Project Report - Working Capital Management

WORKING CAPITAL - Meaning of Working Capital

Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital
Every business needs funds for two purposes for its establishment and to carry
out its day- to-day operations. Long terms funds are required to create production
facilities through purchase of fixed assets such as p&m, land, building, furniture, etc.
Investments in these assets represent that part of firms capital which is blocked on
permanent or fixed basis and is called fixed capital. Funds are also needed for short-
term purposes for the purchase of raw material, payment of wages and other day to-
day expenses etc.
These funds are known as working capital. In simple words, working capital
refers to that part of the firms capital which is required for financing short- term or
current assets such as cash, marketable securities, debtors & inventories. Funds, thus,
invested in current assts keep revolving fast and are being constantly converted in to
cash and this cash flows out again in exchange for other current assets. Hence, it is
also known as revolving or circulating capital or short term capital.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1. Gross working capital
2. Net working capital
The gross working capital is the capital invested in the total current assets of the
enterprises current assets are those
Assets which can convert in to cash within a short period normally one accounting
year.
CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories of stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods
6. Temporary investment of surplus funds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net
working capital is the excess of current assets over current liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS CURRENT
LIABILITIES.
Net working capital can be positive or negative. When the current assets
exceeds the current liabilities are more than the current assets. Current
liabilities are those liabilities, which are intended to be paid in the ordinary
course of business within a short period of normally one accounting year out
of the current assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraft.
5. Provision for taxation , if it does not amt. to app. Of profit.
6. Bills payable.
7. Sundry creditors.
The gross working capital concept is financial or going concern concept whereas net
working capital is an accounting concept of working capital. Both the concepts have
their own merits.
The gross concept is sometimes preferred to the concept of working capital for the
following reasons:
1. It enables the enterprise to provide correct amount of working capital at
correct time.
2. Every management is more interested in total current assets with which it
has to operate then the source from where it is made available.
3. It take into consideration of the fact every increase in the funds of the
enterprise would increase its working capital.
4. This concept is also useful in determining the rate of return on investments
in working capital. The net working capital concept, however, is also
important for following reasons:
It is qualitative concept, which indicates the firms ability to meet to
its operating expenses and short-term liabilities.
IT indicates the margin of protection available to the short term
creditors.
It is an indicator of the financial soundness of enterprises.
It suggests the need of financing a part of working capital requirement
out of the permanent sources of funds.

CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified in to ways:
o On the basis of concept.
o On the basis of time.
On the basis of concept working capital can be classified as gross working
capital and net working capital. On the basis of time, working capital may be
classified as:
Permanent or fixed working capital.
Temporary or variable working capital
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed working capital is minimum amount which is required to ensure
effective utilization of fixed facilities and for maintaining the circulation of current
assets. Every firm has to maintain a minimum level of raw material, work- in-process,
finished goods and cash balance. This minimum level of current assts is called
permanent or fixed working capital as this part of working is permanently blocked in
current assets. As the business grow the requirements of working capital also
increases due to increase in current assets.
TEMPORARY OR VARIABLE WORKING CAPITAL
Temporary or variable working capital is the amount of working capital which is
required to meet the seasonal demands and some special exigencies. Variable working
capital can further be classified as seasonal working capital and special working
capital. The capital required to meet the seasonal need of the enterprise is called
seasonal working capital. Special working capital is that part of working capital which
is required to meet special exigencies such as launching of extensive marketing for
conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that is
required for short periods and cannot be permanently employed gainfully in the
business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING
CAPITAL
SOLVENCY OF THE BUSINESS: Adequate working capital helps in
maintaining the solvency of the business by providing uninterrupted of
production.
Goodwill: Sufficient amount of working capital enables a firm to make
prompt payments and makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit
standing can arrange loans from banks and other on easy and favorable terms.
Cash Discounts: Adequate working capital also enables a concern to
avail cash discounts on the purchases and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital
ensures regular supply of raw material and continuous production.
Regular Payment Of Salaries, Wages And Other Day TO
Day Commitments: It leads to the satisfaction of the employees and
raises the morale of its employees, increases their efficiency, reduces wastage
and costs and enhances production and profits.
Exploitation Of Favorable Market Conditions: If a firm is
having adequate working capital then it can exploit the favorable market
conditions such as purchasing its requirements in bulk when the prices are
lower and holdings its inventories for higher prices.
Ability To Face Crises: A concern can face the situation during the
depression.
Quick And Regular Return On Investments: Sufficient
working capital enables a concern to pay quick and regular of dividends to its
investors and gains confidence of the investors and can raise more funds in
future.
High Morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall efficiency in a
business.
EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate amount of working capital to run its
business operations. It should have neither redundant or excess working capital nor
inadequate nor shortages of working capital. Both excess as well as short working
capital positions are bad for any business. However, it is the inadequate working
capital which is more dangerous from the point of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING
CAPITAL
1. Excessive working capital means ideal funds which earn no profit for
the firm and business cannot earn the required rate of return on its
investments.
2. Redundant working capital leads to unnecessary purchasing and
accumulation of inventories.
3. Excessive working capital implies excessive debtors and defective
credit policy which causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with
banks and other financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also
fall.
7. The redundant working capital gives rise to speculative transactions
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working capital
arises due to the time gap between production and realization of cash from sales.
There is an operating cycle involved in sales and realization of cash. There are time
gaps in purchase of raw material and production; production and sales; and realization
of cash.
Thus working capital is needed for the following purposes:
For the purpose of raw material, components and spares.
To pay wages and salaries
To incur day-to-day expenses and overload costs such as office expenses.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customer.
To maintain the inventories of the raw material, work-in-progress, stores and
spares and finished stock.
For studying the need of working capital in a business, one has to study the
business under varying circumstances such as a new concern requires a lot of
funds to meet its initial requirements such as promotion and formation etc. These
expenses are called preliminary expenses and are capitalized. The amount needed
for working capital depends upon the size of the company and ambitions of its
promoters. Greater the size of the business unit, generally larger will be the
requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and
expensing of the business till it gains maturity. At maturity the amount of working
capital required is called normal working capital.
There are others factors also influence the need of working capital in a business.
FACTORS DETERMINING THE WORKING CAPITAL
REQUIREMENTS
1. NATURE OF BUSINESS: The requirements of working is very
limited in public utility undertakings such as electricity, water supply and
railways because they offer cash sale only and supply services not products,
and no funds are tied up in inventories and receivables. On the other hand
the trading and financial firms requires less investment in fixed assets but
have to invest large amt. of working capital along with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the business,
greater is the requirement of working capital.
3. PRODUCTION POLICY: If the policy is to keep production
steady by accumulating inventories it will require higher working capital.
4. LENTH OF PRDUCTION CYCLE: The longer the
manufacturing time the raw material and other supplies have to be carried
for a longer in the process with progressive increment of labor and service
costs before the final product is obtained. So working capital is directly
proportional to the length of the manufacturing process.
5. SEASONALS VARIATIONS: Generally, during the busy
season, a firm requires larger working capital than in slack season.
6. WORKING CAPITAL CYCLE: The speed with which the
working cycle completes one cycle determines the requirements of working
capital. Longer the cycle larger is the requirement of working capital.

DEBTORS
CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

7. RATE OF STOCK TURNOVER: There is an inverse co-
relationship between the question of working capital and the velocity or
speed with which the sales are affected. A firm having a high rate of stock
turnover wuill needs lower amt. of working capital as compared to a firm
having a low rate of turnover.
8. CREDIT POLICY: A concern that purchases its requirements on credit
and sales its product / services on cash requires lesser amt. of working
capital and vice-versa.
9. BUSINESS CYCLE: In period of boom, when the business is
prosperous, there is need for larger amt. of working capital due to rise in
sales, rise in prices, optimistic expansion of business, etc. On the contrary in
time of depression, the business contracts, sales decline, difficulties are
faced in collection from debtor and the firm may have a large amt. of
working capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing concern,
we shall require large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms
have more earning capacity than other due to quality of their products,
monopoly conditions, etc. Such firms may generate cash profits from
operations and contribute to their working capital. The dividend policy also
affects the requirement of working capital. A firm maintaining a steady high
rate of cash dividend irrespective of its profits needs working capital than
the firm that retains larger part of its profits and does not pay so high rate of
cash dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also affect the
working capital requirements. Generally rise in prices leads to increase in
working capital.
Others FACTORS: These are:
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the problem that arises in
attempting to manage the current assets, current liabilities. The basic goal of
working capital management is to manage the current assets and current
liabilities of a firm in such a way that a satisfactory level of working capital is
maintained, i.e. it is neither adequate nor excessive as both the situations are
bad for any firm. There should be no shortage of funds and also no working
capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of
a firm has a great on its probability, liquidity and structural health of the
organization. So working capital management is three dimensional in nature as
1. It concerned with the formulation of policies with regard to
profitability, liquidity and risk.
2. It is concerned with the decision about the composition and level of
current assets.
3. It is concerned with the decision about the composition and level of
current liabilities.

WORKING CAPITAL ANALYSIS
As we know working capital is the life blood and the centre of a business.
Adequate amount of working capital is very much essential for the smooth
running of the business. And the most important part is the efficient
management of working capital in right time. The liquidity position of the firm
is totally effected by the management of working capital. So, a study of
changes in the uses and sources of working capital is necessary to evaluate the
efficiency with which the working capital is employed in a business. This
involves the need of working capital analysis.
The analysis of working capital can be conducted through a number of devices,
such as:
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting.

1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The
technique of ratio analysis can be employed for measuring short-term liquidity
or working capital position of a firm. The following ratios can be calculated for
these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS
Fund flow analysis is a technical device designated to the study the source from
which additional funds were derived and the use to which these sources were
put. The fund flow analysis consists of:

a. Preparing schedule of changes of working capital
b. Statement of sources and application of funds.
It is an effective management tool to study the changes in financial position
(working capital) business enterprise between beginning and ending of the
financial dates.

3. WORKING CAPITAL BUDGET
A budget is a financial and / or quantitative expression of business plans and
polices to be pursued in the future period time. Working capital budget as a part
of the total budge ting process of a business is prepared estimating future long
term and short term working capital needs and sources to finance them, and
then comparing the budgeted figures with actual performance for calculating
the variances, if any, so that corrective actions may be taken in future. He
objective working capital budget is to ensure availability of funds as and
needed, and to ensure effective utilization of these resources. The successful
implementation of working capital budget involves the preparing of separate
budget for each element of working capital, such as, cash, inventories and
receivables etc.

ANALYSIS OF SHORT TERM FINANCIAL POSITION OR
TEST OF LIQUIDITY
The short term creditors of a company such as suppliers of goods of credit
and commercial banks short-term loans are primarily interested to know the
ability of a firm to meet its obligations in time. The short term obligations of a
firm can be met in time only when it is having sufficient liquid assets. So to
with the confidence of investors, creditors, the smooth functioning of the firm
and the efficient use of fixed assets the liquid position of the firm must be
strong. But a very high degree of liquidity of the firm being tied up in
current assets. Therefore, it is important proper balance in regard to the
liquidity of the firm. Two types of ratios can be calculated for measuring
short-term financial position or short-term solvency position of the firm.
1. Liquidity ratios.
2. Current assets movements ratios.

A) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as and
when these become due. The short-term obligations are met by realizing
amounts from current, floating or circulating assts. The current assets should
either be liquid or near about liquidity. These should be convertible in cash
for paying obligations of short-term nature. The sufficiency or insufficiency
of current assets should be assessed by comparing them with short-term
liabilities. If current assets can pay off the current liabilities then the liquidity
position is satisfactory. On the other hand, if the current liabilities cannot be
met out of the current assets then the liquidity position is bad. To measure the
liquidity of a firm, the following ratios can be calculated:
1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general
liquidity and its most widely used to make the analysis of short-term financial
position or liquidity of a firm. It is defined as the relation between current
assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry
debtors, inventories and work-in-progresses. Current liabilities include
outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has
the ability to pay its current obligations in time. On the hand a low current
ratio represents that the liquidity position of the firm is not good and the firm
shall not be able to pay its current liabilities in time. A ratio equal or near to
the rule of thumb of 2:1 i.e. current assets double the current liabilities is
considered to be satisfactory.

CALCULATION OF CURRENT RATIO
(Rupees in crore)
e.g.
Year 2006 2007 2008
Current Assets 81.29 83.12 13,6.57
Current Liabilities 27.42 20.58 33.48
Current Ratio 2.96:1 4.03:1 4.08:1
Interpretation:-
As we know that ideal current ratio for any firm is 2:1. If we see the current
ratio of the company for last three years it has increased from 2006 to 2008.
The current ratio of company is more than the ideal ratio. This depicts that
companys liquidity position is sound. Its current assets are more than its
current liabilities.
2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio
may be defined as the relationship between quick/liquid assets and current or
liquid liabilities. An asset is said to be liquid if it can be converted into cash
with a short period without loss of value. It measures the firms capacity to
pay off current obligations immediately.
QUICK RATIO = QUICK ASSETS
CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) Debtors.
A high ratio is an indication that the firm is liquid and has the ability to meet
its current liabilities in time and on the other hand a low quick ratio represents
that the firms liquidity position is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally
thought that if quick assets are equal to the current liabilities then the concern
may be able to meet its short-term obligations. However, a firm having high
quick ratio may not have a satisfactory liquidity position if it has slow paying
debtors. On the other hand, a firm having a low liquidity position if it has fast
moving inventories.
CALCULATION OF QUICK RATIO
e.g. (Rupees in Crore)
Year 2006 2007 2008
Quick Assets 44.14 47.43 61.55
Current Liabilities 27.42 20.58 33.48
Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1
Interpretation :
A quick ratio is an indication that the firm is liquid and has the ability to
meet its current liabilities in time. The ideal quick ratio is 1:1. Companys
quick ratio is more than ideal ratio. This shows company has no liquidity
problem.
3. ABSOLUTE LIQUID RATIO
Although receivables, debtors and bills receivable are generally more liquid
than inventories, yet there may be doubts regarding their realization into cash
immediately or in time. So absolute liquid ratio should be calculated together
with current ratio and acid test ratio so as to exclude even receivables from
the current assets and find out the absolute liquid assets. Absolute Liquid
Assets includes :
ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS
CURRENT LIABILITES
ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.
e.g. (Rupees in Crore)
Year 2006 2007 2008
Absolute Liquid Assets 4.69 1.79 5.06
Current Liabilities 27.42 20.58 33.48
Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1
Interpretation :
These ratio shows that company carries a small amount of cash. But there
is nothing to be worried about the lack of cash because company has reserve,
borrowing power & long term investment. In India, firms have credit limits
sanctioned from banks and can easily draw cash.
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and earn
profits. The efficiency with which assets are managed directly affects the
volume of sales. The better the management of assets, large is the amount of
sales and profits. Current assets movement ratios measure the efficiency with
which a firm manages its resources. These ratios are called turnover ratios
because they indicate the speed with which assets are converted or turned
over into sales. Depending upon the purpose, a number of turnover ratios can
be calculated. These are :
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio
4. Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results if current assets
include high amount of debtors due to slow credit collections and moreover if
the assets include high amount of slow moving inventories. As both the ratios
ignore the movement of current assets, it is important to calculate the turnover
ratio.
1. INVENTORY TURNOVER OR STOCK TURNOVER
RATIO :
Every firm has to maintain a certain amount of inventory of finished
goods so as to meet the requirements of the business. But the level of
inventory should neither be too high nor too low. Because it is harmful
to hold more inventory as some amount of capital is blocked in it and
some cost is involved in it. It will therefore be advisable to dispose the
inventory as soon as possible.
INVENTORY TURNOVER RATIO = COST OF GOOD SOLD
AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is
converted into sales. Usually a high inventory ratio indicates an efficient
management of inventory because more frequently the stocks are sold ;
the lesser amount of money is required to finance the inventory. Where
as low inventory turnover ratio indicates the inefficient management of
inventory. A low inventory turnover implies over investment in
inventories, dull business, poor quality of goods, stock accumulations
and slow moving goods and low profits as compared to total investment.
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK
2
(Rupees in Crore)
Year 2006 2007 2008
Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times
Interpretation :
These ratio shows how rapidly the inventory is turning into receivable
through sales. In 2007 the company has high inventory turnover ratio but in
2008 it has reduced to 1.75 times. This shows that the companys inventory
management technique is less efficient as compare to last year.
2. INVENTORY CONVERSION PERIOD:
INVENTORY CONVERSION PERIOD = 365 (net working days)
INVENTORY TURNOVER RATIO
e.g.
Year 2006 2007 2008
Days 365 365 365
Inventory Turnover Ratio 1.5 2.8 1.8
Inventory Conversion Period 243 days 130 days 202 days
Interpretation :
Inventory conversion period shows that how many days inventories takes
to convert from raw material to finished goods. In the company inventory
conversion period is decreasing. This shows the efficiency of management to
convert the inventory into cash.
3. DEBTORS TURNOVER RATIO :
A concern may sell its goods on cash as well as on credit to increase its
sales and a liberal credit policy may result in tying up substantial funds of a
firm in the form of trade debtors. Trade debtors are expected to be converted
into cash within a short period and are included in current assets. So liquidity
position of a concern also depends upon the quality of trade debtors. Two
types of ratio can be calculated to evaluate the quality of debtors.
a) Debtors Turnover Ratio
b) Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)
AVERAGE DEBTORS
Debtors velocity indicates the number of times the debtors are turned
over during a year. Generally higher the value of debtors turnover ratio the
more efficient is the management of debtors/sales or more liquid are the
debtors. Whereas a low debtors turnover ratio indicates poor management of
debtors/sales and less liquid debtors. This ratio should be compared with
ratios of other firms doing the same business and a trend may be found to
make a better interpretation of the ratio.
AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR
2

e.g.
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Average Debtors 17.33 18.19 22.50
Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times
Interpretation :
This ratio indicates the speed with which debtors are being converted or
turnover into sales. The higher the values or turnover into sales. The higher
the values of debtors turnover, the more efficient is the management of credit.
But in the company the debtor turnover ratio is decreasing year to year. This
shows that company is not utilizing its debtors efficiency. Now their credit
policy become liberal as compare to previous year.
4. AVERAGE COLLECTION PERIOD :
Average Collection Period = No. of Working Days
Debtors Turnover Ratio
The average collection period ratio represents the average number of
days for which a firm has to wait before its receivables are converted into
cash. It measures the quality of debtors. Generally, shorter the average
collection period the better is the quality of debtors as a short collection
period implies quick payment by debtors and vice-versa.
Average Collection Period = 365 (Net Working Days)
Debtors Turnover Ratio
Year 2006 2007 2008
Days 365 365 365
Debtor Turnover Ratio 9.6 8.3 7.5
Average Collection Period 38 days 44 days 49 days
Interpretation :
The average collection period measures the quality of debtors and
it helps in analyzing the efficiency of collection efforts. It also helps to
analysis the credit policy adopted by company. In the firm average collection
period increasing year to year. It shows that the firm has Liberal Credit
policy. These changes in policy are due to competitors credit policy.
5. WORKING CAPITAL TURNOVER RATIO :
Working capital turnover ratio indicates the velocity of utilization of
net working capital. This ratio indicates the number of times the
working capital is turned over in the course of the year. This ratio
measures the efficiency with which the working capital is used by the
firm. A higher ratio indicates efficient utilization of working capital
and a low ratio indicates otherwise. But a very high working capital
turnover is not a good situation for any firm.
Working Capital Turnover Ratio = Cost of Sales
Net Working Capital

Working Capital Turnover = Sales
Networking Capital

e.g.
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Networking Capital 53.87 62.52 103.09
Working Capital Turnover 3.08 2.4 1.64
Interpretation :
This ratio indicates low much net working capital requires for
sales. In 2008, the reciprocal of this ratio (1/1.64 = .609) shows that for sales
of Rs. 1 the company requires 60 paisa as working capital. Thus this ratio is
helpful to forecast the working capital requirement on the basis of sale.
INVENTORIES
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Inventories 37.15 35.69 75.01
Interpretation :
Inventories is a major part of current assets. If any company wants to
manage its working capital efficiency, it has to manage its inventories
efficiently. The graph shows that inventory in 2005-2006 is 45%, in 2006-
2007 is 43% and in 2007-2008 is 54% of their current assets. The company
should try to reduce the inventory upto 10% or 20% of current assets.
CASH BNAK BALANCE :
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Cash Bank Balance 4.69 1.79 5.05
Interpretation :
Cash is basic input or component of working capital. Cash is needed to
keep the business running on a continuous basis. So the organization should
have sufficient cash to meet various requirements. The above graph is
indicate that in 2006 the cash is 4.69 crores but in 2007 it has decrease to
1.79. The result of that it disturb the firms manufacturing operations. In 2008,
it is increased upto approx. 5.1% cash balance. So in 2008, the company has
no problem for meeting its requirement as compare to 2007.
DEBTORS :
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Debtors 17.33 19.05 25.94
Interpretation :
Debtors constitute a substantial portion of total current assets. In India it
constitute one third of current assets. The above graph is depict that there is
increase in debtors. It represents an extension of credit to customers. The
reason for increasing credit is competition and company liberal credit policy.

CURRENT ASSETS :
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Current Assets 81.29 83.15 136.57
Interpretation :
This graph shows that there is 64% increase in current assets in 2008.
This increase is arise because there is approx. 50% increase in inventories.
Increase in current assets shows the liquidity soundness of company.

CURRENT LIABILITY :
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Current Liability 27.42 20.58 33.48
Interpretation :
Current liabilities shows company short term debts pay to outsiders. In
2008 the current liabilities of the company increased. But still increase in
current assets are more than its current liabilities.

NET WOKRING CAPITAL :
(Rs. in Crores)
Year 2005-2006 2006-2007 2007-2008
Net Working Capital 53.87 62.53 103.09
Interpretation :
Working capital is required to finance day to day operations of a firm.
There should be an optimum level of working capital. It should not be too less
or not too excess. In the company there is increase in working capital. The
increase in working capital arises because the company has expanded its
business.

RESEARCH METHODOLOGY
The methodology, I have adopted for my study is the various tools, which basically
analyze critically financial position of to the organization:

I. COMMON-SIZE P/L A/C
II. COMMON-SIZE BALANCE SHEET
III. COMPARTIVE P/L A/C
IV. COMPARTIVE BALANCE SHEET
V. TREND ANALYSIS
VI. RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With the
evaluation of each component, the financial position from different angles is tried to
be presented in well and systematic manner. By critical analysis with the help of
different tools, it becomes clear how the financial manager handles the finance
matters in profitable manner in the critical challenging atmosphere, the
recommendation are made which would suggest the organization in formulation of a
healthy and strong position financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and
comparative analysis, the organization would be able to conquer its in efficiencies
and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and
consistent accounting procedure to convey an under-standing of some financial
aspects of a business firm. It may show position at a moment in time, as in the case of
balance sheet or may reveal a series of activities over a given period of time, as in the
case of an income statement. Thus, the term financial statements generally refers to
the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following objectives of financial statements: -
1. To provide reliable financial information about economic resources and obligation
of a business firm.
2. To provide other needed information about charges in such economic resources and
obligation.
3. To provide reliable information about change in net resources (recourses less
obligations) missing out of business activities.
4. To provide financial information that assets in estimating the learning potential of
the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not
present a final picture a final picture of a concern. The utility of these statements is
dependent upon a number of factors. The analysis and interpretation of these
statements must be done carefully otherwise misleading conclusion may be drawn.
Financial statements suffer from the following limitations: -
1. Financial statements do not given a final picture of the concern. The data given in
these statements is only approximate. The actual value can only be determined when
the business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods, generally
one year, during the life of a concern. The costs and incomes are apportioned to
different periods with a view to determine profits etc. The allocation of expenses and
income depends upon the personal judgment of the accountant. The existence of
contingent assets and liabilities also make the statements imprecise. So financial
statement are at the most interim reports rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give
final and accurate position. The value of fixed assets in the balance sheet neither
represent the value for which fixed assets can be sold nor the amount which will be
required to replace these assets. The balance sheet is prepared on the presumption of a
going concern. The concern is expected to continue in future. So fixed assets are
shown at cost less accumulated deprecation. Moreover, there are certain assets in the
balance sheet which will realize nothing at the time of liquidation but they are shown
in the balance sheets.
4. The financial statements are prepared on the basis of historical costs Or original
costs. The value of assets decreases with the passage of time current price changes are
not taken into account. The statement are not prepared with the keeping in view the
economic conditions. the balance sheet loses the significance of being an index of
current economics realities. Similarly, the profitability shown by the income
statements may be represent the earning capacity of the concern.
5. There are certain factors which have a bearing on the financial position and
operating result of the business but they do not become a part of these statements
because they cannot be measured in monetary terms. The basic limitation of the
traditional financial statements comprising the balance sheet, profit & loss A/c is that
they do not give all the information regarding the financial operation of the firm.
Nevertheless, they provide some extremely useful information to the extent the
balance sheet mirrors the financial position on a particular data in lines of the structure
of assets, liabilities etc. and the profit & loss A/c shows the result of operation during
a certain period in terms revenue obtained and cost incurred during the year. Thus, the
financial position and operation of the firm.

FINANCIAL STATEMENT ANALYSIS
It is the process of identifying the financial strength and weakness of a firm from the available
accounting data and financial statements. The analysis is done
CALCULATIONS OF RATIOS
Ratios are relationship expressed in mathematical terms between figures, which are
connected with each other in some manner.

CLASSIFICATION OF RATIOS
Ratios can be classified in to different categories depending upon the basis of
classification
The traditional classification has been on the basis of the financial statement to which
the determination of ratios belongs.

These are:-
Profit & Loss account ratios
Balance Sheet ratios
Composite ratios