Impact of Current Asset On Workng Cap

Impact of Current Assets on Working Capital.
AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Contents
Sl. No. I Chapter 1 Introduction
Titles
Page No. 3 37 39 39 39 40
Literature Review Statement of the Problem Purpose of the Study Scope of the study Objectives of the Study II Chapter 2 Organization Profile Organization Chart Data Collection Method III Chapter 3 Results & discussion with Charts & graphs Findings Suggestions Conclusions IV Chapter 4 Appendix Bibliography Joining Report Weekly Reports
41 50 52
53 77 78 79
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)
Introduction: -
The project is assigned to me Impact of Current Assets on Working Capital. At Oilgear Towler Polyhydron Private Limited (OTPL). The various information regarding classification, determinants, components, sources, arrangement operating cycle have been also discussed and aspects relating to the perspective of Oilgear Towler Polyhydron Private Limited (OTPL).
Ratio Analysis has been carried out using Financial Information for last three accounting years i.e. from 2003 to 2005; Ratios like Current Ratio, Working Capital Turnover Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio have also been analyzed. A Statement of Changes in Working Capital has also been analyzed and attached Turnover & Performance of the Company for last three years has also been analyzed.
Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) MEANING & DEFINITION OF WORKING CAPITAL: -
Working capital in simple terms is the amount of funds, which a company, must have to finance its day-to-day operation, it can be regarded as part/portion of capital, which is, employed in short operation. Every organization invests their funds in two terms of capital namely, 1. Fixed Capital. 2. Working Capital
The amount invested in the assets like Plant and Machinery, Building, Furniture etc, blocked on permanent basis and is called Fixed Capital Organization not only requires Fixed Capital, but also need of fund to meet day to day operations for short term purpose, such funds is called Working Capital.
A Study of Working Capital is of major part of the external and internal analysis because of its close relationship with the current day to day operation of business. Working Capital consists broadly for that position/the assets of a business that are used at related current operations and is represented by raw materials, stores, work in process and finished goods merchandise, note/bill receivable.
Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Definition of Working Capital: -
Genestenberg: -
Working Capital means Current Assets of a company that are changed in the ordinary course of business, from one to another, for ex, from cash to inventories, inventories to receivable, receivable to cash.
Gathman & Dug wall: -
Working Capital as excess of current assets over current liabilities.
Westen & Brigham: -
Working capital refers to a term investment in short term assets cash, short term securities accounts receivables and inventories.
J. Smith: -
The Sum of the current assets is the working capital of the business.
WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.
Working capital cycle: Introduction The working capital cycle can be defined as: The period of time, which elapses between the point at which, cash begins to be expended on the production of a product and the collection of cash from a customer The diagram below illustrates the working capital cycle for a manufacturing firm
The upper portion of the diagram above shows in a simplified form the chain of events in a manufacturing firm. Each of the boxes in the upper part of the diagram can be seen as a tank through which funds flow. These tanks, which are concerned with day-today activities, have funds constantly flowing into and out of them. The chain starts with the firm buying raw materials on credit. In due course this stock will be used in production, work will be carried out on the stock, and it will become part of the firms work in progress (WIP) Work will continue on the WIP until it eventually emerges as the finished product
As production progresses, labor costs and overheads will need to be met
Of course at some stage trade creditors will need to be paid
When the finished goods are sold on credit, debtors are increased
They will eventually pay, so that cash will be injected into the firm Each of the areas stocks (raw materials, work in progress and finished goods), trade debtors, cash (positive or negative) and trade creditors can be viewed as tanks into and from which funds flow. Working capital is clearly not the only aspect of a business that affects the amount of cash:
Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) The business will have to make payments to government for taxation Fixed assets will be purchased and sold
Lessors of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form of Some shares may be redeemed for cash
cash
Dividends may be paid
Long-term loan creditors (existing or new) may provide loan finance, loans will need to be repaid from time to time, and Interest obligations will have to be met by the business. Unlike movements in the working capital items, most of these non-working capital cash transactions are not everyday events. Some of them are annual events (e.g. tax payments, lease payments, dividends, interest and, possibly, fixed asset purchases and sales). Others (e.g. new equity and loan finance and redemption of old equity and loan finance) would typically be rarer events.
COMPONENTS OF WORKING CAPITAL

