Working Capital.docx

A Project Report On

“A STUDY ANALYSIS OF WORKING CAPITAL MANAGEMENT” At

“SRK INDUSTRIES” By “MR. PRASANNA UDAY JAKATI” Under the guidance of “DR.MURARI PREMNATH SHARMA” Submitted to

“SAVITHRI BAI PUNE UNIVERSITY” In partial fulfillment of the requirement for the award of the degree of Master of Business Administration (MBA) Through

Dr Vithalrao Vikhe Patil Foundation's

Institute of Business Management & Rural Development, Ahmednagar-414111. (Year 2016 - 2018) 1

DECELERATION I hereby declare that this Project Report entitled “A STUDY on WORKING CAPITAL management” is written by me and submitted to Savitribai Phule Pune University through Dr Vithalrao Vikhe Patil Foundation’s Institute of Business Management and Rural Development Vilad Ghat Ahmednagar for the award of the Degree of Master of Business Administration in the faculty of management. I further declare that, this has not been submitted, in full or in part, to any other university for any degree or whatsoever.

(Mr.Prasanna Uday Jakati)

MBA II (Finance)

Date: Place :Ahmednagar.

2

ACKNOWLEDGEMENT

“Coming Together is Beginning, Keeping Together is Progress & Working Together is Success.” The project is a great source of learning and a good experience as it made me aware of professional culture and conducts that exist in an organization. Inspiration and guidance are valuable in all aspects of life especially in an academic field. I express my sincere thanks to Mr. Mahesh Tawale, without whose supervision and inspiration, I could not have completed my project. His guidance proved to be valuable in solving many of my difficulties. Special thanks to who give me the opportunity to do the project in SRK Industries. I express my gratitude to Dr. Murari Sharma My Internal Guide, IBMRD, Under Whose Supervision And Guidance It Has Become Possible For Me to bring out this work successfully. Also I would like to express my heartfelt thanks to the team members of Finance Department and all my friends and who helped me in the successful completion of this project. I will always carry fond memories of these training days.

- Mr.Prasanna Uday Jakati

3

CONTENTS LESSONS

TOPICS

PAGE NO.

CHAPTER-1

INTRODUCTION

7-16

1.1

Executive summery

8

1.2

Meaning / Define

9

1.3

Important of Study

10

1.4

Objective of study

12

1.5

Scope

13

1.6

Research Methodology

14

1.7

Data collection

15

1.8

Limitation

16

CHAPTER-2

COMPANY PROFILE

17–23

2.1

Introduction

18

2.2

History

20

2.3

Vision & Mission

21

2.4

Products Profile

24

CHAPTER-3

DATA ANALYSIS INTERPRETATIONS

24 – 43

CHAPTER-4

FINDINGS ,SUGGESTIONS,CONCLUSION

44-51

4

Sr. no.

TOPICS

Page no.

1

Raw material holding period

24

2

Finished goods holding period

26

3

Debtors collection period

27

4

Gross operating cycle

29

5

Payment deferral (creditors) period

31

6

Net operating cycle

32

7

Current assets

34

8

Proportion of current assets

35

9

Current liabilities

38

10

Proportion of current liabilities

38

11

Net working capital

40

12

Comparison between sales and net working capital

43

13

Comparison between proportion sales and net working 45 capital

14

Comparison between operating cycle and net working 46 capital

15

Current ratio

48

16

Acid test ratio

50

17

Working Capital Turnover Ratio

52

18

Inventory Turnover Ratio

54

5

19

Debtors Turnover Ratio

56

20

Creditors Turnover Ratio

58

21

Operating Profit Margin Ratio

60

22

Proportion of short term and long term funds

66

6

CHAPTER1 INTRODUCTION

7

1.1Executive Summery Working capital management is significant in financial management due to the fact that it plays a vital role in keeping the wheels of a business enterprise running. Working capital management is concerned with short-term financial decisions. Shortage of working capital may cause many businesses to fail. Lack of efficient and effective utilization of working capital leads to earn low rate of return. The need for skilled working capital management has thus become greater in recent years. A firm invests a part of its capital in fixed assets and jeeps a part of it for working capital i.e. for meeting its day to day requirements. We will hardly find any firm which does not require any amount of working capital for its normal operations. The requirement of working capital varies from firm to firm depending upon the nature of business, production policy, conditions of sale and purchase etc. Working capital to a company is like the blood to human body. It is the most vital ingredient of a business. Working capital management if carried out effectively efficiently and consistently will assure good health of an organization.

8

1.2 Meaning / Define In simple terms working capital means is that the amount of funds that a company require finance for its day-to-day operations. Working capital states that the period of debtors, receivables etc for a company to raise finance from them at the earliest. Finance manager should develop sound techniques of managing current assets. Working capital management involves managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.

The following should be effective in working capital management: Cash management: Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management: Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials—and minimizes reordering costs—and hence in Lactases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid over production.

Debtors management: Identify the appropriate Lacedit policy, i.e. Lacedit terms, discounts etc. which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by inLaceased revenue and hence Return on Capital. Debtors Lacedit period should be less than 90 days to achieve good working capital ratio and position of the company.

