Management Thesis

FINAL REPORT
ON
MANAGEMENT THESIS
“A multi-dimensional analysis of working capital

management, techniques, tools and changing patterns in a
manufacturing concern at vadodara”
BY
KEYUR A. PRAJAPATI
8NBVD062
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FINAL REPORT
ON
MANAGEMENT THESIS
SUBMITTED BY:
KEYUR A. PRAJAPATI
8NBVD062
(MBA 2008-2010)
A report submitted in partial fulfillment of the requirements of MBA Program
(Class of 2008-10)
VADODARA
Submitted to-
MR. AMOL RANADIVE

TABLE OF CONTENTS:
Acknowledgement……………………………………………………………..04
Preface………………………………………………………………………….05
General Information…………………………………………………………..06
Objectives of Study…………………………………………………………....09
Research Methodology………………………………………………………..10
Introduction to Company……………………………………………………..11
Introduction to Working Capital Management……………………………..15
Time Series Analysis…………………………………………………………..32
Holding Norms………………………………………………………………...35
Contribution to Current Assets………………………………………………36
Schedule of Changes in Working Capital……………………………………37
Profitability Analysis………………………………………………………….38
Assessment of Working Capital Requirement………………………………39
Ration Analysis………………………………………………………………..40
Return on Total Assets, Net Worth and Capital Employed…40
Profitability……………………………………………………...41
Liquidity…………………………………………………………43
Growth…………………………………………………………..44
Conclusion……………………………………………………………………..46
Reference………………………………………………………………………48

ACKNOWLEDGEMENT
This project report is an outcome of sincere efforts and cooperation of everyone who helped
me. I conducted this fieldwork program under the supervision of two respectful guides.
CENTRE HEAD : - MR. AURBINDO GHOSH
FACULTY GUIDE : - MR. AMOL RANADIVE
I also express my deep and heartily gratitude and respect to my soft skills trainer Mrs. Durba medam
and Centre Head Mr.Ghosh Sir for their continuous guidance and support.
I am also very much thankful to all for giving me support, guidance and cooperation in conducting
this project. I am grateful to my college and University which gave me an opportunity to get a
practical exposure and understand the theoretical aspects more clearly by placing me in such a reputed
an renowned company and helping me to understand more clearly marketing & finance concepts.
This training would not have been successful without the support and cooperation of my parents,
friends and everyone who ahs helped me in carrying out fieldwork successfully.
Last but no the least, thanks to the omnipresent GOD

PREFACE
This is an accepted fact that each and every work has two aspects and this universal truth is
also applicable so far as education is concerned, it also has two aspects one is theoretical and the other
is practical. Theoretical knowledge with practical experience is must for every students of
management. Thus practical experience plays a vital role in acquiring the real knowledge in
management study.
After looking to the importance of the practical study, INC Baroda outlined the Management
Thesis – I in III SEM which is helpful for me to explore my self and to understand the behavioral
pattern of investors in allocation of funds towards Gold.
From this report I have learnt how to outline the best Thesis on time. How I draft a
management thesis in way that it include objective of this thesis, limitations of this thesis,
methodology of this thesis, schedule and reference of this thesis

GENERAL INFORMATION
“A category of stocks containing firms that provides financial services to commercial

and retail customers. This sector includes banks, investment funds, insurance
companies and real estate.”
A financial system, which is inherently strong, functionally diverse and displays efficiency and
flexibility, is critical to our national objectives of creating a market-driven, productive and
competitive economy. A mature system supports higher levels of investment and promotes growth in
the economy with its depth and coverage. The financial system in India comprises of financial
institutions, financial markets, financial instruments and services. The Indian financial system is
characterized by its two major segments – an organized sector and a traditional sector that is also
known as informal credit market. Financial intermediation in the organized sector is conducted by a
large number of financial institutions which business organizations are providing financial services to
the community. The activities of financial institutions are further classified as banking and non-
banking entities. The reserve bank of India as the main regulator of credit is the apex institution in the
financial system. Other important financial institutions are the commercial banks. Non-bank financial
institutions include finance and leasing companies and other institutions like LIC, GIC, UTI, mutual
funds, provident funds, post office banks etc.
The financial sector in India had an overall growth of 15%, which has exhibited stability over the last
few years although several other markets across the Asian region were going through turmoil. The
development of the system pertaining to the financial sector was the key to the growth of the same.
With the opening of the financial market variety of products and services were introduced to suit the
need of the customer. The Reserve Bank of India (RBI) played a dynamic role in the growth of the
financial sector of India.

Manufacturing is the use of machines, tools and labor to make things for use or sale. The term may
refer to a range of human activity, from handicraft to high tech, but is most commonly applied to
industrial production, in which raw materials are transformed into finished goods on a large scale.
Such finished goods may be used for manufacturing other, more complex products, such as household
appliances or automobiles, or sold to wholesalers, who in turn sell them to retailers, who then sell
them to end users - the "consumers".
Manufacturing takes turns under all types of economic systems. In a free market economy,
manufacturing is usually directed toward the mass production of products for sale to consumers at a
profit. In a collectivist economy, manufacturing is more frequently directed by the state to supply a
centrally planned economy. In free market economies, manufacturing occurs under some degree of
government regulation.
Modern manufacturing includes all intermediate processes required for the production and integration
of a product's components. Some industries, such as semiconductor and steel manufacturers use the
term fabrication instead.
THE GROWTH RATE OF MANUFACTURING SECTOR IN INDIA
The growth rate of manufacturing sector in a country truly reflects its economy potentiality. Most of
the developed countries are strong enough in their manufacturing sector.
Though the services sector in India has brought faster economic success, still the manufacturing sector
plays an important role on the ground of sustainability.
In India, though the manufacturing sector is growing at a faster pace still it has failed to some extent
with regards to its percentage share in the total GDP.