There are two components of Working Capital A. Current Assets B. Current Liabilities
A. Current Assets An asset is termed as current assets when it is acquired either for the purpose of selling or disposing of after taking some required benefit through the process of manufacturing of which constantly changes in form and contributes to transactions take place with the operation of the business although such assets does continue for long in the same form. Components of Current Assets are as follows: Cash & Bank Balance Stock of Raw Material at cost- work in process and Finished Goods. Advanced Recoverable in Cash or kind or kind or for value to be received. Security deposits with electricity board-telephone department balances with customers. Babasabpatilfreepptmba.com 10
Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Deposits under the company scheme. Prepaid Expenses. Miscellaneous Stores implements goods in transit. Advanced payment of income takes credit certificates. Excise duty and sales tax recoverable. Outstanding debts for a period exceeding six months. CO-RELATION BETWEEN CURRENT ASSETS AND WORKING CAPITAL
The working capital is in simple terms is the amount of funds which company must have to finance its day-to-day operations. The interaction between current assets and current liability is main theme of theory of working capital. In general terms working capital means difference between current assets and current liabilities.
The current assets are main source of working capital. It refers to those assets, which can be converted into cash within a year. The current assets are inventories, cash and bank balance, sundry debtors, loans and advances etc
Current asset management is one the most important aspect of the overall financial management. The efficient management of working capital can determine its profitability skill of every financial manager lies in the efficient management requires maintaining proper relationship between current asset and current liability. Therefore, planning and control of current asset is he most important function of finance manager.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) A study of working of working capital is major part of external and internal analysis. Because, of its close relationship with current day-to-day operations of business. Working capital consists broadly the assets of business that are used at current operations which was represented by raw materials, stores, WIP, and finished goods, merchandise, bills receivable. Etc.
Characteristics of Current Assets
While managing the working capital bear in mind of two characteristics of Current assets. 1. Short life span. 2. Swift transformation into other assets forms.
Current assets a life span, cash balance may be held idle for a week or two accounts receivable may have life span of 32 to 60 days and inventories may be need for 2 to 60 days. It s depends upon time require in the activities of procurement of, production, sales and collection, and the degree of synchronization among them.
Each Current Assets swiftly transform into other asset cash is used for requiring raw materials: raw material are transform in to finished goods, finished goods are generally sold on credit are convertible into account receivable and finally accounts receivable on realization, generate cash.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) The short life span of working capital component and they swift transformation from one from to another has certain implication.
CURRENT ASSETS CYCLE
Finished Goods
A\C Receivable
WIP
Wages / Factory overhead
Raw Materials
Cash
Suppliers
1.
Decisions relating to working capital management are repetitive and frequent.
2. The difference between profit and present value is insignificant.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 3. The close interaction among working capital components implies that efficient management one component cannot undertake without simultaneous consideration of other components.
Working capital means assets of the company that are changed in the ordinary capital of business term to another. For ex, from another as for as from cash to inventories, inventories to debtors and again debtors in to cash where it is collected. Working capital refers to a term investment in short term assets cash; short-term securities account receivable and inventories. Current asset management that affects a firm liquidity is at another important finance function. In addition to the management of long-term assets, Current assets should be managed efficiently for safe guarding the firm against the dangerous of liquidity and insolvency. Investment in Current Assets affects the firm profitability, liquidity and risk.
Current Liabilities: Components of Current Liabilities are as follows: Non-Refundable non-interest bearing advances against subscription to shares. Sundry Creditors for the goods and expenses. Income tax deducted at sources from contractors. Expenses Payable.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Amount due to promoter of company. Unclaimed Dividend. Security Deposits. Dealers Deposits. Liabilities for bills discounted.
IMPORTANCE OF WORKING CAPITAL: -
Working Capital is most important in every organization whether it is a small or big concern. Therefore it is said that, working capital is the blood and center at a business. 1. Adequately Working Capital creates certainty, security and confidence in the minds of the person in the might as well in the minds of creditors and workers. 2. It creates a good credit standing for the firm because credit standing depends upon the ability to pay promptly. A company with adequate working capital is always able to meet C.L. in time. 3. It ensure solvency and stability of the enterprise it also ensures continuity in production and sales. 4. It enables the company to take advantage of cash discount allowed by the suppliers of raw materials or merchandise. 5. It enables the prestige of the company and the morale of its workers because a company with adequately working capital is always able to pay wages and salaries promptly and regularly.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 6. It enables the company to procure loans terms banks on easy and competitive terms. 7. In terms of boon it enables the company to meet increasing demand of its product. 8. In the time of depression, it enables the company to overcome the crises successfully. 9. It enables the company to hold up inventory and wait for better marketing opportunities so as to secure higher prices. 10. It enable the company on its business successfully and achieve progress and prosperity,
METHODS OF ESTIMATING WORKING CAPITAL: Conventional Method: According to the conventional method, cash inflows and outflows are matched with each other. Greater emphasis is laid on liquidity and greater importance is attached to current ratio, liquidity ratio, etc., which pertain to the liquidity of a business.
Operating cycle method: In order to understand what gives rise to differences in the amount of timing of cash flows, we should first know the length of time which is required to convert cash into resources, resources into final product, the final product into receivables and receivables back into cash. Babasabpatilfreepptmba.com 16
CLASSIFICATION OF WORKING CAPITAL
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A. On the basics of Concept (a) Net Working Capital: This is the difference between current assets and current liabilities. Current Liabilities are those that are expected to mature within an accounting year and include creditors, bills payable and outstanding expenses. Investment is current assets represent a very significant portion of the total investment in assets. In case of public limited companies in India, current assets
constitute around 60% of the total capital employed. Therefore the finance manager should attention to working capital management. Working Capital Management is no doubt significant for all firms, but its significance is enhanced in cases of small firms. A small firm has more investment in current assets than fixed assets and therefore current assets should be efficiently managed. The working capital needs increase as the firm grows. As sales grow, the firm needs to invest more in debtors and inventories. The finance manager should be aware of such needs and finance them quickly. Current Assets can be finance through long-term and short-term sources. The ratio of long-term to short-term source will depend on whether the firm is aggressive of
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) conservative. It the firm is aggressive then it will finance a part of its permanent current assets with short-term funds. On the other hand, a conservative firm will finance its permanent assets and also a part of temporary current assets with long-term financing.
(b) Gross Working Capital This refers to the firms investment in current assets. Current Assets are the assets which can be converted into cash within a short period say, an accounting year. Current assets include cash, debtors, and bill receivable, short-term securities. etc.
A. On the basis of Time a. Permanent Working Capital Permanent Working Capital is permanently locked up in the circulation of current assets. It covers the minimum amount requested for maintaining the circulation of current assets.
i. Initial Working Capital At its inception and during the formative period of its operations a company must have enough cash fund to meet its obligations. The need for initial working capital is for every company to consolidate its position.
ii. Regular Working Capital
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) It refers to the minimum amount of liquid capital required to keep up the circulation of the capital from the cash inventories to account receivable and from account receivables to back again cash. It consists of adequate cash balance on hand and at bank, adequate stock of raw materials and finished goods and amount of receivables.
b. Variable Working Capital It refers to the past of the Working Capital that changes with the volume of business; it may be divided into two classes.
i. Seasonal Working Capital There is many line of business where the volumes of operations are different and hence the amount of working capital varies with seasons. The capital required to meet the seasonal needs of the enterprise knows as Seasonal Working Capital.
ii. Special Working Capital The capital required to meet any special operations such as experiments with new products or new techniques of production and making interior advertising campaign etc, is also know as Special Working Capital.
B. Other Determinants of Working Capital
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) In order to manage the Working Capital optimally; on has to give due consideration to the factors that influence the amount of Working Capital to be maintained.
SOURCES OF WORKING CAPITAL: -
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1. Long Term Sources of Working Capital: The following are the some important of the long term sources of working capital.
A. Issue of Shares: Issuing shares can finance a part of long-term working capital.
B. Issue of Debenture: Long Term Working Capital can be collected by the way of issuing the debentures.
C. Retained Profits: Accumulated large profit can also consider as a source of financing the long-term capital.
D. Term Loans: - The mid and term loan above three year are also important source of financing the long term working capital needs.
