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Working capital management

Chapter 1
Introduction:
Working capital management involves the relationship between a firm's short-term
assets and its short-term liabilities. The goal of working capital management is to ensure that
a firm is able to continue its operations and that it has sufficient ability to satisfy both
maturing short-term debt and upcoming operational expenses. The management of working
capital involves managing inventories, accounts receivable and payable, and cash.
The process of managing activities and processes related to working capital. This
level

of management serves as

check

and balances system to

ensure

that

the amount of cash flowing into the business is enough to sustain the company's operations.
This

is

an

ongoing

process

that

must

be

evaluated using the current level

of assets and liabilities. Working capital management may involve implementing shortterm decisions that may or may not carry over from one earnings period to the next.
The

need

for

working

capital

fluctuates

from

time

to

time. However, to carry on day-to-day operations of the business without any


obstacles, a certain minimum level of raw materials, work-in-progress, finished goods and
cash must be maintained on a continuous basis. The amount needed to maintain current assets
on this minimum level is called permanent or regular working capital. The amount involved
as permanent working capital has to be meet from long-term sources of finance, e.g.
(i) Capital
(ii) Debentures
(iii) Long-term loans
The

firm

should

maintain

sound

working

capital

position. It should have adequate working capital to run its business operations. Both
excessive as well as inadequate working capital positions are dangerous from firm's point of
view. Excessive working capital means holding costs and idle funds which earn no profit for
the firm. Paucity of working capital not only impairs the firm's profitability but also results in
production interruptions and inefficiencies and sales disruption

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INDUSTRY PROFILE
In the most general sense of the word, a cement is a binder, a substance which
sets and hardens independently, and can bind other materials together. The word "cement"
traces to the Romans, who used the term "opus caementicium" to describe masonry which
resembled concrete and was made from crushed rock with burnt lime as binder. The volcanic
ash and pulverized brick additives which were added to the burnt lime to obtain a hydraulic
binder were later referred to as cementum, cementum, cement and cement. Cements used in
construction are characterized as hydraulic or non-hydraulic.

The most important use of cement is the production of mortar and concretethe
bonding of natural or artificial aggregates to form a strong building material which is durable
in the face of normal environmental effects.
Concrete should not be confused with cement because the term cement refers only to
the dry powder substance used to bind the aggregate materials of concrete. Upon the addition
of water and/or additives the cement mixture is referred to as concrete, especially if
aggregates have been added.
It is uncertain where it was first discovered that a combination of hydrated nonhydraulic lime and a pozzolan produces a hydraulic mixture (see also: Pozzolanic reaction),
but concrete made from such mixtures was first used on a large scale by Roman
engineers.They used both natural pozzolans (trass or pumice) and artificial pozzolans (ground
brick or pottery) in these concretes. Many excellent examples of structures made from these
concretes are still standing, notably the huge monolithic dome of the Pantheon in Rome and
the massive Baths of Caracalla. The vast system of Roman aqueducts also made extensive use
of hydraulic cement. The use of structural concrete disappeared in medieval Europe,
Modern cement
Modern hydraulic cements began to be developed from the start of the Industrial
Revolution (around 1800), driven by three main needs:
Hydraulic renders for finishing brick buildings in wet climates
Hydraulic mortars for masonry construction of harbor works etc, in contact with sea
water.

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Development of strong concretes.


In Britain particularly, good quality building stone became ever more expensive
during a period of rapid growth, and it became a common practice to construct prestige
buildings from the new industrial bricks, and to finish them with a stucco to imitate stone.
Hydraulic lines were favored for this, but the need for a fast set time encouraged the
development of new cements. Most famous was Parker's "Roman cement." This was
developed by James Parker in the 1780s, and finally patented in 1796. It was, in fact, nothing
like any material used by the Romans, but was a "Natural cement" made by burning septaria nodules that are found in certain clay deposits, and that contain both clay minerals and
calcium carbonate. The burnt nodules were ground to a fine powder. This product, made into
a mortar with sand, set in 515 minutes. The success of "Roman Cement" led other
manufacturers to develop rival products by burning artificial mixtures of clay and chalk.
John Smeaton made an important contribution to the development of cements when
he was planning the construction of the third Eddystone Lighthouse (1755-9) in the English
Channel. He needed a hydraulic mortar that would set and develop some strength in the
twelve hour period between successive high tides. He performed an exhaustive market
research on the available hydraulic lines, visiting their production sites, and noted that the
"hydraulicity" of the lime was directly related to the clay content of the limestone from which
it was made. Smeaton was a civil engineer by profession, and took the idea no further.
Apparently unaware of Smeaton's work, the same principle was identified by Louis Vicat in
the first decade of the nineteenth century. Vicat went on to devise a method of combining
chalk and clay into an intimate mixture, and, burning this, produced an "artificial cement" in
1817. James Frost,orking in Britain, produced what he called "British cement" in a similar
manner around the same time, but did not obtain a patent until 1822. In 1824, Joseph Aspdin
patented a similar material, which he called Portland cement, because the render made from it
was in color similar to the prestigious Portland stone.
All the above products could not compete with lime/pozzolan concretes because of
fast-setting (giving insufficient time for placement) and low early strengths (requiring a delay
of many weeks before formwork could be removed). Hydraulic limes, "natural" cements and
"artificial" cements all rely upon their belite content for strength development. Belite
develops strength slowly. Because they were burned at temperatures below 1250 C, they
contained no alite, which is responsible for early strength in modern cements. The first
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cement to consistently contain alite was made by Joseph Aspdin's son William in the early
1840s. This was what we call today "modern" Portland cement. Because of the air of mystery
with which William Aspdin surrounded his product, others (e.g. Vicat and I C Johnson) have
claimed precedence in this invention, but recent analysis of both his concrete and raw cement
have shown that William Aspdin's product made at Northfleet, Kent was a true alite-based
cement. However, Aspdin's methods were "rule-of-thumb": Vicat is responsible for
establishing the chemical basis of these cements, and Johnson established the importance of
sintering the mix in the kiln.
Types of modern cement
Portland cement
Cement is made by heating limestone (calcium carbonate), with small quantities of
other materials (such as clay) to 1450C in a kiln, in a process known as calcination, whereby
a molecule of carbon dioxide is liberated from the calcium carbonate to form calcium oxide,
or lime, which is then blended with the other materials that have been included in the mix .
The resulting hard substance, called 'clinker', is then ground with a small amount of gypsum
into a powder to make 'Ordinary Portland Cement', the most commonly used type of cement
(often referred to as OPC).
Portland cement is a basic ingredient of concrete, mortar and most non-speciality
grout. The most common use for Portland cement is in the production of concrete. Concrete
is a composite material consisting of aggregate (gravel and sand), cement, and water. As a
construction material, concrete can be cast in almost any shape desired, and once hardened,
can become a structural (load bearing) element. Portland cement may be gray or white.
Portland cement blends
These are often available as inter-ground mixtures from cement manufacturers, but
similar formulations are often also mixed from the ground components at the concrete mixing
plant.
Portland blastfurnace cement contains up to 70% ground granulated blast furnace
slag, with the rest Portland clinker and a little gypsum. All compositions produce high
ultimate strength, but as slag content is increased, early strength is reduced, while sulfate
resistance increases and heat evolution diminishes. Used as an economic alternative to
Portland sulfate-resisting and low-heat cements.
Portland flyash cement contains up to 30% fly ash. The fly ash is pozzolanic, so that
ultimate strength is maintained. Because fly ash addition allows a lower concrete water

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content, early strength can also be maintained. Where good quality cheap fly ash is available,
this can be an economic alternative to ordinary Portland cement.
Portland pozzolan cement includes fly ash cement, since fly ash is a pozzolan, but
also includes cements made from other natural or artificial pozzolans. In countries where
volcanic ashes are available (e.g. Italy, Chile, Mexico, the Philippines) these cements are
often the most common form in use.
Portland silica fume cement. Addition of silica fume can yield exceptionally high
strengths, and cements containing 5-20% silica fume are occasionally produced. However,
silica fume is more usually added to Portland cement at the concrete mixer.
Masonry cements are used for preparing bricklaying mortars and stuccos, and must
not be used in concrete. They are usually complex proprietary formulations containing
Portland clinker and a number of other ingredients that may include limestone, hydrated lime,
air entrainers, retarders, waterproofers and coloring agents..

