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WORKING CAPITAL

INTRODUCTION

Finance is one the basic foundations of all kinds of economic activities It is

the maste! ke"# $hich %!ovides access to all the sou!ces fo! bein& em%lo"ed inmanufactu!in& 'ence it is !i&htl" said that finance is lifeblood of an" ente!%!ise#

besides bein& the sca!cest elements# it is also the most indis%ensable !e(ui!ement

Without finance neithe! an" business can be sta!ted no! successfull" !un P!ovision of

sufficient funds at the !e(ui!ed time is the ke" to success of conce!n As matte! of fact

finance ma" be said to be the ci!culato!" s"stem of economic bod"# makin& %ossible

the needed co)o%e!ation amon& man" units of the activit"

FINANCIAL MANAGEMENT

*ana&ement eme!&ed as a distinct financial field of stud" at the tu!n of this

Centu!" *an" eminent %e!sons defined it in the follo$in& $a"s

DEFINITIONS

+Acco!din& to GUTHMANN AND DOUGHAL +,usiness finance can

b!oadl" be defined as the activit" conce!ned $ith %lannin !isin cont!ollin& and

administe!in& of funds used in the business-

+Acco!din& toBONNEVILE AND DEWEY+Financin& consists in the !isin

%!ovidin& and mana&in& of all the mone"# ca%ital o! funds of an" kind to be used in

connection $ith the business-

+Acco!din& to Prof. EZRA SOLOMAN+Financial mana&ement is conce!ned$ith the efficient use of an" im%o!tant economic !esou!ce# namel" ca%ital funds-

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FINANCE

The $o!d .Finance/ comes di!ectl" f!om the latin $o!d .finis/ Finance ma"

be defined as the %!ovision of mone" at that time it is $anted Fo! e0am%le

!ec!uitment of $o!ke!s in a facto!"# is clea!l" a !es%onsibilit" of the %!oduction

de%a!tment In addition to this# finance ma" be !e(ui!ed eithe! fo! settin& 1 u% a ne$

unit o! e0%ansion o! mode!ni2ation of the %!esent unit etc# these financial

!e(ui!ements ma" be b!oadl" classified as sho!t)te!m finance and lon&)te!m finance

TYPES OF FINANCE:

Finance is usuall" divided into t$o cate&o!ies vi2# %ublic finance and business

finance

PUBLIC FINANCE:

Public Finance is no!mall" conce!n $ith the $a"s of secu!in& mone" fo! the conduct

of &ove!nment and the administ!ation of %ublic funds

BUSINESS FINANCE:

It involves an anal"sis of va!ious means of secu!in& mone" fo! business ente!%!ises

and the administ!ation of this mone" b" individuals o! volunta!" association etc#

business finance is the fu!the! sub divided into Pe!sonal Finance# Pa!tne!shi% Finance

3 Com%an" Finance

MEANING OF FINANCING:

Financin& is the %!ocess of o!&ani2in& the flo$ of funds so that a business fi!m can

ca!!" out its ob4ectives in the most efficient manne! and meet its obli&ations as and

$hen the" fall due

MEANING OF MANAGEMENT:

*ana&ement is the A!t of &ettin& the thin&s done th!ou&h othe!s In othe!

$o!ds +*ana&ement is What the *ana&e!s does-

MEANING OF FINANCIAL MANAGEMENT:

Financial *ana&ement is conce!ned $ith the %!o%e! *ana&ement of Financial

Resou!ces Thus# the finance mana&e! must see that the funds a!e %!ocu!ed in a



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manne! that the !isk# cost and cont!ol conside!ations a!e %!o%e!l" balanced in a &iven

situation and the!e is o%timum utili2ation of funds

EVALUATION OF FINANCIAL MANAGEMENT:

+Financial *ana&ement- eme!&ed as a distinct field of stud" at the tu!n of the 56th

Centu!" Its evaluation ma" be divided into th!ee b!oad Phases7

8 T!aditional Phase

5 T!ansititional Phase

9 *ode!n Phase

1. THE TRADITIONAL PHASE:

The t!aditional %hase $as found its fi!st manifestation in 8:;< in the book .co!%o!ate

finance/ $!itten b" Thomas G!eene A T"%ical $o!k of the t!aditional %hase is the

.Financial %olic" of co!%o!ations/ b" A!thu! = >e$in& This book discusses t"%es of

secu!ities# %!ocedu!es used in issuin& these secu!ities etc#

2. THE TRANSITIONAL PHASE:

The t!ansitional %hase be&an a!ound the ea!l" 8;?6/s and continued th!ou&h the ea!l"

8;@6/s Th!ou&h the natu!e of Financial *ana&ement du!in& this %hase $as simila! to

that of the t!ansitional %hase In this %hase &!eate! em%hasis $as %laced on the da")

to)da" %!oblems faced b" a Financial *ana&e! in the a!eas of funds anal"sis# %lannin&

and cont!ol A !e%!esentative $o!k of this %hase is .ssa"s on ,usiness/ b" Wilf!ed B

Witman etal

3. THE MODERN PHASE:

The mode!n %hase be&an in the 8;@6/s =ince the be&innin& of this %hase# man"

si&nificant develo%ments have occu!!ed in the fields of ca%ital bud&etin $o!kin&

ca%ital mana&ement# ca%ital st!uctu!e theo!ies etc

FINANCIAL MANAGEMENT: SCIENCE OR AN ART?

The Financial *ana&ement is neithe! a %u!e science no! an a!t It deals $ith va!ious

methods and techni(ues $hich can be ado%ted de%endin& on the situation of business

and %u!%ose of the decision As a science it uses va!ious statistical# mathematicalmodels and com%ute! a%%lications fo! solvin& the financial %!oblems !elatin& to the



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fi!m# fo! e0am%le# ca%ital investment a%%!aisal# ca%ital st!uctu!e mi0# %o!tfolio

mana&ement etc# Alon& $ith the above a Finance *an&e! is !e(ui!ed to a%%l" his

anal"tical skills in decision 1 makin& 'ence# Financial *ana&ement is both a

science as $ell as an a!t

NATURE OF FINANCIAL MANAGEMENT:-

Finance *ana&ement is no$ !e&a!ded both as a science and as an a!t It is based on

ce!tain fundamental theo!ies %!o%ounded b" financial e0%e!ts As a science it heavil"

d!a$s on !elated b!anches Ackno$led&e like economics# accountin statistics#

o%e!ations !esea!ch and decision)makin&

FINANCIAL MANAGEMENT AND ECONOMICS:-

Financial *ana&ement is in fact an inte&!al %a!t of mana&e!ial economics ie#

economics a%%lied to decision makin& Financial mana&ement d!a$s heavil" both

f!om mac!o and mic!oeconomics *ac!oeconomics %!ovides the finance mana&e!

$ith an insi&ht into the &ene!al economic envi!onment and the va!iables like national

income# &ene!al %!ice level etc# $hich influence the business activit"

*ic!oeconomics enables the finance mana&e! to kno$ ho$ fo!ces like elasticit" of

demand# su%%l" and demand influences the economics of a fi!m and its %!icin& %olic"

FINANCIAL MANAGEMENT AND ACCOUNTING:-

Financial *ana&ement and Accountin& a!e closel" !elated and a!e com%limenta!" to

each othe! While accountin& is conce!ned $ith !eco!din classif"in& and

summa!i2in& financial t!ansactions and inte!%!etin& the !esults the!eof# financial

mana&ement is conce!ned $ith decision makin& and $ealth ma0imi2ation In

accountin& !evenue is !eco&ni2ed based on acc!ual method b" matchin& e0%enses

$ith sales In financial mana&ement the focus is on cash flo$s and thei! timin&

Accountin& is histo!ical in natu!e It !eco!ds %ast data and hence it is ob4ective

Financial mana&ement looks to the futu!e It involves decision makin& in the face of

unce!taint" 'ence it is sub4ective in natu!e In the follo$in& !es%ects# both a!e

com%limenta!" to each othe!

P!ofit as dete!mined unde! accountin& fo!ms the basis fo! com%utation of

ea!nin& %e! sha!e# $hich is of vital inte!est to the finance mana&e!

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>ivided %olic" dete!mined b" the finance mana&e! de%ends u% on the fi&u!e of

%!ofits asce!tained unde! financial accountin&

Investment decision taken b" the finance mana&e! a!e based on info!mation

fu!nished b" the accounts de%a!tment

FINANCIAL MANAGEMENT AND COST ACCOUNTING :-

Financial *ana&ement is conce!ned not onl" $ith %!ocu!ement of funds but also $ith

effective utili2ation The cost data fu!nished b" the costin& de%a!tment

hel%s the finance mana&e! to evaluate ho$ effectivel" the funds a!e utili2ed and

su&&est measu!es to kee% costs unde! cont!ol

FINANCIAL MANAGEMENT AND STATISTICS:-

=tatistics %!ovide detailed data fo! decision makin& The %!obabilit" theo!" of

statistics offe!s the lo&ic fo! dealin& $ith the unce!taint" of futu!e events It enables

the finance mana&e! to unde!stand the va!iables affects decision makin&

FINANCIAL MANAGEMENT AND OPERATION RESEARCH:-

This is a b!anch of (uantitative science used to anal"2e a business situation to find an

o%timal solution Fo! e0am%le# %!oblems like allocation of sto!a&e s%ace# utili2ation

of t!ans%o!t facilities# choice of invento!" etc Can be solved $ith the hel% of

o%e!ation !esea!ch Linea! %!o&!ammin& is useful in makin& best of sca!ce !esou!ces

FINANCIAL MANAGEMENT AND DECISION MAKING:-

Financial mana&ement involves decision)makin& The theo!" of decision makin&

deals $ith the %!ocesses b" $hich e0%ectations unde! conditions of unce!taint" a!e

fo!med Finance is the life a blood of an o!&ani2ation it is all)%e!vasive in natu!e and

affects all the activities in the o!&ani2ation In fact# it is a se!vice function to othe!

de%a!tments It is closel" inte!linked $ith the othe! functions of %!oduction#

ma!ketin& and %e!sonal These de%a!tments mutuall" e0chan&e info!mation fo!

fo!mulation of %olicies and decision makin& The functional mana&e!s have the

f!eedom to take decisions on matte!s %e!tainin& to thei! line of activit"# but the" have

to take into conside!ations the financial im%lication involved

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In a fi!m $ith %lent" of funds# financial conside!ations do not matte! much in

fo!mulatin& %olicies !e&a!din& %!oduction# ma!ketin& and %e!sonnel ,ut in a fi!m

facin& financial difficulties# financial conside!ations must be &iven due $ei&ht in

fo!mulatin& %olicies The linka&e bet$een financial mana&ement and othe! functionala!eas of mana&ement is e0%lained belo$

FINANCIAL MANAGEMENT AND PRODUCTION:-

P!oduction of &oods !e(ui!es la!&e amounts of $o!kin& ca%ital# fo! $hich funds have

to be %!ocu!ed b" the finance mana&e! >ive!sification of %!oduction# chan&es in

%!oduction %!ocess necessitate ca%ital e0%enditu!e# fo! $hich the finance mana&e!

should make funds available afte! %!o%e! evaluation

FINANCIAL MANAGEMENT AND MARKETING:-

The success of fi!m de%ends not onl" on the efficient utili2ation of funds# but also its

ma!ketin& effo!t and %!icin& %olic" The ma!ketin& mana&e! %!ovides the finance

mana&e! $ith info!mation as to ho$ diffe!ent %!ices affect the demand fo! %!oducts#

so that an a%%!o%!iate %!icin& %olic" can be fo!mulated based on costs estimated at

diffe!ent levels of %!oduction

FINANCIAL MANAGEMENT AND PERSONNEL MANAGEMENT:-

Rec!uitment# t!ainin& and %lacement of staff !e(ui!e finance >ecisions on these

issues can onl" be taken afte! conside!in& the financial im%lications involved In the

face of eve! inc!easin& com%etition# heav" investments have to be made on

develo%ment of human !esou!ces Revision of %a" scales# schemes fo! volunta!"