9

1.3 Important of Study Proper management of working capital is very important for the success of an enterprise. “It aims at protecting the purchasing power of assets and maximizing the return on Investment. The manager of administration of current assets to a very large extent determines the success of the operations of a firm. Constant management is required to maintain appropriate levels in the various working capital accounts. A study of working capital is of major importance to internal and external analysis because of its close relationship to current day-to-dayoperations of business, Inadequacy or mismanagement of working capital isthe leading cause of business failures. Shortage of working capital, so oftenadvanced as the main cause of failure of Industrial concerns, is nothing butthe clearest evidence of mismanagement, which is so common. The current assets and current liabilities flow round in a business like an electric current. The working capital plays the same role in the business as the role of the heart in the human body. Just as the heart gets blood and circulated the same in the body, in the same enterprise, adequate amount ofworking capital is pre-requisite. The adequacy of cash and current assetstogether with their efficient handing virtually determine the survival ordemise of a concern. Inadequate working capital is a business ailment as compared to the availability of excess working capital may leadcarelessness.

About costs and therefore, to inefficiency of operations. Many atimes business failure takes place due to lack of working capital. If aconcern maintains an adequate amount of working capital, it enjoys a goodLacedit rating and gets discount on payment. It will ensure proper functioningof the business operations and help in the maximization of threat of return.A business house can maximize its rate of return on the capital investedprovide in keeps pace with the scientific and technological developmentstaking place in the field to which it pertains. As soon as some technologicaland scientific development takes place, a business enterprise in order toaccelerate its profitability should immediately introduce the same to itsproductive process. In reality, however the sufficiency of working capitalwill determine the course of decision in this regard.

10

Working capital helps to operate the business smoothly without any financial problem for making the payment of short-term liabilities. Purchase of raw materials and payment of salary, wages and overhead can be made without any delay. Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. Quick payment of Lacedit purchase of raw materials ensures the regular supply of raw materials from suppliers. Suppliers are satisfied by the payment on time. It ensures regular supply of raw materials and continuous production. A firm having adequate working capital, high solvency and good Lacedit rating can arrange loans from banks and financial institutions in easy and favorable terms.

11

1.4 Objective of Study

1. To study Working Capital and its affecting factors. 2. To study and analyze Operating Cycle 3. To analyze Working Capital with the help of ratios 4. To study Working Capital financing patterns

12

1.5 Scope of Study The scope of study was extended for three years viz. 1) 2014-15 2) 2015-16 3) 2016-17

13

1.6 Research Methodology Decretive Research: Deceptive research helped me to find out facts and details of the SRK Industries. I have been enquired directly to senior executives and senior employees about what has happened and what is happening in the company.

Data Collection: I have been collected data through both primary and secondary. Primary data from Questionnaire, Observation and Personal interview with Account executives and senior employees. Secondary data from annual reports and company websites. Areas of Data Collection: I was visiting different company to collect data. I have done survey other than SRK Industries. Time Frame: I have done this research activity in two months.

14

1.7 Data Collection Research Tools: Bar Charts and Line Chart for Interpretation Area of Study: Finance Sources of Data: There were mainly two major sources of data namely; Primary Data: Primary data has been obtained through personal discussions with managers and senior officials of the organization; observations and questionnaire both open ended and closed ended. Secondary Data: Secondary data has been obtained from published reports like the annual reports of the company, balance sheets, and profit and loss account, websites, records such as files, reports maintained by the company.

15

1.8 Limitation

1. Most of the information used in the analysis was from secondary sources. 2. Confidential data was not allowed to be accessed or published in the project report. 3. Time duration for the analysis was very short therefore detailed analysis was not possible. 4. Due to time constrain all the measures were not considered for analysis.

16

CHAPTER 2 COMPANY PROFILE

17

2.1 Introduction of Company We are one of the leading manufacturers of Plastic in Maharashtra (INDIA) since last 4 years. We have a wide range of Quality Plastic Components; Manufactured under highly experienced team, available in ready stock as you will observe from the details enlisted ahead. Infrastructure: We are approved by Newly Installed High Mechanized Machineries Manufactured from Worlds Best Machinery Manufacturers High production and Supply capacity. High

Accuracy

Calibration

Instruments

and

Testing

Machinery. Fully Mechanized Material Handling facilities having cranes

18

Applications: We Serve Services to the requirements of the following industry segments, Battery Companies Sugar factories Hardware Merchants Automobile Part Manufacturers Agriculture equipments and implements Manufacturers Engineering Industry.

19

2.2 History of Company

We are one of the leading manufacturers of Plastic components in Maharashtra (INDIA) Since last 4 years. We have a wide range of Quality plastic Products; Manufactured under highly experienced team, available in ready stock as you will observe from the details enlisted ahead.

Flexible manufacturing plans; we can accommodate customer's urgent requirements. We can also Mfg. Products as to Customers Specific requirement i.e Various Sizes etc World Class Quality Raw material Grades is used in Process for Manufacturing plastic Products. We have a dedicated and expertise team of qualified & experienced personnel ensuring timely supply of material to customer requirements. We fight competition, not on price but on total customer satisfaction, on all aspects of our dealing.