E. Reserves and Surplus: -These are also useful for financing long-term working capital.
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SHORT TERM SOURCES OF WORKING CAPITAL: Duration for this generally do not exceeds one year. Its sources are
INTERNAL SHORT TERM SOURCES
1. Depreciation Funds: Depreciation Funds created out of the profit is good source for short-term source of financing working capital.
2. Provision for Taxation: Provision made for the companies, can use taxation as a source of working capital during the intermediate period.
3. Accrued Expenses:
The company executives postpone the payment of certain
expenditures due the date of finalization of account. These accrued expenses are useful as working capital
EXTERNAL SHORT TERM SOURCES.
1. Trade Credit: Trade Credits extended by one business unit to the other on the purchase sale of goods and equipments are very important.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 2. Bank Credit: - Commercial banks are providing a greater part of working capital in the form of over drafts cash credit and short-term loans.
3. Credit Papers: - Bills Payable, promissory notes etc are usefully for working capital requirements.
4. Customer Credit: Amount may also be obtained from customer and these amounts can be used for purchasing raw materials, paying expenses etc.
5. Financial Corporation: The financial corporation likes IDBI, IFCI, ICICI, etc, advances loans for various types of assistance.
6. Government Assistance: State and Central Government, of the country provide short-term finance industries on easy terms.
7. Loan from Directors: - One enterprise can also obtain loan from its directors, officers, M.D. etc
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EFFICIENT UTILIZATION OF WORKING CAPITAL MANAGEMENT
Well working capital management refers to the administration of all aspects of the current assets and liabilities. It is necessary to get maximum benefit. There is a direct relation between sale and working capital needs. As sale grows the firm needs capital to invest in inventories and book debts.
A) Cash Management: -
Cash is required to meet the firms transactions and precautionary needs. The firm needs cash to make payments for acquisition of resources and services, for the normal consist of the business. It keeps addition funds to meet any emergency situation. Cash Management involves three things. Managing cash flow in and out of the firm. Managing cash flow within the firm. Financing deficit or investing surplus cash. And thus controlling of cash balance at the point of time.
B) Inventory Management: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Inventories play very significant role in working capital. It is single most sizable investment in working material, indigenous raw material, spares, stock, tools, the maintenance, and goods in progress, stock of packing materials, stationary etc. To manage inventories efficiently and effectively answer should be sought from the following questions. How much should be ordered? When should be ordered? The aim of inventory management thus should be to avoid excessive and inadequate levels of inventories and to maintain sufficient inventories for the smooth production and sales operation.
C) Management of Receivables: -
Business firm generally sell goods on credit to facilitate sales. When goods are sold on credit finished goods are converted into receivable. Receivable when realized generate cash for forecasting standard ratio of accounts receivables based on analysis of part data of two years. Recessions analysis and making may be appeared.
D) Operating Cycle: Operating Cycle refers to length of time required to complete the series of events as stated below in case of manufacturing enterprise, which is cyclical in nature. For a manufacturing firm, cash is spent on acquiring raw materials, which are transformed in to work in progress. The work in progress is then converted in to finished
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) goods. Finished goods take the form sales, which may be credit or cash. Credit sales convert in to sundry debtors, bills receivables, which after some time, gets converted in to cash. This cycle repeats. OPERATING CYCLE OF MANUFACTURING COMPANY
Cash
Debtors / BR Sales of goods
Raw Materials Work in Progress
Finished Goods
IMPORTANCE OF OPERATING CYCLE Operating cycle concept is a new concept in working capital management, which has been gaining more and more importance in recent years. This concept emphasizes the importance of time factors in the conversion of raw materials into final product and then in to sales resulting in cash collection, right from the acquisition of raw materials, normally operating cycle passes through the following stages.
1. Acquisition of raw materials. 2. Work in Progress.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 3. Stock of finished goods. 4. Sale and realization of sales proceeds.
Operating cycle concept plays an important role in determining the working capital requirement of firm. Duration of manufacturing process right from the acquisition of raw materials till they are sole out after being converted into final products and the cash is realized determines the amount of working capital required. Longer the operating cycle greater will be the amount of working capital required and shortest operating cycle requires limited amount of working capital. Therefore, an efficient management should try to reduce the time elapsed in these consecutive stages in operating cycle.
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DETERMINANTS OF WORKING CAPITAL: A firm should plan its operations in such a way that it should have neither too much not too of little working capital. The working capital requirement is determined by a wide variety of factors. These factors, however, affect different enterprise differently. They also vary from time to time. In general, the following factors are involved in a proper assessment of the quantum of working capital required. The following are the some important determinants of working capital
1. General Nature of Business The working capital requirements of an enterprise are basically related to the conduct of business. Enterprise falls in to some broad categories depending on the nature of their business. For instance, public utilities have certain features which have a bearing on their working capital needs. The two relevant features are, 1. The cash nature of business, that is, cash sale. 2. Sale of services rather than commodities. In a view of these features, they do not maintain big inventories and have, financial enterprise. The nature of their business is such that they have to maintain a sufficient amount of cash, inventories, and book debts.
2. Production Cycle
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Another factors which have a bearing on the quantum of working capital is the production cycle. The term Production or manufacturing cycle refer to the time
involved in the manufacture of goods. It covers the time-span between the procurement of finished goods. Funds have to be necessarily tied up during the process of manufacture, necessitating enhanced working capital. In other words, there is some time gap before raw material becomes finished goods. To sustain such activities the need for working capital is obvious. The longer the time span (i.e. Production Cycle), the larger will be the tied up fund and, therefore, the larger is the working capital needed and viceversa.
3. Business Cycle The working capital requirements are also determined by the nature of business cycle. Business fluctuations lead to cyclical and seasonal changes, which, in turn, cause a shift in the working capital position, particularly for temporary working capital requirement. The variations in business condition may be in two directions, 1. Upward Phase: - When boom conditions prevail, 2. Downswing Phase: - When economic activity is marked by a decline. During the upswing of business activity, the need for working capital is likely to grow to cover the lag between increased sales and receipt of cash as well as to finance purchase of additional material to cater to the expansion of the level of activity.
4. Production Policy
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) The quantum of working capital is also determined by production policy. In case of certain lines of business, the demand for products is seasonal, that is, they are purchased during certain months of the year. There are two options to open to such enterprise: either they confine production only to period when goods are purchased or they follow a steady production policy throughout the year and product goods at a level to meet the peak demand. In former case, there are working force and physical facilities without adequate production and sale.
5. Credit Policy The credit policy relating to sales and purchases, also affects the working capital. The credit policy influences the requirements of working capital in two ways, 1. Through the credit terms granted by the firm to its customers/buyers of goods. 2. Credit Terms available to the firm from its creditors. 1. The credit terms granted to customers have a bearing on the magnitude of working capital by determining the level of book debts. The credit sales result in higher book debt (receivables). Higher book debts mean more working capital. On the other hand, if liberal credit terms are available from the suppliers of goods (trade creditors), the need of working capital is less. The working capital requirements of a business are, thus, affected by the terms purchase and sale, and role given to credit by company in its dealing with creditors and debtors. 2. Credit terms fixed by an enterprise are affected by the prevailing trade practices as well as changing economic conditions. If, for example, competition were keen, there would pressure to grant generous credit terms. Nevertheless, there is wide scope for
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) managerial discretion in working out a suitable credit policy relevant to each customer based on the merits of each case. For instance, liberal credit facilities can be extended on the basis of credit rating. This will avoid the problem of having excess working capital.
6. Growths and Expansion As a company grows, it is logical to expect that a larger amount of working capital is required. It is, of course, difficult to determine precisely the relationship between the growth in the volume of business of a company and the increase in its working capital. The composition of working capital in a growing company also shifts with economic circumstance and corporate practices. Other things, being equal, growth industries require more working capital than those that are static.
7. Profit Level The level of profit earned differs from enterprise to enterprise. In general, the nature of the product, hold on the market, quality of management and monopoly power would by and large determine the profit earned by a firm. A priori, it can be generalized that a firm dealing in a high quality product, having a good marketing arrangement and enjoying monopoly power in the market, is likely to earn high profit and vice-versa. Higher profit margin would improve the prospects of generating more internal funds thereby contributing to the working capital pool.
8. Dividend Policy