!eti!ement etc# !e(ui!e funds on a massive scale 'ence the finance mana&e! should

identif" ne$ sou!ces to %!ocu!e the funds !e(ui!ed

SCOPE OF FINANCIAL MANAGEMENT

The a%%!oach to the sco%e and functions of financial mana&ement is divided fo! the

%u!%ose of e0%osition t$o b!oad cate&o!ies

The T!aditional A%%!oach

The *ode!n A%%!oach

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THE TRADITIONAL APPROACH

The t!aditional a%%!oach to the sco%e of Financial *ana&ement !efe!s to its sub4ect

matte! in academic lite!atu!e# in the initial sta&es of its evolution as a se%a!ate b!anch

of academic stud" The te!m .Co!%o!ation Finance/ $as used to desc!ibe $hat is no$

kno$n in the academic $o!ld as .Financial *ana&ement/

The t!aditional a%%!oach to the sco%e of finance function evolved du!in& the

8;56/s and 8;96/s and dominated academic thinkin& du!in& the 8;?6/s and th!ou&h

the "ea!l" 8;@6/s no$# it has been disca!ded as its suffe!s f!om se!ious limitations

The $eakness of the t!aditional a%%!oach fall into t$o b!oad cate&o!ies

Those !elatin& to the t!eatment of the va!ious to%ics and the em%hasis attached

to them

Those !elatin& to the basic conce%ts and anal"tical f!ame $o!k of the

definitions and sco%e of finance function

THE MODERN APPROACH

Dnde! the mode!n conce%t# finance function is conce!ned $ith the financial activities

of %lannin !aisin allocatin and cont!ollin& of funds and usin& them fo!

&ene!atin& !etu!ns Thus# Finance Function acco!din& to mode!n e0%e!ts ma" be

classified into t$o &!ou%s

0ecutive Finance Function

Incidental E Routine Finance Function

EXECUTIVE FINANCE FUNCTION

The e0ecutive finance function calls fo! administ!ative skills in %lannin& and

e0ecution of finance function It includes the follo$in& decisions

A Investment >ecisions

, Finance >ecisions

C >ividend >ecisions

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A. INVESTMENT DECISIONS

It is conce!ned $ith the allocation of funds to both ca%ital and cu!!ent assets Ca%ital

assets a!e financed th!ou&h lon& 1 te!m funds and the cu!!ent assets a!e financed

th!ou&h sho!t)te!m funds Thus# it consists of the follo$in&

A) CAPITAL BUDGETING:-

ffective allocation of ca%ital is one of the most im%o!tant functions of the financial

mana&ement in mode!n times This function involves the fi!m/s decision to commit

its funds in lon&)te!m assets The investment in lon&)te!m assets fi0ed assets $ill be

(uite heav" and to be made immediatel" but the !etu!ns $ill be available afte! a

ce!tain %e!iod The investment decisions of a com%an" a!e commonl" called as the

ca%ital bud&etin& decisions a!e ca%ital e0%enditu!e decisions

B) ORKING CAPITAL MANAGEMENT:-

The mana&ement of cu!!ent assets is kno$n as $o!kin& ca%ital mana&ement

*ana&in& cu!!ent assets !e(ui!es mo!e attention than mana&in& fi0ed assets

B. FINANCING DECISIONS

The second im%o!tant decision to be %e!fo!med b" the Finance *ana&e! is the

financin& decisions b!oadl" s%eakin& he must decide $hen# $he!e and ho$ to ac(ui!e

funds to meet the fi!m/s investment needs Gene!all"# the finance mana&e! obtained

funds th!ou&h %!ima!" ma!kets# financial institutions and# comme!cial banks A

%!o%e! balance has to be ke%t bet$een the fi0ed and non)fi0ed cost)bea!in& secu!ities

C. DIVIDENDS DECISIONS

The !etu!n on sha!eholde!/s ca%ital is kno$n as .>ividend/ The decision of finance

mana&e! !elated to the dist!ibution of ea!nin&s to the sha!eholde!s and the amount to

be !etained in the fi!ms is te!med as dividend decisions This decisions has been

conside!ed th!ou&h $hich a business fi!m/s %e!fo!mance is measu!ed The sha!e)

holde!s# &ovt# banke!s and othe!s $ill unde!stand the soundness of the business

th!ou&h dividend decisions The!e fo!e# the dividend decisions have been conside!ed

as anothe! im%o!tant decisions of the finance function

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The investment# finance and dividend decisions a!e inte!)!elated to each othe! and

the!efo!e# the finance mana&e! $hile takin& an" decisions should conside! the im%act

f!om all the th!ee an&les simultaneousl"

INCIDENTAL!ROUTINE FINANCE FUNCTION:-

It does not !e(ui!e a &!eat mana&e!ial abilit" to ca!!" %ut finance functions

These a!e chiefl" cle!ical and a!e incident to the effective handlin& of mana&e!ial

finance functions =ome of these functions a!e listed belo$7

=u%e!vision of cash !ecei%ts and %a"ments

=afe custod" of secu!ities# insu!ance %olicies etc#

*aintenance of !eco!ds

Re%o!tin& to mana&ement etc#

GOALS!OB"ECTIVES OF FINANCIAL MANAGEMENT:

The ob4ectives of financial mana&ement a!e b!oadl" classified into t$o cate&o!ies

,asic Ob4ectives

Othe! Ob4ectives

1. BASIC OB"ECTIVES:-

T!aditionall"# the basic ob4ectives of financial mana&ement a!e the

maintenance of li(uid assets and ma0imi2ation of %!ofitabilit" *aintenance of li(uid

assets means that the fi!m has ade(uate cash in hand to meet its obli&ations at all time

And ma0imi2ation of %!ofitabilit" can be e0%lained in the follo$in& lines

PROFIT MAXIMI#ATION:-

The financial ob4ective of a fi!ms is to ma0imi2e the o$ne!/s economic $elfa!e

The!e is a cont!ove!s" as to ho$ the economic $elfa!e of o$ne!s can be ma0imi2ed

Acco!din& to this a%%!oach actions that inc!ease %!ofits should be unde!taken and

those that de&!ees %!ofits should be avoided 'ence ma0imi2ation of %!ofits is

!e&a!ded as an o%e!ational c!ite!ion fo! ma0imi2in& the o$ne!s economic $elfa!e

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Thus# %!ofit is the cent!al economic ob4ective of an" business ente!%!ise The

ob4ective of %!ofit ma0imi2ation is 4ustified on account of the follo$in& !easons

A human bein& %e!fo!min& an" economic activit" !ationall" aims at utilit"

ma0imi2ationDtilit" can be measu!ed in te!ms of %!ofits Thus# the %!ofit

ma0imi2ation is 4ustified on the &!ound of !ationalit"

The fi!m b" %u!suin& its ob4ective of %!ofit ma0imi2ation also ma0imi2es

social economic $elfa!e

P!ofit ma0imi2atio;n $ill be a motive fo!ce to ac(ui!e mono%ol" in the

im%e!fect ca%ital ma!kets

'o$eve!# the ob4ective of %!ofit ma0imi2ation is sub4ect to c!itici2e in !ecent

"ea!s on the follo$in& counts7)

It is a!&ued that %!ofit ma0imi2ation is the !esult of %e!fect com%etition ,ut#

in mode!n ma!kets# the!e e0ists no %e!fect com%etitions

In mode!n ma!kets# it is !e&a!ded as immo!al difficult and un!ealistic

The %!ecise meanin& of %!ofit ma0imi2ation is not clea! The!e is a lack of

unanimit" !e&a!din& the conce%t of %!ofit ie# %!ofit befo!e ta0 o! %!ofit afte!

ta0

It does not s%ecif" the timin& of e0%ected !etu!ns

It does not conside! the !isk and unce!taint" of %!os%ective ea!nin&s

In vie$ of the above !easons# the t!aditional theo!" of %!ofit ma0imi2ation has often

been c!itici2ed It has lost its !elevance in the mode!n business envi!onment 'ence#

the mode!n financial e0%e!ts a!e su&&ested the ma0imi2ation of $ealth as theob4ective of the fi!m

EALTH MAXIMI#ATION

Wealth ma0imi2ation means ma0imi2in& the net %!esent $o!th of a cou!se of action

The net %!esent $o!th of a cou!se of action is the diffe!ence bet$een the &!oss %!esent

$o!th of benefits and the amount of investment !e(ui!ed to achieve those benefits

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OTHER OB"ECTIVES:-

,esides the above basic ob4ectives# the follo$in& a!e the othe! ob4ectives of financialmana&ement

nsu!in& !etu!n on ca%ital em%lo"ed

Halue addition and %!ofitabilit"

G!o$th in ea!nin& %e! sha!e and %!ice ea!nin& !atio

fficient utili2ation of sho!t)te!m# medium and lon&)te!m finances

*a0imi2ation of finance cha!&es

nsu!in& financial disci%line in the o!&ani2ation

FINANCIAL FUNCTIONS

The finance functions of !aisin& funds# investin& them in assets and

dist!ibutin& !etu!ns ea!ned f!om assets to sha!eholde!s a!e !es%ectivel" kno$n as

financin investment and dividend decisions While %e!fo!min& these functions# a

fi!m attem%ts to balance cash inflo$s and outflo$s This is called as li(uidit"

decision

The finance functions can be divided into th!ee b!oad cate&o!ies

Investment o! lon&)te!m asset mi0 decision

Financin& o! ca%ital mi0 decision

>ividend o! %!ofit allocation decision

Li(uidit" o! sho!t)te!m asset mi0 decision

INVESTMENT DECISION

Investment o! ca%ital bud&etin& involves the decisions of allocation of cash o!

commitment of funds to lon&)te!m assets# $hich $ould "ield benefits in futu!e It

involves measu!ement of futu!e %!ofitabilit"# $hich involves !isk# because of

unce!tain futu!e Investment %!o%osal should the!efo!e be evaluated in te!ms of both

e0%ected !etu!n and !isk Othe! ma4o! as%ect of investment decision is the



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measu!ement of standa!d o! hu!dle !ate a&ainst $hich the e0%ected !etu!n of ne$

investment can be com%a!ed

FINANCING DECISIONS

Financin& decision is the second im%o!tant function to be %e!fo!med b" the fi!