The growth rate of manufacturing sector in the country has reached at a two-digit percentage growth
in the year 2006-07 from April-August.
Both Government as well as the private sectors has come forward for the development of the
manufacturing sector of the country. More investments are being proposed in the sector particularly in
the growth rate of capital goods, consumer durables, and some non-durable goods.
The coming budget 2007-08 is to emphasize on the manufacturing sector in India’s Economy for
sustaining its growth and achieving development goals.

OBJECTIVE OF THE STUDY
A well designed and implemented working capital management is expected to contribute positively to
the creation of a firm’s value.
Ø The main objective is to examine the trends in working capital management and its impact of
firms’ performance.
Ø The trend in working capital needs and profitability of firms are to be examined to identify
the causes for any significant difference between the industries.
Ø To study the key variables used in the analysis like inventories days, accounts receivables
days, accounts payable days and cash conversion cycle.
Ø To analyze how the firm is required to maintain a balance between liquidity and profitability
while conducting its day to day operations.
Ø To study the success factors that contribute to success or failure of a particular firm for
example availability of attractive financing, economic conditions, competition, government
regulations, technology and environmental factors.
Ø To analyze effective management of working capital as it may have a consequent impact on
small business survival and growth.
Ø To study how the firm is meeting day-to-day cash flow needs.
Ø To analyze how the firm pays wages and salaries when they fall due.
Ø To know how the firm makes regular payments to creditors to ensure continued supplies of
goods and services.
Ø To know how the firm is meeting with the payments of government taxes
Ø To analyze long term survival of the business entity.

RESEARCH METHODOLOGY
The primary research of our study is to do multi-dimensional analysis of cash management using
different specified techniques and tools and also measure the changing patterns or trends in a present
scenario.
“An Analysis of Emerging corporate Cash Management Approaches and shift in the present scenario”
For the purpose of this study, profitability is measured by return on total assets, which is defined as
profit before interest and tax divided by total assets. The efficiency ratios, namely accounts
receivable, inventory and accounts payable will be computed using applicable formulas. The cash
conversion cycle will be used as a comprehensive measure of working capital.
In order to account for firm’s size and the other variables that may influence profits, the debt-equity
ratio, the gross working capital turnover ratio and the ratio of current assets to total assets will be
included in our study.

INTRODUCTION OF COMPANY
Welcome to Bajaj Electricals limited
Bajaj Electricals Limited (BEL) is a part of the Rs. 20000 crore "Bajaj Group" who are in the business
of steel, sugar, two wheelers & three wheelers besides an impressive range of consumer electrical
products. We are a 70 year old company with a turnover of over Rs. 1404 crores aiming to be a Rs.
2001 crore company in the next couple of years.
Bajaj Electricals has 19 branch offices, a chain of 600 distributors, 3000 authorized dealers, over
2,50,000 retail outlets and over 230 service franchises spread across the country. BEL today has five
major strategic business units comprising of home appliances, fans, lighting, luminaries and
engineering & projects. We are also in the business of manufacturing, erection and commissioning of
Transmission Line Towers, Telecom Towers, Mobile Telecom Towers and Wind Energy Towers.
Export of all BEL's products except of its engineering and projects business unit is taken care of by
group company Bajaj International Pvt. Ltd.
~ A Tradition of Trust ~
"Ethics brings us image, prestige and also better profits."

- Ramkrishna Bajaj
-
The complete circle of trust is a responsibility that arises from the opportunity to serve our consumers.
We try and fulfill this responsibility by enhancing the quality of their lives, through state-of-the-art
products that are convenient to use.
Our Corporate Philosophy is also based on the same belief that enables us to move our products from
elegant store shelves and crowded market places, into the homes and hearts of millions of our loyal
consumers.
Trust is truly the very foundation of our business.

~ A Future of Trust ~
Trust is what has brought us this far. Trust is what will get us much further in the future.
We intend to excel, expand and explore newer vistas of learning, growth and performance, through
new alliances, joint ventures, technology transfers, global sourcing and indigenous manufacturing.
We intend to build upon our rich heritages of being an ethical and a responsible business group.
But most importantly, we commit ourselves to keeping alive the powerful legacy and heritage of our
founders.
Corporate Vision of Bajaj Electricals limited
“We aim to bring greater happiness to our customers by improving their quality of life, while
enhancing stakeholder value”
The Bajaj Group
“Do whatever you think best, but be best at whatever you do”
– Rahul Bajaj
A Group Built on Trust

Group Companies
The Bajaj group comprises 27 companies and was founded in the year 1926. The companies in the
group are:
Bajaj Electricals Ltd. Mukand International Ltd.
Bajaj Auto Ltd. Mukand Engineers Ltd.
Mukand Ltd. Mukand Global Finance Ltd.
Bajaj Hindustan Ltd. Bachhraj Factories Pvt. Ltd.
Maharashtra Scooters Ltd. Bajaj Consumer Care Ltd.
Bajaj Auto Finance Ltd. Bajaj Auto Holdings Ltd.
Hercules Hoists Ltd. Jamnalal Sons Pvt. Ltd.
Bajaj Sevashram Pvt Ltd. Bachhraj & Company Pvt. Ltd.
Hind Lamps Ltd. Jeevan Ltd.
Bajaj Ventures Ltd. The Hindustan Housing Co Ltd.
Bajaj International Pvt Ltd. Baroda Industries Pvt Ltd.
Hind Musafir Agency Pvt Ltd. Stainless India Ltd.
Bajaj Allianz General Insurance Company

Bombay Forgings Ltd.
Ltd.
Bajaj Allianz Life Insurance Company Ltd.

Bajaj Electricals Ltd.
Chairman & Managing Shekhar Bajaj

Director
Address Bajaj Electrical's Ltd. 45-47, Veer Nariman Road, Mumbai 400 023
Phone 91-22-22043841
Fax 91-22-22851279
E-mail publicity@bajajelectricals.com
Website http://www.bajajelectricals.com/
Business Manufacturers of electric fans, highmasts, lattice closed towers and poles, etc.
and marketing of electrical goods such as general lighting service lamps,
special lamps, compact fluorescent lamps, fluorescent tubes, luminaries, fans
and electrical & non-electrical appliances.

