Working Capital Management Project

COMPREHENSIVE PROJECT STUDY
REPORT
ON
WORKING CAPITAL
MANAGEMENT
AND PROFITABILITY AT ATUL
AUTO LTD
Shapar (Veraval)
SUBMITTED TO
SAURASHTRA UNIVERSITY
IN PARTIAL FULFILLMENT FOR THE AWARD OF THE
MBA DEGREE
SUBMITTED BY
Jayesh S. Dobariya & Ankit Raichura

SEMESTER IV
AFFILIATED TO SAURASHTRA UNIVERSITY,

RAJKOT
84
Working Capital Management &
Profitability
PREFACE
Today in the era of globalization where in emerging of varied types of trends of
technological advancement is taking place to give the end user a product which is
better than the best with the changes & development in the field of business
economics & corporate world & emergence of various companies in the Indian
market user had the cutting edge to invest into various fields in order to get the
maximum benefit out of the existing schemes in the regulatory environment.
The objective of this report is to understand the Working Capital Management
and Profitability of Atul Auto Ltd. through various analyses.
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Profitability
ACKNOWLEDGEMENT
It gives me immense pleasure to present this project report on Working Capital
Management and Profitability carried out at ATUL AUTO LTD. In partial
fulfillment of post-graduate course M.B.A.
No work can be carried out without the help and guidance of various persons. I
am happy to take this opportunity to express my gratitude to those who have been
helpful to me in completing this project report.
I would like to thank Mr. Hitesh Popat sir to help me in granting permission in
this organization. I am especially thankful to Mr. J.V. Adhiya sir (Vice President
of Finance) for their valuable advice and guidance during my project completion.
I am also thankful to Mr. Hiren Nayak sir (HR Depart.) for granting me
permission for this project.
I would be failing in my duty if I do not express my deep sense of gratitude to Dr.
Dharmesh S. Raval sir without his guidance it wouldnt have been possible for
me to complete this project work.
Lastly I would like to thank my parents, friends and well wishers who
encouraged me to do this research work and all those who contributed directly or
indirectly in completing this project to whom I am obligated to.
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Profitability
DECLARATION
We, Ankit J. Raichura Students of MBA IV (Finance) 2008-2010 studying at
M.H.Gardi School of Management, Anandpar, declare that the project work
entitled Working Capital Management and Profitability of Atul Auto
Ltd.,Rajkot Was carried by us in the partial fulfillment of MBA program under
the Saurashtra University, Rajkot.
This project was undertaken as a part of academic curriculum according to the
university rules and norms and it has not commercial interest and motive. It is my
original work. It is not submitted to any other organization for any other purpose.
Date : Place :-Rajkot

____________________
Jayesh S. Dobariya
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TABLE OF CONTENT
SR
No.
Particulars
Page
No.
1.
Executive Summary
01
2.
COMPANY INFORMATION
02
3.
1.1 Introduction
1.2 Brief History
1.3 Managing Team
1.4 Group of Companies
1.5 Forms of organization and Size of Unit
1.6 Organization Structure
1.7 Contribution of Unit
WORKING CAPITAL MANAGEMENT
04
05
06
07
08
10
11
12
4.
2.1 Introduction
2.2 Need of Working Capital
2.3 Concept of W.C. Management
2.4 Types of Working Capital
2.5 Importance of W.C. Management
2.6 Determination of Working Capital
2.7 Sources of working capital
2.8 Working Capital Components
RESEARCH METHODOLOGY
13
14
15
16
19
20
22
23
35
3.1 Introduction
3.2 Objective of the Study
3.3 Scope and Limitation of the Study
3.4 Linear Correlation Co-Efficient
3.5Types of data collection
3.6 Data Analysis
36
37
38
39
41
42
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Return on Investments
Working Capital Size & Level Analysis
Working Capital Ratio Analysis and Comparison
with Return on Investments.
43
45
57
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EXECUTIVE SUMMARY
Atul Auto Ltd. is Indias reputed and leading manufacturer of Light Vehicle
Transport. Atul group also in other businesses like Auto Finance, two wheeler
and 4 wheeler distributors. Dealing in Petroleum Fuels and Products,
Telecommunication and also in Real Estate.
Atul Auto Ltd. have a very good market share with product differentiation like
goods carries, passenger carries, special carries. Atul Auto Ltd. covers the good
market share in Gujarat, Uttaranchal, Rajasthan, Orissa and Uttar Pradesh. Atul
Auto Ltd. exports their product in Nigeria, Egypt, Kenya, Tanzania, and plenty of
African country.
Working capital is life blood of any business organization. This study shows the
working capital management of Atul Atuo Ltd. It includes, working capital size
and level analysis, working capital ratio analysis and comparison with
profitability ratio (ROI).
In this study working capital ratios compare with profitability ratio (ROI). With
the help of karl pearsons correlation co-efficient statistical tools and found the
relationship between those ratios. Through this we could found working capital
impact on profitability of the Atul Auto Ltd.
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Profitability
Chap.
1
Company
Information
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Profitability
PROJECT AT A GLANCE
Name of the unit
:-
ATUL AUTO LTD.
Plant &registered office
:-
Survey No. 86, Plant No.1-4,

Near Microwave Tower,
National Highway 8-B,
Shapar (veraval),
Rajkot 360 002.Gujarat.
Telephone & Fax No.
:-
+91 02827 2652996 / 98 / 99
Fax
:-
+91 2827 52254
Website
:-
www.atulautoltd.co.in
Established year
:-
1983
Size of the organization
:-
Large Scale Industry
Form of organization
:-
Public Limited Company
Founder
:-
Jentibhai Chandra
Bankers
:-
State Bank of India

State Bank of Saurashtra
Citizens Co-op. Bank ltd.
Laxmi Vilas Bank Ltd.
HDFC Bank
Auditors
:-
Weekly off
:-
Maharishi & Co.

Chartered Accountant.
Wednesday
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Profitability
1.1 INTRODUCTION
20 years ago Jentibhai Chandra has started the business as a manufacturer of
automobile- Chhakara. The business was started at Jamnagar on Small base.
After some years diversification was made and they have started manufacturing
of DIESEL 3-WHEELERS along with chhakara. With the aim to cover
national market they have started emptier plant at Shapar (Veraval) because of
better transportation services and many other things.
At present the company is running under the name ATUL AUTO LIMITED.
Basically company is producing diesel engine vehicles. It produces 3-wheelers
like chhakera, pick-up van, delivery van and passenger van.
Now a days company is selling its products mainly in Andhra Pradesh,
Karnataka, Gujarat, Rajasthan, MP and Maharashtra. ATUL AUTO LIMITED
is leading company as a manufacturer of diesel 3-wheelers.
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Profitability
1.2 BRIEF HISTORY

Today, when you see or travel by the convenient 'Chhakada' you rarely realize
who invented this amazing people-friendly transportation vehicle. Well, we take
pride in mentioning our founders name the Late Mr. Jagjivanbhai
Karsanbhai Chandra. He was a man of vision. A Dreamer. An Inventor. A
Strategist. And an ingenious master-mind who loved challenges.
Back in the 1970s, when transportation was a crucial problem especially in rural
areas, he decided to blaze a new trail. He was thinking of an affordable mode of
transportation which can benefit rural folks of Saurashtra. The road conditions
were not good but the need for transportation was increasing day in and day out.
After thorough research and planning, he came up with a vehicle which was
skillfully engineered from a motorcycle. And this is how the first 'chhakada' was
developed which later became a way of life for the people of Saurashtra.
The improvements in technologies were done from time to time to make it a
sturdy and comfortable vehicle. And like father like son, Mr. Jayantibhai
Chandra also joined this mission. He took his illustrious fathers vision further.
He introduced diesel chhakada with many new features, and soon 150,000
'chhakadas' were rolling all over Saurashtra making it easy for passengers.
On 1st may, 1992 the company has started plant at Shapar (Veraval) in Rajkot
district to increase its sales and cover entire national market.
In the year 1996 ATUL AUTO PRIVATE LIMITED was converted in a Public
Limited Company due to extra need of finance. Because as per the situation and
demand of market they entered to launch some new products.
At present the company ATUL AUTO LIMITED has plant at Jamnagar,
Rajkot, Haridwara and in Rajasthan also.
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Profitability
1.3 MANAGEMENT TEAM

Board of Directors
Mr. Jentibhai J. Chandra
Chairman & Managing Director
Mr. Shriharsh S. Jogalekar
Vice Chairman
Mr. Mahendra J. Patel
Executive Director
Mr. Bharat J. Chandra
Director
Mr. Rajesh S. Dhruv
Director
Mr. Rajendra H. Kukerja
Director
Auditors
M/S Purohit Company & Company
Charted Accounts
Jamnagar.
Bankers
1.
2.
3.
4.
State Bank Of India