,!oadl"# he must decide $hen# $he!e# and ho$ to ac(ui!e funds to meet the fi!m/s

investment needs 'e has to dete!mine the %!o%o!tion of debt and e(uit" This mi0 of

debt and e(uit" is kno$n as the fi!ms .ca%ital st!uctu!e/ The financial mana&e! must

st!ive to obtain the least financin& mi0 o! the .o%timum ca%ital st!uctu!e/ $he!e the

ma!ket value of sha!e is ma0imi2ed

DIVIDEND DECISIONS

It is the thi!d ma4o! financial decision The financial mana&e! decides $hethe!

the fi!m should dist!ibute all %!ofits# o! !etu!n them# o! dist!ibute a %o!tion and !etu!n

the balance The o%timum dividend %olic" should be dete!mined $he!e is ma0imi2es

the ma!kets value of the sha!e

LI$UIDITY DECISIONS

Cu!!ent assets mana&ement# $hich affects fi!m/s li(uidit"# is "et anothe!finance function in addition to the mana&ement of lon&)te!m assets Cu!!ent assets

should be mana&ed effectivel" safe&ua!din& the fi!m a&ainst the dan&e!s of li(uidit"

and insolvenc"

Investment in cu!!ent assets affects the %!ofitabilit"# li(uidit"# and !isk A

conflict e0ists bet$een %!ofitabilit" and li(uidit" $hile mana&in& cu!!ent assets If the

fi!m doesn/t invest sufficient funds in cu!!ent assets it ma" ,ecome illi(uid ,ut it

could lose %!ofitabilit"# as idle CA $ould not ea!n an"thin& Thus a %!o%e! takeoffmust be achieved bet$een %!ofitabilit" and li(uidit"

GOALS OF FINANCIAL MANAGEMENT

*a0imi2e the value of the fi!m to its e(uit" sha!eholde!s This means that

the Goals of the fi!m should be to ma0imi2e the ma!ket value of its e(uit" sha!es

Which !e%!esent the value of the fi!m to its e(uit" sha!eholde!s

*a0imi2ation of %!ofit

*a0imi2ation of ea!nin&s %e! sha!e



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WORKING CAPITAL

*a0imi2ation of !etu!n on e(uit" defined as e(uit" ea!nin&sEnet $o!th

nsu!in& ma0imum o%e!ational efficienc" th!ou&h %lannin di!ectin& and

Cont!ollin& of the utili2ation of the funds ie# th!ou&h the effective

em%lo"ment of funds

nsu!in& a fai! !etu!n to the sha!eholde!s on thei! investment

The ke" challen&es fo! the finance mana&e! in India a%%ea! to be in the

follo$in& a!eas

Investment Plannin&

Financial =t!uctu!e

T!easu!e O%e!ations

Fo!ei&n 0chan&e

Investo! Communication



14/94

WORKING CAPITAL

INDUSTRY PROFILE

DAIRY E$UIPMENTS

>esi&ned $ith the aid of latest technolo&"# ou! !an&e of >ai!" (ui%ment is

a%%!eciated fo! o%timum %e!fo!mance and du!abilit" Offe!ed at indust!" leadin&

%!ice# these a!e $idel" in milk indust!" to sto!e and %!ocess milk We offe! ou! !an&e

in diffe!ent s%ecifications %!ovided b" ou! clients

HOMOGENI#ER

We a!e !eckoned as one of the chief >ai!" 'omo&eni2e! *anufactu!e!s# 0%o!te!s

and =u%%lie!s based in India *ade usin& su%e!io! (ualit" !a$ mate!ial# these >ai!"

'omo&eni2e!s a!e $idel" demanded in dai!" indust!" due to thei! bette! %e!fo!mance

and hi&h efficienc" The >ai!" 'omo&eni2e!s offe!ed b" us a!e $idel" a%%!eciated

fo! enhancin& the consistenc" of a %!oduct b" dis%e!sion The >ai!" P!ocessin& Plants

offe!ed b" us a!e kno$n fo! u%&!adin& the co lou!# flavo! and a%%ea!ance of the

%!oducts and even avoid occu!!in& of the !in& fo!mation

A%&'('*+, :

,ette! %!oduct stabilit"

=moothness of %!oduct

Avoids !ise of the c!eam la"e!



15/94

WORKING CAPITAL

DAIRY PRODUCTS

Dtili2in& ou! "ea!s of e0%e!ience and advanced inf!ast!uctu!e# $e offe! ou! clients

>ai!" e(ui%ment# $hich is in com%liance $ith inte!national (ualit" standa!ds In)built

featu!es# fo! bette! com%atibilit" $ith continuous as $ell as batch mode of %!ocessdesi&nin makes it %e!fect choice fo! va!ious indust!ies such as food %!ocessin& and

milk dai!"

INDUSTRIAL HOMOGENI#ER

We a!e one of the leadin& manufactu!e!s of Tu!n Ke" Li(uid *ilk >ai!" Plants o!

dai!" %!ocessin& %lants# $hich a!e manufactu!ed usin& su%e!io! (ualit" !a$ mate!ialThese a!e heavil" demanded in dai!" indust!" due to efficient %e!fo!mance and cost

effectiveness Ou! !an&e is e(ui%%ed $ith in)built featu!es to ensu!e %!o%e!

functionin&

VCR INSTITUTE OF MANAGEMENT STUDIES Page 1!


16/94

WORKING CAPITAL

MILK PASTEURI#ERS

'T=T continuous %asteu!i2e!s a!e e0tensivel" used fo! %asteu!i2ation of milk and

c!eam in dai!" 3 food indust!ies Plate heat e0chan&e!s based %asteu!i2e! offe!

eno!mous convenience fo! %!ocessin& milk# c!eam $ith fle0ibilit"# hi&h the!malefficienc" and effective heat t!ansfe! The s"stem is com%act# !e(ui!es minimal s%ace

and is ve!" eas" to e0%and ca%acit" b" addin& additional %lates

SKID MOUNTED PROCESS

We have utili2ed ove! a decade e0%e!ience fo! c!eatin& s"ne!&ies $ith &lobal

technolo&ies so as to b!in& out a locall" acce%table techno)comme!ciall" viable !an&e

of dai!" e(ui%ments We have utili2ed a &ene!ic st!ate&" of cost leade!shi% th!ou&h

focus on (ualit" and inte&!ation of diffe!ent dai!" e(ui%ments in a dai!" %!o4ect ou

ma" al$a"s !el" on ou! e(ui%ment fo! inte!national (ualit" at domestic %!ices The

e(ui%ments have inbuilt featu!es fo! bette! com%atibilit" $ith continuous as $ell as

batch mode of %!ocess desi&nin&

S+&/+, 0 D' I(%,:

,oile!s# 'ot Wate! Gene!ato!# The!mal Fluid 'eate!Js !ection and

Commissionin&

'T E LT Cablin Po$e! Cont!ol Cent!e# *oto! Cont!ol Cent!e# Com%lete

Fab!ication !ection and commissionin&

ffluent t!eatment %lant fo! dai!" indust!"

*ilk# ,utte!fat and *ilk Po$de! Packin& Automatic Fo!m Fill and =eal

FF= machines

Conve"o! and %!oduct flo$ automation s"stem

VCR INSTITUTE OF MANAGEMENT STUDIES Page 1"


17/94

WORKING CAPITAL

Com%lete !ef!i&e!ated chain s"stems fo! dai!" and food indust!"

PASTEURI#ER

We a!e the la!&est manufactu!e! of hi&h (ualit" %asteu!i2in& machine

CREAM SEPARATOR

We a!e the la!&est manufactu!e! of hi&h (ualit" c!eam se%a!ato! machines It can

%!ocess :6 lite!s milk %e! hou!

VCR INSTITUTE OF MANAGEMENT STUDIES Page 1#

*a0 milk out%ut# lEh :6

>!um !otational s%eed# min)8 86@66

Numbe! of disks in d!um# %cs 86 to 85

*ilk bo$l ca%acit"# l 85

*a0 butte!)fat content in

skimmed milk#

66@

C!eamEskimmed milk volume

%!o%o!tion ad4ustment !an&e

87? to 8786


18/94

WORKING CAPITAL

STORAGE TANK

We manufactu!e custom sto!a&e tanks fo! the chemical# %ha!maceutical and

food %!ocess indust!ies

MILK PUMP

We manufactu!e! and e0%o!te! of milk %um% and dai!" milk %um% $ith hi&h (ualit"

and full" automatic

O '(*+ 0 454, , '44+/'+% 6(* 7+ 0886(* 0+'+,:

Lo$ %o$e! consum%tion

'i&h %e!fo!mance

0cellent suction %e!fo!mance

'i&h ca%acit"

EIGH BOL

The su%e!io! (ualit" of Wei&h ,o$l manufactu!ed b" ou! com%an" is made f!om

&ood (ualit" !a$ mate!ial $hich makes them du!able

VCR INSTITUTE OF MANAGEMENT STUDIES Page 1$


19/94

WORKING CAPITAL

HOT ATER GENERATOR

We desi&n 3 manufactu!e va!ious t"%es of %!ocess heat e(ui%ments like hot $ate!

&ene!ato!s# a&!o $aste fi!ed hot $ate! &ene!ato!s and hot $ate! boile!s

Featu!es a!e

8 Ru&&ed const!uction

5 Lo$ maintenance

9 'i&h efficienc"

REFRIGERATION SYSTEM

We a!e en&a&ed in the su%%l" of ice bank tank that a!e in hi&h demand in the domestic

ma!ket *anufactu!ed f!om su%e!io! (ualit" == 96? these a!e used fo! dai!"# chilledmilk tank# %late heat e0chan&e!

VCR INSTITUTE OF MANAGEMENT STUDIES Page 1%


20/94

WORKING CAPITAL

COLD ROOM

Ca!!ie! %anels a!e manufactu!ed in thickness of 6mm#:6mm#866mm#856mm and

8@6mm

Ca!!ie! offe!s indi&enous e(ui%ments !an&in& f!om 8 'P to @ 'P fo! %ositive

tem%e!atu!e and 8 'P to 95 'P fo! ne&ative tem%e!atu!e a%%lications

Fo! la!&e! !ef!i&e!ation e(ui%ments# Ca!!ie! offe!s im%o!ted e(ui%ments f!om o$n

ove!seas facto!ies and sou!cin& %a!tne!s

Ca!!ie! offe!s end to end solutions f!om fa!m to !etail cove!in& $ide s%ect!um of

a%%lications such as P!e)coolin ,last f!ee2e!# IMF# Cont!olled atmos%he!eE*odified

atmos%he!e and la!&e cold sto!a&es

CONVEYOR

We a!e the la!&est manufactu!in& of hi&h (ualit" automaticall" o%e!ated conve"e!s

Conve"o! s"stems a!e used $ides%!ead ac!oss a !an&e of indust!ies These s"stems

a!e commonl" used in man" indust!ies# includin& the automotive# a&!icultu!al#

com%ute!# elect!onic# food %!ocessin?ae!os%ace# %ha!maceutical# chemical# bottlin&

and cannin %!int finishin& and %ackin&

T"%es of conve"e! s"stems a!e7

8 ,elt conve"e!

5 Fle0ible conve"e!

9 He!tical conve"e! etc



21/94

WORKING CAPITAL

KHOVA MAKING MACHINE

We a!e the la!&est manufactu!e! of hi&h (ualit" $ith full" automatic khova makin&

machine

M G+': 8 'P =in&le Phase

B86+ M:6@ 'P =in&le Phase >iesel ,u!ne!

F+8 C(,54(: 8 to 5 Lite! >iesel E Ke!osene o! @66 to 66 &m of LP Gas E

86Lit!e

P%/( C'4: 96 Lite! *ilk conve!t to khova %e! hou!

O4+'+% B: Onl" one un)skilled labou!