Working Capital Management
Every business needs investment to procure fixed assets, which remain in use for a longer period.
Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’. Business also needs
funds for short-term purposes to finance current operations. Investment in short term assets like cash,
inventories, debtors etc., is called ‘Short-term Funds’ or ‘Working Capital’. The ‘Working Capital’
can be categorized, as funds needed for carrying out day-to-day operations of the business smoothly.
The management of the working capital is equally important as the management of long-term
financial investment.
Every running business needs working capital. Even a business which is fully equipped with all types
of fixed assets required is bound to collapse without (i) adequate supply of raw materials for
processing; (ii) cash to pay for wages, power and other costs; (iii) creating a stock of finished goods to
feed the market demand regularly; and, (iv) the ability to grant credit to its customers. All these
require working capital. Working capital is thus like the lifeblood of a business. The business will not
be able to carry on day-to-day activities without the availability of adequate working capital. The
diagram shown on the next page clarifies it:
Working capital cycle involves conversions and rotation of various constituents/components of the
working capital. Initially ‘cash’ is converted into raw materials.
Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get
converted into work in process and then into finished goods. When sold on credit, the finished goods
assume the form of debtors who give the business cash on due date. Thus ‘cash’ assumes its original
form again at the end of one such working capital cycle but in the course it passes through various
other forms of current assets too. This is how various components of current assets keep on changing
their forms due to value addition. As a result, they rotate and business operations continue. Thus, the
working capital cycle involves rotation of various constituents of the working capital.
While managing the working capital, two characteristics of current assets should be kept in mind viz.
(i) short life span, and (ii) swift transformation into other form of current asset. Each constituent of
current asset has comparatively very short life span. Investment remains in a particular form of

current asset for a short period. The life span of current assets depends upon the time required in the
activities of procurement; production, sales and collection and degree of synchronisation among them.
A very short life span of current assets results into swift transformation into other form of current
assets for a running business. These characteristics have certain implications:
Ø Decision regarding management of the working capital has to be taken frequently and on a
repeat basis.
Ø The various components of the working capital are closely related and mismanagement of any
one component adversely affects the other components too.
Ø The difference between the present value and the book value of profit is not significant.
Objectives of working capital:
Every business needs some amount of working capital. It is needed for following purposes-
• For the purchase of raw materials, components and spares.
• To pay wages and salaries.

• To incur day to day expenses and overhead costs such as fuel, power, and office expenses etc.
• To provide credit facilities to customers etc.
Sources of working capital:
The working capital requirements should be met both from short term as well as long term sources of
funds.
A) Financing of working capital through short term sources of funds has the benefits of lower cost
and establishing close relationship with banks.
B) Financing of working capital through long term sources provides the benefits of reduces risk and
increases liquidity
Types of working capital:
Working capital an be divided into two categories-
A) Permanent working capital:
It refers to that minimum amount of investment in all current assets which is required at all times to
carry out minimum level of business activities.
B) Temporary working capital:
The amount of such working capital keeps on fluctuating from time to time on the basis of business
activities.

Advantages of working capital:
• It helps the business concern in maintaining the goodwill.

• It can arrange loans from banks and others on easy and favorable terms.
• It enables a concern to face business crisis in emergencies such as depression.
• It creates an environment of security, confidence, and over all efficiency in a business.
• It helps in maintaining solvency of the business.
Disadvantages of working capital:
• Rate of return on investments also fall with the shortage of working capital.
• Excess working capital may result into over all inefficiency in organization.
• Excess working capital means idle funds which earn no profits.
• Inadequate working capital can not pay its short term liabilities in time.
Management of working capital:
A firm must have adequate working capital, i.e.; as much as needed the firm. It should be neither
excessive nor inadequate. Both situations are dangerous. Excessive working capital means the firm
has
idle funds which earn no profits for the firm. Inadequate working capital means the firm does not have
sufficient funds for running its operations. It will be interesting to understand the relationship between
working capital, risk and return. The basic objective of working capital management is to manage
firms current assets and current liabilities in such a way that the satisfactory level of working capital is
maintained, i.e.; neither inadequate nor excessive. Working capital some times is referred to as
“circulating capital”. Operating cycle can be said to be t the heart of the need for working capital. The
flow begins with conversion of cash into raw materials which are, in turn transformed into work-in
progress and then to finished goods. With the sale finished goods turn into accounts receivable,
presuming goods are sold as credit. Collection of receivables brings back the cycle to cash.

The company has been effective in carrying working capital cycle with low working capital limits. It
may also be observed that the PBT in absolute terms has been increasing as a year to year basis as
could be seen from the above table although profit percentage turnover may be lower but in absolute
terms it is increasing. In order to further increase profit margins, SSL can increase their margins by
extending credit to good customers and also by paying the creditors in advance to get better rates.
The working capital has the following components, which are in several forms of current assets:
v Stock of Cash
v Stock of Raw Material

v Stock of Finished Goods
v Value of Debtors
v Miscellaneous current assets like short term investment loans & advances
The working capital needs of a business are influenced by numerous factors. The important ones are
discussed in brief as given below:
i. Nature of Enterprise
The nature and the working capital requirements of an enterprise are interlinked. While a
manufacturing industry has a long cycle of operation of the working capital, the same would be short
in an enterprise involved in providing services. The amount required also varies as per the nature; an
enterprise involved in production would require more working capital than a service sector enterprise.
ii. Manufacturing/Production Policy
Each enterprise in the manufacturing sector has its own production policy, some follow the policy of
uniform production even if the demand varies from time to time, and others may follow the principle
of 'demand-based production' in which production is based on the demand during that particular phase
of time. Accordingly, the working capital requirements vary for both of them.

