working capital
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
WORKING CAPITAL MANAGEMENT
Working capital management is concerned with the problems arise in attempting to
manage the current assets, the current liabilities and the inter relationship that exist
between them. The term current assets refers to those assets which in ordinary course of
business can be, or, will be, turned in to cash within one year without undergoing a
diminution in value and without disrupting the operation of the firm. The major current
assets are cash, marketable securities, account receivable and inventory. Current liabilities
are those liabilities which intended at there inception to be paid in ordinary course of
business, within a year, out of the current assets or earnings of the concern. The basic
current liabilities are account payable, bill payable, bank over-draft, and outstanding
expenses. The goal of working capital management is to manage the firm’s current assets
and current liabilities in such way that the satisfactory level of working capital is
mentioned. The current assets should be large enough to cover its current liabilities in
order to ensure a reasonable margin of the safety.
Definition:-1. According to Guttmann & Dougall -
“Excess of current assets over current liabilities.”
2. According to Park & Gladson -
“The excess of current assets of a business (i.e. cash, accounts receivables, inventories)
over current items owned to employees and others (such as salaries & wages payable,
accounts payable, taxes owned to government)”.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 1
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Working capital is regarded as the lifeblood of a business. It’s effective provision can do
much to ensure the success of a business while it’s inefficient management can lead not
only to loss of profits but also to the ultimate downfall of what otherwise might be
considered as a promising concern.
A study of working capital is of major importance to the internal and external analysis
because of its close relationship with the day-to-day operations of a business. As pointed
out by Ralph, Kennedy and Steward Mc Muller, the inadequacy or mismanagement of
working capital is the leading cause of business failures. Working capital is that portion
of the assets of a business that are used in or related to current operations, and is
represented at any time by the operating cycle of such items as against receivables,
inventories of raw materials, stores, work-in-progress, finished goods, merchandise, notes
or bills receivables and cash.
In accounting, Working capital is the difference between the inflow and outflow of funds.
In other words, it is the net cash inflow. It is defined as the excess of current assets over
current liabilities and provisions.
Net Current Assets = Current Assets – Current Liabilities
Working capital represents the total of all current assets. In other words, it is “gross
working capital”.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
It is also known as circulating capital or current capital for current assets that are rotating
in nature. The use of term “circulating capital” instead of “working capital” indicates its
flow is circular in nature.
THEORETICAL BACKGROUND OF WORKING CAPITAL
MANAGEMENT
Funds are needed for short-term purposes for the purchase of raw materials, payment of
wages and other day-to-day expenses, etc. These funds are known as working capital.
Working capital represents the total of all current assets. In other words, it is “gross
working capital”. It is also known as circulating capital or current capital for current
assets that are rotating in nature. The use of term “circulating capital” instead of “working
capital” indicates its flow is circular in nature.
SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT
The working capital is important for several reasons. Like the current assets of a typical
manufacturing firm account for half of its total assets. For a distribution company, they
account even more. Executive levels of current assets can easily result in a firm realizing
the sub-standard return on investment. Working capital management affects the
company’s risk, return, and share price.
However, firms with too few current assets may incur shortages and difficulties in
maintaining smooth operations.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 3
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital:
1. Gross working capital
2. Net working capital
Gross working capital: Simply called as working capital, refers to the investment in
current assets. Current assets are the assets, which can be converted into cash within an
accounting year (or operating cycle) and include cash, short-term securities, debtors, bills
receivables and stock (inventory).
Net working capital: Refers to the difference between current assets and current
liabilities. Current liabilities are those claims from outsiders, which are expected to
mature for payment within an accounting year and include creditors, bills payable and
outsider’s expenses.
PROFITABILITY AND RISK
Under laying the sound working capital management, lays two fundamental decision
issues for the firm. They are for the determination of:
1. The optimum level of investment in current asset.
2. The appropriate mix of short-term and long-term financing used to support this
investment in current assets.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
In turn, these decisions are influenced by the trade-off that must be made between
profitability and risk. Lowering the level of investment in current assets, while still being
able to support sales, would lead to an increase in the firms’ return of total assets. To the
extent that the explicit costs of short-term financing, the greater the proportion of short-
term debt to total debt, the higher is the profitability of the firm.
The working capital is essentially the circulating capital has been admirably summed up
by Brown and Howard, who compare it with a river which is always there but, whose
water level is constantly changing. However some transactions are totally independent of
the circular process, for they have no line with operational flows. Borrowing from one
such source to repay the past loans from another source is one such transactions,
redeeming capital or debentures by a fresh issue of share is another. Working capital is
one segment of the capital structure of the business but constitutes an inter-woven part of
the total integrated business system. Therefore, neither is regarded as an independent
entity nor can the working capital decisions be taken in isolation.
“Float” is the amount of money required to get into business. This is the minimum
amount necessary for maintaining a going concern, which is in a position to serve its
customers. This amount of float in the form of cash, inventory and other current assets is
the minimum cushion needed to support the business. A business needs a working capital
over and above the float. The requirements of a business moreover, are governed by the
rate of its turnover, type of credit, the seasonality of its operations, break even point and
other general considerations.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Apart from these, the management strategies planned extent of growth due to vast
unexplored market etc also largely influence the requirement of working capital.
NEED FOR WORKING CAPITAL
The need for working capital gross or current assets cannot be over emphasized. As
already observed, the objective of financial decision making is to maximize the
shareholders wealth. To achieve this, it is necessary to generate sufficient profit. Earning
a steady amount of profit requires successful sales activities. There is a need for working
capital in the form of current assets to deal with the problem arising out of lack of
immediate realization of cash against goods sold. Therefore sufficient working capital is
necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If
the company has certain amount of cash, it will be required for purchasing the raw
material may be available on credit basis. Then the company has to spend some amount
for labor and factory overhead to convert the raw material in work in progress, and
ultimately finished goods. These finished goods convert in to sales on credit basis in the
form of sundry debtors. Sundry debtors are converting into cash after expiry of credit
period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and
sundry debtors and day to day cash requirements. However some part of current assets
may be financed by the current liabilities also. The amount required to be invested in this
current assets is always higher than the funds available from current liabilities.
This is the precise reason why the needs for working capital arise.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Working capital is needed for the following purposes:
For the purchase of raw material, components and spares.
To pay wages.
To incur day-to-day expenses and overhead costs such as fuel, power and office
expenses, etc.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customers.
To maintain the inventories of raw material, work-in-progress, stores and spares
and finished stock.
OPERATING CYCLE
The duration of time required to complete the following cycle of events in case of a
manufacturing firm is called a operating cycle.
1. Conversion of cash into raw materials.
2. Conversion of raw material into work in progress.
3. Conversion of work in progress into finished goods.
4. Conversion of finished goods into debtors and bills receivable through sales.
5. Conversion of debtors and bills receivable into cash.
It can be expressed in the following way by using symbols:
O=R+W+F+D-C
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 7
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Where, O = Time duration for operating cycle.
R = Raw materials and storage period.
W = Work in process period.
F = Finished goods storage period.
D = Debtors collection period.
C = Creditors period.
The components of operating cycle referred to above can be calculated as follows:
R= Average stock of raw materials and stores
Average raw materials and stores consumption per day
W= Average work in progress inventory
Average cost of production per day
F= Average finished goods inventory
Average costs of goods sold per day
D= Average book debts
Average credit sales per day
C= Average trade creditors
Average credit purchases per day
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Since, the cash inflows and cash outflows do not match, the firm has to necessarily keep
Cash or invest in short-term marketable (liquid) securities so that they will be in a
position to meet the obligations when they become due. Similarly, the firms must have
adequate inventory to guard against the possibility of not being able to meet the demand
for their products. Adequate inventory, therefore, provides a cushion against being out of
stock. If firms have to be competitive, they must sell goods to their customers on credit,
which necessitates the holding of account receivables.
DEBTORS (RECEIVABLES)
CASH FINISHED GOODS
RAW MATERIALS WORK-IN-PROCESS
The firm begins with the purchase of Raw materials, which are paid for after a delay,
which represents the account payable period.
The firm converts the raw materials into finished goods and then sells the same. The time
lag between the purchase of raw materials and the sale of finished goods is the inventory
period. Customers pay their bills sometime after the sales. The period that elapses
between the date of sales and the date collection of receivables is the accounts payable
period (debt period).
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
TYPES OF WORKING CAPITAL
The operating cycle creates the need for current assets (working capital). However the
need does not come to an end after the cycle is completed to explain this continuing need
of current assets a destination should be drawn between permanent and temporary
working capital.
1) Permanent working capital
The need for current assets arises, as already observed, because of the cash cycle. To
carry on business certain minimum level of working capital is necessary on continues and
uninterrupted basis. For all practical purpose, this requirement will have to be met
permanent as with other fixed assets. This requirement refers to as permanent or fixed
working capital.
2) Temporary working capital
Any amount over and above the permanent level of working capital is temporary,
fluctuating or variable, working capital. This portion of the required working capital is
needed to meet fluctuation in demand consequent upon changes in production and sales
as result of seasonal changes.
3) Balance sheet working capital
The balance sheet working capital is one which is calculated from the items appearing in
the balance sheet.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Gross working capital, which is represented by the excess of current
Assets, and net working capital, which is represented by the excess of current assets over
Current liabilities, are examples of the Balance sheet working capital.
4) Cash working capital
Cash working capital is one which is calculated from the items appearing in the profit and
loss account. It shows the real flow of money or value at a particular time and is
considered to be the most realistic approach in working capital management. It is the
basis of the operating cycle concept which has assumed a great important in financial
management in recent years. The reason is that the cash working capital indicates the
adequacy of the cash flow, which is an essential prerequisite of a business.