BUTTER CHURNING MACHINE

The com%an" e0clusive !an&e of butte! chu!n that can chu!n out (ualit" butte! *ade

of (ualit" mate!ials these butte! makin& machine a!e in acco!dance $ith an

inte!national standa!ds



22/94


23/94

WORKING CAPITAL

It is obse!ved that in the field of >ai!" 3 Food Indust!" (ui%ments# da")b")

da" !e(ui!ement of hi&hl" so%histicated e(ui%ments

We a!e ha%%" to announce that *Es =!ee Ram Tech havin& full)fled&ed

manufactu!in& unit $ith e0%e!ienced en&inee!s in desi&n# and manufactu!in& P!o4ects

a!e $ith skilled $o!ke!s to ensu!e com%lete e!ection and commissionin& of *ilk

>ai!ies# Ref!i&e!ation# and Ice Plants etc on Tu!n Ke" ,asis

We can su%%l" e(ui%ments as %e! "ou! !e(ui!ements $ith %!om%t delive!"#

'i&h (ualit" and an assu!ed afte! sales se!vice

8 Rece%tion (ui%ments

5 Ref!i&e!ation (ui%ments

K+ /,5+,.

8 'e!ita&e Foods I Ltd#

5 Ti!umala *ilk P!oducts Pvt ltd#

9 H"shnavi Foods Pvt Ltd#

? C!eam line >ai!" P!oducts Pvt Ltd#

@ >odla >ai!" P!oducts#

R+/+4( E945+(,:

Rolle! Conve"o!

,elt Conve"o!

Can T!i%%in& ,a!

Can >!i% =ave!

>um% Tank

Wei&h ,o$lCan =c!ubbe!

Can Lid Washe! T!ou&h

SS MILK DUMP TANKThe Tank is in !ectan&ula! in sha%e and it is made out of 56 thick == 96? G

sheet and $ill be $elded $ith A!&on a!c $eldin& %!ocess All the $elds $ill be

%olished 3 finished to dai!" standa!ds $ith 6 3 :6 &!it %a%e!s All the co!ne!s $ill

be $ell !educed The tank $ill have th!ee 1 $a" slo%e to$a!ds outlet fo! f!ee 3



24/94

WORKING CAPITAL

com%lete d!aina&e of li(uid The tank $ill have ? nos of == lu&s fitted $ith == ball

fits ca%able of ve!tical ad4ustment of @6mm %!ovided $ith @8 No mm outlet endin&

on outside

SS MILK EIGH BOL

The $ei&h bo$l is in Rectan&ula! in sha%e and it is made out of $ith 56 thick

== 96? G sheet The $ei&h bo$l $ill be $elded $ith A!&on A!c $eldin& All the

$elds $ill be &!ound smooth and $ill be tested $ith d"e %enet!ation test All the inne!

co!ne!s $ill be tested $ith d"e %enet!ation test All the inne! co!ne!s $ill be $ell

!educed 3 all == su!faces $ill be %olished to sanita!" finish The bo$l $ill have 9)

$a" slo%e to$a!ds discha!&e valve fo! f!ee and com%lete d!aina&e of li(uid The

$ei&h bo$l $ill be %!ovided $ith == !in& 3 == dumm" alon& $ith !ubbe! &asket

alon& $ith han&in& bolts 3 also %!ovided liftin& a!!an&ement $ith B b!acket s"stem

Filte! mesh $ill be %!ovided and the $ei&h bo$l $ill be $elded $ith A!&on a!c

$eldin& and finished $ith 6 3 :6 &!it %a%e! 3 alon& $ith 866mm dia d!ain

%!ovision

ROLLER CONVEYOR

It is made out of $ith *= st!uctu!al f!ame $ith standa!d desi&n and $ill be

%!ovided $ith GI !olle!s alon& $ith Teflon bushes at both the ends of Rolle!s and t$o

!ods $ill be locked $ith a %in to move smoothl" $ith out an" distu!bances $hile

!unnin&

CAN TRIPPING BAR

It is made u% of $ith teak $ood havin& a %!ovision to tilt a milk can and it is

cove!ed $ith == 96? G 5 mm Thk =heet

COMPUTER TABLE

The Com%ute! cabin made $ith 8@mm thick ==96? &!ade sheet The

com%ute! cabin suitable fo! installation monito! and CPD# and doo!s $ill be



25/94

WORKING CAPITAL

%!ovided fo! lockin& Fou! le&s $ill be %!ovided and %olished $ith :6 and 856 &!it

%a%e!s

SS CAN LID ASH TROUGH

The can Lid $ashe! t!ou&h $ill be made $ith 5 mm Thk 96? G =heet havin&

!ectan&ula! in sha%e and it is ta%e! and $elded $ith A!&on A!c $eldin& and $ill be

&!inded 3 finished $ith 6 3 :6 G!it %a%e! The thou&h $ill be fitted $ith sc!e$s to

the == st!uctu!e

HORI#ONTAL STORAGE TANK

The inne! shell of the tank is made u% of 5mm thick 96? & sheet alon& $ith

dishes $ith 5@mm Thk 96?& sheet The oute! shell is made u% of $ith 5mm Thk

96?& sheet and bet$een these shells insulated $ith hi&h densit" "ello$ $ool and

866mm Thk The!mocoal sheets $ill be %!ovided The shell $ill be Ti&

$elded#&!inded $ith 6 &!it %a%e! and finish $ith :6 &!it %a%e!s The tank $ill be fou!

le&s alon& $ith ==ball fits and othe! standa!d accesso!ies like &ea! bo0 moto! $ith

a&itato!# si&ht &lass and li&ht &lass etc

VERTICAL STORAGE TANK.

The inne! shell of the tank is made u% of 5mm thick 96? & sheet alon& $ith

dishes $ith 5@mm Thk 96?& sheet The oute! shell is made u% of $ith 5mm Thk

96?& sheet and bet$een these shells insulated $ith hi&h densit" "ello$ $ool and

866mm Thk The!mocoal sheets $ill be %!ovided The shell $ill be Ti&

$elded#&!inded $ith 6 &!it %a%e! and finish $ith :6 &!it %a%e!s The tank $ill be fou!

le&s alon& $ith ==ball fits and othe! standa!d accesso!ies like &ea! bo0 moto! $itha&itato!# si&ht &lass and li&ht &lass etc

SS CAN SCRUBBER

The sc!ubbe! made out of $ith 8mm thk == 96?& =heet and havin& a half

!ound in sha%e and it $ill be %!ovided $ith &ea! bo0 and *oto! $ith chain d!ive and



26/94


27/94

WORKING CAPITAL

An" o!&ani2ation must have to maintain ade(uate $o!kin& ca%ital to meet its

da" to da" o%e!ation In o!de! to maintain flo$s of !evenues f!om o%e!ation# eve!"

fi!m need ce!tain amount of cu!!ent assets Fo! e0am%les cash is !e(ui!ed to meet

obli&ations fo! se!vices !eceived etc ," a fi!m on identical %lan in invento!ies a!e!e(ui!ed etc b" a fi!m on identical %lan in invento!ies a!e !e(ui!ed to %!ovide the line

bet$een %!oduction and sales The stud" is !e(ui!ed to unde!stand the $o!kin& ca%ital

%osition in =R RA* TC'

NEED AND IMPORTANCE OF THE STUDY

Thus =R RA* TC' P!oducts is ve!" vital f!om count!"/s >ai!"

(ui%ment/s %oint of vie$ The demand $ould be &!o$in& $ith inc!easin&

technolo&ies and is likel" to !each a sta&&e!in& level in the decades to come

On the othe! hand# the %!ice of =tainless =teel has !emained sta&nant# because

%!ices a!e dete!mined b" ma!ket fo!ces and %!esentl" %!oduction levels a!e &!eate!

than su%%l"

SCOPE OF THE STUDY

FINANCIAL MANAGEMENT



28/94

WORKING CAPITAL

Financial mana&ement is that the mana&e!ial activit" is conce!ned $ith the

%lannin& and cont!ollin& of the fi!m/s financial !esou!ces Thou&h it $as a b!anch of

economics till 8:;6 as a se%a!ate activit" o! disci%line# it is of !ecent o!i&in =till it

has no uni(ue bod" of kno$led&e of its o$n and heavil" on economics fo! itstheo!etical conce%ts even toda"

The sub4ect of financial is of immense inte!est to both academician and

%!acticin& mana&e!s It is of &!eat inte!est of academicians because the sub4ect is still

develo%in& and the!e a!e still ce!tain a!eas $he!e cont!ollin& e0ists fo! $hich no

unanimous solutions have been !eaches as "et

T7+ 4+,+( ,% '5, ' 7+ 0886(*

'i&hli&htin& the necessit" of cu!!ent assets and cu!!ent liabilities

0%lain the %!inci%les of cu!!ent assets# investment and financin&

Focus on the %!o%e! mi0 of sho!t te!m financin& fo! cu!!ent assets

m%hasis the need and &oal of establishin& a sound c!edit %olic"

=u&&est the need of monito!in& the !eceivables

'i&hli&ht the need fo! holdin& cash

>iscuss the techni(ues of %!e%a!in& cash bud&et

Focus on the mana&ement of cash collection and disbu!sement

OB"ECTIVES OF THE STUDY

VCR INSTITUTE OF MANAGEMENT STUDIES Page 2$


29/94

WORKING CAPITAL

To evaluate the %e!fo!mance of =R RA* TC' anal"2in& the %!ofitabilit"

and li(uidit" %osition of the com%an"

To stud" chan&es in $o!kin& ca%ital %osition at the o!&ani2ation f!om 566:)

5689

To e0amine the tu!nove! of the com%an"

To identif" and anal"2e !elationshi% bet$een $o!kin& ca%ital# sales# fi0ed

asset to sales etc

To su&&est measu!es if an" fo! im%!ovin& financial %e!fo!mance of com%an"



30/94

WORKING CAPITAL

LIMITATIONS OF THE STUDY

It is based on the data su%%lied b" the com%an" %e!sonnel

It is based on consultation# decisions of all conce!ned officials

Time is the ma4o! limitation fo! the stud" ie# stud" conducted based on the ?

"ea!s financial !e%o!ts We can/t dete!mine the ove! all financial %osition of

the com%an"

>ue to limitation of time# it $as unable to &o fa! a de%th stud" in to the

sub4ect



31/94

WORKING CAPITAL

RESEARCH METHODOLOGY

MEANING OF ORKING CAPITAL

O!dina!il"# the te!m +$o!kin& ca%ital- stands fo! that %a!t of the ca%ital# $hich

is !e(ui!ed fo! the financin& of $o!kin& o! cu!!ent needs of the com%an" Wo!kin&

ca%ital is the lifetime of eve!" conce!n Whethe! it is manufactu!in& o! non)

manufactu!in& one $ithout ade(uate $o!kin& ca%ital# the!e can be no %!o&!ess in the

indust!"

Inade(uate $o!kin& ca%ital means sho!ta&e of !a$ mate!ials# labo! etc#

!esultin& in %a!tial cu!!ent assets less cu!!ent liabilities)has no economic meanin& in

the sense of im%l"in& some t"%e of no!mative behavio! Acco!din& to this line of

!easonin it is la!&el" an accountin& a!tifact Wo!kin& ca%ital mana&ement# then# is a

misnome!