iii. Operations
The requirement of working capital fluctuates for seasonal business. The working capital needs of
such businesses may increase considerably during the busy season and decrease during the slack
season. Ice creams and cold drinks have a great demand during summers, while in winters the sales
are negligible.
iv. Market Condition
If there is high competition in the chosen product category, then one shall need to offer sops like
credit, immediate delivery of goods etc. for which the working capital requirement will be high.
Otherwise, if there is no competition or less competition in the market then the working capital
requirements will be low.
v. Availability of Raw Material
If raw material is readily available then one need not maintain a large stock of the same, thereby
reducing the working capital investment in raw material stock. On the other hand, if raw material is
not readily available then a large inventory/stock needs to be maintained, thereby calling for
substantial investment in the same.
vi. Growth and Expansion
Growth and expansion in the volume of business results in enhancement of the working capital
requirement. As business grows and expands, it needs a larger amount of working capital. Normally,
the need for increased working capital funds precedes growth in business activities.
vii. Price Level Changes
Generally, rising price level requires a higher investment in the working capital. With increasing
prices, the same level of current assets needs enhanced investment.
viii. Manufacturing Cycle
The manufacturing cycle starts with the purchase of raw material and is completed with the
production of finished goods. If the manufacturing cycle involves a longer period, the need for
working capital would be more.

At times, business needs to estimate the requirement of working capital in advance for proper control
and management. The factors discussed above influence the quantum of working capital in the
business. The assessment of working capital requirement is made keeping these factors in view. Each
constituent of working capital retains its form for a certain period and that holding period is
determined by the factors discussed above. So for correct assessment of the working capital
requirement, the duration at various stages of the working capital cycle is estimated. Thereafter,
proper value is assigned to the respective current assets, depending on its level of completion. The
basis for assigning value to each component is given below:
Component of Working Capital Basis of Valuation

Stock of raw material Purchase cost of raw materials
Stock of work in process At cost or market value, whichever is lower
Stock of finished goods Cost of production
Debtors Cost of sales or sales value
Cash Working expenses
Each constituent of the working capital is valued on the basis of valuation enumerated above for the
holding period estimated. The total of all such valuation becomes the total estimated working capital
requirement.
The assessment of the working capital should be accurate even in the case of small and micro
enterprises where business operation is not very large. We know that working capital has a very close
relationship with day-to-day operations of a business. Negligence in proper assessment of the working
capital,
therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to
liquidation. An inaccurate assessment of the working capital may cause either under-assessment or
over-assessment of the working capital and both of them are dangerous.

CONSEQUENCES OF UNDER ASSESSMENT OF WORKING
CAPITAL
Growth may be stunted. It may become difficult for the enterprise to undertake profitable
projects due to non-availability of working capital.
 Implementation of operating plans may become difficult and consequently the profit goals
may not be achieved.
 Cash crisis may emerge due to paucity of working funds.
 Optimum capacity utilization of fixed assets may not be achieved due to non-availability of
the working capital.
 The business may fail to honor its commitment in time, thereby adversely affecting its
credibility. This situation may lead to business closure.
 The business may be compelled to buy raw materials on credit and sell finished goods on
cash. In the process it may end up with increasing cost of purchases and reducing selling prices by
offering discounts.
Both these situations would affect profitability adversely.
 Non-availability of stocks due to non-availability of funds may result in production stoppage.
 While underassessment of working capital has disastrous implications on business, over

assessment of working capital also has its own dangers.

CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL
 Excess of working capital may result in unnecessary accumulation of inventories.
 It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash
management.
 It may make management complacent leading to its inefficiency.
 Over-investment in working capital makes capital less productive and may reduce return on
investment.
Working capital is very essential for success of a business and, therefore, needs efficient management
and control. Each of the components of the working capital needs proper management to optimize
profit.
Inventory Management
Inventory includes all types of stocks. For effective working capital management, inventory needs to
be managed effectively. The level of inventory should be such that the total cost of ordering and
holding inventory is the least. Simultaneously, stock out costs should also be minimized. Business,
therefore, should fix the minimum safety stock level, re-order level and ordering quantity so that the
inventory cost is reduced and its management becomes efficient.
Receivables’ Management
Given a choice, every business would prefer selling its produce on cash basis. However, due to factors
like trade policies, prevailing marketing conditions, etc., businesses are compelled to sell their goods
on credit. In certain circumstances, a business may deliberately extend credit as a strategy of
increasing sales. Extending credit means creating a current asset in the form of ‘Debtors’ or ‘Accounts
Receivable’. Investment in this type of current assets needs proper and effective management as it
gives rise to costs such as:
i. Cost of carrying receivable (payment of interest etc.)

ii. Cost of bad debt losses

Thus the objective of any management policy pertaining to accounts receivables would be to ensure
that the benefits arising due to the receivables are more than the cost incurred for receivables and the
gap between benefit and cost increases resulting in increased profits. An effective control of
receivables helps a great deal in properly managing it. Each business should, therefore, try to find out
average credit extended to its client using the below given formula:
Average credit Extended (in days) = Total amount of receivables

Average credit sales per day
Each business should project expected sales and expected investment in receivables based on various
factors, which influence the working capital requirement. From this it would be possible to find out
the average credit days using the above given formula. A business should continuously try to monitor
the credit days and see that the average credit offered to clients is not crossing the budgeted period.
Otherwise, the requirement of investment in the working capital would increase and, as a result,
activities may get squeezed. This may lead to cash crisis.
Cash Management
Cash is the most liquid current asset. It is of vital importance to the daily operations of business.
While the proportion of assets held in the form of cash is very small, its efficient management is
crucial to the solvency of the business. Therefore, planning cash and controlling its use are very
important tasks. Cash budgeting is a useful device for this purpose.
Cash Budget
Cash budget basically incorporates estimates of future inflows and out flows of cash over a projected
short period of time which may usually be a year, a half or a quarter year. Effective cash management
is facilitated if the cash budget is further broken down into month, week or even on daily basis.