20

2.3 Vision and Mission Statement Mission SRK Industries has four manufacturing units with large-scale high-capacity. Highefficiency machineries for settled up across Ahmednagar Industrial Area having quality development facilities with inclusion of labs and tool design shop. Our cumulative infrastructure is capable of accomplishing the manufacturing of the best quality and variety products which enables us for offering 50 product variations. Such diversified distinction and quick responsive methodology shows our capability of endeavoring our esteemed customer's satisfaction. Vision We proudly introduced us an ISO standardized company with having high business standards. Thanks to globalization and rapid advances in technology, today's manufacturing environment is increasingly competitive. Our fundamentals business principle has always been to bring superior quality products at competitive prices to our valued customers. We stay focused on finding new ways to design, produce and deliver quality products.

21

2.4

Product Profile

22

23

CHAPTER 3 DATA ANALYSIS

24

CONCEPT OF WORKING CAPITAL There are two concepts of working capital – Gross concept and Net concept. Gross working capital simply called as working capital, refers to the firm’s investment in current assets. The gross working capital concept is financial or going concern concept where as net working capital is an accounting concept of working capital.

Net working capital refers to the difference between current assets and current liabilities. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceeds current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. The consideration of the level of investment in current assets should avoid two danger points – excessive and inadequate investment in current assets. Investment in current assets should be neither excess nor short. Idle investment earn nothing but it block capital, on the other hand, inadequate amount of working capital can threaten solvency of the firm, if it fails to meet its current obligations.

Working capital needs of the firm may be fluctuating with change in business activities. The management should be prompt to initiate an action and correct the imbalance. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Working capital drives the ordinary operating cycle of business, running expenses, daily expenses of the firm. In a narrow sense, the term working capital refers to the net Working capital. Net working capital is the excess of current assets over current liabilities.

Net working capital = Current assets – Current liabilities

Net working capital may positive or negative. 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 25

business within a short period of normally one accounting year out of current assets or the income of the business.

Gross concept is sometimes preferred to the net concept of working capital for the following reasons:

1. It enables the enterprise to provide correct amount of working capital at the right time. Every management is more interested in the total current assets with which it has to operate than the sources from where it is made available.

2. The gross concept of working capital is more useful in determining the rate of return on investment in working capital. The net working capital concept, however, is also important for the following reasons: i) It is qualitative concept, which indicates the firm’s ability to meet its operating expenses and short – term liabilities. ii) It indicates the margin of protection available to the short – term creditors, i.e. the excess of current assets over current liabilities.

WORKING CAPITAL CYCLE: Operating cycle is the time duration required to convert raw materials into cash. The operating cycle of a production unit involves three phases: 

Acquisition of resources such as raw material, labour, etc.



Production of the product.



Conversion of raw materials into finished products. Sales of the finished products either for cash or credit.

26

CASH

PURCHASE OF

PROCESS

ON RAW MATERIAL

RAW

MATERIAL

RECEIVABLES

FINISHED

WORK

–

IN PRODUCTS

PROCESS

Diagram shows Production Cycle. Working capital is required for each and every stage of production. The current assets are required because the operations do not convert into cash immediately. Following is the Working Capital Cycle.

27

WORKING CAPITAL CYCLE FOR SRK INDUSTRIES

Design Department

Marketing Department

Production Planning and Control (PPC)

Money is received from Customer

Goods are dispatched to Customer

Material Requirement Planning (MRP) CASH

Purchase of Raw Material

Production Activity takes place & RM is converted into WIP

Raw Material Supply to Production Department

28

IMPORTANCE OF WORKING CAPITAL Working capital is the lifeblood and never center of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital is as follows: 1. Solvency of the business: Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

2. Goodwill: Sufficient working capital enables a business concern to make prompt payments and helps in creating and maintaining goodwill.

3. Cash discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces the costs.

4. Regular supply of raw material: Sufficient working capital ensures regular supply of raw materials and continuous production.

5. Regular payments of day – to – day activity: Working capital can make regular payments of salaries, wages and other day – to – day a commitment, which raises the morale of its employees, increases their efficiently, reduces wastages and costs and enhances production and profits.

6. Exploitation of favorable market conditions: Only concerns with adequate working capital can exploit favorable market condition such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices. 29

FACTORS DETERMINING THE WORKING CAPITAL The working capital requirements of concern depend upon a large number of factors such as 1.

Nature of business:

The Working Capital requirements of a firm basically depend upon the nature of its business. Public utility undertakings like Electricity, Water Supply and Railways need very limited working capital because they offer cash sales only and supply services, not products, and as such no funds are tied up in inventories and receivables. On the other hand, trading and financial firms require less investment in fixed assets but have to invest large amounts in current assets like inventories, receivables and cash; as such they need large amount of working capital. 2. Size of business / Scale of operation: The scale of operations directly influences the working capital requirements of concern. Greater the size of a business unit, generally large will be the requirements of working capital. However, in some cases even a smaller concern may need more working capital due to high overhead charges, inefficient use of available sources and other economic advantages of small size.

3. Production Policy:

In certain industries the demand is subject to wide fluctuations due to seasonal variations. The requirements of working capital, in such cases, depend upon the production policy. The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak seasons or the production could be curtailed during slack season and increased during peak period. If the policy is to keep production steady by accumulating inventories it will require higher working capital.

30

4. Manufacturing process / Length of production cycle:

In manufacturing business, the requirements of working capital increases in direct proportion to length of manufacturing process. Longer the process of manufacture, larger is the amount of working capital required.