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Another appropriation of profit, which has a bearing on working capital, is dividend payment. The payment of dividend consumes cash resources and, thereby, affects working capital to that extent. Conversely, if the firm does not pay dividend but retains the profits, working capital increase. In theory, a firm should retain profits to preserve cash resources and, at the same time, it must pay dividends to satisfy the expectations of investors. When profits are relatively small, the choice is between retention and payment. The choice must be made after taking in to account all the relevant factors.
9. Depreciation Policy Depreciation Policy also exerts an influence on the quantum of working capital. Depreciation charges do not involve any cash outflows. The affect of depreciation policy on working capital is, therefore, indirect. In the first place, depreciation affects the tax liability and retention of profits. Depreciation is allowable expenditure in calculating net profits. Enhanced rates of depreciation lower the profits and, therefore, the tax liability and, thus, more cash profits. Higher depreciation also means lower disposable profits and, therefore, a smaller dividend payment. Thus, cash is preserved. In the second place, the selection of method of depreciation has important financial implication.
10. Price level Changes Changes in the price level also affect the requirement of working capital. Rising prices necessitate the use of more funds for maintaining an existing level of activity. For
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) the same level of current assets, higher cash outlays are required. The effect of rising prices is that a higher amount of working capital needed. However, in the case of companies, which can raise their prices proportionately, there is no serious problem regarding working capital.
11. Operating Efficiency The operating efficiency of the management is also an important determinant of the level of working capital. The management can contribute to a sound working capital position through operating efficiency. Although the management cannot control the rise in prices, it can ensure the efficient utilization of resources by eliminating waste, improving co-ordination, and a fuller utilization of existing resources and so on. Efficiency of operations accelerates the pace of cash cycle and improves the working capital turnover. It releases the pressure on working capital by improving profitability and improving the internal generation of funds.
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Techniques of Working Capital Management: Working Capital management involves deciding upon the amount and composition of current asset and how to finance the asset. This decision involves trade off between risk and profitability. Working Capital Balances are measured from the financial dates of the companys balance sheet. A study of the causes for changes of working capital that take place in the balance from time to time is necessary. These changes can be measured in rupee amount and also in percentage by comparing current assets, current liabilities and working capital over the given period. The importance tools of Working Capital are,
1. Ratio Analysis of Working Capital: 1. Ratio analysis of working capital. 2. Turnover of working capital Ratio. 3. Current Ratio. 4. Current Debt tangible net worth. 5. Inventory Turnover Ratio. 6. Debtor Turnover Ratio.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 2. Funds Flow Analysis of Working Capital: It is an effective management tool to study how funds have been produced for a business and how they have been employed. This technique helps to analyze change in working capital components between two data. The comparison of current asset and current liability at the beginning and at the end of specific period show changes in such type of current assets and resources from which Working Capital has been obtained funds flow statement contributes materially to the financial aspects.
3. Working Capital Budget: The working capital budget is an important phase of overall financing budgeting. This budgeting should be distinguished from a cash budget that is designed to measure all the financial repayment of loans, term loan and similar item. On the other hand working capital repayment and assure that they are duly provided for. The objective of that budget is to secure an effective utility of investment.
4. Trend Analysis: A trend analysis indicates the change, which has been taking place from time to time of an individual item of current assets. Assets and utility and net working capital on the basis of some standards year and its effect on working capital portion. It enables creative the upward and down ward trend of current assets and current liabilities. These are usage measured from review of comprehensive balance sheet of a concern at the end of account year and result is drawn on the basis of trend shown by them.
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Literature Review: -
Working Capital management is concerned with the problems that arise in attempting to manage the current assets and current liabilities and the interrelationship that exists between them. The term Current Assets refer to those assets, which in the ordinary course of business can be, or will be converted in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current are cash, marketable securities, accounts receivable and inventory. The term Current Liabilities refer to those liabilities, which are intended at their inception, to be paid in the ordinary course of business, within a year out of current assets or earning of the concern. The basic current liabilities are accounts payable, bills payable, banks overdraft and outstanding expenses. The goal of working capital management is to manage the firms current assets and liabilities in such a way that a satisfactory level of working capital is maintained. This is so because, if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of the firm while not keeping too high a level of any one of them. A proper balance between Current Assets and Current Liabilities is, therefore, the main theme of the theory of working capital management. Working Capital refer to that part of total capital which is kept invest in current assets that are required for regular business operation. In accounting, working capital is taken to mean the difference between Current Assets and Current Liabilities.
According to Genestenberg: -
Working Capital means Current Assets of a company that are changed in the ordinary course of business, from one to another, for ex, from cash to inventories, inventories to receivable, receivable to cash.
Management Problem The Company wants to study its working capital efficiency where current assets are main constituents of working capital management. The company wants to avoid two dangerous points i.e excessive and inadequate investment in current assets. Investment in Inventories and Debtors should be minimized so that it can maximize its cash and bank balance.
Research Problem: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Research Problem is to maximize the companys cash and bank balance through the study of Impact of Current Assets on Working Capital.
Statement of the Problem: The study has been undertaken in the organization for the purpose to know the companys working capital management through the study of Impact of Current Assets on Working Capital.
Purpose of the Study:The Purpose of the Study of working capital in Oilgear Towler Polyhydron Private Limited is to analyze the working capital with the help of financial ratios and to check how the company is maintaining the working capital. The study should be made on the basis of the followings, 1. Financial Statements. 2. Financial Ratios.
Scope of the Study: The working capital is spread to some important departments in Oilgear Towler Polyhydron Private Limited. The departments are,
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 1. Finance Department. 2. Design Department. 3. Production Department.
Objective of the Study: The following are the some importance objective of the study of working capital management. 1. To analyze the working capital of the organization. 2. To analyze the effect of current assets on working capital. 3. To study financial performance of organization with the help of ratios. 4. To study the working capital and recommend the suitable working capital of the year to the organization.
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1. INTRODUCTION: -
OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED, (Now popular by its short name OTPL) was formerly known as Polyhydron Systems Private Ltd. The company established in the year 1985. The company, Polyhydron System Private Ltd, was one of the four independently run engineering concern managed by a group of entrepreneurs well known in the country for their quality products, fair approach to business ethics. The group is known in the country as Polyhydron. Name of the other three companies are,
1. HYLOC HYDROTECTINIC PRIVATE LIMITED. 2. POLYHYDRON PRIVATE LIMITED. 3. SPICA MOUCLD CYLINDERS PRIVATE LIMIED.
The oldest company in the group is HYLOC HYDROTECTINIC PRIVATE LIMITED, The Company started in 1974 and is engaged in manufacturing complete range of Hydraulic Tubes coupling for metric tubes flanged fitting, shut of valves and needle valves POLYHYDRON PRIVATE LIMITED. As founded in 1984 and is known in the country for its modern and sophisticated management techniques and quality
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) marketed very reasonable price, the company manufacturing Redial Piston Pumps, Relief Valves, and Directional Control Valves. And SPICA MOUCLD CYLINDERS
PRIVATE LIMIED, established in Jan 06 for manufacture of Mould Cylinders to be exported to Italy. This company is yet to commence its production. OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED: -
From its inspection has been manufacturing OIL HYDRAULIC SYSTEMS & HYDRAULIC ACTUATORS & has later added PISTION type accumulators to its range of products.
1. COLLABORATION
The company entered into a joint venture collaboration agreement with the OILGEAR COMPANY, OILGEAR TOWLER INTERNATIONAL DIVISION, USA in Dec 1993. THE OILGEAR COMPANY is a world famous for its Electro-Hydraulic and Hydraulics products such as sophisticated pumps, valves and systems and especially known in the technology of world for its contribution to the technology of Metal Extrusion and Metal forming systems. The company also has its subsidiaries in Australia, Canada, France, Germany, Great Britain, Italy, Japan, and Korea & Spain. Participated in following Business Areas Market Oilgear products in the Indian market. Include products like piston, pumps, solenoid valves, prefil valves and cartridge valves.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Market Hydraulic and Electro hydraulic and subsystems for presses and machines. Install, commission, and service, Hydraulic and Electro hydraulic systems manufacturing by the Oilgear Company in Asian and South East Asian countries. Assemble, service, repairs and test Oilgear products. Design, manufacturing, sell, Install, repair, and service Hydraulic and Electro hydraulic systems and subsystems, cylinders and other equipment in Asian and South East Asian countries.
2. THE CONSTITUTION OF THE COMPANY: -
Name
OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)
Constitution