5) Negative working capital
Negative working capital emerges when current liabilities exceed current assets. Such a
situation is not absolutely theoretical, and occurs when a firm is nearing a crisis of some
magnitude.
SOURCES OF WORKING CAPITAL
Sources of financing of working capital differ as per the classification of working capital
into long-term financing, short-term financing and spontaneous financing.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
LONG-TERM FINANCING:
Loans from financial institutions.
Floating of debentures.
Accepting public deposits.
Issue of shares.
Raising funds by internal financing.
SHORT-TERM FINANCING:
Short-term financing refers to those sources of short-term credit that the firm must
arrange in advance. A few are as follows-
Short-term loans.
Commercial papers.
WORKING CAPITAL INVESTMENT POLICIES
Matching Approach:
When the firm follows the matching approach, the firm’s fixed assets or
permanent assets are financed with long-term funds and as the level of these assets
increases.
The temporary or variable current assets are financed with short-term funds and
as their level increases. Under, matching plan no short-term financing will be used
if the firm needs only current assets.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Conservative Approach:
A firm in practice may adopt a conservative approach in financing its current and
fixed assets. The financing policy of the firm is said to be conservative when it
depends more on the long-term funds for financing needs. Under the conservation
plan, the firm finances its permanent assets and also a part of temporary current
assets, the idle long-term funds can be invested in the tradable securities to
conserve liquidity.
Aggressive Approach:
An aggressive policy is said to be followed by the firm when it uses mere short-
term financing than warranted by the matching plan. In aggressive policies, the
firm finances a part for its permanent current assets with short-term financing.
Some extremely aggressive firms may even finance a part of their fixed assets
with short-term financing. The relatively more use of short-term financing making
the firm more risky.
Short-term v/s Long-term financing; a risk return trade-off
A firm should decide whether or not it should use short-term financing. If short-term
financing has to be used, the firm must determine its position in total financing. This
decision will be guided by the risk-return trade-off.
Short-term financing may be preferred over long-term financing for two reasons; cost
advantage and flexibility. Short-term financing is more risky than long-term financing.
Thus, there is a conflict between long-term and short-term financing.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 13
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Short-term financing is less expensive than long-term financing, but at the same time
short-term financing involves greater risks than long-term financing. The choice between
long-term and short-term financing involves trade-off between risk and return.
IMPORTANCE OF WORKING CAPITAL MANAGEMENT:
Adequate working capital helps in maintaining solvency of the business by
providing uninterrupted flow of production.
Sufficient working capital enables a business concern to make prompt payments
and hence helps in creating and maintaining goodwill.
Sufficient working capital ensures regular supply of raw materials and continuous
production.
A company which has ample working capital can make regular payment of
salaries, wages and other day-to-day commitments which raises the morale of its
employees, increases their efficiency, reduces wastages and costs and enhances
production and profits.
Only concerns with adequate working capital can exploit favorable market
conditions such as purchasing its requirements in bulk when the prices are lower
and by holding its inventories for higher prices.
Adequate working capital enables a concern to face business crisis in emergencies
such as depression because during such periods, generally, there is much pressure
on working capital.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 14
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
ADEQUACY OF WORKING CAPITAL
The firm should maintain a sound working capital position. It should have adequate
working capital to run its business operations. Both excessive as well as inadequate
working capital positions are dangerous from the firm’s point of view.
DANGERS OF EXCESSIVE WORKING CAPITAL
It results in unnecessary accumulation of inventories. Thus, the chances of
inventory mishandling, waste, theft and losses increase.
It is an indication of defective credit policy and slack collection period.
Consequently, higher incidence of bad debts adversely affects profits.
Excessive working capital makes management complacent, which degenerates
into managerial efficiency.
Tendencies of accumulating inventories to make speculative profits grow. This
way tends to make the dividend policy liberal and difficult to cope in future when
the firm is unable to make speculative profits.
Excessive working capital means idle funds which earn no profits for the business
and hence the business cannot earn a proper rate of return on its investments.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 15
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
DANGERS OF INADEQUATE WORKING CAPITAL
A concern which has inadequate working capital cannot pay its short-term
liabilities in time. Thus, it will lose its reputation and shall not be able to get good
credit facilities.
It becomes difficult for the firm to exploit favorable market conditions and
undertake profitable projects due to lack of working capital.
The firm cannot pay day-to-day expenses of its operations and it creates
inefficiencies, increases costs and reduces the profits of the business.
It becomes impossible to utilize efficiently the fixed assets due to non-availability
of liquid funds.
The rate of return on investments also falls with the shortage of working capital.
DETERMINANTS OF THE LEVEL OF WORKING CAPITAL
1. Nature of business:
The working capital requirement of the firm is closely related to the nature of its
business. The composition of current assets is a function of the size of the
business and the industry to which it belongs. Small companies have small
proportion of cash, receivables and inventory than large corporations.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
For example: a service firm like an electricity undertaking or a transport corporations,
which has a short operating cycle which sells predominantly on cash basis, has a modest
working capital requirement on the other hand a manufacturing concern like a machine
tools unit, which has a long operating cycle and which fills largely on credit, has a very
subsequent working capital requirement.
2. Seasonality of the operations:
Firms, which have marked seasonality in their operations usually, have high
working capital requirements. During the periods of peak demand, increasing
production may be expensive for the firm.
Similarly, it will be more expensive during slack periods when the firm has to
sustain its working force and physical facilities without adequate production and
sales. A firm may, thus, follow a policy of steady production, irrespective of
seasonal changes, in order to utilize its resources to the fullest extent.
3. Production policy:
A firm marked by seasonal fluctuations in its sales may pursue a production
policy, which may reduce the sharp variations in working capital requirements.
For example: A manufacturer of fans may maintain a steady production
throughout the year rather than intensify the production activity in the peak
business season. Such a production policy may dampen the fluctuations in the
working capital requirements.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
4. Price-level changes:
The increasing shifts in the price level make the functions of financial manager
difficult. They should anticipate the effect of price level changes on working
capital requirements of the firm. Generally, rising price levels will require a firm
to maintain a higher amount of working capital. The firms will feel the effect of
increasing the general price level differently.
5. Profit-margin:
Firms differ in their capacity to generate profit from business operations. Some
firms enjoy a dominant position due to quality product or good marketing
management or monopoly power in the market and earn a high profit margin.
Some other firms may have to operate in an environment of intense competition
and may earn low margin of profits of the high net profit margin contributes
towards the working capital pool. In fact, the net profit is a source of working
capital to the extent it has been earned in cash.
6. Credit policy:
The credit policy of the firm affects the working capital by influencing the levels
of book debts. The credit terms granted to the customers may depend upon the
norms of the industry the firm may belong. But the firm has the flexibility of
shaping its credit policy within the constraint of industry norms and practices. The
credit policy influences the requirement of the working capital in two ways.
Firstly, credit terms granted to the customers by the firm. And, secondly, credit
term available to the firm from its customers.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 18
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
The firm should be discretionary in granting credit terms to its customers.
Depending upon the individual case, different terms may be given to different
customers. A liberal policy without rating the credit worthiness of customers will
be detrimental to the firm and will create problems to the firm later on. The firm
should be prompt in making collections. A high collection period will mean tie-up
of funds in the book debts.
7. Availability of credit:
The working capital requirements of the firm are also affected by credit terms
granted by its creditors. For a firm with less working capital, liberal credit terms
are available to it. Similar availability of credit from banks also influences the
working capital needs of a firm. A firm, which can get bank credit easily on
favorable conditions, will operate with less working capital than a firm without
such a facility.
CURRENT ASSETS:
1. Cash and bank balances.
2. Investment (marketable) securities, government and other trust securities (other
than long-term purpose, eg: fund, gratuity fund, etc.)
3. Fixed deposits with banks (maturing within one year).
4. Receivables arising out of sales other than deferred receivables (including bills
purchased and discounted by bankers).
5. Installments of deferred receivables due within one year.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
6. Raw material and components used in the process of manufacturing including
those in transit.
7. Stock-in-progress including semi-finished goods.
8. Finished goods including those in transit.
9. Other consumable stores.
10. Advance payment for tax.
11. Prepaid expenses.
12. Advance for purchase of raw materials, components and consumable stores.
13. Deposit kept with public bodies, etc. for normal business operation.
14. Money receivable from contracted sale of fixed assets during the next twelve
months.
CURRENT LIABILITIES:
1. Short-term borrowings (including bills purchased and discounted) from banks and
others.
2. Unsecured loans maturing within one year.
3. Public deposits maturing during one year.
4. Sundry creditors (trade) for raw materials and consumable stores and spares.
5. Interest and other charges due for payment.
6. Advance payments from customers.
7. Deposits from dealers, selling agents, etc.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 20
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
8. Installments on term loans, deferred payment credits, debentures, and long-term
deposits payable within a year.
9. Statutory liabilities:
Provident fund dues.
Provision for taxation.
Sales tax, excise duty, etc.
Statutory obligations towards workers.
Miscellaneous Current Liabilities:
1. Dividends.
2. Liabilities for expenses.
3. Gratuity payable within one year.
4. Any other payment due within twelve months.
WORKING CAPITAL STRATERGY
The quantum of working capital requirement is directly dependent on the policy of
the company regarding the level of current assets, as to how much stock of
inventories of raw materials and finished goods may be considered to be
sufficiently and reasonably safe, so as to fairly avoid the possible risk of stock
outs (in the case of raw materials) and losses of business (in the case of finished
goods) and the resultant losses. Based upon these criteria, the working capital
policy may broadly be divided into three categories which is,
1. Conservative or liberal or flexible policy
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 21
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
The company may prefer to have somewhat heavy cash balance and bank balance
in current account and investments in readily marketable securities, as also higher
stocks of raw materials and finished goods with a view to almost eliminating the
risk of stock outs and losers of sales. Such companies may also prefer to have a
rather liberal credit policy resulting in a substantial amount of funds locked up in
sundry debtors. All this investments in the various components of current assets
will naturally require correspondingly higher levels of current liabilities and the
working capital requirements.