Cement Industry in India


India is the world's second largest producer of cement according to the Cement
Manufacturers Association.
During September 2010, the cement production touched 12.54 million tonnes (MT),
while the cement despatches quantity was 12.56 MT during the month. The total cement
production during April-September 2010-11 reached 81.54 MT as compared to 77.22 MT
over the corresponding period last fiscal. Further, cement despatches also witnessed an
upsurge from 76.50 MT during April-September 2009-10 to 81.10 MT during AprilSeptember 2010-11.
Moreover, the government's continued thrust on infrastructure will help the key
building material to maintain an annual growth of 9-10 per cent in 2010, according to India's
largest cement company, ACC.
In January 2010, rating agency Fitch predicted that the country will add about 50
million tonne cement capacity in 2010, taking the total to around 300 million tonne.

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Further, speaking at the Green Cementech 2010, a seminar jointly organised by the
Confederation of Indian Industry (CII) and the Cement Manufacturer's Association in
Hyderabad in May 2010, G Jayaraman, Executive President, Birla Corporation Ltd, said that
in 2009, 40 MT of capacity was added and he expects a similar trend to follow this year.
New Investments
Cement and gypsum products have received cumulative foreign direct investment
(FDI) of US$ 1,971.79 million between April 2000 and September 2010, according to the
Department of Industrial Policy and Promotion (DIPP).

Dalmia Bharat Enterprises plans to invest US$ 554.32 million to set up

two greenfield cement plants in Karnataka and Meghalaya.

Bharathi Cement plans to double its production capacity by the end of

the current financial year by expanding its plant in Andhra Pradesh, with an
investment of US$ 149.97 million.

Madras Cements Ltd is planning to invest US$ 178.4 million to

increase the manufacturing capacity of its Ariyalur plant in Tamil Nadu to 4.5 MT
from 2 MT by April 2011.

My Home Industries Limited (MHI), a 50:50 joint venture (JV)

between the Hyderabad-based My Home Group and Ireland's building material major
CRH Plc, plans to scale up its cement production capacity from the existing 5 million
tonne per annum (mtpa) to 15 mtpa by 2016. The company would undertake this
capacity expansion at a cost of US$ 1 billion.

Shree Cement, plans to invest US$ 97.13 million this year to set up a

1.5 million MT clinker and grinding unit in Rajasthan. Moreover, in June 2010, Shree
Cement signed a memorandum of understanding (MoU) with the Karnataka
government to invest US$ 423.6 million for setting up a cement unit and a power
plant. US$ 317.7 million will be used to set up a cement manufacturing unit with an
annual capacity of 3 mtpa while the balance will be for the 100 mega watt power
plant.

Jaiprakash Associates plans to invest US$ 640 million to increase its

cement capacity.

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Swiss cement company Holcim plans to invest US$ 1 billion in setting

up 2-3 greenfield manufacturing plants in the country in the next five years to serve
the rising domestic demand. Holcim is present in the country through ACC and
Ambuja Cements and holds around 46 per cent stake in each company. While ACC
operates 16 cement plants, Ambuja Cements controls five plants in India. The Aditya
Birla group is the largest cement-making group by capacity in the country and
controls Grasim Industries and Zuari Cement.
Government Initiatives
The cement industry is pushing for increased use of cement in highway and road
construction. The Ministry of Road Transport and Highways has planned to invest US$ 354
billion in road infrastructure by 2012. Housing, infrastructure projects and the nascent trend
of concrete roads would continue to accelerate the consumption of cement.
Increased infrastructure spending has been a key focus area. In the Union Budget
2010-11, US$ 37.4 billion has been provided for infrastructure development.
The government has also increased budgetary allocation for roads by 13 per cent to
US$ 4.3 billion.
Gujarat plans to treble its cement production capacity in 3-5 years. Proposals have
been invited from cement companies such as ACC, ABG, Ambuja Cement, Emami,
Indiabulls, Adani group, Ultratech and L&T and the state hopes to raise its capacity from 20
million tonnes per annum to 70 million tonne. The state will host the biennial Vibrant Gujarat
Global Summit in January 2011 and expects to witness investment proposals worth US$ 13.2
billion in the cement sector.
Exchange rate used: 1 USD = 47.82 INR (as of January 2013)
The cement industry is one of the vital industries for economic development in a
country. The total utilization of cement in a year is used as an indicator of economic growth.
Cement is a necessary constituent of infrastructure development and a key raw material for
the construction industry, especially in the governments infrastructure development plans in

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the

context

of

the

nations

socioeconomic

development.

Prior To Independence
The first endeavor to manufacture cement dates back to 1889 when a Calcutta based
company, But the first endeavor to manufacture cement in an organized way commenced in
Madras. South India Industries Limited began manufacture of Portland cement in 1904.But
the

effort

did

not

succeed

and

the

company

had

to

halt

production.

Finally it was in 1914 that the first licensed cement manufacturing unit was set up by
India Cement Company Ltd at Porbandar, Gujarat with an available capacity of 10,000 tons
and production of 1000 installed. The First World War gave the impetus to the cement
industry still in its initial stages. The following decade saw tremendous progress in terms of
manufacturing

units,

installed

capacity

and

production.

is

During the earlier years, production of cement exceeded the demand. Society had a biased
opinion against the cement manufactured in India, which further led to reduction in demand.
The

government

intervened

by

giving

protection

to

the

Industry.

In 1927, the Concrete Association of India was formed with the twin goals of creating
a positive awareness among the public of the utility of cement and to propagate cement
consumption.
After Independence
the growth rate of cement was slow around the period after independence due to
various factors like low prices, slow growth in additional capacity and rising cost. The
government intervened several times to boost the industry, by increasing prices and providing
financial

incentives.

But

it

had

little

impact

on

the

industry.

Period Of Restriction (1969-1982)


The cement industry in India was severely restrained by the government during this
period. Government hold over the industry was through both direct and indirect means.
Government intervened directly by exercising authority over production, capacity and
distribution

of

cement

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and

it

intervened

indirectly

through

price

control.
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Working capital management

In 1977 the government authorized higher prices for cement manufactured by new units or
through capacity increase in existing units. But still the growth rate was below par.
In 1979 the government introduced a three tier price system. Prices were different for cement
produced in low, medium and high cost plants.
However the price control did not have the desired effect. Rise in input cost, reduced profit
margins meant the manufacturers could not allocate funds for increase in capacity.
Partial Control (1982-1989)
To give impetus to the cement industry, the Government of India introduced a quota
system in 1982.A quota of 66.60% was imposed for sales to Government and small real estate
developers. For new units and sick units a lower quota at 50% was effected. The remaining
33.40%

was

allowed

to

be

sold

in

the

open

market.thes

changes

These changes had a desired effect on the industry. Profitability of the manufacturers
increased

substantially,

but

the

rising

input

cost

was

cause

for

concern.

After Liberalization
In 1989 the cement industry was given complete freedom, to gear it up to meet the
challenges of free market competition due to the impending policy of liberalization. In 1991
the industry was de licensed.
This resulted in an accelerated growth for the industry and availability of state of the art
technology for modernization. Most of the major players invested heavily for capacity
expansion.
To maximize the opportunity available in the form of global markets, the industry laid
greater focus on exports. The role of the government has been extremely crucial in the growth
of the industry.

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Company Profile
Ambuja Cements Ltd, a part of the global conglomerate LafargeHolcim, is one of the
leading cement companies in the Indian cement industry.
Operating for over 25 years, Ambuja has proved to be the best cement for construction
and the best cement manufacturing company in India with its uniquely sustainable
development projects. Its environment friendly initiatives have played a key role in
Indias efforts to become a green state. The sustainable constructions and renewable
energy projects undertaken by it have a lions share in creating a blueprint for
sustainable development in Indias bright future.
By virtue of its hassle-free customer support & home building solutions and its unique
cement sustainability initiatives such as True Value and Water Positive, Ambujas
business has seen a rapid growth in the past decade. The company has a significant
presence across western, eastern and northern markets of India as a brand for Ordinary
Portland Cement (OPC) and Pozzolana Portland Cement (PPC).
Currently, Ambuja has a cement capacity of 28.75 million tonnes with five integrated
cement manufacturing plants and eight cement grinding units across the country. It is
the first Indian cement manufacturer to build a captive port with four terminals along the
countrys western coastline to facilitate timely, cost effective and environmentally cleaner
shipments of bulk cement to its customers.

About LafargeHolcim
With a well-balanced presence in 90 countries and a focus on Cement, Aggregates and
Concrete, LafargeHolcim (SIX Swiss Exchange, Euronext Paris: LHN) is the world
leader in the building materials industry. The Group has 115,000 employees around the
world and combined net sales of CHF 33 billion (EUR 27 billion) in 2014. LafargeHolcim
is the industry benchmark in R&D and serves from the individual homebuilder to the
largest and most complex project with the widest range of value-adding products,
innovative services and comprehensive building solutions. With a commitment to drive

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sustainable solutions for better building and infrastructure and to contribute to a higher
quality of life, the Group is best positioned to meet the challenges of increasing
urbanization.