A private limited company registered under companies act 1956 Registered Office
Location
Plot No 4, R.S. No- 608/2, BEMCIEL UDYAMBAG BELGAUM, 590008 KARNATAKA STATE, INDIA.
Works
Phone: - 0831-2441157; Fax: - 0831-2441610 Plot No 34 & 37B Village Kuttalwadi
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) P.O. Navage, Belgaum, 590014 (0091)(831) 2411528 (4 lines) (0091)(831) 2411576 otplbgmpl2@oilgear.co.in Phone E-mail Works 91831-2441157, 2441459 otplbgm@sanchearnet.com (0091)(831) 2411528 (4 lines) (0091)(831) 2411576 otplbgmpl2@oilgear.co.in Board of Directors: -
Chairman Managing Director Director Production Director Commercial Director Finance Director
Mr. Robert Drake. Mr. V.K.Samant. Mr. H.D. Kadrolkar. Mr. N. Radhakrishana Rao Mr. D.S. Chitnis Mr. Srikanth Srinivasan.
Collaborators - THE OILGEAR COMPANY OILGEAR TOWLER INTERNATIONAL DIVISION, USA. 4. ASSETS: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 4.1) LAND AND BUILDING Land and the site of the registered office 11054 Sq.ft (1026 Sq.m.) Building and the site of the registered office- 4830 Sq.ft (450 Sq.m.) Land at site of plant 1- 2200 Sq.ft. (204 Sq.m.) Building at site of plant 1- 1622 Sq.ft (51 Sq.m.) Land site of the works 258,100 Sq.ft (23978 Sq.m.) Building Site of the works 25,000 Sq. ft (2322 Sq.m.).
4.2)
MACHINERY, HANDLING, EQUIPMENT AND TEST RIGS Laths Horizontal Bore CNC Machine Center CNC Vertical Machine Center Drilling Machine Milling Machine Surface Machine Honing Machine Hack Saws TIG Welding Set Flame Cutting Equipments Arc Welding Set 3 No s 3 No s 1 No s 1 No s 3 No s 1 No s 2 No s 1 No s 2 No s 1 No s 1 Set 2 No s Painting Equipment Electro Static Cleaner Cleaning Machine Pallet Trucks Air Compressors Prgauge Calibrator Hardness Tester Pumps Test Stands Valve Test Stands Generating Stands Over head Cranes 2 Sets 1 No s 2 No s 2 No s 3 No s 1 No s 1 No s 3 No s 1 No s 3 No s 3 No s
4.3) OFFICE AND EQUIPMENT Communication: Head Office: Phone lines Fax lines E-mail 6 Nos. 1 No 1 No
Electronic Exchange 10*30 Capacities.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Works: Phone lines Fax line E-mail 6 Nos. 1 No. 1 No
Electronic Exchange 10*30 Capacities.
4.4)
DATA PROCESSING
Computer ---- 24 Nos.
For Design Inventory Sales Accountancy Planning Purchase
Administration.
5)
STAFF: -
Sales Purchase
7 Engineers + 4 Support 2 Officers + 3 Support
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Planning 1 Engineer
Design Accounts and Administrations Manufacturing Servicing Quality Assurance
9 Engineers + 1 Support 6 Officers + 3 Supports 3 Engineers + 40 Supports 3 Engineers + 4 Support 1 Engineers + 1 Support
6)
FACILITIES: -
6.1)
In House Design - Designing of mechanical and electro hydraulic systems Auto card 2000 solid works 2001 + Cosmos works.
Machining Metal Cutting Turning Milling Prilling & Tapping
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Surface Grinding Honing
Welding TIG Welding. ARC Welding
Surface Treatment Cleaning by Kerosene Phosphating Painting.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Methodology adopted and data collection: -
The nature of the study was collection analysis and interpretation of working capital management in OTPL The information about this was gathered through following sources.
Primary Data: -
Primary Data are those, which are collected fresh and for the first time, and thus it happens to be original in character. The primary sources of data are collected from the financial executives through personal discussion in the light of the set objectives. Along with this, informal discussion with other, member of the finance.
Secondary Data: -
Secondary Data are those have already been collected by someone else and while already been passed through statistical process. Annual Report of the Company. Annual Accounts of the Company. Ledger Profit and Loss Account.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2003 OTPL Particulars A) Current Assets 1. Inventories. 2. S. Debtors 3. Cash & Bank Balance 4. Other C. Assets. 5. Loans & Advances. TOTAL B) Current Liabilities 1. Current Liabilities 2. Provision TOTAL Working Capital (A-B) Net Increase in Working Capital GRAND TOTAL 23,11,839 2,93,49,456 2,93,49,456 68,17,493 23,11,839 68,17,493 2,70,37,707 2,93,49,456 68,17,493 45,05,654 88,76,844 56,67,201 1,45,44,045 1,27,30,292 47,89,238 1,76,19,530 -------8,77,963 39,53,448 -----------1,43,29,584 1,47,19,225 96,70,212 5,04,462 23,58,269 4,15,81,752 1,82,87,763 1,62,67,703 99,24,482 6,83,065 18,000,63 4,69,69,076 39,58,179 15,48,478 2,54,270 1,78,603 ----------------------------------------5,52,206 2002 2003 Increase Decrease
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) INTERPRETATION
As we can see in the above year 2002-03, there is an increase in the working capital by Rs. 23,11,839. This is because:
1. As we can see that there is a great increase in Current Assets as the company is looking to invest more in the inventory of raw material in this year, because of the shortage of raw material in the market, so overall there is increase in the current assets. But in current assets loans and advance are decreased.
2. As we can see there is decrease of Rs. 39,53,448 in the liabilities of the company, which is good for the company. But Rs. 8,77,963 increases provisions.
3. So from all the above calculation we can see that there is good increase in the working capital. So we can say that company is more likely to increase there
inventory because they thinking it for the long term perspective.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004 OTPL PVT LTD Particulars A) Current Assets 1. Inventories 2. S. Debtors 3. Cash & Bank Bal. 4. Other C. Assets 5. Loans & Advances TOTAL 18,288 16,298 9,924 6,83 1,806 46,969 34,600 32,122 12,492 9,45 1,939 82,098 16,312 15,854 2,568 2,62 1,33 ------------------------------2003 2004 (Rs. In Thousand) Increase Decrease
B) Current Liabilities 1. Current Liabilities 2. Provision TOTAL 12,830 4,789 17,619 28,541 7,664 36,205 ------------------15,711 2,875
Working Capital (A-B) Net Increase in Working Capital 16,543, 16,543 29,350 45,893 35,129 18,586
GRAND TOTAL
45,893
45,893
35,129
35,129
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) INTERPRETATION
In the above table it is seen that, there is an increased in the working capital by Rs.16, 543 in the year 2003-04, this is because: -
1. As we can see in the above table that in the Current assets are increased, because of increase in inventories, debtors, cash and bank balance, loans and advance and also increase in other current assets.
2. As we can see there is overall decrease in current liabilities. Because of current liabilities are decreased by Rs. 15,711 and also provision are also decreased by Rs. 2,875.
3. So as the liabilities have decreased this year and there is increase in current assets, so there is increase in working capital.
STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) OTPL PVT LTD (Rs. In Thousand) Particulars A) Current Assets 1. Inventories 2. S. Debtors 3. Cash & Bank Bal 4. Other C. Assets 5. Advance to Suppliers 6. Loans & Advances TOTAL 34,600 32,122 12,492 9,45 ------1,930 82,098 28,042 47,790 10,084 6,056 1,215 1,771 94,958 -------15,668 -------5,111 1,215 -------21,994 6,558 ------2,408 ------------1,59 9,125 2004 2005 Increase Decrease
B) Current Liabilities 1. Current Liabilities 2. Advance from customer 3. Provision TOTAL 28,541 --------7,664 36,205 26,531 9,082 6,778 42,191 2,210 -----8,86 3,096 -------9,082 ------9,082
Working Capital (A-B) Net Increase in Working Capital GRAND TOTAL
45,896 6,874 52,767
52,767
25,090
18,207 6,883
52,767
25,090
25,090
INTERPRETATION
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) In the above table it is seen that, there is an increased in the working capital by Rs.6, 883 in the year 2004-05, this is because: -
1. As we can see of the Current Assets side there is decrease in Inventories, cash and bank balance and loans and advances. There is an increased in sundry debtors, other current assets and company also given the advance to supplies by Rs. 1,215. This decrease in Inventory because there is unavailability of their main raw material. Because of the shortage of it in the market.
2. Current Liabilities side there has been increased in current liabilities and provisions of Rs. 2,210 and Rs. 8,86 respectively and also company has taken the advance from customers of Rs. 9,082.
3. So, looking above calculation we see that working capital of the company is increased, because current assets are more than current liability. Working Capital is increased from Rs. 6,874 to Rs. 6,883. Because in this year company has taken the advance from customer and given advance to suppliers.
RATIO ANALYSIS Meaning: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Ratio Analysis is a widely used tool of financial analysis. It defined as the systematic use of to interpret the financial statement so that the strength and weakness of a firm well as its historical performance and current financial condition can be determined. This relationship can be expressed 1. Percentage says net profits are 25 percent of sales. 2. Proportion of numbers (the relationship between net profit and sales is 1:4), these alternative methods of expressing items which are related to each other are, for the purpose of financial analysis, referred to as ration analysis.
Types of Ratios Ratio can be classified into following categories, 1. Current Ratios. 2. Net Working Capital Ratios. 3. Total Assets Turnover Ratios. 4. Inventory Turnover Ratios. 5. Fixed Assets Turnover Ratios. 6. Creditors Turnover Ratios. 7. Creditors Collection Period. 8. Debtors Turnover Ratios. 9. Debtors Collection Period. 10. Gross Profit Margin Ratios.
MERITS AND DEMERITS OF THE RATIO: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Merits of the Ratio: The following are the some important merits of the ratio 1. Ratio Analysis reflects the working efficiency of a concern. 2. Since, ratio analysis relates the financial health of a concern, insurance other financial institution relay on them while judging loan application and in taking vital investment decision. 3. It helps in establishing trends since the result are preparing plans for the future. 4. It is helpful in forecasting likely events in future.
Demerits of the Ratio: The following are the some important demerits of the ratio. 1. The striking aspect of ratio analysis is the absence of an explicit theoretical structure; different methods of collection are adopted by different concerns. 2. For concert analysis inside information must be known by the analyst since most concern report to portray of easy picture of the financial attachments. 3. Change in the basis of accounting may pose difficulty in analysis ratios between one period
1. Current Ratios: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) It can be calculated as current assets divided by current liabilities. The current ratio measures the relative ability of a company to pay its short-term debts. The ratio is used to reveal how well a company could meet a sudden demand to pay off its short-term creditors. Formulas, Current Ratio = Current Assets Current Liabilities
Particulars Current Assets Current Liabilities Current Ratio
2002-2003 4,69,69,00 0 1,76,19,00 0 2.66
2003-2004 8,20,98,000 3,62,05,000 2.26
2004-2005 9,49,58,000 4,21,91,000 2.25
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Current Ratio 2.8 Ratios 2.6 2.4 2.2 2 2002-2003 2003-2004 2004-2005 Years Current Ratio
Interpretation: As a conventional rule, a current ratio of 2:1 or more considered satisfactory. The OTPL Company, has current ratio is 2.66:1; therefore, it may be interpretated to be satisfactory company. The current ratio represents a margin of safety for creditors. The higher the current ratio, the greater the margin of safety, so, there has been increased in the ratio during 2002-2003, when compared with 2003-2004 and 2004-2005. So, larger the amount of current assets in relation to current liabilities, the more the firms ability to meet its current obligation. Firm with less than 2:1, current ratio may be doing well, while firm with 2:1 or even higher current ratio may be struggling to meet their obligations. This is so because, if Rs.2 is your Current Assets and Rs.1 is Your Current Liabilities. Thus Current Ratio shown is 2:1, which is an Ideal Ratio.
2. Quick Ratio It establishes a relationship between quick or liquid, assets and current liabilities. An asset is liquid if it can be converted in to cash immediately or reasonably soon without a loss of value. Cash is most liquid assets. Other assets, which are considered to
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) be relatively liquid and included in the quick assets, are debtors, and bills receivable and marketable securities. Inventories are considered to be less liquid, inventories normally requires some time for realizing in to cash; their value also has a tendency to fluctuate. Formula Quick Ratio = Current Assets Inventories Current Liabilities
Particulars Current Assets (-) Inventory Total (/) Current Liabilities Quick Ratio
2002-2003 4,69,69,000 1,82,88,000 2,86,81,000 1,76,19,000 1.62
2003-2004 8,20,98,000 3,46,00,000 4,74,98,000 3,62,05,000 1.31
2004-2005 9,49,58,000 2,80,42,000 6,69,16,000 4,21,91,000 1.58
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Quick Ratio 2 Ratios 1.5 1 0.5 0 2002-2003 2003-2004 Years 2004-2005 Quick Ratio
Interpretation: Generally a quick ratio is 1:1 is considered to represent a satisfactory current financial condition. In the year 2002-03 quick ratio was 1.62 and there has been decreased in the year compared to 2003-04 and 2004-05. The high ratio indicates that all debtors may not be quick and cash may be immediately needed to pay operating expenses. It should be noted that inventories are not absolutely non-liquid to a measurable extent inventories are available to meet current obligations. So the company can suffer from shortage of funds. On the other hand, a company with low ratio in the year 2003-04 and 204-05, indicates that quick ratio may really be prospering and paying its current obligation in time if it has been turning over its inventories efficiently.
3. Total Assets Turnover Ratio: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) The Total assets turnover ratio in addition to, or instead the net current assets, This ratio shows the firms ability in generating sale from all the financial resource committed to total assets Formula, Total Assets Turnover Ratio = Net Sales Total Assets
Particulars Net Sales Total Assets Total Assets Turnover Ratio
2002-2003 5,73,73,000 2,69,95,000 2.12
2003-2004 2004-2005 10,86,60,000 10,70,00,000 2,57,87,000 2,52,21,000 4.21 4.24
Total Assets Turnover Ratio 5 4 3 2 1 0 2002-2003 2003-2004 2004-2005 Years
Ratios
Total Assets Turnover Ratio
Interpretation: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) There has been increased in the year 2004-05, when compared to 2002-2003 and 2003-2004. And high ratio indicates that in the year 2004-05, that ratio shows the firms ability in generating sales from all financial resources.
4. Inventory Turnover Ratio: -
It indicate the efficiently of the firm in producing the selling its product. The ratio indicates how fast inventory is sold. A high ratio is good from viewpoint of liquidity and vice versa. A low ratio would signify that inventory does not sell and stay on the shelf or in warehouse for a long time. Inventory Turnover Ratio = Net Sales Inventory
Particulars Net Sales Inventory Inventory Turnover Ratio
2002-2003 5,73,73,000 1,82,88,000 3.13
2003-2004 2004-2005 10,86,60,000 10,70,00,000 3,46,00,000 2,80,42,000 3.14 3.81
Interpretation: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) There has been increased in the ratio in the year 2004 2005, when compared with 2002-2003 and 2003-2004. In the year 2004-2005, indicates high ratio, it means, Inventory turnover ratio implies good inventory management and very high ratio calls for a careful analysis. It may indicate under investment in inventory. While a Low ratio indicate in the year 2002-2003, that, it may be result in use of inferior quality of goods and over investment in sales in the 2003-2004. 4. Fixed Assets Turnover Ratio: Fixed Assets Turnover Ratio measures Sales per rupees investment in Fixed Assets. It measures the efficiency of fixed assets employed in the organization. High degree of ratio indicates high efficiency of assets utilization vice-versa.
Fixed Assets Turnover Ratio = Net Sales Fixed Assets
Particulars
Net Sales Fixed Assets Fixed Assets Turnover Ratio
2002-2003
5,73,73,000 3,69,41,000 1.55
2003-2004
2004-2005
10,86,60,000 10,70,00,000 3,72,38,000 3,83,06,000 2.91 2.79
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Fixed Assets Turnover Ratio 4 Ratios 3 2 1 0 2002-2003 2003-2004 2004-2005 Years Fixed Assets Turnover Ratio
Interpretation: There has been increased in the ratio during 2002-2003 and 2004-2005, when compared with 2003-2004. A low ratio in the year 2002-2003 indicates in efficiency use of assets, and the next two years (2003-2004 and 2004-2005) shows high ratio, which means that increasing efficiency of fixed assets employed in the organization. One of the cautions to be kept in the mind is when fixed assets are old and substantially depreciated the ratio tenders to be high, because, the denominator of the ratio will be low.
5. Creditors Turnover Ratio: It is the ratio between the Sales and Creditors or Net Credit Purchase and average amount of creditors. It is an important tool of analysis as a firm can maintain minimum amount of Current Assets, as credit from suppliers is easily available.
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Creditor Turnover Ratio = Net Sales Creditors
Particulars
Net Sales Creditors Creditors Turnover Ratio
2002-2003
5,73,73,000 1,28,30,000 4.47
2003-2004
10,86,60,000 2,85,41,000 3.80
2004-2005
10,70,00,000 2,63,31,000 4.06
Creditors Turnover Ratio 5 Ratios 4.5 4 3.5 3 2002-2003 2003-2004 Years 2004-2005 Creditors Turnover Ratio
Interpretation: In the year 2002-2003, there was been increased when compared to 203-2004 and 2004-2005. In the year 2002-2003 indicate high ratio means the sales of the year very low as compared to 2003-2004 and 2004-2005 and also creditors are low as compared to 2003-2004 and 2004-2005.
6. Creditors Collection Period: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) This ratio is the difference between Days and Creditors turnover ratios.
Particulars
Days Creditors Turnover Ratio Creditors Collection Period Formula,
2002-2003
365 4.47 81.65
2003-2004
365 3.80 96.05
2004-2005
365 4.06 89.90
Creditors Collection Period = Days Creditors Turnover Ratio
Creditors Collection Period 150 Ratios 100 50 0 2002-2003 2003-2004 Years 2004-2005 Creditors Collection Period
Interpretation: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) In the year 2002-2003, there was increase when compared to 2003-2004 and 2004-2005. The high ratio of 2002-2003 indicates that the sales of the year is very low as compared to 2003-2004 and 2004-2005, and also creditors are low as compared to as compared to 2003-2004 and 2004-2005. While low ratio in the year 2003-2004 indicates that creditors are high as compared to other year.
7. Debtors Turnover Ratio: It indicate the how many times debtors turnover each year. Generally, the higher the ratio of debtors turnover, the more efficient is the management of credit. The ratio measured how will reveal the days of debts to be colleted. Debtors Turnover Ratio= Net Sales Debtors
Particulars
Net Sales Debtors Debtors Turnover Ratio
2002-2003
5,73,73,000 1,62,68,000 3.52
2003-2004
10,86,60,000 3,21,22,000 3.38
2004-2005
10,70,00,000 4,77,90,000 2.23
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Debtors Turnover Ratio 4 Ratios 3 2 1 0 2002-2003 2003-2004 Years 2004-2005 Debtors Turnover Ratio
Interpretations: There has been increased debtor in the year 2002-2003 as compared to 2003-204 and 2004-2005, high ratio indicates of shorter time gap between credit sales and cash collation. A low ratio shows that debts are not being colleted rapidly. So, the standard norms this high ratio reveals that company has quite efficient management of debtors. In the year 2000 & 2003 are showing equal turnover ratio.
8. Debtors Payment Period: The debtors payment period is mainly related to how many days debtors have taken to complete a period and how much is debtors turnover ratio. Debtors Payment Period = Days Debtors Turnover Ratio
Particulars
2002-2003
2003-2004
2004-2005
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Days Debtors Turnover Ratio Debtors Collection Period 365 3.52 103.69 365 3.38 107.98 365 2.23 163.67
Debtors Collection Period 200 150 100 50 0 20022003 20032004 Years 20042005
Ratios
Debtors Collection Period
Interpretation: The shorter the collection period is better quality of debtors. Since, a short collection period implies that prompt payment by debtors. In collection period having some increase and decrease. So, we can find out that there is no uniformity in the debtors collection period of the year.
8. Gross Profit Margin Ratio: Gross Profit Margin Ratio is the result of relationship between price, sales, volume and cost. A change in gross profit margin can be due to changes in any of these factors. It represents the limit of beyond which fall in sales price are outside and tolerance limit. Gross Profit Margin Ratio = Gross Profit
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Net Sales
Particulars
Gross Profit Net Sales Gross Profit Margin Ratio
2002-2003
7,26,000 5,73,73,000 1.26
2003-2004
1,42,88,000 10,86,60,000 13.14
2004-2005
1,86,54,000 10,70,00,000 17.43
Gross Profit Margin Ratio 20 Ratios 15 10 5 0 2002-2003 2003-2004 Years 2004-2005 Gross Profit Margin Ratio
Interpretation: There has been increased in the year 2004-2005 as compared to 2002-2003 and 2003-2004. The high ratio indicates that the company should earn a sufficient profit on each rupee of sales. While low ratio indicate that in the year 2002-2003 that the company will be meeting the operations expenses and no returns will be available to the owners. And also high ratio indicate that a good management indicate that cost of production of
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) the firm is relatively low, it may also indicate higher the sales price without a corresponding increase in the cost of the goods. CONSOLIDATED STATEMENT OF THE RATIOS FOR THREE YEARS
Sl. No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Particulars Current Ratio Quick Ratio Total Assets Turnover Ratio Inventory Turnover Ratio Fixed Assets Turnover Ratio Creditors Turnover Ratio Creditors Collection Period Debtors Turnover Ratio Debtors Collection Period Gross Profit Margin Ratio
2002-2003 2.66 1.62 2.12 3.13 1.55 4.47 81.65 3.52 103.69 1.265
2003-2004 2.26 1.31 4.21 3.14 2.91 3.80 96.05 3.38 107.98 13.14
2004-2005 2.25 1.58 4.24 3.81 2.79 4.06 89.90 2.23 163.67 17.43 Gross Profit
Consolidated Statement of Ratios Margin Ratio

