RESEARCH PROJECT REPORT

On

“Working capital management in banking sector”

Submitted to Mahamaya Technical University, Noida in the partial fulfillment of the requirement for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

ABES INSTITUTE OF MANAGEMENT

ACADEMIC SESSION (2012 – 2013)

Research Guidance Submitted By: Miss Sarita Srivastav Anoop Mishra Assistant professor M.B.A Roll no. 117007000

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DECLRATION

I Anoop Mishra declare that the project entitled “Working capital management in banking sector.” is my original being submitted to MAHAMAYA TECHNICAL UNIVERSITY for the partial fulfillment of the requirement for the degree of the master of business administration is my own endeavors and it has not being submitted earlier to any institute/university for any degree

Date Anoop MishraPlace MBA IV SEM

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ACKNOWLEDGEMENT

Completing a task is never a one – man effort. It is often the result of valuable contributors of individuals in a direct or indirect manner ,which in shaping and achieving an objective . Here we cannot resist the temptation of expressing our thanks to those who have contributed greatly accomplishing this task.

I am highly thankful to (ABES IT).

I would like to pay my gratitude to Faculty Guide Miss.Sarita srivastav for her kind attention support and giving an opportunity to research work on Working capital management in banking sector.”.””.

AnoopMishra MBA IV SEM

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Table Of Content

S.NO. Contents Page NO.

1 Introduction To Topic

2 0bjective of the study

3 Scope of Study

4 Review of literature

5 Research Methodology

6 Data Analysis

7 Findings

8 Suggestions

9 Conclusion

10 Bibliography

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PREFACE

The significant outcome of the government policy of liberalization in industrial and financial sector has been the development of new financial instruments. These new instruments are expected to impart greater competitiveness flexibility and efficiency to the financial sector. Growth and development of various Banking services in Banking sector market has proved to be one of the most catalytic instruments in generating momentous investment growth in the present market scenario.

There is a substantial growth in the banking sector due to a high level of precision in the design and marketing of variety of management services nad products by banks and other financial institution providing growth, liquidity and return. In this context, in this project has been done with an objective to have an overall understanding of the different types working capital need in various banks To conduct a detailed analysis of the working capital, and its relationship with banks.

working capital is an important ingredient in the smooth working of business entities, it has not attracted much attention of scholars. Whatever studies have conducted, those have exercised profound influence on the understanding of working capital management good number of these studies which pioneered work in this area have been conducted abroad, following which, Indian scholars have also conducted research studies exploring various aspects of working capital. Special studies have been undertaken, mostly economists, to study the dynamics of inventory investment which often represented largest component of total working capital. As such the previous studies may be grouped into three broad classes─ (1) studies conducted abroad, (2) studies conducted in India, and (3) studies relating to determine of inventory investment. Studies on Working Capital Management Studies adopting a new approach towards working capital management are reviewed here.

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INTRODUCTION

INTRODUCTION

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Working capital is the capital required for maintenance of day-to-day business operations. The present day competitive market environment calls for an efficient management of working capital. The reason for this is attributed to the fact that an ineffective working capital management may force the firm to stop its business operations, may even lead to bankruptcy. Hence the goal of working capital management is not just concerned with the management of current assets & current liabilities but also in maintaining a satisfactory level of working capital.

Holding of current assets in substantial amount strengthens the liquidity position & reduces the riskiness but only at the expense of profitability. Therefore achieving risk – return trade off is significant in holding of current assets. While cash outflows are predictable it runs contrary in case of cash inflows. There is a time lag in maintained by working capital in the form of current assets. The whole process of this conversion in explained by the operation cycle concept.

The study gives in detail the working capital management practices in Company. Management of each current assets, namely inventory management, cash management, accounts receivable management is studied permanent to Company . Similarly management of accounts payable is studied to understand the managing of current liabilities. A part from this concept of operating cycle is studied.

The research methodology adopted for this study is mainly from secondary sources of data which include annual reports of Company., & website of the company. The use of primary sources is limited to interviews with few of the employees in finance department.

The study of working capital management has shown that Company has a strong working capital position. The company is also enjoying reasonable short and medium term finance to the company. For financial requirement of projects outside India, Company has arranged forex funds. Company sales position is also very goods. Its excellent performance is attributed to reduced cost of product The overall position of Company is good & the same is expected by continuum of existing management policies, checking exchange rate risk, competing with domestic and global players in terms of quality & quantity.

Working Capital Management

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Cash is the lifeline of a company. If this deteriorates, so does the company’s ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company’s cash flow health is essential to making investment decisions. A good way to judge a company’s cash flow prospects is to look at its working capital management (WCM).

Defining Working Capital

Working capital refer to that part of total capital which is used for carrying out the routine of regular business operation. In the words, it is the amount of funds used for financing the day-to-day operation. In short, it is the capital with which the business is worked over. Thus, the capital invested and locked up in various current assets, such as stocks of raw material, work in progress, stocks of finished goods account receivable and cash and bank balances constitutes the working capital.

Working capital may be regarded as life blood of a business. Its effective provision can do much to ensure the success of a business while its in provision can do much to ensure the success of a business while its in efficient management can lead not only to loss of profits but also to the ultimate downfall of what otherwise might be considered as a promising concerns.

According to shoo-in, “Working Capital is the amount of funds necessary to cover the cost of operating the enterprise”. Working Capital is also known as Revolving or Circulating Capital.

According to Genesterberg, “Circulating Capital means current assets of a company that are changed in the ordinary cause of business form one to another form. Example : From cash to inventory, inventories to bills receivable and bills receivable to cash.

Concept of working capital

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There are five concepts of working capital :-

Gross Working Capital

Net Working Capital

On the basis of the components or items comprised in working capital, working capital can be classified into the following types :

Gross Working capital : Simply called as working capital, refers to the firms investment in current assets. Current assets which can be converted in to cash with in the accounting year (or operating cycle) and includes cash, short term securities, debtors, Bills receivable and stock (inventory). The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometimes preferred to the concept of working capital for the following reasons:

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

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

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

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

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

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

      It is an indicator of the financial soundness of enterprises.

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

Net Working Capital : Refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment with in a year and include creditors, Bills payable and outsider’s expenses.

Negative working capital or working capital deficit : means the excess of current liabilities over the current assets. It accurse when the current liabilities exceed the current assets

Permanent working capital or fixed working capital : refer to the minimum amount of investment in current assets required throughout the year for carrying out the business. In other words, it is the amount of working capital which remains in the business permanently in one form or other.

Variable working capital or fluctuating working capital : refer to the amount of working capital which goes on fluctuating or changing from time to time with the change in the volume of business activities.

Working capital refers to the cash a business requires for day-to-day operations, or , more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company’s efficiency and financial strength.

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The term working capital refers to the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities).

Thus:

WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

COMPONENTS OF WORKING CAPITAL

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Current Assets

Liquid Assets (cash and bank deposits) Inventory Accrued Income Sundry Debtors Bills Receivables Short term loans and advances Temporary Investment of surplus funds

Current Liabilities

Bank Overdraft Sundry Creditors Bills payables Provisions Accrued or outstanding Incomes Short term loans, advances and deposits Other Short Term Liabilities

CLASSIFICATION OF WORKING CAPITAL

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Working capital may be classified in to ways:

On the basis of concept.

On the basis of time

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

Permanent or fixed working capital.

Temporary or variable working capital

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PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of raw material, work- in-process, finished goods and cash balance. This minimum level of current assts is called permanent or fixed working capital as this part of working is permanently blocked in current assets. As the business grow the requirements of working capital also increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal need of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing for conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business.

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Importance Or Advantage Of Adequate Working Capital

SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production.

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

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

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

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

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

Exploitation Of Favorable Market  Conditions: If a firm is having adequate working capital then it can exploit the favorable market conditions such as purchasing its requirements in bulk when the prices are lower and holdings its inventories for higher prices.

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

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

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

Excess or Inadequate working capital

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

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Disadvantage of Redundant and Excessive Working capital

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

2.   Redundant working capital leads to unnecessary purchasing and accumulation of inventories.

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

4.     It may reduce the overall efficiency of the business.

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

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

7.    The redundant working capital gives rise to speculative transactions

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Disadvantage of Inadequate working capital

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

Thus working capital is needed for the following purposes:

       For the purpose of raw material, components and spares.

       To pay wages and salaries

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

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

       To provide credit facilities to the customer.

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

For studying the need of working capital in a business, one has to study the business under varying circumstances such as a new concern requires a lot of funds to meet its initial requirements such as promotion and formation etc. These expenses are called preliminary expenses and are capitalized. The amount needed for working capital depends upon the size of the company and ambitions of its promoters. Greater the size of the business unit, generally larger will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and expensing of the business till it gains maturity. At maturity the amount of working capital required is called normal working capital.

There are others factors also influence the need of working capital in a business.

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Factors Determining the requirement of working capital

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

undertakings such as electricity, water supply and railways because they offer cash sale

only and supply services not products, and no funds are tied up in inventories and

receivables. On the other hand the trading and financial firms requires less investment in

fixed assets but have to invest large amt. of working capital along with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating inventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progressive increment of labor and service costs before the final product is obtained. So working capital is directly proportional to the length of the manufacturing process.

5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger working capital than in slack season.

6.  WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital.

 

                       

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6. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover wuill needs lower amt. of working capital as compared to a firm having a low rate of turnover.

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FINISHED GOODS

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

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

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital requirements. Generally rise in prices leads to increase in working capital.

Others FACTORS: These are:

   Operating efficiency.

   Management ability.

    Irregularities of supply.

    Import policy.

    Asset structure.

    Importance of labour

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Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cashflow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expense.

The faster a business expands, the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits.

There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

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Sources of Additional Working Capital

Sources of additional working capital include the following:

Existing cash reserves Profits (when you secure it as cash !) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include:

Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending receipt

of a cheque).

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Objective of Study

To study in general the working capital management procedure in Company. To analyze and apply operation cycle concept of working capital in Company. To know how the working capital is being financed. To know the various methods to be followed by Company for inventories and

accounts receivables. To give suggestions, if any, for better working capital management in Company.

Thus a detailed study regarding the working capital management in COMPANY is to be done to consider the effectiveness of working capital management, identify the shortcoming in management and to suggest for improvement in working capital management.

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Scope of the study

Working Capital Management is concerned with the problems that arise in attempting to manage the Current Assets, the Current Liabilities and the inter-relationship that exists between them. The term Current Assets refers to those Assets which in the ordinary course of business can be, or will be, converted into Cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. The Major Current Assets are Cash, Marketable Securities, Accounts Receivables and Inventory.Current Liabilities are those Liabilities, which are intended at their inception, to be paid in the ordinary course of business, within a year out of the current assets or the earnings of the concern .The basic Current Liabilities are Accounts Payable, Bills Payable, Bank Overdraft and outstanding expense. The goal of Working Capital Management is to manage the firm's Assets and Liabilities in such a way that a satisfactory level of working capital is maintained.  This is so because if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy.The Current Assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of the firm while not keeping too high a level of any one of them. Each of the short term sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way. The interaction between current assets and current liabilities is, therefore, the main theme of the theory of management of working capital

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REVIEW OF

LITERATURE

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European Journal of Business and Management www.iiste.orgISSN 2222-1905(Paper) ISSN2222-2839 vol 4, No.13,2012 121(Filbeck and Krueger)Business success heavily depends on the financial executives’ ability to effectively manage receivables and loans, inventory, and payables. Firms can reduce their financing costs and/or increase the fundsavailable for expansion projects by minimizing the amount of investment tied up in current assets.Van Horne (1995) explains that, working capital management is the administration of current assets in the name of cash ,marketable securities, receivables and staff advances, and inventories. Osisioma (1997) demonstrated that good working capital management must ensure an acceptable relationship between the different components of a firm’s working capital so as to make an efficient mix, which will guarantee capital adequacy. Thus, working capital management should make sure that the desirable quantities of each component of the working capital are available for management. However, the question is “What determines the necessary components of a bank’s working capital and how much of such necessary components can be regarded as adequate or desiarable.

The three main motives advanced by Keynes, (1936) for holding cash offer the framework within which research woks on cash holdings are based. The transaction motive for holding cash is to cater for the day to day operating activities of the firm .While the precautionary motive explains that cash is also kept by firms to meet certain unforeseen circumstances, thespeculative motive says that could also be kept or invested in order to take advantage of the effect of perceived future fluctuations in interest rates. The reason for keeping cash together with the business cycle of the firm would influence the level of investment in working capital.

Banks throughout the world have mandatory liquidity position to maintain in addition to ensuring that they have enough liquid funds to meet customer withdrawals. Section 31 of the Banking Act (2004) of Ghana states inter alia that the Bank of Ghana may prescribe (a) that a bank shall hold liquid assets or a specific amount and composition; (b) the amount provided for under paragraph (a) either ascertain percentage of all bank’s deposit liabilities or in another manner, and; (c) different percentages for different classes of deposits or assets, as the Bank of Ghana may determine in any particular case. The section also outlines some penalties for non-compliance.

Prior researchers have approached working capital management (WCM) in numerous ways. Some studies done included: the working capital management and corporate performance (Raheman et al. 2010; Padachi , 2006;Deloof , 2003), Cash Conversion Cycle and Profitability, (Uyar, 2009), determinant factors of working capital management (Nazir and Afza, 2008)and WCM Practices in UK SMEs and Financial management (Chittenden, Poutziouris, Michaelas, 1998). All these studiest end to postulate an optimal way efficient

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working capital policies could lead to profit maximization and which in turn, leadsto increase firm wealth (Lazaridis I, TryfonidisD, 2006; Besley S, Meyer R, 1987). Filbeck and Krueger (2005) survey the importance of efficient working capital management by analyzing the working capital management policies of 32non-financial industries in the US. According to their findings, significant differences exist among industries in working capital practices overtime. Moreover, these working capital practices, themselves, change significantly within industriesovertime.

Raheman and Nasr (2007) examine working capital management effect on liquidity as well on profitability of the firm. In this study, they use sample of 94 Pakistani firms listed on Karachi Stock Exchange for a period of 6 years from 1999–2004.

