PROJECT REPORT ON

Under the partial fulfillment of T .Y. BANKING & INSURANCE SEMESTER 5 Submitted By _______________ Roll no.____ Project Guide PROF. (Mrs.) CHANDRA IYER Submitted to UNIVERSITY OF MUMBAI Academic Year 2011-2012

Pragati CollegeCertificate
THIS IS TO CERTIFY THAT _______________________________________ HAS SATISFACTORILY CARRIED OUT THE PROJECT WORK ON THE TOPIC_____________________________________________________________ FOR THE V SEMESTER OF _________________ IN THE ACADEMIC YEAR ____________ SIGNATURE OF PROJECT GUIDE ________________________ SIGNATURE OF BMS COORDINATOR SIGNATURE OF PRINCIPAL ________________________ SIGNATURE OF EXTERNAL EXAMINER DATE

________________________

________________________ ________________________

ACKNOWLEDGEMENT

________________________________________________ RESEARCHER

DECLARATION

Name _______________________ Signature _______________________ Place:_____________ Date:-____________

1 Chapter1: Introduction and Background of Research

1.1
1.1.1 1.1.2 1.1.3 1.1.4 1.1.5

Background and rationale of study

______________________________ ____________________________ ____________________________ ____________________________ __________________________

2
2.1 2.2 2.3 2.4 2.5 2.6

Chapter2: Research Problem analysis

____________________________ ____________________________ ____________________________ ____________________________ Research questions Key Issues of Research

Chapter 3: Objectives & Methodology

3.1 Research Objectives 3.2 Research Approach 3.3 Literature of research 3.3.1 ____________________________ 3.3.2 ____________________________ 3.3.3 ____________________________ 3.3.4 ____________________________ 3.3.5 ____________________________ 3.4 Research tools and techniques 3.5 Collection of data

Chapter 4: Empirical results

4.1 Observations 4.1.1 ____________________________ 4.1.2 ____________________________ 4.1.3 ____________________________ 4.1.4 ____________________________ 4.1.5 _________________________ 4.2 Comments 4.2.1 ____________________________ 4.2.2 ____________________________ 4.2.3 ____________________________ 4.2.4 ____________________________ 4.2.5 ____________________________

Chapter 5: Data analysis

5.1 Analysis of data 5.1.2 ____________________________ 5.1.3 ____________________________ 5.1.4 ____________________________ 5.1.5 ____________________________ 5.2 Data Results 5.2.1 ____________________________ 5.2.2 ____________________________ 5.2.3 ____________________________ 5.2.4 ____________________________ 5.2.5 ____________________________

Chapter 6: Summary of Findings

6.1 Findings 6.1.1 ____________________________ 6.1.2 ____________________________ 6.1.3 ____________________________ 6.1.4 ____________________________ 6.1.5 ____________________________

Chapter 7: Conclusions & Suggestions

7.1 Conclusions 7.1.1 ____________________________ 7.1.2 ____________________________ 7.1.3 ____________________________ 7.1.4 ____________________________ 7.1.5 ____________________________ 7.2 Suggestions 7.2.1 ____________________________ 7.2.2 ____________________________ 7.2.3 ____________________________ 7.2.4 ____________________________ 7.2.5 ____________________________

8 9

Bibliography Appendices

Chapter1: Introduction and Background of Research Background and rationale of study

______________________________ ____________________________ ____________________________ ____________________________ __________________________

Chapter2: Research Problem analysis ____________________________ ____________________________ ____________________________ ____________________________ Research questions Key Issues of Research

CONCEPT OF WORKING CAPITAL

Introduction:
Working capital is the life blood and nerve centre of a business. Just as 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 with out an adequate amount of working capital. Working capital refers to that part of firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors, and inventories. In other words working capital is the amount of funds necessary to cover the cost of operating the enterprise.

Meaning
The amount of money a company has on hand, or will have, in a given year. Working capital is calculated by subtracting current liabilities from current assets. That is, one takes the value of all debts and obligations for the current year and subtracts that from the value of all cash and assets that might reasonably be converted into cash in the current year. This is a good measure of the short and medium-term financial health of a company, and may indicate by how much it can expand its operations without resorting to borrowing or another capital raising tactic. Working capital is also called operating assets or net current assets. Working capital means the funds (i.e.; capital) available and used for day to day operations (i.e.; working) of an enterprise. It consists broadly of that portion of assets of a business which are used in or related to its current operations. It refers to funds which are used during an accounting period to generate a current income of a type which is consistent with major purpose of a firm existence.

DEFINITION OF WORKING CAPITAL:Working capital is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

OBJECTIVES OF WORKING CAPITAL:Every business needs some amount of working capital. It is needed for following purposes For the purchase of raw materials, components and spares. To pay wages and salaries. To incur day to day expenses and overhead costs such as fuel, power, and office expenses etc. To provide credit facilities to customers etc.