300 250 200 Ratios 150 100 50 0 Debtors Collection Period Debtors Turnover Ratio Creditors Collection Period Creditors Turnover Ratio Fixed Assets Turnover Ratio FINDING AND SUGGESTIONS Inventory Turnover Ratio Total Assets Turnover Ratio Quick Ratio Current Ratio 76
20022003
20032004 Years
20042005
Findings: -
Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) 1. Current Ratio of OTPL Company shows the solvency of the firm ability to repay its liabilities. As ratio is decline to 2.66. It shows that company is in solvency state. Current assets are should always be twice of current liabilities.
2. In a comparative statement of Balance Sheet, debtors were 1,47,19,000 in the year 2002-2003, and it has increased to 3,21,22,000 and 4,77,90,000 in the last two years. Because increased in credit sales.
3. Total assets turnover ratio shows the ability to convert all its assets incurring fixed assets to sales. As per the ratio calculated in the year 2002-2003 it was 2.12, which was low ratio means firm is able to convert its total assets quickly into funds as per the company ratio the firm is able to convert it assets because the ratio are higher between 4.24 to 2.12, which was low ratio.
4. Inventory Turnover Ratio is increased from 3.13 to 3.81 in the year 2002-2003 and 2004-2005 respectively. It shows company has maintained good inventory policy.
5. Gross profit margin ratio shows that increasing year to year. It shows that company should earn a sufficient profit on each rupee of cash.
Suggestions: -
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Impact of Current Assets on Working Capital. AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) The working capital including all its related aspects is managed quite well by OTPL. The finance department is carrying out its responsibilities efficiently. The entire departments are collectively working hard for the progress of OTPL.
The following are the suggestions.
1. In a comparative Balance Sheet Debtors are increased from year to year (1,47,19,000 to 4,77,90,00). Even though debtors are increased which is favorable enough for the company. But should take care while dealing against the loss due to doubtful and bad debt.
2. The company net sale is very low in the year 2002-2003 Rs 5,73,73,000, as compared to 2003-2004 Rs. 10,86,60,000. So, the company should manage its current assets, which effects on production and ultimately on sales.
3. The Current Ratio of the company is decreased from 2.66 to 2.55 in the last threeyear (2003 to 2005). So, the current ratio should be maintained by the company in such a way that the ratio does not follow below 2:1.
4. Company should give minimum payment time to get prompt payment by debtors.
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Conclusion
Working capital may be regarded as lifeblood of a business. Its effective provision can do much to ensure the success of a business, while its inefficient management can lead not only to loss of profits but also to the ultimate down fall of what otherwise might be considered as a promising concern. A study of working capital is of major importance to internal and external analysis because of its close relationship with the current day to day operations of a business.
1. Here, I conclude that Changes in the financial year is showing increase in the working capital, because company maintains its working capital properly in the year 2003 to 2005.
2. According to my calculation Current Assets main part of, the working capital of the business. According to all Ratios, It shows that company maintains its ratio is very well. So, In the year 2004-2005 company showing better position in the working capital.
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80
BIBLOGRAPHY
Financial Management by books used from which I have taken help for the theory part of the study: M.V. Khan & P.K. Jain I.M. Pandey
I have also used the trial balance of Oilgear Towler Polyhydron Private Limited (OTPL). Those are from the year 2003-2005. Which provide by the official at Belgaum Works.
I have meet with the different people at the Administrative Department at Oilgear Towler Polyhydron Private Limited (OTPL). As also took their views and information for my Study.
I have also took the help form the company site www.oilgear.co.in
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AT OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL) Contents

Sl. No. I Chapter 1 Introduction

Gathman & Dug wall: -

Working Capital as excess of current assets over current liabilities.

Westen & Brigham: -

WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.

As production progresses, labor costs and overheads will need to be met

Of course at some stage trade creditors will need to be paid

Lessors of fixed assets will be paid their rent

Dividends may be paid

COMPONENTS OF WORKING CAPITAL

Characteristics of Current Assets

CURRENT ASSETS CYCLE

Wages / Factory overhead

Decisions relating to working capital management are repetitive and frequent.

2. The difference between profit and present value is insignificant.

IMPORTANCE OF WORKING CAPITAL: -

CLASSIFICATION OF WORKING CAPITAL

ii. Regular Working Capital

B. Other Determinants of Working Capital

SOURCES OF WORKING CAPITAL: -

INTERNAL SHORT TERM SOURCES

The company executives postpone the payment of certain

EXTERNAL SHORT TERM SOURCES.

EFFICIENT UTILIZATION OF WORKING CAPITAL MANAGEMENT

Debtors / BR Sales of goods

Raw Materials Work in Progress

1. Acquisition of raw materials. 2. Work in Progress.

2. THE CONSTITUTION OF THE COMPANY: -

OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)

Phone: - 0831-2441157; Fax: - 0831-2441610 Plot No 34 & 37B Village Kuttalwadi

Electronic Exchange 10*30 Capacities.

Electronic Exchange 10*30 Capacities.

Computer ---- 24 Nos.

For Design Inventory Sales Accountancy Planning Purchase

7 Engineers + 4 Support 2 Officers + 3 Support

Design Accounts and Administrations Manufacturing Servicing Quality Assurance

Machining Metal Cutting Turning Milling Prilling & Tapping

Welding TIG Welding. ARC Welding

Surface Treatment Cleaning by Kerosene Phosphating Painting.

inventory because they thinking it for the long term perspective.

STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004

Working Capital (A-B) Net Increase in Working Capital GRAND TOTAL

45,896 6,874 52,767

RATIO ANALYSIS Meaning: -

MERITS AND DEMERITS OF THE RATIO: -

Particulars Current Assets Current Liabilities Current Ratio

2002-2003 4,69,69,00 0 1,76,19,00 0 2.66

2003-2004 8,20,98,000 3,62,05,000 2.26

2004-2005 9,49,58,000 4,21,91,000 2.25

2002-2003 4,69,69,000 1,82,88,000 2,86,81,000 1,76,19,000 1.62

2003-2004 8,20,98,000 3,46,00,000 4,74,98,000 3,62,05,000 1.31

2004-2005 9,49,58,000 2,80,42,000 6,69,16,000 4,21,91,000 1.58

3. Total Assets Turnover Ratio: -

Particulars Net Sales Total Assets Total Assets Turnover Ratio

2002-2003 5,73,73,000 2,69,95,000 2.12

2003-2004 2004-2005 10,86,60,000 10,70,00,000 2,57,87,000 2,52,21,000 4.21 4.24

Total Assets Turnover Ratio 5 4 3 2 1 0 2002-2003 2003-2004 2004-2005 Years

Total Assets Turnover Ratio

4. Inventory Turnover Ratio: -

Particulars Net Sales Inventory Inventory Turnover Ratio

2002-2003 5,73,73,000 1,82,88,000 3.13