2. Aggressive or strict or restrictive policy
The level of current asset and accordingly the working capital requirement, will,
of course, be of a much lower order in case of company adopts an aggressive or
restrictive working capital policy. But again, too much of restrictive working
capital policy may as well result in a disproportionately heavier loss by way of
stock – out risk and the consequential losses of production and lowering of the
profitability of the company.
3. Moderate or middle-of-the road policy
In the case of adoption of a moderate policy, the requirement of working capital
will be moderate, too, that is, neither too high nor too low but just right.
BANK FINANCE FOR WORKING CAPITAL
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 22
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Banks are main institutional source of working capital finance in India. After trade credit,
bank credit is the most important source of financing working capital in India. A bank
considers a firm’s sales and production plane and desirable levels of current assets in
determining its working capital requirements. The amount approved by bank for the
firm’s working capital is called credit limit. Credit limit is the maximum funds which a
firm can obtain from the banking system. In practice banks do not lend 100% credit limit;
they deduct margin money.
Forms of bank finance:
1. Term Loan
2. Overdraft
3. Cash credit
4. Purchase or discounting of bills
1) Term Loan
In this case, the entire amount of assistance is disbursed at one time only, either in cash or
to the company’s account. The loan may be repaid in installments along with interest
charged on outstanding balance.
2) Overdraft
In this case, the company is allowed to withdraw in excess of the balance standing in its
Bank account. However, a fixed limit is stipulated by the Bank beyond which the
company will not able to overdraw the account. Legally, overdraft is a demand assistance
given by the bank i.e. bank can ask repayment at any point of time.
3) Cash credit
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
In practice, the operations in cash credit facility are similar to those of overdraft facility
except the fact that the company need not have a formal current account. Here also a fixed
limit is stipulated beyond which the company is not able to withdraw the amount.
4) Bills purchased / discounted
This form of assistance is comparatively of recent origin. This facility enables the
company to get the immediate payment against the credit bills / invoice raised by the
company. The banks hold the bills as a security till the payment is made by the customer.
The entire amount of bill is not paid to the company. The company gets only the present
worth of amount of bill form of discount charges. On maturity, bank collects the full
amount of bill from the customer.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 24
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
RESEARCH DESIGN
INTRODUCTION
Research methodology is a way to systematically solve the research problem. It may be
understood as a science of studying how research is done systematically. In that various
steps, those are generally adopted by a researcher in studying his problem along with the
logic behind them. It is important for researcher to know not only the research method but
also know methodology. ”The procedures by which researcher do about their work of
describing, explaining and predicting phenomenon are called methodology.” Methods
comprise the procedures used for generating, collecting and evaluating data. All this
means that it is necessary for the researcher to design his methodology for his problem as
the same may differ from problem to problem. Data collection is important step in any
project and success of any project will be largely depend upon how much accurate you
will be able to collect and how much time, money and effort will be required to collect
that necessary data, this is also important step. Data collection plays an important role in
research work. Without proper data available for analysis you cannot do the research
work accurately.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
TITLE OF THE STUDY:
“Working Capital Management at PROSEAL CLOSURES LIMITED”.
STATEMENT OF THE PROBLEM:
Working Capital Management being an integral part of the overall corporate management
throws open challenges and an opportunity to study the Working Capital Management as
an individual unit. This study is an attempt in this direction.
The company is facing the following problems related to the Working Capital
Management:
The investment in Current Assets is increasing.
The receivables are not under manageable limits.
The need for external borrowings to support working capital.
This study was conducted at PROSEAL CLOSURES PVT. LTD., Bangalore. This study
will cover the financial analysis of debtors and inventories’ behavior. Other Current
Assets and Current Liabilities are also analyzed. An attempt has been made to interpret,
understand, analyze, and evaluate the requirements of working capital of PROSEAL
CLOSURES PVT LTD.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
OBJECTIVES OF THE STUDY:
Study of the working capital management is important because unless the working
capital is managed effectively, monitored efficiently, planned properly and
reviewed periodically at regular intervals to remove bottlenecks if any the
company cannot earn profits and increase its turnover. With this primary objective
of the study, the following further objectives are framed for a depth analysis.
To have a brief account of operations of Proseal Closures Pvt. Ltd.
To calculate the profitability of the organization.
To interpret financial statements.
To calculate the liquidity position of the organization.
To study different components of current assets, the extents of the funds tied up
in each, the reason for high volume of debtors, inventories, etc. and suggest
possible solutions.
SCOPE OF THE STUDY
A study of Working Capital is of major importance to the internal and external analysis
because of its close relationship with the day-to-day operations of a business. The
business firms aim at maximizing the wealth of the shareholders, for this the firm should
earn sufficient returns from its operations.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 27
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Earning a steady amount of profit requires a successful sales activity. Current assets are
needed for the functioning of business operations.
COLLECTION OF DATA:
PRIMARY DATA:
The data was collected from discussions with the executives and the finance
manager. Primary data are that, which are collected freshly and for first and thus happens
to be original in character.
The methods of primary data collection are:
Observation method.
Personal interview.
SECONDARY DATA:
The data which have been collected from some one else and which have already
been passed through statistical process.
The secondary data sources are:
Record of the company.
Annual reports.
News papers and text books.
Internet.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 28
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
ANALYSIS OF DATA:
The data was analyzed using the following tools and techniques of financial analysis:
Common size statement.
Trend analysis
Ratio analysis.
RESEARCH METHODOLOGY:
This being an analytical study, data for the study was collected by the concerned official
of the company books, annual reports and journal etc.
LIMITATION OF THE STUDY:
Time restriction.
The information, which was needed could not be made public by the organization.
The findings were substantially based on information given by the annual reports
of the company.
Only those concepts that have a direct bearing on working capital management of
company’s financial position were studied and covered. Those concepts that have
an indirect bearing on the company’s financial plan are not covered in the study.
Due to strict policies and guidelines of the company on certain matters like
optimum inventory, optimum investment in current assets etc cannot be disclosed
in this report.
COMPANY PROFILE:
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 29
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
PROSEAL CLOSURES PRIVATE LIMITED was founded by
Mr.K.Prabodhchandra Bhat in the year 1989 with a mission to provide a Quality
Closures System for the Steel Drum Industry. From a humble beginning, the Company
made a global presence by establishing customer base in U.S.A, Middle East, Far East
and African countries.
In the year 2001 the Company became a subsidiary of M/s. Greif U.S.A, which acquired
a majority stake through its joint venture M/s. Balmer Lawrie- Van Leer Ltd., India.
Located in the garden city of India, Bangalore, also recognized globally as one of the
highly industrialized cities, PROSEAL provides a conducive environment for turning out
excellence in the form of drum closures. Founded on sound objectives of customer
satisfaction, through providing quality products, at competitive prices, prompt delivery
and efficient after sales service, PROSEAL has now won the hearts of many a barrel
manufacturer.
Global acceptance of barrel closures and accessories has led to regular exports to USA,
UK, Canada, and Australia, Far-East, Middle East and a host of other countries. Growth
of PROSEAL is attributed to its ability to meet the changing and challenging needs of
barrel industry and the ever growing list of patrons.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 30
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
BOARD OF DIRECTORS:
D.S.van Griethuysen (chairman)
P.C.Bhat (Managing Director)
S.K.Mukherjee
P.B.Anandrao
Suchitra Bhat
Prakash Prabhu
CUSTOMER BASE:
The Company has a substantial market share in India for its products - Drum Closures,
Flanges, Plugs and Cap seals. The Customers include Steel Drum Manufacturers, Oil
Companies and Chemical Companies. The Company also services the requirements of
Steel Drum manufacturers in U.S.A, Canada, Middle East, Africa, Australia and Far
Eastern Countries. It has a Warehousing facility in the U.S to ensure delivery at the right
time.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 31
Board of directors
Managing director
Head of marketing
Head of planning, purchase
Head of accounts
General Manager (works)
General Manager
(operations
Assistant marketing
Officer purchaser
Assistant manager dispatch
Assistant technicians
Office assistant
Accounts manager
System analyst
Accounts assistant
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
ORGANISATIONAL CHART
GOAL, MISSION, VISION AND VALUES:
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 32
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
GOAL:
To enter new millennium and scale new heights. To get recognized as one of the best and
leading closures manufacturing company worldwide by providing high quality closures to
its customers.
MISSION:
To provide products and services of exceptional values.
To assume leadership in business through proactive customer services.
To perform behind customer exception.
To create long-term relationship.
To achieve excellence in business through continual improvement.
VISION:
We shall endeavor to understand our Customers fully to provide total customer
satisfaction.
We shall continuously add value to our customer relationship by providing
competitive products innovative solutions in closure systems.
All our commitments, actions and products must be recognized as the expression
of quality.
Creating atmosphere for employees to excel.
Superior return on assets.
Values:
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 33
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Conduct business activities honestly and ethically.
Provides safe and clean environment.
Develop dedicated individuals by supporting and encouraging personal and
professional growth.
Accomplish targets through team work, training and dedication.
Recognize talents in people and utilize their idea to create solutions.
POLICIES USED:
Quality policy:
“To be a premier organization in the manufacture of drum closures, levers and
latches by incorporating contemporary technologies and is committed to meet quality
deliveries at competitive prices.”
Environmental policy:
Optimizing resource consumption.
Reducing waste generation.
Comply with environmental statutory and regulatory requirements.