The $o!kin& ca%ital of the fi!m is not mana&ed The te!m desc!ibes a cate&o!"

of mana&ement decisions affects s%ecific t"%es of cu!!ent assets and cu!!ent liabilities

In tu!n# those decisions should be !ooted in the ove!all Haluation of the fi!m

CONCEPTS OF ORKING CAPITAL

The te!m $o!kin& ca%ital can be used in t$o diffe!ent $a"s7 the" a!e

1. GROSS ORKING CAPITAL

The &!oss $o!kin& ca%ital !efe!s to investment in all the cu!!ent assets taken

to&ethe! The total of investments in all cu!!ent assets is kno$n as &!oss $o!kin&

ca%ital

2. N+ ;(* C'4'8

The te!m net $o!kin& ca%ital !efe!s e0cess of total cu!!ent assets ove! total

cu!!ent liabilities It ma" be noted that the cu!!ent assets !efe!s to these liabilities

$hich a!e %a"able $ith in a %e!iod of one "ea!



32/94

WORKING CAPITAL

METHODS

TYPES OF ORKING CAPITAL

F!om the %oint of vie$ of time# the te!m $o!kin& ca%ital can be divided into

t$o cate&o!ies

1. PERMANENT ORKING CAPITAL

It is also !efe!s to the ha!d co!e $o!kin& ca%ital it is the minimum level of

investment in the cu!!ent assets that is ca!!ied b" the business at all times to ca!!ies

ou! minimum level of its activities

2. TEMPORARY ORKING CAPITAL

It !efe!s to the %a!t of total $o!kin& ca%ital $hich is !e(ui!ed b" a business

ove! and about %e!manent $o!kin& ca%ital It is also called va!iable $o!kin& ca%ital

=ince the volume of the tem%o!a!" $o!kin& ca%ital kee%s on fluctuatin& f!om time to

time acco!din& to the business activities it ma" be financed f!om sho!t te!m !esou!ces

PERMANENT ORKING CAPITAL CAN BE FURTHER DIVIDED INTO

TO TYPES

8 Re&ula! Wo!kin& Ca%ital

5 Rese!ve Wo!kin& Ca%ital

1. REGULAR ORKING CAPITAL

It is the minimum amount of li(uid ca%ital needed to kee% u% the ci!culation of

the ca%ital f!om cash to invento!ies to !eceivables and a&ain to cash

2. RESERVE ORKING CAPITAL

It is the e0cess ove! the needs o! !e&ula! $o!kin& ca%ital that should be ke%t in

!ese!ve fo! contin&encies that ma" a!ise at an" time these contin&encies include !isin&

%!ices# business de%!ession# st!ikes and s%ecial o%e!ations such as e0%e!iments $ith

ne$ %!oducts



33/94

WORKING CAPITAL

COMPOSITION OF ORKING CAPITAL

1.C+( A,,+,

a Invento!ies Ra$ *ate!ialsWo!k in %!o&!ess

Finished &oods

=to!es and s%a!es

*iscellaneous Goods

b Receivables T!ade debto!s

Loans and advances

Othe! debto! balances

c *a!ketable secu!ities Govt secu!ities

=emi)Gove!nment secu!ities

=ha!es# >ebentu!e# etc#

d Cash and bank balance Cash in 'and

Cash At ,ank

Cash in T!ansit

5C+( L'


34/94

WORKING CAPITAL

SOURCES OF ORKING CAPITAL

8 =ale of sha!es 8 >e%!eciation funds 8 T!ade c!edit

5 =ale of >ebentu!es 5 P!ovision of Ta0ation 5 C!edit %a%e!s

9 =ale of idle fi0ed assets 9 Acc!ued 0%enses 9 ,ank c!edit

? Lon&)te!m loans ? Public >e%osits

@ Custome!s c!edit

Loans f!om di!ecto!s


35/94

WORKING CAPITAL

; G!o$th and e0%ansion

86 Level of ta0es

88 >ividend %olic"

85 P!ice level chan&es

89 O%e!atin& efficienc"

1. PRODUCTION POLICY:

The %!oduction schedule ie# the %lan fo! %!oduction# has &!eat influence on

the level of the invento!ies In some cases !a$ mate!ials can be %!oduced onl" in a

%a!ticula! season and have to be stocked fo! the %!oduction of the $hole "ea! In man"

othe!s the %!oduction c"cle is limited to a %a!t of the "ea! and !a$ mate!ials have to

be accumulated th!ou&hout the "ea! Thus# need fo! $o!kin& ca%ital $ill va!"

acco!din& to the %!oduction %lans

2. NATURE OF THE BUSINESS

The si2e of business also has an im%o!tant im%act on its $o!kin& ca%ital needs

=i2e ma" be measu!ed in te!ms of the scale of o%e!ations A fi!m $ith la!&e scale of

o%e!ation $ill need $o!kin& ca%ital than small te!m The $o!kin& ca%ital

!e(ui!ements of a fi!m a!e basicall" influenced b" the natu!e of the business t!adin&

and financial fi!m has a ve!" less investment in fi0ed assets# but !e(ui!e a la!&e sum of

mone" to be invested in $o!kin& ca%ital

3. CREDIT POLICY

A com%an"# $hich allo$s libe!al c!edit to its custome!s# ma" have hi&he!

sales but conse(uentl" $ill have la!&e amount of funds tied u% in sund!" debto!s

C!edit te!ms# >ebt collection s"stem also influences the level of $o!kin& ca%ital

=. INVENTORY POLICY

La!&e amount of funds is no!mall" locked u% in invento!" An efficient fi!m

ma" stock !a$ mate!ial fo! a smalle! %e!iod and ma" the!efo!e !e(ui!e lesse! amount

of $o!kin& ca%ital



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WORKING CAPITAL

>. ABNORMAL FACTORS

Abno!mal facto!s like st!ikes# lockouts also !e(ui!e additional $o!kin& ca%italRecessiona!" conditions necessitate a hi&he! amount of stock of finished &oods

. MARKET CONDITIONS

*a!ket conditions like com%etition la!&e invento!" a!e essential as delive!"

has to be off the self o! c!edit has to be e0tended on libe!al te!ms $hen ma!ket

com%etition is fie!ce

@. CONDITIONS OF SUPPLY

If %!om%t and ade(uate su%%l" of !a$ mate!ials !e(ui!es small investment in

invento!" If su%%l" is scant# seasonal canali2ed# it is essential to kee% lon&e! stocks

inc!easin& $o!kin& ca%ital !e(ui!ements

. BUSINESS CYCLE

,usiness fluctuations lead to c"clical and seasonal chan&es in %!oduction#

sales and effect the $o!kin& ca%ital !e(ui!ements

. GROTH AND EXPANSION

The $o!kin& ca%ital needs of fi!m inc!eases in &!o$th in te!ms sales of fi0ed

assets If is difficult to %!ecisel" dete!mine the !elationshi% bet$een volume of sales

and the $o!kin& ca%ital needs The c!itical fact ho$eve! that is the need fo! inc!eased

$o!kin& ca%ital funds does not fallo$ &!o$th in business activities but %!ecedes it

1. LEVEL OF TAXES

Ta0ation is a sho!t te!m liabilit" %a"able in cash Advance %a"ment of cash

ma" have to be %aid on the basis of antici%ated %!ofits Ta0 is fi!st a%%!o%!iation out

of %!ofits 'i&he! the ta0# &!eate! is the stain on the $o!kin& ca%ital of the com%an"

Wo!kin& ca%ital va!ies $ith ta0 !ate and advanced ta0 %!ovisions

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WORKING CAPITAL

11. DIVIDEND POLICY

Pa"ment of dividend utili2es cash $hile !etainin& %!ofits acts as a sou!ce of

$o!kin& ca%ital

12. PRICE LEVEL CHANGES

Inflationa!" t!ends in the econom" necessitate mo!e $o!kin& ca%ital maintain

the same level of activit"

13. OPERATING EFFICIENCY

The o%e!atin& efficienc" of the fi!m !elates to the o%timum utili2ation of

!esou!ces at minimum costs The fi!m $ill be effectivel" cont!ibutin& in kee%in& the

$o!kin& ca%ital investment at a lo$e! level if it is efficient to cont!ollin& o%e!atin&

costs and utili2in& cu!!ent assets The use of $o!kin& ca%ital is im%!oved and %ace of

a cash conve!sion c"cle is accele!ated $ith o%e!atin& efficienc"

OTHERS

ORKING CAPITAL CYCLE THE OPERATING CYCLE)

The $o!kin& ca%ital c"cle !efe!s to the len&th of time bet$een the fi!m/s

%a"in& cash fo! mate!ials# etc# ente!in& in to the %!oduction %!ocessE stock and the

inflo$ of cash f!om debto!s =u%%ose a com%an" has a ce!tain amount of cash it $ill

need !a$ mate!ials =ome !a$ mate!ials $ill be available on c!edit but# cash $ill be

%aid out fo! the othe! %a!t immediatel" Then it has to %a" labou! cost and incu!s

facto!" ove!heads These th!ee combined to&ethe! $ill constitute $o!k)in)%!o&!ess

Afte! the %!oduction c"cle is com%lete# $o!k)in)%!o&!ess $ill &et conve!ted into

sund!" debto!s =und!" debto!s $ill be !eali2ed in cash afte! the e0%i!" of c!edit

%e!iod this cash can a&ain be used fo! financin& of !a$ mate!ials# $o!k)in)%!o&!ess#

etc thus the!e is a com%lete c"cle f!om cash to cash $he!e in cash &ets conve!ted into

!a$ mate!ials# $o!k)in)%!o&!ess# finished &oods# debto!s and finall" into cash a&ain

=ho!t te!m funds a!e !e(ui!ed to meet the !e(ui!ements of funds du!in& this %e!iod

This time %e!iod is de%endent u%on the len&th of time $ithin $hich the o!i&inal cash

&ets conve!ted into cash a&ain This c"cle is also kno$n as o%e!atin& c"cle o! cash

c"cle



38/94


39/94

WORKING CAPITAL

conve!sion sales

conve!sion of account !eceivable into cash

COMPONENTS OF ORKING CAPITAL

Wo!kin& Ca%ital mana&ement involves diffe!ent com%onents such as

8 *ana&ement of cash

5 *ana&ement of Invento!"

9 *ana&ement of Receivables

1. MANAGEMENT OF CASH

Cash is the im%o!tant cu!!ent asset fo! the o%e!ation of the business Cash is

the basic in%ut needed to kee% the business !unnin& on continuous basis it is also the

ultimate out%ut e0%ected to be !eali2ed b" sellin& the se!vices of %!oduct

manufactu!es b" the fi!m The fi!m should kee% sufficient cash# neithe! mo!e no! less

Cash sho!ta&e $ill dis!u%t the fi!m/s manufactu!in& o%e!ations $hile e0cessive cash

$ill sim%l" !emain idle# $ithout cont!ibutin& an"thin& to$a!ds the fi!m/s %!ofitabilit"

Thus# ma4o! functions of the financial mana&e! to maintain a sound cash %osition

Cash is the mone"# $hich a fi!m can disbu!se immediatel" $ithout an"

!est!iction The te!m cash includes coins# cu!!enc" and che(ues held b" the fi!m# and

balance in its bank accounts =ometimes nea! cash items# such as ma!ketable

secu!ities o! bank times de%osits# a!e also includes in cash The basic cha!acte!istic of

nea! cash assets is that the" can !eadil" be conve!ted to cash Gene!all" $hen a fi!m

has e0cess of nea! cash# it invests it in ma!ketable secu!ities This kind of investment

cont!ibutes some %!ofit to the fi!m

A. FACETS OF CASH MANAGEMENT

Cash mana&ement is conce!ned $ith the mana&in& of

8 Cash flo$s into and out of the fi!m

5 Cash flo$s $ithin the fi!m and

9 Cash balance held b" the fi!m a %oints of time b" financin&

deficit o! investin& su!%lus cash It can be !e%!esented b" a cash mana&ement c"cle assho$in& fi&8sales &ene!ates cash# $hich has to be disbu!sed out The su!%lus cash



40/94

WORKING CAPITAL

has to be invested $hile deficit has to be bo!!o$ed Cash mana&ement seeks to

accom%lish this c"cle at a minimum cost At the same time# it also seeks to achieve

li(uidit" and cont!ol

Cash mana&ement assumes mo!e im%o!tance than othe! cu!!ent assets because

it is the most si&nificant and the least %!oductive asset that a fi!m holds It is a

si&nificant because it is used to %a" the fi!m/s obli&ations 'o$eve!# cash is

un%!oductive Dnlike fi0ed assets o! invento!ies# it does not %!oduce &oods fo! sales

B. CASH PLANNING

Cash inflo$s and outflo$s should be %lanned to %!o4ect cash su!%lus o! deficit

fo! each %e!iod of the %lannin& %e!iod Cash bud&et should be %!e%a!ed fo! this

%u!%ose

C. MANAGING THE CASH FLOS

The flo$ of cash should be %!o%e!l" mana&ed The cash should be accele!ated

$hile# as fa! as %ossible# the cash outflo$s should be decele!ated

D. OPTIMUM CASH LEVEL

The fi!m should decide about the a%%!o%!iate level of cash balances The cost of

e0cess cash and dan&e! of deficienc" should be matched to dete!mine the o%timum

level of cash balances

E. INVESTING SURPLUS CASH

The su!%lus balance should be %!o%e!l" invested to ea!n %!ofits The fi!m should

decide about the division of cash balances bet$een alte!native sho!t)te!m investment

o%%o!tunities such as bank de%osits# ma!ketable secu!ities# o! inte! co!%o!ation

lendin&

The ideal cash mana&ement s"stem $ill de%ends on the fi!m/s %!oducts#

o!&ani2ation st!uctu!e# com%etition# cultu!e and o%tion available The task is com%le0#

and decisions taken can affect im%o!tant a!eas of the fi!m Fo! e0am%le# to im%!ove

collection if the c!edit %e!iod is !educed# it ma" affect sales 'o$eve!# in ce!tain

cases# even $ithout fundamental chan&es# it %ossible to si&nificantl" !educe cost of

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WORKING CAPITAL

cash mana&ement s"stem b" choosin& a !i&ht bank and cont!ollin& the collections

%!o%e!l"

F. MOTIVES FOR HOLDING CASH

The fi!m/s needs fo! cash ma" be att!ibuted to the follo$in& needs

i T!ansaction motive

ii P!ecautiona!" motive

iii =%eculation motive

iv T!anslation motive

I. TRANSACTION MOTIVE

The t!ansaction motive !e(ui!es a fi!m to hold cash to conduct its business in

the o!dina!" cost The fi!m needs cash %!ima!il" to make %a"ments fo! %u!chases#

$a&es and sala!ies# othe! o%e!atin& e0%enses# ta0es# dividends etc the need to hold

cash $ould not a!ise if the!e $e!e %e!fect s"nch!oni2ation bet$een cash !ecei%ts and

cash %a"ments# ie# enou&h cash is !eceived $hen the %a"ment has to be made ,ut

cash !ecei%ts and %a"ments a!e not %e!fectl" s"nch!oni2ed Fo! those %e!iods# $hen

cash %a"ments e0ceed cash !ecei%ts# the fi!m should maintain some cash balance to be

able to make !e(ui!ed %a"ments Fo! t!ansaction %u!%ose# a fi!m ma" invest its cash in

ma!ketable secu!ities usuall" the fi!m $ill %u!chase secu!ities $hose matu!it"

co!!es%onds $ith some antici%ated %a"ments

H. PRECAUTIONARY MOTIVE

Afi!m also kee%s cash balances to meet une0%ected cash needs a!isin& out of

une0%ected contin&encies such as floods# st!ikes# %!esentment of bills fo! %a"ment

ea!lie! than e0%ected date# sha!% inc!ease in !a$ mate!ials %!ice etc# The mo!e is the

%ossibilit" of such contin&encies# the mo!e is the amount of cash ke%t b" the fi!m fo!

meetin& them

I. SPECULATIVE MOTIVE

A fi!m also kee%s cash balance to take advanta&e of une0%ected o%%o!tunities

t"%icall" outside the no!mal cou!se of business# such motive is the!efo!e a %u!el"

s%eculative fo! e0am%le a fi!m ma" like to take advanta&e of an o%%o!tunit" to



42/94

WORKING CAPITAL

%u!chase !a$ mate!ial at !educed %!ices in antici%ation of decline %!ices# simila!l"# it

ma" like to kee% some c ash balance to make %!ofit b" bu"in& secu!ities at times $hen

thei! %!ices fall due to ti&ht mone" conditions etc#

". CASH PLANNING

Cash %lannin& is a techni(ue to %lan and cont!ol the use of cash It %!otects the

financial condition of the fi!m b" develo%in& a %!o4ected cash statement f!om a

fo!ecast of e0%ected cash inflo$s and outflo$s fo! a &iven %e!iod The fo!ecast ma"

be used on the %!esent o%e!ations o! antici%ated futu!e o%e!ations Cash %lans a!e ve!"

c!ucial in develo%in& the ove!all o%e!atin& %lans of the fi!m

K. CASH FORECASTING AND BUDGETING

Cash bud&et is the most si&nificant device to %lan fo! and cont!ol cash !ecei%ts

and %a"ments A cash bud&et is a summa!" of the fi!m/s e0%ected cash inflo$s ove! a

%!o4ected %e!iod It &ives info!mation on the timin& and ma&nitude of e0%ected cash

flo$s and cash balances ove! the %!o4ected %e!iod This info!mation hel%s the

financial mana&e! to dete!mine the futu!e cash needs of the fi!m

The time ho!i2on of a cash bud&et ma" diffe! f!om fi!m to fi!m A fi!m $hose

business is affected b" seasonal va!iations ma" %!e%a!e monthl" cash bud&ets >ail"

o! $eekl" bud&ets should be %!e%a!ed fo! dete!mine cash !e(ui!ements if cash flo$s

e0t!eme fluctuations Cash bud&ets fo! a lon&e! inte!val ma" be %!e%a!ed if cash flo$s

a!e !elativel" stable

2. MANAGEMENT OF INVENTORY

The %!ecedin& t$o cha%te!/s basic st!ate&ies and conside!ation in mana&in&cu!!ent assets namel"# cash and !eceivables a!e stocks of %!oduct a com%an" is

manufactu!in& fo! sale and com%onents that make u% a %!oduct Invento!ies like

!eceivables a!e also a si&nificant %o!tion of most fi!ms/ assets and acco!din&l" !e(ui!e

substantial investment To kee% these investments f!om becomin& unnecessa!il" la!&e#

invento!ies must be mana&ed efficientl" The va!ious fo!ms in $hich invento!ies e0ist

in a manufactu!in& com%an" a!e



43/94

WORKING CAPITAL

') R'6 M'+'8,: Ra$ mate!ials a!e those basic in%uts that a!e

conve!ted into finished %!oducts th!ou&h the manufactu!in& %!ocess Ra$

mate!ial invento!ies a!e those units# $hich have been %u!chased and sto!ed fo!

futu!e %!oductions


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WORKING CAPITAL

2B) INVENTORY MANAGEMENT TECHNI$UES

In mana&in& invento!ies the fi!m should dete!mine the o%timum level of

invento!" fficientl" cont!olled invento!ies make the fi!m fle0ible Inefficientinvento!" cont!ol !esults in unbalanced invento!" and infle0ibilit"# the fi!m ma" be

sometimes out of stock and sometimes ma" %ile u% unnecessa!" stocks This inc!eases

the level of investment and makes the fi!m un%!ofitable

The fi!st (uestion# ho$ much to o!de!# !elated in the %!oblem of dete!minin&

economic o!de! (uantit" OM and is ans$e!ed $ith an anal"sis of costs of

maintainin& ce!tain level of invento!ies The second (uestion $hen to o!de! a!ises

because of unce!taint" and is a %!oblem of dete!minin& the !e)o!de! %oint

3. MANAGEMENT OF RECEIVABLES

Accounts !eceivable o! t!ade c!edit is the most %!ominent fo!ce of the mode!n

business It is conside!ed as an essential ma!ketable tool# actin& as a b!id&e fo! the

movement of &oods th!ou&h %!oduction and dist!ibution sta&es to custome!s finall" It

also involved an element of !isk as the cash %a"ment has &et to be !eceived# hence

the" has to be ca!efull" anal"2ed

Receivables constitute a substantial %o!tion of cu!!ent assets of seve!al fi!ms

The" fo!m about 8E9 %a!t of cu!!ent assets in India As substantial amounts a!e tied u%

in t!ade debto!s# it needs ca!eful anal"sis and %!o%e! mana&ement# fo! %!o%e!

mana&ement of !eceivable a conce!n must ado%t an o%timum c!edit %olic"

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WORKING CAPITAL

SOURCES OF DATA

The stud" !e(ui!ed both %!ima!" and seconda!" data

A. P5' %''

P!ima!" data has been collected b" inte!vie$in& ce!tain e0ecutives $ho $e!e

chosen on the basis of thei! in de%th kno$led&e and e0%e!ience in the

com%an" The inte!vie$s in natu!e a!e unde! to &ain as much info!mation as

%ossible

B. S+/(%' %''

=econda!" data $as obtained f!om the %ast !eco!ds file and !e%o!ts of the

o!&ani2ation also f!om othe! financial statements



46/94

WORKING CAPITAL

REVIE OF LITERATURE

ORKING CAPITAL MANAGEMENT

Wo!kin& ca%ital is that amount of funds# $hich is !e(ui!ed to ca!!" out the

da")to)da" o%e!ations of an ente!%!ise It ma" also !e&a!d as that %osition of an

ente!%!ise total ca%ital# $hich is em%lo"ed in its sho!t)te!m o%e!ations This o%e!ation

consists of %!ima!il" such items such as !a$ mate!ials# semi)finished &oods# finished

&oods# sund!" debto!s# sho!t)te!m investments etc Thus $o!kin& ca%ital also !efe!s to

all the sho!t)te!m assets kno$n cu!!ent assets used in da")to)da" o%e!ations of an

o!&ani2ation

DEFINITION OF ORKING CAPITAL

+Wo!kin& Ca%ital sometimes called as Net Wo!kin& Ca%ital is !e%!esented b"

the e0cess of cu!!ent assets ove! the cu!!ent liabilities and identified the !elativel"

li(uid %o!tion to total ente!%!ise ca%ital $hich constitutes a ma!&in of buffe! fo!

matu!in& obli&ations $ithin the o!dina!" o%e!atin& c"cle of the business-

.Wo!kin& Ca%ital is a e0cess of cu!!ent assets ove! cu!!ent liabilities/

CONCEPT OF ORKIGN CAPITAL

The!e a!e t$o conce%ts of $o!kin& ca%ital such as

1. G,, C(/+4

2. N+ C(/+4

GROSS ORKING CAPITAL: GC)

The &!oss $o!kin& ca%ital sim%l" called as $o!kin& ca%ital# !efe!s to the fi!m/s

investment in cu!!ent assets Cu!!ent assets a!e the assets $hich can be conve!ted into

cash $ithin an accountin& "ea! o! o%e!atin& c"cle and include cash# sho!t)te!m

secu!ities# debto!s# bills !eceivables# invento!ies and %!e%aid e0%enses

G,, ;(* C'4'8 T'8 0 C+( A,,+,

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WORKING CAPITAL

NET ORKING CAPITAL7 NC)

The Te!m Net Wo!kin& Ca%ital# can be defined in t$o $a"s

+The 0cess of Cu!!ent assets ove! Cu!!ent liabilities+

+That %o!tion of a fi!m/s cu!!ent assets $hich is financed $ith lon& te!m funds

N+ ;(* C'4'8 C+( A,,+, - C+( L'


48/94

WORKING CAPITAL

=imila!l"# if suddenl"# some su!%lus funds a!ise the" should not be allo$ed to

!emain idle# but should be invested in sho!t te!m secu!ities Thus# the financial

mana&e! should have kno$led&e of the sou!ces of $o!kin& ca%ital funds as $ell as

investment avenues $he!e idle funds ma" be tem%o!a!il" invested

Net $o!kin& ca%ital# bein& the diffe!ence bet$een cu!!ent assets and cu!!ent

liabilities# is a (ualit" conce%t it

Indicate the li(uidit" %osition of the fi!m and

=u&&ests e0tent to $hich $o!kin& ca%ital needs ma" be financed b"

%e!manent sou!ces of funds

Cu!!ent assets should be sufficientl" in e0cess of cu!!ent liabilities to

constitute a ma!&in o! buffe! fo! matu!in& obli&ations $ithin the o!dina!" o%e!ation

c"cle of a business In o!de! to %!otect thei! inte!ests# sho!t te!m c!edito!s al$a"s like

a com%an" to maintain cu!!ent assets at a hi&he! level than cu!!ent liabilities

It is conventional !ule to maintain the level of cu!!ent assets t$ice of the level

of cu!!ent liabilities 'o$eve!# the (ualit" of the cu!!ent assets should be conside!ed

in dete!minin& the level of cu!!ent assets vis))vis cu!!ent liabilities

We kno$ that fi!m aim at ma0imi2in& the $ealth of the sha!e holde!/s $ealth#

a fi!m should ea!n sufficient !etu!ns f!om its o%e!ations ea!nin& a stead" amount of

%!ofit !e(ui!es successful sales activities The fi!m has to invest enou&h funds in

cu!!ent assets fo! the success of sales activit" Cu!!ent assets a!e needed because

sales do not conve!t into cash instantaneousl" The!e is al$a"s an o%e!atin& c"cle

involved in conve!sion of sales into cash

ORKING CAPITAL GAP: CG)

The Wo!kin& ca%ital shall be met f!om the NWC and f!om cu!!ent liabilities

and still the!e shall be some &a% left to meet the total !e(ui!ement

'ence# WCG is the &a% bet$een the total $o!kin& ca%ital !e(ui!ed and total

funds b!ou&ht on lon& te!m basis and ma!ket bo!!o$in& liabilities e0cludin& sho!t

te!m finance available f!om banks E financial institutions

WCG S TCA 1 CL 0cl =T,,

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WORKING CAPITAL

These conce%ts can be bette! unde!stood f!om the follo$in& dia&!ammatic

!e%!esentation

L'


50/94

WORKING CAPITAL

DIAGRAM

VCR INSTITUTE OF MANAGEMENT STUDIES Page !&

CASH

Raw Materials

Work-in-rogress

Finished

!oods

Sales

Debtors

Operating Cycle of a manufacturingFirm

CASH

"nventor#Receivable

s

Operating Cycle of a Non

manufacturing Firm

DebtorsCash

Operating Cycle of Service and

Finance Firm


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WORKING CAPITAL

SPECIMENT OF ORKING CAPITAL CHANGES STATEMENT

S'+5+( 0 S/7+%8+ 0 C7'(*+, ( ;(* C'4'8

P'/8', P+&,+'

C+(+'

E00+/ ( 6;(*

/'4'8

I(/+',+ %+/+',+

C+( A,,+,:

Cash in hand

Cash at bank

=und!" debto!s

Tem%o!a!" Investments

=tocksEInvestmentsP!e%aid 0%enses

Acc!ued Incomes

T'8 C+( A,,+,

C+( L'


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WORKING CAPITAL

Fo! calculation of net o%e!atin& c"cle# va!ious conve!sion %e!iods a!e calculated usin&

the follo$in& fo!mulas7

8 Ra$ mate!ial conve!sion %e!iod

A&+'*+ '6 5'+'8 (&+(

RMPC ------------------------------------------------

A&+'*+ '6 5'+'8 /(,5+% 4+ %'

5 Wo!k)in)%!o&!ess conve!sion %e!iod

A&+'*+ 6;-(-4*+,,

IPCP ----------------------------------------------------

A&+'*+ /, 0 4%/( 4+ %'

9 Finished &ood conve!sion %e!iod

A&+'*+ 0(,7+% *%,

FGCP ----------------------------------------------------------

A&+'*+ /, 0 4%/( 0 *%, 4+ %'

? >ebto!s conve!sion %e!iod

A&+'*+ %+


53/94

WORKING CAPITAL

,usinesses $ith a lot of cash sales and fe$ c!edit sales should have minimal

t!ade debto!s =u%e!ma!kets a!e &ood e0am%les of such businesses

,usinesses that e0ist to t!ade in com%leted %!oducts $ill onl" have finished

&oods in stock Com%a!e this $ith manufactu!e!s $ho $ill also have to

maintain stocks of !a$ mate!ials and $o!k)in)%!o&!ess

=ome finished &oods# notabl" foodstuffs# have to be sold $ithin a limited

%e!iod because of thei! %e!ishable natu!e

La!&e! com%anies ma" be able to use thei! ba!&ainin& st!en&th as custome!s to

obtain mo!e favo!able# e0tended c!edit te!ms f!om su%%lie!s

=ome businesses $ill !eceive thei! monies at ce!tain times of the "ea!#

althou&h the" ma" incu! e0%enses th!ou&hout the "ea! at a fai!l" consistent

level This is often kno$n as +seasonalit"- of cash flo$ Wo!kin& ca%ital

needs also fluctuate du!in& the "ea! The amount of funds tied u% in $o!kin&

ca%ital $ould not t"%icall" be a constant fi&u!e th!ou&hout the "ea! Onl" in

the most unusual of businesses $ould the!e be a constant need fo! $o!kin&

ca%ital fundin& Fo! most businesses the!e $ould be $eekl" fluctuations

*an" businesses o%e!ate in indust!ies that have seasonal chan&es in demand

This means that sales# stocks# debto!s# etc $ould be at hi&he! levels at some

%!edictable times of the "ea! than at othe!s

In %!inci%le# the $o!kin& ca%ital need can be se%a!ated into t$o %a!ts7

Pe!manent $o!kin& ca%ital

Ha!iable $o!kin& ca%ital

PERMANENT AND VARIABLE ORKING CAPITAL

The!e is al$a"s a minimum level of cu!!ent asse!ts $hich is continuousl"

!e(ui!ed b" the fi!m to ca!!" out its business o%e!ations This minimum level of

cu!!ent assets is !efe!!ed to as %e!manent o! fi0ed $o!kin& ca%ital

The e0t!a $o!kin& ca%ital# needed to su%%o!t the chan&in& %!oduction and

sales activities is called fluctuatin o! va!iable o! tem%o!a!" $o!kin& ca%ital ,oth

kinds of $o!kin& ca%ital %e!manent and tem%o!a!" a!e necessa!" to facilitate

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WORKING CAPITAL

%!oduction and sale th!ou&h o%e!atin& c"cle# but tem%o!a!" $o!kin& ca%ital is c!eated

b" the fi!m to meet its li(uidit" !e(ui!ements that $ill last onl" tem%o!a!il"

D'*'5,

F*-1')

F*-2')

In the t$o fi&u!es diffe!ences bet$een %e!manent and tem%o!a!" $o!kin& ca%ital It

is sho$n that %e!manent $o!kin& ca%ital is stable ove! time# $hile tem%o!a!" $o!kin&

ca%ital is fluctuatin& sometimes inc!easin& and sometimes dec!easin&

Fi&)8bFo! a &!o$in& fi!m the diffe!ence bet$een %e!manent and tem%o!a!" $o!kin&

ca%ital can be de%icted th!ou&h fi&)8b

ADE$UACY OF ORKING CAPITAL

The fi!m should maintain a sound $o!kin& ca%ital %osition It should have

ade(uate $o!kin& ca%ital to !un its business o%e!ations ,oth e0cessive as $ell as

inade(uate $o!kin& ca%ital %ositions a!e dan&e!ous f!om the fi!m/s %oint of vie$

0cessive $o!kin& ca%ital means idle funds $hich ea!n no %!ofits fo! the fi!m


er$anent

%e$porar#

or

Fl&ct&ating

%i$e

er$anent

%e$porar# or

Fl&ct&ating

%i$e


55/94

WORKING CAPITAL

Paucit" $o!kin& ca%ital not onl" im%ai!s fi!m/s %!ofitabilit" but also !esults in

%!oduction inte!!u%tions and inefficiencies

THE DANGERS OF EXCESSIVE ORKING CAPITAL

It !esults in unnecessa!" accumulation of invento!ies Thus# chances of

invento!" mishandlin $aste# theft and losses inc!ease

It is an indication of defective c!edit %olic" and slack collection %e!iod

Conse(uentl"# hi&he! incidence of had debts !esults# $hich adve!sel" affects

%!ofits

0cessive $o!kin& ca%ital makes mana&ement com %lacement# $hich

de&ene!ates into mana&e!ial inefficienc"

Tendencies of accumulatin& invento!ies to make s%eculative %!ofits &!o$

This ma" tend to make dividend %olic" libe!al and difficult to co%e $ithin

futu!e $hen the fi!m is unable to make s%eculative %!ofits

INADE$UATE ORKING CAPITAL IS ALSO BAD AND HAS THE

FOLLOING DANGERS

It sta&nates &!o$th It becomes difficult fo! the fi!m to unde!take %!ofitable%!o4ects fo! the non)availabilit" of $o!kin& ca%ital funds

It becomes difficult to im%lement o%e!atin& %lans and achieve the fi!m/s

ta!&et

O%e!atin& inefficiencies c!e%t in $hen it becomes difficult even to meet the

da" to da" commitments

Fi0ed assets a!e not utili2ed fo! the lack of $o!kin& ca%ital funds Thus the

fi!m/s %!ofitabilit" $ould dete!io!ate

Paucit" of $o!kin& ca%ital funds !ende!s the fi!m unable to avail att!active

c!edit o%%o!tunities etc#

The fi!m loses its !e%utation $hen it is not in a %osition to honou! its sho!t

te!m obli&ations As a !esult the fi!m faces ti&ht c!edit te!ms

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WORKING CAPITAL

ORKING CAPITAL INVESTMENT POLICIES

') C(,+&'&+ A44'/77 Dnde! this %olic" the fi!m holds !elativel" la!&e

%!o%o!tion of total assets in the fo!m of cu!!ent assets This %olic" lo$e!s e0%ected

%!ofitabilit"# assumin& that cu!!ent liabilities !emain constant This %olic" also

inc!eases the fi!m/s net $o!kin& ca%ital %osition !esultin& in a lo$e! !isk that fi!m $ill

encounte! financial %!oblems


57/94

WORKING CAPITAL

Natu!e and si2e of business

=ales &!o$th

,usiness c"cles

P!oduction %olic"

P!ice level chan&es

O%e!atin& efficienc" and %e!fo!mance

Fi!m/s c!edit %olic"

Availabilit" of c!edit

Invento!" %olic"

Level of ta0es

Abno!mal facto!s

=easonal fluctuations

DIMENSIONS OF ORKING CAPITAL MANAGEMENT

The!e a!e man" as%ects of $o!kin& ca%ital mana&ement# $hich make it an

im%o!tant function of financial mana&ement

Wo!kin& ca%ital mana&ement !e(ui!es much of the financial mana&e!/s time

Wo!kin& ca%ital !e%!esents a la!&e %o!tion of the total investment in the assets

Wo!kin& ca%ital mana&ement has a &!eate! si&nificance fo! the smalle! fi!ms

The need fo! $o!kin& ca%ital is di!ectl" !elated to sales &!o$th

SOURCE OF ORKING CAPITAL

The t"%ical sou!ces of $o!kin& ca%ital a!e summa!i2ed as belo$

F(%, 05 4+'(, '%,+% (+ (/5+).