There are two components of cash budget (i) cash inflows and (ii) cash out flows. The main sources
for these flows are given hereunder:
Cash Inflows:-
(a) Cash sales
(b) Cash received from debtors
(c) Cash received from loans, deposits, etc.
(d) Cash receipt of other revenue income
(e) Cash received from sale of investments or assets.
Cash Outflows:-
a) Cash purchases
(b) Cash payment to creditors
(c) Cash payment for other revenue expenditure
(d) Cash payment for assets creation
(e) Cash payment for withdrawals, taxes
(f) Repayment of loans, etc.
Financing Working Capital

Now let us understand the means to finance the working capital. Working capital or current assets are
those assets, which unlike fixed assets change their forms rapidly. Due to this nature, they need to be
financed through short-term funds. Short-term funds are also called current liabilities. The following
are the major sources of raising short-term funds:
i. Supplier’s Credit
At times, business gets raw material on credit from the suppliers. The cost of raw material is paid after
some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the
business is in a position to use raw material and continue the activities. The credit given by the
suppliers of raw materials is for a short period and is considered current liabilities. These funds should
be used for creating current assets like stock of raw material, work in process, finished goods, etc.

ii. Bank Loan for Working Capital
This is a major source for raising short-term funds. Banks extend loans to businesses to help them
create necessary current assets so as to achieve the required business level. The loans are available
for creating the following current assets:
d Stock of Raw Materials
d Stock of Work in Process
d Stock of Finished Goods
d Debtors
Banks give short-term loans against these assets, keeping some security margin. The advances given
by banks against current assets are short-term in nature and banks have the right to ask for immediate
repayment if they consider doing so. Thus bank loans for creation of current assets are also current
liabilities.
iii. Promoter’s Fund
It is advisable to finance a portion of current assets from the promoter’s funds. They are long-term
funds and, therefore do not require immediate repayment. These funds increase the liquidity of the
business

WORKING CAPITAL MANAGEMENT
Introduction
A managerial accounting strategy focusing on maintaining efficient levels of both components of
working capital, current assets and current liabilities, in respect to each other is referred to as working
capital management. Working capital management ensures a company has sufficient cash flow in
order to meet its short-term debt obligations and operating expenses. Implementing an effective
working capital management system is an excellent way for many companies to improve their
earnings. The two main aspects of working capital management are ratio analysis and management of
individual components of working capital. Ratio analysis will lead management to identify areas of
focus such as inventory management, cash management, accounts receivable and payable
management.
The study objectives in working capital management particular to this study are:
Ø To examine the impact of accounts receivables days, inventories days, accounts payable days and
cash conversion cycle on return on total assets
Ø To analyze the trend in working capital needs of firms and to examine the causes for any
Significant differences between the industries.
Working Capital Components

The term working capital refers to the amount of capital which is readily available to an organization.
It is a measure of both a company's efficiency and its short-term financial health. 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). Current
Assets are resources which are in cash or will soon be converted into cash in “the ordinary course of
business”‘. Current Liabilities are commitments which will soon require cash settlement in “the
ordinary course of business”.

The working capital is calculated as:
WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES
Component of Working Capital Basis of Valuation

Stock of raw material Purchase cost of raw materials
Stock of work in process At cost or market value, whichever is lower
Stock of finished goods Cost of production
Debtors Cost of sales or sales value
Cash Working expenses
Positive working capital means that the company is able to pay off its short-term liabilities. Negative
working capital means that a company currently is unable to meet its short-term liabilities with its
current assets (cash, accounts receivable, inventory). If a company's current assets do not exceed its
current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case
scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red
flag that warrants further analysis. Working capital also gives investors an idea of the company's
underlying operational efficiency. Money that is tied up in inventory or money that customers still
owe to the company cannot be used to pay off any of the company's obligations. So, even if a
company is not operating in the most efficient manner (slow collection), it will show up as an increase
in the working capital. This can be seen by comparing the working capital from one period to another;
slow collection may signal an underlying problem in the company's operations.
Working Capital Analysis

The major components of gross working capital include stocks (raw materials, work-in-progress and
finished goods), debtors, cash and bank balances. The composition of working capital depends on a
multiple of factors, such as operating level, level of operational efficiency, inventory policies, book
debt policies, technology used and nature of the industry. While inter- industry variation is expected
to be high, the degree of variation is expected to be low for firms within the industry.

Nature and Importance of Working Capital
The working capital meets the short-term financial requirements of a business enterprise. It is a
trading capital, not retained in the business in a particular form for longer than a year. The money
invested in it changes form and substance during the normal course of business operations. If it
becomes weak, the business can hardly prosper and survive. The success of a firm depends ultimately,
on its ability to generate cash receipts in excess of disbursements. On the one hand, working capital is
always significant. This is especially true from the lender's or creditor's perspective, where the main
concern is defensiveness: can the company meet its short-term obligations, such as paying vendor
bills?
But from the perspective of equity valuation and the company's growth prospects, working capital is
more critical to some businesses than to others. At the risk of oversimplifying, we could say that the
models of these businesses are asset or capital intensive rather than service or people intensive.
The Importance of Good Working Capital Management

Working capital constitutes part of the Crown’s investment in a department. Associated with this is an
opportunity cost to the Crown. (Money invested in one area may “cost” opportunities for investment
in other areas.) If a department is operating with more working capital than is necessary, this over-
investment represents an unnecessary cost to the Crown.
From a department’s point of view, excess working capital means operating inefficiencies. In
addition, unnecessary working capital increases the amount of the capital charges.
The Management of Working Capital

The amounts invested in working capital are often high in proportion to the total assets employed and
so it is vital that these amounts are used in an efficient and effective way. A firm can be very
profitable, but if this is not translated into cash from operations within the same operating cycle,
the firm would need to borrow to support its continued working capital needs. Thus, the twin
objectives of profitability and liquidity must be synchronized and one should not impinge on the
other for long. Investments in current assets are inevitable to ensure delivery of goods or services to
the ultimate customers and a proper management of same should give the desired impact on either
profitability or liquidity. If resources are blocked at different stages of the supply chain, this will

prolong the cash operating cycle. Although this might increase profitability (due to increase sales), it
may also adversely affect the profitability if the costs tied up in working capital exceed the benefits of
holding more inventory and/or granting more trade credit to customers. Another component of
working capital is accounts payable, but it is different in the sense that it does not consume resources;
instead it is often used as a short term source of finance. Thus it helps firms to reduce its cash
operating cycle, but it has an implicit cost where discount is offered for early settlement of invoices.
Approaches to Working Capital Management