Material policy:
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 34
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Adhering to the quality products delivery schedules in right quantities at right
time.
Maintaining optimum inventories.
Working continually for development of new materials to add value to customer.
CERTIFICATION AND MERITS:
ISO 9002 accreditation by TUV Rhineland, Germany.
License of Bureau of Indian Standards.
Certified by various International certifying agencies.
Acclaimed as the quality products supplier among leading drum/barrel
manufacturers & oil refineries.
Export Excellency award from:
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 35
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Engineering Export Promotion Council (EEPC):- Southern Region.
Federation of Karnataka Chambers Commerce – Industries (FKCCI).
Visvesvaraya Industrial Trade Center (VITC)
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 36
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
PRODUCT FOCUSED:
2" Zinc Plated Flange
Plating - Zinc Plated, White, Yellow & Tin coated.
Washers - Black Nitrile(Buna), EPDM, Polyethylene, Polyirridiated & Viton
2" Zinc Plated Plug
Plating - Zinc Plated, White, Yellow & Tin coated.
Washers - Black Nitrile(Buna), EPDM, Polyethylene, Polyirridiated & Viton
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 37
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
3/4” Zinc Plated Flange
Plating - Zinc Plated, White, Yellow & Tin coated.
Washers - Black Nitrile(Buna), EPDM, Polyethylene, Polyirridiated & Viton
3/4” Zinc Plated Plug
Plating - Zinc Plated, White, Yellow & Tin coated.
Washers - Black Nitrile(Buna), EPDM, Polyethylene, Polyirridiated & Viton
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 38
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
2” & 3/4 Metal Capseal Neutral
Plain White or Red
CLIENTS:
DOMESTIC:
1. Asian barrels P Ltd, Hyderabad
2. Baba containers Mfrs, Hyderabad
3. Balmer lawrie & co. Ltd, Mumbai
4. Beta industries Ltd, Chennai
5. Bijaya drums P Ltd, Kolkata
6. Bostik India P Ltd, Bangalore
7. Chandra containers Mfrs, Hyderabad
8. Chennai drums, Chennai
9. Dharamshi metals P Ltd, Bangalore
10. Gopal metal containers P Ltd, Chennai
11. IOC Ltd, Chennai
12. Industrial engg corp, Cochin
13. KB engg co, Hyderabad
14. Lintas packaging P Ltd. Kolkata
15. Metal Pdts & engg co, Howrah
16. Nataraj drums industries P Ltd, Rajasthan
17. Neha drums and barrels P Ltd, Bangalore
18. Pearson drums & barrels P Ltd, Kolkata
19. Radhey shyam vaish, kannauj
20. Royal Industries, Chennai
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 39
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
21. Santhi industries, Chennai
22. Sera containers P Ltd, Kolkata
23. Shri metal containers, New Delhi
24. Sivasakthi engg co, Bangalore
25. Standard drum & bucket factory, Mumbai
26. Tech steel Pdts Ltd, Bangalore
27. Time Mauser industries P Ltd, Raigad
28. Yashraj containers Ltd, Daman
INTERNATIONAL:
1. American flange & Mfg Co Inc, USA
2. Cosmetic pack LLC, Malaysia
3. D.C.closures Pty Ltd, Australia
4. Dur chyi industries co Ltd, Taiwan
5. Fujairah steel barrels & drums, UAE
6. SPA grief algerie, Algeria
7. Grief Saudi Arabia co Ltd, S.arabia
8. Grief south Africa Pty Ltd, S.Africa
9. Homs refinery company, Syria
10. Izvar ambalaj sanvayi ve ticaret A S, turkey
11. Metro Intl LLC, UAE
12. Rubel steel mills Ltd, Bangladesh
13. Salem Faraj S Bin Mahfooz EST, SA
14. Shekat boshke sazi foolad sakafcgegan, Iran
15. Tema lube oil co Ltd, Ghana
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 40
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
16. Tri sure closures Australia Pty Ltd, Australia
17. Grief Nederland B.V, Nederland
WORKING CAPITAL LEVEL:
The consideration of the level of investment in current assets should avoid two danger
points excessive and inadequate investment in current assets. Investment in current assets
should be just adequate, not more or less, to the need of the business firms. Excessive
investment in current assets should be avoided because it impairs the firm’s profitability,
as idle investment earns nothing. On the other hand inadequate amount of working capital
can be threatened solvency of the firms because of its inability to meet its current
obligation. It should be realized that the working capital need of the firms may be
fluctuating with changing business activity. This may cause excess or shortage of
working capital frequently.
WORKING CAPITAL TREND ANALYSIS:
In the words of S.P. Gupta “The term trend is very commonly used in day-today
conversion trend, also called secular or long term need is the basic tendency of
population, sales, income, current assets, and current liabilities to grow or decline over a
period of time”
According to R.C.galeziem “The trend is defined as smooth irreversible movement in
the series. It can be increasing or decreasing.”
The financial statements may be analyzed by computing trends of series of information.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 41
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
This method determines the direction upwards or downwards and involves the
computation of the percentage relationship that each statement item bears to the same
item on the base year.
The information for a number of years is taken up and one year, generally the first year, is
taken as a base year. The figures of the base year are taken as 100 and trend ratios for
other years are calculated on the basis of base year. The analyst is able to see the trend of
figures, whether upward or downward.
Table 1: Table showing the trend analysis of the Working Capital of PROSEAL Ltd., for
the four years.
Trend Analysis of the Working Capital of PROSEAL ltd.
Particulars Amount Trend Percentages
2007 2008 2009 2010 2007 2008 2009 2010
Current Assets
Inventories 65669362 63846594 88310664 91042203 100 97.2 134.5 138.6
Sundry Debtors 28043822 24370416 25890546 44923035 100 86.9 92.3 160.2
Cash and Bank balances 3014705 3946627 10375816 8930476 100 130.9 344.2 296.2
Loans and Advances 21497656 21625545 26690417 38439726 100 100.6 124.1 178.8
Total Current Assets 118225545 11378918215126744
3 183335440 100 96.2 127.9 155.1
Current Liabilities and Provisions
Current Liabilities 47843821 59005489 70239991 72845717 100 123.3 146.8 152.2
Provisions 15701095 15927575 23906743 36244115 100 101.4 152.3 230.8
Total Current Liabilities 63544916 74933064 94146734 109089832 100 117.9 148.2 171.7
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 42
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
and Provision
Net Working Capital 54680629 38856118 57120709 74245608 100 71.1 104.5 135.8
Table 2: Table showing working capital size of PROSEAL CLOSURE Ltd over the last
four years.
Years 31/03/2007 31/03/2008 31/03/2009 31/03/2010
Net working capital 54680629 38856118 57120709 74245608
Working capital indices 100% 71.1% 104.5% 135.8%
GRAPH-1
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 43
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
INTERPRETATION:
Current Assets
The inventories have reduced to 97.2% in the year 2008 and has increased by
34.5% in the year 2009 and 38.6% in the year 2010, taking 2007 as the base year.
This suggests that there has been an increase in the demand for the company’s
products in the year 2009 and 2010, which has led to an increase in the production
and thus there is an increase in the inventories.
Debtors has decreased to 86.9% in the year 2008and 92.3% in the year 2009, but
since there is an increase in the demand for the products manufactured by the
company, there is an increase in the sales of the company resulting in an increase
in Sundry Debtors of 60.2% in the year 2010.
Cash and bank balances have increased by 30.9% in the year 2008 and there has
been a drastic increase by 244.2% and 196.2% in the year 2009 and 2010
respectively, taking 2007 as the base year. This is mainly due to the increase in
production on one hand and an increase in cash sales on the other.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 44
0
20000000
40000000
60000000
80000000
100000000
Chart showing the movement of Inventories and Sundry Debtors
Inventories
Sundry Debtors
Inventories 65669362 63846594 88310664 91042203
Sundry Debtors 28043822 24370416 25890546 44923035
2007 2008 2009 2010
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Loans and advances have increased by 0.6% in the year 2008. But it has
tremendously increased by 24.1% and 78.8% in the year 2009 and 2010
respectively.
As a result of an increase in most of the components of Current Assets, the total
current assets have increased by 27.9% and 55.1% in the years 2009 and 2010
respectively. But there has a decrease in the total current assets to 96.2% in the
year 2007.
GRAPH-2
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 45
0
10000000
20000000
30000000
40000000
Chart showing the movement of Cash and Bank balances & Loans and Advances
Cash and Bank balances
Loans and Advances
Cash and Bank
balances
3014705 3946627 10375816 8930476
Loans and Advances 21497656 21625545 26690417 38439726
2007 2008 2009 2010
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
GRAPH-3
Composition of current assets:
Analysis of current assets components enable one to examine in which components the
working capital fund has locked. A large tie up of funds in inventories affects the
profitability of the business or the major portion of current assets is made up cash alone,
the profitability will be decreased because cash is non earning assets.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 46
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Table 3- Table showing composition of current assets of proseal ltd
(No. in %)
Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010
Inventories 55.55 56.11 58.38 49.66
Sundry debtors 23.72 21.42 17.12 24.50
Cash and bank balances 2.55 3.47 6.86 4.87
Loans and Advances 18.18 19.00 17.64 20.97
Total Current Assets 100 100 100 100
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 47
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Current assets components in %
GRAPH-4
INTERPRETATIONS:
The excess of current assets is showing positive liquidity position of the firm but it is not
always good because excess current assets then required, it may adversely affects on
profitability. Current assets include some funds investments for which company pay
interest. It is clearly observed that an inventory has increased gradually by the year 2009.
