working capital project final

7/28/2019 Working Capital Project Final

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ABHINANDAN ENGINEERS

EXECUTIVE SUMMARY

The project was undertaken at Abhinandan Engineers, Belgaum. The training wasundertaken to understand the Working Capital Management at Abhinandan EngineersCompany.

My project conducted at Company consists of two parts:

1. The first part belongs to overall study relating to the organization.

2. The second part belonging to the finance project is specially focused on workingcapital management.

Working Capital plays an important role in the successful operation of businessactivities. The need for managing working capital is very necessary for any business house.Working capital management is a matter of top priority, as it has a bearing on

creditworthiness, liquidity, solvency and profitability.

Working capital management is a process of determining quantum of current assets to beheld at right time, so as to discharge current liabilities and there by utilizing them to theiroptimum extent and at the same time increasing overall value of the firm by keeping theliquidity position intact.

Objectives:

To study the pattern & procedure followed regarding working capital management.

To study the different components of working capital of the corporation.

To understand how effectively the working capital management is in AbhinandanEngineers.

To offer suggestions for improving the efficiency in working capital management.

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Methodology of the Study

1. Primary Data:

It is collection of first hand information. This data is collected throughdiscussion. The required primary data is collected from the concerned officers of theAbhinandan Engineers, Belgaum. The data collected is processed and presented inthe data analysis through various tables and explanations. The tables are analyzed byindividual current assets and current liabilities and by calculating working capital forevery year.

2. Secondary Data:

It is reviewing relevant information, which is already collected and making

inferences based on the information collected from secondary data from annualreports of the company. The present study is mainly based on the secondary data.

Scope of Study:

Scope of the study in General terms is the extent to which it is possible tocover the subject. This study attempts to cover almost all the tools and techniques forthe purpose of evaluating working capital management in Abhinandan Engineers,Belgaum

Study is limited to the information that could be gathered from personnel and

records that were made available.

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INTRODUCTION:

The ABHINANDAN ENGINEERS is a private limited company directed by, the company is

registered with government of India registrar of companies Bangalore. Abhinandan engineers

commenced operations in 1997, with the initiative of first generation young entrepreneur

Mr. Udaykumar M. Patil with his first confidence steep to manufacture of Die, Pattern making and

foundry and all types of engineering CI machined components in Belgaum.

The proprietor of the business is versed in this line of business. Proprietor is currently

financed by many institutions, now wishes to expand his business over new horizons. For this

proprietor wishes to consolidate his borrowings and achieve economy by cost reduction and savings

in running and interest costs. The proprietor has been approached with many proposal for Die and

Pattern making of one of its kind in the market. The proprietor being one person in and around his

vicinity who can undertake such work is very much assured of customers who would flocking to his

doorsteps for such Dies and Patterns. He is aware that there is a vast un-catered market which he can

tap. This will require additional sources. He is very certain that this market is tapped, he can repay hisborrowing well before time. Taking a conservative approach, the project proposals have been worked

out by him. Despite the project as proposed in seen to be viable as per the basis and orders on hand.

The proprietor is currently engaged in making and selling of casting materials and also die

and pattern making on a small scale basis. The proprietor is now venturing into mainly making of dies

and pattern in additions to his existing business of making casting. The applicant will also be getting a

subsidy of almost Rs 5.76 lakhs by March 2011. The amount will gain the invested into the business

of the applicant to achieve better results. The proprietor has ready orders on hand but is not able to

cater to the same due to lack of infrastructure. The standing orders will fetch a gross revenue of Rs. 3

lakhs per month on an average to cater this market on a conservative basis with monthly labour

turnover of Rs. 3 lakhs itself. The proprietor had invested in infrastructure in form of new VMC

machineries worth Rs. 30 lakhs.

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FACTORY UNIT:

The proprietor is already running his business of manufacture of casting materials of die and

pattern making and is currently operating from 185, Mahalaxmi Foundry Compound, Udyambag,

Belgaum. He has the required infrastructure along with requisite man power requirement to under

take the proposed activity of expansion into major die and pattern making activity. The applicant is

currently operating on single machinery supplied to him by one of his customer. Who is recovering

lease rental on the same for its usage. The proprietor now is desirous of expanding his activity by

procuring additional VMC machinery with installation at a cost about 30 lakhs. This new machinery

will enable the proprietor to undertake additional order of Rs 3 lakhs per month which will yield a net

inflow about 25%. The financial of the same have been explained in the detailed working of the

project.

LOCATION:

The company is situated at 185, Mahalaxmi Foundry Compound, Industrial Estate,

Udyambag, Belgaum. The raw materials, labour, power and transportation and other infrastructural

facilities are easily available for the company this industrial area has been developed by the

Karnataka Small Industries Development Corporation LTD. Belgaum.

This existing factory building is located in 185, Mahalaxmi Foundry Compound, IndustrialEstate Udyambag, Belgaum.

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PROPOSED MACHINERY:

The details of plant and machinery proposed to be installed are given below.

Name of the machine

1. BFW Make CHAKRA BMV65T24

2. Toolcraft make Radial type

3. KMT make Pillar type

4. Hydrotech make Hydraulic Press

5. Bench Grinder's Electrocraft make

6. Flexible Shaft Grinder Electrocraft make

7. 4" Angle Grinder Dewalt make

8. 5HP COMPTECH make Compressor

9. Die Grinder Makita make

10. 7" Angle Grinder Atlas Copco make

PRODUCT PROFILE :

Electric motors, which are used mainly in industrial and agricultural sectors, account for a substantial

35 percent of the total electricity consumption in India. One of the ways to address the problem of

energy shortage is to reduce demand, mainly by increasing end-use efficiency of appliances used. As

per manufacturers feedback, sale of energy-efficient motors is approximately two percent of the total

sales. The major reason identified for the low sales is the high initial cost. Hence, there is a need to

develop technology that can reduce the initial cost of energy-efficient motors. According to motordesign experts, using copper die-cast technology instead of aluminium die-cast for rotors is cost

effective and will also reduce the size of the motors, without affecting the output.

PRODUCTS:

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Using raw C.I.Casting various components for electric motors and alternators various types

of terminal boxes and covers. For power transmission unit various types of gear boxes centers, top

and bottom bearing housing, gear cases, shafts. Bearing housing for automobile industry back plates,

face plates, drums. etc are manufactured by the company.