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 RAW MATERIAL FINISHED GOODS WORK IN PROGRESS

7.

RATE OF STOCK TURNOVER:

There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will 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.

OTHER FACTORS: These are:

Operating efficiency. Management ability. Irregularities of supply. Import policy. Asset structure. Banking facilities, etc.

TYPES OF WORKING CAPITAL

1.

NET WORKING CAPITAL:

The net working capital is the different between current assets and current liabilities. The concept of net working capital enables a firm to determine how much amount is left for operational requirements.
2.

GROSS WORKING CAPITAL:

Gross working capital is the amount of funds invested in the various components of current assets.
3.

PERMANENT WORKING CAPITAL:

Permanent working capital is the minimum amount of current assets which is needed to conduct a business even during the dullest season of the year. The amount varies from year to year depending up on the growth of the company and stage of business cycle in which it operates. It is the amount of funds required to produce goods and services which are necessary to satisfy demand at a particular point.
4.

TEMPORARY OR VARIABLE WORKING CAPITAL:

It is represents the additional assets which are required at different times during the operating year additional inventory, extra cash etc., seasonal working capital is the additional amount of current assets particularly cash, receivables and inventory which is required during the more active business seasons of the year.

5.

BALANCE SHEET WORKING CAPITAL:

The balance sheet working capital is one which calculated from the items appearing in the balance sheet. Gross working capital which is represented by the excess of current assets, and net working capital which is represented by the excess of current assets over current liabilities are examples of balance sheet working capital.
6.

CASH WORKING CAPITAL:

Cash working capital is one which is calculated from the appearing in the profit and loss account. It shows the real flow of money or value at a particular time and is considered to be the most realistic approach in working capital management. It is the basis of the operating cycle concept which has assumed a great importance in financial management in recent years. The reason is the working capital indicates the adequacy of the cash flow. Which is an essential pre-requisite of a business.
7.

NEGATIVE WORKING capital:

Numbers working capital emerges when current liabilities exceed current assets. Such a situation is not absolutely theoretical, and occurs when a firm is nearing a crisis of some magnitude.

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.

1.

GOODWILL :
Sufficient amount of working capital enables a firm to make prompt payments

and makes and maintain the goodwill.

2.

Easy loans: Adequate working capital leads to high solvency and credit standing can

arrange loans from banks and other on easy and favorable terms. 3. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost. 4. Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw material and continuous production. 5. Regular Payment Of Salaries, Wages And Other Day TO Day 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. 6. 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.

Commitments:

7.

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

8.

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. 9. High Morale: Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business.

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 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.

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. 2.
3.

It concerned with the formulation of policies with regard to profitability, liquidity It is concerned with the decision about the composition and level of current It is concerned with the decision about the composition and level Of current liabilities. Working capital management involves the relationship between a

and risk. assets.

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.

CASH MANAGEMENT

Cash management is important for any new or growing business, and here are some tips to aid your company in the collection, concentration, and disbursement of cash. Cash management is a broad term that refers to the collection, concentration, and disbursement of cash. The goal is to manage the cash balances of an enterprise in such a way as to maximize the availability of cash not invested in fixed assets or inventories and to do so in such a way as to avoid the risk of insolvency. Factors monitored as a part of cash management include a company's level of liquidity, its management of cash balances, and its short-term investment strategies In some ways, managing cash flow is the most important job of business managers. If at any time a company fails to pay an obligation when it is due because of the lack of cash, the company is insolvent. Insolvency is the primary reason firms go bankrupt. Obviously, the prospect of such a dire consequence should compel companies to manage their cash with care. Moreover, efficient cash management means more than just preventing bankruptcy. It improves the profitability and reduces the risk to which the firm is exposed. Cash management is particularly important for new and growing businesses. Cash flow can be a problem even when a small business has numerous clients, offers a product superior to that offered by its competitors, and enjoys a sterling reputation in its industry. Companies suffering from cash flow problems have no margin of safety in case of unanticipated expenses. They also may experience trouble in finding the funds for innovation or expansion. It is, somewhat ironically, easier to borrow money when you have money. Finally, poor cash flow makes it difficult to hire and retain good employees.

It is only natural that major business expenses are incurred in the production of goods or the provision of services. In most cases, a business incurs such expenses before the corresponding payment is received from customers. In addition, employee salaries and other expenses drain considerable funds from most businesses. These factors make effective cash management an essential part of any business's financial planning. Cash is the lifeblood of a business. Managing it efficiently is essential for success. When cash is received in exchange for products or services rendered, many small business owners, intent on growing their company and tamping down debt, spend most or all of these funds. But while such priorities are laudable, they should leave room for businesses to absorb lean financial times down the line. The key to successful cash management, therefore, lies in tabulating realistic projections, monitoring collections and disbursements, establishing effective billing and collection measures, and adhering to budgetary restrictions.