Product & Services


High Strength. High Performance.

Ambuja Cement is committed to make high strength cement that would enable our
customers build strong and durable structures.

Ambuja Cements Limited, formerly known as Gujarat Ambuja Cement


Limited, is a major cement producing company in India. [2] The Group's
principal activity is to manufacture and market cement and clinker for both
domestic and export markets.
ABOUT AMBUJA CEMENT
Ambuja Cements Ltd (ACL), a part of a global conglomerate Holcim, is one of
Indias leading cement manufacturers and has completed over 25 years of
operations. The company, initially called Gujarat Ambuja Cements Ltd, was
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Working capital management

founded by Narotam Sekhsaria in 1983 in partnership with Suresh Neotia.


Global cement major Holcim acquired management control of Ambuja in 2006.
The Company has also made strategic investments in ACC Limited.

Customer segments
This function has been working with our stakeholders for over two decades now in
Educating & empowering users & Influencers, Onsite guidance on right construction
practices, Value added services for building strong houses, Training & certification of
unskilled / semiskilled manpower, Knowledge transfer on advancement of materials &
technology, Developing simple tools & methods for improving construction practices and
Developing Customers & Influencer engagement programs.
The Company has created many such platforms under which the engagement programs,
customized as per customer segments, are carried out by the Customer Support Group.
It is a continuous endeavor to upgrade the programs and make it more sustainable.

The

Company

has

been

creating

sustainable

impact

beyond

business

transaction. A team of 200 experienced graduate civil engineers is engaged in creating


sustainable impact through Products & Services. This includes
Training & certification of more than 10000 masons
Training & certification of more than 5000 contractors

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Modular curing services to more than 1200 IHBs


Conserving water more than 18 million liters water
Replacing conventional clay bricks with more than 100 millioneco friendly bricks
Setting up 14 Ambuja Knowledge centers throughout the country and starting
another 14 Ambuja Knowledge centers by Dec. 2014

VALUE ADDED SERVICES

Sustainability
Sustainable construction can contribute to environment protection
The food we eat and the air we breathe has all come to a point where it is no more
consumable. Urbanization has led to environmental challenges which have a negative
effect on our planet. These effects need to be treated at the earliest. The one factor that
is triggering such a hazardous effect is the construction industry.Sustainable
Construction in India is perhaps one of the most frequently used but the least
understood usages in the cement industry. It is an approach which doesnt have a
negative impact on the environment throughout its life time and even after it. The
Cement Sustainability Initiative (CSI) is trying to do just the same.
The world is progressing at a lightning speed and due to such a rapid progress the
needs and priorities of the people have also changed. Such a progress is good, but we
should make sure that it doesnt reach a point where we affect the needs of our future
generations by being highly dependent on natural resources and depleting its overall
supply. That is why the need for Sustainable Development Projects in India is the

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need of the hour. New and innovative methods to implement it have to be realized which
can be used in the long run. The society should be educated about such a sustainable
approach so that it becomes a part of peoples lives.
Sustainable Development in India is not only good for the environment but is also
important for the economic development of the nation. The environmental effects that it
has are pretty amazing. The indoor quality of air drastically increases and hence
provides healthier air to breathe. It reduces the energy consumption by nearly 36
percent as well as it also helps in reducing the overall consumption of natural resources
and emits lesser carbon dioxide in our atmosphere.
Sustainable Development Projects even reduce the overall cost of the construction and
hence in fact help in the economic development of a nation. Sustainable construction
has some social impacts as well. Citizens can be more aware about the importance of
green development and hence will push developers to go green. It will also improve
productivity as Sustainable Development Environment will improve the health of the
citizens.

Policy and Goals


We believe the vision of sustainable development and environment conservation can be
achieved more effectively through a structured and systematic approach. ACL is
empowered by the overarching Corporate Environment Policy along with unit specific
policies. The corporate policy is in conformance with the Ministry of Environment and
Forests guidelines. In addition, we also have various specific policies like Corporate
Sustainability Policy, Climate Change Mitigation Policy and Green Procurement Policy
which mention Companys approach on Sustainable Development,Climate Change
Mitigation and Greening of Supply Chain.
All our manufacturing locations have environment team, equipped with laboratory
facilities to enable the complete monitoring of stack emissions, ambient air quality, noise
level and water quality. These teams are also responsible for implementing various
environment initiatives at the units.
o

01Sustainability Policy

02Climate Change Mitigation Policy

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Working capital management

o
o
o

03Corporate Social Responsibility Policy


04Green Procurement Policy
05Corporate Environment Policy

Sustainable Development

Sustainability

CSR

Environmental Sustainability

Health & Safety

AFR

Renewable Energy Projects in India

Sustainable Supply Chain Management

True Value Approach

Sustainability Reports

Policy and Goals


We believe the vision of sustainable development and environment conservation can be
achieved more effectively through a structured and systematic approach. ACL is
empowered by the overarching Corporate Environment Policy along with unit specific
policies. The corporate policy is in conformance with the Ministry of Environment and
Forests guidelines. In addition, we also have various specific policies like Corporate
Sustainability Policy, Climate Change Mitigation Policy and Green Procurement Policy
which mention Companys approach on Sustainable Development,Climate Change
Mitigation and Greening of Supply Chain.
All our manufacturing locations have environment team, equipped with laboratory
facilities to enable the complete monitoring of stack emissions, ambient air quality, noise
level and water quality. These teams are also responsible for implementing various
environment initiatives at the units.
o
o
o

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01Sustainability Policy
02Climate Change Mitigation Policy
03Corporate Social Responsibility Policy
20

Working capital management

o
o

04Green Procurement Policy


05Corporate Environment Policy

Sustainable Development

Sustainability

CSR

Environmental Sustainability

Health & Safety

AFR

Renewable Energy Projects in India

Sustainable Supply Chain Management

True Value Approach

Sustainability Reports

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Chapter 2
Review of Literature
NCEAR (1966)i The first and foremost formals study conducted and compiled on
working capital management in India was by the National council of applied Economic
Research (NCEAR) in 1966. The council published a report on Structure of Working
Capital which confined to the analysis of the composition of working capital with special
reference to fertilizers, Cement and Sugar industries. The prime objective of the study was to
examine as to The study revealed that working capital management practices were highly
unplanned and hence the establishment of suitable accounting policies, costupuring system
and inventory controlling techniques in the above-mentioned industries. This study highlights
the significance of suitable and appropriate working capital management policies in the
success of the business.
Misra (1975)ii has studied the problem of working capital in a selected six public
enterprises for a period of 1960-61 to 1967 68. The importance and findings of the study
are : 1) Selected enterprises are not able to utilize working capital efficiently. 2) In all
enterprises excess inventory is noticed which is due to lack of inventory control, defective
inventory management and also due to a congenial organization. Inordinate delays in the
releases of foreign exchange and issue of import licenses are also some reasons for overstock
of inventory. It is found that receivable turnover ratio is very low due to the generous credit
granting and inadequate collection policy. In all the selected enterprises, the size of cash is
found to be very much high on account of improper planning and control of cash.
Vijaya (1977)iii study conducted on working capital management in six cooperative
and seven private sector companies in the sugar industry of Tamil nadu found that the growth
in current assets had registered more than that of sale indicating poor working capital
management. The application of correlation analysis revealed that there was a negative
correlation between return on investment and working capital.
Gangadhar (1981)iv study examined the statistical trends in working capital position
among medium, large and small public, private limited companies in the Indian corporate
sector during 1961 76. The application of second parabola revealed that the current assets
formed relatively higher proportion of total net assets in private limited companies than that
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of public limited companies. This study also revealed that in case of medium and large scale
publics limited companies there appeared to be a lead lag relationship between gross fixed
assets and current assets over the study period.
Ghosh (1983)v study proves in to the existing practice of working capital in crane
manufacturing industry in India. The study findings indicate that the management of
individual components of working capital was erratic. The collection mechanism followed by
the sample companies was very unplanned and the companies took more time that allowed in
collecting the cash from the customers. The study also revealed that payable to the suppliers
were equally delayed keeping highest portion of payable pending for more than allowed
period. The study recommended the immediate need for streamlining the working capital
management practices.
Akkihal (1984)vi study of 94 small scale industries in Hubli Dharwad Municipal
Corporation (HDMC) in the state of Karnataka revealed that he management of working
capital in sample industries was found to be highly unplanned. The study concentrated on the
ratios like current ratio, inventory turnover ratio, fixed assets turnover ratio, total assets
turnover ratio, earnings power and gross profit margin. The application of ratio analysis has
revealed that the mismanagement of working capital had adverse effect on the performance of
the industries.
Khandelwal (1985)vii carried on half complete empirical research initiated by late
N.M Agarwal, among forty small scale industries in Jodhpur industrial estate. The study
attempted to investigate in to working capital management process and practices among the
selected units between the years 1975 1980. The study revealed that the sample firms held
more investments in inventories than required and management of receivables constituted as
much as 50% of total current assets. Highlighting the sickness in Jodhpur Industrial estate the
study attributed the main reason to inefficient management of working capital. Based on
findings the study suggested that the entrepreneurs need to be educated about the basic
concepts and efficient way of working capital management.
Rajeshwar (1985)viii in his study among a few selected public enterprises in India,
tried to examine the working capital policies adopted by the sample units. He attempted to
assess the degree of effective management of working capital components with a special
emphasis on inventories. The study revealed that no samples company clearly defined
working capital policies and hence majority of them could not achieve efficiency in working
capital management. The study also revealed that the investment in inventories in sample
units soared up from 63% in 1971 -72 to 66% in 1976-77. It was further found out that
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majority of such investment was made in finished goods inventory which indicated that the
units did not manage the working goods inventory which indicated that the units did not
manage the working capital in a planned way. The study recommended to recognize prudent
management of working capital as a vital part of financial management
Mukerjee (1986)ix in his study on management of working capital in public
Enterprises in respect of central government industrial undertakings, and covering a period
from 1974 75 to 1978-79 has found that, the current assets increased due to the
accumulation of inventories and current liabilities increased due to increase in financing
through payables, the Overall Size of the workings capital had been significantly influenced
by the overall size of sales and output, the working capital requirement of the units were not
ascertained based on the considerations as suggested for prudent financial management, there
was a significant negative correlations between overall profitability and size of working
capital, there was an over investment in structural determinants and huge size of working
capital and due to faulty financial policies adopted by the units, the liquidity and profitability
has a very significant negative correlations.
Panda (1986)x study of small scale units in the state of Orissa, examines the issues
like optimum investment of funds in current assets, relationship between sales growth and
working capital needs, the role of banks in meeting working capital requirements. The study
revealed that management of working capital was neglected by majority of sample units,
which lead to incurrence of loss. It was found that long term funds were highly limited to
the firms and hence majority of small scale industries depended on short term credit in
meeting working capital requirements.
Oppendahl and Richard (1990)xiii essay expressed capital budgeting projects
consumes much of the time of a firms management group to the detriment of the quality of
the working capital decision. It emphasized determinant of the quality of the working capital
decision. It emphasized that the business executives must become more cognizant of the
working capital decision that their firms face every day. The stress in this essay has been laid
on two most important components of working capital called accounts receivables and
marketable securities. The essay revealed that the managers have to be very cautious in
accounts receivables and marketable securities decision.
Mohan (1991)xiv study examines various issues related to working capital
management among selected (six companies) private large scale companies in the state of
Andhra Pradesh during the period from 1977 1986. The study revealed that investments in
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current assets in sample companies was more than that of fixed assets and inventories
constituted highest percentage of total current assets in the sample companies. Analysis
revealed that the liquidity and solvency position of sample units was found to be highly
unsatisfactory because the companies carried with lesser balance sheet working capital than
cash working capital. He based on his findings, suggested the dire need for improvement of
liquidity and solvency position of sample companies failing which the situation would lead to
serious liquidity crunch.
Rao and Rao (1991)xv in their study among a few public enterprises belonging to
manufacture sector in the state of Karnataka, have attempted to probe in to the capacity of the
various techniques I evaluating working capital efficiency of business enterprises. The study
revealed that the investment working capital was considerably high when compared to the
total investment.
The Tandon Committee norms were found to be yielding better results among the
surveyed companies. However, the study also revealed that the working capital planning and
control was found to be disorderly and ineffective and hence, the urgent need for full focus on
working capital management.
Jain (1993)xvi studied seven paper companies in Indian to analyze the basic
components of working capital. The study revealed that the current ratio in public sector
undertakings during the study period was found to be highly erratic while the same in private
sector undertakings registered continuous decrease. As far as the inventory was concerned the
study revealed that it was highly unplanned in public sector undertakings units when
compared to private sector units. The study contributed much in terms of realizing the
importance of effective management of working capital. A survey conducted by the
insolvency Practitioners Society CIMA (1994)xvii in the UK indicated 20% of firm failures
were due to bad debts or poor receivables management. Previous research findings related to
working capital management practices, especially working capital management, could be
significantly improved in the SME sector, then few firms would fail, and therefore working
capital management practices are extremely important for SMEs. Nevertheless, in the
emerging countries such as china and Vietnam, almost no previous research has been
concerned with working capital management practices. Therefore, the main purpose of this
paper is to report findings of a survey of working capital management practices of SMEs
conducted in September 2000 in Vietnam. These findings provide deeper insight into working
management practices and provide suggestion for future research in the emerging countries
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like Vietnam. Concentrating exclusively on borrowing as a source of financing working
capital requirement in the corporate sector in India.
Manjumdar (1994)xviii has carried out an empirical analysis among 20 corporate
companies in India (10 from private sector and 10 from public sector) for the period from
1981 to 1990. The study revealed that the share of public deposits to total borrowings on an
average was only 6% in public limited companies and this was only 0.08% in private sector
companies. The results indicated that the public deposits were not a significant source of
working capital finance among the selected sample companies during the study period. The
study revealed that current ratio in private corporate limited companies was 1.38, which
indicated aggressive policy. In government companies the current ratio was4.32 indicating
conservative policy adopted by them which in turn resulted in higher debt equity ratio. On
overall basis, this comparative study indicated that working capital management in public
sector companies was better than that of private sector companies. Siddharth and Das
(1994)xix in his study on

FINANCIAL MANAGEMENT INTRODUCTION


Finance management has always vital and integrated part of business management.
Financial management is concerned with the planning and controlling of the firms financial
resources. It is often said that the financial management has received less emphasis as
compared to topics like production and marketing. However, the task of financial planning
and controlling will assume relative more important role than in the past due to certain
changes that have taken place in economy. Factors such as increasing pace of
industrialization, technological innovation land inventories, raising price levels, increasing
influence of government in financial matters etc.

Definition of Financial Management:


Financial management as an application of general managerial principles to the area
of financial decision-making.
- HOWARD AND UPTON
Financial management is the operational activity of the business that is responsible
for obtaining and effectively utilizing the funds necessary for effectively utilizing the funds
necessary for efficient operations.
- JOSEPH & MASSIC
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Financial management is an area of financial decision making harmonizing
individual motives and enterprises goals.
- WESTERN & BRIGHAM

Objectives of Financial Management:


The financial objectives of company are to maximize owners economic welfare.
However, there is disagreement as to how the economic welfare of owners can be maximized
They are mainly two points discussed.
1. Profit Maximization.
2. Wealth Maximization.
1. Profit Maximization:
Maximization of profit is generally regarded as the main objectives of business
enterprises. Each collects its finances by way of issue of shares to the public. Investors
purchase these shares in the hope getting maximum profits the company whose goal is to
earn maximum profit out its available recourses.
Financial management evaluates how the funds are used and procured. It involved a
sound judgment combined with all logical approach to decision making. This calls for
evolution of the condition of the alternative used of funds and allocation of resources after
consideration of production and marketing interrelationships. So, profit maximization will
depend upon several aspects, which are mentioned below.

Objectives of Profit Maximization:


1. An individual or firm performing any economic activity rationally aims at utility
maximization. Utility can be measured in term of profit.
2. Profit maximization ensures the use of resources the best of their advantage to gain
maximize out of them.
3. It maximizes the social economic welfare.

2. Wealth Maximization:
According to prof. Sol man, maximization of Wealth provides useful and meaningful
objectives as basic guideline by which financial decision should be evaluated.
Wealth maximization means the net present value of a course of action to share
holders. The net present value of a course of action is differences between the net present
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value its benefits and present value of the cost. The negative present value should be
rejected.
WORKING CAPITAL MANGEMENT:
A) MEANING:
The management and control of working capital is of vital important to companies
and firms and major load function of finance personnel, besides all other factors. It is capital,
which is required to meet the day-to-day operations of the business. The working capital of
any business is the capital required to find its current assets. Current assets are defined as
either cash or those assets that can be converted into cash with in the current fiscal year,
including marketable securities, account receivables and inventories. It is also a very essential
feature and task of finance manager to maintain an appropriate level of working capital i.e.,
an appropriate level of current assets to meet the current liabilities. The inadequacy of
working capital may lead the company into difficulties in meeting its regular day-to-day
operations smoothly. Essential outlays may have to be postponed for want of funds.
Operating plans will go out of hand and there by not be able to accomplish the
companys overall objectives. There is a danger of extinction of the external sources like
suppliers and creditors because they may have to wait for longer period for collection of their
payments and in case of default by the company the creditors may not extend further credit to
the company. On the other hand excess holding of working capital is an indication of the
companys lack of boldness in expanding and diversifying the business. This redundant
working capital is in turn due to the excessive, unchecked accumulation of inventories, too
liberal credit policy and slack collection procedures. Thus it is a primary requirement of
finance manager to manage the working capital efficiently and effectively for successful
working of a business concern.
DEFENITION:
Any acquisition of funds which increase the current assets, increased working capital,
for there are one and the same.
-

BONNEVILLE & DEWEY

Working capital has ordinarily been defined as the excess of current assets over
current liabilities.
-

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The interaction between current assents and current liabilities is, there fore the
main theme of the theory if working management

Concept of working capital:


There are two concepts of working capital

Gross Working Capital

Net Working Capital

Gross working Capital:


The current assents with represent the proportion of investment that circulates form
one form to another in the ordinary conduct of business.
Networking Capital:
The difference between current assets and current liabilities or alternatively the
portion of current assets finance with long term funds.
CLASSIFICATION OR KINDS OF WORKING CAPIAL
Working capital may be classified in two ways:
(a) On the basis of concept
(b) On the basis of time
GROSS WORKING CAPITAL:
The gross working capital to the firms investment in he total current assts of the
enterprise. The current assts are those with in the ordinary course of business can converted
into cash with in the short period of normally one accounting.
NET WORKING CAPITAL:
The net working capital can be defined into two the most common definition of
working capital is difference between current assts and current liabilities.
Net working capital can also defined as that portion of firms current assets. Which
are financed with long-term funds.
On the basis of concept, working capital is classified as gross working capital and
new working capital as discussed earlier. This classification is important from the point of
view the financial manager. On the basis of time, working capital may be classified as
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1.

Permanent working capital.

2. Temporary working capital.

1. Permanent or fixed working capital:


Permanent or fixed working capital is he minimum amount which is required to
ensure effective utilization of fixed facilities and maintaining the circulation of current assets.
There is always a minimum level of current asst6s which is continuously required by the
enterprise to carry out its normal business operation. For example, every firm has o maintain
a minimum level of raw materials, work-in-process, finished goods and cash balance. This
minimum level of current assets is called permanent or fixed working capital.
2. Temporary or variable working capital:
Temporary or variable working capital is the amount of working capital which is
required o meets the seasonal demands and se special exigencies. Most of the enterprises
have to provide additional working capital to meet the seasonal and special needs. The capital
required to meet the seasonal needs 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 campaigns for conducting research, etc

IMPORTANCE OF ADEQUATE WORKING CAPITAL


Working capital is the life of the blood and nerve canter of a business. Just circulation
of blood is essential in the human body for maintaining life, working capital is very essential
to maintain the smooth running of a business. No business can run successfully without an
adequate amount of working capital. The main advantages of maintaining adequate amount of
working capital are as follows
1. Solvency of the business:
Adequate working capital helps in maintaining solvency of the business by providing
uninterrupted flow of production.
2. Good will:
Sufficient working capital enables a business concern to make prompt payments and
hence helps in creating and maintaining good will.
3. Easy loans:

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A concern having adequate working capital, high solvency and good credit standing
can arrange loans from banks and others on easy and favorable terms.
4. Cash discount:
Adequate working capital also enables a concern to avail cash discounts on the
purchase and hence it reduces costs.
5. Regular supply of raw material:
Sufficient working capital ensures regular supply of raw materials and continuous
production.
6. Regular payments of salaries, wages and other day-to-day commitments:
A company which as sample working capital can make regular payments of salaries,
wages and other day-to-day commitments which raises the morale of its employees, increases
their efficiency wastages and costs enhances production and profits.
7. Exploitation of favorable market conditions:
Only concerns with adequate working capital can exploit favorable market condition
such as purchasing its retirements in bulk when the prices are lower and by holdings its
inventories for higher prices.
8. Ability to face crisis:
Adequate working capital enables a concern to face business crisis in emergencies
such as depreciation because during such periods, generally, there is much pressure on
working capital.
9. Quick and regular return on investments:
Every investor wants a quick and regular return on investments. Sufficiency of
working capital enables a concern to pay quick and regular dividends to its invertors as there
may not be much pressure to plough back profits. This gains the confidence of its investors
and creates a favorable market to raise additional funds in the future.
10. High morale:
Adequacy of working capital creates an environment of security, confidence, and high
morale and creates overall efficiency in a business.
Excess or inadequate working capital
Every business concern should have adequate working capital to run itd business
operations. It should have redundant or excess working capital or inadequate or shortage of
working capital. Both excess as well ads short worki8ng capital position is bad for any
business. However, out the two, it is the inadequacy of working capital which is more
dangerous from the point of view of the firm.
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Disadvantages of redundant or excessive working capital:
1. Excessive working capital means idle funds which earn no profits for the business and
hence the business cannot earn a proper rate of return on its investments.
2. When there is redundant working capital, it may lead to unnecessary purchasing and
accumulation of inventories causing more chances of theft, waste and losses.
3. Excessive working capital implies excessive debtors and defective credit policy which
may higher incidence of bad debts.
4. It may result in to overall inefficiency in the organization.
5. When there is excessive working capital, relations with banks and other financial
institution may not be maintained.
6. Due to low rate of return on investments, he value of shares may also fall.
7. The redundant working capital gives raise to speculative transaction.
Disadvantages or danger of inadequate working capital:
1. A concern which has inadequate working capital cannot pay its short-term liabilities in
time. Thus, it will lose its reputation and shall not be able to get good credit facility.
2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.
3. It becomes difficult for the firm to exploit favorable market condition and undertake
profitable projects due to lack of working capital.
4. The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies,
increases costs and reduces the profit of the business.
5. It becomes impossible to utilize efficiency the fixed assets due to non-availability of
liquid funds.
6. The rate of return on investments also falls with the shortage of working capital.

The need for objectives of working capital


The need for working capital cannot be over emphasized. Every business needs some
amount of working capital. The needs for working capital arise due to the time gap between
production and realization of cash from dales. There is an operating cycle involved in the
sales and realization of cash. There are time gaps in purchases of raw materials and
production; production and sales; and sales realization of cash. Thus working capital is need
for the following purpose.
1. For the purchase of raw materials, components and spares.
2. To pay wages and salaries.
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3. To incur day-to-day expenses and overhead costs such as fuel, power and office
expenses
4. To meet the selling costs as packing, advertising, etc.
5. To provide a credit facility to the customers.
6. To maintain the inventories of raw material, work-in-progress, stores and spares and
finished stock.
Determinants of working capital:
The working capital requirements of a concern depend upon a large number of factors
such as
Nature and size of the business
Manufacturing cycle
Business fluctuation
Production policy
Firms credit policy
Availability of credit
Growth and expansion activities
Profit margin and profit appropriation
Operating efficiency
Price level changes
Sources of working capital:
The sources of working capital may said to fall in four categories
(a). Trade credit
(b). bank credit
(c). current provision of non-bank short-term borrowing
(d). Long-term sources comparing equity capital and long-term Borrowings

They can also classify as follows.


1. Internal sources:
(A). Retained earnings
(B). Depreciation
2. External sources:
(A). share
(B). loans
(C). trade creditors
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(D). debentures
(E). deposits from public

Estimated working capital requirement :


Working capital is the life blood and controlling nerve centre of business. No business
can be successfully run without an adequate amount of working capital. To avoid the shortage
of working capital at once, an estimate of working capital requirements should be made in
advance so that arrangements can be made to procure adequate working capital. But
estimation of working capital requirements id not an easy task and a large number of factors
have to be considered before darting this exercise.
Components of current assets:
1. cash(in hand, in bank, and in transit)
2. Investments (short-term only, and not long-term)
3. Inventories (raw materials and consumable stores and spares, work-in-process,
and finished goods)
4. sundry debtors (also known as receivable and accounts receivable)
5. loans and advances (granted by the company)
Components of current liabilities:
1. Sundry creditors (also known as bills payable and account payable)
2. trade advances (given to the company for supply of goods)
3. short-term borrowings from banks and others
4. Provisions (for taxes, bas debts, exchange rate fluctuations, etc.)
Better business sense, however, calls for keeping the current assets at the minimal level,
whereby minimum sources of funds, (both current and non-current liabilities), may be
requires to finance them, and thereby, the inventory carrying costs, and the interests
outgo may as well be kept the minimal level.

Why working capital management:


Effective management and control of the various components of working capital
has been rated as one of the important and vital function of financial management in any of
the industrial and business units, based on varied parameters, discussed hereunder.
(I). flexibility:

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Working capital management is highly flexible in nature, so much so that it can
very easily be adapted to suit even extreme conditions, like raising and falling demands in
peak and off season, buoyant and sluggish economic and market condition, etc. further, if
some inappropriate policy or procedure is detected at a later stage, remedial and right steps
can be adopted henceforth, any time. This however, is not position in the case of project
management.
(2). Level of investment in various components of current assets:
Investments in current assets constitute a very substantial percentage (usually
more then 50%) of the total investment in most of the Indian companies and firms.
(3). Criticality:
The under mentioned fact itself can bring home the extent of criticality of
working capital management.
One of the components of the working capital can make such a dramatic
difference, the importance of meticulous management of all the components of the working
capital (viz. current assets, current liabilities and even a portion of the differed liabilities) can
vary well be imagined and appreciated.
(4). Quantum of efforts and time:
Empirical study and observations have revealed that a major portion of the time
of the finance managers, in most of the companies, is devoted (and rightly so) towards the
management of the various components of the working capital, with a view to maximizing
their profitability, and the prospects and prosperity therewith.

Types of Working Capital


There are two concepts of working capital, viz., Gross Working Capital and Net
Working Capital.

1. Gross Working Capital:


The term Gross Working Capital, also referred to as working capital, means
The total current assets, which can be converted into cash within an Accounting year

and

include cash, short-term securities, debtors, bills receivable and stock.


The gross working capital concept focuses attention on two aspects of current assets
management;
A. Optimum investment in current assets.
B. Financing current assets.
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2. Net Working Capital:


The net working capital refers to the difference between the current assets and current
liabilities. It is a qualitative concept.
A. It indicates the liquidity position of the firm.
B. It suggests the extent to which working capital needs may be financed by
permanent sources of funds.
WORKING CAPITAL = CURRENT ASSETS_ CURRENT LIABILITIES
Therefore,
1. An increase in current assets increases working capital.
2. An increase in current liabilities decreases working capital.
3. A decrease in current assets decreases working capital.
4. A decrease in current liabilities increases working capital.
The change in the amount of any current asset or current liability in the current balance
sheet as compared to that of previous balance sheet either results in an increase or decrease,
in working capital.
Therefore, the statement of changes in finance position based on changes in working
capital position is a useful tool for highlighting the changes that have occurred in the
financial operation between two balance sheet dates.

NEED:
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 are
time gaps in purchases of raw material and production, production and sales, and sales and
realization of cash.

FACTORS DETERMINING THE WORKING CAPITAL


01.REQUIREMENTS:
The working capital requirement of a concern depends on a large number of factors.
These factors affect different enterprises differently. They also vary from time to time.
The following are important factors generally influencing the working capital
requirements.
They are:SVTM, MADANAPALLI.

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1. Nature and size of industry.
2. Operation efficiency.
3. Accessibility with money market.
4. Business fluctuations.
5. Manufacturing cycle.
6. Production policy.
7. Credit policy.
8. Credit terms available from suppliers.
9. Growth and expansion proposals.
10. Profit margin.
11. Price level changes.
12. Tax liability.
13. Retention policy and dividend policy.
14. Depreciation policy.
Thus, in working capital planning, a finance executive should take into Account the different
influencing factors, to obtain an optimum level of working capital.

02. OPERATING CYCLE


Business activity is a continuous process, and so a firm needs funds to run the day-today business activities. It has to invest enough funds in current assets, as sales do not convert
into cash immediately. There is a time lag between the sales and the receipt of cash. This time
period is the Operating Cycle or the Cash Cycle. The Operating Cycle can be said to be at the
heart of the need for working capital.
The continuing flow from cash to suppliers, to inventory, to Accounts receivable and
back into cash is called the Operating Cycle.
Thus Operating cycle is the time lag defers from firm depending on the nature of the
business. The Operating Cycle of the manufacturing company involves three phases;
1. Conversion of cash into inventory

Acquisition of resources such as Raw Materials, Labour, power and Fuel etc.

2. Conversion of Inventory into Finished Goods.

Manufacturing process includes conversion Raw Materials into Work-InProgress and finished goods.

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3.

Conversion of Receivables into Cash.

Sales of the product either for cash or credit. Credit sales create Book Debts for
collection. This phase completes the Operating Cycle.

There is a need of Current Assets as the Operating Cycle is a continuous process.


Firms have to invest short-term liquid securities or hold cash to meet obligations when due.
Similarly firms must have adequate inventory for smooth production. Firms sell goods on
credit to retain the customers and to maintain Accounts receivables. It is in this way that an
adequate level of Working Capital has to be maintained. The following figure will clearly
illustrate the Operating Cycle.

OPERATING CYCLE

03. MANAGEMENT OF CASH


Cash is the important current asset for the operation of the business. Cash is the basic
input needed to keep the business roaring on a continuous basis. The firm should keep
sufficient cash, neither more nor less. Cash is the item that influences the solvency, liquidity
and profitability of a company. If the company has got a greater proportion of cash in the
current assets, the company is said to be highly liquid, as a company is said to be highly
liquid, as a company has got sufficient cash balance as its disposal.
The company has got sufficient funds, its solvency position is considered to be good.
On the other hand a company holding more cash implies that it is losing the opportunity cost
of investing that cash in the profitable investment categories.
Cash management is concerned with managing of:1. Cash flows into and out of the firm.
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2. Cash flows within the firm, and
3. Cash balances held by the firm at a point of time by financing deficit or investing
surplus cash.

CASH MANAGEMENT CYCLE

Sales generate cash that has to be disbursed. The surplus cash has to be invested while deficit
has to be borrowed. Cash management seeks to accomplish this cycle at a minimum cost at a
minimum cost. At the same time, it also seeks to achieve liquidity and control.
Therefore, the aim of cash management is to maintain adequate control over cash
position to keep the firm sufficiently liquid and to use excess cash in some profitable way. In
order to resolve the uncertainty about cash flow prediction and lack of synchronization
between cash receipts and payments, the firm should develop appropriate strategies of cash
management.

Cash Planning:
Cash inflows and outflows should be planned to project cash surplus or deficit for
each period of the planning period. Cash budget should be prepared for this purpose.

1.

Managing the cash flow:


The flow of cash should be properly managed. The inflows should be accelerated

while, as far as possible, devaluating the cash flows.


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2. Optimum Cash Level:


The firm should decide about the appropriate level of cash balances. The cost of
excess cash and danger of cash deficiency should be matched to determine the optimum level
of cash balances.

3. Investing Surplus Cash:


The surplus cash balances should be properly invested to earn profits. The firm should
decide about the division of such cash balance between bank deposits, marketable securities
and inter-corporate lending.

RATIO ANALYSIS
Ratio analysis is a form of financial statement analysis that is used to obtain a quick
indication of firms financial performance in several key areas. The ratios are categorized as
shortterm solvency ratios. Debt management ratios, asset management ratios, profitability
ratios and market value ratios.
Ratios analysis as a tool possesses several important features. The data, which are
provided by financial statements, are readily available. The computation of ratios facilitates
the comparison of firms which differ in size. Ratios can be used to compare a firms financial
performance with industry average. In addition, ratios can be used in a form of trend analysis
to identify areas where performance has improved or deteriorated over time.
Because ratio analysis is based upon accounting information, its effectiveness is
limited by the distortions which arise in financial statements due to such things as historical
cost accounting and inflation. Therefore, ratio analysis should only be used as a first step in
financial analysis, to obtain a quick indication of a firms performance and to identify areas
which need to be investigated further.

CLASSIFICATION OF RATIOS:
Classification from the point of financial management is as follows:
1. Liquidity ratios
2. Leverage ratios
3. Activity ratios
4. Profitability ratios

LIQUIDITY RATIOS:
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Current ratios:
The current ratio is calculated by dividing current assets by current liabilities. Current
assets that the firm expects to convert in to cash in the coming year and current liabilities
which have to be paid in cash in the coming year. The appropriate value for this ratio depends
on the characteristics of the firms industry and the composition of its current assets. How
ever at a minimum the current ratio should be greater than once.
Current assets
Current ratio = -----------------Current liabilities

QUICK RATIO:
The quick ratio recognizes that, for many firms, inventories can be rather liquid. If
these inventories had to sold off in a hurry to meet an obligation the firm might have
difficulty in finding a buyer and the inventory items would likely have to be sold at a
substantial discount from their fair market value. This ratio attempts to measure the ability of
the firm to meet its obligations relying solely on its more current asset accounts such as cash
and accounts receivable. This ratio is calculated by dividing current assets less inventories by
current liabilities.
Current assets inventory
Quick ratio = --------------------------------Current liabilities

CASH POSITION RATIO:


Cash is the most liquid asset; a financial analyst may examine cash ratio and its
equivalent to current liabilities. Trade investment or marketable securities are equivalent of
cash; therefore, they may be included in the computation of cash ratio.
Cash ratio= cash marketable securities / current liabilities

ACTIVITY RATIOS:
INVENTORY TURN OVER RATIO:
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The inventory turnover and days inventory ratios measure the firms management of
its inventory. In general, a higher inventory turnover ratio is indicative of better performance
since this indicated that the firms inventories are being sole more quickly. How ever, if the
ratio is too high then the firm may be losing sales to competitors due to inventory shortages.
The inventory turnover ratio is calculated by dividing cost of goods sold by inventory. When
comparing one firms inventory turnover ratio with that of another firm it is important to
consider the inventory valuation method used by the firms. Some firms us FIFO ( first in first
out) and some use LIFO ( last in first out)
Inventory turnover ratio = sales / average inventory
The days inventory ratio is calculated by dividing the number of days in a year, 365
by the inventory turnover ratio. There fore the days inventory indicates how long, on average
an inventory item sits on the shelf until it is sold.

FIXED ASSETS TURNOVER RATIO:


The fixed assts turnover ratio measures how productively the firm is managing its
fixed assets to generate sales. This ratio is calculated by dividing sales by net fixed assets.
When comparing fixed assets turnover ratios of different firms it is important to keep in mid
that the values for net fixed assets reported on the firms balance sheets are book values which
can very different from market values.
Sales
Fixed assets turnover ratio = ------------------------Net fixed assets

TOTAL ASSETS TURNOVER RATIO:


The total assets turnover ratio measures how productively the firm is managing all of
its assets to generate sales. This ratio is calculated by dividing sales by total assets.
Annual Sales
Total asset turnover =

-------------------Total assets

WORKING CAPITAL TURNOVER RATIO:


This ratio makes clear whether the business is being carried on with small or large
amount of working capital in relation to sales.
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Working capital turnover ratio = Net sales / Net working capital.
(Net working capital = Total current assets Current liabilities)

DEBTORS TURNOVER RATIO:


Debtors turnover ratio indicates the no of times debtors turnover each year. Generally
the higher the value of debtors turnover, the more efficient is the management of credit.
Debtors turnover ratio = credit sales / average debtors

DEBTORS COLLECTION POERIOD:


The average collection period measures the quality of debtors since it indicates speed
of their collection. The shorter the average collection period, the better the quality of debtors,
since a short collection period implies the prompt payments by debtors.

PROFITABILITY RATIOS:
Profitability ratios attempt to measure the firms success in generating income. These
ratios reflect the combined effects of the firms asset and debt management. The profit margin
indicates the dollars in income that the firm earns on each dollar of sales. This ratio is
calculated by dividing net income by sales.
Net profit after taxes
Net profit margin =

------------------------------Total Revenues

EARNINGS PER SHARE:


The profitability of the common shareholders investment can also be measured in
many ways. One such measure is to calculate the earnings per share. The earnings per share
are calculated by dividing the profit after taxes by the total number of common

(ordinary)

shares outstanding.
EPS = profit after tax / no of equity shares

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Chapter -3
RESEARCH METHODOLOGY
Methodology of research can be divided into two types. One of the sources of data is
called primary data and a second source of data is called secondary data. The primary data
which means collection of data with a questioner form the employees, the customers and the
sources. The secondary data which means collection of information from the books records
journals magazines of the organizations.

Statement of the problem:


Working capital is an important aspect of financial management. It plays an essential
role in organizations financial success. The nature of such working capital is very liquid.
Valuation of working capital elements like cash, debtors, stock and creditors itself is a
difficult task for any organization. So there arises a requirement for assessing working capital
requirements, monitoring and managing it, from time to time for greater efficiencies.

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NEED FOR THE STUDY


Finance is said to be life blood of economic and Industrial activities. Managements of
every organization is Interested to know the strengths and weaknesses. It can be possible
through financial performance analyses. It can be possible through financial performance
analysis is useful to make either best use of the financial strength to overcome the
weaknesses. The future plans of the organizations should be laid down in view of the starting
point for making plans before using nay sophisticated forecasting and paining procedures.
Undertaking the post prerequisite for anticipating in the future. Generally the users of
financial analysis like trade creditors, suppliers of long term debt, Investors management etc,
are Interested to know the financial performances of the firm.

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OBJECTIVE OF THE STUDY


The present study in AMBUJA Cements undertaken to evaluate the working capital
strategy in the organization by establishing the following objectives.
1. To calculate the quantum of working capital and evaluated the financial strength of the
firm.
2. To examine the sources of financing the working capital.
3. To analyze the profitability liquidity position of the company.
4. To apply appropriate ratios for the analysis of financial statements.
5. To interpret the results for various ratios.
6. To study and evaluated the cash, receivables and inventory management performances.

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SOURCES OF THE STUDY


Primary Data: The primary information and data related to the project has been obtained by
interviewing the Administrator, Manager, Accountants, Industrial guides and other concerned
executives constitute the primary data.
Secondary Data: Secondary Data is collected from the P & L Account, Balance sheet, Books
and company website.

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Working capital management

SCOPE OF THE STUDY


The scope of the study is defined below in terms of concepts adopted and period under
focus.
1. First, the study of working capital management is confined only to the ambujacement.
2. Secondly, the concepts of

the working capital i.e., Gross and Net are used in

measuring the liquidity and profitability performance and also to arrive at various
objectives of the study,
3. Thirdly, the study is based on the annual reports of the company for a period of 5
years from 2011-2015. Due to time constraint the study period is restricted.

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Working capital management

TOOLS FOR ANALYSIS:


To analyze the data acquired from the secondary sources the following tools are used:

Statement of changes in working capital.

Liquidity Ratio analysis.

Statistical Tools ( Bare Charts and Tables)

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Working capital management

LIMITATIONS OF THE STUDY


a) The Information used is primarily from annual reports available to the public
and the same doesnt indicate the current situation of the firm.
b) Detailed analysis could not be carried for the project work because of the
limited time span.
c) Since financial matters are sensitive in nature the same could be acquired
easily.

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Working capital management

Chapter - 4
DATA ANALYSIS AND INTERPRETATION
TABLE 1.1 Statement of changes in Working Capital as on 31-3-2015
Working Capital Management as 2015 -2014
Particulars

31-Mar-15

31-Mar-14

Increase

2848.39

888.39

1960

336.26

227.98

62.91

2458.12

108.28
2395.21

Loance and Advances

2848.39

308.32

2540.07

other Current Assets

62.91

45.4

17.51

6548.6

5995.21

553.39

679.82

618.49

61.33

deferred Tax Liabilities

1461.93

1342.83

119.1

Other Long Term Liabilities

1084.34

1176.22

Total current Liabilities

3226.09

3137.54

Decrease

Current Assets

current investment
Inventories
Sundry Debtors
Cash and Bank Balance

total

-2395.21

Current Liabilities
Short term Borrowings
trade payables

-91.88
88.55
0

Working Capital

3322.51

2857.67

464.84

FORMULA: Working Capital= Current Assets-Current Liabilities.


INFERENCE:
The above tables in the year 2015 the total Current assets are increase by Rs 553.39
and the Total Current liabilities are increased by Rs 88.55. Hence the working capital
increased by Rs, 464.84.

TABLE 1.2,

Statement of changes in Working Capital as on 31-3-2014

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Working capital management

Working Capital Management 2013 ---2014

Particulars

31-Mar-14

31-Mar-13

Increas
e

Decrees

Current Assets
current investment

Inventories

888.39

933.94

-45.55

Sundry Debtors

227.98

231.51

-3.53

2458.12

2341.09

117.03

Loance and Advances

308.32

289.41

18.91

other Current Assets

45.4

57.15

5995.21

5537.04

Cash and Bank Balance

Total
Current Liabilities
Short term Borrowings

-11.75
458.17
0

618.49

974.52

deferred Tax Liabilities

1342.83

792.39

550.44

Other Long Term Liabilities

1176.22

1076.29

99.93

Total current Liabilities

3137.54

2843.2

294.34

Working Capital

2857.67

2693.84

trade payables

0
-356.03

2406.1
7

FORMULA:
Working Capital= Current Assets-Current Liabilities.

INFERENCE:
The above tables in the year 2014 the total Current assets are increase by Rs
458.17 and the Total Current liabilities are increased by Rs 294.34. Hence the working capital
increased by Rs 2406.17.

TABLE 1.3, Statement of changes in Working Capital as on 31-3-2013


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Working capital management

working Capital 2012 -- 13


Particulars

31-Mar-13

31-Mar-12

Increas
e

Decrees

Current Assets
current investment

Inventors

933.94

983.93

Sundry Debtors

231.51

213.37

18.14

2341.09

2253.72

87.37

Loance and Advances

289.41

248.98

40.43

other Current Assets

57.15

32.57

24.58

5537.04

5276.4

260.64

Cash and Bank Balance

Total
Current Liabilities
Short term Borrowings

0
-49.99

0
0

trade payables

974.52

934.54

39.98

deferred Tax Liabilities

792.39

655.87

136.52

1076.29

1308.93

-232.64

2843.2

2899.34

-56.14

2693.84

2377.06

Other Long Term Liabilities


Total Current Liabilities

working Capital

316.78

FORMULA:
Working Capital= Current Assets-Current Liabilities.

INFERENCE:
The above tables in the year 2013 the total Current assets are increase by Rs 260.64
and the Total Current liabilities are decreased by Rs 56.14. Hence the working capital
increased by Rs 316.78.

TABLE 1.1 Statement of changes in Working Capital as on 31-3-2012


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Working capital management

working Capital 2011-12


Particulars

31-Mar-12

31-Mar-11

Increase

Decrees

Current Assets
current investment

Inventories

983.93

924.97

58.96

Sundry Debtors

213.37

240.85

2253.72

2071.23

Loance and Advances

248.98

567.61

other Current Assets

32.57

23.66

8.91

5276.4

3828.32

1448.08

Cash and Bank Balance

Total
Current Liabilities
Short term Borrowings

-27.48
182.49
-318.63

0
0

trade payables

934.54

934.54

deferred Tax Liabilities

655.87

1588.13

Other Long Term Liabilities

1308.93

1106.11

202.82

Total current Liabilities

2899.34

2694.24

205.1

-932.26

0
working Capital

2377.06

1134.08

1242.98

FORMULA: Working Capital= Current Assets-Current Liabilities.


INFERENCE: The above tables in the year 2012 the total Current assets are increase by
Rs 1448.08 and the Total Current liabilities are increased by Rs 205.10. Hence the working
capital increased by Rs 1242.98.

NET WORKING CAPITAL

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Working capital management


Formula

Net working capital= networking capital/net Sales


Year

Net working
Capital

Net Sales

Working
Capital Ratio

31-Mar-15

3322.51

9368.30

2.82

31-Mar-14

2857.67

9910.70

3.47

31-Mar-13

2693.84

9086.84

3.37

31-Mar-12

2377.06

9674.94

4.07

31-Mar-11

1134.08

7390.21

6.52

Table no.4.2 Net working capital ratio


INFERENCE:

Ambuja Cement has maintained net working capital ratio. In


the year 2011 Ratio is 6.52, in the year 2012 ratio is 4.07, in the year
2013 ratio is 3.37, in the year 2014 ratio is 3.47 and in the year 2015
ratio is 2.82.
no.4.1 Net working capital ratio

QUICK RATIO
Formula:
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Working capital management

Quick Ratio =

Quick Assets
Current liabilities

Table 2.2 Quick ratio of Amara Raja Batteries Ltd., company for the year 2008-2012.
year

Quick Asset

Current
Liabilities

Quick Ratio

31-Mar-15

5653.15

3226.09

1.75

31-Mar-14

5106.82

3137.54

1.63

31-Mar-13

4603.10

2843.20

1.62

31-Mar-12

4292.47

2899.34

1.48

31-Mar-11

3596.81

2694.24

1.33

Table no. 4.6 Quick ratio

Fig no. 4.6 Quick ratio


INFERENCE:

Ambuja Cement has maintained Quick Ratio. In the year


2011 Ratio is 1.33, in the year 2012 ratio is 1.48, in the year 2013
ratio is 1.62, in the year 2014 ratio is 1.63 and in the year 2015 ratio is
1.75.
CASH RATIO
Formula:
CASH RATIO
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Working capital management

Cash Ratio =

Current liabilities

Table 2.2 Quick ratio of Amara Raja Batteries Ltd., company for the year 2008-2012.
Years

Quick Assets Current Liabilities RS

Ratio (%)

RS
31-Mar-15
31-Mar-14
31-Mar-13
31-Mar-12
31-Mar-11

5653.15
5106.82
4603.10
4292.47
3596.81

3226.09
3137.54
2843.20
2899.34
2694.24

1.75
1.63
1.62
1.48
1.33

Table no. 4.6 Cash Ratio

Fig no. 4.6 Cash Ratio


INFERENCE:

Ambuja Cement has maintained Cash Ratio. In the year 2011


Ratio is 1.33, in the year 2012 ratio is 1.48, in the year 2013 ratio is
1.62, in the year 2014 ratio is 1.63 and in the year 2015 ratio is 1.75.

Current ratios:
Current assets
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Working capital management


Current liabilities

Table 2.2 Current Ratio


year

Current Asset

Current
liabilities

Current Ratio

31-Mar-15

6548.60

3226.09

2.03

31-Mar-14

5995.21

3137.54

1.91

31-Mar-13

5537.04

2843.20

1.95

31-Mar-12

5276.40

2899.34

1.82

31-Mar-11

3828.32

2694.24

1.42

Table no. 4.6 Cash Ratio

Fig no. 4.6 Quick ratio


INFERENCE:

Ambuja Cement has maintained net working capital ratio. In


the year 2011 Ratio is 1.42, in the year 2012 ratio is 1.82, in the year
2013 ratio is 1.95, in the year 2014 ratio is 1.91 and in the year 2015
ratio is 2.03.
Chapter -5
FINDINGS
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On the detailed study and analysis and evolution of the ratio, trends funds flow
statements the following were drawn.
The above tables in the year 2015 the total Current assets are increase by Rs
553.39 and the Total Current liabilities are increased by Rs 88.55. Hence the
working capital increased by Rs, 464.84.
The above tables in the year 2014 the total Current assets are increase by Rs
458.17 and the Total Current liabilities are increased by Rs 294.34. Hence the
working capital increased by Rs 2406.17.
The above tables in the year 2013 the total Current assets are increase by Rs
260.64 and the Total Current liabilities are decreased by Rs 56.14. Hence the
working capital increased by Rs 316.78.
The above tables in the year 2012 the total Current assets are increase by Rs
1448.08 and the Total Current liabilities are increased by Rs 205.10. Hence the
working capital increased by Rs 1242.98.
Ambuja Cement has maintained net working capital ratio. In the year 2011
Ratio is 6.52, in the year 2012 ratio is 4.07, in the year 2013 ratio is 3.37, in
the year 2014 ratio is 3.47 and in the year 2015 ratio is 2.82.
Ambuja Cement has maintained Quick Ratio. In the year 2011 Ratio is 1.33, in
the year 2012 ratio is 1.48, in the year 2013 ratio is 1.62, in the year 2014 ratio
is 1.63 and in the year 2015 ratio is 1.75.
Ambuja Cement has maintained Cash Ratio. In the year 2011 Ratio is 1.33, in
the year 2012 ratio is 1.48, in the year 2013 ratio is 1.62, in the year 2014 ratio
is 1.63 and in the year 2015 ratio is 1.75.
Ambuja Cement has maintained net working capital

ratio. In the year 2011

Ratio is 1.42, in the year 2012 ratio is 1.82, in the year 2013 ratio is 1.95, in
the year 2014 ratio is 1.91 and in the year 2015 ratio is 2.03.

SUGGETIONS

The company should maintain huge inventories, which results in high inventory
carrying cost.

The company should increase the current assets.

The company should maintain sales increases to every year respectively.

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The firm need to maintain sufficient working capital.

The firm go to the short term deposits are investment for surplus of quick Assets

CONCLUSION
The net working capital is sufficient, but the total assets, inventories are decreased.
The bank balance is less. In the Ambuja Cement there was increase the assets, inventory&
bank balance. If there is high properties they can face many problems. The net working
capital is high. The total properties are Very high in.
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BIBLIOGRAPHY
1. S.P.JAIN ANDK.L.NARANG

ADVANCED ACCOUNTANCY VOLUME- 2


Kalyani publishers

2. I M PANDEY

FINANCIAL MANAGEMENT, 9-EDITION


VIKAS PUBLISHING HOUSE PVT .LTD.

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Working capital management

3. S.P.JAIN AND K.L.NARANG

CAST AND MANAGEMENT ACCOUNTING


Kalyani publishers

4. PRASANNA CHANDRA

FUNDAMENTALS OF FINANCIAL
MANAGEMENT

WEBSITE:
WWW.Ambujacement.com
WWW.google.COM

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