1. Electric motors

MANUFACTURING PROCESS:

The manufacturing process involves finished grinding, turning, boring, milling, salting,

shaping, drilling, taping, burnishing and painting etc by using lathes, milling machines, drillings,

balancing machines. All the parameters mentioned by customers in their components, drawings are

firstly shaped and finished on the above mentioned machines. Then finally these components are

inspected and checked by measuring instruments like bore gauges, verniers, micrometers, height and

depth gauges.

THE MAIN CUSTOMERS OF THE COMPANY:

1) Indotech Machines Pvt Ltd., Indore.

2) Alucast Auto Parts Ltd., Belgaum.

3) Surya Project Management Pvt Ltd., Belgaum.

4) Trio Enterprises, Kolhapur.

5) Shree Gajanan Alloys., Belgaum.

6) ARS Foundries Pvt Ltd., Belgaum.

7) Meritech. Pune.

8) Tulsi Castings & Machining Ltd., Sangli.

9) Soundcast Alloys Pvt Ltd., Belgaum.

10) Perfect Actuators & Controls Pvt Ltd., Hubli.

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11) Joshi Jampala Engineering Pvt Ltd., Satara.

12) Prakash Iron Works, Belgaum.

13) Rajmane Industries Pvt Ltd., Bangalore.

14) Sharma Group, Belgaum.

EXECUTIVE SUMMARY:

THE QUALITY:

The stringent quality control procedure is followed at Abhinanadan Engineers. Top class

testing instruments in the well equipped material testing laboratory has ably supported the quality

control activity. The results are visible.

THE COMMITMENT:

Abhinanadan Engineers with a open mind approach are always willing to accept new

developments and technologies to ensure the strict adherence to the delivery schedule on time, every

time. Restricting itself to a limited type of casting, Abhinanadan Engineers ensures 100% focuses, on

every minutes quality needed.

QUALITY POLICY:

Abhinanadan Engineers shall always strive for customer satisfaction.

We shall endeavor to be build in quality in our product to the at most satisfaction to our

customers.

We shall motivate and empower our employees and bring in a feeling of ownership in them.

We shall strive for continuous improvement in QMS to achieve our goal of providing a

quality product at a competitive price and on time.

We believe that with this goal we shall be able to excel in competitive markets.

COMPANY POLICY

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We set to be the most preferred partner in manufacturing and supply of engineering products

as well as production of tooling manufacturing like metallic patterns and the jigs & fixtures required

to develop the particular component.

Our motto is to give our entire efforts to get customer satisfaction & to prove our self as a one of

good & renowned tooling manufacturer.

Offer better customer service

STRATEGIC OBJECTIVES:

To provide products of the highest quality and value.

To achieve cost effectiveness in the Abhinandan Engineers and machine shops through

establishment of world class manufacturing facilities. To strive for employ empowerment,

team work and motivation.

DESIGNS AND INNOVATIONS:

All products are manufactured, as per customer design/ drawing AFBPL has no rights to change any

specifications.

SERVICE AGREEMENTS WITH CUSTOMER:

There is no service agreement with customer as not involved in after sales activities.

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VISION AND MISSION:

The corporate vision is to become one of the most vibrant, self reliant, financially viable,and steady growth oriented corporate. The corporate mission is:

Improve productivity and profitability.

Provide financial stability on long term.

Register steady growth in terms of percentage of capacity utilization, production ofincome and overall profitability.

Provide safe working conditions in the company.

Introduction of modern and effective management apart from achieving day to dayproduction target.

Promote harmonious and cordial industrial relationship.

Promote Human Resource Development.

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ORGANISATION STRUCTURE

SWOT ANALYSIS

SWOT analysis is a analysis of STRENGTH, WEAKNESS, OPPORTUNITY AND

THREATS of the Company. This is used to analysis the company environment will helpeach and every company to know the present situation of the company.

STRENGTH:

This is only a reputed Company in Belgaum.

It has been producing the product as the standard specified by the Government ofKarnataka.

Fully computerized environment.

Its continuous and larger production unit in India.

Product quality is the strength of the company.

The work environment is full of excitement, creativity, and innovative atmosphere.

WEAKNESS:

Absenteeism is the main problem in the Company.

Huge sound and air pollution in the production department.

Workers are not well qualified.

OPPORTUNITY:

Company is having the excellent growth opportunity.

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Company is having the good hold in the market so it will help to earn more profit.

In the capacity of the plant is the increasing direction.

THREATS:

Huge power consumption and power failure.

Foreign currency fluctuation.

INTRODUCTION TO FINANCIAL MANAGEMENT

Finance is defined as the money at the time when it is required. Every firm needs

finance whether it is small, medium, and big to carry in its operation and to a show itstargets. And it is rightly said that finance is lifeblood of an enterprise. Without adequatefinance, no enterprise can possibly accomplish its objective.

Management is a vital function control with all aspects of business management, havebecome a sort of pre-requisite for the successful carrier in dynamic business environment.The present study is concerned in Abhinandan Engineers, Belgaum.

Technically analysis of working capital in which the present project report is animportant part of financial managing current assets is more difficult than management of

fixed assets and the finance management needs to strike a balance both profitability andliquidity. If liquidity more there will be adverse effect of profitability is given more weightage is to greater risk.

A business enterprise with adequate working capital is always a position to eviladvantage of any favorable opportunities. The present study related to the working capitalmanagement Abhinandan Engineers, Belgaum. Sources control and effective utilization of theworking capital by the company.

An endeavor has been made to study and analyze the assisting pattern and utilization

of financial resources and analyze the five year of working capital management, receivablemanagement. The project primarily deals with the study of financing and utilization of

available resources and measuring the perform of the company.

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WORKING CAPITAL MANAGEMENT Working Capital is needed for the smooth conduct of day-to day business activities. It

is needed to finance the current assets of the firm. The working capital should neither be in excess nor

should it be inadequate. Excessive investment in current assets would have a negative impact on the

firms profitability because of idle investment On the other hand, inadequate working capital would

lead to inability to meet the current obligations which would hamper the firms creditability and

thereby its reputation.

Usually the current assets are maintained at twice the level of current liabilities i.e .thecurrent ratio is 2:1 But the quality of current assets is important. The current assets should be easily

marketable. i.e. they should be liquid. If the Liquidity is also harmful. It may be due to

mismanagement of current assets.

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CLASSIFICATION OF WORKING CAPITAL

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WORKING CAPITAL

On the basis of On the basis of

Net working Capital Gross working

capital

Seasonal working

Capital

Special working

capital

Initial working

capital

Regular working

capital

Permanent

working

capital

Variable

Working


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A. On the basics of Concept

1. Net Working capital

This is the difference between current assets and current liabilities. Current liabilities are

those that are expected to mature within an accounting year and include creditors, bills payable and

outstanding expenses.

Investment in current assets represents a very significant portion of the total

investment in assets. In case of public limited companies in India, current assets constitute

around 60% of the total capital employed. Therefore the finance manager should attention to

working capital management.

Working Capital Management is no doubt significant for all firms, but its significance is

enhanced in cases of small firms. A small firm has more investment in current assets than fixed assets

and therefore current assets should be efficiently managed.

The working capital needs increase as the firm grows. As sales grow, the firm needs to invest

more in debtors and inventories. The finance manager should be aware of such needs and finance

them quickly.

Current Assets can be financed through long term and short-term sources. The ratio of long

term to short-term source will depend on whether the firm is aggressive or conservative. If the firm is

aggressive then it will finance a part of its permanent current assets with short-term funds. On the

other hand , a conservative firm will finance its permanent assets and also a part of temporary current

assets with long- term financing.

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2. Gross Working Capital

This refers to the firms investment in current assets. Current assets are the assets

which can be converted into cash within a short period say, an accounting year. Current

assets include cash, debtors, bills receivable ,short term securities etc.

B) On the Basis of Time

1) Permanent Working Capital

Permanent Working Capital is permanently locked up in the circulation of current

assets. It covers the minimum amount requested for maintaining the circulation of current

assets.

a) Initial working capital

At its inception and during the formative period of its operations a company must

have enough cash fund to meet its obligations. The need for initial working capital is for

every company to consolidate its position.

b) Regular working capital

It refers to the minimum amount of liquid capital required to keep up the circulation of the

capital from the cash inventories to accounts receivable and from account receivables to back again

cash. It consists of adequate cash balance on hand and at bank, adequate stock of raw materials and

finished goods and amount of receivables.

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1) Variable Working Capital

It refers to the past of the Working Capital which changes with the volume of business, it

may be divided into two classes.

a) Seasonal Working Capital

There are many lines of business where the volume of operations is different and

hence the amount of working capital varies with the seasons. The capital required to meet the

seasonal needs of the enterprise is known as seasonal Working capital.

b) Special Working Capital

The Capital required to meet any special operations such as experiments with new products

or new techniques of production and making interior advertising campaign etc, are also known as

special Working Capital.

Determinants of Working Capital

In order to manage the Working Capital optimally, one has to give due consideration to the

factors that influence the amount of Working Capital to be maintained.

The determinants of Working Capital are stated below with reference to the

operations of Abhinandan Engineers, Belgaum :

1) Nature of business

2) Capacity Utilization3) Credit Policy

4) Demand, Sales and Conditions

5) Availability of Credit

6) Price Level

7) Degree of Competition

8) Conditions of Supply

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COMPONENTS OF WORKING CAPITAL

There are two components of Working Capital viz.

Current Assets

Current liabilities.1) Current Assets

An asset is termed as current assets when it is acquired either for the purpose of selling or

disposing of after taking some required benefit through the process of manufacturing or which

constantly changes in form and contributes to transactions take place with the operation of the

business although such assets does continue for long in the same form.

Components of Current Assets are as follows

0 Cash and bank balance

1 Stock of raw materials at cost- work in process and finished

goods.

2 Advanced recoverable in cash or kind or kind or for value to be

received.

3 Security deposits with electricity board- telephone

department balances with customers.

0 Deposits under the company scheme.

1 Prepaid expenses

2 Miscellaneous stores_ implements _ goods in transit

3 Advanced payment of income tax credit certificates

4 Excise duty and sales tax recoverable

5 Outstanding debts for a period exceeding six months

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6 Balance with central excise authorities.

2) Current Liabilities

Components of Current Liabilities are as follows

Non- refundable non-interest bearing advances against subscription to shares.

Sundry creditors for the goods and expenses Income tax deducted at sources from contractors

Expenses payable

Amount due to promoter of company

Unclaimed dividend

Security deposits

Dealers deposits

Liabilities for bills discounted

Bank overdraft acceptance

Dividend warrants but not un- cashed.

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SOURCES OF WORKING CAPITAL

SOURCES OF WORKING CAPITAL

SHORT TERM SOURCES

LONG TERM SOURCES

1 .ISSUE OF SHARES

2. ISSUE OF DEBENTURES

3. RETAINED PROFIT

4. RESERVES AND SURPLUS

5. LONG TERM LOANS

INTERNAL SHORT TERM SOURCES

EXTERNAL1 DEPRECITION FUNDS 1. TRADE CREDITS

2 PROVISION FOR TAXATION 2. BANK CREDIT

3 ACCURED EXPENSES 3. CREDIT PAPER

4. CUSTOMER CREDIT

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5. PUBLIC DEPOSITS

6. FINANCIAL CO-OPERATION

7. GOVERNMENTASSISTANCE

8. LOAN FROM DIRECTORS

ARRANGEMENT OF WORKING CAPITAL

The trade credit and cash creditors are two primary sources of working capital in India. Bank loan

and trade creditors together account for finance about 75% of the working capital credit requirements

of industry. The bankers after granting of the loans and applications on the line suggested by Reserve

Bank of India determine the maximum line of credit permissible for the period based on the margin

requirement of the security offered. After getting the overall credit limit sanctioned by the banker the

company actually draws the funds needed from time to time using all or any of the following forms of

credit

0 Loan Arrangement

The entire amount of loan is credited by the bank to the parties account. Interest is payable

on the entire amount or when loan is repaid in installments on the actual balance of outstanding.

1 Overdraft Arrangement

The party is permitted to over draft on his current account with his banker up to a specified

amount and during a specified period.

Interest is charged on the amount actually utilized and repayments are permitted.

2 Cash Credit Arrangement

The borrower is allowed to withdraw funds from the bank up to the sanctioned credit once

rather he can draw periodically to the extent of his requirements and repay by depositing surplus

funds in his cash credit amount.

3 Term loan for working capital

Under this arrangement borrower can obtain a loan for appeared three to five years and the

said amount in nearly or half yearly installments.

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4 Bills purchased or Bills discounted

Bills are purchased by bankers and advance bills are discounted whether bills are purchased

as discounted the amount need available under this arrangement is covered by cash and over draft

element. In obtaining commercial bank credit the various modes of security are such as

0 Hypothecation

Under hypothecation money is borrowed by owner of gods on the security of movable

property (normal inventories) without parting with the possession of movable property. The right of

the hypothecation depends upon the term of the contract between parties.

1 Pledge

Under this arrangement the borrower is required to transfer the physical possession of the

property offered as security to the bank to obtain credit.

2 Lien

It is the right of retaining goods belonging to the another until the debts due to him are paid.

3 Mortgage

It is the transfer of interest in specific immovable property for securing the payment of

money advanced.

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OPERATING CYCLE OF WORKING CAPITAL

It is essential that the operating cycle should be kept up continuously.

Others the fixed assets will remain idle and to the cost without bringing any reserve .so

long with fixed capital ready and adequate working capital is necessary to get the

understating successful on a sound pedestal

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Receipts

fromDebto

Creation of Account

Receivables

Debtors

Sales of finished

Goods/

Warehousing of

finished

Purchase

Raw material

Manufacturing

Operation

1.Wages&Salaries

2.Fuel supply

Payment to creditors

Creation of

Accounts

CASH


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Office selling Distribution &OtherExpenses

THE NEED FOR THE WORKING CAPITAL

The need for the working capital cannot be once emphasized. Every business need some

amount of working capital. The need for working capital arises due to the time gap between

production and realization of cash from sales. Therefore Working capital required for

To meet the cost of inventories including total of raw materials purchased parts, operating

supplies, work in progress, finished goods.

To pay wages, salaries, for indirect labour, clerical staff, managerial and supervision staff.

To meet overhead costs, including those of maintenance services activities, fuel, power charges,

taxes and general expense administration.

To bear the expansion(with regard to promotion of sales) e.g. expenses on packing advertisement,

salesmanship, sales servicing , after requires ,credit facilities, delivery services etc.

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IMPORTANCE OF WORKING CAPITAL MANAGEMENT

0 Adequate working capital creates certainty, security and confidence in the

minds of the persons in the management as well as in the minds of creditors andworkers.

1 It creates a good credit standing for the firm because credit standing depends upon

the ability to pay promptly. A Company with adequate working capital is always

able to meet current liabilities.

2 It ensures solvency and stability of the enterprises It also ensures continuity in

production and sales.

3 It enable the company to take advantage of cash discount offered by the suppliers of

raw materials or merchandise.4 It enhances the prestige of the company and moral of its workers because a company

with adequate working capital is always able to pay wages and salaries promptly and

regularly.

5 It enables the company to procure loans from banks on easy and competitive terms.

6 In times of boom, it enables the company to meet increasing demands for its

products.

7 In times of depression the company to overcome the crisis successfully.

8 It enables the company to hold carry on its business successfully and active continuedprogress and prospective.

9 It enables the company to carry on its business successfully and active continued

progress and prosperity.

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Working Capital Management is concerned with the following aspects:

0 Debtors Management

1 Creditors Management

2 Inventory Management

3 Cash Management

All these aspects will be analyzed in relation to the functioning of Ashok Iron Works Ltd in

the report as below.

Debtors Management

Now-a- days debtors management has assumed a lot of importance If the debtors are

efficiently managed, the blocked capital will be reduced and thereby the associated costs. Due to theincrease in competition, one cannot do away with credit sales. Credit provision can increase sales. It

is particularly appealing to those customers who cannot borrow from other sources or find it

inconvenient to do so.

A firms investment in accounts receivable depends on how much it sells on credit and how

long it takes to collect receivables. The firm should be very good at assessing the credit worthiness of

its customers and effective collection methods. Debt collection is no doubt challenging but a firm,

which executes it efficiently, will reduce costs to a great extent.

Debtors Management mainly concerns itself with three major aspects:

0 Credit Policy

1 Credit Analysis

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2 Collection Policy

INVENTORY MANAGEMENNT

The inventory is broadly classified into the following:

1) Raw material inventory.

2) Consumables inventory consisting of tools, statonery,fuel etc.3) Work in Progress inventory.

4) Finished goods inventory.

Usually the finished goods inventory is maintained at zero level. The parts are

manufactured to fulfil the current demand. Raw materials (basic) are usually in stock for 4 to

15 days. Raw materials (others) or consumables are kept for 15 days to 1 month. The

duration depends the availability, prices, demand and other market factors. Say, if the priceof a certain raw material is expected to increase or it is likely to be in short supply in the

future, then the quantity purchased will be more than usual and it will be stocked. On the

other hand if the raw material is freely available, then it will be purchased as and when

required.

ABC analysis is carried out to determine the relative importance of the types of raw materials

and the stocking duration is determined based on he rating assigned to the particular raw material.Thematerials with rating Awill be the most controlled because they constitute a major portion of the

investment.

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Economic Order Quantity ( E.O.Q) & Re-Order Level ( R.O.L)

Now, two Important questions need to be answered-when to purchase? and how much to

purchase?The first question can be answered by fixing the Re-order level (ROL). This is the level

after reaching which the order for the material should be placed. Calculation of this level and its

practical implementation will ensure the smooth flow of production activity without bottlenecks. This

is calculated as:

ROL=average daily consumption *Lead time+ safety stock

The second question can be answered by finding out the Economic Order Quantity ( EOQ).

Now, EOQ is the trade-off between the carrying costs and the ordering costs. It is that quantity at

which the ordering costs and carrying costs are minimum. This is calculated by using the formula:

E.O.Q.= 2AOC

Here,

A= Annual consumption

O= Ordering cost per order

C= Carrying cost per unit

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Safety stock is maintained to avoid unnecessary stoppage in production. Minimum and

Maximum stock level is also calculated on average yearly basis. But all these calculations made may

be altered depending on the activity of market forces.

Cash Management

Cash is the basic input of any business. It is necessary for the smooth flow of the business

operations. The cash balance with any business firm should neither be in excess nor in shortage.

Inadequate cash will disrupt the business operations and excess cash will result in higher opportunity

costs because it is idle.

Cash Management is an important function of the finance manager. Sufficient cash balance

has to be maintained to run the firm efficiently. But at the same time, the finance manager has to bear

in mind that cash balance is an idle resource which has an opportunity cost. The liquidity provided by

the cash holding is by sacrificing the profits of a foregone alternative investment opportunity. Hence

the finance manager should:

establish reliable forecasting and reporting systems, improve cash collections and disbursements &

achieve optimal conservation and utilization of funds.

There are three possible motives for holding cash. They are.

0 Transaction Motive:

1 Cash is required to carry out the numerous transactions involved in day-to-day business

activities. The firm needs cash to make payments for wages and salaries, for purchases, otheroperating expenses, taxes, dividends, etc. There would have been no need to hold cash if the

receipts and payments were perfectly synchronized.

2

3 Precautionary Motive:

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Cash is also needed to effectively confront uncertainties in the future. There may be some

uncertainty about the timing of cash inflows from sale of gods and services, assets etc. Similarly,

there may be uncertainty about cash outflows resulting from purchases and other obligations.

Stronger the ability of the firm to borrow at short notice less the need for precautionary balance.

The precautionary balance may be kept in cash and marketable securities.

4 Speculative Motive:

5 This motive relates to the holding of cash for investing in profit making opportunities arising

from fluctuations in commodity prices, security prices, interest rates and foreign exchange rates. A

cash-rich firm is better prepared to exploit such bargains. By and large business firms do not engage in

speculations.

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Four Facts of Cash Management

In order to manage cash effectively, the firm should evolve strategies regarding the following

four facets of cash management

Cash Planning: Cash inflow and outflows should be planned to project cash surplus or deficit for each

period of the planning period. Cash planning is a technique to plan and control the use of cash. A

projected cash statement is prepared from forecast of expected cash inflows and outflows for a given

period . The forecasts may be based on the present operations or the anticipated future operations.

Cash Planning may be done on daily, weekly or monthly basis. The period and frequency of

cash planning generally depends upon the size of the firm and the philosophy of the management.

Large firms prepare daily and weekly forecasts. Medium-size firms usually prepare weekly and

monthly forecasts .Small firms may not prepare may not prepare formal cash forecasts

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.

Managing Cash Collection and Disbursements: The projected cash flows should match the actual cash

flows and the finance manager should ensure that there is no significant deviation. To achieve this,

cash management efficiency will have to be improved through proper control on cash collection and

disbursement. Generally it is recommended that the collections should be accelerated and the

payments should be delayed. But to manage cash efficiently we need to understand the concept of

float. The cash balance shown by a firm in its books is called the book or ledger balance and the

balance shown in its bank account is called the available or collected balance.

The difference between the available and the ledger balance is called float. There are two

kinds of float-disbursement float and collection float. Say a company has issued a cheque worth Rs 1

lakh. It will reduce the companys available balance only when the cheque is presented for

encashment. This creates a disbursement float of Rs .1 lakh. Similarly we have the collection float.

When a company receives acheque of say ,Rs 2 lakhs then it will increase its book balance by the

above amount .However, the companys bank will increase the available balance only when the

cheque is presented to the customers bank.

Optimal Cash Balance: It is one of the primary responsibilities of the finance manager to

maintain a sound liquidity position so that the production operation is carried on smoothly and also

the dues are settled in time. If a firm maintains a small cash balance, it has to sell its marketable

securities more frequently and this will result in increasing transaction costs. On the other hand if the

firm maintains a large cash balance then it will lead to higher opportunity costs. Therefore the cash

balance should neither be too small nor too large. We find that there is a trade-off between

transaction costs and opportunity costs. Hence the balance maintained should result in minimum

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possible transaction costs and opportunity costs. This case is similar to the calculation of E.O.Q.We

have the Baumols model to find optimal cash balance under certainty . The

Formula is:

C = 2FT/K

Where,

C = Optimal Cash Balance

T = per transaction cost

F = total funds requirement during the year

K = opportunity cost

The Baumol Model does not provide a solution in cases of uncertainty. To overcome these

disadvantages we have The Miller-Orr model. It assumes that the net cash flows are normally

distributed with a zero value of mean and a standard deviation. In this case the firm should fix the

upper control limit, the lower control limit and the return point. The return point is the normal level of

cash balance which is a healthy level. If the firms cash flows fluctuate and touch the upper

Control limit, then it buys sufficient marketable securities to reach the return point If the cash

balance touches the lower control limit then sufficient marketable securities are sold to reach the

return point. The firm sets the lower limit at a point which is its minimum cash requirement. Theformula for determining the distance (Z) between the upper and lower control limit is:

Z = (3/4* Transaction cost * Cash Flow Variance/ Interest Rate)1/3

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Investing Surplus Funds: The surplus funds with a company can be invested for short periods

before they are required. The surplus can be invested in marketable securities which can be

sold easily later when funds are required. The various options available for investments are as

follows:

Term Deposits with Scheduled Banks: Banks accept term deposits for periods ranging from 15days to 5 years. The interest may vary from 6% to 11% per anum. The interest rate rises sharply as

the period of deposits increase from 30 days to 1 year.

0 Mutual Fund Schemes: There are a variety of schemes offered by mutual funds like equity

schemes, balanced schemes and debt schemes. The most popular scheme is the debt scheme for

investing short-term surpluses because the investments are for a short period and is highly and

therefore less risky.

1 Treasury Bills: Treasury bills are the short-term obligations of the government. They have

maturity periods of 91 days, 182 days and 364 days. They do not carry an explicit interest rate

(coupon rate) but are instead sold at discount and redeemed at par.

2

3 Inter- Corporate Deposits: An inter-corporate deposit is a deposit made by one company with

another for a period of up to six months. The inter-corporate deposits represent unsecured

borrowings; hence the lending company must satisfy itself about the credit-worthiness of the

borrowing firm. There are also certain conditions prescribed under section 370 of the Companys Act1956 which should be adhered to by the lending company.

4 Bill Discounting: A bank may purchase a premature bill from the drawer at a discount and it

will release the worth of the bill less discount to the drawer. Similarly a company can purchase a bill

like a bank at a discount and thereby invest its idle funds. But a company should ensure that the bill

and should try to go for bils that are backed by letters of credit for security.

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DETERMINANTS OF WORKING CAPITAL

A firm should plan its operation in such a way that it should have neither too much nor

too little working capital. The working capital requirement is determined by a wide variety of

factors. These factors, however, affect different enterprises differently. They also vary from

time to time. In general, the following factors are involved in a proper assessment of the

quantum of working capital required. The following are some of the important determinantsof working capital

1. General nature of business

The working capital requirements of an enterprise are basically related to the conduct

of business. Enterprise falls in to some broad categories depending on the nature of

their business. For instance, public utilities have certain features which have a bearing

on their working capital needs. The relevant features are

1) The cash nature of business, that is, cash sale.

2) Sale of services rather than commodities.

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In a view of these features, they do not maintain big inventories and have, therefore, the

least requirement of working capital. The nature of their business is such that they have

to maintain a sufficient amount of cash, inventories, and book debts.

2. Production cycle

Another factor which has a bearing on the quantum of working capital is the production

cycle. The term production or manufacturing cycle refers to the time involved in

manufacture of goods. It covers the time span between the procurement of raw materials

to production of finished goods. Funds have to be necessarily tied up during the process

of manufacturing, necessitating enhanced working capital. In other words, there is some

time gap before raw materials become finished goods. To sustain such activities the need

for working capital is obvious. The longer the span the larger will be the tide up fundand therefore, the larger is the working capital needed and vice versa.

3. Business Cycle

The working capital requirements are also determined by the nature of business cycle.

Business fluctuations lead to cyclical and seasonal changes, which, in turn cause a shift

in the working capital position, particularly for temporary working capital requirement.

The variations in business condition may be in two directions,

I. Upswing phase- when boom conditions prevail

II. Downswing phase- when economic activity is marked by a decline.

During the upswing phase of business activity, the need for working capital is likely to

grow to cover the lag between increased sales and receipt of cash as well as to finance

purchase of additional materials to cater to the expansion of the level of activity.

4. Production Policy

The quantum of working capital is also determined by production policy.

In case of certain lines of business, the demand for production is seasonal, that is they

are purchased during certain months of the year. There are two options open to such

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enterprise, either they confine only to period when goods are purchased or they follow

a steady production policy throughout the year and produce goods at a level to meet the

peak demand. In former case, there are working force and physical facilities without

adequate production and sales.

5. Credit policy

The credit policy relating to sales and purchases also affect the working capital. The

credit policy influences the requirement of working capital in two ways,

I. Through the credit terms granted by the firm to its customers/buyers of goods.

II. Credit terms available to the firm from its creditors.

The credit terms granted to customers have a bearing in the magnitude of the working

capital by determining the level of book debts. The credit sales result in higher book

debt (receivables). Higher book debts mean higher working capital.

On the other hand, if liberal credit terms are available from the suppliers of goods

(trade creditors), the need of working capital will be very less. The working capital

requirements of a business are thus affected by the terms of purchase and sales, and

role given to credit by company in its dealing with creditors and debtors.

6. Growth and Expansion

As a company grows, it is logical to expect that a large amount of working

capital is required. It is, of course, difficult to determine precisely the relationship

between the grown in the volume of business of a company and the increase in its

working capital. The composition of working capital in a growing company also shifts

with economic circumstances and corporate practices. Other things being equal,

growing industries require more working capital then those that are static.

7. Profit Level

The level of profit earned differs from enterprise to enterprise. In general,

the nature of product, hold on the market, quality of management and monopoly power

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would by and large determine the profit earned by a firm. It can be generalized that a

firm dealing in a high quality product, having a good market presence and enjoying

monopoly power in the market, is likely to earn high profit and vice-versa. High profit

margin would improve the prospects of generating more internal funds there by

contributing to working capital pool.

8. Dividend Policy

Another appropriation of profit, which has bearing on working capital, is

dividend payment. The payment dividend consumes cash resources and there by affects

working capital as funds flow out of firm through dividends.

Conversely, if the firm does not pay dividend but retains profits, working capital

increases. In theory, a firm should retain profits to preserve cash resources and at the

same time, it must pay dividends to satisfy the expectations of share holders. When

profits are relatively small, the choice is between retention and payment. The choice

must be made after taking in to account all the relevant factors.

9. Depreciation Policy

Depreciation charges do not involve any cash outflows. The affect of

depreciation policy on working capital is therefore indirect. In the first place,

depreciation affects the tax liability and retention of profits. Depreciation is allowable

expenditure in calculating net profits. Higher depreciation also means lower disposable

profits and, therefore, smaller dividend payment. Thus cash is preserved. In the second

place, the selection of method of depreciation has important financial implication.

10. Price Level Changes

Changes in the price levels also affect the requirement of working capital.Rising prices necessitate the use of more funds for maintaining an existing level of

activity. For the same level of current assets, higher cash outlays are required. The

effect of rising price is that a higher amount of working capital is needed. However, in

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the case of companies, which can raise their prices proportionately, there is no serious

problem regarding working capital.

11. Operating efficiency

The operating efficiency of the management is also an important determinant of

the level of working capital. The management can contribute to a sound working

capital position through operating efficiency. Although the management cannot control

the rise in prices, it can ensure the efficient utilization of resources and so on.

Efficiency of operations accelerates the pace of cash cycle and improves the working

capital turnover. It releases the pressure on working capital by improving profitability

and improving the internal generation of funds.

Techniques of Working capital management

Working capital management involves deciding upon the amount and

Composition of current asset and how these assets are to be financed. This decision

involves tradeoff between risk and profitability.

Working capital balances are measured from the financial dates of the companys

balance sheet. A study of the causes for changes of working capital that take place in thebusiness from time to time is necessary. These changes can be measured in rupee

amount and also in percentage by comparing current assets, current liabilities and

working capital over the given period.

The important tools of working capital are,

1. Ratio Analysis of working capital

I. Ratio analysis of working capital

II. Turnover of working capital ratio

III. Current ratio

IV. Current debt tangible net worth

V. Inventory turnover ratio

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VI. Debtor turnover ratio

2. Fund Flow Analysis of Working capital

It is an effective management tool to study how funds are generated for a

business and how they have been employed. This technique helps to analyze change inworking capital components between two datas. the comparison of current asset andcurrent liability at the beginning and at the end of specific period show changes in suchtype of current assets and resources from which working capital has been obtainedfunds flow statement contributing materially to the financial aspects.

3. Working Capital Budget

The working capital budget is an important phase of overall financebudgeting. This budgeting should be distinguished from a cash budget that is designedto measure all the financial repayment of loans, term loans and similar items. Theobjective of this budget is to secure an effective utility of investment.

4. Trend Analysis

A trend analysis indicates the change, which has been taking place from time to time ofan individual item of current assets. It enables of creation of upward and downwardtrend of current asset and current liabilities. These are measured from review ofcomprehensive balance sheet of concern at the end of accounting year and result isdrawn on the basis of trend shown by them

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Analysis and Interpretation

STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2010-11

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40

Particulars 2009-10

(Rs 000)

2010-11

(Rs 000)

Increase Decrease

A) Current Assets

Stock 8810 8,506 304S. Debtors 2294 2,196 98

Cash & bank balance 23 31 8

Loans & advances 536 406 130

TOTAL 11,663 11,335

B) Current Liabilities

Current liabilities 6,641 3,173 3,468

TOTAL 6,641 3,173 3,574 434

Working Capital (A-B) 5,022 8162

Net increase in W.C 3140 3140

GRAND TOTAL 7966 7966


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INTERPRETATION:-

In the year 2010-11 there is an overall increase in the working capital by Rs

31,40,000 i.e. by 62.52% but not as significant as in the previous financial year. This

is because of the following reasons

1. In the table we can see that there is increase in the current assets like inventories,

increase in the cash and bank balance, sundry debtors and decrease in the loans and

advances.

3. As there is decrease in the current liabilities and increase in the current assets it

implies that the firm has increased its operations while it has paid off its liabilitiesreducing the availability of funds through creditors, so there is an increase in the

working capital.

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STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2009-10

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43

Particulars 2008-09

(Rs 000)

2009-10

(Rs 000)

Increase Decrease

A) Current Assets

Stock 9136 8810 326

S. Debtors 3211 2294 917

Cash & bank balance 83 23 60

Loans & advances 563 536 27

TOTAL 12993 11663

B) Current Liabilities

Current liabilities 8,697 6,641 2056

TOTAL 8,697 6,641 1330

Working Capital (A-B) 4296 5022

Net increase in W.C 726 726

GRAND TOTAL 5022 5022 2056 2056


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INTERPRETATION:-

In the year 2009-10 there is an overall increase in the working capital by Rs 726,000

i. e by 16.89% but not as significance as in the previous financial year. This is

because of the following reasons

1. In the above table we can see that there is decrease in the assets like sundry debtors

and decrease in the assets like inventories , cash & bank balance and loans &

advances.

2. There is overall decrease in the current liabilities by Rs 2,056.

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RATIO ANALYSIS

Ration analysis is a widely used tool of financial analysis. It is defined as the systematic use

of ratios to interpret the financial statements so that the strength and weaknesses of a firm as

well as its historical performance and current financial condition can be determined. The

term ratio refers to the numerical or quantitative relationship between two items or variables.

The ratios does not add any information not already inherent in the values of profits or sales

but, they reveal the relationship in a more meaningful way so as to enable the management to

make better decision.

Types of Ratios

Ratios can be classified in to broad categories as follows

1) Liquidity Ratios

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2) Capital Structure /Leverage ratios

3) Profitability Ratios

4) Activity /Efficiency Ratios

5) Integrated Analysis of Ratios

6) Growth Ratios

There are many ratios from which analysis can be made in relation to many aspects. The

ratios which we are using here to analysis the working capital related components are as

follows

1) Current Ratio

2) Quick Ratio

3) Cash Ratio

4) Cash Turnover Ratio

5) Working Capital Turnover Ratio

6) Inventory Turnover Ratio

7) Current Assets Turnover Ratio

8) Debt Equity Ratio

MERITS AND DEMERITS OF THE RATIOS

Merits of the ratios

The following are some of the important merits of ratios

1. Ratio analysis reflects the working efficiency of the organization

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2. Since ratio analysis relates the financial health of a concern, insurance and other financial

institutions rely on them while deciding about loan application and in taking vital investment

decisions

3. It helps in establishing trend it helps in preparing plans for the future

4. It is helpful in forecasting likely events of the future.

Demerits of the Ratios

The following are the some important demerits of the ratios

1. There is no single method adapted by all concerns as there is no explicit theoretical

structure for the calculation of the ratios

2. For concrete analysis inside information must be know by the analysis since most concerns

report to portray of ease picture of the financial attachments.

3. Change in the basis of accounting may pose difficult in analysis of ratios between two

intervals.

RATIO ANALYSIS

1. Current Ratios

It measures the relative ability of a company to pay its short term liabilities as and

when they become due. The ratio is used to calculate how well a company is prepared to

meet a sudden demand of short term payments to its creditors.

Formula: current Ratio = Current Assets / Current liabilities.

Particulars 2008-09 2009-10 2010-11

Current Assets 1,29,93,261 11664649 11138095

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Current Liabilities 86,97,007 6641016 3173245

Current Ratios 1.49 1.75 3.5

1.49

1.75

3.5

0

0.5

1

1.5

2

2.5

3

3.5

VAL

UES(intimes)

2009 2010 2011

YEARS

CURRENT ASSETS TO CURRENT LIABILITIES

Graph 1.1 CURRENT ASSTES TO CURRENT LIABILITIES

INTERPRETATION:-

The ratio 2:1 means that for every current liability of one rupee the firm is having two

rupees of current assets which it can repay the current liabilities as and when the

liabilities become due. Compared to previous year 2008-09 increase in the current

ratio of the year 2010-11 which implies that the firm is having sufficient funds to

meet its liabilities as and when they become due.

2. Quick Ratio

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it is also known as Acid Test Ratio and it is used to measure the liquidity of a firm

by its availability of cash as more liquid than other current assets like inventory which

require some time to realize in to cash and current ratio fails as it also takes in to

account assets like inventory which cannot be realized all of sudden. Quick ratio

comes out of this defect present in the current ratio. It gives more accurately the

liquidity of the organisation.

Formula: Acid Test Ratio = Quick Assets/Current Liabilities

Or

Acid Test Ratio = (Current Assets- Inventories)/Current Liabilities

Quick Assets refers to those assets which can be converted into cash immediately or a

shortest span of time without diminution of value such as cash & bank balance, short

term marketable securities, debtors/receivables.

Particulars 2008-09 2009-10 2010-11

Current Assets 38,56,786 28,54,407 26,32,455

Current Liabilities 86,97,007 66,41,016 3173245

Quick Ratios 0.44 0.43 0.83

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0.44 0.43

0.83

0

0.1

0.2

0.3

0.4

0.5

0.60.7

0.8

0.9

VALUES(intimes)

2009 2010 2011

YEARS

QUICK ASSETS TO CURRENT LIABILITIES

Graph 1.2 QUICK ASSETS TO CURRENT LIABILITIES

INTERPRETATION:-

Generally a quick ratio of 1:1 is considered as a satisfactory current financial

condition. Here in the graph 1.2 it can be seen that improvement in the year 2010-11

compared to the previous earlier year and also company improve its efficiency of

inventory turnover. The ratio 1:1 which implies the efficient utilization of resourcesand improvement in the operations of the firm.

3. Cash ratio

This ratio analysis the availability of cash to meet the current liabilities. It finds out

the capacity of the firm to meet the liabilities as and when they become due.

Formula: Cash Ratio= Cash Balance/Current Liabilities

Particulars 2008-09 2009-10 2010-11

Cash Balance 83,213 23864 30,762

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Current Liabilities 86,97,007 66,41,016 3173245

Cash Ratio 0.0095 0.0035 0.0096

0.0095

0.0035

0.0096

0

0.001

0.002

0.003

0.004

0.005

0.006

0.007

0.008

0.009

0.01

VALUES(intimes

)

2009 2010 2011

YEARS

CASH RATIO

Graph 1.3 CASH RATIO

INTERPRETATION:-

In most of the firm it is seen that the cash balance is always less than the current

liabilities. But in this year the cash balance is more compared to the previous year

there is no investment in the other ways like investment.

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4. Cash Turnover Ratio

This ratio represents how many times the cash has been covered in the sales. It shows

the no of times of sales made in terms of one unit of cash.

Formula: Cash Turnover Ratio = Sales/Cash

Particulars 2008-09 2009-10 2010-11

Sales 9962455 7096159 4506987

Cash Balance 83,213 23864 30,762

Cash Turnover Ratio 119 297 146

119

297

146

0

50

100

150

200

250

300

VALU

ES(intimes)

2009 2010 2011

YEARS

Cash Turnover Ratio

Graph 1.4 Cash Turnover Ratio

INTERPRETATION:-

-From the above table it can be seen that the cash ratio is in decreasing manner which is not a

good for the company for the growth.

5. Working Capital Turnover Ratio (WCTR)

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This ratio shows the no of times the working capital covered in the sales. The high

working capital ratio indicates high sales and high working capital coverage in the

sales made by the company.

Formula: WCTR= Cost of Goods Sold/Net Working Capital

Particulars 2008-09 2009-10 2010-11

Cost of Goods Sold 5538953 4994836 5800188

Net Working Capital 4296000 5023633 7966000

Cash Turnover Ratio 1.28 0.99 0.72

1.28

0.99

0.72

0

0.2

0.4

0.6

0.8

1

1.2

1.4

VALUES(intimes)

2009 2010 2011

YEARS

Working Capital Turnover Ratio

Graph 1.5 Working Capital Turnover Ratio

INTERPRETATION:-

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This ratio shows the no of times the working capital rotated in the cost of goods sold.

Higher capital turnover ratio higher will be the requirement of working capital if the

firm is selling goods on long term credit and vice versa.

6. Inventory Turnover Ratio (ITR)

This ratio shows the no of times the inventory covered in the cost of goods sold. Higher the ratio

higher the sales and turnover of inventory which is a good sign of an organisation.

Formula: Inventory turnover Ratio = Cost of Goods Sold/Average Inventory

Particulars 2008-09 2009-10 2010-11

Cost of Goods Sold 5538953 4994836 5800188

Avg Inventory 3784252 8657941 7966000

Cash Turnover Ratio 1.46 0.57 0.72

1.46

0.57

0.72

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

VALUES(intimes)

2009 2010 2011

YEARS

Inventory Turnover Ratio

Graph 1.6 Inventory Turnover Ratio

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1.43

1.74

2.2

0

0.5

1

1.5

2

2.5

VALUES(intimes)

2009 2010 2011

YEARS

Current Assets Turnover Ratio Ratio

Graph 1.7 Current Assets Turnover Ratio

INTERPRETATION:-

This ratio shows the no of times of coverage of current assets in the cost of goods

sold. The higher the ratio the better the operation of the company and vice versa the

current assets turnover ratio is on the rise which is good sign of management of

assets.

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Conclusion

Working capital may be regarded as lifeblood of a business. Its effective provision

can do much to ensure the success of a business, while its inefficient management can lead

not only to loss of profits but also to the ultimate down fall of what otherwise might be

considered as a promising concern. A study of working capital is of major importance to

internal and external analysis because of its close relationship with the current day to dayoperations of a business.

1. Here, I conclude that Changes in the financial year is showing increase in the working

capital, because company maintains its working capital properly in the year 2008-09.

2. According to my calculation Current Assets main part of, the working capital of the

business. According to all Ratios, It shows that company maintains its ratio is very well.

So, In the year 2010-11 company showing better position in the working capital.

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6. Summary of Findings

The Current Ratio has come to a satisfactory level and is nearing 2:1

The Quick Ratio is Should be bit greater than the 1:1 ratio but still the

company is growing this which is a good sign in managing working

capital

The Cash Ratio of the company is increasing as compared to the previous

year

The Cash Turnover Ratio of the company is decreasing year by year

which is not a good sign

The Working Capital Turnover is satisfactory of the company

The Inventory Turnover Ratio is rise which is good sign

The Current Assets Turnover Ratio has raised compared to the previous

year which is good sign of growth of the company

The Company is investing its own equity funds it decreased the debt

totally which indicates that the firm is generating more cash by its

operation

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7.Suggestions:-

Overall long term solvency of ABHINANDAN ENGINEERS is good.

The company is using its own fund for investment.

The overall profitability should be increased by reducing the costof raw material, administrative expenses and by increasing sales.

The company should utilize the available large marketing network

and improve the customer relation through the constant customer

support and often-sales services.

The company should focus on cost control measure for ensuring

competitive pricing of the product.

The company should take full advantages of creditors and obtain

maximum credits from them. So that it reduce interest payments

and the net profit

It is profitable to concentrate on business diversification.

So as the company has a better goodwill in the market it will help

them to a new market.

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It is good to have a decentralized decision making unit in order to

activate the company performance effectively and compete with

other companies.

8. BIBLIOGRAPHY

1. Company Manual

2. Financial Management Book by A.D Bhat

3. Financial Management Book by Khan and Jain.

4. Final Accounts ofABHINANDAN ENGINEERS.

working capital project final

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