Working Capital Management

A STUDY ON WORKING CAPITAL MANAGEMENT IN
Vijai Electricals Ltd

1
ACKNOWLEDGEMENT
This acknowledgement transcends the reality of formality when I would like to express deep gratitude and respect to all those people behind the screen who guided, inspired and helped me for the completion of my project work. I take this opportunity to express my profound gratitude to Mr. A.KAMALAKAR, Vice President (HR) Vijai Electricals Ltd. for having provided me the opportunity to undertake this project in their esteemed organization. I am thankful for his cooperation and guidance. I would like to thank Mr. BH.Venkateswara Rao, Dy.Manager (Accounts & Finance) Vijai Electicals Ltd. for giving his valuable suggestions and helping me in successfully completing the project. Vijai Electricals Ltd., Rudraram, Medak District. I am highly obliged to ________________ Faculty guide, who helped me in successfully completing the project. I am extremely grateful to him for his valuable suggestions, advice, cooperation and support in completion of project work. I am thankful to the Faculty of ____College Name _____ Director of MBA____ Head Of the Department(MBA), SBIT for the encouragement given to me to complete the project and my friends and family who are directly or
indirectly involved in bringing out this project.
(XXXXXXXXX)
DECLARATION
I, R.Janaki Rama Rao, student of Acharya Nagarjuna University, Guntur pursuing Master of Business
Administration hereby declare that the Project report entitled WORKING CAPITAL MANAGEMENT in VIJAI ELECTICALS LIMITED, HYDERABAD. Is an Original and
genuine work carried out by me, under the guidance of Mr.BH.Venkateswara Rao. I also state that it is not submitted elsewhere in part or full apart from me submitting it from the context of an academic Endeavour and Partial fulfillment for the award of MBA degree by Acharya Nagarjuna University as a part of the academic curriculum.
Place:
3
(XXXXXXXXXXXXXX
) Date:
CONTENTS
Chapt er No Title
Introduction Company Profile Theoretical Frame work Data Analysis Findings & Suggestions
Page No
I II III IV V
5-8 9 26 27 51 52 - 70 71 73
Bibliography
74 75
INTRODUCTION: The study is mainly on working capital management in Vijai Electricals Limited. The study is made by using financial statements of the company. Working capital is one of the most important requirements of any business concern. It plays an important role in operations of the firm. As humans cannot survive without blood, in the same way no business concern can survive without working capital. In practice, a firm has to employ short term assets and short run resources of financing in addition to fixed assets. Working capital represents liquidity position of any firm. Firms require adequate working capital to pay its liabilities. Hence managerial decisions relating to current assets i.e. cash, receivables, inventory, and marketable securities are ultimately reflects the liquidity, risk, and profitability as there is a relationship between risk, return and profitability. So deciding size and future means of financing the current assets is a challenge to any finance manager. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses.
TOPIC OF THE STUDY: Analysis of working capital and liquidity position of the VIJAI ELECTRICALS LIMITED by using the technique of ratio analysis. NEED FOR STUDY: Need for studying working capital management is to identify how efficiently the company manages its current assets i.e. inventories, accounts payable, and cash. The study is also made to know the efficiency of management. And to know how effectively working capital is utilized for the operations of the company. The need for working capital arises from the gaps in the phases of operating cycle i.e. there is a time gap between sale of goods and actual realization of cash. So the optimum level of working capital is needed to sustain the sales activities for certain period. The study is made to know whether the company has efficiency to maintain the optimum working capital or not. The study is made with emphasis on liquidity position of the company by using the technique of ratio analysis.
OBJECTIVES OF THE STUDY: 1. To study the existing system of working capital management in VIJAI ELECTRICALS LIMITED. 2. To analyze the financial performance of the company with reference to its working capital components 3. To examine the efficiency of the company in managing its current assets 4. To give suggestions for improving working capital or management of the company. METHODOLOGY: 7
The study basically depends on 1. Primary data 2. Secondary data 1. Primary data collection: The information collected directly without any reference is primary data. In the study it is mainly through conversation with concerned officers or staff members either individually or collectively. The data includes: 1. through conversation with the Employees of the company 2. Individual observations and inferences. 2. Secondary data collection: The secondary data are those which have been already collected by someone else and which have already been published. This data is obtained from journals, books, Magazines, news papers, reports, and publications of various associations connected with business and industry, stock exchanges etc.
The data of VIJAI ELECTRICALS LIMITED for the years 2003 to 2008 used in this study have been taken from secondary sources e.g. published annual reports of the company. The financial data which have been collected from the above mentioned sources is edited, classified, and tabulated as per the requirement of the study. For accessing the performance of the working capital position, the technique of ratio analysis has been used. The collected data have been analyzed in three ways: 1. Analysis of liquidity position 2. Analysis of gross working capital 3. Analysis of operating cycle. SCOPE OF THE STUDY: The scope and period of study is restricted to the following. 1. The scope is limited to the operations of the VIJAI ELECTRICALS LIMITED.
2. The information obtained from the primary and secondary sources was limited to company. 3. The key performance indicators were taken from 2003-2008. 4. The profit and loss A/C, the balance sheet was of last five years LIMITATIONS OF THE STUDY: 1. The study was restricted to period of five years. 2. The period under study was limited to shorter period which is not sufficient to undertake a comprehensive study. 3. The information required for the analysis provided by organization was limited, as the financial information of the company is confidential.
HISTORY OF VIJAI ELECTRICALS LTD.

Vijai Electricals Limited (VEL) was promoted by Sri D.Jai Ramesh, Chairman & Managing Director, and a first generation technocrat in 1973, as a small-scale unit to manufacture transformers, immediately after completion of his Master of Technology in Transformer Design. The unit was started as a proprietary concern under the technocrat scheme of State Bank of India with an initial capital investment of Rs 1.30 laces. It was converted into a company form of organization as a Private Limited Company in 1980 and subsequently became a public company in 1992.In its saga of 30 years, it has crossed several mile stones and introduced several new technologies to the Power Distribution Systems in the country and in the process of its pioneering efforts; it has established its presence felt in the form of Completely Self-Protected (CSP) Transformers, Single Phase Transformers, etc. For its contribution in the field, quality of the products and revenues to the exchequer it has been bestowed with several awards at the State and National levels. In line with technological
advancements, its sales have also grown at steady pace in the last two decades. The net turnover as on 31-3-06 is RS 484 Crores. VEL is one among the private sector industry which have made great strides and made their presence felt in manufacturing of transformers. VEL since establishment in 1973 has made leaps and bounds and today has grown into one of the most sophisticated and quality conscious companies in the field of transformer manufacturing company in India as well as Asia. Today it has well integrated facilities for manufacture of transformers from 5KVA rating 10000 MVA. The companys enviable achievement in terms of sales, profitability and market is due to its steadfast commitment to quality even during tough times. The company has fully integrated facilities due to backward integrated projects undertaken by the company during last decade. Due to integrated projects company could cut down its costs without compromising on quality. The gross profit margin of nearly 25% is one of the visible parameters of its achievement. PROFILE OF THE COMPANY The company was established in the year 1973 for the design and manufacture distribution and power transformers. The company had became one of the leading manufacturers of transformers in the country, through providing the needs of electricity Boards and private enterprises within country. It has established and managed professionally with robust quality systems and modern manufacturing and testing facilities. With these facilities the company embarked on ventures of export to foreign countries. Today the organization exports 60% of its turnover to many countries. Established almost three decades back, Vijai electricals ltd has come a long way in the manufacture of electrical power & distribution transformers. Today it stands as one of the most trusted and reputed brand name among all the customers in the industry. With one of the most complete and integrated plants in the Asian sub-continent, VE constantly endeavor to achieve high standards of excellence and committed to enhance its quality as per the 11
international standards. It has 1000 plus strong dedicated work force consisting of highly qualified, experienced and well trained Engineers & Technicians and has a well established QUALITY POLICY in place. With continuous innovation and pioneering, as strategy all through, VE today has unmatched world-class design, which was developed in-house to meet customized design demand. VE has full-fledged facilities for testing and also dedicated Engineers working tirelessly on product development. s thrust on export has also earned it recognized Export House status from the Ministry of Commerce, Government of India. With rapid technological advancements and innovations of new grades of materials and improved process methodologies & capabilities, VE has been successful in considerably bringing down the T&D losses benefiting several Overseas and Domestic Utilities / Electricity Boards.
The strengths of Vijai Electricals Ltd which makes it to become one of largest and leading manufacturers exporter of power and distribution transformers in India are 1. Pioneer leadership 2. Remarkable vision 3. Strong customer focus 4. Commitment to quality VISION: To become one of the worldss most admired enterprises in power sector, staying a head in technologies trends. MISSION: Creating value for all stakeholders, society and economy.
SISTER CONCERN OF THE COMPANY: Vijai electrical ltd is the largest fully integrated and manufacturing facility in the world outside USA, with the help of its sister concern. Samrakshana electrical ltd is the sister concern which provides support by manufacturing and supplying almost all major components that go into the manufacture of transformers. This helps the company to get an edge over its competitors in terms of quality, price and delivery schedules, while maintaining an effective and complete control over entire supply chain. Samrakshana Breaker provides short circuit and thermal protection for both pad mounted and overhead distribution transformers. The breaker is applied immersed on the transformer oil on the low voltage side to protect the transformer against secondary faults and excessive overloads.
TEAM OF THE COMPANY:

The belief of the company is the most valuable resource they possess is its people. The strength of the company is well motivated work forces that are willing to give the further impetus to the growth. This triggered off a major expansion, culminating in the establishment of the exclusive amorphous metal transformers plant comprising of most modern integrated manufacturing facilities. Today the organization draws its strength from highly motivated work force which consists of qualified, trained and experienced managers. Engineers, supervisors and workmen are ever willing to meet the exacting and changing demands of the enlightened customers, and wholly committed to working towards companys vision of leadership in the transformer industry. Vijai electricals has team of qualified and experienced design engineers, software engineers and skilled design draughts men trained in advanced AUTOCAD, AUTOLISP and 13
other areas. Software wing of its engineering department has successfully developed computer programmes for electrical design calculations enabling millions of iterative calculations converging to a very optimum design. This is done exclusively for National and International tenders with capitalization of loss parameters. VE' s vision is to achieve complete set of design calculations, bill of materials and constructional drawings, all with a single click of a mouse
TRAINING PROGRAMME:
In VIJAI ELECTRICALS company, workmen and supervisors undergo induction training whereas graduate engineers undergo vigorous one year training programmed to gain skill, knowledge, and competence; in order they can measures up to the challenging tasks and assume higher responsibilities. The company has rich experienced and highly knowledgably technical and HR professionals. For achieving managerial excellence, individuals identified for taking up managerial position undergo long term training in the reputed premier management institutes of the country. Employees at various levels and from diverse functions are exposed to various technical and behavior training programmers based on the identified needs for self development and for enhancement of organizational effectiveness. In Vijay electrical HR practices to give excellent rewards for better performance, sky is the limit for better performers, performance driven reward system to encourage them. It has a culture of nurturing talents and grooming performers. More emphasis on good health by conducting fitness programmes. Employees were participated in various welfare social activities. Encouraging employees meritorious children by providing scholarships and awards for better education.
QUALITY:
The company has well established quality systems to ensure quality at all stages and in all functions in a climate of total quality work culture, where participation by everyone reins
supreme. Quality is a watch word across the entire organization and has proved to be a corner stone for the companys sustained growth and success. The three major plants of the company have their independent ISO 9001 certification and have been successfully passing through certification of surveillance and renewal audits since the year 1994.Acheiving the customer satisfaction is the quality policy of the company and to this end the company has been adopting progressive measures visualizing quality as a key strategy to stay competitive in the business. Total commitment to quality and ISO-9001 certification has created a special place for VE in the world market. It was marching towards ISO 14000 through setting new quality standards in transformers field. Each letter in the name Vijai explains the companys policies in producing qualitative products to the transformer world. It is as follows:
V Vijai Electricals Ltd designs, manufacturers & supplies Customized power transmission &
distribution equipments and also executes turnkey projects in transmission and distribution of power utilities to meet wide range of global market ensuring support services to enhance customer satisfaction.
I Improvement in different processes for minimize owner ship cost to customer shall be one
of Vijai electrical goals by employing most suitable material, optimized design & effective process.
J Joint efforts within organization for excellence in all functional areas shall be prime
objective for achieving improvements.
A Adapting to changes that could help us in continual improvement of our systems,

practices& Business performance is top priority.
I Inherent commitment to comply with requirements of international standards and other

regulations in quality management system and be continually improve its effectiveness in true spirit & action shall be the prime responsibility of every employee.
15
PRODUCTS:
The different products manufactured in this company are: 1. Completely self protected transformers 2. Single phase transformers 3. Cast resin transformers 4. Amorphous core transformers 5. Pad mounted transformers 6. Continuously transposed conductors 7. 1 Phased oil filled power transformers.
EXPORTS OF THE COMPANY:

In vijai electricals the substantial percentage of sales are constituted by Exports. VE has exported Transformers to countries such as Bangladesh, Cyprus, Philippines, Vietnam, Zimbabwe, Nepal, Ghana, Brazil, Saudi Arabia, UAE etc. and its products have been inspected and accepted by several reputed third-party inspection agencies like Crown Agents, Lloyds, Bureau Veritas, S.G.S. Robert, W.Hunt Company, Bsi Inspectorate Griffith UK, OMIC Japan, Tubescope Vecto GmbH Germany etc.
DOMESTIC AND INTERNATIONAL CUSTOMERS: DOMESTIC CUSTOMERS

1. Andhra Pradesh state electricity board 2. Ahmadabad Electricity company limited 3. Assam State Electricity Board 4. Bombay Suburban state Electricity Board
5. Bombay Electric Supply and Transport Undertaking, Mumbai 6. Bihar State Electricity Board 7. Delhi Vidyut Board 8. Department of Atomic Energy, Mumbai 9. Grid co, Bhubaneswar 10. Govt. of Jammu and Kashmir 11. Gujarat Electricity Board 12. Haryana State Electricity Board 13. Himachal Pradesh State Electricity Board 14. Indian Railways 15. Karnataka Electricity Board 16. Kerala State Electricity Board 17. Larsen & Toubro Ltd. 18. Madhya Pradesh Electricity Board 19. Maharashtra State Electricity Board 20. Nuclear Power Corporation 21. Punjab State Electricity Board 22. Rajasthan State Electricity Board 23. Siemens Ltd. 24. Singareni Collieries Co.Ltd. 25. Tamil Nadu Electricity Board 26. Uttar Pradesh State Electricity Board
GLOBAL CUSTOMERS:
17
1. Dubai Electricity and Water Authority, Dubai 2. Electricity Authority, Cyprus 3. Electricity Corporation of Ghana, Ghana 4. Eletropaulo- Eletricidade de Sao Paulo S.A., Brazil 5. Fasons Metal Industries, Bangladesh 6. Ho Chi Minh City Power Corporation, Vietnam 7. Kuwait Oil Company, Kuwait 8. Ministry of Electricity and Water, Oman 9. National Electrification Administration, Philippines 10. Nepal Electricity Authority, Nepal 11. Rural Electrification Board, Bangladesh 12. Sena Kalvan Sangstha, Bangladesh. 13. Water and Electricity Department, Al Ain, UAE 14. Wescosa, Saudi Arabia 15. Zimbabwe Electricity Supply Authority, Zimbabwe
ACHIEVEMENTS : Certifications and awards:

1. VE received the ITID Quality Excellence award for the year 2002 on 24Dec.2002 at New Delhi, for its State of Art Amorphous Metal Transformer. 2. Udyog Patria Award from vice president of India in the year 1982 3. Udyog Ratna Award from the then Union Minister of Energy, Government of India in the year 1987.
4. Recognized as ' Export House ' in 1993-94 by the Government of India. 5. Recognized as ' Trading House ' in 1997-98 by the Government of India. 6. Award for best Export Effort in the state (Surana Udyog Silver Rolling Trophy) during 200102 from the FAPCCI. 7. National Citizen's Award received from National Citizens Committee for outstanding contribution in the field of industry on 25th august, 2001 at New Delhi. 8. Certificate of Merit from EEPC for outstanding Export for the years 1992, 1993 and 1994. 9. All India Award for Export Excellence by EEPC for the years 1994-95, 1995-96 and 1996-97. 10.2005 Achieved NABL Accreditation for all the testing laboratories
Landmarks and milestones:

1. Establishment of organization in 1973. 2. 1983 introductions of CSP transformers in the country. 3. In 1987 Collaboration of with m/s Westinghouse Corporation, USA for single phase wound transformers. 4. 1988 Developed and supplied 10 KVA Dry Type Cast Resin Transformers with 190 KV BIL to Indian Railways. 5. 1989 Commencement of Exports worth $1.0 Million 6. 1994 recognition by government of India. 7. 1994 Manufacture of Earthquake Resistant Transformers for the first time in India. 8. In 1994 ISO 9001 certification.
19
9. 1995 secured an export order worth US $9.12 Million from Philippines, the largest ever single export order of Transformers in the country. 10. 2001 Tech. Collaboration with M & C Germany for Cast Resin Transformers. 11. 2002 Entry into Turnkey Electrification & Sub-station Projects. 12. 2003 Deployment of ERP to handle multiple functions like better customer interaction, effective capacity utilization and expenditure control. 13. 2004 Technical Collaboration with Daihen Corporation, Japan for higher rating Power Transformers up to 500 MVA, 500 KV class.
14. 2005 Plunged into the Designing & Manufacturing of Extra High Voltage Class (EHV) Power Transformers. 15. 2005 Accreditation to all Testing laboratories from National Accreditation Board for Testing and Calibration Laboratories (NABL) for filling the requirements of ISO-17025. Vijai electricals is a leading transformer industry in designing and manufacturing of power and distribution transformers. The industry has different manufacturing units. Different types of transformers are produced in different units. It has four manufacturing units. They are as follows
UNIT-1
The first plant in vijai Electricals limited having the requisite outfit to cater not only to the manufacture of distribution and power transformers of various ratings, but also to undertake servicing. Total built up Area: 6, 617.5 sq mts.
UNIT-2
It has wide ranging facilities across the various disciplines with capacity to meet the ever growing needs of the customers in terms of their exact design specifications and stringent quality requirements. While the major portions of operations, center round the Distribution and Power Transformers of various ratings upto 10 MVA, the plant also has the facility to manufacture Cast Resin Dry Type Transformers, a product being produced by only a few renowned manufacturers in the country. Total Built-Up Area: 16,111.68 Sq.mts.
LIST OF PRODUCTS MANUFACTURED IN UNIT-2

Volt Sl. No. Type Class (kV) Range Relevant Standards
21
3 Phase Oil Filled Power Transformers CRGO Silicon steel 66
Up to 10000 KVA IS, IEC, ANSI, JIS, DIN, BS etc.
3 Phase Oil filled Dist. Transformers CRGO Silicon
Upto 4000 36 kVA
- do -
steel
1 Phase Oil filled Dist. 3 Transformers Upto 167 12 kVA - do -
CRGO Silicon steel & Amorphous Metal

1 Phase Oil filled Power 4 Transformers
Upto 3333 36 Kva Upto 315 12 kVA
- do -
CRGO Silicon steel

CSP transformers 5 (Completely Self Protected)
- do -
UNIT- 10
Unit-x is the one of the plants of vijai electricals which was located 43 kms from Hyderabad in the state of Andhra Pradesh. It spreads over a vast expense of 16000 sq. m. This plant manufactures the following transformers. They are as follows: 1. Single Phase Distribution Transformers.
2. Medium Range Distribution Transformers. 3. Small power transformers. 4. Dry type Cast Resin Transformers. 5. Pad mounted Transformers. 6. Corrugated Tank Transformers. Total Built-Up Area: 16,111.68 sq.mt The following is a list of products of unit-10 VOLT CLASS (kv) 66 RELEVANT STANDARDS IS, IEC, ANSI, JIS, DIN, BS etc DO DO
S.NO
TYPE 3 Phase Oil Transformers CRGO
RANGE Up to 20000 KVA Up to 167 KVA Up to 3333 KVA Up to315KVA Up to 8000 KVA Up to
1.
Silicon steel 1 Phase Oil filled Dist. Transformers CRGO Silicon steel 1 Phase Oil filled Small Power TransformersCRGO Silicon steel Filled Power CSP Transformers(Completely Self Protected) Cast Resin Transformers CRGO Silicon steel Pad Mounted Transformers CRGO Silicon steel
2.
12
3.
36
4.
12
DO DO
5.
36
6.
36
2500 KVA
DO
UNIT-3
23
An exclusive unit for the manufacture of Single Phase and Three Phase Energy Efficient Low loss Amorphous Metal Distribution Transformers of Conventional and Completely Self Protected (CSP) types. It stands out as a distinguishable manufacturing plant employing the most modern equipment and practices. The plant, engaged in world class manufacturing practices is the only one of its kind in the country and in the world outside the USA. This is presently the largest manufacturing facility in the world producing around 1000 Transformers every day.Total Built-Up Area: 4,456 Sq.mts.
List of Products Manufactured in Unit-3:

Volt Class Sl. No. Type (kV) Range Relevant Standards
1.
1 Phase Oil filled Dist. Transformers
CRGO Silicon steel & Amorphous Metal

2. 3 Phase Oil filled Dist. Transformers(Amorphous metal)
12
Upto 167 kVA Upto1000 KVA
- do -
36
- do -
UNIT-4
In the same premises of Vijai which comprises more than 200 acres of land, is an exclusive facility for manufacturing Copper and Aluminum Conductors in a spread over of 5640 sq.m. The conductor plant division was established in 1997 to meet the high quality demands of magnet wires by the customers and to cater the needs of all units of the company for all types of Enamel coated, Paper covered and Fiber glass covered copper and aluminum wires as per IEC, BS, IS, NEMA, and JIS standards. This Plant also houses State of the Art machinery for making continuously transposed Conductors and Diamond Dotted Kraft paper. Conductors can be rounded or rectangular with different insulation such as Super Enameled, Paper
Covered, Fiber Glass Covered, Enamel and Fire glass covered depending on the requirement. The plant is equipped with state-of-the-art technology Wire drawing, In-line enameling, Transposing and other machinery of renowned machine suppliers. The Quality Testing lab has the latest equipments for conducting all routine and type tests to confirm quality of wires as per National and International standards and customer satisfaction. The total plant is provided with a dust free environment. The following is a list of products of the Conductor Plant.
List of Products Manufactured in Unit-4:
Sl. No 1 Enamelled
Product Round Copper
Indian Standard IS 13730 Part 0-Sec 1 & Part 34 IS 13730 Part 0-Sec 2 & Part 16 25
International Standard IEC 60317-0-1 & 60317-34 IEC 60317-0-2 & 60317-16
Wires (Terebec 101.36) Enamelled Rectangular Copper Wires (Terebec Fn)
PVA 3
Enamelled
Rectangular 105
Copper
Wires-Class
IS 13730 Part 0-Sec 2 & Part 17
(Formvar 1530) PVA 4 Enamelled Rectangular 120
IEC 60317-0-2 & 60317-17
Copper
Wires-Class
IS 13730 Part 0-Sec2 & Part 18
(Sivaform 120/22B) 5 Paper Covered Round Copper Wires Paper Covered Rectangular
IEC 60317-0-2 & 60317-18
IS 7404 Part 1
Copper Wires Glass Fibre Covered varnish
IS 13730-Part 27
IEC 60317-27
Bonded Bare Round Copper Wires Glass Fibre Covered Varnish
IS 4685-Part 1
Bonded
Bare
Rectangular
IS 13730-Part 0-Sec 4
IEC 60317-0-4
Copper Wires Glass Fibre Covered Varnish Bonded 9 Enamelled Round IS 11184 IS 13730 Part 0-Sec 4 & Part 16 Copper Wires Glass Fibre Covered Varnish 10 Bonded Enamelled Rectangular Copper Wires 11 Paper Covered Round
IEC 60317-16
Aluminium Wires Paper Covered Rectangular
IS 6162 Part 1
12 13
Aluminium Wires Enamelled Round Aluminium
IS 6162 Part 2 IS 13730 Part 0-Sec 3
NEMA MW 1000, 15/18
Wires (Formvar 11313C) Enamelled 14 Aluminium 11313C) Continuously 15 Conductor Cable Strands 5 to 35) 16 Tinned Copper Fuse Wire Transposed (No of Wires Rectangular (Formvar
& Part 6
NEMA MW 1000, 15/18
IEC 60264, IEC 60317, 9335, IS 2069, IS 4654 IEC 60554, IEC 60851 IS 9926 / IS 8130 -
IS 3855, IS 2654, IS
27
WORKING CAPITAL MANAGEMENT INTRODUCTION:

Working capital is one of the most important requirements of any business concern. As humans cannot survive without blood, in the same way no business concern can survive without working capital. In practice, a firm has to employ short term assets and short run resourcing of financing in addition to fixed assets Working capital management deals with maintaining the level of working capital to optimum, because if a concern has inadequate opportunities and if the working capital is more than required then the concern will lose money in the form of interest on the blocked funds. Therefore working capital management plays a very important role in the profitability of a company.
Any concern should have adequate working capital that is as much as needed by any firm. It should be neither excessive nor inadequate. Both The situations are harmful to any concern. If firm has excessive working capital, it has idle funds on which firm earns no profits. If the firm has inadequate working capital, ultimately it results in production interruptions; concern may not have the ability to meet its current obligations if any and lowering down of profitability.
DEFINITION OF WORKING CAPITAL MANAGEMENT:

Decisions relating to working capital and short term financing are referred as working capital management. Investment decisions involving short term assets are known as working capital management decisions. One aspect of working capital management is tradeoff between profitability and risk (liquidity).That is there is a relationship between working capital, risk and return. It is generally accepted that higher levels of working capital decrease the risk and have the potential of increasing the profitability also. These involve managing the relationship between firms short term assets and short term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses. It is concerned with management of current assets and current liabilities and the interrelationship that existed between current assets and current liabilities. Its objective is to maintain satisfactory level of working capital.
DEFINING WORKING CAPITAL:

Working capital refers to amount of capital which is readily available in the organization. It stands for that part of capital, which is required for financing the current needs of the 29
company. Working capital is the difference between resources in cash or readily convertible into cash i.e. current assets and organizational commitments for which cash will soon be required i.e.current liabilities. Working capital = current assets current liabilities
A. CURRENT ASSETS:
Current assets are those assets which in the ordinary course of business can 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: 1. Liquid assets (cash and bank deposits) 2. Inventory(Rawmaterials,work in progress, and finished goods) 3. marketable securities 4. Accounts receivables 5. Debtors
B.CURRENT LIABILITIES:
Current liabilities are those liabilities which are to be paid within a year i.e. in the ordinary course of business. The basic current liabilities are: 1. Bank over draft
2. Outstanding expenses 3. Bills and accounts payable 4. Creditors 5. Other short term liabilities
NEED FOR WORKING CAPITAL:

The basic objective of financial management is to maximize the shareholders wealth. This is possible only when the company earns sufficient profits. The amount of such profits largely depends upon the magnitude of sales. However Sales do not convert into cash instantaneously. These are always a time gap between the sale of goods and their actual realization in cash. Working capital is required in order to sustain the sales activities in this period. In case adequate working capital is not available for this period. The company will not be in a position to purchase raw materials, pay wages and other expenses required for manufacturing the goods. Therefore sufficient amount of working capital is to be maintained at any point of time.
CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital. They are Gross working capital, net working capital.
GROSS WORKING CAPITAL:
31
Gross working capital is also called as working capital. It refers to total current assets i.e. the amount of funds invested in Current assets. Current assets include inventories, sundry debtors, and cash in hand & bank, advances, investments, short term deposits etc. The gross working capital concept is financial or going concern concept.
NET WORKING CAPITAL:

Net working capital is the excess of current assets over current liabilities. It refers to the difference between current assets and current liabilities. Current liabilities include sundry creditors, advances from customers, provision for taxation etc. In narrow sense the term working capital refers to the net working capital. Net working capital= current assets-current liabilities Net working capital may be positive or negative. When the current assets exceed the current liabilities, the working capital is positive and the negative working capital results when the current liabilities are more than the current assets.net working capital is an accounting concept of working capital. The two concepts of working capital are not exclusive; rather both have their own merits. Gross concept is very suitable to the company form of organization where there is divorce between ownership, management and control. The net concept of working capital may be suitable only for proprietary form of organizations such as sole-trader or partnership firms.
TYPES OF WORKING CAPITAL:

Working capital may be classified in two ways: a) b) On the basis of concept On the basis of time
On the basis of concept, working capital 1. Gross working capital 2. Net working capital Based on time, working capital can be further classified into 1. Permanent or fixed working capital 2. Temporary or variable working capital
PERMANENT WORKING CAPITAL:

Permanent or fixed working capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets, which is continuously required by the enterprise to carry out its normal business operations. For example, every firm has to maintain a minimum level of raw materials, work-in-process, finished goods and cash balance. This minimum level of current assets is called fixed working capital.
TEMPORARY WORKING CAPITAL:

33
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 fluctuations in demand consequent upon changes in production and sales because of seasonal changes.
OPERATING CYCLE:
Cash flows in a cycle into, around and out of a business. It is the businesss lifeblood and every managers primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably then it should, expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exit as working capital right with in 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 firms total profits. Working capital cycle is also known as operating cycle or cash cycle. It is Continuing flow from cash to suppliers, cash to inventory, to accounts receivables and back into cash. There are two elements in the business cycle that absorb cash-Inventory (Stocks and work-inprogress) and Receivables (debtors owing you money). The operating cycle consists of three phases. They are as follows a. Conversion of cash to inventory b. Conversion of inventory into receivables. in theory, generate cash surpluses. If it doesnt generate surpluses, the business will eventually run out of cash and
c. Conversion of receivables into cash.
Different phases of operating cycle can be shown as follows
Each component of working capital (namely inventory, receivables and payables) has two dimensions TIME and MONEY. When it comes to managing working capital TIME IS MONEY. If you can get money to move faster around the circle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. Consequently, you could reduce the cost of bank interest or you will have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate, improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales. If you 35 Then
1. Collect receivables (debtors) faster 2. Collect receivables (debtors) slower 3. Get better credit (in terms of duration Or amount) from suppliers. 4 .Shift inventory (stocks) faster 5. Move inventory (stocks) slower
you release cash from the cycle your receivables soak up cash you increase your cash resources
you free up cash you consume more cash
________________________________________________________________________ It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is no longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plughole, they remove liquidity from the business
ADVANTAGES OF ADEQUATE WORKING CAPITAL:

Working capital is the life blood and nerve centre of business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows:
1. Solvency of the business:

Adequate working capital helps in maintaining solvency of the business by providing by providing uninterrupted flow of production.
2. Good will:
Sufficient working capital enables a business concern to make prompt payments and
hence helps in creating and maintaining goodwill.
3. Easy loans:
A concern having inadequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favorable terms.
4. Cash Discounts:
Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs.
5. Regular supply of raw materials:

Sufficient working capital ensures regular supply of raw materials and continuous production.
6.
Regular
payment
of
salaries,
wages
and
other
day-to-day
commitments:
The company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which rises the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits.
7. Ability to face crisis:

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.
8. Quick and Regular return on investments:

Every investor wants a quick and regular return on investments. Sufficient of working capital enables a concern to pay quick and regular dividends to its investors, as there may not be much pressure to plough back profits. This gains the confidence of its Investors and creates a favorable market to raise additional funds in the future.
DISADVANTAGES OF INADEQUATE WORKING CAPITAL:

37
1. 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. 2. It cannot buy its requirements in bulk and cannot avail of discounts, etc. 3. It becomes difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lack of working capital. 4. The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business. 5. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds. 6. The rate of return on investments also falls with the shortage of working capital.
DISADVANTAGES OF EXCESSIVE WORKING CAPITAL:

Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excessive working capital nor inadequate nor shortage of working capital. Both excessive as well as short working capital positions are bad for any business. 1. 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. 2. When there is redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, waste and losses. 3. Excessive working capital implies excessive debtors and defective credit policy, which
may cause higher incidence of bad debts. 4. It may result into overall inefficiency in the organization. 5. When there is an excessive working capital, relation with the banks and other financial institutions may not be maintained. 6. Due to low rate of return on investments the value of shares may also fall.
DETERMINANTS OF WORKING CAPITAL: In determining the working capital

requirements of the concern, the following are to be considered. 1. Nature and size of the Business 2. Manufacturing cycle 3. Sales growth 4. Production policy 5. Price level changes 6. Firms Credit policy 7. Availability of Credit
Nature and size of business:

Working capital requirements of a firm are basically influenced by nature of its business. A trading and financial firm has a very small investment in fixed assets, but requires a large sum of money to invest in the working capital. Working capital management depends on the size of the business.
39
Manufacturing cycle:
The manufacturing cycle comprises of the purchase and use of raw material and the production of finished goods. Larger the manufacturing cycle, larger will be the firms working capital requirements.
Sales growth:
The working capital needs of the firm increases as it is difficult to precisely determine the relationship between volume of sales and working capital needs. In practice, current assets will have to be employed before growth takes place. It is, therefore, necessary to make advance planning of working capital for a growing firm on a continuous basis.
Production policy:
We just noted that a strategy of constant production may be maintain in order to solve the working capital problems arising due to seasonal change in the demand for the firms product. A steady production cause inventories to accumulate during the off-season periods and the will be exposed to greater inventory costs and risks.
Price level changes:

The increasing shifts in price level make function of the financial manager difficult. He should anticipate the effect of price level changes as working capital of firm. Generally, rising price level will require a firm to maintain higher amount of working capital.
Operating efficiency and performance:

The operating efficiency of the firm related to the firm optimum utilization of resources
at minimum cost. The firm will be effectively contributing to its working capital if it is controlling operating costs.
Firms credit policy:

The credit policy of the firm affects the working capital by influencing the level of book debts. The credit term to be granted to customers may depend upon norms of the industry, which the firms belongs. But a firm has the flexibility of shaping its credit policy with in the constant of industry norms and practices.
Availability of credit:
The working capital requirements of a firm also effect by credit terms granted by its creditors. A firm will need less working capital if liberal credit terms are available.
MANAGEMENT OF ACCOUNTS RECEIVABLES:

Accounts receivables represent an extension of credit to customers, allowing them a reasonable period, in which to pay for the goods/services which they have received. The receivables represent an important component of the current assets of a firm. Firms grant trade credit to customers, because they expect the investment in receivables to be profitable, either by expanding sales volume or by retaining sales that otherwise would be lost to competitors. A planned credit-policy can assist in increasing corporate profitability. When considering relaxing credit terms, management must weigh up the profits of increased sales with the cost of additional investments in debtors.
41
OBJECTIVE OF RECEIVABLES MANAGEMENT:

The objective of receivables management is to promote sales and profits until that point is reached where the return on investment is further finding of receivables is less than the cost of funds raised to finance that additional credit. The major categories of costs associated with the extension of credit and accounts receivables are:
1. Collection Cost:
These costs are administrations costs incurred in collecting the receivables from the customers to whom credit sales have been made.
2. Capital Cost:
The increased level of accounts receivable is an investment in assets. They have to be financed thereby involving a cost. The cost on the use of additional capital to support credit sales, which apparently could be profitably employed elsewhere, are therefore a part of the cost of extending credit or receivables.
3. Delinquency Cost:
This is the cost, which arises out of the failure of the customer to meet their obligations when payment on credit sales becomes due after the expiry of the period of credit.
4. Default Cost:
Sometimes the firm may not be in a position to recover the dues because of the inability of the customers, such debts are treated as bad debts and are written off as they cannot be realized, and such costs are known as default costs associated with credit sales and
accounts receivables.
BENEFITS:
The benefits are the increased sales and profits anticipated because of a more liberal policy. When the firm extends trade credit, the impact of liberal policy is likely to have two forms. First, it is oriented to sales expansions. In other words, the increase in sales would be either from the existing customer or from new customers. Secondly, the extension of credit may be to protect its current sales against emerging customers. Because of increased sales, the profits of the firm will be increased.
PURPOSE OF RECEIVABLES:
If firms insist on cash sales, the customer will not be ready to purchase from the firm since he may not in a position to pay the cash. So, if the firm sells goods on credit, the customer may purchase more than that on cash. This in turn will result in the increase of profits. On the other hand, the credit is also offered to meet competition. The firm can easily attract customers by offering better credit facilities than the competitors.
MAINTAINENCE OF RECEIVABLES:
Maintenance of receivables results in blocking of the firms financial resources in them .Then firm has to arrange funds, which can be acquired from outside or from the profits. In case of former, the firm has to pay the interest and in the case of latter, the firm bears the opportunity cost of the amount invested. The firm incurs additional administrative costs for maintaining accounting records for determining the payment due from credit customers and from default customers. 43
The size of the accounts receivables depends on the level of sales, credit policies, terms of trade. A firm having a large volume of sales will have large amount of receivables. The terms of trade are the credit period and cash discount. The crucial decision areas in receivables management are credit policies, collection policies, and credit terms.
CREDIT POLICY:
The credit policy of a firm providing the frame work to determine whether or not to extend the credit to customers and how much credit to extend. The credit policy decision of a firm has two broad dimensions which are credit standards and credit analysis. A firm has to establish and use standards in making credit decisions, develop appropriate sources of credit information and methods of credit analysis. Credit policy of the firm affects to large extent the amount of investment in receivables. The sales department of the concern to whom credit should be granted should decide it. If credit policy of the concern is liberal, the investment in receivables will be larger because credit will be extended even to those customers whose credit worthiness is proven hence the size of receivables in this account will be lower. Moreover, if collection is made within stipulated time or a sound collection policy is enforced the investment in receivables will naturally be lower.
COLLECTION POLICY:
The management should provide for bad debts to keep the losses minimum. A collection procedure should be estimated and action should be taken accordingly. The other step should be to record the age of debt to facilitate the collection of debts. Collection policy of the firm affects to large extent the amount of investment in receivables. Moreover, if collection
is made within stipulated time or a sound collection policy is enforced the investment in receivables will naturally be lower.
CREDIT TERMS:
The second decision area in accounts receivables management is the credit terms. The speculations under which goods are sold on credit are referred to as credit terms. Credit terms have three components:
A: Credit Period: Time duration for which trade credit is extended. B: Cash Discount: The amount which a customer can take advantage of C: Cash Discount Period: It refers to the duration during which the discount can be
availed of.
SIZE AND POLICY OF CASH DISCOUNT:

It is also an important variable in deciding the level of investment in receivables. Cash discount affects the cost of capital of the firm and the investment in receivables. If cost of capital of the firm is lower in comparison to the cash discount to be allowed investment in receivables will be less. If both are equal, it will not affect the investment at all. If cost of capital is higher than cash discount, the investment in receivables will be larger.
MANAGEMENT OF INVENTORY
Inventory is the third major component of current assets. Inventories are stock of the product a company is manufacturing for sale and components that make up the product. Every enterprise needs inventory for smooth running of its activities. It serves as a link between production and distribution process. The various forms in which inventories exist in a 45
manufacturing company are raw materials, Work- in-progress and finished goods.
TYPES OF INVENTORIES
The common types of inventories for most of the business firms may be classified as Finished Goods, Work in Progress and Raw Materials. Finished goods: These are the goods, which are either being purchased by the firm or are being produced or processed in the firm. These are just ready for sale to customers. Inventory of finished goods arises because of the time involved in production process and the need to meet customers demand promptly. If the firm do not maintain a sufficient finished goods inventory, they run the risk of losing sales, as the customers who are unwilling to wait may turn to competitors. The purpose of finished goods inventory is to uncouple the production and sales function so that it is not necessary to produce goods before sales can occur and therefore sales can be made directly out of inventory
Work-in-progress:
It refers to the raw materials engaged in various phases of production schedule. The degree of completion may be varying for units. Some units might have been just introduced; while some others may be 40% completed, others may be 90% complete. The work-in progress refers to partially produced goods. The value of work in progress includes the raw material costs, the direct wages, expenses already incurred, and the overheads, if any. So, the work in progress inventory contains produced/ completed goods.
Raw materials:
The raw materials include the materials, which are used in production process, and every manufacturing firm has to carry certain stock of raw materials in stores. These units of
raw materials are regularly issued/transferred to production department. Inventories of raw materials are held to ensure that the production process is not interrupted by a shortage of these materials. The amount of raw materials to be kept by a firm expends on a number of factors, including the speed with which raw materials can be ordered and procured uncertainly in the supply of these raw materials. Its purpose is to uncouple the production function from the purchasing function i.e. to make these two functions independent of each other so that delays and the firm can satisfy its need for raw materials out of the inventory lying in the stores.
OBJECTIVES:
The main objective of inventory management is operational and financial. The operational objectives means that the materials and spares should be available in sufficient quantity so that work is not interrupted for want of inventory. The financial objective means that investment in inventories should not remain idle and minimum working capital should be locked in it.
The following are the objectives of the inventory management: 1. To ensure continuous supply of materials, spares and finished goods. 2. To avoid both overstocking and under stocking of inventory. 3. To maintain investments in inventories at the optimum level as required by the operational and sales activities. 4. To keep materials cost under control
47
5. To eliminate duplication in ordering and replenishing stocks. 6. To design proper organization for inventory management. 7. To minimize losses through deterioration, pilferage, wastages and damages. 8. To ensure right quality goods at reasonable prices. 9. To ensure perpetual inventory controls so that materials shown in stock ledgers should be actually lining the stocks. 10.To facilitate furnishing of data for short term and long term planning and control of inventory.
INVENTORY MANAGEMENT IN VIJAI ELECTRICALS

The management of the company at both unit and corporate level every month reviews inventory. All the functional heads are called for meeting and the inventory holdings are discussed in detail at the meeting every month. It purchases the material when the customer places the order. After purchasing the raw materials, which is mostly copper wires, PCBs, electronic components required for manufacturing of different types of transformers, will be stocked at one place and all others procured against production orders are stored. Depending upon the requirement in various production departments the raw material is sent to the respective departments or production shops. When the order is placed for raw material, certain raw material is in transit; such raw material is called as raw material-in-transit. The raw material can be transferred from one unit to another or from one department to another is called transfer-in-transit. It is nothing but transfer of materials among the inter firm units of company. The raw material, which is in production process, is called work in process. The work-inprocess becomes finished goods inventory. The finished goods should not be kept for a longer
time. They should be sold off to clear off the inventory. The raw material is purchased and the whole process is repeated again which we call it as Inventory Cycle.
RATIO ANALYSIS:
Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statement so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined.
MEANING OF RATIO:
A Ratio is a simple arithmetical expression of the relationship of one number to another. Accounting ratios are relationships expressed in Mathematical forms between figures which has connected with each other in some manner, obviously no purpose will be served by comparing two sets of figures are also unfit for a comparison, ratio analysis shows the interrelationship between the different items in the data. For example, on a day a firm is having 10 lakh of current assets and 5 lakh of current liabilities, the ratio of current assets to current liabilities 10/5=2:1. As the Current Assets are double the amount of Current Liabilities the firm could able to discharge all Current Liabilities without many difficulties. So the ratio can be expressed in the form of a simple ratio or as a percentage. In the above illustration in the relationship is expressed by a simple ratio. This simple ratio can be converted into a percentage, Instead of saying that the Current Assets are double the amount of Current Liabilities.
49
SIGNIFICANCE OF RATIO ANALYSIS:

An absolute figure does not convey anything unless it is related with the other relevant figure. Magnitude of Current Liabilities of a company does not reveal anything about solvency position of the company. It is only when it is related with current assets figures of the same company an idea about the solvency position of the company can be had. Ratios make a humble attempt in this direction. Ratios are significant both in vertical and horizontal analysis. The vertical analysis, help the analyst to go for a judgment whether, performance of the corporation at a point of time is good, questionable or poor, likewise, use of ratio in horizontal analysis indicates whether the financial condition of the corporation is improving or deteriorating and whether the cost, profitability or efficiency is showing upward or downward trends. Financial ratios become meaningful to judge financial condition and profitability performance of the company only when there is comparison. In fact analysis of ratio involves two types of comparison, firstly, a comparison of present ratio with past and expected future ratios for the same company when financial ratios for several proceeding years are computed. The analyst can be determine the composition of changes and determine whether there has been an improvement or deterioration in the financial position of the company with those similar types of company or with industry averages at the same point of time such as comparison would considerable insight into the relative financial condition and performance of the company.
OBJECTIVES OF THE RATIO ANALYSIS:

Ratios provide clues to the financial position of the concern. The main objective of ratio analysis is to know the financial strength, position, soundness or weakness of the enterprise. One can draw conclusions about the exact financial position of the concern with the help of
ratio analysis.
The following are the objectives of the ratio analysis: 1. To simplify the comprehensive financial statements, 2. To facilitate the inter-firm comparison, 3. To facilitate intra-firm comparison possible, 4. To know the financial position and profitability of the concern.
CLASSIFICATION OF RATIOS:
Ratios are classified into four broad groups that provide different kind of information as per the requirement. The classification is as follows: 1. Liquidity ratios 2. Leverage ratios 3. Profitability ratios 4. Activity ratios 1. Liquidity ratios indicates the firms ability to meet its obligations 2. Leverage ratio indicates the extent to which firm is financed by debt. 3. Profitability ratio indicates efficiency with which firm manages its resources. 4. Turnover indicates how effectively firm manages resources at its disposal of sales. 51
The ratios that are used by the company in managing the working capital and measuring how effectively it was utilized are 1. Liquidity ratios 2. Turnover ratios
LIQUIDITY RATIOS
The liquidity ratios measure the ability of a firm to meet its short-term obligations and reflect the short term financial strength/ solvency of a firm. The ratios which indicate the liquidity of a firm are: Current Ratio Quick Ratio/ Acid Test Ratio
CURRENT RATIO:
A current ratio may be defined as the relationship between current assets and current liabilities. It is the ratio of total current assets to current liabilities. Current Ratio = Current Assets/ Current liabilities The higher the current ratio, larger the amount of rupees available per rupee of current liability, the more the firms ability to meet current obligations and greater the safety of funds of short term creditors. Thus the current ratio in a way is a measure of margin of safety to the creditors. Conventionally rule for current ratio is 2:1 i.e. for every one rupee of current liabilities
there should be two rupees of current assets, is considered satisfactory.
ACID TEST OR QUICK RATIO:

Acid test ratio is the relationship between quick assets and current liabilities. It is the ratio of quick assets to current liabilities. This ratio is used to measure the liquidity of the firm. Quick assets are those assets that can be converted into cash immediately. By exclusion of inventory and prepaid expenses from current assets, we get quick current assets. Acid-test ratio or Quick ratio= Quick Assets/Current liabilities Conventionally a Quick ratio of 1:1 i.e. for every one rupee of current liability there should be a rupee of current asset is considered satisfactory.
ABSOLUTE LIQUIDRATIO OR CASH RATIO:

It is a ratio of Absolute Liquid Assets to Quick Liabilities.However, for
calculationpurpose, it is taken as ratio of absolute liquid assets to current liabilities. Absolute liquid assets include cash in hand,cash at bank and short term or temporary investment.
Absolute Liquid Ratio= Absolute Liquid Assets/Current liabilities

The ideal ratio for absolute liquid ratio is taken as 1:2 or 0.5 the absolute liquid ratios
RCEIVABLES TO CURRENT ASSETS:

As againist cash receivables (Sundry Debtors) have possibility of becoming bad and doubtful? Due to be risk and uncertainity receivables have to be taken at only half of their amounts. 53
Thus the ideal ratio of receivables to current assets can be desired as 1:4 or 0.25
Receivables to Current Assets = Receivables / Current Assets
CASH AND BANK BALANCES TO WORKING CAPITAL RATIO:

It is the most liquid component current assets. More than 50% of the current liabilities are liquidity by cash. Therefore the idle ratio of cash to working capital can be considered as 1:2.
Cash and Bank balances to WC = Cash and Bank Balance/Working Capital
RECEIVABLES TO WORKING CAPITAL:

Receivables involve risk of becoming bad and doubtful or insolvent. Due to this reason they are not to be taken at their full amount. According to to the law of coservatism that states not to anticipate for the profits anticipate for the future is uncertain and may involve risk so, in order to avoid such risk the debtors are be assigned only half of their amount. Thus, the ratio is 1:4 is cosidered ideal.
Receivables to Working Capital = Receivables / Working Capital.
DEBTORS TURNOVER RATIO:

Debtors turnover ratio indicates the relationship between credit sales and average debtors. It indicates number of times debtors turnover each year. If debtors turnover is high, it shows the efficiency of management in credit.
Debtors turnover ratio = Credit Sales/ Average Debtors