The objective of working capital management is to maintain the optimum balance of each of the
working capital components. This includes making sure that funds are held as cash in bank deposits
for as long as and in the largest amounts possible, thereby maximizing the interest earned. However,
such cash may more appropriately be “invested” in other assets or in reducing other liabilities.
Working capital management takes place on two levels:

§ Ratio analysis can be used to monitor overall trends in working capital and to identify areas
requiring closer management.
§ The individual components of working capital can be effectively managed by using various
Techniques and strategies.
When considering these techniques and strategies, departments need to recognize that each
department has a unique mix of working capital components. The emphasis that needs to be
placed on each component varies according to department. For example, some departments have
significant inventory levels; others have little if any inventory.
Furthermore, working capital management is not an end in itself. It is an integral part of the
department’s overall management.
Working Capital Cycle

Working capital cycle, also known as the asset conversion cycle, operating cycle, cash conversion
cycle or just cash cycle, is used in the financial analysis of a business. The higher the number, the
longer a firm's money is tied up in business operations and unavailable for other activities such as

investing. The cash conversion cycle is the number of days between paying for raw materials and
receiving cash from selling goods made from that raw material.
Cash Conversion Cycle = Average Stockholding Period (in days) + Average Receivables Processing
Period (in days) - Average Payables Processing Period (in days) with:
§ Average Stockholding Period (in days) = Closing Stock / Average Daily Purchases
§ Average Receivables Processing Period (in days) = Accounts Receivable / Average Daily Credit
Sales
§ Average Payable Processing Period (in days) = Accounts Payable / Average Daily Credit
Purchases.
A short cash conversion cycle indicates good working capital management. Conversely, a long cash
conversion cycle suggests that capital is tied up while the business waits for customers to pay. The
longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the
longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other
hand, if a firm can delay paying for its own materials, it may reduce the amount of cash it needs. In
other words, accounts payable reduce net working capital.

TIME SERIES ANALYSIS
Profit & Loss A/C (Rs. In Millions)

(table 1)
Particulars 2006-07 2007-08 2008-09

Net sales 10788.62 13744.76 17688.92
Cost of Production 8522.00 10679.90 13479.30
Cost of Goods sold 8354.60 10257.00 13324.10
Operating Profit Before Interest 804.20 1374.80 1802.20
Operating Profit after Interest 573.50 1081.40 1432.50
Profit Before Tax 608.40 1114.10 1398.00
Profit After Tax 385.30 731.00 891.30
Dividend Pay-out 80.25 161.79 202.24
Retained Profit 649.50 1218.70 1908.40
Balance Sheet (Rs. In Millions)

(table 2)
Particulars 2006-07 2007-08 2008-09
Total Current Liabilities 3181.22 4070.98 5703.47
Total Term Liabilities 2371.71 2366.99 2138.52
Total Net Worth 1168.24 1747.78 2450.14
Total Liabilities 6793.81 8227.00 10323.59
Total Current Assets 5656.30 7084.53 9037.24
Total Non-Current Assets 222.95 223.28 315.59
Net Block 908.61 916.20 946.00
Total Assets 6793.81 8227.00 10323.59

Working Capital Cycle
GWC CYCLE = (Inventory Period + Receivables Period)
NWC CYCLE = (Inventory Period + Receivables Period - Payables Period)
A Inventory Period
A1. Raw Material Conversion Period
(Rs. In Millions)
Particulars 2006-07 2007-08 2008-09
Raw Material Consumption 1374.41 1348.60 1656.13
Raw Material Consumption per Day 3.77 3.69 4.54
Average Inventory 253.09 279.37 295.60
Raw Material Inventory Holding in Days 67.13 75.78 65.11
(table 3)
A2. Work In Process Conversion Period
(Rs. In Millions)
Particulars 2006-07 2007-08 2008-09
Cost of Production 8412.35 10638.60 13339.39
Cost of Production per Day 23.05 29.15 36.55
Average Working Progress Inventory 63.63 88.27 149.38
Working Progress Inventory Holding Day 2.76 3.03 4.08
(Table 4)
A3. Finished Goods Conversion Period
(table 5) (Rs. In
Millions)
Particulars 2006-07 2007-08 2008-09
Cost of Goods Sold 8354.60 10257.00 13324.10
Cost of Goods Sold per Day 22.89 28.10 36.50
Finish Goods Inventory 795.10 1014.77 1213.22
Finish Goods Inventory Holding Days 34.74 36.11 33.24

Total Inventory Holding Days 104.63 114.92 102.43
(A1 + A2 + A3)
B Receivables Period
Particulars 2006-07 2007-08 2008-09
Credit Sales 10788.62 13744.76 17688.92
Sales Per Day 29.56 37.66 48.46
Average Debtors 3297.41 3916.39 4922.53
Debtors Outstanding Days 111.55 103.99 101.58
(table 6)
C Payables Period
Particulars 2006-07 2007-08 2008-09
Credit Purchase 8144.90 10198.51 12969.59
Purchase Per Day 22.31 27.94 35.53
Creditors 1356.75 1356.55 1775.10
Creditors Outstanding Days 60.81 48.55 49.96
(table 7)
GROSS WC CYCLE (A1 + B1) 216.18 218.91 204.01
NET WC CYCLE (A1 + B1 – C1) 155.37 170.36 154.05

Holding Norms
(table 8)
Particulars 2006-07 2007-08 2008-09
Raw Material-Days 67.13 75.78 65.11
Working -in –Process Days 2.76 3.03 4.08
Finish Goods Days 34.74 36.11 33.24
Receivable Days 111.55 103.99 101.58
Payable Days 60.81 48.55 49.96
Inferences
Ø Raw material holding period has been decreased by 3.00%, which is a positive sign while
work in process inventory holding period has been increased by 47.83%, which shows
inefficient Management in the stocks in process holding period.
Ø The credit receivables period has also been brought down slightly by about 8.94% which
shows the efficiency of the debtors’ management.
Ø The payables period has also been stretched by 17.84%, which imposes tight management
control over working capital or liquidity position.

Contribution to Current Assets
(table 9)
Particulars 2006-07 2007-08 2008-09
Raw Material to Current Assets 27.10 21.77 20.95
Work In Process to Current Assets 1.25 1.42 1.89
Finished Goods Inventory to Current 15.68 16.38 15.34
Assets
Total Inventory to Current Assets 21.92 22.31 20.97
Debtors to Current Assets 65.00 63.22 62.26
Inference.
Ø Minor decrease in finished goods inventory over the years by 2.16%.

Ø Debtors have been highly reduced over the years by 4.23%.
Ø The work in process inventory has been maintained more than required and this is one of the
cause of liquidity crunch., on the other hand finished goods inventory and receivables have
been reduced, which is a positive sign for company.
Ø The debtors are managed efficiently as it has been decreased by 4.23%.

Schedule of Changes in Working Capital
(table 10)
Particulars 2006-07 2007-08 2008-09
CURRENT ASSETS
Inventories (1530.42) 422.87 155.30
Sundry debtors 563.82 674.15 1338.11
Cash and bank (527.24) 25.90 218.58
Other current assets (721.03) (0.05) (0.175)
Loans and advances (20689.53) 6500.37 1952.71
CURRENT LIABILITIES
Current liabilities (9279.95) 636.51 1545.62
Provisions (22986.43) 3898.51 1632.49
Profitability Analysis
(As % of Net Sales)
(Table 11)
Particulars 2006-07 2007-08 2008-09
P.B.D.I.T. 8.42 10.79 10.49
P.B.I.T. 7.74 10.25 10.00
P.B.D.T. 6.27 8.66 8.40
P.B.T. 5.60 8.11 7.92
P.A.T. 3.58 5.33 5.05

Inferences.
Profitability has increased by 41.06% in the current year, which is due to following reasons:
Ø Operating cost has gone down proportionally higher than net sales from 2006-07 to 2008-09.
Ø Full benefit of investment to increase capacity was partially realized in FY 2008-09

Assessment of Working Capital Requirements
(Maximum Permissible Bank Finance)
For Year 2009
(table 12) Rs in million
Sr.No. Particulars 2008-09

1. Total Current Assets 7906.81
2. Current Liabilities (other than Bank borrowings) 5168.54
3. Working Capital Gap (1-2) 2738.27
4. Min. stipulated Net Working Capital (25 % of Total C.A) 1976.70
5. Actual / Projected Net W.C 2715.93
6. Item 3 minus Item 4 1261.57
7. Item 3 minus Item 5 22.34
8. Max. Permissible Bank Finance (Item 6 or 7, whichever is lower) 22.34
9. Excess Borrowing, if any representing shortfall in NWC N.A.

RATIO ANALYSIS
(table 13)
As on 2006-07 2007-08 2008-09
Return on Total Assets (%) 21.48 21.91 32.67
Return on Net worth (%) 31.12 33.08 41.84
Return on Capital Employed (%) 23.66 24.17 35.59
Inference.
The return on total assets is 32.67 for the year 2008-09 which indicates that the company with an asset
base of 1 unit could produce 32.67 units of sales. This is very healthy sign as it has been increased by
52.09% over the year.
Inferences.
The return on net worth 41.84% in 2008-09 i.e., increased by 34.45%, which was 31.12% during
2006-07.

Inference
The return on capital employed was 23.66% during 2006-07 and the same has been increased to
35.59% during 2008-09. i.e., increased by 50.42%.
Profitability
As on 2006-07 2007-08 2008-09
Gross Margin (%) 19.43 18.01 20.22
Operating Margin (%) 7.42 7.34 9.88
Net Profit Margin (%) 3.33 3.53 5.32
Adjusted Net Profit Margin (%) 3.34 3.58 5.32
Asset Turnover (%) 3.08 3.30 3.54
(table 14)

Inference
This ratio shows the profits relative to sales after the direct production costs are deducted. It may be
used as an indicator of the efficiency of the production operation and the relation between production
costs and selling price.
The gross profit margin has been increased by 4.07% during the year 2008-09.
Inference
This ratio shows the earnings left for share holders as a percentage of net sales. It measures the overall
efficiency of production, administration, selling, financing, pricing, tax management. The net profit
margin for the current year has been 5.32%. I.e. increased by 59.76%

Inference
It highlights the amount of assets that the firm uses to generate its total sales. The ability to generate a
large volume of sales on small assets base is an important part of the firm’s profit pictures.
The asset turnover ratio has been increased by 14.94% during 2008-09
Liquidity
(table 15)
As on 2006-07 2007-08 2008-09
Current Ratio 1.58 1.61 1.54
Quick Ratio 1.26 1.29 1.25
Cash Ratio 0.08 0.10 0.09
Inference
The current ratio measures the ability of the enterprise to meet its current obligations, a current ratio
1.54:1 implies that the firm has the current assets which are 1.54 times the current liabilities. This
shows conservative approach or traditional approach followed by the management regarding working
capital.

Inferences
There is an increased by 12.5% in the cash ratio during the period. As per my analysis cash is
sufficiently managed by the company in order to meet day to day obligations.
Growth (%) (table 16)
As on 2006-07 2007-08 2008-09
Total Operating Income 30.56 27.54 27.40
EBITDA 72.39 25.01 65.69
EBIT 83.94 26.11 71.53
Inferences
The operating income has been decreased by 10.34% because of drastically increase in operating cost
as compared to previous years.