5. Credit Policy:

The credit policy of a concern in its dealing with debtors and creditors influence considerably the requirement of working capital.A concern that purchases its requirements on credit and sells its products / services on cash requirement lesser amount of working capital. On the other hand, a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of working capital as very huge amount of funds are bound to be tied up in debtors of bills receivables.

Both credit policies of customer and vendor change from customer to customer and from vendor to vendor depending on relation with company.

31

CHAPTER 4 DATA INTERPRETATIONS

32

ANALYSIS OF OPERATING CYCLE OPERATING CYCLE In case of the Century Textile & Industries Limited, nearly 42% of the Current Assets consist of inventory. This is a major factor that affects the Working Capital of this company. This leads to increase in maintenance costs, carrying costs and storing costs. Inventory has been marginally decreased from Rs. 490.93 Lac in the year 2005-2006 to Rs. 474.37 Lac in the year 2006-2007. Therefore, efficient management of inventory will lead to substantial savings in terms of costs as well as the Working Capital required. In case of receivable management, the collection period has decreased over a period of time, which signifies that the company is providing lucrative credit facilities to their debtors. Thus, we can say that:

“It Is Easy To Turn Cash into Inventory… Challenges Is To Turn Inventory Back To Cash.”

33

OPERATING CYCLE

The time lag between the purchases of raw materials and the collection of cash for sales is referred to as the Operating Cycle for the company. The time lag between the payment for raw materials purchases and the collection of cash from sales is referred to as the Cash Cycle.

CALCULATION OF NET OPERATING CYCLE: 1) Raw Material Holding Period

Raw Material =

Average Inventory

Holding Period

Annual Cost of Good Sold

* 365

Rs. In Lac Particular

2014-15

2015-16

2016-17

Avg. Inventory

456.04

466.75

482.65

Cost of good sold

2218.99

2319.51

2518.45

Raw Material

75 days

73 days

Holding Period

34

70 days

75 74 73 72 RM Holding Period

71 70 69 68 67 2014-15

2015-16

2016-17

Interpretation: The raw material holding period is showing decreasing trend as the average Inventory and annual cost of goods sold is continuously increasing from the year 2014-15 to 2016-17 As raw material holding period decreases, the requirement of working capital is low.

35

2) Finished Goods Holding Period

FG Holding Period

=

Average FG

* 365

Sales Rs. In Lac Particular

2014-15

2015-16

2016-17

Avg. FG

108.78

102.41

101.35

Sales

2441.47

2578.27

3140.16

Finished Goods

16 Days

14 Days

12 Days

Holding Period

16 14

12 10 8

FG Holding Peiod

6 4 2 0 2014-15

2015-16

2016-17

36

Interpretation: The Finished goods holding period is inversely proportional to ratio average finished goods to sales. So, when the finished goods cost decreases and sales increases then the finished goods holding period will also decrease. As finished goods holding period increases, the requirement of working capital is high.

3) Debtors Collection Period

Debtors Collection

=

Average Debtors

Period

* 365

Sales

Rs. In Lac Particular

2014-15

2015-16

2016-17

Avg. Debtors

208.51

188.04

182.59

Sales

2789.12

2962.37

3506.31

Debtors Collection

27 Days

23 Days

Period

37

19 Days

30 25 20 15

Receivable Holding Period

10 5 0 2014-15

2015-16

2016-17

Interpretation: Debtors Collection Period is inversely proportional to the sales. So, when sale will increase, the receivable holding period will decrease. As debtors’ collection period decreases, the requirement of working capital is low. 4) Gross Operating Cycle

Gross Operating Cycle = Raw Material Holding Period + Finished Goods Holding Period + Debtors Collection Period

38

Particular

2014-15

2015-16

2016-17

Raw Material

75 Days

73 Days

70 Days

16 Days

14 Days

12 Days

27 Days

23 Days

19 Days

118 Days

110 Days

Holding Period Finished Goods Holding Period Debtors Collection Period Gross Operating Cycle

101 Days

120 115 110 105

Gross Operating Cycle

100 95 90 2014-15

2015-16

2016-17

Interpretation: The gross operating cycle is directly proportional to the Raw material holding period, finished goods holding period and Receivables holding period. As the cost of goods sold and 39

sale increases, the Raw material holding period, finished goods holding period and Receivables holding period decreases. As a result of that the gross operating cycle also decreases. As gross operating period decreases, the requirement of working capital is low. 5) Payment Deferral (Creditors) Period

Creditors Period = Average Creditors

* 365

Purchases Particular

2014-15

Creditors Period

45 Days

2015-16 45 Days

2016-17 45Days

45 40 35 30 25 Creditors Period

20 15 10 5 0 2014-15

2015-16

2016-17

Interpretation: The company’s creditor’s period is constant i.e. for the last three years i.e. from the year 2014-15 to 2016-17. As creditor’s period is constant, the requirement of working capital will also remain same in all the three years.

