.47 1.45 1.74 1.44

Table......Current assets Turnover Ratio

Current Assets Turnover Ratio
2.5 2.47
2.32

2 1.96

1.74

1.5 1.45 1.44
C.A TOR

C.A TOR
1

0.5

0
2005-2006 2007-2008 2009-2010
2004-2005 2006-2007 2008-2009
Years

Figure.......Current assets turnover Ratio
Observation:

This ratio is very significant as it shows how fast the current assets turns into


sales. The current asset turnover ratio is in haphazard way but comparing to
2006-07 the ratio is low in recent years. In previous years the ratio was good.
The current asset changes in sales in 155days, 184 days, and 146 days
continuously in 2004-05, 2005-06, and 2006-07. While in 2007-08, 2008-09,
2009-10 the days are 248 days, 207 days, and 250 days continuously. The
increasing no of days of current asset turnover ratio because company can maintain
high level of inventory for upcoming its projects.
Current Ratio:

The current ratio is a crude and quick measure of the firm‟s liquidity. The
current is calculated by dividing current assets by current liabilities:

Current Assets

Current Ratio =

Current Liabilities

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 income
tax liabilities and long term debt maturing in the current year. Current ratio
indicates the availability of current assets in rupees for every rupee of current
liability.
This ratio is important as the value of the current assets may decrease or
increase but the value of the current liabilities is always constant. That has to be
paid.

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Current 127270647 307866662 540845439 2156643952 3585863626 6988782501
assets
Current 42632767 121648520 105763831 858935086 1147928616 1447454152



liabilities
Current ratio 2.99 2.53 5.11 2.51 3.12 4.83

Current Ratio
6

5.11
5 4.83

4
Current Ratio

3.12
2.99
3
2.53 2.51
Current Ratio
2

1

0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years

Observation:

As a conventional rule, a current ratio of 2 to 1 or more is considered
satisfactory. In all the years the current ratio of ARSS is more than 2. It means
the company has its short term securities (cash & bank balances, Inventories,



Inventories, loans and advances) to fulfill it's short term liabilities (sundry
creditors, provision for taxation). Also the current ratio shows the margin of
safety for it‟s creditors. Higher the ratio greater will be the margin of safety.

Quick Ratio:

Quick ratios establish the relationship between quick or liquid assets and
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 are
debtors, bills receivable and marketable securities. Inventories are considered as
less liquid. Inventory normally required some time for realizing into cash.

Their value also is tendency to fluctuate. The quick ratio is found out by
dividing quick assetsby current liabilities:-

Current Assets - Inventories

Quick Ratio =

Current Liabilities

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
C.A 127270647 307866662 540845439 2156643952 3585863626 6988782501
Inventories 58429517 104206335 73298835 622103160 1882704940 3701088121
Quick C.A 68841130 203660 326 467546604 1534540792 1703158686 3287694373
C.L 42632767 121648520 105763831 858935086 1147928616 1447454152
Quick ratio 1.61 1.67 4.42 1.79 1.48 2.27

Table.......Quick Ratio



Quick Ratio
4.5 4.42

4

3.5

3
Quick Ratio

2.5
2.27
Quick Ratio
2
1.79
1.61 1.67
1.5 1.48

1

0.5

0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years

Figure.......Current Ratio

Observation:

The quick ratio of 1 to 1 is considered as satisfactory financial condition. The
company has not a very high ratio throughout except one year 2006-07. In
2006-07 the company had high value of cash & bank balances, sundry debtors
etc. whereas the sundry creditors andprovision were compairatively low. High
quick ratio will benefit to the company in its bidding activities i.e It shows the
financial strength of the company.

Working Capital Management Components



Receivables Management
Inventory Management
Cash Management



Receivable Management:

Introduction:


Receivables or debtors are the one of the most important parts of the current assets which is created
if the company sells the finished goods to the customer but not receive the cash for the same
immediately. Trade credit arises when firm sells its products and services on credit and dose not
receive cash immediately. It is essential marketing tool, acting as bridge for the movement of goods
through production and distribution stages to customers. Trade credit creates receivables or book
debts which the firm is expected to collect in the near future. The receivables include three
characteristics:
1) It involve element of risk which should be analyse carefully.
2) It is based on economic value. To the buyer, the economic value
in goods or services passes immediately at the time of sale, while seller expects an equivalent value
to be received later on.
3) It implies futurity. The cash payment for goods or serves received
by the buyer will be made by him in a future period.

Objective of Receivable Management:

The sales of goods on credit basis are an essential part of the modern competitive economic system.
The credit sales are generally made up on account in the sense that there are formal
acknowledgements of debt obligation through a financial instrument. As a marketing tool,they are
intended to promote sales and there by profit. However extension of credit involves
risk and cost, management should weigh the benefit as well as cost to determine the goal of
receivable management. Thus the objective of receivable management is to promote sales and profit
until that point is reached where the return on investment in further funding of receivables is less
than the cost of funds raised to finance that additional credit.

Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Sundry Debtor 71791868 145136306 653574370 428533465 786122901
Indices 100 202 910 597 1095

Table..........Size Of Receivables



Receivables Indices
1200
1095

1000
910
Receivables Indices

800

600 597
Receivables Indices

400

202
200
100

0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years

Figure.......Receivables Indices

Average Collection Period:

The average collection period measures the quality of debtors since it indicate
the speed of their collection. The shorter the average collection period, the
better the quality of the debtors since a short collection period implies the
prompt payment by debtors. The average collection
period should be compared against the firm‟s credit terms and policy judges its
credit and collection efficiency. The collection period ratio thus helps an analyst
in two respects:



1. In determining the collectability of debtors and thus, the efficiency of
collection efforts.

2. In ascertaining the firm‟s comparative strength and advantages related to its
credit policy
and performance.

The debtor‟s turnover ratio can be transformed in to the number of days of
holding of debtors:-

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Gross sales 295777455 602467051 1338321101 3136709419 6243752255 10065504283
Avg.Debtors 1632619 36478584 216928175 399355338 541053918 607328183
D.T.R 181.17 16.52 6.17 7.85 11.54 16.57
A.C.P* 2 22 58 46 31 22

Table.............Average collection period

Average collection period(In days)
300
258
250
Average collection period

200

150
average collection
period
100

46
50 31
22 22
2
0
2005-2006 2007-2008 2009-2010
2004-2005 2006-2007 2008-2009
years



Observation
The average collection period increased from 2004-05 to 2006-07 and then it
decreases from 2006-07 to 2009-10. The increasing average collection period shows
the inefficiency of the management in collecting the debtors money while the
decreasing average collection period shows the efficient management and better
credit policy. The reason behind average collection period is high due to debtors
turnover ratio is low. In 2006-07 the company had taken a no of projects but the
company did projects alone. So there is no chance of debting in 2006-07. While in
2007-08 the company had taken 10 projects on the joint venture basis. Company‟s
share is 100% in those projects. In 2008-09 and 2009-10 the company has taken 3
and 5 projects on the joint venture basis so there is case of debting.

Inventory Management:

In financial view, inventory defined as the sum of the value of raw material and
supplies,including spares, semi-processed material or work in progress and finished
goods. The nature of inventory is largely depending upon the type of operation
carried on. A firm neglecting the management of inventories will be jeopardizing its
long term profitability and may fail ultimately. It is possible to reduce the inventory to
a certain level without affecting production and sales, by using simple inventory
planning and controlling technique. The reduction in “excessive” inventories carries a
favourable impact on the company‟s profitability. Maintaining inventories involves
tying up of the company‟s funds and incurrence of storage and handling cost. There
are three components: Raw material, Work in progress; and finished goods involved
in inventory management.

Objective of Inventory Management:

In the case of Inventory Management, the firm is faced with the problem of meeting
two conflicting needs:



1) To maintain a large amount of inventory for efficient and smooth production;

2) To maintain a minimum amount of inventory for increasing the profitability;
But the firms avoid both the cases. In the first case, the firms avoid overinvestment
because of:-

(a) unnecessary tie-up of the firm‟s funds and loss of profits (b) excess carrying cost
(c)risk of liquidity. Another danger of holding excess inventories is deterioration of
the inventories. Maintaining a minimum level of inventories is also dangerous. The
consequences of under-investment in inventories are: (a) production hold-ups (b)
failure to deliver commitments. So the aim of inventory management is:

(1) To ensure a continuous supply of raw material to facilitate uninterrupted
production;
(2) To maintain a sufficient stock of the raw material in period of short supply and
overprices;

(3) To maintain sufficient finished goods inventory for smooth sales operation, and
efficient customer service;

(4) To maintain the carrying cost and time;

(5) To control investment in inventories and keep at optimum level;

Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Raw 1803094 1517210 10008237 255489710 464589560
materials
W.I.P 69724520 57300640 560122560 1512045660 2523687458
Finished 32678721 14480985 40523740 81715450 651456230
Goods
Stores and 0 0 11448623 33454120 61354880
spares
Total 104206335 73298835 622103160 1882704940 3701088128
Indices 100 70.34 597.o 1806.7 3551.7
Table.......Size of inventory



Inventory indices
4000
3551.7
3500

3000
Inventory indices

2500
2000 1806.7 Inventory indices
1500
1000
597
500
100 70.34
0
2005-5006 2006-2007 2007-2008 2008-2009 2009-2010
Years

Figure........Inventory indices

Inventory Components:
The firm‟s inventory consist following components

(i) Raw material

(ii) Work- in-progress

(iii) Finished goods

To analyze the level of raw material inventory and work in progress inventory held by the
firm on an average it is necessary to examine the efficiency with which the firm converts raw
material inventory and work in progress into finished goods.

Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Raw Material 1.73 2.07 1.6 13.57 12.55
W.I.P 66.91 78.17 90.03 80.31 68.18


Finished Goods 31.36 19.75 6.51 4.34 17.6
Stores&Spares 0 0 1.84 1.78 1.66
Total(%) 100 100 100 100 100

Table........Inventory components(%)

100
90.03
90
80.31
78.17
80

68.18
70 66.91

60
Raw Material
50 W.I.P
Finished Goods
40 Stores&Spares
31.36
30
19.75
20 17.6
13.57 12.55

10 6.51
4.34
1.73 2.07 1.6 1.84 1.78 1.66
0 0
0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Figure......Inventory components in %

100
90.03
90
80.31
78.17
80

68.18
70 66.91

60

50

40
31.36

30
19.75
17.6
20
52 Projectsformba.blogspot.com 13.57 12.55

10 6.51
4.34
1.73 2.07 1.84
1.6 1.78 1.66
0 0
0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010


Observation:
As the ARSS Infrastructure Projects Limited is a construction company. And it takes project

of different segment in construction sector like road, railway, irrigation, aviation, marine,

jetty etc. The company‟s inventory work in progress is very high in terms of cash as well as

in terms of % and it increases year by year. The company is taking a no of projects which

completes in more than one year because of season factor.

The company did not concern about the stores and spares in the period of 2005 and 2006. But

as the stores and spares plays a important role in the construction industry examples for

equipments. So from 2007 onwards the company made a certain account in the inventories. In

2008-09 the recession was happening. The company was unable to good projects because of

the downturn in the industry. As mentioned earlier the company had taken only three projects

in the railway segment in 2008-09. So the raw material remained high and the finished goods

remained low.

Inventory Holding Period:

The reciprocal of inventory turnover gives average inventory holding in percentage term.


When the no of days in a year (said as 360) are divided by inventory turnover, days of

inventory holding (DIH) can obtain

360

DIH =

Inventory Turnover

To examine the efficiency of the firm (how the firm converts raw material into work in

process and work-in-process into finished goods), raw material inventory and work in process

inventory should be known. The raw material inventory should be related to materials

consumed, and work-in-process to the cost of production.

Material consumed

Raw Material Inventory Turnover =

Avg. Raw Material Inventory

Cost of Production

Work-in-Process Inventory Turnover =

Avg. work-in-process inventory



Cash Management:
Cash is common purchasing power or medium of exchange. As such, it forms the most

important component of working capital. The term cash with reference to cash management

is used in two senses, in narrow sense it is used broadly to cover cash and generally accepted

equivalent of cash such as cheques, draft and demand deposits in banks. The broader view of

cash includes near cash items, such as marketable securities or bank time deposits. The basic

characteristic of near-cash assets is that they can readily be converted into cash. They also

provide short term investment outlet for excess and are also useful for meeting planned

outflow of funds. Irrespective of the form in which it is held, a distinguishing feature of cash

as assets is that it has no earning power. Company have to always maintain the cash balance

to fulfill the dally requirement of expenses. There are four primary motives for maintain the

cash as follow:



Cash management is concerned with the managing of:

(i) Cash flows into and out of the firm,

(ii) Cash flows within the firm, and

(iii) Cash balances held by the firm at a point of the time by financing deficit or investing

surplus cash.

Motives for Holding Cash:

The firm‟s need to hold cash may be attributed to the following three motives:

Transaction Motive:

The transactions motive requires a firm to hold cash to conduct its business in the ordinary

course. The firm needs cash primarily to make payments, for purchases, wages and salaries,

operating expenses, taxes, dividends etc. There should be a proper channel between the cash

inflow and cash outflow in the firm. For periods when cash payments exceed cash receipts,

the firm should maintain some cash balance to be able to make required payments. Usually

the firm maintains such accounts to meet anticipated payments whose timings is not perfectly

matched with cash receipts.

The Precautionary Motive:

The precautionary motive is the need to hold cash to meet contingencies in the future. It helps

in the future. The precautionary amount of cash depends upon the predictability of cash

flows. If cash flows are predicted with accuracy, less cash will be maintained for emergency.

If the firm is able to borrow at short notice there will less need for precautionary balance.

Generally the precautionary balance held in marketable securities and relatively less in cash.

The speculative Motive:

The speculative motive relates to the holding of cash for investing in profit making



opportunities as and when they arise. As the firm can postpone materials‟ purchasing when

the price of materials is high. And make purchase in future when the price of materials falls.

The primary motives to hold cash and marketable securities are: the transactions and the

precautionary motives.

Advantage of Cash Management:

Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither

profit nor losses but without cash, profit remains meaningless for an enterprise owner.

1. A sufficient of cash can keep an unsuccessful firm going despite losses;

2. An efficient cash management through a relevant and timely cash budget may enable a

firm to obtain optimum working capital and ease the strains of cash shortage, fascinating

temporary investment of cash and providing funds normal growth;

3. Cash management involves balance sheet changes and other cash flow that do not appear

in the profit and loss account such as capital expenditure;

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Cash &Bank 19100114 50648882 116425792 373999265 717214943 1095090536
balance
Indices 100 265.18 609.55 1958.09 3755.02 5733.42

Table.........Cash&Bank balance Indices



Cash&Bank balance indices
6000 5733.42
Cash&Bank balance indices

5000

4000 3755.02

3000 Indices

2000 1958.09

1000
609.55
265.18
100
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years

Figure.........Cash & Bank balance indices

Observation:

The cash and bank balances of ARSS was continuously increasing from 2005-06 to 2009-10.

The reason of increasing cash and bank balances was the increasing no of projects with their

value. The company entered into new areas and earned increasing profits. There was a sharp

increase in cash and bank balances in 2007-08 from it‟s previous year (i.e. 212.23%

increase). There was increase due to 10 projects of railway, road, irrigation taken.

Cash Cycle:

One of the distinguishing features of the fund employed as working capital is that constantly



changes its form to drive „business wheel‟. It is also known as „circulating capital‟ which

means current assets of the company, which are changed in ordinary course of business from

one form to another, as for example, from cash to inventories, inventories to receivables and

receivables to cash.



Working capital finance and estimation

Introduction
Sources of capital finance
Working capital loan and interest
Estimation of working capital



Introduction:

Funds available for period of one year or less is called short term finance. In India short term

finance are used as working capital finance. Two most significant short term sources of

finance for working capital are trade credit and bank borrowing. Trade credit ratio of current

assets is about 40%, it is indicated by Reserve Bank of India data that trade credit has grown

faster than the growth in sales. Bank borrowing is the next source of working capital finance.

The relative importance of this varies from time to time depending on the prevailing

environment. In India the primary source of working capital financing are trade credit and

short term bank credit. After determine the level of working capital, a firm has to consider

how it will finance. Following are sources of working capital finance.

Sources of Working Capital Finance:
1) Trade credit

2) Bank Finance

1) Trade credit:

Trade credit refers to the credit that a customer gets from suppliers of goods in the normal

course of business. The deferral of payment in short term financing is called trade credit. It is

major source of financing for firm. Particularly small firms are heavily depend on trade credit

as a source of finance since they find it difficult to raised funds from banks or other sources

in the capital market. Trade credit is mostly an informal arrangement, and it granted on an

open account basis.


For ARSS infrastructure Projects Limited the sundry creditors are the trade credit finance

which is shown in the balance sheet of the firm.

2) Bank finance:

Banks are main institutional source of working capital finance in India. After trade credit,

bank credit is the most important source of financing working capital in India. A banks

considers firm‟s contract revenue and services and desirable levels of current assets in

determining its working capital requirements. The amount approved by bank for the firm‟s

working capital is called credit limit. Credit limit is the maximum funds which a firm can

obtain from the banking system. In practice banks do not lend 100% credit limit; they deduct

margin money.

There are two types of loans involved as bank finance in ARSS Infrastructure Projects

Limited.

1) Secured loans in which the term loan, working capital loan; and loan from NBFCs. The

working capital loan is secured by way of mortgages of land and building and hypothecation

of plant and machinery, stock and book debts.

2) Unsecured loans in which the loans from banks and from others are included.

(Amount in crores)
Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
W.C loan 12.34 23.04 48.33 139.06 288.54
Interest 1.64 2.89 7.34 23.99 46.33

Table.........Working capital loan size



3500000000

3000000000 2885494519

2500000000

2000000000
W.C loan
Exponential Re-
1500000000 1390672703 gression for W.C
loan
1000000000

483320993
500000000
230446691
123413232

0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Fugure.........Working Capital size


A dissertation report on working capital management of arss infrastructure ltd

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