Similar to Shin and Soenen (1998), Deloof (2003), results of this study show that a strong negative relationship between components of the working capital management and profitability of the firm In other study, Lyroudi and Lazaridis (2000) used food industry in Greek to examine the cash conversion cycle (CCC) as a liquidity indicator of the firms and attempts to determine its relationship with the current and the quick ratios, with its component variables, and investigates the implicationsof the CCC in terms of profitability, indebtness and firm size. The results of their study indicate that there is a significant positive relationship between the cash conversion cycle and the traditional liquidity measures of current and quick ratios. The cash conversion cycle also positively related to the return on assets and the net profit margin but had no linear relationshipwith the leverage ratios. Conversely, the current and quick ratios had negative relationship with the debt to equity ratio, and a positive one with the times interest earned ratio. Finally, there is no difference between the liquidity ratios of large and small firms.

The empirical evidences (Kim et al., 1998; Opler et al., 1999; Ferreira and Vilela, 2004; Ozkan and Ozkan 2004) demonstratea reduction in cash levels when firms increase their financial leverage. This may be because the higher the financial leverage ,the higher the costs of the funds used to invest in liquid assets (Baskin,1987). In addition, as John (1993) maintains, firms that can access the debt market can resort to lending as a subsistute Size effect.size is another significant variable that affects cash holdings. The traditional models to determine the optimal cash levels(Baumol, 1952; Miller and Orr, 1966), or more recent models such as that of Mulligan (1997), demonstrate that there are economies of scale associated with the cash levels required to confront the normal transactions of the firm, so that larger firmscan keep lower cash holdings. Moreover, firm size is related to another set of factors that may influence liquidity levels. More specifically, smaller firms suffer more severe information asymmetries (Berger, Klapper and Udell, 2001), more financial constraints (Fazzari and Petersen, 1993) and they are more likely to suffer financial distress (Rajan and Zingales, 1995;Titman and Wessel, 1988). Also, financial distress are associated with high fixed costs and these costs are proportionately greater for smaller firms (Warner, 1977). Thus, we would expect a negative relation between firm size and cash holding .

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The existence of growth opportunities in firms is an important factor that affect cash levels, as has been shown in various empirical studies (Kim et al., 1998; Opler et al., 1999; Ferreira and Vilela, 2004; Ozkan and Ozkan, 2004). As Myers and Majluf (1984) point out, firms whose value is largely determined by their growth opportunities have larger information a symmetry. Consequently, firms with greater growth opportunities incur higher external financing costs. They also suffer more serious agency conflicts associated with the debt, which can lead to underinvestment (Myers, 1977), insofar as it discourages shareholders from embarking on profitable projects. On the other hand, firms with more growth opportunities may also incur greater costs of financial distress (Harris and Raviv, 1990; Shleifer and Vishny, 1992). This is because their value depends on their growth opportunities rather than on tangible assets or specific cash flows. Thus, this type of firm will keep higher cash levels to avoid costs of financial distress. In this respect, John (1993) finds that firms with good growth opportunities but few tangible assets tend to keep higher cash holdings. Hence we might expect firms with more investment opportunities to keep higher liquidity levels, in order not to limit or cancel their profitable investment projects. Their value depends on carrying out these projects, so that the cost of not having sufficient cash to make the investments is higher. This notwithstanding where firms have projects on-going their levels of cash may dwindle as more of their cash are put in to investment projects. Thus age and bank growth (measured as change in interest income) are used as proxies for firm growth. Regulation and recent Developments in the Ghanaian Banking Sector Banks throughout the world have mandatory liquidity position to maintain in addition to ensuring that they have enough liquid funds to meet customer withdrawals. Section 31 of the Banking Act (2004) states inter alia that the Bank of Ghana may prescribe (a) that a bank shall hold liquid assets or a specific amount and composition; (b) the amount provided for under paragraph (a) either ascertain percentage of all bank’s deposit liabilities or in another manner, and; (c) different percentages for different classes of deposits or assets, as the Bank of Ghana may determine in any particular case. The section also outlines some penalties for non-compliance .Developments in the Ghana banking system as of January 2008 show a continuous surge in asset growth resulting mainly from credit expansion. Banks’ deposits and borrowings were used to fund the growth in assets .The period between January 2007 and January 2008 witnessed some changes in the structure of the banking sector. The level of concentration in the industry remained low with the market share of the 5 top banks (in terms of assets) also declining over the period. The ratios of assets to Gross Domestic Product (GDP), loans to GDP and deposits to GDP rose significantly, suggesting an increased financial deepening. Generally, the industry recorded improved profitability and asset quality and increased operational efficiency. All the banks maintained a Capital Adequacy Ratio (CAR) above the statutory required minimum of 10.0 percent. Credit continues to be concentrated in a few sectors, including the Commerce and Finance, Services and Manufacturing sectors, with a combined share of 66.5 per cent of total outstanding credit in January 2008, compared with 68.5 per cent for the corresponding period in 2007 (BoG , 2009).2.2 Theoretical considerations The main objective of working capital management is to maintain an optimal balance between each of the working capital components. Business success heavily depends on the financial executives’ ability to effectively manage receivables and loans, inventory, and payables

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(Filbeck and Krueger, 2005). Firms can reduce their financing costs and/or increase the funds available for expansion projects by minimizing the amount of investment tied up in current assets. According to Van Horne (1977), working capital management is the administration of current assets in the name of cash, marketable securities, receivables and staff advances, and inventories . Osisioma (1997) demonstrated that good working capital management must ensure an acceptable relationship between the different components of a firm’s working capital so as to make anefficient mix, which will guarantee capital adequacy. Thus, working capital management should make sure that the desirable quantities of each component of the working capital are available fo r management. However, the question is “Whatdetermines the necessary components of a bank ’sworking capital and how much of such necessary components can be regarded as adequate ordesirable ?”The necessary components of an organization’s working capital, basically, depend on the type of business and industry. Cash, debtors, receivables, inventories, marketable securities, and redeemable futures can be recognized as the common components of organization’s working capital. However, the question is to recognize the factors that determine the adequacy of working capital based on growth, size, operating cash flow,

According to Weston and Copeland (1986) cash includes “demand deposits and money market accounts as well as currency holdings”. It recognizes highly liquid short-term investments such as marketable securities .Weston and Copeland refer to marketable securities as a “portfolio of highly liquid, near-cash assets which serves as a backup to the cash account”. There are several types of marketable securities, such as ‘Treasury securities’, ‘Repurchase agreements’, ‘Agency securities’ or‘Commercial papers’. Marketable securities with a maturity of less than three months are referred to as cash equivalents on the balance sheet.2.2.1 Keynesian motives for holding cash Keynes, (1936) devotes and elaborates on the motives for holding cash. He distinguishes between three different but interrelated motives: The ‘transactions-motive’, the ‘precautionary-motive’ and the ‘speculative-motive’. The ‘transactions-motive’ deals with bridging the gap between cash collections and disbursements. Income-motive and transactive -motive are based on a very similar principle but while the ‘income-motive’ deals with an individual’s cash holding behavior , the ‘business-motive’ describes an enterprise’s motives. In other words Companies hold a certain amount of cash in order to meet the regular expenses of their activity. Therefore, the higher the firm’s ability to schedule its cash flows depending on their predictability – the weaker the ‘transactions-motive’ for holding cash will be. On the other hand, precautionary-motive’ pays regard to a company’s need to provide for unsuspected expenses and “unforeseen opportunities of advantageous purchases”. The strength of the ‘precautionary-motive’ is determined by the risk of a sudden contingency and the probability of a profitable acquisition. Thus, if a firm operates in a highly volatile sector of activity, its precautionary cash holding will be higher than that of firms which act in a less risky environment. Nonetheless, Speculative motive refers to the holding of cash for the purpose of speculation. The ‘speculative-motive’ is based on the assumption t t rising interest rates induce decreasing prices of securities and vice versa. Therefore, a firm wil invest its idle cash in securities when interest rates are expected to decrease for generating benefits for the firm, because the prices

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of the acquired securities will rise as a consequence of 7 .8. the anticipated interest rate drop. Van Horne claims that companies do not hold cash for this kind of speculative purpose and it can be assumed that this estimation is valid especially for small banks which usually do not have the resources to make such complex financial decisions .The Keynesian motives for holding cash are frequently referred to and further developed or slightly modified in relevant literature. Keynes’ motives are a very widespread approach in financial theory in order to explain cash holding behaviours of companies and they also constitute the basis for a great deal of cash management practices. As already pointed out, the third motive is irrelevant when studying the cash holding behaviour of banks because of its complexity. However, the ‘transactions-motive’ and ‘precautionary-motive’ represent a very basic approach for illustrating the cash holding behaviour of firms (Horne,1995).2.3 Review of Empirical Literature Prior researchers have approached working capital management (WCM) in numerous ways .Some studies done included: the working capital management and corporate performance(Raheman et al. 2010; Padachi, 2006;Deloof, 2003), Cash Conversion Cycle and Profitability,(Uyar, 2009), determinant factors of working capital management (Nazir and Afza, 2008) and WCM Practices in UK SMEs and Financial management (Chittenden, Poutziouris, Michaelas,1998). All these studies tend to postulate an optimal way efficient working capital policies could lead to profit maximization and which in turn, leads to increase firm wealth (Lazaridis I, Tryfonidis D, 2006; Besley S, Meyer R (1987).

Stock Exchange for a period of 6 years from 1999–2004. Similar to Shin and Soenen (1998),Deloof (2003), results of this study show that a strong negative relationship between components of the working capital management and profitability of the firm In other study, Lyroud i and Lazaridis (2000) used food industry in Greek to examine the cash conversion cycle (CCC) as aliquidity indicator of the firms and attempts to determine its relationship with the current and the quick ratios, with its component variables, and investigates the implications of the CCC in terms of profitability, in debtnes and firm size. The results of their study indicate that there is asignificant positive relationship between the cash conversion cycle and the traditional liquidity measures of current and quick ratios. The cash conversion cycle al so positively related to the return on assets and the net profit margin but had no linear relationship with the leverage ratios .Conversely, the current and quick ratios had negative relationship with the debt to equity ratio ,and a positive one with the times interest earned ratio. Finally, there is no difference between the liquidity ratios of large and small firms.2.3.1 Determinants of cash level of firms Among the key factors which influence level of cash position of firms include but not limited to leverage, firm size, growth opportunities, efficiency of firms, firm profitability, age, previous level of cash and firm risk. Leverage The leverage ratio will also affect firms’ cash holdings. The empirical evidence (Kim et al., 1998; Opler et al., 1999; Ferreira and Vilela, 2004; Ozkan and Ozkan 2004)demonstrates a reduction in cash levels when firms increase their financial leverage. This may be because the higher the financial leverage, the higher the

31

costs of the funds used to invest in liquid assets (Baskin, 1987). In addition, as John (1993) maintains, firms that can access the debt market can resort to lending as a substitute for liquid assets .Size Size is another significant variable that affects cash holdings. The traditional models to determine the optimal cash levels (Baumol, 1952; Miller and Orr, 1966), or more recent modelssuch as that of Mulligan (1997), demonstrate that there are economies of scale associated with 9 10. the cash levels required to confront the normal transactions of the firm, so that larger firms cankeep lower cash holdings. Moreover, firm size is related to another set of factors that mayinfluence liquidity levels. More specifically, smaller firms suffer more severe information a symmetries (Berger, Klapper and Udell, 2001), more financial constraints (Fazzari and Petersen, 1993) and they are more likely to suffer financial distress (Rajan and Zingales, 1995;Titman and Wessel, 1988). Also, financial distress are associated with high fixed costs and these costs are proportionately greater for smaller firms (Warner, 1977). Thus, we would expect anegative relation between firm size and cash holdings. Growth opportunities . The existence of growth opportunities in firms is an important factor that affect cash levels, as has been shown in various empirical studies (Kim et al., 1998; Opler et al., 1999; Ferreira and Vilela, 2004; Ozkan and Ozkan, 2004). As Myers and Majluf (1984) point out, firms whose value is largely determined by their growth opportunities have larger information asymmetry .Consequently, firms with greater growth opportunities incur higher external financing costs .They also suffer more serious agency conflicts associated with the debt, which can lead tounder investment (Myers, 1977), insofar as it discourages shareholders from embarking on profitable projects. On the other hand, firms with more growth opportunities may also in curgreater costs of financial distress (Harris and Raviv, 1990; Shleifer and Vishny, 1992). This is because their value depends on their growth opportunities rather than on tangible assets or specific cash flows. Thus, this type of firm will keep higher cash levels to avoid costs of financial distress. In this respect, John (1993) finds that firms with good growth opportunities but few tangible assets tend to keep higher cash holdings. Hence we might expect firms with more investment opportunities to keep higher liquidity levels, in order not to limit or cancel their profitable investment projects. Their value depends on carrying out these projects, so that the cost of not having sufficient cash to make the investments is higher. This notwithstanding where firms have projects on-going their levels of cash may dwindle as more of their cash are put into investment projects. Thus age and bank growth (measured as change in interest income) are use das proxies for firm growth .Profitability 10 11. Profit is a source of cash flow for firms. The amount of profit made by a firm is either retained for funding future investment opportunities or distributed to shareholders as dividend. Even though the amount of profit made in a particular year by a firm does not automatically translate into exactly the same amount of cash, it is unlikely that less profitable firms would have more cash flows than highly profitable firms, all other things being equal. Therefore, profitable firm sare expected to have more cash than less profitable firms. RiskFirms that are risky tend to use cash holding as buffer against future uncertainties. Guney et al.(2007) contend that firms with more volatile cash flows are expected to hold more cash in anattempt to mitigate the expected costs of liquidity constraints. After short falling of liquid asset ,when firms have valuable growth opportunities, then these opportunities are given up and firm value will drop. Minton

32

and Schrand (1999) find that firms with higher volatile cash flow permanently forgo investment rather than reacting to cash flow shortfalls by changing the discretionary investment timing. Again, firms that hold a lot of debt are considered to be more risky than others. Thus total debt to asset ratio is used to represent risk. Efficiency of firms Cash can be put into various uses such as for transaction, precaution and speculation purposes. In some situations the level of cash held by a company can be used as a basis for assessing how efficient the firm is. It is therefore expected that efficient firms run by rationale managers would put idle funds into investment vehicles if the returns on these vehicles are expected to be more than keeping cash. (Baltag i, 1995).

33

RESEARCH

METHODOLOGY

RESEARCH METHODOLOGY

METHODS EMPLOYED

Descriptive type of research

Secondary data are used

Financial report analysis Periodical analysis Ratio Analysis Cash flow Analysis

Methods used:

34

35

DATA ANALYSIS

Analysis of Financial Statement

 

FINANCIAL STATEMENTS:

36

Financial statement is a collection of data organized according to logical and consistent accounting procedure to convey an under-standing of some financial aspects of a business firm. It may show position at a moment in time, as in the case of balance sheet or may reveal a series of activities over a given period of time, as in the case of an income statement. Thus, the term ‘financial statements’ generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account

.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations) missing out of business activities.

4. To provide financial information that assets in estimating the learning potential of the business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final picture a final picture of a concern. The utility of these statements is dependent upon a number of factors. The analysis and interpretation of these statements must be done carefully otherwise misleading conclusion may be drawn.

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Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these statements is only approximate. The actual value can only be determined when the business is sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year, during the life of a concern. The costs and incomes are apportioned to different periods with a view to determine profits etc. The allocation of expenses and income depends upon the personal judgment of the accountant. The existence of contingent assets and liabilities also make the statements imprecise. So financial statement are at the most interim reports rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and accurate position. The value of fixed assets in the balance sheet neither represent the value for which fixed assets can be sold nor the amount which will be required to replace these assets. The balance sheet is prepared on the presumption of a going concern. The concern is expected to continue in future. So fixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in the balance sheet which will realize nothing at the time of liquidation but they are shown in the balance sheets.

4. The financial statements are prepared on the basis of historical costs Or original costs. The value of assets decreases with the passage of time current price changes are not taken into account. The statement are not prepared with the keeping in view the economic conditions. the balance sheet loses the significance of being an index of current economics realities. Similarly, the profitability shown by the income statements may be represent the earning capacity of the concern.

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

Research methodology used for study secondary sources of data. Most of study is conducted based on secondary sources.Secondary sources of data mainly include annual reports of COMPANY. Statement of changes in working capital for the past 5 years is done using the data taken from these financial reports. Similarly time series analysis of operating cycle and calculations of ratios is done. Apart from these financial reports. Similarly time series analysis of operating cycle and calculations of ratios

38

is done. Apart from this, the website of Company is referred to know the products, product facilities, network etc.

Industry analysis is done based on the information gathered from newspapers and websites of Indian steel ministry & other sector related websites.

The use of primary sources is limited to interviews with some of the employee in finance department. The reason being, it is against the Company’s policies & producers to reveal the sensitive financial information.

Collecting the Information

With respect to primary and secondary data, the information is collected. Primary data tells us to asking the question to the person personally like interaction with employers and account head in Company. Secondary data means that to get the data from the internet, company magazines, annual reports of the company, internal financial document which is provided by the account department.

Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital utilization.

Ratio Formulae Result InterpretationStock Turnover(in days)

Average Stock * 365/

Cost of Goods Sold

= x days On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock

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management.Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days.

Receivables Ratio(in days)

Debtors * 365/Sales

= x days

It take you on average x days to collect monies due to you. If your official credit terms are 45 day and it takes you 65 days... why ?One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days.

Payables Ratio(in days)

Creditors * 365/Cost of Sales (or

Purchases)= x days

On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer.

Current Ratio

Total Current Assets/

Total Current Liabilities

= x times

Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands.

Quick Ratio

(Total Current Assets - Inventory)/

Total Current Liabilities

= x timesSimilar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.

Working Capital Ratio

(Inventory + Receivables -

Payables)/Sales

As % SalesA high percentage means that working capital needs are high relative to your sales.

Other working capital measures include the following:

Bad debts expressed as a percentage of sales. Cost of bank loans, lines of credit, invoice discounting etc.

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Debtor concentration - degree of dependency on a limited number of customers.

Once ratios have been established for your business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry

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  WORKING CAPITAL ANALYSIS

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

The analysis of working capital can be conducted through a number of devices, such as:

1.     Ratio analysis.

2.     Fund flow analysis.

3.     Budgeting.

 

RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. The following ratios can be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3.  Absolute liquid ratio

4.  Inventory turnover.

5.  Receivables turnover.

6.  Payable turnover ratio.

7.  Working capital turnover ratio.

8.  Working capital leverage

9.  Ratio of current liabilities to tangible net worth.

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FUND FLOW ANALYSIS

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

 

a.      Preparing schedule of changes of working capital

b.     Statement of sources and application of funds.

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

 

WORKING CAPITAL BUDGET

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

 

ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF LIQUIDITY

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

43

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

1.     Liquidity ratios.

2.     Current assets movements ‘ratios.

 

Balance sheet of state bank of india

(Rs crore)

Mar ' 12 Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08

Sources of funds

Owner's fund

Equity share capital 671.04 635.00 634.88 634.88 631.47

Share application money - - - - -

Preference share capital - - - - -

Reserves & surplus 83,280.16 64,351.04 65,314.32 57,312.82 48,401.19

Loan funds

Secured loans - - - - -

Unsecured loans ############ 9,33,932.818,04,116.2

37,42,073.1

35,37,403.9

4

Total ############ 9,98,918.868,70,065.4

38,00,020.8

25,86,436.6

0

Uses of funds

Fixed assets

Gross block 14,792.33 13,189.28 11,831.63 10,403.06 8,988.35

Less : revaluation reserve - - - - -

44

Mar ' 12 Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08

Less : accumulated depreciation 9,658.46 8,757.33 7,713.90 6,828.65 5,849.13

Net block 5,133.87 4,431.96 4,117.72 3,574.41 3,139.22

Capital work-in-progress 332.68 332.23 295.18 263.44 234.26

Investments 3,12,197.61 2,95,600.572,85,790.0

72,75,953.9

61,89,501.2

7

Net current assets

Current assets, loans & advances 53,113.02 43,777.85 35,112.76 37,733.27 44,417.03

Less : current liabilities & provisions 80,915.09 1,05,248.39 80,336.701,10,697.5

7 83,362.30

Total net current assets -27,802.08 -61,470.54 -45,223.94 -72,964.30 -38,945.27

Miscellaneous expenses not written - - - - -

Total 2,89,862.08 2,38,894.222,44,979.0

32,06,827.5

01,53,929.4

8

Notes:

Book value of unquoted investments - - - - -

Market value of quoted investments - - - - -

Contingent liabilities 8,99,565.18 7,90,386.795,96,366.4

17,67,567.5

28,29,740.4

8

Number of equity sharesoutstanding (Lacs) 6710.45 6349.99 6348.83 6348.80 6314.70

Mutual Fund Selector

Cash flow of state bank of india (Rs crore)

Mar ' 12 Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08

Profit before tax 18,483.31 14,954.23 13,926.10 14,180.64 10,438.90

Net cashflow-operating activity -28,468.59 34,282.52 -1,804.99 29,479.73 -856.87

Net cash used in investing activity -1,648.56 -1,245.53 -1,761.52 -1,651.93 -2,798.01

Netcash used in fin. Activity 2,147.66 2,057.11 -3,359.67 5,097.38 19,371.12

Net inc/dec in cash and equivlnt -25,710.98 35,094.10 -6,926.18 32,925.18 15,497.65

Cash and equivalnt begin of year 1,22,874.15 87,780.05 1,03,110.02 71,478.62 51,968.69

Cash and equivalnt end of year 97,163.16 1,22,874.15 96,183.84 1,04,403.80 67,466.34

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Ratios (Rs crore)

Mar ' 12 Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08

Per share ratios

Adjusted EPS (Rs) 174.80 130.44 144.54 143.71 106.39

Adjusted cash EPS (Rs) 189.81 146.04 159.23 155.74 117.16

Reported EPS (Rs) 174.46 130.15 144.37 143.67 106.56

Reported cash EPS (Rs) 189.47 145.75 159.06 155.69 117.33

Dividend per share 35.00 30.00 30.00 29.00 21.50

Operating profit per share (Rs) 289.44 255.39 229.63 230.04 173.61

Book value (excl rev res) per share EPS (Rs) 1,251.05 1,023.40 1,038.76 912.73 776.48

Book value (incl rev res) per share EPS (Rs) 1,251.05 1,023.40 1,038.76 912.73 776.48

Net operating income per share EPS (Rs) 1,776.47 1,504.34 1,353.15 1,179.45 899.83

Free reserves per share EPS (Rs) 645.05 468.29 412.36 373.99 356.61

Profitability ratios

Operating margin (%) 16.29 16.97 16.96 19.50 19.29

Gross profit margin (%) 15.44 15.93 15.88 18.48 18.09

Net profit margin (%) 9.73 8.55 10.54 12.03 11.65

Adjusted cash margin (%) 10.59 9.60 11.62 13.04 12.81

Adjusted return on net worth (%) 13.97 12.74 13.91 15.74 13.70

Reported return on net worth (%) 13.94 12.71 13.89 15.74 13.72

Return on long term funds (%) 96.84 96.72 95.02 100.35 86.83

Leverage ratios

Long term debt / Equity - - - - -

Total debt/equity 12.43 14.37 12.19 12.81 10.96

Owners fund as % of total source 7.44 6.50 7.57 7.24 8.36

Fixed assets turnover ratio 0.10 7.24 7.26 7.20 6.32

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Mar ' 12 Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08

Liquidity ratios

Current ratio 0.65 0.41 0.43 0.34 0.53

Current ratio (inc. st loans) 0.04 0.04 0.03 0.04 0.07

Quick ratio 12.05 8.50 9.07 5.74 6.15

Inventory turnover ratio - - - - -

Payout ratios

Dividend payout ratio (net profit) 22.59 26.03 23.36 22.90 22.64

Dividend payout ratio (cash profit) 20.80 23.24 21.20 21.13 20.56

Earning retention ratio 77.45 74.03 76.67 77.11 77.33

Cash earnings retention ratio 79.24 76.80 78.82 78.88 79.41

Coverage ratios

Adjusted cash flow time total debt 81.94 100.71 79.54 75.05 72.64

Financial charges coverage ratio 0.32 0.35 0.33 1.36 0.37

Fin. charges cov.ratio (post tax) 1.20 1.19 1.21 1.23 1.23

Component ratios

Material cost component (% earnings) - - - - -

Selling cost Component 0.17 0.26 0.26 0.33 0.30

Exports as percent of total sales - - - - -

Import comp. in raw mat. consumed - - - - -

Long term assets / total Assets 0.85 0.87 0.89 0.88 0.81

Bonus component in equity capital (%) - - - - -

47

Balancesheet - Allahabad Bank

Particulars Mar'12 Mar'11 Mar'10 Mar'09 Mar'08

Liabilities 12 Months 12 Months 12 Months 12 Months 12 Months

Share Capital 500.03 476.22 446.70 446.70 446.70

Reserves & Surplus 9,146.58 7,166.93 5,437.56 4,531.88 4,800.48

Net Worth 10,506.61 8,507.39 6,752.95 5,851.95 5,247.18

Secured Loans 9,094.48 6,918.18 5,435.48 937.04 1,792.00

Unsecured Loans 159,593.08 131,887.16 106,055.75 84,971.79 71,616.38

TOTAL LIABILITIES 179,194.17 147,312.72 118,244.18 91,760.78 78,655.56

Assets

Gross Block 1,846.76 1,745.24 1,648.89 1,577.18 1,482.58

(-) Acc. Depreciation 649.03 597.01 530.62 467.43 411.11

Net Block 337.73 283.99 249.59 236.38 1,071.47

Capital Work in Progress. 0.00 0.00 0.00 0.00 0.00

Investments. 54,283.24 43,247.06 38,428.62 29,651.05 23,400.25

Inventories 0.00 0.00 0.00 0.00 0.00

Sundry Debtors 0.00 0.00 0.00 0.00 0.00

Cash And Bank 14,025.21 11,027.38 9,168.22 6,636.76 7,042.10

Loans And Advances 113,428.39 95,863.69 72,984.09 60,250.44 51,425.51

Total Current Assets 127,453.60 106,891.07 82,152.31 66,887.21 58,467.61

Current Liabilities 3,740.40 3,973.64 3,455.03 5,887.23 4,283.76

Provisions 0.00 0.00 0.00 0.00 0.00

Total Current Liabilities 3,740.40 3,973.64 3,455.03 5,887.23 4,283.76

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NET CURRENT ASSETS 123,713.21 102,917.43 78,697.28 60,999.97 54,183.84

Misc. Expenses 0.00 0.00 0.00 0.00 0.00

TOTAL ASSETS (A+B+C+D+E) 179,194.17 147,312.72 118,244.18 91,760.78 78,655.56

Cash FlowParticulars Mar'12 Mar'11 Mar'10 Mar'09 Mar'08

Profit Before Tax 0.00 0.00 0.00 0.00 0.00

Net Cash Flows from Operating Activity 1,434.97 584.13 1,523.10 -2.39 703.27

Net Cash Used in Investing Activity -123.00 -96.34 -71.22 -94.60 -68.30

Net Cash Used in Financing Activity 1,685.87 1,371.36 1,079.58 -308.34 1,465.17

Net Inc/Dec in Cash and Cash Equivalent 2,997.83 1,859.15 2,531.46 -405.33 2,100.13

Cash and Cash Equivalent - Beginning of the Year

11,027.38 9,168.22 6,636.76 7,042.10 4,941.97

Cash and Equivalent - End of the Year 14,025.21 11,027.38 9,168.22 6,636.76 7,042.10

Key Financial Ratios of Allahabad Bank

Mar '12

Mar 11 Mar '10 Mar '09 Mar’o8

Investment Valuation Ratios

Face Value - 10.00 10.00 10.00

Dividend Per Share 6.00 5.50 2.5 3.00

Operating Profit Per Share (Rs) 44.28 38.78 37.05 27.92

Net Operating Profit Per Share (Rs) 327.51 250.12 218.47 181.54 158.53

Free Reserves Per Share (Rs) 112.66 91.46 74.68 62.00 57.96

Bonus in Equity Capital -- -- -- -- --

Profitability Ratios

10.00 4.75 4.28 4.13 3.63 3.19

6.00 11.68 12.15 12.71 10.12 14.44

Net Profit Margin 11.24 11.61 12.07 9.43 13.69

Return on Long Term Fund(%) 130.00 116.06 127.11 126.10 106.77

Return on Net Worth(%) 19.35 18.61 20.50 13.13 18.57

Adjusted Return on Net Worth(%) 19.35 18.61 20.51 15.43 18.57

Return on Assets Excluding Revaluations 192.92 160.50 131.73 111.45 117.47

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Return on Assets Including Revaluations 210.12 178.65 151.17 131.00 117.47

Management Efficiency Ratios

Interest Income / Total Funds 9.85 8.78 8.97 8.98 9.40

Net Interest Income / Total Funds 3.62 3.63 3.71 3.22 3.43

Non Interest Income / Total Funds 0.14 0.25 0.21 0.04 0.05

Interest Expended / Total Funds 6.23 5.16 5.26 5.77 5.97

Operating Expense / Total Funds 2.29 2.27 2.19 1.83 1.82

Profit Before Provisions / Total Funds 1.42 1.57 1.67 1.36 1.58

Net Profit / Total Funds 1.12 1.05 1.11 0.85 1.29

Loans Turnover 0.16 0.14 0.15 0.15 0.16

Total Income / Capital Employed(%) 9.99 9.04 9.18 9.03 9.45

Interest Expended / Capital Employed(%) 6.23 5.16 5.26 5.77 5.97

Total Assets Turnover Ratios 0.10 0.09 0.09 0.09 0.09

Asset Turnover Ratio 0.10 0.09 0.09 0.10 4.78

Profit And Loss Account Ratios

Interest Expended / Interest Earned 66.74 63.48 68.33 70.69 71.64

Other Income / Total Income 1.36 2.80 , 2.29 0.49 0.48

Operating Expense / Total Income 22.90 25.07 23.88 20.33 19.30

Selling Distribution Cost Composition 0.16 0.30 0.22 0.17 0.21

Balance Sheet Ratios

Capital Adequacy Ratio 12.83 12.96 13.62 13.11 12.04

Advances / Loans Funds(%) 72.29 74.81 72.55 73.82 74.65

Debt Coverage Ratios

Credit Deposit Ratio 70.25 69.44 68.27 69.30 69.39

Investment Deposit Ratio 33.46 34.33 35.64 33.88 32.13

Cash Deposit Ratio 5.70 6.34 6.44 7.28 7.90

Total Debt to Owners Fund 16.54 17.26 18.02 17.07 13.65

Financial Charges Coverage Ratio 0.24 0.31 0.33 1.25 1.28

Financial Charges Coverage Ratio Post Tax 1.19 1.21 1.22 1.16 1.23

Leverage Ratios

Current Ratio 0.01 0.02 0.01 0.02 0.02

Quick Ratio 32.65 26.11 23.20 11.10 13.47

Cash Flow Indicator Ratios

Dividend Payout Ratio Net Profit 18.67 23.33 23.82 16.99 16.08

Dividend Payout Ratio Cash Profit 17.97 22.29 22.65 15.83 15.25

Earning Retention Ratio 81.33 76.67 76.19 83.01 83.92

Cash Earning Retention Ratio 82.03 77.71 77.36 84.17 84.75

AdjustedCash Flow Times 82.25 88.54 83.54 103.01 69.67

Mar '12

Mar '11 Mar '10 Mar '09 Mar’o8

Earnings Per Share 37.33 29.88 27.01 17.21 21.82

50

Book Value 192.92 160.50 131.73 111.45 117.47

Balance Sheet of State Bank of India

Mar '12 Mar '11 Mar '10 mar '09Mar '08

12 mths 12 mths 12 mths 12 mths 12 mths

Capital and Liabilities:

Total Share Capital 671.04 635.00 634.88 634.88 631.

Equity Share Capital 671.04 635.00 634.88 634.88 631.47

Share Application Money 0.00 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 83,280.16 64,351.04 65,314.32 57,312.8248,401.19

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Net Worth 83,951.20 64,986.04 65,949.20 57,947.70 49,032.66

Deposits1,043,647.3

6933,932.81 804,116.23 742,073.13 537,403.94

Borrowings 127,005.57 119,568.96 103,011.60 53,713.68 51,727.41

Total Debt1,170,652.9

31,053,501.7

7907,127.83 795,786.81 589,131.35

Other Liabilities & Provisions 80,915.09 105,248.39 80,336.70 110,697.57 83,362.30

Total Liabilities1,335,519.2

21,223,736.2

01,053,413.7

3\

964,432.08 721

,526.31

51

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

12 mths 12 mths 12 mths 12 mths 12 mths

Assets

Cash & Balances with RBI 54,075.94 94,395.50 61,290.87 55,546.17 51,534.62

Balance with Banks, Money at Call 43,087.23 28,478.65 34,892.98 48,857.63 15,931.72

Advances 867,578.89 756,719.45 631,914.15 542,503.20 416,768.20

Investments 312,197.61 295,600.57 285,790.07 275,953.96 189,501.27

Gross Block 14,792.33 13,189.28 11,831.63 10,403.06 8,988.35

Accumulated Depreciation 9,658.46 8,757.33 7,713.90 6,828.65 5,849.13

Net Block 5,133.87 4,431.95 4,117.73 3,574.41 3,139.22

Capital Work In Progress 332.68 332.23 295.18 263.44 234.26

Other Assets 53,113.02 43,777.85 35,112.76 37,733.27 44,417.03

Total Assets1,335,519.2

41,223,736.2

01,053,413.7

4 964,432.08

721,526.32

Contingent Liabilities 698,064.74 585,294.50 429,917.37 614,603.47 736,087.59

Bills for collection 201,500.44 205,092.29 166,449.04 152,964.06 93,652.89

Book Value (Rs) 1,251.05 1,023.40 1,038.76 912.73 776.48

Cash Flow of State Bank of India

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

12 mths 12 mths 12 mths 12 mths 12 mths

Net Profit Before Tax 18483.31 14954.23 13926.10 14180.64 10438.90

Net Cash From Operating Activities -28468.59 34282.52 -1804.99 29479.73 -856.87

Net Cash (used in)/fromInvesting Activities

-1648.56 -1245.53 -1761.52 -1651.93 -2798.01

Net Cash (used in)/from Financing Activities 2147.66 2057.11 -3359.67 5097.38 19371.12

Net (decrease)/increase In Cash and Cash Equivalents

-25710.98 35094.10 -6926.18 32925.18 15716.24

Opening Cash & Cash Equivalents 122874.15 87780.05 103110.02 71478.62 51968.69

Closing Cash & Cash Equivalents 97163.16 122874.15 96183.84 104403.80 67466.34

52

Key Financial Ratios of State Bank of India

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

Investment Valuation Ratios

Face Value 10.00 10.00 10.00 10.00 10.00

Dividend Per Share 35.00 30.00 30.00 29.00 21.50

Operating Profit Per Share (Rs) 289.44 255.39 229.63 230.04 173.61

Net Operating Profit Per Share (Rs) 1,776.47 1,504.34 1,353.15 1,179.45 899.83

Free Reserves Per Share (Rs) 645.05 468.29 412.36 373.99 356.61

Bonus in Equity Capital -- -- -- --

Profitability Ratios

Interest Spread 5.04 4.12 3.82 4.34 4.32

Adjusted Cash Margin(%) 10.59 9.60 11.62 13.04 12.81

Net Profit Margin 9.73 8.55 10.54 12.03 11.65

Return on Long Term Fund(%) 96.84 96.73 95.02 100.35 86.83

Return on Net Worth(%) 13.94 12.7113.89

15.74 13.72

Adjusted Return on Net Worth(%) 13.97 12.74 13.91 15.74 13.70

Return on Assets Excluding Revaluations 1,251.05 1,023.40 1,038.76 912.73 776.48

Return on Assets Including Revaluations 1,251.05 1,023.40 1,038.76 912.73 776.48

Management Efficiency Ratios

Interest Income / Total Funds 9.32 8.39 8.52 8.88 8.82

Net Interest Income / Total Funds 4.37 4.10 3.82 3.79 3.87

Non Interest Income / Total Funds 0.08 0.09 0.10 0.11 0.14

Interest Expended / Total Funds 4.94 4.29 4.69 5.09 4.96

Operating Expense / Total Funds 2.86 2.67 2.38 2.06 2.16

Profit Before Provisions / Total Funds 1.52 1.43 1.46 1.75 1.74

Net Profit / Total Funds 0.91 0.65 0.91 1.08 1.04

Loans Turnover 0.15 0.14 0.15 0.16 0.15

Total Income / Capital Employed(%) 9.40 8.48 8.62 8.99 8.96

Interest Expended / Capital Employed(%) 4.94 4.29 4.69 5.09 4.96

Total Assets Turnover Ratios 0.09 0.08 0.09 0.09 0.09

Asset Turnover Ratio 0.10 0.09 0.09 0.10 6.32

Profit And Loss Account Ratios

Interest Expended / Interest Earned 59.36 60.04 66.66 67.28 65.23

Other Income / Total Income 0.85 1.10 1.21 1.18 1.56

Operating Expense / Total Income 30.40 31.51 27.61 22.91 24.13

Selling Distribution Cost Composition 0.17 0.26 0.26 0.33 0.30

Balance Sheet Ratios

53

Capital Adequacy Ratio 13.86 11.98 13.39 14.25 13.47

Advances / Loans Funds(%) 78.01 77.19 74.22 78.34 78.31

Debt Coverage Ratios

Credit Deposit Ratio 82.14 79.90 75.96 74.97 77.51

Investment Deposit Ratio 30.73 33.45 36.33 36.38 34.81

Cash Deposit Ratio 7.51 8.96 7.56 8.37 8.29

Total Debt to Owners Fund 12.43 14.37 12.19 12.81 10.96

Financial Charges Coverage Ratio 0.32 0.35 0.33 1.36 0.37

Financial Charges Coverage Ratio Post Tax 1.20 1.19 1.21 1.23 1.23

Leverage Ratios

Current Ratio 0.05 0.04 0.04 0.04 0.07

Quick Ratio 12.05 8.50 9.07 5.74 6.15

Cash Flow Indicator Ratios

Dividend Payout Ratio Net Profit 22.59 26.03 23.36 22.90 22.64

Dividend Payout Ratio Cash Profit 20.80 23.24 21.20 21.13 20.56

Earning Retention Ratio 77.45 74.03 76.67 77.11 77.33

Cash Earning Retention Ratio 79.24 76.80 78.82 78.88 79.41

AdjustedCash Flow Times 81.94 100.71 79.54 75.05 72.64

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

Earnings Per Share 174.15 116.07 144.37 143.67 106.56

Book Value 1,251.05 1,023.40 1,038.76 912.73 776.48

54

Problems Of Financial Statement Analysis

Development of benchmarks

Window Dressing

Price Level changes

Variations in accounting policies

Correlation among ratios

55

Findings

Companies tend to think of banks solely as providers of capital but this is a conservative and restricted outlook. Successful banks today have evolved from being pure transaction banks that simply offer credit facilities and traditional banking products into strategic advisory partners. This is a trend that companies should seek to exploit by making greater demands on their banking partners.

Of course, a bank can function as a provider of capital and financial advice including optimising cash flow and cash management but it should also be capable of creating a financial overview that can form the basis of the company's management strategy. Significantly, a bank should be capable of projecting profit and loss, balances, operational development, working capital and investment.

Importance Of The Study

To maintain the liquidity and profitability in business

To have appropriate working capital for performance of day to day transactions .

To reduce blockage of funds in the business.

To maintain profitability with appropriate funds for daily operations.

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Recommendations And Suggestions

There is a great need for effective management of working capita in any firm. There is no precise way to determine the exact amount of gross or net working capital for any firm. The data and problems of each company should be analyzed to determine the working capital. There is no specific rule as to how current assets should be financed. It is not feasible in practice to finance current assets by short-term sources only. Keeping in view the constraints of the company, a judicious mix of short and long term finances should be invested in current assets. Since current assets involve cost of funds, they should be put to productive use.

During my project period, I have studied the working capital management in Company . On the basis of my study I am putting forward some suggestions.

Implementation of which may certainly improve the efficiency of working capital management in the unit.

Due to order base work in unit the inventories are determined after the order is received. It takes time to inform the requirement for the inventories to higher authority. Unit should arrange the raw material in advance which may reduce the time and leads to overcome the outstanding orders problem and defiantly help in the expansion of capacity production..

Outstanding orders of recent past years are in increasing mode these orders should be minimize as far as possible. It shows the capacity of production of any company but with reference of past data available with us the production turnover is also increasing thus it clearly seems that the order receiving one in financial year is somewhere higher than increased production capacity.

Storage capacity should be made more reliable so that the storage of materials can be made in safe manner which leads to faster production.

Government department customers are lagging in debt payment which should be consider.

57

Conclusion

Any change in the working capital will have an effect on a business’s cash flows. A positive change in working capital indicates that the business has paid out cash, for example in purchasing or converting inventory, paying creditors etc. Hence, an increase in working capital will have a negative effect on the business’s cash holding. However, a negative change in working capital indicates lower funds to pay off short term liabilities (current liabilities), which may have bad repercussions to the future of the company.

The Company is focusing strict eye watch on cash management now days. The WC is also showing an increasing trend which is attributed to the increasing profits.

Net working capital increased year on year. The factors contributing to the increase are :

Increase in Sundry Debtors due to relaxing of the credit policy Increase in Inventory. Increase in other Current Assets and Loans and Advances. However, increase in Current

Liabilities and Provisions has offset the increase in Current Assets. The Current and Quick ratio are around 2.18 and 1.38 respectively indicating that the firm is

highly liquid and would be able to meet its short term liabilities effectively

58

Bibliography

1) John L. Person, “A Complete Guide to Working capital management Tactics”, Ninth Edition (March 26, 2010)

2) Colby, Robert W. and Thomas A. Meyers, “The Encyclopedia of Technical Stock Exchange Indicators” (Tenth Edition 2010)

3) Nison, Steve, “Beyond Candlesticks” (John Wiley & Sons, 2009), Tenth Edition 1998

4) Edwards, Robert D., and John Magee, Technical Analysis of Stock Trends (John Magee, 1997; first edition, 1948).

4) Geoffrey Poitras, “Security Analysis and Investment Strategy” (2001)

5) Benjamin Graham and David Dodd, “Security Analysis” (November, 2009)

6) Erich A. Helfert, D.B.A., “Financial Analysis: Tools and Techniques” (2010)

7) Peter J. Klien, “Getting Started in Security Analysis” (April, 2010)

8) Richard A. Brealey, Stewart C. Myers, Alan J. Marcus ”Fundamentals of Corporate Finance” Third Edition, McGraw-Hill, Section A

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