Citizens Co-Operative Bank
Laxmi Vilas Co-Operative Bank
State Bank Of Saurashtra
Functional Managers
1. Finance Manager
: Mr. J. H. Adhiya
2. Personal Manager : Mr. M.H. Desai
3. Marketing Manager : Mr. K. M. Cheriyan
4. Production Manager : Mr. P. J. Raval
Registered & Transfer Agent
Sharex India Private Ltd.
1.4 GROUP COMPANYS

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1. Atul Auto Industries

(Manufacturers of Diesel 3-Wheelers)
2. Atul Engines Ltd.
(Manufacturers of I.C. Engine)
3. Atul International
(Export- Import House)
4. Atul Motor Pvt. Ltd.
(Marketing Of Maruti Range of Cars& 4- Wheelers)
5. Atul Buildcon Pvt. Ltd.
(Real Estate Developers & Builders)
6. Khushbu Auto Pvt. Ltd.
(Auto Finance Company)
7. Khushbu Auto Finance Ltd.
(Auto Finance Company)
8. New Chandra Motorcycle House
(Distributors of L.M.L., Vespa Scooter, Royal Enfield Motorcycles Auto
Parts)
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Profitability
1.5 FORM OF ORGANIZATION AND SIZE OF UNIT

Form or organization can be divided mainly in four categories. There are two
other forms also.
Basic Forms
1.
2.
3.
4.
Sole Proprietor ship

Partnership
Private Limited Company
Public Limited Company
Other Forms
1.
2.
Public sector unit

Co-operative society
From above given all forms of organization ATUL AUTO LIMITED is a

public limited company.
There are many features of public limited company some of there are given
below,
Characteristics:
Free transfer of shares.
Large No. of Membership.
Artificial Legal Personality.
Limited liability.
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1.
2.
3.
4.

Profitability
Size of Unit
Size of unit can measured from in total capital divested in business. On the basis
of capital investment, there are main two types of industry. But there are there
other types also.
1.
2.
Small Scale Industry

Large Scale Industry
Other
1. Tiny Industry
2. Cottage Industry
3. Ancillary Industry
The total investment in large-scale industry; must be more than 20 corers and up
to 100 corers. Total investment of ATUL AUTO LIMITED is more than 20
corers. Thats why it is large-scale industry.
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Profitability
1.6 ORGANIZATION STRUCTURE

Authority and responsibility are the essential element on which type of
organization depends. But there other element also like function, communication
etc.
Organization can be divided in below given six types,
1)
2)
3)
4)
5)
6)
LINE ORGANIZATION
LINE & STAFF ORGANIZATION
MATRIX ORGANIZATION
FUNCTIONAL ORGANIZATION
PROJECT ORGANIZATION
COMMITTEE ORGANIZATION
From above given all type of organization ATUL AUTO LIMITED had
adopted LINE ORGANIZATION.
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1.7 CONTRIBUTION OF UNIT

Contribution of unit to the industry refers to the share of proportion the company
holds in entire industry.
ATUL AUTO LIMITED is manufacturer of 3-wheelers so its contribution is
towards 3-wheelers automobile segment. In 3-wheeler passenger van and load
carrier they have captured near about 18% to 20% of market. But if you take
diesel 3-wheeler as a separate part they are a leading company.
In Saurashtra Region Company has captured near about 50% market. But in
Gujarat region and in other state their contribution is less than that.
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Profitability
Chap.
2
Working
Capital
Management
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Profitability
2.1 INTRODUCTION
Working capital management is concerned with the problems arise in attempting
to manage the current assets, the current liabilities and the inter relationship that
exist between them. The term current assets refers to those assets which in
ordinary course of business can be, or, will be, turned in to cash within one year
without undergoing a diminution in value and without disrupting the operation of
the firm. The major current assets are cash, marketable securities, account
receivable and inventory. Current liabilities ware those liabilities which intended
at there inception to be paid in ordinary course of business, within a year, out of
the current assets or earnings of the concern. The basic current liabilities are
account payable, bill payable, bank over-draft, and outstanding expenses.
The goal of working capital management is to manage the firms current assets
and current liabilities in such way that the satisfactory level of working capital is
mentioned. The current should be large enough to cover its current liabilities in
order to ensure a reasonable margin of the safety.
A managerial accounting strategy focusing on maintaining efficient levels of both
components of working capital, current assets and current liabilities, in respect to
each other. Working capital management ensures a company has sufficient cash
flow in order to meet its short-term debt obligations and operating expenses.
Definition :
According to Guttmann & DougallExcess of current assets over current liabilities.
According to Park & GladsonThe excess of current assets of a business (i.e. cash, accounts receivables,
inventories) over current items owned to employees and others (such as salaries
& wages payable, accounts payable, taxes owned to government).
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Profitability
2.2 NEED OF WORKING CAPITAL MANAGEMENT

The need for working capital gross or current assets cannot be over emphasized.
As already observed, the objective of financial decision making is to maximize
the shareholders wealth. To achieve this, it is necessary to generate sufficient
profits can be earned will naturally depend upon the magnitude of the sales
among other things but sales can not convert into cash. There is a need for
working capital in the form of current assets to deal with the problem arising out
of lack of immediate realization of cash against goods sold. Therefore sufficient
working capital is necessary to sustain sales activity. Technically this is refers to
operating or cash cycle. If the company has certain amount of cash, it will be
required for purchasing the raw material may be available on credit basis. Then
the company has to spend some amount for labour and factory overhead to
convert the raw material in work in progress, and ultimately finished goods.
These finished goods convert in to sales on credit basis in the form of sundry
debtors. Sundry debtors are converting into cash after expiry of credit period.
Thus, some amount of cash is blocked in raw materials, WIP, finished goods, and
sundry debtors and day to day cash requirements. However some part of current
assets may be financed by the current liabilities also. The amount required to be
invested in this current assets is always higher than the funds available from
current liabilities. This is the precise reason why the needs for working capital
arise.
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2.3 CONCEPT OF WORKING CAPITAL

MANAGEMENT
There are two concepts of working capital management
1. Gross working capital
According to this concept, the total assets are termed as the gross working
capital. It is also known as quantitative or circulating capital. Total current assets
include, cash, marketable securities, account receivables, inventory, prepaid
expense, advance payment of tax, etc. To quote Weston and Brigham, Gross
working capital refers to firms investment in short term assets such as cash,
short term securities, accounts receivable and inventories. This concept helps in
making optimum investment in current assets and their financing. According to
Walker, Use of this concept is helpful in providing for the current amount of
working capital at the right time so that the firms are able to realize the greatest
return on investment.
2. Net working capital
Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors, bills payable
and outstanding expenses. Net working capital can be positive or negative
Efficient working capital management requires that firms should operate with
some amount of net working capital, the exact amount varying from firm to firm
and depending, among other things; on the nature of industries.net working
capital is necessary because the cash outflows and inflows do not coincide. The
cash outflows resulting from payment of current liabilities are relatively
predictable. The cash inflow are however difficult to predict. The more
predictable the cash inflows are, the less net working capital will be required. The
concept of working capital was, first evolved by Karl Marx. Marx used the term
variable capital means outlays for payrolls advanced to workers before the
completion of work. He compared this with constant capital which according to
him is nothing but dead labour. This variable capital is nothing wage fund
which remains blocked in terms of financial management, in work-in- process
along with other operating expenses until it is released through sale of finished
goods. Although Marx did not mentioned that workers also gave credit to the
firm by accepting periodical payment of wages which funded a portioned of
W.I.P, the concept of working capital, as we understand today was embedded in
his variable capital.
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Profitability
2.4 TYPES OF WORKING CAPITAL
The operating cycle creates the need for current assets (working capital).
However the need does not come to an end after the cycle is completed to explain
this continuing need of current assets a destination should be drawn between
permanent and temporary working capital.
Working
Capital
Permanent Working
Capital
Initial
W.C.
Regular
W.C.
Variable Working
Capital
Seasonal
W.C.
Special
W.C.
1. Permanent working capital

The permanent working capital refers to that part of the working capital which is
necessary for maintaining stock of raw material and finished goods at their
normal level and for paying wages and salaries regularly. It is minimum amount
of current assets which is needed for the smooth running of business. In other
words, permanent working capital is that which is permanently locked up in
current assets. Permanent working capital is off two kinds: A. Initial working
capital and B. Regular working capital
A. Initial working capital
In the initial period of its operation, a company must have enough money to pay
certain expenses. This amount will have to be supplied the owners themselves,
because in the initial years, credit facilities may not be available from creditors,
bank do not grant loans or overdrafts and credit-sales will have to be made.
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Profitability
B. Regular working capital

It is the working capital required to continue the regular business operations. It is
required for maintaining regular stock of finished goods to meet the customers
demands, to pay regular business expenses etc. Regular working capital is the
excess of current assets over current liabilities. This part of the working capital
needed for smooth operations of the business.
Temporary W.C.
W.C
.
Permanent W.C.
Time
2. Temporary working capital

It is the part of the working capital which is needed to meet the seasonal demands
and special needs. This is called variable working capital because its amount
varies according to the extent of extra demand. Variable working capital is of two
types A. Seasonal working capital and B. Special working capital.
A. Seasonal working capital
Some business enterprises require a larger amount of current assets during a
particular season. For instance sugar mills have to purchase sugarcane and
employ more people to process it during a particular season.
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B. Special working capital

In any business enterprise some unforeseen events take place when extra funds
are needed to meet with the situation. E.g. during depression prices and sales
decline considerably which necessitates extra working funds. During inflationary
conditions, prices of raw material and finished goods up, hence extra money is
needed to maintain the same level of stock. Unforeseen contingencies like strikes
and lockouts fire and looting, etc. also force the management to provide for extra
funds.
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Profitability
2.5 IMPORTANCE OF WORKING CAPITAL

MANAGEMENT
Working capital is considered as central nervous system of a firm. The
importance of working capital management is reflected in the time most spent by
financial managers in managing current assets and current liabilities.
Maintenance of adequate working capital is necessary in order to discharge day
to day liabilities and protect the business from adverse effects in times of
emergencies. It aims at protecting the purchasing power of assets and maximizes
the return on investment.
The goal of working capital management is to minimize the cost of working
capital while maximizing a firms profit. The working capital management is
concerned with determination of relevant levels of current assets and their
efficient use as well as the choice of financial mix. The efficiency of a firm to
earn profits depends largely on its ability to manage working capital. In other
words, working capital management policies have a crucial effect on firms
liquidity and profitability. Hence, working capital has to be effectively planned,
systematically controlled and optimally utilized.
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Profitability
2.6 DETERMINATION OF WORKING CAPITAL

1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed
capital is more rather than working capital. These businesses sell services and not
the commodities and that too on cash basis. As such, no founds are blocked in
piling inventories and also no funds are blocked in receivables. E.g. public utility
services like railways, infrastructure oriented project etc. there requirement of
working capital is less. On the other hand, there are some businesses like trading
activity, where requirement of fixed capital is less but more money is blocked in
inventories and debtors.
2. Length of production cycle
In some business like machine tools industry, the time gap between the
acquisition of raw material till the end of final production of finished products
itself is quit high. As such amount may be blocked either in raw material or work
in progress or finished goods or even in debtors. Naturally there need of working
capital is high.
3. Size and growth of business
In very small company the working capital requirement is quit high due to high
overhead, higher buying and selling cost etc. as such medium size business
positively has edge over the small companies. But if the business start growing
after certain limit, the working capital requirements may adversely affect by the
increasing size.
4. Business/ Trade cycle
If the company is the operating in the time of boom, the working capital
requirement may be more as the company may like to buy more raw material,
may increase the production and sales to take the benefit of favorable market, due
to increase in the sales, there may more and more amount of funds blocked in
stock and debtors etc. similarly in the case of depressions also, working capital
may be high as the sales terms of value and quantity may be reducing, there may
be unnecessary piling up of stack without getting sold, the receivable may not be
recovered in time etc.
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Profitability
5. Terms of purchase and sales

Some time due to competition or custom, it may be necessary for the company to
extend more and more credit to customers, as result which more and more
amount is locked up in debtors or bills receivables which increase the working
capital requirement. On the other hand, in the case of purchase, if the credit is
offered by suppliers of goods and services, a part of working capital requirement
may be financed by them, but it is necessary to purchase on cash basis, the
working capital requirement will be higher.
6. Stock Turnover
By turnover is meant the ratio of sales to average stock held in business. The
greater the turnover, the larger the volume of business that can be conducted with
a given working capital. In other words, if the turnover is rapid, burden of
working capital is not heavy.
7. Profitability
The profitability of the business may be vary in each and every individual case,
which is in turn its depend on numerous factors, but high profitability will
positively reduce the strain on working capital requirement of the company,
because the profits to the extend that they earned in cash may be used to meet the
working capital requirement of the company.
8. Attitude of Management
If the attitude of the management is aggressive and they are primarily risk-takers,
the need for working capital is reduced.
9. Operating efficiency
If the business is carried on more efficiently, it can operate in profits which may
reduce the strain on working capital; it may ensure proper utilization of existing
resources by eliminating the waste and improved coordination etc.
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Profitability
2.7 SOURCES OF WORKING CAPITAL

The main sources of working capital are as under:
1. Shares and Debentures
2. Retained Earnings
3. Commercial Banks
a. Loans
b. Bank Overdraft
c. Cash Credit
4. Commercial Paper
5. Certificate of Deposit
6. Commercial Bills Market
7. Factoring
8. Trade Creditor or Trade Creditors
9. Public Deposits
10.Indigenous Bankers and Money Lenders
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Profitability
2.8 WORKING CAPITAL COMPONENTS

Mainly three components of working capital management
1. Receivables Management
2. Inventory Management
3. Cash Management
Above three has equal importance to manage or handle working capital of any
firm. Now we discuss detail of above three components.
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Profitability
1. RECEIVABLES MANAGEMENT
The term receivable is defined as debt owed to the firm by customers arising
from sales of goods or services in the ordinary course of business.
Receivables or debtors are the one of the most important parts of the current
assets which is created if the company sells the finished goods to the customer
but not receive the cash for the same immediately. Trade credit arises when firm
sells its products and services on credit and dose not receive cash immediately. It
is essential marketing tool, acting as bridge for the movement of goods through
production and distribution stages to customers. Trade credit creates receivables
or book debts which the firm is expected to collect in the near future. The
receivables include three characteristics
1. It involve element of risk which should be carefully analysis.
2. It is based on economic value. To the buyer, the economic value in goods
or services passes immediately at the time of sale, while seller expects an
equivalent value to be received later on.
3. It implies futurity. The cash payment for goods or serves received by the
buyer will be made by him in a future period.
Objective of Receivable Management

Maximizing the value of the firm: The basic objective of debtors management
is to maximize the value of the firm by achieving a trade off between liquidity
(risk) and return. The main purpose of receivables management is to minimize
the risk of bad debts and not maximization of order. Efficient management of
receivables expands sales by retaining old customers and attracting new
customers.
Optimum Investment in Sundry Debtors: allowing credit, expands sales, but
they involve block of funds, that have an opportunity cost, which can be reduced
by optimum investment in receivables. Providing liberal credit increases sales
consequently profits will increase, but increases investment in receivables result
in increased costs.
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Profitability
Control and managing the cost of trade of credit: when there are no credit
sales, there will not be any trade credit cost. But credit sales increases profits, it is
possible only when the firm is able to keep the costs at minimum.
Size of Receivable in Atul Auto Ltd.
Particulars
Sundry Debtors
Indices
2004-05
2005-06
2006-07
2007-08
2008-09
62,934,110
100
87,395,034
138.87
81,660,540
129.75
39,619,066
62.95
35,213,006
55.95
Receivables Indices
Average Collection Period

The average collection period measures the quality of debtors since it indicate the
speed of there collection. The shorter the average collection period, the better the
quality of the debtors since a short collection period implies the prompt payment
by debtors. The average collection period should be compared against the firms
credit terms and policy judges its credit and collection efficiency. The collection
period ratio thus helps an analyst in two respects.
2.
In determining the collectability of debtors and thus, the efficiency of

collection efforts.
In ascertaining the firms comparative strength and advantages related to
its credit policy and performance.
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1.

Profitability
2. INVENTORY MANAGEMENT
The term inventory is used to designate the aggregate of those items of tangible
assets which are
1. Finished goods (saleable)
2. Work-in-progress (convertible)
3. Material and supplies (consumable)
In financial view, inventory defined as the sum of the value of raw material and
supplies, including spares, semi-processed material or work in progress and
finished goods. The nature of inventory is largely depending upon the type of
operation carried on. For instance, in the case of a manufacturing concern, the
inventory will generally comprise all three groups mentioned above while in the
case of a trading concern, it will simply be by stock- in- trade or finished goods.
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Profitability
Components of Inventory
Components of
Inventory
Raw
Materials
Work-inprogress
Finished
Product
Stores
and
Spares
1. Raw Materials
Raw materials are those inputs that are converted into finished goods through
manufacturing process. A major input for manufacturing a product. In other
words, they are very much needed for uninterrupted production.
2. Work-in-Progress
Work-in-progress is that stage of stocks that are between raw materials and
finished goods. Work-in-progress inventories are semi-finished products. They
represent products that need to under go some other process to become finished
goods.
3. Finished Products
Finished products are those products, which are ready for sale. The stock of
finished goods provides a buffer between production and market.
4. Store and Spares
Stores and spares inventory (include office and plant cleaning materials like,
soap, brooms, oil, fuel, light, bulbs etc.) are those purchased and stored for the
purpose of maintenance of machinery.
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Profitability
Inventory Management Motives

Managing inventories involves block of funds and inventory holding costs.
Maintenance of inventory is expensive, then why to firm hold inventories? There
are three general motives of holding inventories.
1. Transaction Motive
Transaction motive includes production of goods and sale of goods. It facilitates
uninterrupted production and delivery of order at a given time (right time).
2. Precautionary Motive
This motive necessitates the holding of inventories for unexpected changes in
demand and supply factors.
3. Speculative Motive
This compels to hold some inventories to take the advantage of changes in price
and getting quantity discount.
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Profitability
Objectives of Inventory Management

In company there should be an optimum level of investment for any asset,
whether it is plant, cash or inventories. Again inadequate disrupts production and
causes losses in sales. Efficient management of inventory should ultimately result
in wealth maximization of owners wealth. It implies that while the management
should try to pursue financial objective of turning inventory as quickly as
possible, it should at the same time ensure sufficient inventories to satisfy
production and sales demand. The objectives of inventory management consist of
two counterbalancing parts:
1. To minimize the firms investment in inventory
2. To meet a demand for the product by efficiently organizing the firms
production and sales operation.
This two conflicting objective of inventory management can also be expressed in
term of cost and benefits associated with inventory. That the firm should
minimize the investment in inventory implies that maintaining an inventory cost,
such that smaller the inventory, the better the view point .obviously, the financial
manager should aim at a level of inventory which will reconcile these conflicting
elements. Some objective as follow
1. To have stock available as and when they are required.
2. To utilize available storage space but prevents stock levels from exceeding
space available.
3. To maintain adequate accountability of inventories assets.
4. To provide, on item by- item basis, for re-order point and order such
quantity as would ensure that the aggregate result confirm with the
constraint and objective of inventory control.
To keep low investment in inventories carrying cost an obsolesce losses to the
minimum.
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Profitability
Size of Inventory
Particulars
Raw Materials
W.I.P.
Finished Goods
Total
Indices
2004-05
2005-06
2006-07
2007-08
2008-09
44,769,200 67,035,755 125,346,150 111,552,584 145,870252
26,221,991 28,418,545 64,199,726 71,465,522 24,723,408
1,314,829
4,961,700 18,028,663 10,586,166
6,165,644
72,306,020 100,416,000 207,574,539 193,604,272 176,759,304
100
138.88
287.08
267.76
244.46
Inventory Indices
Inventory components
The firms inventory consist following components
1. Raw material
2. Work- in-progress
3. Finished goods
To analyze the level of raw material inventory and work in progress inventory
held by the firm on an average it is necessary to examine the efficiency with
which the firm converts raw material inventory and work in progress into
finished goods.
84
Profitability
3. CASH MANAGEMENT
Cash is common purchasing power or medium of exchange. As such, it forms the
most important component of working capital. The term cash with reference to
cash management is used in two senses, in narrow sense it is used broadly to
cover cash and generally accepted equivalent of cash such as cheques, draft and
demand deposits in banks.
The broader view of cash also induce hear- cash assets, such as marketable sense
as marketable securities and time deposits in banks. The main characteristics of
this deposits that they can be really sold and convert in to cash in short term.
They also provide short term investment outlet for excess and are also useful for
meeting planned outflow of funds. We employ the term cash management in the
broader sense. Irrespective of the form in which it is held, a distinguishing feature
of cash as assets is that it was no earning power. Company have to always
maintain the cash balance to fulfill the dally requirement of expenses.
Motives for Holding Cash

1. Transaction Motive
Cash balance is necessary to meet day-to-day transaction for carrying on with the
operation of firms. Ordinarily, these transactions include payment for material,
wages, expenses, dividends, taxation etc. there is a regular inflow of cash from
operating sources, thus in case of JISL there will be two-way flow of cashreceipts and payments. But since they do not perfectly synchronize, a minimum
cash balance is necessary to uphold the operations for the firm if cash payments
exceed receipts.
Always a major part of transaction balances is held in cash, a part may be held
in the form of marketable securities whose maturity conforms to the timing of
anticipated payments of certain items, such as taxation, dividend etc.
84
Profitability
2. Precautionary Motive
Cash flows are somewhat unpredictable, with the degree of predictability varying
among firms and industries. Unexpected cash needs at short notice may also be
the result of following:
1. Uncontrollable circumstances such as strike and natural calamities.
2. Unexpected delay in collection of trade dues.
3. Cancellation of some order for goods due unsatisfactory quality.
4. Increase in cost of raw material, rise in wages, etc.
The higher the predictability of firms cash flows, the lower will be the necessity
of holding this balance and vice versa. The need for holding the precautionary
cash balance is also influenced by the firms capacity to have short term
borrowed funds and also to convert short term marketable securities into cash.
3. Speculative motive
Speculative cash balances may be defined as cash balances that are held to enable
the firm to take advantages of any bargain purchases that might arise. While the
precautionary motive is defensive in nature, the speculative motive is aggressive
in approach. However, as with precautionary balances, firms today are more
likely to rely on reserve borrowing power and on marketable securities portfolios
than on actual cash holdings for speculative purposes.
4. Compensating Motive
According to I.M. Pandey, the amount of cash to be held for the first two
motives, which are two most important motives, the following factors must be
taken into account:
The expected cash inflows and outflows based on cash budget.
The degree of deviation between expected and actual net cash flows.
The maturity structure of the firms liabilities.
The firms ability to borrow at short notice in the event of any emergency.
The philosophy of management regarding liquidity and risk of insolvency.
84
1.
2.
3.
4.
5.

Profitability
Advantage of Cash Management

Cash does not enter in to the profit and loss account of an enterprise, hence cash
is neither profit nor losses but without cash, profit remains meaningless for an
enterprise owner.
1. A sufficient of cash can keep an unsuccessful firm going despite losses
2. An efficient cash management through a relevant and timely cash budget may
enable a firm to obtain optimum working capital and ease the strains of cash
shortage, fascinating temporary investment of cash and providing funds normal
growth.
3. Cash management involves balance sheet changes and other cash flow that do
not appear in the profit and loss account such as capital expenditure.
Size and Indices of cash in Atul Auto

2004-05
2005-06
11,441,798 16,113,868
100
141.15
2006-07
2,387,963
20.92
2007-08
3,752,117
32.86
2008-09
18,628,235
163.18
84
Particulars
Cash & Bank
C.A. Indices

Profitability
Cash cycle
One of the distinguishing features of the fund employed as working capital is that
constantly changes its form to drive business wheel. It is also known as
circulating capital which means current assets of the company, which are
changed in ordinary course of business from one form to another, as for example,
from cash to inventories, inventories to receivables and receivables to cash.
Basically cash management strategies are essentially related to the cash cycle
together with the cash turnover. The cash cycle refers to the process by which
cash is used to purchase the row material from which are produced goods, which
are then send to the customer, who later pay bills. The cash turnover means the
number of time firms cash is used during each year.
84
Profitability
Chap.
3
Research
Methodology
84
Profitability
3.1 INTRODUCTION
Research methodology is a way to systematically solve the research problem. It
may be understood as a science of studying now research is done systematically.
In that various steps, those are generally adopted by a researcher in studying his
problem along with the logic behind them.
It is important for research to know not only the research method but also know
methodology. The procedures by which researcher go about their work of
describing, explaining and predicting phenomenon are called methodology.
Methods comprise the procedures used for generating, collecting and evaluating
data. All this means that it is necessary for the researcher to design his
methodology for his problem as the same may differ from problem to problem.
Data collection is important step in any project and success of any project will Be
largely depend upon now much accurate you will be able to collect and how
much time, money and effort will be required to collect that necessary data, this
is also important step.
Data collection plays an important role in research work. Without proper data
Available for analysis you cannot do the research work accurately.
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Profitability
3.2 OBJECTIVE OF THE STUDY

Study of the working capital management is important because unless the
working capital is managed effectively, monitored efficiently planed properly
and reviewed periodically at regular intervals to remove bottlenecks if any the
company can not earn profits and increase its turnover. With this primary
objective of the study, the following further objectives are framed for a depth
analysis.
To study the working capital management of Atul Auto Ltd.
2. To study the optimum level of current assets and current liabilities of the
company.
3. To study the liquidity position through various working capitals relate
ratios.
4. To study the working capital components such as receivables accounts,
cash management, Inventory position.
5. To study the way and means of working capital finance of the Atul Auto
Ltd.
6. Compare the working capital ratios with the profitability ratio (ROI).
1.
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Profitability
3.3 SCOPE & LIMITATIONS OF THE STUDY

Scope of the Study
The scope of the study is identified after and during the study is conducted. The
study of working capital is based on tools like trend Analysis, Ratio Analysis,
working capital leverage, operating cycle etc. Further the study is based on last 5
years Annual Reports of Jain Irrigation Systems Ltd. And even factors like
competitors analysis, industry analysis were not considered while preparing this
project.
Limitations of the Study

Following limitations were encountered while preparing this project:
1. Limited data
This project has completed with annual reports; it just constitutes one part of data
collection i.e. secondary. There were limitations for primary data collection
because of confidentiality.
2. Limited period
This project is based on five year annual reports. Conclusions and
recommendations are based on such limited data. The trend of last five year may
or may not reflect the real working capital position of the company.
3. Limited Area
Also it was difficult to collect the data regarding the competitors and their
financial information. Industry figures were also difficult to get.
84
Profitability
3.4 Linear Correlation Co-efficient

Meaning
Correlation is a measure of finding out the degree of relationship between two or
more variables. It means the tendency of the variables to move together.
Therefore, it means the movement of two or more variables in sympathy with
another. This movement may be in the same or reverse direction.
The number representing the measure (or degree) of linear correlation between
two variables is called the coefficient of correlation. It is represented by r. the
value of r is greater than or equal to -1 and smaller than or equal to 1.
Definition
The relationship between two variables such that a change in one is accompanied
by a positive or a negative change in the other and also a greater change in one is
accompanied by a corresponding greater change in the other, is called correlation.
Properties of Coefficient of correlation:(1) The coefficient of correlation is an absolute relation measure.

(2) The value of coefficient of correlation r is invariant under change in units
of measurement of variable X and Y.
(3) The
coefficient of correlation between X and Y is equal to the coefficient
of correlation between Y and X I, e.; r(x, y) = r(y, x).

(4) The value of coefficient of correlation r is always greater than or equal to
-1 and less than or equal to 1. That is -1 r 1.
(5) The
coefficient of correlation is invariant under the change of origin and
scale. That is r(x, y) = r (u, v).
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Profitability
Pearson product-moment correlation coefficient

In statistics, the Pearson product-moment correlation coefficient (sometimes
referred to as the PMCC, and typically denoted by r) is a measure of the
correlation (linear dependence) between two variables X and Y, giving a value
between +1 and 1 inclusive. It is widely used in the sciences as a measure of the
strength of linear dependence between two variables. It was developed by Karl
Pearson from a similar but slightly different idea introduced by Francis Galton in
the 1880s. The correlation coefficient is sometimes called "Pearson's r."
Pearson's correlation coefficient between two variables is defined as the
covariance of the two variables divided by the product of their standard
deviations:
Pearson Correlation Assumptions

That the relationship between X and Y can be Represented by a straight
line, i.e. it is linear.
That X and Y are metric variables, measured on an interval or ratio scale
of measurement.
In using a t distribution to test the significance of the correlation
coefficient
That the sample was randomly drawn from the population, and That X and Y are
normally distributed in the population. This assumption is less important as the
sample size increases.
84
Profitability
3.5 TYPES OF DATA COLLECTION

There are two types of data collection methods available.
1. Primary data collection
2. Secondary data collection
1. Primary data collection method
Primary data is that data which is collected fresh or first hand, and for first time
which is original in nature. Primary data can collect through personal interview,
questionnaire etc. to support the secondary data.
2. Secondary data collection
The secondary data are those which have already collected and stored. Secondary
data easily get those secondary data from records, journals, annual reports of the
company etc. It will save the time, money and efforts to collect the data.
Secondary data also made available through trade magazines, balance sheets,
books etc.
This project is based on primary data collected through personal interview of
head of account department, head of production department and other concerned
staff member of finance department. But primary data collection had limitations
such has matter confidential information thus project is based on secondary
information collected through five years annual report of the company. The data
collection was aimed at study of working capital management of the company.
Project is based on
1. Annual report of Atul Auto Ltd. 2004-05
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Profitability
3.6 DATA ANALYSIS

After collection of the data the second step is analyze the data. In this report we
use the Profitability Ratio (Return on Investment) and working capital Ratio. We
compare both ratios with the Karl Pearsons correlation co-efficient statistical
tool.
With the help of primary data and mainly secondary data we could found the
below results.
Return on Investments
Working Capital Size and Level Analysis
Working Capital Ratios Analysis
Comparison between Working capital ratios and Return on Investment.
To compare Working capital ratios and Return on Investment we have used Karl
Pearsons correlation co-efficient statistical tool. Because it is very effective
84
Profitability
Return on
Investmen
t
84
Profitability
Return on Investment
The profitability of the firm is measured by establishing relation of net profit with
the total assets of the company. The ratio indicates the efficiency of utilization of
assets in generating revenue.
Net Profit
Return on Investment =
Year
Net Profit
Total Assets
2004-05
30,155,499
390,094,141
ROI
7.73 %
2005-06
41,980,321
583,793,97
4
7.19%
Total Assets
2006-07
31,438,941
690,831,93
8
4.55%
X 100
2007-08
2008-09
12,669,841
4,596,564
733,998,35
778,616,638
5
1.73%
0.59%
Return on Investment
Observation
From year 2004-05 the return on investment were reduced continuously. Net
sales in Rs. was increase but the no. of unit is reduced because raw material price
and product prices hike. Its happened due to the competition and competitors. In
the year 2008-09 the return on investment reduces by 92% as compare to the year
2004-05. Its shows the inefficient utilization of the available resources.
84
Profitability
84
Profitability
Working
Capital Size
&
Level
Analysis
84
Profitability
WORKING CAPITAL LEVEL

The consideration of the level investment in current assets should avoid two
danger points excessive and inadequate investment in current assets. Investment
in current assets should be just adequate, not more or less, to the need of the
business firms. Excessive investment in current assets should be avoided because
it impairs the firms profitability, as idle investment earns nothing. On the other
hand inadequate amount of working capital can be threatened solvency of the
firms because of its inability to meet its current obligation. It should be realized
that the working capital need of the firms may be fluctuating with changing
business activity. This may cause excess or shortage of working capital
frequently. The management should be prompt to initiate an action and correct
imbalance.
Size of Working Capital

2004-05
2005-06
2006-07
2007-08
2008-09
72,306,020
62,934,110
11,441,798
56,145,885
100,416,000
87,395,034
16,113,867
94,058,239
207,574,539
81,660,540
2,387,963
63,045,027
193,604,272
39,619,066
3,752,117
76,001,619
176,759,304
35,213,006
18,628,235
77,265,386
202,827,813
297,983,140
354,668,069
312,977,074
307,865,931
53,374,115
1,686,940
55,061,055
147,766,758
139,779,195
15,667,246
155,446,441
142,536,699
92,499,837
15,382,278
107,882,115
246,785,954
71,621,898
10,003,311
81,625,209
231,351,865
100,822,850
11,419,468
112,242,318
195,623,613
84
Particulars
A. Current Assets
Inventories
Sundry Debtors
Cash & Bank
Loans & Advances
Total of A
(Gross W.C.)
B. Current Liabilities
Current Liabilities
Provision
Total of B
Net W.C. (A-B)
(Amnt. In Rs.)

Profitability
WORKING CAPITAL TREND ANALYSIS

In working capital analysis the direction at changes over a period of time is of
crucial importance. Working capital is one of the important fields of
management. It is therefore very essential for an annalist to make a study about
the trend and direction of working capital over a period of time. Such analysis
enables as to study the upward and downward trend in current assets and current
liabilities and its effect on the working capital position.
The term trend is very commonly used in day-today conversion trend, also
called secular or long term need is the basic tendency of population, sales,
income, current assets, and current liabilities to grow or decline over a period of
time
The trend is defined as smooth irreversible movement in the series. It can be
increasing or decreasing.
Emphasizing the importance of working capital trends, analysis of working
capital trends provide as base to judge whether the practice and privilege policy
of the management with regard to working capital is good enough or an
important is to be made in managing the working capital funds.
Further, any one trend by it self is not very informative and therefore comparison
with Illustrated their ideas in these words, An upwards trends coupled with
downward trend or sells, accompanied by marked increase in plant investment.
Especially if the increase in planning investment by fixed interest obligation
Working Capital Size trend
(Amnt. In Rs.)
2004-05
147,766,758
100
2005-06
142,536,699
96.46
2006-07
246,785,954
167.01
2007-08
231,351,865
156.56
2008-09
195,623,613
132.39
84
Years
Net W.C (A-B)
W.C. Indices

Profitability
Working Capital Indices
Observations
It was observe that in the year 2006-07 indices is very high because of mismatch
of current assets and current liabilities. Current Assets increase by 19% and
Current Liabilities decrease by 30%. After year 2006-07 companys decreased its
working capital continuously. By reducing working capital company might be
increased its profitability in next years. The fall in working capital is a clear
indication that the company is utilizing its short term resources with efficiency.
84
Profitability
Current Assets
Total assets are basically classified in two parts as fixed assets and current assets.
Fixed assets are in the nature of long term or life time for the organization.
Current assets convert in the cash in the period of one year. It means that current
assets are liquid assets or assets which can convert in to cash within a year.
Current Assets Size
(Amnt. In Rs.)
C.A. Indices
2004-05
72,306,020
62,934,110
11,441,798
56,145,885
2005-06
100,416,000
87,395,034
16,113,867
94,058,239
2006-07
207,574,539
81,660,540
2,387,963
63,045,027
2007-08
193,604,272
39,619,066
3,752,117
76,001,619
2008-09
176,759,304
35,213,006
18,628,235
77,265,386
202,827,813
297,983,140
354,668,069
312,977,074
307,865,931
100
146.91
174.86
154.31
151.79
Current Assets Indices
84
Particulars
Inventories
Sundry Debtors
Cash & Bank
Loans & Advances
Other Assets
Total of C.A.

Profitability
Composition of current assets

Analysis of current assets components enable one to examine in which
components the working capital fund has locked. A large tie up of funds in
inventories affects the profitability of the business or the major portion of current
assets is made up cash alone, the profitability will be decreased because cash is
non earning assets.
Composition of Current Assets
Particulars
Inventories
Sundry Debtors
Cash & Bank
Loans & Advances
2008-09
57.41
11.44
06.05
25.10
No. in %
100
Current Assets Components
84
Total of C.A.
2004-05 2005-06 2006-07 2007-08

35.65
33.70
58.33
61.86
31.03
29.33
23.02
12.66
05.64
05.41
00.67
01.2
27.68
31.56
17.78
24.28
100
100
100
100
(No. in %)

Profitability
Observation
It was observed that the size of current assets is increasing with increases in the
sales. The excess of current assets is showing positive liquidity position of the
firm but it is not always good because excess current assets then required, it may
adversely affects on profitability. Current assets include some funds investments
for which company pay interest.
The balance of current assets is maintained in the years 2004-05 and 2005-06. As
per my view in year 2006-07 is ideal because in this year Inventory was increase
and Sundry Debtors, Cash & Bank Balance and Loan & Advances were decrease
compare to last two financial years. In the year 2007-08 again Inventory was
increase and Sundry Debtors and Cash & Bank were decrease but Loans &
Advances increased. But it was not bed situation for the company.
In the year 2008-09 the Inventory was down by 7.19% compare to last year and
Cash & Bank Balance and Loans & Advances were decrease. But Sundry
Debtors was decrease by 9.64% compare to last year.
With the help of Composition of Current Assets company try to maintain and
increase the inventory level and its profitable for the company. In last five years
company reduces Sundry Debtors continuously, so we can say that company has
no more risk regarding Bed Debts.
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Profitability
Current liabilities
Current liabilities mean the liabilities which have to pay in current year. It
includes sundry creditors means supplier whose payment is due but not paid yet,
thus creditors called as current liabilities. Current liabilities also include short
term loan and provision as tax provision. Current liabilities also includes bank
overdraft. For some current assets like bank overdrafts and short term loan,
company has to pay interest thus the management of current liabilities has
importance.
Current Liabilities Size

Particulars
Current Liabilities
Provision
Total of B
Indices
2004-05
53,374,115
1,686,940
55,061,055
100
2005-06
139,779,195
15,667,246
155,446,441
2006-07
92,499,837
15,382,278
107,882,115
282.32
195.93
2007-08
71,621,898
10,003,311
81,625,209
148.24
(Amnt In Rs.)
2008-09
100,822,850
11,419,468
112,242,318
203.85
Current Liabilities Indices
Observation
Current Liabilities graph not shown continuous growth. In the year 2008-09
current liabilities in increase compare to 2006-07 and 2007-08 years. It means
company creates the credit in the market by good transaction. To get maximum
credit from supplier which is profitable to the company it reduces the need of
working capital of firm.
84
Profitability
CHANGES IN WORKING CAPITAL

There may be long run trend of change e.g. The price of row material say oil may
constantly raise necessity the holding of large inventory. Cyclical changes in
economy dealing to ups and downs in business activity will influence the level of
working capital both permanent and temporary. Changes in seasonality in sales
activities.
The second major case of changes in the level of working capital is because of
policy changes initiated by management. The term current assets policy may be
defined as the relationship between current assets and sales volume. The third
major point if changes in working capital are changes in technology because
change sin technology to install that technology in our business more working
capital is required. A change in operating expanses rise or full will have similar
effects on the levels of working following working capital statement is prepared
on the base of balance sheet of last two year.
Statement of changes in Working Capital

(Amnt In Rs.)
Particulars
A. Current Assets
Inventories
Sundry Debtors
Cash & Bank
Loans & Advances
Other Assets
Total of A
B. Current Liabilities
Current Liabilities
Provision
Total of B
Net W.C. (A-B)
Net Decrease in W.C.
Total
Changes in W.C.
Increase
Decrease
2007-08
2008-09
193,604,272
39,619,066
3,752,117
76,001,619
176,759,304
35,213,006
18,628,235
77,265,386
312,977,074
307,865,931
5,111,143
71,621,898
10,003,311
81,625,209
231,351,865
100,822,850
11,419,468
112,242,318
195,623,613
35,728,252
29,200,952
1,416,157
30,617,109
16,844,968
4,406,060
14,876,118
1,263,767
35,728,252
51,868,137
51,868,137
Observation
As per the table data current assets decreased and current liabilities increased so
the working capital decreased as compare to the previous year. Inventory
decreased by 9% and current liabilities increased by 41% as compare to previous
year.
84
Profitability
WORKING CAPITAL LEVERAGE

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

EBIT
Return on Capital Employed =
Total Assets
The working capital leverage reflects the sensitivity of return on capital

employed to changes in level of current assets. Working capital leverage would
be less in the case of capital intensive capital employed is same working capital
leverage expresses the relation of efficiency of working capital management with
the profitability of the company.
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Profitability
Calculation of working capital leverages
Particulars
ROCE %
% Change in ROCE
% Change in C.A.
W. C. Leverages
2004-05 2005-06 2006-07 2007-08 2008-09

11.38
11.15
7.03
2.60
0.76
0.611
-2.021 -36.950 -63.016 -70.769
19.913 46.914 19.023 -11.755 -1.633
0.031
-0.043
-1.942
5.361
43.337
Working Capital Leverage
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Profitability
Working Capital Leverage Components
Observation
Working capital leverage increase in 2008-09 as compare to 2004-05 its shows
the efficient use of current assets and current liabilities. In year 2006-07 lowest
working capital leverages. Company reduces its current assets and tries to
increasing in profitability.
84
Profitability
Working Capital
Ratio Analysis &
Comparison with
ROI
84
Profitability
INTRODUCTION
Ratio analysis is the powerful tool of financial statements analysis. A ratio is
define as the indicated quotient of two mathematical expressions and as the
relationship between two or more things. The absolute figures reported in the
financial statement do not provide meaningful understanding of the performance
and financial position of the firm. Ratio helps to summaries large quantities of
financial data and to make qualitative judgment of the firms financial
performance.
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Profitability
ROLE OF RATIO ANALYSIS

Ratio analysis helps to appraise the firms in the term of there profitability and
efficiency of performance, either individually or in relation to other firms in same
industry. Ratio analysis is one of the best possible techniques available to
management to impart the basic functions like planning and control. As future is
closely related to the immediately past, ratio calculated on the basis historical
financial data may be of good assistance to predict the future. E.g. On the basis of
inventory turnover ratio or debtors turnover ratio in the past, the level of
inventory and debtors can be easily ascertained for any given amount of sales.
Similarly, the ratio analysis may be able to locate the point out the various arias
which need the management attention in order to improve the situation. E.g.
Current ratio which shows a constant decline trend may be indicate the need for
further introduction of long term finance in order to increase the liquidity
position. As the ratio analysis is concerned with all the aspect of the firms
financial analysis liquidity, solvency, activity, profitability and overall
performance, it enables the interested persons to know the financial and
operational characteristics of an organization and take suitable decisions.
84
Profitability
LIMITATION OF RATIO ANALYSIS
The basic limitation of ratio analysis is that it may be difficult to find a

basis for making the comparison
Normally, the ratios are calculated on the basis of historical financial

statements. An organization for the purpose of decision making may need
the hint regarding the future happiness rather than those in the past. The
external analyst has to depend upon the past which may not necessary to
reflect financial position and performance in future.
The technique of ratio analysis may prove inadequate in some situations if

there is differs in opinion regarding the interpretation of certain ratio.
As the ratio calculates on the basis of financial statements, the basic

limitation which is applicable to the financial statement is equally
applicable In case of technique of ratio analysis also i.e. only facts which
can be expressed in financial terms are considered by the ratio analysis.
The technique of ratio analysis has certain limitations of use in the sense
that it only highlights the strong or problem arias, it dose not provide any
solution to rectify the problem arias.
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Profitability
EFFICIENCY RATIO
1. Working capital turnover ratio
It signifies that for an amount of sales, a relative amount of working capital is
needed. If any increase in sales contemplated working capital should be adequate
and thus this ratio helps management to maintain the adequate level of working
capital. The ratio measures the efficiency with which the working capital is being
used by a firm. It may thus compute net working capital turnover by dividing
sales by net working capital.
Sales
Working Capital Turnover Ratio =
Sales
Net W.C
W.C. TOR
2004-05
989,129,942
147,766,758
6.69
2005-06
1,290,284,137
142,536,699
9.05
2006-07
1,217,733,969
246,785,954
4.93
2007-08
803,977,774
231,351,865
3.48
2008-09
1,168,174,548
195,623,613
5.97
84
Years
Net Working Capital

Profitability
Relation between Working Capital Turnover and ROI
Year
W.C. TOR
ROI
2004-05
2005-06
2006-07
2007-08
2008-09
6.69
9.05
4.93
3.47
5.96
7.73
7.13
4.55
1.73
0.59
Co-relation (r) =
0.66
Observation:
From the above figure we can say that the Working Capital Turnover was
fluctuated year by year. The highest ratio in 2005-06 and low in 2007-08 year. It
means that company fails to use of working capital efficiently in the 2007-08.
But in the year 2008-09 company increase the ratio by 72%. Company decreased
inventory, cash & bank balance and sundry debtors as compare to previous year
and increased current liabilities as compare to previous year. Correlation between
working capital turnover and return on investment is 0.66 it means relation
between them is partial positive. Working capital turnover ratio leads towards
profitability so, we can say that effective utilization of working capital resources
is very essential for maintain and improve profitability of the business.
84
Profitability
2. Inventory turnover ratio

Inventory turnover ratio indicates the efficiency of the firm in producing and
selling its product. This ratio indicates the effectiveness and efficiency of the
inventory management. The ratio shows how speedily the inventory is turn into
cash or receivables through sales. It is calculated by dividing the cost of good
sold by average inventory.
Cost of Goods Sold

Inventory Turnover Ratio =
Average Inventory
Inventory Turnover
Inventory TOR
2004-05
2005-06
2006-07
2007-08
2008-09
944,744,377
1,225,196,366
1,169,161,821
784,863,874
1,162,235,516
58,360,743
86,361,010
153,995,270
200,589,406
185,181,788
16.19
14.19
7.59
3.91
6.28
Inventory Turnover Ratio
84
Years
Cost of Goods
Sold
Average Inventory

Profitability
Relation between Inventory Turnover and ROI
Year
2004-05
2005-06
2006-07
2007-08
2008-09
Inventory
TOR
16.19
14.19
7.59
3.91
6.28
ROI
7.73
7.13
4.55
1.73
0.59
Correlation (r) =
0.92
Observation
It was observed that Inventory turnover ratio indicates maximum sales achieved
with the minimum investment in the inventory. As such, the general rule high
inventory turnover is desirable but high inventory turnover ratio may not
necessary indicates the profitable situation. An organization, in order to achieve
a large sales volume may sometime sacrifice on profit, inventory ratio may not
result into high amount of profit. Companys inventory level is high as compare
to the sales. So the turnover ratio may be decline and profitability also decreases.
Inventory turnover ratio and Return on investment have strong correlation. So it
means that Inventory strongly affects the profitability of Atul Auto Ltd.
84
Profitability
3. Receivable Turnover Ratio

Receivable turnover ratio provides relationship between credit sales and
receivables of a firm. It indicates how quickly receivables are converted into
sales.
Sales
Receivable Turnover Ratio =
Average A/C. Receivables
Receivable Turnover Ratio

2004-05
989,129,942
56,950,707
17.36
2005-06
1,290,284,137
75,164,572
17.17
2006-07
1,217,733,969
84,527,787
14.41
2007-08
803,977,740
60,639,803
13.26
2008-09
1,168,174,548
37,416,036
31.22
Receivable Turnover Ratio
84
Particulars
Sales
Avg. Debtors
Rec. TOR

Profitability
Relation between Receivable Turnover and ROI
Year
Receivable
TOR
ROI
2004-05
2005-06
2006-07
2007-08
2008-09
17.36
17.17
14.41
13.26
31.22
7.73
7.13
4.55
1.73
0.59
Correlation (r) = 0.46
Observation
From 2004-05 to 2007-08 there were no huge difference in Receivable turnover
ratio. But in 2008-09 this ratio increase by 80% as compare to 2004-05 it was
highest changes in last 5 years period of time. Company decreases average
debtors so the collection turnover ratio increment possible. Company increased
the receivable turnover ratio but it was not affected to the positive profitability
indices. Here inverse correlation between receivable turnover ratio and return on
investment. It indicates that receivables failed to give positive impact in
profitability of the Atul Auto Ltd.
84
Profitability
4. Current Assets Turnover Ratio

Current assets turnover ratio is calculate to know the firms efficiency of utilizing
the current assets .current assets includes the assets like inventories, sundry
debtors, bills receivable, cash in hand or bank, marketable securities, prepaid
expenses and short term loans and advances. This ratio includes the efficiency
with which current assets turn into sales. A higher ratio implies a more efficient
use of funds thus high turnover ratio indicate to reduced the lock up of funds in
current assets. An analysis of this ratio over a period of time reflects working
capital management of a firm.
Sales
Current Assets Turnover Ratio =
Average A/C. Receivables
Current Assets Turnover Ratio

2004-05
2005-06
989,129,942 1,290,284,137
202,827,813
297,983,139
4.87
4.33
2006-07
1,217,733,969
354,668,069
3.43
2007-08
2008-09
803,977,740 1,168,174,548
312,977,074
307,865,931
2.57
3.79
Current Assets Turnover Ratio
84
Particulars
Sales
Current Assets.
C. A. TOR

Profitability
Relation between Current Assets Turnover and ROI
Year
2004-05
2005-06
2006-07
2007-08
2008-09
C.A.
TOR
4.87
4.33
3.43
2.57
3.79
ROI
7.73
7.13
4.55
1.73
0.59
Correlation (r) =
0.74
Observation
Current Assets turnover ratio decreased every year compare to 2004-05. In 2004
-05 ratio was highest and in 2007-08 the ratio of current assets is very low
because of high inventory. In year 2008-09 this ratio increased by 47%. But it has
not given any positive impact on the profitability. Current assets ratio not
indicates any particular trend over the period of time. Here strong correlation
between current assets turnover and return on investment. Its indicate that
company use the current assets effectively. Effective utilization of current assets
helps to create healthy profit.
84
Profitability
5.5 LIQUIDITY RATIO

1. Current Ratio
Current assets include cash and those assets which can be converted in to cash
within a year, such marketable securities, debtors and inventories. All obligations
within a year are include in current liabilities. Current liabilities include creditors,
bills payable accrued expenses, short term bank loan income tax liabilities and
long term debt maturing in the current year. Current ratio indicates the
availability of current assets in rupees for every rupee of current liability.
Current Assets
Particulars
Current Assets.
Current Liabilities
Current Ratio
Current Liabilities
2004-05
202,827,813
55,061,055
3.68
2005-06
297,983,139
155,446,441
1.92
2006-07
354,668,069
107,882,116
3.28
2007-08
312,977,074
81,625,209
3.83
2008-09
307,865,931
112,242,318
2.74
84
Current Ratio =

Profitability
Relation between Current Ratio and ROI
Year
2004-05
2005-06
2006-07
2007-08
2008-09
Current
Ratio
3.68
1.92
3.28
3.83
2.74
ROI
7.73
7.13
4.55
1.73
0.59
Correlation (r) = 0.19
Observation
The current ratio indicates the availability of funds to payment of current
liabilities in the form of current assets. A higher ratio indicates that there were
sufficient assets available with the organization which can be converted in cash,
without any reduction in the value. As ideal current ratio is 2:1, where current
ratio of the firm is more than 2:1, it indicates the unnecessarily investment in the
current assets. Ratio is higher in the 2007-08 because current liability decreased
by 24%. Correlation between current ratio and return on investment is negative.
To improve the profitability company must decrease the current ratio because
some unnecessary investment in current assets blocked the money.
84
Profitability
2. Quick Ratio
Quick ratios establish the relationship between quick or liquid assets and
liabilities. An asset is liquid if it can be converting in to cash immediately or
reasonably soon without a loss of value. Cash is the most liquid asset .other
assets which are consider to be relatively liquid and include in quick assets are
debtors and bills receivable and marketable securities. Inventories are considered
as less liquid. Inventory normally required some time for realizing into cash.
Their value also be tendency to fluctuate. The quick ratio is found out by dividing
quick assets by current liabilities
Current Assets - Inventory

Quick Ratio =
Current Liabilities
Quick Ratio
2004-05
130,521,793
55,061,055
2.37
2005-06
197,567,139
155,446,441
1.27
2006-07
147,093,530
107,882,116
1.36
2007-08
119,372,802
81,625,209
1.46
2008-09
131,106,627
112,242,318
1.17
Quick Ratio
84
Particulars
Liquid C. A.
Current Liabilities
Quick Ratio

Profitability
Relation between Quick Ratio and ROI
Year
2004-05
2005-06
2006-07
2007-08
2008-09
Quick
Ratio
2.37
1.27
1.36
1.46
1.17
ROI
7.73
7.13
4.55
1.73
0.59
Correlation (r) =
0.59
Observation
Quick ratio indicates that the company has sufficient liquid balance for the
payment of current liabilities. The standard liquid ratio is 1:1 but here liquid ratio
is more than 1:1 over the period of 5 years, it indicates that the firm maintains the
over liquid assets than actual requirement of such assets. Here, correlation
between quick ratio and return on investment is moderate. Such a policy is called
conservative policy of finance affects on the cost of the fund and return on the
funds.
84
Profitability
3. Absolute Liquid Ratio

Even though debtors and bills receivables are considered as more liquid then
inventories, it can not be converted in to cash immediately or in time. Therefore
while calculation of absolute liquid ratio only the absolute liquid assets as like
cash in hand cash at bank, short term marketable securities are taken in to
consideration to measure the ability of the company in meeting short term
financial obligation. It calculates by absolute assets dividing by current liabilities.
Absolute Liquid Assets
Absolute Liquid Ratio
Current Liabilities
Current Liabilities
Absolute Liquid
Ratio
2004-05
2005-06
2006-07
2007-08
2008-09
11,441,798
16,113,867
2,387,963
3,752,117
18,628,235
55,061,055
155,446,441
107,882,116
81,625,209
112,242,318
0.104
0.022
0.208
0.046
0.166
84
Particulars
Absolute Liquid
Ratio

Profitability
Relation between Absolute Liquid Ratio and ROI
Year
2004-05
2005-06
2006-07
2007-08
2008-09
Absolute
Quick
Ratio
0.208
0.104
0.022
0.046
0.166
ROI
7.73
7.13
4.55
1.73
0.59
Correlation (r) =
0.26
Observation
Absolute liquid ratio indicates the availability of cash with company is sufficient
because company also has other current assets to support current liabilities of the
company. In the year 2004-05 the ratio high. Because cash was law as compare
to current liabilities. Correlation between Absolute Liquid Ratio and Return on
investment is low. But its not any drastic impact on profitability.
84
Profitability
Chap.
4
Findings,
conclusion and
Recommendati
on
84
Profitability
Findings, Conclusion and Suggestion
Working capital management is important aspects of financial management. The

study of working capital of Atul Auto Ltd. Has reviled that the efficiency and
liquidity ratios were as per the standard industrial practices but liquidity position
of the company showed an increasing trend. The study has been conducted on
working capital ratios analysis, working capital leverage, working capital size a
level analysis and comparison with profitability ratio (Return on Investment)
which helped the company to manage its working capital efficiency and
affectively.
Return on investment of the company reduced year by year. So the

profitability of the firm automatically down. Compare to year 2004-05
with 2008-09 return on investment down by 92%.
Working capital size of Atul Auto Ltd. not indicate any specific trend and
fluctuate every year. Company decrease the working capital size in year
2008-09 as compare to previous year. Here lack of combination between
current assets and current liabilities so the profitability was reduced.
Current assets are more than current liabilities indicates that company use
long term funds for short term requirements, where long term funds are
most costly than short term funds.
Company has a more inventories in total current assets. It is very good

because inventory is essential for the smooth business operation. Company
increases the current liabilities size and tries to maintain liquidity ratios as
per standard industrial practices.
84
Profitability
Atul Auto Ltd. Increase the working capital leverage but its failed to
increased profitability.
84
Profitability
Working capital turnover ratio leads towards profitability. Working capital

turnover ratio and ROI have a positive correlation (0.66). It means that
changes in working capital turnover directly effect on profitability of the
business. Thus, working capital turnover is very important for the business.
Correlation between inventory turnover ratio and return on investment near

to perfect. If there is a positive change in inventory turnover ratio it gives
positive sign in profitability of the company and vice versa. So company
should keep the inventory as per the sales. Raw material is major part of
the inventory. Company required reducing the raw material size and
holding period so, company need less funds for working capital and
increase the profitability.
There is a negative correlation between receivable turnover ratio and return

on investment. It is due to the strict credit policy of the Atul Auto Ltd. It
has given negative impact on the sales of the company. Company should
develop liberal credit policy so, it will help in increasing sales and also the
profitability of the firm.
Positive correlation of current assets turnover ratio and return on

investment. It means that current assets plays vital role in profitability.
Companys current assets were always more than requirement it affect on
profitability of the company. The higher current assets turnover ratio
implies more efficient use of the funds.
Current ratio of the company in last years above the ideal current ratio. It
indicates companys good liquidity position and also indicates unnecessary
investment in current assets. Correlation with return on investment is
0.19 and it is negative. It means that our funds have blocked in
unnecessary current assets.
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Profitability
Quick ratio of Atul Auto Ltd. also above the ideal ratio. We found
moderate correlation between quick ratio and return on investment. Here
company require to reduce some investment in current assets so the cost of
fund reduce and profitability increase.
Correlation between absolute liquid ratio and return on investment is weak.

This ratio did not match with ideal ratio and it was below as compare to
ideal ratio. Its not big impact on profitability of the Atul Auto Ltd. as per
our view it is good because cash is less performing assets in working
capital.
Atul Auto Ltd. working capital shows the good liquidity position. Positive
working capital indicates that company has the ability of the payments of short
terms liabilities. Working capital of Atul Auto Ltd. not indicates any trend for
particular period of time. All over working capital management of the company
is average and its impact on profitability is average.
84
Profitability
BIBLIOGRAPHY
Books Referred
1.
2.
I.M. Pandey - Financial Management - Vikas Publishing House Pvt. Ltd.

- Ninth Edition 2006
Ravi M. Kishore Financial Management - Taxman Allied Services
Pvt. Ltd., New Delhi. 7th Edition 2008
3.
G. Sudarsana Reddy Financial Management - Himalaya Publication

House Pvt. Lt. Mumbai 1st Edition 2008.
4.
Dr. R.S. Khandelwal Quantitative Analysis For Management-Ajmera

Book Company-2nd Edition 2008
Websites References
1.
www.atulauto.co.in
2.
www.google.co.in
Annual Reports
2.
Annual report of Atul Auto Ltd. 2005-06
3.
4.
5.
84
Profitability

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COMPREHENSIVE PROJECT STUDY

Jayesh S. Dobariya & Ankit Raichura

AFFILIATED TO SAURASHTRA UNIVERSITY,

Date : Place :-Rajkot

ATUL AUTO LTD.

Plant &registered office

Survey No. 86, Plant No.1-4,

Telephone & Fax No.

+91 02827 2652996 / 98 / 99

+91 2827 52254

Size of the organization

Large Scale Industry

Public Limited Company

State Bank of India

Maharishi & Co.

1.2 BRIEF HISTORY

1.3 MANAGEMENT TEAM

Chairman & Managing Director

Mr. Shriharsh S. Jogalekar

Mr. Mahendra J. Patel

Mr. Bharat J. Chandra

Mr. Rajesh S. Dhruv

Mr. Rajendra H. Kukerja

State Bank Of India

1.4 GROUP COMPANYS

1. Atul Auto Industries

1.5 FORM OF ORGANIZATION AND SIZE OF UNIT

Sole Proprietor ship

Public sector unit

From above given all forms of organization ATUL AUTO LIMITED is a

Working Capital Management &

Small Scale Industry

1.6 ORGANIZATION STRUCTURE

1.7 CONTRIBUTION OF UNIT

2.2 NEED OF WORKING CAPITAL MANAGEMENT

2.3 CONCEPT OF WORKING CAPITAL

2.4 TYPES OF WORKING CAPITAL

1. Permanent working capital

B. Regular working capital

2. Temporary working capital

B. Special working capital

2.5 IMPORTANCE OF WORKING CAPITAL

2.6 DETERMINATION OF WORKING CAPITAL

5. Terms of purchase and sales

2.7 SOURCES OF WORKING CAPITAL

2.8 WORKING CAPITAL COMPONENTS

Objective of Receivable Management

Average Collection Period

In determining the collectability of debtors and thus, the efficiency of

Working Capital Management &

Inventory Management Motives

Objectives of Inventory Management

Motives for Holding Cash

Working Capital Management &

Advantage of Cash Management

Size and Indices of cash in Atul Auto

Working Capital Management &

3.2 OBJECTIVE OF THE STUDY

3.3 SCOPE & LIMITATIONS OF THE STUDY

Limitations of the Study

3.4 Linear Correlation Co-efficient

Properties of Coefficient of correlation:(1) The coefficient of correlation is an absolute relation measure.

coefficient of correlation between X and Y is equal to the coefficient

of correlation between Y and X I, e.; r(x, y) = r(y, x).