But it has declined in the year 2010. Though there is not much increase in % of cash and
bank balance, there is a study growth. Loans and advances have decreased by the year
2010 and forms 20.97% of the total current assets. Sundry debtors’ shows improve mental
growth in 2010 and forms 24.5 % of the total current assets. Current assets components
show sundry debtors are the major part in current assets it indicates that the inefficient
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 48
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
collection management. Over investment in the debtor affects liquidity of firm for that
company has raised funds from other sources like short term loan which incurred the
interest.
Current Liabilities:
The increase in the Current Liabilities of the years 2008, 2009 and 2010 can be
attributed to an increase in production by the company to meet its increasing
demand. The current liabilities have increased by 23.3%, 46.8% and 52.2% in the
years 2008, 2009 and 2010 respectively, taking the year 2007 as the base.
Provisions have witnessed a drastic rise from 101.4% in the year 2008 to 152.3%
and 230.8% in the years 2009 and 2010 respectively.
Due to the mammoth increase in the provisions over the years, the total Current
Liabilities have increased.
COMMON SIZE STATEMENTS:
The common size statements, namely balance sheets and income statement are shown in
analytical percentages. The individual figures are shown as percentages of total assets and
total liabilities for a common size balance sheet. Similarly, the individual figures from the
profit and loss account are shown as percentages of total sales, for example, the total
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 49
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
assets are taken as 100 and different assets are expressed as a percentage of the total.
These statements are also known as Component Percentages or 100 Percent Statements
because every individual item is stated as a percentage of the total 100.
It must be noted here that for the purpose of the project report i.e., to study the working
capital, common size statement is one of the tools used. For this sole purpose the total
current assets and current liabilities are taken as a 100, and the different components of
the current assets and current liabilities are shown as percentages of the total.
Table 4: Table showing common size statement of Current Assets and Current Liabilities
of PROSEAL Ltd. over the last four years.
Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010 Amount % Amount % Amount % Amount %Current Assets Inventories 65669362 55.55 63846594 56.11 88310664 58.38 91042203 49.66Sundry debtors 28043822 23.72 24370416 21.42 25890546 17.12 44923035 24.50Cash and bank balances 3014705 2.55 3946627 3.47 10375816 6.86 8930476 4.87
Loans and Advances 21497656 18.18 21625545 19.00 26690417 17.64 38439726 20.97 Total Current Assets 118225545 100 113789182 100 151267443 100 183335440 100.00
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 50
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Current Liabilities and Provisions Current Liabilities 47843821 75.29 59005489 78.74 70239991 74.61 72845717 66.78Provisions 15701095 24.71 15927575 21.26 23906743 25.39 36244115 33.22 Total Current Liabilities 63544916 100.00 74933064 100.00 94146734 100.00 109089832 100.00
INTERPRETATION:
Table 5: Table showing the Working Capital Position of PROSEAL Ltd. over the last
four years.
Particulars 31/03/200731/03/200
8 31/03/2009 31/03/2010
Current Assets 118225545 113789182 151267443 183335440
Current Liabilities 63544916 74933064 94146734 109089832Net Working Capital 54680629 38856118 57120709 74245608
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 51
0
50000000
100000000
150000000
200000000
2007 2008 2009 2010
Chart showing the movement of Current Assets and Current Liabilities
Current Assets
Current Liabilities
Current Assets 118225545 113789182 151267443 183335440
Current Liabilities 63544916 74933064 94146734 109089832
31/03/2005 31/03/2006 31/03/2007 31/03/2008
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
The Working Capital has decreased in the year 2008, but increased considerably in the
other three years. Though the investment in working capital has not been adequate in the
year 2008, it has increased immensely in the following two years. Working capital must
be effectively utilized for the overall profitability of the firm. The firm should maintain a
sound working capital position. It should have adequate working capital to run its
business operations. Both excessive as well as inadequate working capital is dangerous
from the firm’s point of view.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 52
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
GRAPH-5
Net Working Capital:
An increase in the Total Current Assets and a decrease in the Total Current
Liabilities have resulted in an increase in the Net Working Capital in the years
2009 and 2010.
The Net Working Capital has decreased to 71.1% in the year 2008. It has
increased by 4.5% and 35.8% in the years 2009 and 2010 respectively.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 53
010000000
20000000
30000000
40000000
50000000
60000000
70000000
80000000
2007 2008 2009 2010
Chart showing the Net Working Capital
Net Working Capital
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
GRAPH-6
Liquidity Position:
A major portion of the current assets is formed by inventories and sundry debtors. Cash
and other marketable securities form a very minimal portion of the total current assets.
Thus, though the company has a lot of investment in current assets, the amount of cash
that can be realized at a moment’s notice is very less and it would serve the firm better to
improve its cash reserves so that creditors and other debts can be paid off at any time and
the dependability on debtors reduces marginally.
CHANGES IN WORKING CAPITAL
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 54
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
There are so many reasons to changes in working capital as follow:
1. Changes in sales and operating expenses:-
The changes in sales and operating expenses may be due to three reasons
There may be long run trend of change e.g. The price of raw materials may
constantly raise which is necessity for holding of large inventory.
Cyclical changes in economy dealing to ups and downs in business activity will
influence the level of working capital both permanent and temporary.
Changes in seasonality in sales activities
2. Policy changes:-
The second major case of changes in the level of working capital is because of policy
changes initiated by management. The term current assets policy may be defined as the
relationship between current assets and sales volume.
3. Technology changes:-
The third major point in changes in working capital is changes in technology because
changes in technology to install that technology in our business more working capital is
required. A change in operating expenses rise or full will have similar effects on the
levels of working following working capital statement is prepared on the base of balance
sheet of last two year.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 55
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Table 6: Table showing changes in working capital of PROSEAL Ltd. over the last four
years.
Particulars 31/03/2009 31/03/2010Changes in working capitalIncrease Decrease
A) Current assets
Inventories 88310664 91042203 2731539
Sundry Debtors 25890546 44923035 19032489
Cash & Bank Balance 10375816 8930476 1445340
Loan & Advances 26690417 38439726 11749309
Total of A 151267443 183335440
B) Current liabilities
Current liabilities 70239991 72845717 2605726
Provisions 23906743 36244115 12337372
Total of B 94146734 109089832
W.C.(Total A- Total B) 57120709 74245608Net Increase in WorkingCapital 17124899 17124899
Total 74245608 74245608 33513337 33513337
INTERPRETATION:
Working capital has increased in the year 2009 to 2010 because,
As a result of an increase in most of the components of Current Assets, the total
current assets have increased by 27.9% and 55.1% in the years 2009 and 2010
respectively.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 56
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
An increase in the Total Current Assets and a decrease in the Total Current
Liabilities have resulted in an increase in the Net Working Capital in the years
2009 and 2010.
The Net Working Capital has decreased to 71.1% in the year 2008. But it has
increased by 4.5% and 35.8% in the years 2009 and 2010 respectively.
OPERATING CYCLE:
The need of working capital arrived because of time gap between productions of goods
and their actual realization after sale. This time gap is called “Operating Cycle” or
“Working Capital Cycle”. The operating cycle of a company consist of time period
between procurement of inventory and the collection of cash from receivables. The
operating cycle is the length of time between the company’s outlay on raw materials,
wages and other expanses and inflow of cash from sales of goods.
Calculation of operating cycle
To calculate the operating cycle of PROSEAL Ltd for the last four years data. Operating
cycle of the PROSEAL Ltd. vary year to year as changes in policy of management about
credit policy and operating control.
Table 7: Table showing operating cycle of PROSEAL Ltd. over the last four years.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 57
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
(No. of Days)
Years 31/03/2007 31/03/2008 31/03/2009 31/03/2010
ADD
Raw materials holding period.
66 58 54 58
W-I-P period 4 3 2 1
Finished goods holding period
58 47 39 36
Receivable collection period
133 116 107 109
GROSS OPERATING
CYCLE
261 224 202 204
LESS
Creditors payment period
178 122 130 130
NET OPERATING CYCLE
83 102 72 74
(No. of Days)
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 58
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
GRAPH-7
COMPONENTS OF OPERATING CYCLE
GRAPH-8
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 59
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
INTERPRETATION:
Operating cycle of PROSEAL Ltd, shows the numbers of day are decreasing in recent
Years and it is reflecting the efficiency of management. Days of operating cycle shows
period of lack of funds in current assets, if number of days are more than it increases the
cost of funds as taken from outside of the business. In 2008, shows the high no. of days
because of reduced of creditors holding period.
COMPONENTS OF WORKING CAPITAL AND THEIR
MANAGEMENT
CASH MANAGEMENT
Cash is the most important current asset for the operation of a business. Cash is the basic
input needed to keep the business running on a continuous basis. It is also the ultimate
output expected to be realized by selling the service or product manufactured by a firm. A
firm should maintain an optimum level of cash, neither more nor less. Cash shortage will
disrupt any firm’s manufacturing operations, while excessive cash will remain idle,
without contributing anything towards the firm’s profitability. Cash management is
concerned with the management of:
Cash inflows and outflows.
Cash flows within the firm.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 60
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Cash forecasting and budgeting
A cash budget is the most significant tool devised for the control of cash receipts and
payments. A cash budget is a statement which summarizes the expected cash inflows and
outflows of a firm over a projected time period.
Cash forecasts are needed to prepare cash budgets. Cash forecasting may be done on a
short-term or on a long-term basis.
Options for investing surplus funds
Companies often have surplus funds for short periods of time before they are required for
capital expenditure, loan repayments or for any other purpose. These funds may be
deployed in many ways. At one end of the spectrum is the term deposit that can be made
for a minimum of 46days in a bank which is a risk-free investment that offers a relatively
modest rate of interest and at the other end of the spectrum is the investment in equity
shares which can produce highly volatile returns. In between lie several avenues like units
of a mutual fund scheme, public sector bonds, treasury bills, inter corporate deposits etc.
In order to enhance the efficiency of cash management, the following practices are
followed:
Time lag between sales and the negotiations with the banker is almost reduced to
nil.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Personal follow up is also affected to ensure that the reimbursements are realized
by the negotiation of the documents and credits.
Follow up is also affected to ensure that reimbursements are realized by the
negotiating banker in order to avoid interest costs.
Advantages of cash management
Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither
profit nor losses but without cash, profit remains meaningless for an enterprise owner.
1. A sufficient of cash can keep an unsuccessful firm going despite losses
2. An efficient cash management through a relevant and timely cash budget may
enable a firm to obtain optimum working capital and ease the strains of cash shortage,
fascinating temporary investment of cash and providing funds normal growth.
3. Cash management involves balance sheet changes and other cash flow that do
not appear in the profit and loss account such as capital expenditure.
Table 8: Table showing the Size and indices of cash in PROSEAL Ltd.,
Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010
Cash and bank balance
3014705 3946627 10375816 8930476
Indices 100 130.9 344.2 296.2
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
GRAPH-9
INTERPRETATION:
Cash and bank balances have increased by 30.9% in the year 2008 and there has been a
drastic increase by 244.2% and 196.2% in the year 2009 and 2010 respectively, taking
2007 as the base year. This is mainly due to the increase in production on one hand and
an increase in cash sales on the other.
CASH CYCLE:
One of the distinguishing features of the fund employed as working capital is that
constantly changes its form to drive ‘business wheel’.
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CASH
FINIHED
GOODS
DEBTORS
WIP
RAW MATERIALS
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
It is also known as ‘circulating capital’ which means current assets of the company,
which are changed in ordinary course of business from one form to another, as for
example, from cash to inventories, inventories to receivables and receivables to cash.
Basically cash management strategies are essentially related to the cash cycle together
with the cash turnover. The cash cycle refers to the process by which cash is used to
purchase the raw material from which are produced goods, which are then send to the
customer, who later pay bills. The cash turnover means the number of time firms cash is
used during each year.
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Table 9: Table showing the cash cycle of PROSEAL Ltd.,
(Days)
Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010
Inventory holding period
128 108 95 95
(+) Account receivable period
133 116 107 109
(-) Account payable period
178 122 130 130
Cash cycle 83 102 72 74
INTERPRETATION:
The size of the cash in the current assets of the company indicates the miss cash
management of the company. The cash balance in the year 2009 was extremely increased;
because of encashment of deposits from schedules bank funds. Company failed to proper
investment of available cash. After the study of cash management it mentioned above it
can be conclude that management of cash involve three things: a) Managing cash flow
into and out of the firm. b) Managing cash inflow within the firm, c) Financial deficit or
investing surpluses cash and thus controlling cash balance at a point of a time.
The firm should hold an optimum balance of cash and invest any temporary excess
amount in short term marketable securities such as treasury bills, commercial papers,
certificates of deposit, bank deposits and inter corporate deposit.
The high portion of cash balance in the current assets it adversely affected on profitability
of the company as cash is ideal asset; it reduced the working capital leverage.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
INVENTORY MANAGEMENT
The term inventory refers to the stock of products a firm is offering for sale. In other
words, inventory is composed of assets that will be sold in the future in the normal course
of business operations. The inventory of a firm is the sum total of the raw materials,
work-in-progress and finished goods of a firm.
Raw materials consist of items purchased by a firm from others for conversion into
finished goods through the manufacturing process. Work-in-progress is made up of items
currently in the stage of production. These are partially finished goods that are at various
stages of production in a multi-stage production process. Finished goods represent the
final or completed products which are available for sale.
The objective of inventory management at Proseal Closures Ltd. consists of two counter-
balancing parts:
1. To minimize the investments in inventory.
2. To meet the demand for the product by efficiently organizing the firm’s
production and sales operation.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
The firm has a comprehensive system for monitoring its inventory levels based on its own
experiences. The sales budget is the basis for the production and materials requirement
planning.
Inventory components
The manufacturing firm’s inventory consist following components
I) Raw material
ii) Work- in-progress
iii) Finished goods
To analyze the level of raw material inventory and work in progress inventory held by the
firm on an average it is necessary to examine the efficiency with which the firm converts
raw material inventory and work in progress into finished goods.
Table 10: Table showing size of inventory of PROSEAL Ltd.,
(No of days)
Particulars 31/03/2007 31/03/2008 31/03/2009 31/03/2010
Raw materials 4182 6343 8213 14052
WIP 43 31 22 113
Finished goods 4671 6354 15013 22963
Other inventories 1932 2710 3613 9831
Total 10828 15438 26861 46959
Indices 100.00 142.57 248.07 433.68
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
z
GRAPH-10
INTERPRETATION:
Size of inventory of PROSEAL Ltd, was increasing with the increase in the sales. The
inventory size was increasing because of increment in the finished goods stock; it
indicates that the company reduced the liquidity of finished goods. The graph shows an
increase in inventories size. In the year 2010 the inventories indices% is 433.68.
RECEIVABLES MANAGEMENT
The term receivable is defined as “debt owed to the firm by customers arising from sale
of goods or services in the ordinary course of business”. While business firms would like
to sell goods for cash, the pressure of competition and the force of custom persuade them
to sell the same on credit. Firms grant credit to facilitate sales.
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It is valuable to customers as it augments their resources. It is particularly appealing to
those customers who cannot borrow from other sources or find it very expensive to do so.
The credit period extended by business firms usually ranges from 15 days to 60 days.
When goods are sold on credit, finished goods gets converted into accounts receivables in
the books of the seller. A firm’s investment in accounts receivables depends on how
much it sells on credit and how long it takes to collect the receivables. The objectives of
the receivables management are:
To obtain maximum sales.
To minimize bad debt losses.
To minimize the cost of investment in book debts.
To minimize service and clerical costs for book debts.
Since receivables often account for a significant proportion of the total assets, it
becomes very important to manage its receivables well.
Credit policy variables
A firm’s interests in allowing credit facilities to a customer are dependent on the
following variables:
1. Credit standards :
It refers to the maximum risk that a firm is willing to take in extending credit.
Lowering the credit standard may increase credit sales. This in turn will
increase the accounts receivables which increases the collection cost and risk
of bad debts. Sound judgment must be made in developing credit standards.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
2. Industrial capacity and phase of business cycle:
It is another important consideration used in granting credit. In a booming
phase of the business cycle of the firm, it has excess capacity and may use
credit standards to increase sales and plant utilization. In the phase of
recession, the firm will not allow liberal standards.
3. Credit information:
This can be collected from a variety of sources like periodic financial
statements, creditors of the company etc.
4. Bank reference :
It is another source of collecting credit information. The bank with which the
applicant has dealings can provide such information. Trade references are also
used to collect credit information. The firms who have had business dealings
with the applicant can provide useful information about the applicant.
5. Analysis of Credit Information and Deciding Credit Terms:
After credit information has been received it should be properly analyzed to
determine the credit worthiness of the applicant. The particulars should be
analyzed both quantitatively and qualitatively. Quantitative analysis will
include age wise analysis of accounts payable, profitability and liquidity ratio.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Qualitative assessment will include consideration of references from other suppliers and
bank reference. The ultimate decision is whether or not to extend credit and deciding the
terms of credit which depends on subjective interpretation of the assessment of the above
mentioned analysis.
6. Credit period:
A firm’s credit period is determined by industry customs and thus it is
different in different industries. It may be as short as seven days or as long as
six months. A major consideration for the company is to see what competitors
are doing and decide.
7. Collection effort:
Collection effort includes the methods that a firm employs in attempting to
collect dues from customers. Some commonly used terms are:
Sending notices and letters to customers informing them of the status
of past dues and requesting early payment.
Employing a collection agency.
Rejecting new orders for supply until the last dues are paid.
Taking legal action against customers.
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Management of Receivables at PROSEAL LTD. :
The normal credit period allowed by the firm is 30 to 60 days. To ease the funds tied up
in the receivables, the firm has applied the following two measures:
1. Factoring
2. Securitization of Debts
Factoring:
Factoring is a method of financing where by a company sells its trade debts at a discount
to a financial institution. In other words, factoring is a continuous arrangement between a
financial institution, namely the factor, and a company which sells goods and services to
trade customers on credit. As per this arrangement, the factor purchases the client’s trade
debts including accounts receivables either with or without recourse to the client, and
thus, exercises control over the credit extended to the customers and administers the sales
ledger of his client.
Securitization of debts:
Securitization of debts means giving the bills receivables as the security for the long term
loans taken by the firm.
Tools and Techniques used for Financial Analysis of Working Capital
The following are the tools used in this report to analyze the working capital position in
PROSEAL CLOSURES Ltd. :
Trend Analysis
Common Size Statements
Ratio Analysis
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Ratio Analysis:
Ratio Analysis is one of the powerful tools of the financial analysis. A ratio can be
defined as “the indicated quotient of two mathematical expressions”, and as “the
relationship between two or more things”. Ratio analysis is a technique of analysis and
interpretation of financial statements. It is the process of establishing and interpreting
various ratios for helping in making certain decisions. They serve as indicators of
financial strength, soundness, weakness and position of a concern.
Importance of Ratio Analysis
To indicate the liquidity position of the firm.
To know about the Long Term Solvency of the firm.
It allows inter firm comparisons of financial statements.
Advantages of Ratio Analysis
It helps in judging the financial health of the firm.
It helps in decision making.
It is useful in judging the operating efficiency.
It is useful in forecasting and planning.
It can be used as an instrument of management control.
It is useful in comparison of performance.
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Disadvantages of Ratio Analysis
Lack of adequate standards.
The accuracy and correctness of ratios are totally dependent on the reliability of
the data contained in financial statements.
Problems of price level changes.
Ratios devoid of absolute figures may distort facts.
Personal bias.
FINANCIAL RATIOS
LIQUIDITY RATIOS:
Liquidity ratios measure the ability of the firm to meet its current obligations. These
are ratios which measure the finance position of a firm. It helps to assess the
sufficiency of its current assets to meet its current liability. The liquidity position is
satisfactory if current liabilities are easily met out of current assets. The liquidity
ratios used are:
(a)Current ratio:
The current ratio shows the amount of short-term resources available to service
every rupee of current debt. It measures the general liquidity position of the firm
and also represents the margin of safety.
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A high ratio reveals ability to pay current debts on time. The standard current ratio
is considered to be 2:1 . Current ratio can be calculated by using the following
formula:
CURRENT RATIO= CURRENT ASSETS
CURRENT LIABILITIES
Table 11: Table showing the current ratio of PROSEAL over the last 4 years
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 75
Year Current AssetsCurrent Liability
Current Ratio
2007 118225545 63544916 1.86
2008 113789182 74933064 1.52
2009 151267443 94146734 1.61
2010 183335440 109089832 1.68
00.20.40.60.8
11.21.41.61.8
2
CR
2007 2008 2009 2010
Year
Chart Showing the Current Ratios
CR
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
GRAPH -11
INTERPRETATION:
As can be seen from the chart, the current ratio has been on a decreasing trend
as compared to the year 2007.
Current ratio’s of all the four years have not been up to the standard of 2:1,
indicating the firm is in danger, in terms of liquidity.
This means that the company is not having sufficient funds to meet its current
liabilities. The current assets are increasing but the current liabilities are also
increasing rapidly. Therefore, the company does not have sufficient funds to
meet its current liabilities.
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In the year 2008, the current ratio has been the least of 1.52, which is
extremely low and shows the unsatisfactory liquidity position of the firm.
This has in a way hampered the profitability of the company.
(b)Quick/Acid Test Ratio
This ratio establishes a relationship between the liquid assets and current
liabilities. It measures the ability of the firm to meet its current liabilities by using
only its liquid assets. A high ratio indicates good liquidity. The standard acid test
ratio is considered to be 1:1 . Acid test ratio is be calculated using the following
formula :
ACID TEST RATIO= LIQUID ASSETS
CURRENT LIABILITIES
Liquid Assets= Current Assets- Inventory
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0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
LR
2007 2008 2009 2010
Year
Chart showing the Liquid Ratios
Liquid Ratio
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Table 12: Table showing the Acid Test Ratio of PROSEAL Ltd. over the last four years.
Year Liquid AssetsCurrent Liability
Liquid Ratio
2007 52556183 63544916 0.83
2008 49942588 74933064 0.67
2009 62956779 94146734 0.67
2010 92293237 109089832 0.85
GRAPH-12
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
INTERPRETATION:
All the four years have witnessed a highly unsatisfactory Quick Ratio.
The years 2008 and 2009 show the least with a quick ratio of 0.67. The year 2007
has shown a quick ratio of 0.83 whereas the year 2010 has the highest ratio of
0.85. But none of the years did the firm reach the ideal ratio of 1:1 .
This can be attributed to the considerable increase in the current liabilities over the
last four years.
The firm in future has to design a policy to increase the liquid assets so as to meet
the current liabilities.
(c) Cash Ratio
This ratio is the most vigorous measure of the firm’s liquidity position. The accepted
standard ratio is 0.5:1 . This means that rupee one worth of absolute liquid assets are
considered adequate to pay off rupees two worth current liabilities because all the
creditors are not expected to demand at the same time and cash can be realized from
debtors and inventory. Cash ratio can be computed by using the following formula:
CASH RATIO= ABSOLUTE LIQUID ASSETS
CURRENT LIABILITIES
Absolute Liquid Assets= Cash + Marketable Securities
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 79
0.00
0.02
0.04
0.06
0.08
0.10
0.12
Ratio
2007 2008 2009 2010
Year
Chart showing the Cash Ratio
Ratio
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Table13: Table showing the Cash Ratio of PROSEAL Ltd. over the last four years.
YearAbsolute liquid
assetsCurrent
LiabilitiesRatio
2007 3014705 63544916 0.047
2008 3946627 74933064 0.052
2009 10375816 94146734 0.110
2010 8930476 109089832 0.081
GRAPH-13
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
INTERPRETATION:
The Cash Ratio of PROSEAL Ltd., in all the four years is less than the accepted
standard ratio of 0.5:1 .
Although these are not alarming signs for the company, the company has to be
careful that such a low ratio doesn’t prove to be detrimental to the firm’s
revenues.
This ratio also throws light on the fact that the proportion of cash in the liquid
assets is very low.
The company needs to improve on this and maintain a better cash ratio.
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ACTIVITY RATIOS/ TURNOVER RATIOS
Activity ratios indicate the efficiency with which the capital employed is rotated in the
business. The overall profitability of the business depends on two factors:
1. The rate of return on capital employed
2. The turnover.
In order to find out which part of the capital is efficiently employed and which part is not,
different turnover ratios are calculated. These ratios are as follows:
(a) Inventory Turnover Ratio
This ratio indicates whether investment in inventory is efficiently used or not. It therefore
explains whether investments in inventories are within proper limits or not. The ratio is
calculated as follows:
Inventory Turnover Ratio= Cost of Goods Sold/ Sales
Average Inventory
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SIGNIFICANCE:
The inventory turnover ratio signifies the liquidity of the inventory.
A high inventory turnover ratio indicates brisk sales.
The ratio is a measure to discover the possible trouble in the form of over-stocking
and over-valuation.
A low inventory turnover ratio results in the blocking of funds in inventory which
may ultimately result in heavy losses due to inventory becoming obsolete or
deteriorate in quality.
Table1 4: Table showing the inventory turnover ratio of PROSEAL Ltd. over the last
four years.
Year Sales Average Stock Ratio
2007 164949145 49766966 3.31
2008 197693165 64757978 3.05
2009 290418830 76078629 3.82
2010 335620082 89676433.5 3.74
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0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Ratio
2007 2008 2009 2010
Years
Chart showing Inventory Turnover Ratio
Ratio
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
GRAPH-14
INTERPRETATION:
The firm has witnessed a highly constant Inventory Turnover Ratio over the past
four years.
The year 2009 can be considered as the year in which the inventory movement
was at its best with a ratio of 3.82 times and the year 2007 faced the least with
3.05 times.
A low inventory turnover ratio results in the blockage of funds in inventory which
may ultimately result in heavy losses due to inventory becoming obsolete or
deteriorate in quality. This in a way hampers the profitability of the company.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Measures should be implemented to increase the Inventory Turnover Ratio so that
the firm faces no possible trouble in the form of over-stocking and over-valuation.
(b) Working Capital Turnover Ratio
This is also known as Working Capital Leverage Ratio. This ratio indicates whether or
not the working capital has been effectively utilized in making sales. It is calculated as
follows:
Working Capital Turnover Ratio= Cost of Goods Sold/Sales
Working Capital
SIGNIFICANCE:
In case a firm can achieve higher volume of sales with relatively small amount of
working capital, it is an indication of the operating efficiency of the company
A low ratio indicates excess net working capital.
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0.00
1.00
2.00
3.00
4.00
5.00
6.00
Ratio
2007 2008 2009 2010
Year
Chart showing Working Capital Turnover Ratio
Ratio
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Table15: Table showing the working capital turnover ratio of PROSEAL Ltd., over the
last four years.
Year SalesWorking Capital
Ratio
2007 164949145 54680629 3.02
2008 197693165 38856118 5.09
2009 290418830 57120709 5.08
2010 335620082 74245608 4.52
GRAPH-15
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
INTERPRETATIONS:
There has been a constant fluctuation in the Working Capital Turnover Ratio of
the company over the past four years.
The ratio over the past four years has remained above 3 indicating the working
capital has proved quite profitable.
The year 2008 saw the highest working capital turnover ratio indicating that
working capital was best utilized in this year.
(c) Current Assets Turnover Ratio
The relationship between sales and current assets is called Current Assets Turnover Ratio.
It can be computed using the following formula:
Current Assets Turnover Ratio = Net Sales
Current Assets
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
SIGNIFICANCE:
This ratio indicates how much net sales are made for every rupee of investment in
current assets.
A low ratio may signify that the firm has an excessive investment in current
assets.
Table1 6: Table showing the Current Assets Turnover Ratio of PROSEAL Ltd., over the
last four years.
Year Sales Current Asset Ratio
2007 164949145 118225545 1.40
2008 197693165 113789183 1.74
2009 290418830 151267443 1.92
2010 335620082 183335440 1.83
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0.00
0.50
1.00
1.50
2.00
Ratio
2007 2008 2009 2010
Year
Chart showing Current Assets Turnover Ratio
Ratio
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
GRAPH-16
INTERPRETATION:
This ratio is very similar to Working Capital Turnover Ratio.
All four years witnessed a reasonably good Current Assets Turnover Ratio,
suggesting that Current Assets were very profitably used in these years.
The year 2009 saw the sales amounting to twice the amount invested in Current
Assets suggesting that Current Assets proved to be extremely high income
generating.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
The year 2009 also threw light on the point that a little increase in the investments
in current assets lead to higher increase in sales.
(d) Creditors Turnover Ratio
It is called as Creditors Velocity. It is very similar to Debtors Turnover Ratio. It indicates
the speed with which the payments for credit purchases are made to the creditors. This
ratio can be computed as follows:
Creditors Turnover Ratio:
= Credit Purchases
Average Accounts Payables
Or
= Total Purchases
Closing Accounts Payables
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Significance:
It indicates the speed with which payment is made to creditors.
It enhances the credit worthiness of the firm.
A high ratio indicates prompt payment made to creditors.
A high ratio may also indicate the company is not utilizing the credit period to the
full extent.
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0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Ratio
2007 2008 2009 2010
Year
Chart showing Creditor's Turnover Ratio
Ratio
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Table1 7: Table showing the Creditors Turnover Ratio of PROSEAL Ltd., over the last
four years.
YearCredit
PurchasesAverage
CreditorsRatio
2007 101158713 33523917.5 3.02
2008 104387394 53424652.5 1.95
2009 181134402 64622737.5 2.80
2010 201094385 71542854 2.81
GRAPH-17
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(e) Debt Payment Period:
It is also called as Average Payment Period. The ratio gives the average credit period
enjoyed from the creditors. It can be computed as follows:
Debt Payment Period:
= Months/ Days in a year
Creditors Turnover Ratio
Or
= Average Accounts Payable
Average Monthly/Daily Credit Purchases
SIGNIFICANCE:
A short payment period indicates prompt payment made to creditors.
A low credit period may also mean that the firm is not taking full advantage of
credit facilities offered.
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0.00
1.00
2.003.00
4.005.00
6.00
7.00
No. of Months
2007 2008 2009 2010
Year
Chart showing the Debt Payment Period
Debt Payment Period
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Table 18: Table showing the Debt Payment Period of PROSEAL Ltd., over the last four
years.
YearMonths in a
year
Creditors Turnover
Ratio
Debt Payment Period
2007 12 3.02 3.97
2008 12 1.95 6.15
2009 12 2.8 4.29
2010 12 2.81 4.27
GRAPH-18
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INTERPRETATION:
The firm has been maintaining quite low Creditor’s Turnover Ratio over the past
four years indicating that the firm is taking full advantage of the credit facilities
offered.
As a result, the debt payment period has been on a higher side over the years with
2008 being the highest with 6.15 months.
On one hand it may be improving its profitability by utilizing the credit period to
the fullest. On the other hand this says that the firm is not quite concerned about
its credit worthiness and image in the market by delaying the payment to creditors.
If the firm is able to strike the right balance between maintaining its image and
using the credit period given judiciously, it will be the icing on the cake of an
already flourished business.
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(f) Debtor’s Turnover Ratio:
It is also called as Debtors Velocity. Debtors constitute an important constituent of
current assets and therefore the quality of debtors to a great extent determines a firm’s
liquidity. Debtor’s Turnover Ratio can be calculated as follows:
Debtor’s Turnover Ratio = Credit Sales
Average Accounts Receivable
SIGNIFICANCE:
Sales to Accounts Receivables indicate the efficiency of the staff entrusted with
collection of book debts.
The higher the ratio the better it is, since it would indicate debts are being
collected more promptly.
For measuring the efficiency, it is necessary to set up a standard figure; a ratio
lower than the standard will indicate inefficiency.
The ratio helps in cash budgeting since the flow of cash from customers can be
worked out on the basis of sales.
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0.00
2.00
4.00
6.00
8.00
10.00
12.00
Ratio
2007 2008 2009 2010
Year
Chart showing the Debtors Turnover Ratio
Debtors Turnover Ratio
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Table 19: Table showing the Debtors’ Turnover Ratio of PROSEAL Ltd., over the last
four years.
Year Credit SalesAverage Accounts
Receivables
Debtors Turnover
Ratio
2007 164949145 20782416.5 7.94
2008 197693165 26207119 7.54
2009 290418830 25130481 11.56
2010 335620082 35406790.5 9.48
GRAPH-19
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
(g) Debtors Collection Period:
This ratio indicates the extent to which the debts have been collected in time. It gives the
average debt collection period. The ratio is very helpful to the lenders because it explains
to them whether their borrowers are collecting money within a reasonable time. An
increase in the period will result in greater blockage of the funds in debtors. The ratio
may be calculated in any of the following methods:
Debtors Collection Period:
= Months/ Days in a year
Debtors Turnover Ratio
Or
= Accounts Receivables
Average Monthly/ Daily Credit Sales
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
SIGNIFICANCE:
It measures the quality of debtors since it measures the rapidity or slowness with
which money is collected from them.
A shorter collection period implies prompt payments by the debtors; it reduces the
chances of bad debt.
A longer collection period implies too liberal and inefficient credit and collection
inefficiency.
Its average collection should be compared with that of the industry; it should
neither be too liberal nor restrictive.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 99
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
No. of months
2007 2008 2009 2010
Year
Chart showing the Debt Collection Period
Debt Collection Period
WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
Table 20: Table showing the Debt Collection Period of PROSEAL Ltd., over the last four
years.
YearMonths in a
year
Debtors Turnover
Ratio
Debt Collection
Period
2007 12 7.94 1.51
2008 12 7.54 1.59
2009 12 11.56 1.04
2010 12 9.48 1.27
GRAPH-20
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
INTERPRETATIONS:
The firm’s collection policy has been considered reasonably good as its Debt
Collection Period over the four years has been hovering around 1.35 months (on
an average).
The year 2009 was the year in which the firm made best use of its debtors by
converting them into cash in 1.04 months with a Debtors Turnover Ratio of 11.56
times.
The other three years have also been good with a debtor’s turnover ratio of 7.93,
7.54 and 9.47 for the years 2007, 2008 and 2010 respectively.
The firm should take measures to maintain such collection policies which
ultimately enhance the profitability of the firm.
The firm may also consider analyzing the credit worthiness of its customers as an
option before extending credit to them.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
FINDINGS
An analysis of the trend of the Working capital of PROSEAL CLOSURES [P]
LTD., along with the analysis of a few ratios shows that the working capital
position of the company has been really strong over the years.
There has been an increase in the demand for the products manufactured by the
company. This has lead to an increase in the production activities of the company
and thus inventories of the company have increased.
The high demand for the products has led to an increase in the sales of the
company which in turn has led to an increase in the debtors to the company. But
the period for collection of debts from the trade customers has been 1.35 months
(on an average) which is reasonably good.
The most worrying aspect in the company is that the current ratio, liquid ratio and
cash ratio has been way below the required standard. The cash ratio of the
company has been below the required standard of 0.5:1 in all four years. This
shows that the proportion of cash and marketable securities in the liquid assets is
very low and the company needs to improve on it and maintain a better cash ratio.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
On the other hand, the company has had a very low inventory turnover ratio in all
the four years with the lowest being 3.05 times in the year ending 31/03/08. A low
inventory turnover ratio results in the blocking of funds in inventory which may
ultimately result in heavy losses due to inventory becoming obsolete.
The creditors have shown an increase in the year ending 31/03/07 and then a
decrease in the year ending 31/03/08. The increase in the year ending 31/03/07 is
due to an increase in the production activities of the company due to which the
company has had to purchase a greater quantity of raw materials on credit. In the
year ending 31/03/08 the amount of creditors has come down as the company has
been paying off its creditors.
The company has maintained a low creditors’ turnover ratio over the past four
years and so is fully utilizing the credit facilities offered to them. Though the
company is taking advantage of the credit facilities, it is neglecting the aspect of
developing credit worthiness.
The analysis of working capital turnover ratio shows that the relationship between
working capital and sales is quite volatile. In spite of such volatility, the
investment in working capital has resulted in sales shooting up to nearly 3 to 5
times the investment made in working capital.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
The year 2007 saw a dip in the working capital turnover ratio which may be an
indicator of a high level of dead working capital in this year. However, in the
following 2 years, the company has maintained a steady ratio which suggests that
the working capital was used quite efficiently during those years.
The current assets turnover ratio gives us a clear picture of the elasticity between
the investments in current assets and the sales of the company. The year 2008-09
was the year in which the investment in current assets proved to be the most
profitable with a current assets turnover ratio of 1.92. The current assets turnover
ratio has been quite profitable even in the other 3 years. This shows the firm’s
ability to use its working capital effectively in order to generate high sales and
thus increase the overall profitability of the company.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
CONCLUSION
Working capital is that portion of the assets of a business which are used in current
operations, and is represented at any time by the operating cycle of such items, as against
receivables, inventories of raw materials stores, work in progress, finished goods,
merchandise, notes, or bills receivables and cash. The study on working capital is of
major importance due to its close relation with the day to day operations of a business.
A study on working capital management at PROSEAL CLOSURES Pvt. Ltd. was
conducted in order to find out their actual working capital requirements and know how
efficiently it is being utilized in the day to day operations by the methods of ratio
analysis, trend analysis and common size income statements which helps us to compare
their financial position across 4 years.
From the study it was identified that the working capital position of the company has
been really strong over the past 4 years and has also been increasing. There is an increase
in production activities due to an increase in demand for their products, due to this factor
debtor of the company has also increased.
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WORKING CAPITAL MANAGEMENT Proseal Closures Pvt. Ltd
SUGGESTIONS
The firm’s absolute liquidity position is a major concern as the investment in cash
and marketable securities is extremely low. The firm should either improve its
absolute liquidity position or make sure that in future, such a low ratio doesn’t
hamper its profitability.
The company’s debt collection and payment policies are pretty good. However,
the company should give importance to its credit worthiness and also that its
payment period is a little higher than its collection period. If this is used
effectively, this will allow the company to enhance its profits.
The company should assess its customers before extending credit to them. This
reduces the bad debts on one hand and if done properly, the company will no
longer require the services of a factor to collect its book debt and so the company
will cut down on its collection costs.
The dead working capital in the company has been increasing over the past three
years. The company should find alternative avenues for investing these funds so to
obtain a steady return. This will also help the company in maintaining liquid
funds.
THE OXFORD COLLEGE OF BUSINESS MANAGEMENT 106
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