S'8+, 0 (( /+( ',,+,

8 =ales of lon& te!m investment sha!es# debentu!es etc#

5 =ale of tan&ible fi0ed assets land# buildin&s etc#

VCR INSTITUTE OF MANAGEMENT STUDIES Page !#

Factors

affectin

g

Workin

g

Capital


58/94

WORKING CAPITAL

9 =ale of intan&ible fi0ed assets &ood$ill# %atents etc#

LONG TERM FINANCING

8 Lon& te!m bo!!o$in&s institutional loans# debentu!es# bonds etc#

5 Issuances of e(uit" and %!efe!ence sha!es

SHORT TERM FINANCING1

=uch as bank bo!!o$in&s

INVENTORY MANAGEMENT

Invento!ies constitute the most si&nificant %a!t of cu!!ent assets of ma4o!it"

of com%anies in India On an ave!a&e# invento!ies a!e a%%!o0imatel" 6 %e!cent of

cu!!ent assets in %ublic limited com%anies in India ,ecause of the la!&e si2e of the

invento!ies maintained b" fi!ms# a conside!able amount of funds is !e(ui!ed to be

committed to them It is# the!efo!e# absolutel" im%e!ative to mana&e invento!ies

efficientl" and effectivel" in o!de! to avoid unnecessa!" investment A fi!m ne&lectin&

the mana&ement of invento!ies $ill be 4eo%a!d" disin& its lon& !un %!ofitabilit" and

ma" fail ultimate It is %ossible fo! a com%an" to !educe its levels of invento!ies to a

conside!able de&!ee# e 86to56 %e!cent# $ithout an" adve!se effect on %!oductionand sales# b" usin& sim%le invento!" %lannin& and cont!ol techni(ues The !eduction

in e0cessive ca!!ies a favo!able im%act on a com%an" %!ofitabilit"

NATURE OF INVENTORIES

Invento!ies a!e stock of the %!oduct a com%an" is manufactu!in& fo! sales and

com%onent that make u% the %!oduct The va!ious fo!ms in $hich invento!ies e0istin&

a manufactu!in& com%an" a!e7 !a$ mate!ial# $o!k in %!ocess and finished &oods

1. RA MATERIAL

A!e those basic in%ut that a!e conve!ted in to finished %!oduct th!ou&h the

manufactu!in& %!ocess Ra$ mate!ial invento!ies a!e those units $hich have been

%u!chased and sto!ed fo! futu!e %!oduction

2.ORK IN PROGRESS

Invento!ies a!e semi)manufactu!ed %!oduct The" !e%!esent %!oduct that the

need mo!e $o!k befo!e the" become finished %!oduct fo! sale

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WORKING CAPITAL

3. FINISHED GOODS

Invento!ies a!e those com%letel" manufactu!ed %!oduct $hich a!e !ead" fo!

sale =tock of !a$ mate!ial and $o!k in %!ocess facilitate %!oduction# $hile stock of

finished &oods is !e(ui!ed fo! smooth ma!ketin& o%e!ation Thus# invento!ies se!ve as

a link bet$een the %!oduct and consum%tion of &oods

NEED TO HOLD INVENTORIES

The!e a!e th!ee &ene!al motives fo! holdin& invento!ies

8 T!ansaction motive em%hasi2ed the need to maintain invento!ies to facilitate

smooth %!oduction and sales o%e!ation

5 P!ecautiona!" motive necessitates holdin& of invento!ies to &ua!d a&ainst the

!isk of un %!edictable chan&e in demand and su%%l" fo!ces and othe! facto!

9 =%eculative motive influences the decision to inc!ease o! !educe invento!"

levels to take advanta&e of %!ices fluctuations

A com%an" should maintain ade(uate stock of mate!ial fo! a continuous

su%%l" to the facto!" fo! an uninte!!u%ted %!oduction A $o!k)in)%!o&!ess invento!"builds u% because of the %!oduction c"cle =tock of finished &oods has to be held

because %!oduction and sales a!e not instantaneous

Failu!e to su%%l" %!oduct to custome!# $hen demanded# $ould means loss of

the fi!m/s sales to com%etito!s The level of finished &oods invento!ies $ould de%end

u%on the co)o!dination bet$een sales and %!oductions as $ell as on %!oduction time

MANAGEMENT OF ACCOUNT RECEIVABLE

T!ade c!edit a!ises $hen a fi!m sells its %!oducts o! se!vice on c!edit does not

!eceive cash immediatel" It is an essential ma!ketin& tool# actin& as a b!id&e fo! the

movement of &oods th!ou&h %!oduction and dist!ibution sta&e to custome! A &!ant

t!ade %!otects its %!oduction of favo!able te!ms T!ade c!edit c!eates !eceivable o!

book debt $hich the fi!m is e0%ected to collect in the nea! futu!e The book debts o!

!eceivable a!isin& out of c!edit has th!ee cha!acte!istics/7

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WORKING CAPITAL

Fi!st# it involves an element of !isk $hich should be ca!efull" anal"2ed Cash

sales a!e totall" !isk less# but not the c!edit sale as the cash %a"ment is "et to be

!eceived

=econd# it is based on economic value To the bu"e!# the economic value in

&oods o! se!vice %asses immediatel" at the time of sales# $hile the selle! e0%ects an

e(uivalent value to be !eceived late! on

Thi!d# it im%lies futu!it" The custome! f!om $hom !eceivable o! book debts

have to be collected in the futu!e a!e called t!ade debto!s o! sim%l" as debto!s and

!e%!esent the fi!m/s claims o! assets

>ebto!s amount to the blockin& of the fi!m/s funds The inte!nal

bet$een the date of sales and date of %a"ment has to be financed out of $o!kin&

ca%ital This necessitates the fi!m to &et funds f!om banks o! othe! sou!ces Thus#

t!ade debto!s !e%!esent investment As substantial amount a!e tied)u% in t!ade debto!s#

it needs ca!efull" anal"sis and %!o%e! mana&ement

USES OF ORKING CAPITAL

The t"%ical uses of $o!kin& ca%ital a!e as follo$s7

Ad4usted net loss f!om o%e!ations

Pu!chase of non)cu!!ent assets

Re%a"ment of lon& te!m debt and sho!t te!m debt

Redem%tion of !edeemable %!efe!ence sha!es

Pa"ment of cash dividend

A $eak li(uidit" %osition %oses a th!eat to solvenc" of the com%an" and

makes it unsound A ne&ative $o!kin& ca%ital means a ne&ative li(uidit"# and ma"

%!ove to be ha!mful fo! the com%an" 0cessive li(uidit" is also bad

Net $o!kin& ca%ital also cove!s the (uestion of 4udicious mi0 of lon& te!m and

sho!t)te!m funds fo! financin& cu!!ent assets Fo! eve!" fi!m# the!e is a minimum

amount of net $o!kin& ca%ital# $hich is %e!manent The!efo!e a %o!tion of the

$o!kin& ca%ital should be financed b" the %e!manent sou!ces of funds such as

o$ne!/s ca%ital# debentu!es# lon&)te!m debt# %!efe!ence ca%ital o! !etained ea!nin&s

*ana&ement must# the!efo!e# decide the e0tent to $hich cu!!ent assets should be

financed $ith e(uit" ca%ital andEo! bo!!o$ed ca%ital

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WORKING CAPITAL

CURRENT RATIOS

The cu!!ent !atio is calculated b" dividin& cu!!ent assets b" cu!!ent

liabilities

Whe!e#

C+( ',,+, include cash and bank balances ma!ketable secu!ities#

debto!s and invento!ies and also %!e%aid e0%enses etc

C+( 8'


62/94


63/94

WORKING CAPITAL

Whe!e#

Gro(( +rof,)S sales 1 Ra$ mate!ial# $!a%%in& and %ackin& mate!ial consumed Q

%u!chase of finished &oods Q manufactu!in& e0%enses

NET PROFIT RATIO

Net %!ofit is obtained $hen o%e!atin& e0%enses# inte!est and ta0es a!e

subt!acted f!om the &!oss %!ofit The net %!ofit ma!&in !atio is measu!ed b" dividin&

%!ofit afte! ta0 b" sales

Whe!e# N+ 40S P,I>T

VCR INSTITUTE OF MANAGEMENT STUDIES Page "3

0et pro,it

0et pro,it Ratio ' .//

Sales


64/94

WORKING CAPITAL

DATA ANALYSIS AND INTERPRETATION

TOOLS FOR ANALYSIS OF ORKING CAPITAL

The (uantum of $o!kin& ca%ital as $ell as its financin& %atte!n is

sub4ect to constant monito!in& and !evie$s b" the financial mana&e! The!e a!e

diffe!ent anal"tical tools $hich can hel% a financial mana&e! in monito!in& in vie$in&

and cont!ollin& the $o!kin& ca%ital The %o%ula!l" used tools a!e7

8 =chedule of chan&es in $o!kin& ca%ital

5 Wo!kin& ca%ital !atios

1.SCHEDULE OF CHANGES IN ORKING CAPITAL

Gene!all" $o!kin& ca%ital !efe!s to the e0cess of cu!!ent assets ove! cu!!ent

liabilities *ana&ement of $o!kin& ca%ital the!efo!e is conce!ned $ith the %!oblems

that a!ise in attem%tin& to mana&e! the cu!!ent assets# the cu!!ent liabilities and the

inte! !elationshi% that e0ists bet$een them It !efe!s to all as%ects of administ!ation of

both cu!!ent assets and cu!!ent liabilities

2. ORKING CAPITAL RATIOS

Anothe! anal"tical tool that can be used fo! anal"ses of $o!kin& ca%ital the

accountin& !atio/s %a!ticula!l" the $o!kin& ca%ital !atio/s =ome of the im%o!tant

$o!kin& ca%ital !atio/s a!e7

Cu!!ent Ratio

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