40

6) Net Operating Cycle Net Operating Cycle = Gross Operating Cycle – Creditors Period

Particular

2014-15

2015-16

2016-17

Gross Operating Cycle

118 Days

110 Days

101 Days

Creditors Period

45 Days

45 Days

45 Days

Net Operating Cycle

73 Days

65 Days

56 Days

80 70 60 50 40

Net Operating Cycle

30 20 10 0 2014-15

2015-16

2016-17

Interpretation: The gross operating period will decrease by increase in cost of goods sold and sale. As a result of that the Net Operating Cycle will decrease. As net operating cycle decreases, the requirement of working capital is low. 41

ANALYSIS OF NET WORKING CAPITAL 1) Current Assets: Current Assets are which can be converted into cash within an accounting year. Rs. In Lac Particulars

2014-15

2015-16

2016-17

Inventories

442.56

490.93

474.37

Sundry Debtors

207.80

168.28

196.90

Cash & Bank Balance

31.09

38.35

139.19

Other CAs

3.74

4.41

6.03

Loans & Advances

200.05

313.61

319.46

Total

885.24

1015.58

1135.95

TABLE SHOWING THE PROPORTION OF CURRENT ASSETS

Particulars

2014-15

2015-16

2016-17

Raw Material

17.28

16.84

11.28

WIP

8.41

6.43

5.70

Finished Goods

11.86

13.05

10.90

Others

12.45

12.01

13.88

Inventories

42

Total Inventories

50

48.33

41.76

Sundry Debtors

23.47

16.57

17.33

Cash & Bank Balance

3.51

3.78

12.26

Other CAs

0.42

0.43

0.53

Loans & Advances

22.59

30.89

28.12

Total

100

100

100

100 Loans & Advances

80

Other CA

60

Cash & Bank Balance

40

Sundry Debtors 20 Inventory 0 2014-15

2015-16

2016-17

Interpretation:  In the year 2014-15, the investment in inventories, work in progress, finished goods, other inventories, sundry debtors, cash & bank balance, loans & advances and in other current assets are 17.28%, 8.41%, 11.86%, 12.45%, 23.47%, 3.51%, 0.42% and 22.59% respectively.  In the year 2015-16, there was increase in requirement of working capital because there was increase in fluctuation in prices. Sundry debtors decreased because cash was received within maturity period. Due to which cash and 43

bank balance was also increased and advances recoverable in cash were also increased.

 In the year 2016-17, there was increase in requirement of working capital because there was increase in fluctuation in prices. Sundry debtors decreased because cash was received within maturity period. Due to which cash and bank balance was also increased and advances recoverable in cash were also increased.

2) Current Liabilities:

Current Liabilities are those claims outsiders, which are expected to mature for payment within an accounting year. Rs. In Lac Particular

2014-15

2015-16

2016-17

Liabilities

326.84

374.09

412.85

Provisions

66.54

122.09

176.17

Total

393.38

496.18

589.02

TABLE

SHOWING THE

PROPORTION

OF

CURRENT

LIABILITIES Particular

2014-15

2015-16

2016-17

Sundry Creditors

78.54

71.07

68.94

1.38

0.39

6.42

00

Overdrawn Bank Balance as 1.40 per books Proposed Dividend

6.74 44

Other Liabilities

13.32

21.13

30.67

Total Current Liabilities

100

100

100

100 90

Other Liabilities

80 70 Proposed Dividend

60 50

40

Overdrawn Bank Balance as per books

30

20 10

Sundry Creditors

0 2014-15

2015-16

2016-17

Interpretation:  In the year 2014-15, Sundry creditors, Overdrawn Bank Balance as per books, proposed dividend and other liabilities were 78.54%, 1.40%, 6.74% and 13.32%.  In the year 2015-16, Current liabilities increased as Sundry creditors and tax provisions were increased due to increase in production.  In the year 2016-17, Current liabilities increased as Sundry creditors and tax provisions were increased due to increase in production.

45

CALCULATION OF NET WORKING CAPITAL OF SRK INDUSTRIES . Net working capital refers to the difference between current assets and current liabilities. Net Working Capital = Current Assets – Current Liabilities

Rs. In Lac Particulars

2014-15

2015-16

2016-17

Inventories

442.56

490.93

474.37

Sundry Debtors

207.80

168.28

196.90

Cash & Bank Balance

31.09

38.35

139.19

Other CAs

3.74

4.41

6.03

Loans & Advances

200.05

313.61

319.46

Total

885.24

1015.58

1135.95

Liabilities

326.84

374.09

412.85

Provisions

66.54

122.09

176.17

Total

393.38

496.18

589.02

C] Net WC

491.86

519.40

546.93

A] Current Assets

B] Current Liabilities

46

550 540 530 520 510 Net Working Capital

500 490 480 470 460 2014-15

2015-16

2016-17

Interpretation:  In the year 2014-15, net working capital were 491.86 Lac because Total current assets were 885.24 Lac due to blockage in inventory and total liabilities were 393.38 Lac.  In the year 2015-16, net working capital has increased to 519.40 Lac because total current assets have been increased to 1015.58 due to blockage in inventory and total liabilities have also increased to 496.18 Lac.

 In the year 2016-17, net working capital has increased to 546.93 Lac because total current assets have been increased to 1135.95 as in composition of current assets, cash and bank balance are more and total liabilities have also increased to 589.02 Lac.

47

COMPARISON BETWEEN SALES AND NET WORKING CAPITAL

Rs. In Lac Year

Sales

Net Working Capital

2013-14

2253.52

487.52

2014-15

2441.47

491.86

2015-16

2578.27

519.40

2016-17

3140.16

546.93

4000 3500 3000 2500

Net Working Caital

2000 Sales

1500 1000 500 0 2013-14

2014-15

2015-16

48

2016-17

Interpretation:  In the year 2014-15, as sales increases net working capital requirement also increases because investment in current assets increases in that blockage in inventories are more than others.  In the year 2015-16, as sales increases net working capital requirement also increases because investment in current assets increases in that blockage in inventory are more than others.  In the year 2016-17, as sales increases net working capital requirement also increases because investment in current assets increases in that cash and bank balance is more than others.

COMPARISON BETWEEN PROPORTION SALES AND NET WORKING CAPITAL

Year

Increase in sales (%)

Increase in net working capital (%)

2014-15

8.34

0.89

2015-16

5.6

5.6

2016-17

21.79

5.3

49

Interpretation:  Proportion of increase in sales from year 2014-15 was 8.34% and increase in net working capital was 0.89%. This is a good sign for the company as increase in sales is more as compared to increase in working capital.  In the year 2015-16, there is decrease in sales 5.6% but increase in net working capital by 5.6% which is not a good sign.  In the year 2016-17, there is increase in sales by 21.79% but decrease in net working capital by 5.3% which is a good sign for the company because there are less funds blocked in the current year. COMPARISON BETWEEN OPERATING CYCLE AND NET WORKING CAPITAL Year

Operating Cycle (Days)

Net Working Capital (Lac)

2014-15

73

491.86

2015-16

65

519.40

2016-17

56

546.93

Interpretation:  In the year 2014-15 operating cycle was 73 days and net working capital was 491.86 Lac as working capital was used more efficiently .  In the year 2015-16, operating cycle decreased to 65 days and net working capital increased to 519.40 Lac . This is because there is hike in prices in raw material that resulted into increase in working capital requirement.  In the year 2016-17, operating cycle again decreased to 56 days and net working capital is increased to 546.93 Lac. This is because there is hike in prices in raw material that resulted into increase in working capital requirement. 50

ANALYSIS OF WORKING CAPITAL WITH RATIOS

In financial statements, there are some limitations. There is need of analyzing interpretation of financial statements. This is necessary to find out realistic picture of business and to analyze the business from various angles like liquidity, profitability, solvency etc. The most important objective of analysis and interpretation of financial statements are to understand the strength and weakness of a business firm so as to facilitate the future prospect of the business firm. Financial ratio indicates about the financial position of the company. A company is deemed to be financially sound if it is in position to carry on its business smoothly and meet the obligations, both short term as well as long term requirement of funds. Ratio analysis techniques are of great help in analyzing the efficiency of financial operations. It gives at a glance comparative study of the firm of various years. This ratio is very useful in inert-firm and intra-firm comparison. Accounting ratios are of great assistance in locating the weak spot in the business. Ratio analysis of working capital helps the management in checking upon the efficiency with which the working capital is being used in business. The analysis of working capital can be done with the help of following ratios: 1) Current Ratio 2) Acid Test Ratio 3) Working Capital Turnover Ratio 4) Inventory Turnover Ratio 5) Debtors Turnover Ratio 6) Creditors Turnover Ratio 7) Operating Profit Margin Ratio

1) Current Ratio:

This is a current asset to current liabilities ratio. A higher current assets ratio indicates that there are sufficient assets available with the organization, which can be converted in the form of Cash. As such higher is the current ratio, better is the situation. A current ratio of 2:1 is supposed to be ideal. 51

CURRENT RATIO =

CURRENT ASSETS CURRENT LIABILITIES Rs. In Lac

Year

Current Assets

Current Liabilities

Ratio

2014-15

885.24

393.38

2.25:1

2015-16

1015.58

496.18

2.05:1

2016-17

1135.95

589.02

1.93:1

2.25 2.2 2.15 2.1 2.05 2

Current Ratio

1.95 1.9 1.85 1.8 1.75

Interpretation: Ideally 2:1 is considered satisfactory. Srk industries ratios are 2.25, 2.05 and 1.93 for the year 2014-15 to 2016-17 respectively. It is not considered as benchmark as it differs from industry to industry. Based on industry standard, Srk industries’s current ratio is below 2. It indicates current liabilities have increase more than the increase in current assets.

52

2) Acid Test Ratio:

This is also known as Quick Ratio. When paying capacity of assets of a going concern is to be tested for their ability to meet short – term obligation. Standard ratio is 1:1. Acid Test Ratio =

Quick Assets Current Liabilities

Quick Assets = Current Assets – Inventories Rs. In Lac Year

Current

Inventories

Assets

Quick

Current

Assets

Liabilities

Ratio

2014-15

885.24

442.56

442.68

393.38

1.13:1

2015-16

1015.58

490.93

524.31

496.18

1.06:1

2016-17

1135.95

474.37

661.58

589.02

1.12:1

1.14 1.12 1.1 1.08

Acid Test Ratio

1.06 1.04 1.02 2014-15

2015-16

2016-17

53

Interpretation: This ratio should ideally be 1:1. When the ratio goes below 1, it is a danger sign. So, this ratio must be minimum 1. Above table shows company’s Quick assets are sufficient to meet its current liabilities. In the year 2014-15 has decreased to 1.06 but in the year 2016-17, it has increased to 1.12.

3) Working Capital Turnover Ratio:

This is a sale to working capital ratio. The turnover ratio should be stable if not increasing over time. On the contrary if it is falling, it indicates longer build up current assets or fall in level of current liabilities or both. Whatever may be the reason, the demand for fund will rise, the non – availability of which may lead to default in payment.

Working Capital =

Net Sales

Turnover Ratio Net working capital

Rs. In Lac Year

Current

Current

Net

Assets

Liabilities

Working

Net Sales

Ratio

Capital 2014-15

885.24

393.38

491.86

2441.47

4.96

2015-16

1015.58

496.18

519.40

2578.27

4.96

2016-17

1135.95

589.02

546.93

3140.16

5.74

54

5.8 5.6 5.4 5.2 Working Capital Turnover Ratio

5 4.8 4.6 4.4 2014-15

2015-16

2016-17

Interpretation:

It indicates how efficiently the company is employing its working capital. A higher working capital turnover indicates that with less working capital, company is able to sell more. In Srk industries this ratio was 4.96 in 2014-15 and now for the year 2016-17 it is 5.74. It clearly indicates better utilization of working capital.

55

4) Inventory Turnover Ratio:

This indicates many times finished goods stock is moving. Lower ratio indicates less demand for finished goods and vice – versa.

Inventory Turnover =

Cost of goods sold

Ratio Average Stock

Average Stock =

Opening Stock + Closing Stock

2

Rs. In Lac Year

Cost

of Opening

Closing

Average

Ratio

goods sold

Stock

Stock

Stock

2014-15

2219.69

469.52

442.56

456.04

4.87

2015-16

2303.60

442.56

490.93

466.75

4.94

2016-17

2518.45

490.93

474.37

482.65

5.22

56

5.3 5.2 5.1 5 Inventory Turnover Ratio

4.9 4.8 4.7 4.6 2014-15

2015-16

2016-17

Interpretation: This ratio display efficiency of the firm in selling its products. SRK Industries. Inventory turnover ratio was 4.87 in 2011-12 and now in 2013-14, it s 5.22, which is good sign and has directly contributed to the profitability of the firm, which is reflected in improved profit margins.

5) Debtors Turnover Ratio This is a sale to debtor’s ratio. If sales are regarded as the growth variable of a business, receivable is the first constraints to such variable. Hence, high debtor’s turnover ratio indicates less percentage of debtors.

Debtors Turnover Ratio =

Sales

Debtors 57

Rs. In Lac Year

Sales

Debtors

Ratio

2014-15

2789.12

207.80

13.42

2015-16

2962.37

168.28

17.60

2016-17

3506.31

196.90

17.81

18 16 14

12 10 Debtors Turnover Ratio

8 6 4 2 0 2014-15

2015-16

2016-17

Interpretation:

Every company sells goods on credit. The credit period may differ from debtor to debtor. This ratio indicates how many days credit is given to debtors. Higher ratio indicates efficiency in collection from debtors. Srk industries Debtors turnover ratio shows increasing trends which indicate that the company has been able to collect its debtors faster. 58

6) Creditors Turnover Ratio:

The measurement of the creditor turnover period shows the average time taken to pay for goods and services purchases by the company. In general the longer the period achieved the better because a delay in payment means that supplier, which, if they are operating in a seller’s market, may harm the company, is financing the operation of the company. If too longer period is taken to pay creditors, the credit rating of the company may suffer. Thereby making it more difficult to obtain suppliers in future.

Creditors Turnover Ratio =

Credit Purchases

Creditors

Rs. In Lac Year

Purchases

Creditors

Ratio

2014-15

567.68

308.99

1.83

2015-16

600.58

352.63

1.70

2016-17

606.70

406.09

1.50

59

2

1.8 1.6 1.4 1.2 1

Creditors Turnover Ratio

0.8 0.6 0.4 0.2 0

2014-15

2015-16

2016-17

Interpretation:

This ratio shows the speed with which payments are made to the suppliers for purchases made to them. Srk industries creditors’ turnover ratio is decreased from 1.83 to 1.50 in 2016-17. It means that the trade creditors are being paid promptly.

7) Operating Profit Margin Ratio:

This ratio shows what is profit margin. It is calculated to divide EBIT by Sales. EBIT stands for Earning before Interest and Tax.

Operating Profit Margin Ratio =

EBIT

Sales

60

Rs. In Lac Year

EBIT

Sales

Ratio

2014-15

177.92

2789.12

0.06

2015-16

244.69

2962.37

0.08

2016-17

421.56

3506.31

0.12

0.1

0.09 0.08 0.07 0.06 0.05

Profit Margin Ratio

0.04 0.03 0.02 0.01 0 2014-15

2015-16

2016-17

Interpretation:

This ratio shows what the ratio of EBIT on sales is. In Srk industries operating profit margin ratios are 0.05, 0.07 and 0.10 for the year 2014-15 to 2016-17 respectively. As current assets increases, working capital requirement also increases. Moreover sales increases, the operating profit margin ratio also increases. Also current assets of the company were sourced from short term funds, so risk increased and as a result profit margin also increased.