This ratio measures how rapidly debts are collected. A high ratio is indicative of shorter time lag between credit sales and cash collections. A low ratio shows that debts are not being collected rapidly.
55
TABLE SHOWING THE WORKING CAPITAL FOR THE FINANCIAL YEAR 2002-03 TO 2003-04
(Rs.in Lacs)
Sl. No.
Particulars
Year
Change in W.C
2002-03 Current Assets: (i) (ii) (iii) (iv) (v) Inventories Sundry Debtors Cash & Bank Balance Loans & Advances Int. Accrued on dep.&Investiments 2442.96 3391.92 1275.66 998.48 24.06 8133.08 2480.06 179.47 21.83 182.83 2864.19 5268.89 2792.28 8061.17
2003-04 5594.33 5943.59 1237.66 1696.31 25.24 14497.13 4716.74 1518.45 17.94 182.83 6435.96 8061.17 8061.17
Increase 3151.36 2551.68 697.83 1.18 3.89 -
Decrease 38.00 2236.69 1338.98 -
Gross W.C (A) Current Liabilities: (i) Sundry Creditors: (ii) (iii) (iv) Advances From Cust. Int. Accrued not due Provisions
Total C.L (B) Networking capital: Current Assets (A) Current Liabilities (B) Change in working capital Total
2792.28
6405.94
6405.94
Interpretation
After analyzing the above table the working capital of two financial years i.e. 2002-03 and 2003-04 intimating that the inventory utilization is increased by Rs.3151.36 lacs, debtors increased by Rs.2551.68 lacs, cash & bank balances decreased by Rs.38 lacs, loans & advances increased by Rs.697.83 lacs, interest accrued on deposits & investments increased by Rs.1.18 lacs. 57
The current liabilities i.e. creditors increased by Rs.2236.69 lacs, Advance from customers increased by Rs.1338.98 lacs, interest accrued but not due decreased by Rs.3.89 lacs, The change in the working capital is 2792.28 lacs which refers to that the difference between the increased and decreased working capital was Rs.2792.28 lacs. According to the above analysis, the working capital is increased by Rs.2792.28 lacs comparing to the FY-2002-03 in the FY-2003-04.
TABLE SHOWING THE WORKING CAPITAL FOR THE FINANCIAL YEAR 2003-04 TO 2004-05
(Rs.in Lacs)
Sl. No.
Particulars 2003-04
Year 2004-05
Change in W.C Increase Decrease
Current Assets:
(i) (ii) (iii) (iv) (v)
Inventories Sundry Debtors Cash & Bank Balance Loans & Advances Int. Accrued on dep.&Investiments
5594.33 5943.59 1237.66 1696.31 25.24 14497.13 4716.74 1518.45 17.94 182.83 6435.96 8061.17 4965.31 13026.48
10701.15 7740.24 3791.87 3193.36 30.00 25459.62 9945.36 1703.10 13.70 770.98 12433.14 13026.48 13026.48
5109.82 1796.65 2554.21 1497.06 4.75 4.25 10966.73
5310.66 184.65 506.10 4965.31 10966.73
Interpretation
After analyzing the above table the working capital of two financial years i.e. 2003-04 and 2004-05 intimating that the inventory utilization is increased by Rs.5109.82 lacks, debtors increased by Rs.1796.65 lacks, cash & bank balances increased by Rs.2551.21 lacks, loans & advances increased by Rs.1497.06 lacks, interest accrued on deposits & investments increased by Rs.4.75 lacks. The current liabilities i.e. creditors increased by Rs.5310.66 lacks, Advance from 59
customers increased by Rs.184.65 lacks, interest accrued but not due decreased by Rs.4.25 lacks, Provisions increased by Rs.506.10 lacks, working capital was Rs.4965.31 lacks. According to the above analysis, the working capital is increased by Rs.4965.31lacks comparing to the FY-2003-04 in the FY-2004-05. The change in the working capital is Rs.4965.31 lacks which refers to that the difference between the increased and decreased
TABLE SHOWING THE WORKING CAPITAL FOR THE YEAR 2004 -05 TO 2005-06
(Rs.in Lacs)
Sl. No.
Particulars 2004-05
Year 2005-06
Change in W.C Increase Decrease
Current Assets:
(i) (ii) (iii) (iv) (v)
Inventories Sundry Debtors Cash & Bank Balance Loans & Advances Int. Accrued on dep.&Investiments
10701.15 7740.24 3791.87 3193.36 30.00 25459.62 9945.36 1703.10 13.70 770.98 12433.14 13026.48 17382.78 30409.25
20766.20 20909.68 7301.83 6103.70 50.61 55132.02 18075.71 4617.99 52.95 1976.11 24722.77 30409.25 30409.25
10062.06 13169.44 3509.97 2910.33 20.61 -
8130.35 2914.89 39.26 1205.13 17382.78
29672.41
29672.41
Interpretation
After analyzing the above table the working capital of two financial years i.e. 2004-05 and 2005-06 intimating that the inventory utilization is increased by Rs.10062.06 lacks, debtors increased by Rs.13169.44 lacks, cash & bank balances increased by Rs.3509.97 lacks, loans & advances increased by Rs.2910.33 lacks, interest accrued on deposits & investments increased by Rs.20.61 lacks. The current liabilities i.e. creditors increased by Rs.8130.35 lacks, Advance from 61
customers increased by Rs.2914.89 lacks, interest accrued but not due increased by Rs.39.26 lacks, Provisions increased by Rs.1205.13 lacks, working capital was Rs.17382.78 lacks. According to the above analysis, the working capital is increased by Rs.17382.78 lacks comparing to the FY-2004-05 in the FY-2005-06. The change in the working capital is Rs.17382.78 lacks which refers to that the difference between the increased and decreased
TABLE SHOWING THE WORKING CAPITAL FOR THE YEAR 2005-06 TO 2006-07
(Rs.in Lacs)
Sl. No.
Particulars 2005-06
Year 2006-07 29461.09
Change in W.C Increase 8694.89 Decrease -
Current Assets: (i) Inventories 20766.20
(ii) (iii) (iv) (v)
Sundry Debtors Cash & Bank Balance Loans & Advances Int. Accrued on dep.&Investiments
20909.68 7301.83 6103.70 50.61 55132.02 18075.71 4617.99 52.95 1976.11 24722.77 30409.25 15588.07 45997.32
40018.19 8360.79 5378.05 249.12 83467.24 28487.48 4914.83 67.21 4000.40 37469.92 45997.32 45997.32
19108.51 1058.96 198.51 -
725.65 10411.77 296.84 14.26 2024.29 15588.07
29060.88
29060.88
Interpretation
After analyzing the above table the working capital of two financial years i.e. 2005-06 and 2006-07 intimating that the inventory utilization is increased by Rs.8694.89 lacs, debtors increased by Rs.19108.51 lacs, cash & bank balances increased by Rs.1058.96 lacs, loans & advances decreased by Rs.725.65 lacs, interest accrued on deposits & investments increased by Rs. 198.51 lacs. The current liabilities i.e. creditors increased by Rs. 10411.77 lacs, Advance from customers increased by Rs.296.84 lacs, interest accrued but not due increased by Rs.14.26 lacs, provisions increased by Rs.2024.29 lacks. The change in the working capital is 15588.07 lacks which refers to that the difference between the increased and decreased working capital 63
was Rs.15588.07 lacs. According to the above analysis, the working capital is increased by Rs.15588.07 lacs comparing to the FY-2005-06 in the FY-2006-07.
TABLE SHOWING THE WORKING CAPITAL FOR THE YEAR 2006-07 TO 2007-08
(Rs.in Lacs)
Sl. No.
Particulars 2006-07
Year 2007-08 39504.69 49079.42 11875.78 12060.40
Change in W.C Increase 10043.60 9061.23 3514.99 6682.35 Decrease -
Current Assets: (i) (ii) (iii) (iv) Inventories Sundry Debtors Cash & Bank Balance Loans & Advances 29461.09 40018.19 8360.79 5378.05
(v)
Int. Accrued on dep.&Investiments
249.12 83467.24 28487.48 4914.83 67.21 4000.40 37469.92 45997.02 16905.37 62902.69
84.69 112604.98 43535.56 4914.52 75.51 1176.70 49702.29 62902.69 62902.69
0.31 2823.70 32126.18 -
164.43 15048.08 0.30 16905.37 32126.18
Interpretation
After analyzing the above table the working capital of two financial years i.e. 2006-07 and 2007-08 intimating that the inventory utilization is increased by Rs.10043.60 lacs, debtors increased by Rs.9061.23 lacs, cash & bank balances increased by Rs.3514.99 lacs, loans & advances increased by Rs.6682.35 lacs, interest accrued on deposits & investments decreased by Rs.164.43 lacs. The current liabilities i.e. creditors increased by Rs.15048.08 lacks, Advance from customers decreased by Rs.0.31 lacks, interest accrued but not due increased by Rs.0.30 lacks, provisions decreased by Rs.2823.70 lacks. The change in the working capital is 16905.37 lacks which refer to that the difference between the increased and decreased working capital was Rs.16905.37 lacs. According to the above analysis, the working capital is increased by Rs.16905.37 lacks comparing to the FY-2006-07 in the FY-2007-08. 65
CURRENT ASSET RATIO:

Financial Year 2003-04 2004-05 2005-06 2006-07 2007-08 Current Assets 14497.13 25459.62 55132.02 83467.24 112604.98 Current Liabilities 6435.96 12403.14 24722.77 37469.92 49702.39 2.05:1 2.23:1 2.23:1 2.27:1 Current Ratio 2.25:1
Interpretation
Generally 2:1 (Current assets: Current liabilities) will be considered as the ideal ratio in order to analyze the satisfactory liquidity position of any organization. The Current ratio of the company is also satisfactory to say as the current assets volume is always exceeded 2:1 as it explained well in the above chart i.e. the current ratio is more than 2:1 in all the 5 years that studied. And it is also observed that the current ratio is 2.27:1 for the financial year 2007-08 which is the highest of all the studied years.
QUICK ASSET RATO:

Financial Year 2003-04 2004-05 2005-06 2006-07 2007-08 Quick Assets 8902.80 14755.47 34365.82 54006.15 73100.28 Current Liabilities 6435.96 12403.14 24722.77 37469.92 49702.39 1.19:1 1.39:1 1.44:1 1.47:1 Quick Ratio 1.38:1
67
Interpretation
Generally 1:1 (Quick assets: Current liabilities) will be considered as the ideal ratio in order to analyze the satisfactory quick liquidity position of any organization. The Quick asset ratio of the company is also satisfactory to say as the Quick assets volume is always exceeded 1:1 as it explained well in the above chart i.e. the Quick asset ratio is more than 1:1 in all the 5 years that studied. And it is also observed that the Quick ratio is 1.47:1 for the financial year 2007-08 which is the highest of all the studied years.
ABSOLUTE LIQUID RATIO:

Financial Year 2003-04 2004-05 2005-06 2006-07 2007-08 Absolute liquid Assets 1237.66 3791.87 7301.83 8360.79 12875.78 Current Liabilities 6435.96 12403.14 24722.77 37469.92 49702.39 0.30:1 0.30:1 0.22:1 0.24:1 Absolute Liquid Ratio 0.19:1
Interpretation
Generally 0.50:1 (Absolute liquid assets: Current liabilities) will be considered as the ideal ratio in order to analyze the satisfactory absolute liquidity position of any organization. The Absolute liquid asset ratio of the company is not much satisfactory to say as the Absolute liquid assets volume is always lower than 0.50:1 as it explained well in the above chart i.e. the Absolute liquid asset ratio is less than 0.50:1 in all the 5 years that studied. And it is also observed that the Absolute liquid ratio is 0.19:1 for the financial year 2003-04 which is the lowest of all the studied years. And the company needed to maintain more cash and bank balances.
RECEIVABLES TO CURRENT ASSET RATIO:

Financial Year 2003-04 2004-05 2005-06 2006-07 2007-08 Receivables 5943.59 7740.24 20909.68 40018.19 49079.42 Current Assets 14497.13 25459.62 55132.02 83467.24 112604.98 0.30:1 0.38:1 0.48:1 0.44:1 Ratio 0.41:1
69
Interpretation
From the above ratio we can find that the receivables part in the current assets and it is seen that the ratio is encountered to 0.41,0.30,0.38,0.48 and 0.44.for the financial years 2003-04,2004-05,2005-06,2006-07 and 2007-08 respectively. It seems that the debtors are taking a large part in the current assets as the percentage is high. It is not safe for any organization with its existence in multiple countries.
Cash and Bank Balances to WC Ratio:

Financial Year 2003-04 2004-05 2005-06 2006-07 2007-08 Cash and Bank Balances 1235.66 3791.87 7301.83 8360.79 11875.78 Working Capital 8061.17 13026.48 30409.25 45997.32 62902.69 0.29:1 0.24:1 0.18:1 0.19:1 Ratio 0.15:1
Interpretation
In the assessment year 2003-04 this ratio is very low i.e.0.15 and for the assessment year 2004-05 & 2005-06 this ratio is high it is 0.29 & 0.24 respectively. Again the ratio decreased to 0.18 & 0.19 for the FY 2006-07 & 2007-08 respectively. From the above ratio it is observed that the part of cash and bank balances is taking a satisfactory part in the net working capital.
RECEIVABLES TO WORKING CAPITAL RATIO:

Financial Year 2003-04 2004-05 2005-06 2006-07 2007-08 Receivables 5943.59 7740.24 20909.68 40018.19 49079.42 Working Capital 8061.17 13026.48 30409.25 45997.32 62902.69 Ratio 0.74:1 0.59:1 0.69:1 0.87:1 0.78:1
71
Interpretation
It seems that from the above ratio we can observe that the debtors are taking a very huge part in the networking capital. It is also observed that the ratio is secured highest in the year 2006-07 as the ratio is 0.87 and it is very low in the year 2004-05 with a ratio of 0.59.
Debtors Turn Over Ratio: Credit sales/Debtors

Year 2003-04 2004-05 2005-06 2006-07 2007-08 Sales 26734.80 54339.16 85012.43 132147.33 132930.86 debtors 5943.59 7740.24 20909.68 40018.09 49079.42 3.30 2.71 7.02 4.07 ratio 4.50
Interpretation
Debtors Turnover Ratio should be very high then only the company will be receiving its debts within a short period. It indicates the company has taken less time to convert the credit sales into cash. In the above Table shows the Debtors turnover ratio of five years (2003-04 to 2007-08). The debtors turnover ratio of Vijai Electricals Ltd. was started with 4.5 in the year 2003-04 and it increased to 7.02 in the year 2004-05, it was decreased to 4.07 in next year 20005-06, and it was decreased to 2.71 by the end of year 2007-08.
Debtors collection period: No of days a year/Debtors turnover ratio

Year 2003-04 2004-05 2005-06 2006-07 2007-08 Days 360 360 360 360 360 73 debtors 4.5 7.02 4.07 3.30 2.71 109.09 132.84 51.28 88.45 Collection Period 80
Interpretation:
If the Debtors Turnover Ratio increases the debtors collection period will be short. If the debtors turnover ratio decreases the debtors collection period will take long time. In the above Table shows the Debtors Collection Period (Days) of five years (2003-04 to 2007-08). During the year 2003-04 the period of days is 80 days. It is decreased to 51 days in 2004-05. It again increased to 88 days in the year 2005-06, it raised to very high in the year 2006-07 and 2007-08 as it rose to 109.09 and 132.84 days respectively.
FINDINGS:
The company has consistency in current ratio which is in satisfactory position. Liquidity position of the company is good. Management is very effective in taking investment decisions. Investments made in current assets are adequate. Working capital is more due to which it has funds remain in idle. Debtors constitute more percentage of current assets which will be difficult to collect rapidly. So that there are variations in collection period. 75
The company is efficient in utilizing its current assets. There is no progressive change in holding the inventory during the period 2003-08 though sales are more as there is delay in work-in-progress and finished goods are not delivered in time. As sales increases, cost of production increases due to which it has to raise additional funds from other sources. The company is making payments to creditors in satisfactory way. The payments are made rapidly without losing its good will. But still required some changes in payment period.
SUGGESTIONS:
It is suggested that the company should concentrate on management of current assets and current liabilities, so that it can have good liquidity position in future. The company should effectively utilize working capital in order to avoid idle funds which will be loss in form of interest. The funds can be used in other operations. Receivables management should take necessary steps to realize its receivables more rapidly. As debtors constitute more percentage of current assets, collection period is not
satisfactory. So there should be revision of credit policy on sales and liquidity in order to increase the efficiency in collection process and reducing debtors. The inventory period should be reduced to maximum possible extent by following procedures like Just in time in importing the finished goods, so that we can avoid the delay in delivering finished goods. The cost of production can be controlled by reducing the period in holding work-inprogress inventory and by procuring the raw material according demand.
The company in order to have a good will and to compete with others, it is necessary
to make payments rapidly.
77
Bibliography
I.M Pandey, 2007, FINANCIAL MANAGEMANT, 9th Edition, Vikas publishing House private Limited, New Delhi.
Prasanna Chandra 2002, 5th Edition FINANCIAL MANAGEMENT, TATAMcGraw HILL, New Delhi.
S.P. Jain, K.L Narang, 2003, ADVANCED ACCOUNTANCY, VOLUME II, 13thEdition, Kalyani publishers, Ludhiana.
Websites
www.vijaielectricals.com
79

Working Capital Management

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Working Capital Management

Загружено:

Авторское право:

Доступные форматы

A STUDY ON WORKING CAPITAL MANAGEMENT IN

Vijai Electricals Ltd

indirectly involved in bringing out this project.

HISTORY OF VIJAI ELECTRICALS LTD.

TEAM OF THE COMPANY:

A Adapting to changes that could help us in continual improvement of our systems,

I Inherent commitment to comply with requirements of international standards and other

EXPORTS OF THE COMPANY:

DOMESTIC AND INTERNATIONAL CUSTOMERS: DOMESTIC CUSTOMERS

ACHIEVEMENTS : Certifications and awards:

Landmarks and milestones:

LIST OF PRODUCTS MANUFACTURED IN UNIT-2

3 Phase Oil Filled Power Transformers CRGO Silicon steel 66

Up to 10000 KVA IS, IEC, ANSI, JIS, DIN, BS etc.

3 Phase Oil filled Dist. Transformers CRGO Silicon

Upto 4000 36 kVA

1 Phase Oil filled Dist. 3 Transformers Upto 167 12 kVA - do -

CRGO Silicon steel & Amorphous Metal

Upto 3333 36 Kva Upto 315 12 kVA

CRGO Silicon steel

TYPE 3 Phase Oil Transformers CRGO

List of Products Manufactured in Unit-3:

1 Phase Oil filled Dist. Transformers

CRGO Silicon steel & Amorphous Metal

Upto 167 kVA Upto1000 KVA

List of Products Manufactured in Unit-4:

Product Round Copper

Wires (Terebec 101.36) Enamelled Rectangular Copper Wires (Terebec Fn)

IS 13730 Part 0-Sec 2 & Part 17

(Formvar 1530) PVA 4 Enamelled Rectangular 120

IEC 60317-0-2 & 60317-17

IS 13730 Part 0-Sec2 & Part 18

IEC 60317-0-2 & 60317-18

Copper Wires Glass Fibre Covered varnish

Bonded Bare Round Copper Wires Glass Fibre Covered Varnish

Aluminium Wires Paper Covered Rectangular

Aluminium Wires Enamelled Round Aluminium

IS 6162 Part 2 IS 13730 Part 0-Sec 3

NEMA MW 1000, 15/18

NEMA MW 1000, 15/18

WORKING CAPITAL MANAGEMENT INTRODUCTION:

DEFINITION OF WORKING CAPITAL MANAGEMENT:

DEFINING WORKING CAPITAL:

NEED FOR WORKING CAPITAL:

CONCEPTS OF WORKING CAPITAL:

GROSS WORKING CAPITAL:

NET WORKING CAPITAL:

TYPES OF WORKING CAPITAL:

PERMANENT WORKING CAPITAL:

TEMPORARY WORKING CAPITAL:

c. Conversion of receivables into cash.

Different phases of operating cycle can be shown as follows

you free up cash you consume more cash

ADVANTAGES OF ADEQUATE WORKING CAPITAL:

1. Solvency of the business:

hence helps in creating and maintaining goodwill.

5. Regular supply of raw materials:

7. Ability to face crisis:

8. Quick and Regular return on investments:

DISADVANTAGES OF INADEQUATE WORKING CAPITAL:

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL:

DETERMINANTS OF WORKING CAPITAL: In determining the working capital

Nature and size of business:

Price level changes: