Working Capital Project

PROJECT REPORT ON “WORKING CAPITAL” A PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF DEGREE OF

MASTER OF BUSINESS ADMINISTRATION (FINANCIAL MANAGEMENT) TO

BARKATULLAH UNIVERSITY BHOPAL 2008-2010 SUBMITTED BY BHAWNA SONAIKAR

ORGANISATIONAL GUIDE: GUIDE Mr. Mukul Chinchalkar

INSTITUTIONAL Miss Agnes Peter Belly (FACULTY)

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ACKNOWLEDGEMENT Success is the outcome of diligence & perseverance, I, Bhawna Sonaikar, student of Third semester MBA programmed, would, like to ascribe to my success in completing my summer project’ “Working Capital” to Miss Agnes Peter Belly and to my project supervisor Mr.Mukul Chinchalkar who have extended their sincere help in accomplishing my project. I really want to thank the above mentioned persons for their continuous support & guidance during the project, with out their help my project would have been a distant dream. Bhawna Sonaikar (Projectee) MBA II SEM SIST BHOPAL

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DECLARATION I am Bhawna Sonaikar of MBA II semester of Shree Institute of Science & Technology Bhopal hereby declare that the project report entitled Working Capital the outcome of my own work and the same has not been submitted to any University / Institute for the award of any degree or any professional diploma. Bhawna Sonaikar MBA II SEM SIST, BHOPAL

INTRODUCTION OF WORKING CAPITAL

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The net working capital of business is its current assets less its current liabilities. Current Assets include: •

Stock of Raw Material

•

Work in Progress

•

Finished Goods

•

Trade Debtors

•

Prepayments

•

Cash Balances

Current Liabilities include: •

Trade Creditors

•

Accruals

•

Taxation Payable

•

Dividends Payable

•

Short term Loans

Every business needs adequate liquid resources in order to maintain day to day cash flows. It needs enough cash to by wages and salaries as they fall

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due and to pay creditors if it is to keep its workforce and ensure its supplies. Maintaining adequate working capital; is not just important in the short term. Sufficient liquidity must be maintained in order to ensure the survival of business in the long term as well. Even a profitable business may fail if it does not have adequate cash flows to meet its liabilities as tyhey fall a due. Therefore when business make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building etc, but must also take account of the additional current assets that are usually involved with any expansion of activity . Increase production tends to engender a need to hold additional stocks of raw material & work in progress. Increased sales usually mean that the level of debtor will increase. A general increase in the firm’s scales of operation tends to imply a need for greater level of cash.

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INTRODUCTION OF COMPANY The introduction of company can be described in two parts: •

Company Details

•

Company Overview

Company Details: Company Name:

United Engineering Services (Material Handling Equipments)

Address:

Plot No. K-1, Sector – ‘A’, Sanver Road, Industrial Estate, Indore (M.P) – 452015

Telephone: Mobile: Email:

0731-6538578, 272030 09826077201 [email protected]

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COMPANY OVERVIEW

United Engineering Services was incorporated in the year of 1988 at Indore, Madhya Pradesh ever since its inception it has be nurtured by the multitalented personality of respected CEO, Mr. Mukul Chinchalkar. Under his experienced and motivating headship the company has been leading exporters of material handing equipments like stone crushers and industrial feeders. The below mentioned feature of company have constantly help standardize among the most distinguish stone crushers supply in India. QUALITY ASSURANCE:

To ensure the quality of products, the

company follow a standard quality control system and maintain strict vigil throughout the production process. The company has promptly inspect of the quality of raw materials used at our manufacturing unit. Further the finished products are again scrutinized by our quality control inspection to prevent any sub standard product to reach the hands of the customer. In addition to it the company take pride to acquire with the fact that the company have not received any complaints from the customers.

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TEAM: The company thrives on the mutual efforts of highly committed team of engineers technicians, quality, supervisors etc. they are matchless experts of their own fields who within the sincere efforts have modeled our company into and overdriving entity of the market. They have acquired sound knowledge and understanding of the industry and render their services accordingly. CUSTOMERBASE: Due to the fact that quality is tradition at company and to show the tradition, the company have professional companionship of the country’s renowned companies like that of BHEL, TATA, BIRLA etc.and many more. In addition to that the market is also spread in the countries such as Gulf, Middle East, and East Asia. And due to this, the company is an all industrial spare manufacture of the country. Name of CEO: Mr. Mukul Chinchalkar Establishment: 1988 Primary Business Type: Manufactures and Exporters Market Cover: Gulf, Middle East, East Asia Products offer: Pre cleaner, Bucket Elevators, Industrial Feeders, Industrial Crushers, Industrial spare and Industrial Conveyors..

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RANGE: The Company manufacturing and offering wide range of material handling conveyors & subsystem manufacturing from high quality material, the range is known for its high operational efficiency and long lasting functional services. The range has wide application area that includes fertilizers, food processing, automobiles, flow mills, distillates and many more fields. Beside designing & manufacturing the company has also offering services relating to installations commissioning as per client requirements the range includes: •

Belt Conveyors

•

Bucket Elevators

•

Screw Conveyors

•

Crushers

•

Feeders

•

Belt feeders

•

Control gate

•

Belt flow Conveyors

•

Roller Conveyors.

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PRODUCTS: Hence described earlier the following products are in the usual manufacturing range: 1. Rollers for belt Conveyors 2. Rollers for Roller conveyors 3. Pulleys for Belt Conveyors In general the rollers are of variety of lengths for different applications. According to the width of conveyors belts and the roller conveyors applications these are normally of following divators and lengths. The below mentioned table is a brief description. These are some rollers which are either of rubber lugging or with the rubber rings.

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RESEARCH METHODOLOGY

STATEMENT OF PROJECT  Evaluation, analysis & interpretation of working capital management of United Engineering Services.  Suggesting ways to improve its working capital utilization. OBJECTIVE OF RESEARCH  Estimation of working capital requirement  Evaluation of working capital management  Evaluation of Liquidity position & working capital utilization  Analysis of relationship between working capital and profitability  Analysis & sources of working capital  Analyzing the level of current assets with relation to current liabilities.

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COLLECTION OF DATA:  Data has been collected from various sources like:  Annual reports of last three years  Manual of concerned departments  Consultants and personnel of United Engineering Services.  Internet sites like www.google.com,

[email protected] METHODS OF QUANTATIVE ANALYSIS  Calculation of net working capital requirements.  Ratio analysis  Operating cycle & cash cycle  Cash flow analysis  Determining the Financing mix  Statistical tools like graphical presentation

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ASSUMPTIONS  Year is taken of 365 days  All purchases have been taken as credit purchases and all sales have been taken as credit sales.  In the absence of relevant data the data from internet site is taken as the relevant information. LIMITATIONS  The data is mostly secondary in nature  Data has been recalculated & regrouped wherever necessary  In the absence of sufficient data personnel judgment have been taken on reasonable assumption.  In the absence of sufficient data in-depth study of cash, Receivables and inventory management was not possible.

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THEORY OF WORKING CAPITAL MEANING OF WORKING CAPITAL: Capital required for a business can be classifies under two main categories: • Fixed Capital • Working Capital Every business needs funds for two purposes for its establishments and to carry out day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land and building, furniture etc. Investments in these assets are representing that part of firm’s capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short term purposes for the purchasing of raw materials, payments of wages and other day to day expenses etc. These funds are known as working capital. In simple words, Working capital refers to that part of the firm’s capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. CONCEPTS OF WORKING CAPITAL:

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There are two concepts of working capital: • Balance Sheet concepts • Operating Cycle or circular flow concept BALANCE SHEET CONCEPT: There are two interpretation of working capital under the balance sheet concept: • Gross Working Capital • Net Working Capital The term working capital refers to the Gross working capital and represents the amount of funds invested in current assets . Thus, the gross working capital is the capital invested in total current assets of the enterprises. Current assets are those assets which are converted into cash within short periods of normally one accounting year. Example of current assets is: Constituents of Current Assets: • Cash in hand and Bank balance • Bills Receivable • Sundry Debtors • Short term Loans and Advances • Inventories of Stock as:

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 Raw Materials  Work in Process  Stores and Spaces  Finished Goods •

Temporary Investments of Surplus Funds

•

Prepaid Expenses

•

Accrued Incomes

The term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities or say: Net Working Capital = Current Assets – Current Liabilities. NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE: When the current assets exceed the current liabilities, the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year of the current assets or the income of the business. Examples of current liabilities are: CONSTITUENTS OF CURRENT LIBILITIES: • Bills Payable

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• Sundry Creditors or Account Payable • Accrued or Outstanding Expenses • Short term Loans, Advances and Deposits • Dividends Payable • Bank Overdraft

• Provision for Taxation, If does not amount to appropriation of profits The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. OPERATING CYCLE OR CIRCULATING CASH FORMAT:

Working Capital refers to that part of firm’s capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Funds thus invested in current assets keep revolving fast and being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence it is also known as revolving or circulating capital. The circular flow concept of working capital is

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based upon this operating or working capital cycle of a firm. The cycle starts with the purchase of raw material and other resources

And ends with the realization of cash from the sales of finished goods. It involves purchase of raw material and stores, its conversion into stocks of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stocks into sales, debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. The speed/ time of duration required to complete one cycle determines the requirements of working capital longer the period of cycle, larger is the requirement of working capital.

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Receivable conversion period (RCP)

Raw material storage conversion period (RMSCP)

Cash received form Debtors and paid to suppliers Of raw materials

Sales of finished Goods

Raw materials introduced into process

Finished Goods Produced Finished goods conversion Period (FGCP)

Work in process Conversion period (WIPCP)

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The gross operating cycle of a firm is equal to the length of the inventories and receivables conversion periods. Thus, Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP Where, RMCP = Raw Material Conversion Period WIPCP = Work –in- Process Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables Conversion Period However, a firm may acquire some resources on credit and thus defer payments for certain period. In that case, net operating cycle period can be calculated as below: Net Operating Cycle Period = Gross Operating Cycle Period – Payable Deferral period

Further, following formula can be used to determine the conversion periods.

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 Raw Material Conversion Period = Average Stock of Raw Material.

Raw Material Consumption per day 

Work in process Conversion Period = Average Stock of Work-in-Progress Total Cost of Production per day



Finished Goods Conversion Period = Average Stock of Finished Goods Total Cost of Goods sold per day



Receivables Conversion Period = Average Accounts Receivables Net Credit Sales per day



Payable Deferral Period =

Average Payable Net Credit Purchase per day

CLASSIFICATION OR KIND OF WORKING CAPITAL:

Working capital may be classified in two ways: • On the basis of concept • On the basis of time

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Om the basis of concept, working capital is classified as gross working capital and net working capital. The classification is important from the point of view of the financial manager. On the basis of time, working capital may be classified as: •

Permanent or Fixed working capital

•

Temporary or Variable working capital.

t

Kinds of Working Capital

On the basis of concept

Gross Working Capital

On the basis of time

Permanent or Fixed Working Capital

Net Working Capital

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Temporary or Variable Working Capital

Regular Working Capital

Special Working Capital

Reserve Working Capital

Seasonal Working Capital

1. PERMANENT OR FIXED WORKING CAPITAL:

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Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operations. 2. TEMPRORAY OR VARIABLE WORKING CAPITAL: Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies.Varibles working capital can be further classified as second working capital and special working capital. The capital required to meet the seasonal needs of the enterprises is called the seasonal working capital. Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL: Working capital is the life blood and nerve centre of a business . just a circulation of a blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of

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working capital. The main advantages of maintaining adequate amount of working capital are as follows: • Solvency of the Business • Goodwill • Easy Loans • Cash discounts • Regular supply of Raw Materials • Regular payments of salaries, wages & other day to day commitments. • Exploitation of favorable market conditions • Ability of crisis • Quick and regular return on investments • High morals THE NEED OR OBJECTS OF WORKING CAPITAL: The need for working capital cannot be emphasized. Every business needs some amount of working capital. The need of working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycle involved in the sales and realization of cash. There are time gaps in purchase of raw materials and production, production and sales,

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And sales, and realization of cash, thus , working capital is needed for the following purposes:  For the purchase of raw materials , components and spaces  To pay wages and salaries  To incur day to day expenses and overhead costs such as fuel, power and office expenses etc.  To meet the selling costs as packing, advertising etc.  To provide credit facilities to the customers.  To maintain the inventories of raw materials, work –in- progress,

stores and spares and finished stock. FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT: The working capital requirements of a concern depend upon a large number of factors such as nature and size of the business, the characteristics of their operations, the length of production cycle , the rate of stock turnover and the state of economic situation. However the following are the important factors generally influencing the working capital requirements. 

NATURE OR CHARACTERSTICS OF A BUSINESS:

The

nature and the working capital requirement of enterprises are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an 26

enterprises involve in providing services. The amount required also varies as per the nature, an enterprises involved in production would required more working capital then a service sector enterprise. 

MANAFACTURE PRODUCTION POLICY: Each enterprises in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time and other may follow the principles of demand based production in which production is based on the demand during the particular

phase

of

time.

Accordingly

the

working

capital

requirements vary for both of them. 

OPERATIONS: The requirement of working capital fluctuates for seasonal business. The working capital needs of such business may increase considerably during the busy season and decrease during the



MARKET CONDITION:

If there is a high competition in the

chosen project category then one shall need to offer sops like credit, immediate delivery of goods etc for which the working capital requirement will be high. Otherwise if there is no competition or less competition in the market then the working capital requirements will be low.

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

AVABILITY OF RAW MATERIAL: If raw material is readily available then one need not maintain a large stock of the same thereby reducing the working capital investment in the raw material stock . On other hand if raw material is not readily available then a large inventory stocks need to be maintained, there by calling for substantial investment in the same.



GROWTH AND EXAPNSION: Growth and Expansions in the volume of business result in enhancement of the working capital requirements. As business growth and expands it needs a larger amount of the working capital. Normally the needs for increased working capital funds processed growth in business activities.



PRICE LEVEL CHANGES : Generally raising price level require a higher investment in the working capital. With increasing prices, the same levels of current assets needs enhanced investments.



MANAFACTURING CYCLE: The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period

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the need for working capital would be more. At time business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of the working capital requirement is made keeping this factor in view. Each constituents of the working capital retains it form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement the duration at various stages of the working capital cycle is estimated. Thereafter proper value is assigned to the respective current assets, depending on its level of completion. The basis for assigning value to each component is given below: COMPONENTS OF WORKING CAPITAL Stock of Raw Material Stock of Work -in- Process Stock of finished Goods Debtors

BASIS OF VALUATION Purchase of Raw Material At cost of Market value which is lower Cost of Production Cost of Sales or Sales Value

Cah

Working Expenses

Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement.

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The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous. PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY: The following are the general principles of a sound working capital management policy: PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY

PRINCIPLES OF RISK VARIATIONS

PRINCIPLES OF COST OF CAPITAL

PRINCIPLES OF EQUITY PRINCIPLES

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PRINCIPLES OF MATURITY OF PAYMENTS

1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY): Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. Larger investment in current Assets with less dependence on short term borrowings, increase liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investments in current assets with greater dependence on short term borrowings, reduces liquidity and increase profitability. In other words there is a definite inverse relationship between the degree of risk and profitability. In other words, there is a definite inverse relationship between the risk and profitability. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management assumes greater risk by reducing working capital. However, the goal of management should be to establish a suitable trade off between profitability and risk. 2. PRINCIPLES OF COST OF CAPITAL: The various source of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher and risk however the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two.

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3.PRINCIPLE OF EQUITY POSITION: The principle is concerned with planning the total investments in current assets. According to this principle, the amount of working capital invested in each component should be adequately justified by a firm’s equity position. Every rupee invested in current assets should contribute to the net worth of the firm. The level of current assets may be measured with the help of two ratios: 1. Current assets as a percentage of total assets and 2. Current assets as a percentage of total sales While deciding about the composition of current assets, the financial manager may consider the relevant industrial averages. 4. PRINCIPLES OF MATURITY OF PAYMENT:

The principle is

concerned with planning the source of finance for working capital. According to the principles, a firm should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments. Generally shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater the inability to meet its obligations in time.

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CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:  Growth may be stunted. It may become difficult for the enterprises to

undertake profitable projects due to non availability of working capital.  Implementations of operating plans may brome difficult and consequently the profit goals may not be achieved.  Cash crisis may emerge due to paucity of working funds.  Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital. The business may fail to honour its commitment in time thereby adversely affecting its creditability. This situation may lead to business closure. The business may be compelled to by raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchase and reducing selling price by offering discounts . both the situation would affect profitable adversely. Now avaibility of stocks due to non availability of funds may result in production stoppage.

While underassessment of working capital has

disastrous implications on business overassesments of working capital also has its own dangerous.

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CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL:  Excess of working capital may result in un necessary accumulation of inventories.  It may lead to offer too liberal credit terms to buyers and very poor recovery system & cash management.  It may make management complacent leading to its inefficiency.  Over investment in working capital makes capital less productive and may reduce return on investment. Working Capital is very essential for success of business & therefore needs efficient management and control. Each of the components of working capital needs proper management to optimize profit. INVENTORY MANAGEMNT: Inventory includes all type of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously stock out costs should be minimized. Business therefore should fix the minimum safety stock level reorder level of ordering quantity so that the inventory costs is reduced and outs management become efficient.

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RECEIVABLE MANAGEMENT: Given a choice, every business would prefer selling its produce on cash basis. However, due to factors like trade policies , prevailing market conditions etc. Business are compelled to sells their goods on credit. In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating current assets in the form of debtors or account receivables. Investment in the type of current assets needs proper and effective management as, it gives rise to costs such as :  Cost of carrying receivables

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 Cost of bad debts losses Thus the objective of any management policy pertaining to accounts receivables would be to ensure the benefits arising due to the receivables are more then the costs incurred for the receivables and the gap between benefit and costs increased resulting in increase profits. An effective control of receivables Help a great deal in properly managing it. Each business should therefore try to find out coverage credit extends to its clients using the below given formula: Average Credit =

Total amount of receivable

(Extend in days)

Average credit sale per day

Each business should project expected sales and expected investments in receivable based on various factor, which influence the working capital requirement. From this it would be possible to find out the average credit days using the above given formula. A business should continuously try to monitor the credit days and see that the average. Credit offer to clients is not crossing the budgeted period otherwise the requirement of investment in the working capital would increase and as a result, activities may get squeezed. This may lead to cash crisis.

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CASH BUDGET:

Cash budget basically incorporates estimates of

future inflow and outflows of cash cover a projected short period of time which may usually be a year, a half or a quarter year . effective cash management is facilated if the cash budget is further broken down into months, weeks or even a daily basis. There are two components of cash budget are: 1. Cash inflows 2. Cash outflows The main source for thses flows are given here under: 1. Cash Sales 2. Cash received from debtors 3. Cash received from Loans, deposits etc. 4. Cash receipts other revenue income 5. Cash received from sale of investment or assets. CASH OUTFLOWS: 1. Cash Purchase 2. Cash payments to Creditors 3. Cash payment for other revenue expenditure 4. Cash payment for assets creation 5. Cash payments for withdrawals, taxes.

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6. Repayments of Loan etc. A suggestive for, at for cash budget is given below:

PARTICULARS Estimated cash inflows ……………………………… …………………………………. I. Total cash inflows Estimated cash outflows …………………………….. ………………………….. II. Total cash outflows III. Opening cash balances IV. Add/deduct surplus/deflictduring the month ( III) V. Closing cash balances (III -IV) VI. Minimum level of cash balance VII. Estimated excess or short fall of cash (V-VI)

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MONTHS JANUARY

FERBUARY

MARCH

DATA ANALYSIS WORKING CAPITAL ESTIMATION Current assets Loans & advances Currents assets Inventories stock in trade work in progress raw materials stores and spare parts Total Inventories Debtors

FY 05-06

Cash & Bank balances (subtracting FCCB issue unutilized money as it amounts to long term liability) loans and advances Net current assets Current Liabilities

FY 06-07

FY 07-08

223.94 2528.4 7224.96 1131.8 11109.1 5516.14

662.87 4563.76 8145.37 1463.13 14835.13 7402.6

1176.85 8714.56 9242.58 1810.73 20944.72 14211.12

1027.1

8042.12 -6910.46

5225.01 -5272.52

3249.1 7529.5 8647.1 20901.44 30898.89 43755.43 FY 05-06 FY06-07 FY 07-08

Sundry Creditors Creditors for capital expenditure other liabilities unclaimed dividend sundry deposits advances from customers interest accrued but not due on loan Net current liabilities

1476.37 1456.05 342.26 21.33 174.14 217.21 7.04 3694.404

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1589.57 365.64 645.34 31.66 229.23 362.59 20.05 3244.08

3748.82 258.4 621.04 35.29 321.66 73.55 32.12 5090.88

INVENTORIES In the context of United Engineering Services the major increase in the present three financial years has been of the inventory. INVENTORIES 25000 20000 stock in trade 15000

work in progress raw materials

10000

stores and spare parts Total Inventories

5000 0 FY 05-06

FY 06-07

FY 07-08

Reasons:  The pile up of inventory that is used in trial run, before hand to be used in the checking the machinery & the newly installed production capacity.  The increased inventory to produce more goods so as to utilize the new plant set up DEBTORS AND AVERAGE RECEIVABLES The debtors are increasing heavily in the financial year 06-07 because of a sales boom that has accounted for huge accounts receivables increase. 40

DEBTORS AND AVERAGE RECEIVABLES 16000 14000 12000 10000 8000

Debtors

6000 4000 2000 0

FY 05-06

FY 06-07

FY 07-08

CASH AND BANK BALANCES Cash and bank balance as per the balance sheet it is seen to be increasing but from the above chart it is seen to be decreasing. This discrepancy can be attributed to the fact that balance sheet figures carry additional cash balance of unutilized FCCB issue proceeds which amount to long term liability as well. Thus the actual figures are distorted because the money from FCCB issue has to be returned and it is a kind of long term loan which the company has sought for expansion purpose. As a result to find the actual outlay of cash the unutilized money has been subtracted. Also we should take note of the fact that the FCCB money can only be used for expansion purpose and not as money for usual application of working capital. 41

C AS H & B AN K B ALAN C E

5225.01

FY 07-08

8042.12

FY 06-07

FY 05-06 0

Cash & B ank balanc es

1027.1

2000 4000 6000 8000 10000

LOANS AND ADVANCES Loans & advances are increasing on the part of increased advances that are given to pile up inventory when the company went for the expansion mode

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LOANS AND ADVANCES

FY 05-06 17% FY 07-08 44%

FY 05-06 FY 06-07 FY 07-08 FY 06-07 39%

CURRENT ASSETS includes cash & those assets which can be easily converted into cash within a short period generally one year such as marketable securities , bills receivables, sundry debtors, inventories, work in progress, prepaid expenses etc .The total current assets are the sum of below contingency i.e. Current Assets = Stock/ Inventory + Sundry Debtors + Advances + Cash and bank balances + other current assets

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CURRENT ASSETS loans and advances

FY 07-08

Cash & Bank balances Debtors Total Inventories

FY 06-07

stores and spare parts raw materials work in progress

FY 05-06

stock in trade 0

5000 10000 15000 20000 25000

NET CURRENT ASSETS

FY 05-06 22% FY 07-08 46%

FY06-07 32%

Conclusions: The trend of the current assets in United Engineering Services throughout the period from 2005-08 are shown in the pie-chart .it is evident from the table that the current assets in United engineering Services has increased except in year 2006-07.

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CURRENT LAIBILITIES These are those obligations which are payable within a short period of generally one year and includes outstanding expenses, bills payable, sundry creditors, accrued expenses, bank overdraft, short term advances, income tax payable. TOTAL CURRENT LAIBILITIES Sundry Creditors 4000 3500

Creditors for capital expenditure

3000

other liabilities

2500 unclaimed dividend

2000 1500

sundry deposits

1000 500

advances from customers

0 FY 05-06

FY06-07

FY 07-08

interest accrued but not due on loan

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NET CURRENT LAIBILITIES 6000 5000 4000 3000

Net current liabilities

2000 1000 0 FY 05-06

FY06-07

FY 07-08

Conclusion: The trend of Current Liabilities of United Engineering Services throughout the period from 2005-2008 are shown in the table. It is evident from the table that it shows increasing trends in the year 2005 to 2008. It shows that the United Engineering Services has stability in trends of Current Liabilities.

CREDITORS AND CREDITORS OF CAPITAL EXPENDITURE Creditors of United Engineering Services limited are increasing from 70 Cr (FY 05-06) to 18 Cr (FY 06-07) to 12 Cr (FY 07-08). The main reason for the increase in can be attributed to the heavy purchase of the inventory for stocking it up for trial run & use before the expansion mode.

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Creditors for capital expenditure seem to be decreasing over the three years i.e. from 18Cr (FY 05-06) to 12 Cr (FY 06-07) which is in sync with the fact that the expansion work that has been in process and all preparations for that are coming to an end.

CREDITORS FOR CAPITAL EXPENDITURE

1600 1400 1200 1000

Creditors for capital expenditure

800 600 400 200 0

FY 05-06

FY06-07

FY 07-08

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RATIO ANALYSIS

FY 05-06

current liabilities

29843.52 7611.44

quick assets quick liabilities Net turnover (sales)

12759.32 7611.44 45503

working capital average inventory (average of opening & closing stock of year)

22232.08

Current assets

8594.615

cost of goods sold = cost of sales

37398

total assets total annual expenses -(depreciation +debt expenses)

87666 37313.16

average gross income PROFIT before interest and taxes Total interest

97754.89 5998 747.8

Net Profit after tax (NPAT)

4115

capital employed (FA+CA-CL )

89529.68

investment (FA+CA)

97141.12

Fixed assets

67297.6

FY 0607 47163.7 2 6597.95 14530.4 6 6597.95 52527.1 40565.7 7 14476.4 65 47018.3 1 124436. 12 27364.0 6 63633.3 7 8120.16 2653.75 3893.37 106917. 71 113515. 66 66351.9 4

FY 07-08 61410.49 7459.4 20880.64 7459.4 81786.93 53951.09 22666.83 67855.4 138465.6 23898.65 51858 14612.92 5214.77 7383.56 111772.7 119232.1 57821.59

LIQUIDITY RATIOS CURRENT RATIO Current ratio is defined as the relationship between current assets and current liabilities. It is a measure of general liquidity & is most widely used to make the analysis of short term financial position of a firm. Current ratio is the

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ratio of current assets to current liabilities. A relatively higher ratio is an indication that the firm is liquid and has the ability to pay its current obligations on time. On the other hand a low current ratio indicates that the Liquidity position of the firm is not good and shall not be able to pay its current liabilities in time. Current Ratio: The Current ratio is calculated by dividing current assets by current liabilities: Current ratio:

Current Assets Current Liabilities

FIANANCIAL YEAR FY 2005-2006 FY 2006-2007 FY2007-2008

CURRENT ASSETS 29843.52 47163.72 61410.49

CURRENT LAIBILITIES 7611.44 6597.95 7459.4

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CURRENT RATIO 3.92 7.14 8.23

CURRENT RATIO

20% 43%

FY 2005-2006 FY 2006-2007 FY2007-2008 37%

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FIANANCIAL YEAR FY 2005-2006 FY 2006-2007 FY2007-2008

QUICK ASSETS QUICK LIABILITITES 12759.32 14530.46 20880.64

CURRENT LAIBILITIES 7611.44 6597.95 7459.4

QUICK RATIO 1.67 2.2 2.78

QUICK RATIO: Quick ratio or liquid ratio is a more rigorous test of liquidity than the current ratio. The term liquidity refers to the ability of the firm to pay short term obligations as and when they become due. Quick ratio may be defined as ration of quick assets to quick liabilities. Liquid assets include all the current assets excluding inventories & prepaid expenses. Liquid liabilities mean all liabilities excluding bank overdraft. Inventories & prepaid expenses are not termed as liquid assets because they cannot be converted into cash immediately without a loss of value.

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QUICK RATIO

25% FY 2005-2006

42%

FY 2006-2007 FY2007-2008 33%

CURRENT SCENERIO INTERPRETATION While interpreting the figures of both the above ratios we should keep in mind the following one point  United Engineering Services is a manufacturing concern Since it is manufacturing concern the an excess of inventory as compared to other industry models such as the services sector is an integral fact. As a result it is bound to have higher current ratio and quick ratio as compared to other industries. The sharp rise of current ratio from 20% (FY 05-06) to 37% (FY 06-07) to 43 %( FY 07-08) Can be attributed to a. Higher pile up of inventory which was to be used up for trial run in producing new products from the new plant set up. 52

b. Higher prepaid expenses related to advances given so as to pile up the inventory so that when the inventory is needed for trial run, it’s available. c. An increase in average receivables which was in sync with increased capacity of production and also increased sales. An important point to note here is that an excess of cash balance arising out of idle money coming out of FCCB issue expense has been deducted as correspondingly it accounts for long term liability (debentures) which have no effect on working capital management. The quick ratio is a more important indicator of liquid position of United Engineering Services as it hardly varies from 25% (FY 06-07) to 33% (FY 07-08). Obviously the effect of inventories has been negated.

EFFICIENCY RATIO From the perspective of working capital management we would be discussing three important ratios they are.  Sales to working capital ratio  Inventory turnover ratio  Current assets turnover ratio. 53

SALES TO WORKING CAPITAL RATIO This ratio is computed by dividing working capital by sales. This ratio helps to measure efficiency of the utilization of net working capital. It signifies that for an amount of sales. A relative amount of working capital is needed. If any increase in sales in contemplated, working capital should be adequate & thus this ratio helps management to maintain the adequate level of working capital

Financial Year Sales to working capital ratio

FY 05-06

FY 06-07

2.046727

1.294863

SALES TO WORKING CAPITAL RATIO 2.046727 2.5

1.515946

1.29486264

2 1.5 1 0.5 0

FY 05-06

FY 06-07

FY07-08

Sales to working capital ratio

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FY 07-08 1.51595

CURRENT SCENERIO INTERPRETATION As seen from the above table the ratio has decreased from 2 (FY 05-06) to 1.29 in (FY 06-07) and then increased to 1.5 (FY 07-08). This ratio is again indicative of the fact that the year in which the expansion took place the sales did not match up with the scale of expansion. Otherwise it would have remained intact and not decreased. The slight increase from 1.29 to 1.51 is indicative of the fact that the full impact of expansion is being slowly realized & sales are slowly increasing.

INVENTORY TURNOVER RATIO This ration indicates the effectiveness and efficiency of inventory management. This ratio is calculated as cost of goods sold: average inventory shows how speedily the inventory is turned into accounts receivables through sales. The higher the inventory turnover ratio (also called stock velocity) the more the efficient inventory management.

Financial Year

FY 05-06 FY 06-07

inventory turnover ratio/ stock velocity

4.3513 29

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3.24791 38

FY07-08 2.9936

INVENTORY TURNOVER RATIO

FY07-08

inventory turnover ratio/ stock velocity

FY 06-07

FY 05-06

0

1

2

3

4

5

CURRENT SCENERIO INTERPRETATION The stock velocity is decreasing subsequently from 4.35 (FY 06-07) to 2.99 (FY 07-08) which shows inefficiency on the part of inventory management. Partly the reason for the fall can be attributed to stocking up of inventory for the trail run & using them in testing the expansion mode machinery.

CURRENT ASSETS TURNOVER RATIO This ratio is indicated by sales upon current assets. This ratio indicates the efficiency with which the current assets turn into sales & higher current assets turnover ratio implies by & large a more efficient use of funds in current assets. Thus, a high turnover rate indicates reduced lock up of funds

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in current assets. An analysis of this ratio over a period reflects working capital management of the firm

Financial Year

FY 05-06

current assets turnover ratio

1.52472

FY 06-07 1.11371834

FY07-08 1.331807

CURRENT ASSETS TURNOVER RATIO 1.6

1.52472 1.331807

1.4 1.11371834

1.2 1

current assets turnover ratio

0.8 0.6 0.4 0.2 0

FY 05-06

FY 06-07

FY07-08

CURRENT SCENERIO INTERPRETATION The ratio is slightly decreasing from 1.52 (FY 05-06) to 1.11 (FY 06-07) & then increasing to 1.33 (FY 07-08) which shows that sales increase is not matched by the increase in current assets in the expansion phase of United Engineering Services . The reason can be well attributed to the piling up of trial stock and not full use of the expanded production capacity.

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OPERATING RATIOS  Working ratio  Interest coverage ratios WORKING RATIO A ratio used to measure a company's ability to recover operating costs from annual revenue. This ratio is calculated by taking the company's total annual expenses (excluding depreciation and debt-related expenses) and dividing it by the annual gross income. A working ratio below 1 implies that the company is able to recover operating costs, whereas a ratio above 1 reflects the company's inability to do so.

Financial Year working ratio

FY 05-06 0.381701

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FY 06-07 0.43002689

FY07-08 0.460848

WORKING RATIO

FY07-08

0.460848

FY 06-07

0.43002689 working ratio

FY 05-06

0.381701

0

0.1

0.2

0.3

0.4

0.5

CURRENT SCENERIO INTERPRETATION The ratio consistently has been below 1 which means company can very well take out its operating costs, though the margin of comfort is slightly decreasing because of the increase in expenses of the United Engineering Services

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COCLUSION Working capital management is an important aspect of any business. Every business concern should have adequate working capital to run its business operation. Every concern should have neither redundant of excess working capital nor inadequate or shortage of working capital. Both excess as well as short working capital positions are bad for any business. The three elements of working capital management are cash management receivable management and inventory management. If a finance manager maintains these three elements of working capital management properly means the concern will get dramatic improvement in their sales volume and also in business. Working capital policies of a firm have a great effect on its profitability, liquidity and structured health of the organization. Every concern should adopt some new tread management strategies that will help in greater productivity, inventory optimization and also better working capital management. So, it is noted that working capital is a means to run business smoothly and profitability. Thus, the concept of working capital has its own important in a going concern.

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Good management of working capital is part of good finance management effective use of working capital will contribute to the operational efficiency of a department; optimum use will help to generate maximum return. United Engineering Services is also using “SAP” 6.0 versions which is very advanced to do every transaction of any organization. applicable for e-transaction.

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‘SAP’ 6.0 also

BIBLOGRAPHY

 Financial Management theory and practice by Prassanna Chandra

 Financial Management theory and practice by Shashi .K. Gupta & R.K. Sharma.  Www. Google.com, www. Wikepidia.com

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FINDING AND SUGGESTION

• Making available just adequate quantum of working capital. Some of the existing machinery is new with absolute equipments requiring modernization and rebuilding. •

The company should administrate their credit on the basis of certain well recognized and established principle of credit administration.

• The company should maintain an optimum level of cash in the business in order to maintain a proper liquidity in the business.

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