61

FINANCING PATTERN

The basic objective of working capital management is that there should be an optimum investment in working capital. There should not be either excessive working capital or shortage of working capital. In order to decide the optimum investment in working capital, there is need to consider different policies of working capital. The different policies are: There are three broad policy options i.e. a) Conservative current assets financing policy b) An aggressive current asset financing policy c) Moderate current assets financing policy In conservative current asset financing policy, a firm relies more on long term financing such as shares, debentures, preference shares, long term debt and retained earnings. In this method, as the emphasis is on long term financing, the firm has less risk of facing problems of shortage of funds. An aggressive policy is said to be followed by a firm, when it relies heavily on short term bank financing and other short term sources. Even some part of fixed assets is financed by short term funds. The policy exposes the firm to a higher degree of risk but reduces the average cost of financing. Consecutive current assets financing policy reduces the risk but has a higher cost of financing. There is one more way which is called as hedging approach. In this approach long term sources are used for financing fixed assets and permanent current assets while short term funds are funds used for financing temporary or variable current assets. However exact matching is not possible because of the uncertainty about the expected lives of the assets. The different approaches explained above are shown in the following diagrams.

62

Short term Aggressive

funds

Approach Permanent CA Long term Fixed Assets

funds

Time

Short term Funds Conservative Approach Permanent CA Long term Fixed Assets

funds

Time 63

Short term Funds Hedging Approach Permanent CA Long term Fixed Assets

funds

Time

64

TABLE SHOWING PROPORTION OF SHORT TERM AND LONG TERM FUNDS Rs. In Lac Year

2014-15

2015-16

2016-17

Current Assets

885.24

1015.58

1135.95

Current Liabilities

393.38

496.18

589.02

Long term funds

491.86

519.40

546.93

Long term funds (%)

55.56%

51.14%

48.15%

Short term funds (%)

44.44%

48.86%

51.85%

Interpretation:  In 2014-15, company followed conservative policy as current assets were sourced from long term funds.  In 2015-16, company followed conservative policy as current assets were sourced from long term funds.  In 2016-17, company followed aggressive policy as current assets were sourced from short term funds.

65

CHAPTER 5 FINDINGS

66

5.1 Findings 1) FACTORS AFFECTING WORKING CAPITAL  The working capital requirement of the company is mainly affected by size of the company.  Working capital requirement of Srk industries has increased every year because of there was hike in prices.  The major element of working capital of the company is debtors, creditors and stock. 2) OPERATING CYCLE  The NET OPERATING PERIOD is showing decreasing trend.  The optimum utilization of inventory Reduces the average inventory cost, and optimum sales will Increase the annual cost of goods sold, which reduces the cost of holding goods.  The net operating cycle is continuously decreasing but the requirement of net working capital increasing as there was hike in prices. 3) WORKING CAPITAL WITH ITS RATIOS  The working capital requirement of the company is showing increasing trend.  Based on industry standard, Srk industries current ratio is below 2. It indicates current liabilities have increase more than the increase in current assets.  Srk industries is maintaining quick ratio greater than 1. Hence, the short – term liquidity position of company is strong. It indicates good repayment capacity of current liabilities. Company is investing more amounts in Liquid assets, thus improving its short – term liquidity position.  A higher working capital turnover indicates that with less working capital, company is able to sell more.

67

4) FINANCING PATTERN  The company follows aggressive policy as current assets were sourced from short term funds which helped to increase in profit.

68

5.2 SUGGESTIONS  The company should try to keep the net operating cycle period low by minimizing raw material holding period, finished goods holding period and debtors turnover ratio.  Currently, Current Ratio of Srk industries is 1.93 which is as good as standard. Company should take measures so that its Current Ratio is maintained and it’s not too below from standard by increasing current assets.  Srk industries has its quick ratio more than standard ratio. This is because current assets have increased so company should try to reduce inventories.

 Srk industries used aggressive policy, so company is earning more profit at the cost of higher risk. So company should be cautious while taking risk.

69

5.3 CONCLUSION

Thus, to conclude through the project study it is clear that management of working capital is an essential task of financial management. The management must be such that company should not have excessive funds, which may be lying idle, nor should it have fewer funds, which may result in bottleneck during production. Thus, it is the duty of Finance Department to estimate proper working capital requirements in the organizations and utilize the funds in the best optimal manner.

Thus it can be stated that management of working capital could enable the organization to reap the benefits as and when they come and thus, also enable the organization to consolidate its position in the market.

A good working capital management would improve the organization’s sales, profit, and liquidity position and mind share of the consumers.

70

5.4 Bibliography Ref Books: 

Research Methodology- R.C. Kothari.



Research Methods In Business- Dhruv Shah, Rupal Jain.



Research Methodology- Michal Vaz, Madhu Nair.



Financial Management – Prasanna Chandra.

Journals: 

CAMS Journal of Business Studies and Research ISSN : 0975-7953 JulySeptember



Asian Journal of Management Research Volume 4 Issue 2, 2014



International Journal of Economics and Financial Issues, Vol. 2, No. 4, 2012, pp.488-495



Proceedings of the 3rd International Conference on Management and Economics (ICME 2014)

Annual Reports: 

SRK industries Annual Report from 2015-16 to 2016-17

Websites: 

www.google.com



www.wikipedia.com



www.fm-magazine.com



www.accountingtools.com



www.varshagroup.net

71