Inferences
The Earning Before Interest and Tax has been reduced by 14.78% due to increased in the operating
cost, in that work in process inventory is the prime cause for the blockage of liquidity as compared to
other current assets. Still as compared to the previous year i.e. 2007-08 the EBIT was 26.11%, and in
the current year i.e., 2008-09 the EBIT has been 71.53%. So, I can point out that the company is
improving well enough to increase the wealth of the shareholders.

conclusion
Engineering & Projects Business Unit (E&P)
Highmast, Transmission Line Towers and Special Projects comprise the various Divisions of this
Business Unit (BU). BEL has been focusing on its high-Margin E&P BU to garner strong Sales
Volume. In FY2009, the BU recorded a robust 42% growth in Sales to more than Rs500cr
I believe that the BU is well-geared to achieve its Sales target of Rs700cr for FY2010 given its
healthy Order Book position and its excellent execution capabilities. This capital-intensive BU
generates lower ROE than the company's Consumer Durables business. However, it may be noted
here that on a standalone basis the BU has been registering high ROE of around 20%. Further, we
believe that the BU has substantial growth potential particularly with the Eleventh Five-year Plan
having earmarked Rs1, 40,000cr for the Transmission Systems development.
Appliances BU
This is the second largest BU of the company in terms of Sales. In FY2008 and FY2009 the BU
clocked 40% and 29% Sales growth, respectively. In comparison, peer Usha International grew its
Top-line by 19% and 15% in FY2008 and FY2009, respectively. BEL has a technical tie up with the
global premium brand, Morphy Richards, which clocked Sales of Rs57cr in FY2009. Management
has also been focusing on value-for-money products.
I believe that weak monsoons will have limited impact on sales of appliances. However, I expect sales
to slow down marginally compared to the previous years.
The Fans BU
The Fans BU has done exceptionally well for BEL. In the last two years, the BU increased its Sales
from 17.8 lakh units to 32 lakh units. In FY2009, when the Fans' market grew by less than 5%, the
BU clocked a strong growth of 20%. Comparatively, Usha clocked 8% growth. Peer Havells is still at
nascent stages of growth and registered 15% growth in FY2009

I believe that Sales of this BU have been driven by the growth witnessed in the Real Estate Sector.
While the BU did exceedingly well in FY2009, going ahead, I expect growth to moderate to around
17% and be closer to industry growth levels.
Luminaires BU
Indoor fixture, Luminaires, is the main product marketed by this BU. The BU has been getting regular
orders from both the government and private players. BEL has launched LED luminaires as well. The
BU has also developed Photolux application design software to be used by lighting professionals.
The BU registered 23% growth in FY2009. I believe that BEL is strengthening its all-round
capabilities in this space to prepare for the projected change in industry dynamics. In the long term,
BEL expects to leverage its key competency in lighting and we estimate this BU to be a key growth
driver for the company going ahead.
Lighting BU
Lighting BU achieved 18% Sales growth in FY2009 on the back of expanding distributor network. At
the end of FY2007, the company had 165,000 retail outlets across the country, which has increased by
more than 50% to 250,000 units at the end of FY2009. Owing to this expansion, the company has
grown much faster than Surya and Havells. Surya's Revenues from the Lighting and Luminaries
business grew at a CAGR of 6% during the last two years, while Havells' Top-line grew by 2% in
FY2009.
I believe that this unit will benefit immensely from the company's rapid network rollout. Moreover, on
account of the company's focus on CFL lighting, its Sales and Profitability will also continue to grow.
Moreover, as size of the BU grows, especially in the CFL Segment,

Reference
Books & Magazine
ANNUAL REPORTS OF BAJAJ ELECTIRALS LIMITED.

BUSINESS OUTLOOK.
BUSINESS INDIA.
THE FINANCIAL MANAGEMENT.
CORPORATE FINANCIAL MANAGEMENT.
Websites
www.bajajelectirals.com
www.rediffnews.com
Search engine www.google.com
www.moneycontrol.com
www.Bapho.com


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FINAL REPORT

“A multi-dimensional analysis of working capital

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A report submitted in partial fulfillment of the requirements of MBA Program

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Introduction to Working Capital Management……………………………..15

Time Series Analysis…………………………………………………………..32

Contribution to Current Assets………………………………………………36

Schedule of Changes in Working Capital……………………………………37

Assessment of Working Capital Requirement………………………………39

Return on Total Assets, Net Worth and Capital Employed…40

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CENTRE HEAD : - MR. AURBINDO GHOSH

FACULTY GUIDE : - MR. AMOL RANADIVE

Last but no the least, thanks to the omnipresent GOD

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“A category of stocks containing firms that provides financial services to commercial

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THE GROWTH RATE OF MANUFACTURING SECTOR IN INDIA

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Welcome to Bajaj Electricals limited

"Ethics brings us image, prestige and also better profits."

Trust is truly the very foundation of our business.

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Corporate Vision of Bajaj Electricals limited

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Bajaj Electricals Ltd. Mukand International Ltd.

Bajaj Auto Ltd. Mukand Engineers Ltd.

Mukand Ltd. Mukand Global Finance Ltd.

Bajaj Hindustan Ltd. Bachhraj Factories Pvt. Ltd.

Maharashtra Scooters Ltd. Bajaj Consumer Care Ltd.

Bajaj Auto Finance Ltd. Bajaj Auto Holdings Ltd.

Hercules Hoists Ltd. Jamnalal Sons Pvt. Ltd.

Bajaj Sevashram Pvt Ltd. Bachhraj & Company Pvt. Ltd.

Hind Lamps Ltd. Jeevan Ltd.

Bajaj Ventures Ltd. The Hindustan Housing Co Ltd.

Bajaj International Pvt Ltd. Baroda Industries Pvt Ltd.

Hind Musafir Agency Pvt Ltd. Stainless India Ltd.

Bajaj Allianz General Insurance Company

Bajaj Allianz Life Insurance Company Ltd.

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Chairman & Managing Shekhar Bajaj

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Objectives of working capital:

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Sources of working capital:

Types of working capital:

Working capital an be divided into two categories-

A) Permanent working capital:

B) Temporary working capital:

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• It helps the business concern in maintaining the goodwill.

Disadvantages of working capital:

Management of working capital:

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v Stock of Raw Material

ii. Manufacturing/Production Policy

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