A PROJECT REPORT ON

WORKING CAPITAL MANAGEMENT: A CASE STUDY ON UCO BANK

(SUBMITTED IN PARTIAL FULFILLMENT OF DEGREE OF MASTER OF COMMERCE)

Submitted by:
Anil mohanty
ROLL NO- 2015MCFC012
SESSION- 2015-17

Under the guidance of:

PROF. PRADYOT KESHARI PRADHAN
P.G DEPT. OF COMMERCE,
B J B AUTONOMOUS COLLEGE, BHUBANESWAR.

M.COM (F&C), DEPT. OF COMMERCE

B J B AUTONOMOUS COLLEGE, BHUBANESWAR, ODISHA

DECLARATION

I do hereby declare that the project entitled THE WORKING CAPITAL MANAGEMENT
submitted by me as a partial fulfillment of the requirements for the degree of Master of
commerce in finance and control, B J B Autonomous college in the course curriculum. It is the
original piece of work done by me under the guidance of PROF. PRADYOT KESHARI
PRADHAN as my faculty guide and has not been submitted for the awards of any other degree
elsewhere in full or in part.

Date:
Place:

LIZA RATH
Roll No.- 10619V142026
P.G Dept. of commerce,

Utkal University.
CERTIFICATE

This is to certify that the project entitled THE SERVICE QUALITY

OF TELECOM SECTORS IN INDIA: AN ASSESSMENT IN BHUBANESWAR
is a record of bona fide research work carried out by LIZA RATH under my
supervision and guidance. It embodies the result of him original contribution. The
project has reached the standard of fulfilling the requirements of regulation relating to
the master degree of commerce. No part of this project has been submitted to any
institution for the award of any degree.
I wish him all the best and success in future endeavors.
Date:

PROF.PRADYOT KESHARI PRADHAN

Place:

P.G. DEPARTMENT OF COMMERCE

UTKALUNIVERSITY, BHUBANESWAR

ACKNOWLEDGEMENT
The satisfaction that accompanies the successful completion of any task
would be incomplete without mentioning people who made it possible,

whose

encouragement and consistent guidance crowned my effort with success.

I express my deep sense of gratitude and indebtedness to my guide, PROF.
PRADYOT KESHARI PRADHAN, P.G. Dept. Of commerce, Utkal University,
Bhubaneswar for his suggestions, constant inspiration and prompt guidance to carry
out and complete this study.
Last but not the least I especially thank all those who have helped
me directly or indirectly to complete this project. I express my profound thanks to my

teachers as well as my friends for their valuable suggestions and constant

encouragement.

Date:
Place:

LIZA RATH
Roll No.- 10619V142026
P.G Dept. of commerce,
Utkal university.

CONTENTS
Particulars

page no.

Certificate

Declaration

II

Acknowledgement

III

Executive summery

IV

List of Tables and Charts

CHAPTER 1:INTRODUCTION..1-9
1.1- Context
1.2-Importance of the topic
1.3- Literature review
1.4- Research gap
1.5- Objective of the study
1.6- Research methodology
1.6.1- Sources of the data
1.6.2-Scope of the study
1.6.3-Sample design
1.6.4-Period of the study
1.6.5-Tools and techniques
1.7- Relevance of the study
1.8- Limitation of the study
1.9- Chapter plan
CHAPTER 2- CONCEPTUAL FRAMEWORK OF SERVICE QUALITY AND CUSTOMERS
SATISFACTION AND THEIR INTERRELATIONSHIP..10-13
2.1- Service quality:the conceptual framework.
2.1.1-Service quality definition
2.1.2-Service quality dimensions
2.2-Customers satisfaction

2.3- Relationship between service quality & customers satisfaction

2.4- Conclusion
CHAPTER 3-HISTORY OF TELECOM INDUSTRY IN INDIA & SAMPLE
COMPANIES14-22
3.1- The history & development of Telecom sector in India
3.1.1- Beginning of telecom sectors in India
3.1.2- Development of telecom sectors in India
3.1.3- Recent trends
3.2- Sample companies
3.3- Conclusion
CHAPTER 4-ANALYSIS OF DATA23-38
CHAPTER 5-MAJOR FINDINGS , SUGGESTIONS AND CONCLUSION
..39-40
5.1- Major findings
5.2- Suggestions
5.3- Conclusion

Chapter 1

Introduction

Chapter-2

WORKING CAPITAL - Meaning of Working Capital

Capital required for a business can be classified under two main categories via,
1)

Fixed Capital

2)

Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day
operations. Long terms funds are required to create production facilities through purchase of fixed
assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part of
firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also
needed for short-term purposes for the purchase of raw material, payment of wages and other day
to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to that part
of the firms capital which is required for financing short- term or current assets such as cash,
marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fast

and are being constantly converted in to cash and this cash flows out again in exchange for other
current assets. Hence, it is also known as revolving or circulating capital or short term capital.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1.

Gross working capital

2.

Net working capital

The gross working capital is the capital invested in the total current assets of the enterprises
current assets are those
Assets which can convert in to cash within a short period normally one accounting year.
CONSTITUENTS OF CURRENT ASSETS
1)

Cash in hand and cash at bank

2)

Bills receivables

3)

Sundry debtors

4)

Short term loans and advances.

5)

Inventories of stock as:

a.

Raw material

b.

Work in process

c.

Stores and spares

d.

Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.
9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net working capital is
the excess of current assets over current liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.
Net working capital can be positive or negative. When the current assets exceeds the current
liabilities are more than the current assets. Current liabilities are those liabilities, which are
intended to be paid in the ordinary course of business within a short period of normally one
accounting year out of the current assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
1.

Accrued or outstanding expenses.

2.

Short term loans, advances and deposits.

3.

Dividends payable.

4.

Bank overdraft.

5.

Provision for taxation , if it does not amt. to app. Of profit.

6.

Bills payable.

7.

Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working capital
is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the following reasons:
1.

It enables the enterprise to provide correct amount of working capital at correct time.

2.

Every management is more interested in total current assets with which it has to operate then
the source from where it is made available.

3.

It take into consideration of the fact every increase in the funds of the enterprise would
increase its working capital.

4.

This concept is also useful in determining the rate of return on investments in working
capital. The net working capital concept, however, is also important for following reasons:

It is qualitative concept, which indicates the firms ability to meet to its operating
expenses and short-term liabilities.

IT indicates the margin of protection available to the short term creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital requirement out of the
permanent

sources

of

funds.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:
o

On the basis of concept.

On the basis of time.

On the basis of concept working capital can be classified as gross working capital and net
working capital. On the basis of time, working capital may be classified as:

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to

maintain a minimum level of raw material, work- in-process, finished goods and cash balance. This
minimum level of current assts is called permanent or fixed working capital as this part of working is
permanently blocked in current assets. As the business grow the requirements of working capital also
increases due to increase in current assets.
TEMPORARY OR VARIABLE WORKING CAPITAL
Temporary or variable working capital is the amount of working capital which is required to meet the
seasonal demands and some special exigencies. Variable working capital can further be classified as
seasonal working capital and special working capital. The capital required to meet the seasonal need
of the enterprise is called seasonal working capital. Special working capital is that part of working
capital which is required to meet special exigencies such as launching of extensive marketing for
conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that is required for
short periods and cannot be permanently employed gainfully in the business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the

solvency of the business by providing uninterrupted of production.

Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and
makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and credit standing can arrange
loans from banks and other on easy and favorable terms.

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

Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw
material and continuous production.

Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It leads to the
satisfaction of the employees and raises the morale of its employees, increases their
efficiency, reduces wastage and costs and enhances production and profits.

Exploitation Of Favorable Market Conditions: If a firm is having adequate working capital

then it can exploit the favorable market conditions such as purchasing its requirements in bulk
when the prices are lower and holdings its inventories for higher prices.

Ability To Face Crises: A concern can face the situation during the depression.

Quick And Regular Return On Investments: Sufficient working capital enables a concern to
pay quick and regular of dividends to its investors and gains confidence of the investors and
can raise more funds in future.

High Morale: Adequate working capital brings an environment of securities, confidence,

high morale which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate nor
shortages of working capital. Both excess as well as short working capital positions are bad for
any business. However, it is the inadequate working capital which is more dangerous from the
point of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL
1.

Excessive working capital means ideal funds which earn no profit for the firm and
business cannot earn the required rate of return on its investments.

2.

Redundant working capital leads to unnecessary purchasing and accumulation of

inventories.

3.

Excessive working capital implies excessive debtors and defective credit policy which
causes higher incidence of bad debts.

4.

It may reduce the overall efficiency of the business.

5.

If a firm is having excessive working capital then the relations with banks and other
financial institution may not be maintained.

6.

Due to lower rate of return n investments, the values of shares may also fall.

7.

The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises due to the
time gap between production and realization of cash from sales. There is an operating cycle involved
in sales and realization of cash. There are time gaps in purchase of raw material and production;
production and sales; and realization of cash.
Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

To incur day-to-day expenses and overload costs such as office expenses.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and spares and
finished stock.

For studying the need of working capital in a business, one has to study the business under
varying circumstances such as a new concern requires a lot of funds to meet its initial
requirements such as promotion and formation etc. These expenses are called preliminary
expenses and are capitalized. The amount needed for working capital depends upon the size of the
company and ambitions of its promoters. Greater the size of the business unit, generally larger
will be the requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and expensing of the
business till it gains maturity. At maturity the amount of working capital required is called normal
working capital.
There are others factors also influence the need of working capital in a business.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of working is very limited in public utility

undertakings such as electricity, water supply and railways because they offer cash sale
only and supply services not products, and no funds are tied up in inventories and
receivables. On the other hand the trading and financial firms requires less investment in
fixed assets but have to invest large amt. of working capital along with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of
working capital.
3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating
inventories it will require higher working capital.
4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material
and other supplies have to be carried for a longer in the process with progressive
increment of labor and service costs before the final product is obtained. So working
capital is directly proportional to the length of the manufacturing process.
5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger
working capital than in slack season.
6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one
cycle determines the requirements of working capital. Longer the cycle larger is the
requirement of working capital.

DEBTORS
CASH

FINISHED GOODS

RAW MATERIAL

7.

WORK IN PROGRESS

RATE OF STOCK TURNOVER: There is an inverse co-relationship between the

question of working capital and the velocity or speed with which the sales are affected. A

firm having a high rate of stock turnover wuill needs lower amt. of working capital as
compared to a firm having a low rate of turnover.
8.

CREDIT POLICY: A concern that purchases its requirements on credit and sales its
product / services on cash requires lesser amt. of working capital and vice-versa.

9.

BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need
for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion
of business, etc. On the contrary in time of depression, the business contracts, sales
decline, difficulties are faced in collection from debtor and the firm may have a large amt.
of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large
amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning
capacity than other due to quality of their products, monopoly conditions, etc. Such firms
may generate cash profits from operations and contribute to their working capital. The
dividend policy also affects the requirement of working capital. A firm maintaining a
steady high rate of cash dividend irrespective of its profits needs working capital than the
firm that retains larger part of its profits and does not pay so high rate of cash dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital
requirements. Generally rise in prices leads to increase in working capital.
Others FACTORS: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

Banking facilities, etc.

Chapter-3

MANAGEMENT OF WORKING CAPITAL

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

It concerned with the formulation of policies with regard to profitability, liquidity and
risk.

2.

It is concerned with the decision about the composition and level of current assets.

3.

It is concerned with the decision about the composition and level of current liabilities.

WORKING CAPITAL ANALYSIS

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

Ratio analysis.

2.

Fund flow analysis.

3.

Budgeting.

1.

RATIO ANALYSIS

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

9. Ratio of current liabilities to tangible net worth.

2.

FUND FLOW ANALYSIS

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

a.

Preparing schedule of changes of working capital

b.

Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital)
business enterprise between beginning and ending of the financial dates.

3.

WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices to be

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

ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST OF LIQUIDITY

The short term creditors of a company such as suppliers of goods of credit and commercial
banks short-term loans are primarily interested to know the ability of a firm to meet its

obligations in time. The short term obligations of a firm can be met in time only when it is
having sufficient liquid assets. So to with the confidence of investors, creditors, the smooth
functioning of the firm and the efficient use of fixed assets the liquid position of the firm
must be strong. But a very high degree of liquidity of the firm being tied up in current
assets. Therefore, it is important proper balance in regard to the liquidity of the firm. Two
types of ratios can be calculated for measuring short-term financial position or short-term
solvency position of the firm.
1.

Liquidity ratios.

2.

Current assets movements ratios.

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

CURRENT RATIO

2.

QUICK RATIO

3.

ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general liquidity and its
most widely used to make the analysis of short-term financial position or liquidity of a firm.
It is defined as the relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The two components of this ratio are:
1)

CURRENT ASSETS

2)

CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry debtors,
inventories and work-in-progresses. Current liabilities include outstanding expenses, bill
payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability to
pay its current obligations in time. On the hand a low current ratio represents that the
liquidity position of the firm is not good and the firm shall not be able to pay its current
liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double
the current liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO

(Rupees in crore)
e.g.

Year

2011

2012

2013

Current Assets

81.29

83.12

13,6.57

Current Liabilities

27.42

20.58

33.48

Current Ratio

2.96:1

4.03:1

4.08:1

Interpretation:As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the
company for last three years it has increased from 2011 to 2013. The current ratio of
company is more than the ideal ratio. This depicts that companys liquidity position is
sound. Its current assets are more than its current liabilities.
2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be
defined as the relationship between quick/liquid assets and current or liquid liabilities. An
asset is said to be liquid if it can be converted into cash with a short period without loss of
value. It measures the firms capacity to pay off current obligations immediately.
QUICK RATIO = QUICK ASSETS
CURRENT LIABILITES
Where Quick Assets are:
1)

Marketable Securities

2)

Cash in hand and Cash at bank.

3)

Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its current
liabilities in time and on the other hand a low quick ratio represents that the firms liquidity
position is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick
assets are equal to the current liabilities then the concern may be able to meet its short-term

obligations. However, a firm having high quick ratio may not have a satisfactory liquidity
position if it has slow paying debtors. On the other hand, a firm having a low liquidity
position if it has fast moving inventories.
CALCULATION OF QUICK RATIO

e.g.

(Rupees in Crore)

Year

2011

2012

2013

Quick Assets

44.14

47.43

61.55

Current Liabilities

27.42

20.58

33.48

Quick Ratio

1.6 : 1

2.3 : 1

1.8 : 1

Interpretation :
A quick ratio is an indication that the firm is liquid and has the ability to meet its
current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more than
ideal ratio. This shows company has no liquidity problem.
3. ABSOLUTE LIQUID RATIO
Although receivables, debtors and bills receivable are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash immediately or in
time. So absolute liquid ratio should be calculated together with current ratio and acid test
ratio so as to exclude even receivables from the current assets and find out the absolute
liquid assets. Absolute Liquid Assets includes :
ABSOLUTE LIQUID RATIO =

ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g.

(Rupees in Crore)

Year

2011

2012

2013

Absolute Liquid Assets

4.69

1.79

5.06

Current Liabilities

27.42

20.58

33.48

Absolute Liquid Ratio

.17 : 1

.09 : 1

.15 : 1

Interpretation :
These ratio shows that company carries a small amount of cash. But there is nothing to
be worried about the lack of cash because company has reserve, borrowing power & long
term investment. In India, firms have credit limits sanctioned from banks and can easily
draw cash.
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and earn profits. The
efficiency with which assets are managed directly affects the volume of sales. The better the
management of assets, large is the amount of sales and profits. Current assets movement
ratios measure the efficiency with which a firm manages its resources. These ratios are
called turnover ratios because they indicate the speed with which assets are converted or
turned over into sales. Depending upon the purpose, a number of turnover ratios can be
calculated. These are :
1.

Inventory Turnover Ratio

2.

Debtors Turnover Ratio

3.

Creditors Turnover Ratio

4.

Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high amount
of debtors due to slow credit collections and moreover if the assets include high amount of
slow moving inventories. As both the ratios ignore the movement of current assets, it is
important to calculate the turnover ratio.
1.

INVENTORY TURNOVER OR STOCK TURNOVER RATIO :

Every firm has to maintain a certain amount of inventory of finished goods so as to
meet the requirements of the business. But the level of inventory should neither be
too high nor too low. Because it is harmful to hold more inventory as some amount of
capital is blocked in it and some cost is involved in it. It will therefore be advisable to
dispose the inventory as soon as possible.
INVENTORY TURNOVER RATIO =

COST OF GOOD SOLD

AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is converted into
sales. Usually a high inventory ratio indicates an efficient management of inventory
because more frequently the stocks are sold ; the lesser amount of money is required
to finance the inventory. Where as low inventory turnover ratio indicates the
inefficient management of inventory. A low inventory turnover implies over
investment in inventories, dull business, poor quality of goods, stock accumulations
and slow moving goods and low profits as compared to total investment.
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK
2

(Rupees in Crore)

Year

2011

2012

2013

Cost of Goods sold

110.6

103.2

96.8

Average Stock

73.59

36.42

55.35

Inventory Turnover Ratio

1.5 times

2.8 times

1.75 times

Interpretation :
These ratio shows how rapidly the inventory is turning into receivable through sales. In
2012 the company has high inventory turnover ratio but in 2013 it has reduced to 1.75
times. This shows that the companys inventory management technique is less efficient as
compare to last year.
2.

INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO
e.g.

Year

2011

2012

2013

Days

365

365

365

Inventory Turnover Ratio

1.5

2.8

1.8

243 days

130 days

202 days

Inventory Conversion Period

Interpretation :
Inventory conversion period shows that how many days inventories takes to convert
from raw material to finished goods. In the company inventory conversion period is
decreasing. This shows the efficiency of management to convert the inventory into cash.

3.

DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to increase its sales and a
liberal credit policy may result in tying up substantial funds of a firm in the form of trade
debtors. Trade debtors are expected to be converted into cash within a short period and are
included in current assets. So liquidity position of a concern also depends upon the quality
of trade debtors. Two types of ratio can be calculated to evaluate the quality of debtors.
a)

Debtors Turnover Ratio

b)

Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS
Debtors velocity indicates the number of times the debtors are turned over during a
year. Generally higher the value of debtors turnover ratio the more efficient is the
management of debtors/sales or more liquid are the debtors. Whereas a low debtors
turnover ratio indicates poor management of debtors/sales and less liquid debtors. This ratio
should be compared with ratios of other firms doing the same business and a trend may be
found to make a better interpretation of the ratio.
AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR
2

e.g.

Year

2011

2012

2013

Sales

166.0

151.5

169.5

Average Debtors

17.33

18.19

22.50

Debtor Turnover Ratio

9.6 times

8.3 times

7.5 times

Interpretation :
This ratio indicates the speed with which debtors are being converted or turnover into
sales. The higher the values or turnover into sales. The higher the values of debtors
turnover, the more efficient is the management of credit. But in the company the debtor
turnover ratio is decreasing year to year. This shows that company is not utilizing its debtors
efficiency. Now their credit policy become liberal as compare to previous year.
4.

AVERAGE COLLECTION PERIOD :

Average Collection Period =

No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average number of days for which a
firm has to wait before its receivables are converted into cash. It measures the quality of
debtors. Generally, shorter the average collection period the better is the quality of debtors
as a short collection period implies quick payment by debtors and vice-versa.
Average Collection Period =

365 (Net Working Days)

Debtors Turnover Ratio

Year

2011

2012

2013

Days

365

365

365

Debtor Turnover Ratio

9.6

8.3

7.5

38 days

44 days

49 days

Average Collection Period

Interpretation :

The average collection period measures the quality of debtors and it helps in
analyzing the efficiency of collection efforts. It also helps to analysis the credit policy
adopted by company. In the firm average collection period increasing year to year. It shows
that the firm has Liberal Credit policy. These changes in policy are due to competitors
credit policy.
5.

WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of net working
capital. This ratio indicates the number of times the working capital is turned over
in the course of the year. This ratio measures the efficiency with which the working
capital is used by the firm. A higher ratio indicates efficient utilization of working
capital and a low ratio indicates otherwise. But a very high working capital
turnover is not a good situation for any firm.
Working Capital Turnover Ratio =

Cost of Sales
Net Working Capital

Working Capital Turnover

Sales
Networking Capital

e.g.

Year

2011

2012

2013

Sales

166.0

151.5

169.5

Networking Capital

53.87

62.52

103.09

Working Capital Turnover

3.08

2.4

1.64

Interpretation :
This ratio indicates low much net working capital requires for sales. In 2013,
the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company
requires 60 paisa as working capital. Thus this ratio is helpful to forecast the working
capital requirement on the basis of sale.
INVENTORIES
(Rs. in Crores)

Year

Inventories

2010-2011

2011-2012

2012-2013

37.15

35.69

75.01

Interpretation :
Inventories is a major part of current assets. If any company wants to manage its
working capital efficiency, it has to manage its inventories efficiently. The graph shows that
inventory in 2010-2011 is 45%, in 2011-2012 is 43% and in 2012-2013 is 54% of their
current assets. The company should try to reduce the inventory upto 10% or 20% of current
assets.
CASH BNAK BALANCE :
(Rs. in Crores)

Year

Cash Bank Balance

2010-2011

2011-2012

2012-2013

4.69

1.79

5.05

Interpretation :
Cash is basic input or component of working capital. Cash is needed to keep the
business running on a continuous basis. So the organization should have sufficient cash to
meet various requirements. The above graph is indicate that in 2011 the cash is 4.69 crores
but in 2012 it has decrease to 1.79. The result of that it disturb the firms manufacturing
operations. In 2013, it is increased upto approx. 5.1% cash balance. So in 2013, the
company has no problem for meeting its requirement as compare to 2012.
DEBTORS :
(Rs. in Crores)

Year

Debtors

2010-2011

2011-2012

2012-2013

17.33

19.05

25.94

Interpretation :
Debtors constitute a substantial portion of total current assets. In India it constitute one
third of current assets. The above graph is depict that there is increase in debtors. It
represents an extension of credit to customers. The reason for increasing credit is
competition and company liberal credit policy.

CURRENT ASSETS :
(Rs. in Crores)

Year

Current Assets

2010-2011

2011-2012

2012-2013

81.29

83.15

136.57

Interpretation :
This graph shows that there is 64% increase in current assets in 2013. This increase is
arise because there is approx. 50% increase in inventories. Increase in current assets shows
the liquidity soundness of company.

CURRENT LIABILITY :
(Rs. in Crores)

Year

Current Liability

2010-2011

2011-2012

2012-2013

27.42

20.58

33.48

Interpretation :
Current liabilities shows company short term debts pay to outsiders. In 2013 the current
liabilities of the company increased. But still increase in current assets are more than its
current liabilities.

NET WOKRING CAPITAL :

(Rs. in Crores)

Year

Net Working Capital

Interpretation :

2010-2011

2011-2012

2012-2013

53.87

62.53

103.09

Working capital is required to finance day to day operations of a firm. There should be
an optimum level of working capital. It should not be too less or not too excess. In the
company there is increase in working capital. The increase in working capital arises because
the company has expanded its business.

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

I.
II.

COMMON-SIZE P/L A/C

COMMON-SIZE BALANCE SHEET

III.

COMPARTIVE P/L A/C

IV.

COMPARTIVE BALANCE SHEET

V.
VI.

TREND ANALYSIS
RATIO ANALYSIS

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

I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis,
the organization would be able to conquer its in efficiencies and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and consistent accounting
procedure to convey an under-standing of some financial aspects of a business firm. It may show
position at a moment in time, as in the case of balance sheet or may reveal a series of activities over a
given period of time, as in the case of an income statement. Thus, the term financial statements
generally refers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following objectives of financial statements: 1. To provide reliable financial information about economic resources and obligation of a business
firm.
2. To provide other needed information about charges in such economic resources and obligation.
3. To provide reliable information about change in net resources (recourses less obligations) missing
out of business activities.

4. To provide financial information that assets in estimating the learning potential of the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not present a final
picture a final picture of a concern. The utility of these statements is dependent upon a number of
factors. The analysis and interpretation of these statements must be done carefully otherwise
misleading conclusion may be drawn.
Financial statements suffer from the following limitations: 1. Financial statements do not given a final picture of the concern. The data given in these statements
is only approximate. The actual value can only be determined when the business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods, generally one year,
during the life of a concern. The costs and incomes are apportioned to different periods with a view to
determine profits etc. The allocation of expenses and income depends upon the personal judgment of
the accountant. The existence of contingent assets and liabilities also make the statements imprecise.
So financial statement are at the most interim reports rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give final and accurate
position. The value of fixed assets in the balance sheet neither represent the value for which fixed
assets can be sold nor the amount which will be required to replace these assets. The balance sheet is
prepared on the presumption of a going concern. The concern is expected to continue in future. So
fixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in the
balance sheet which will realize nothing at the time of liquidation but they are shown in the balance
sheets.
4. The financial statements are prepared on the basis of historical costs Or original costs. The value of
assets decreases with the passage of time current price changes are not taken into account. The
statement are not prepared with the keeping in view the economic conditions. the balance sheet loses

the significance of being an index of current economics realities. Similarly, the profitability shown by
the income statements may be represent the earning capacity of the concern.
5. There are certain factors which have a bearing on the financial position and operating result of the
business but they do not become a part of these statements because they cannot be measured in
monetary terms. The basic limitation of the traditional financial statements comprising the balance
sheet, profit & loss A/c is that they do not give all the information regarding the financial operation of
the firm. Nevertheless, they provide some extremely useful information to the extent the balance sheet
mirrors the financial position on a particular data in lines of the structure of assets, liabilities etc. and
the profit & loss A/c shows the result of operation during a certain period in terms revenue obtained
and cost incurred during the year. Thus, the financial position and operation of the firm.

FINANCIAL STATEMENT ANALYSIS

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

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

These are:

Profit & Loss account ratios

Balance Sheet ratios

Composite ratios

Project Description :
Title : Project Report on Working Capital Management
Pages : 73
Description : Project Report on Working Capital Management, Working capital analysis, Working
Capital Management - Meaning & Concept, working capital Classification, Importance, Advantages
and Disadvantages of Working Capital, Factors determining the working capital requirements & Ratio
Analysis
Category : Project Report for MBA
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