Вы находитесь на странице: 1из 49

A

PROJECT REPORT
ON
WORKING CAPITAL MANAGEMENT
AT
PARAMOUNT POLISH PROCESSORS PVT.LTD, BADDI
SUBMITTED IN THE PARTIAL FULFILLLMENT FOR THE DEGREE OF
MASTER OF BUISNESS ADMINISTRATION
(SESSION 2013-2015)

SUBMITTED TO:

SUBMITTED BY:
DINESH KUMAR
ROLL NO 1230275

RAYAT BAHRA INSTITUTE OF MANAGEMENT, MOHALI


AFFILIATED TO
PUNJAB TECHNICAL UNIVERSITY

DECLARATION

I hereby declare that this project titled WORKING CAPITAL


MANAGEMENT submitted by me to the department of Business
Management is a bonafide work undertaken by me and it is not submitted to
any other university or institution for the award of any degree /certificate or
published any time before.

EXECUTIVE
SUMMARY

A well designed and implemented working capital management is


expected to contribute positively to the creation of a firm s value. The
purpose of this project is to examine the trends in working capital
management (WCM) and its impact on the performance of
PARAMOUNT POLISH PROCESSORS Pvt.Ltd. during the last few
years.
This project aims at learning various facets of working capital
management at RIL by studying the day to day activities at its EPC
division which mainly deals in power projects.
These projects also draws a comparison between P.P and other
prominent players active in the infrastructure segment and tries to find
out the reasons playing an active role behind the numero uno status of
P.P in the infrastructure segment.
Working capital management involves not only managing the different
components of the current assets, but also managing the current
liabilities, or to be more precise, financing the current assets. A firm is
required to maintain a balance between liquidity and profitability while
conducting its day to day operations.

Liquidity is a precondition to ensure that firms are able to meet its shortterm obligations and its continued flow can be guaranteed from a
profitable venture.
The importance of cash as an indicator of continuing financial health
should not be surprising in view of its crucial role within the business.
This requires that business must be run both efficiently and profitably. In
the process, an asset-liability mismatch may occur which may increase
firm s profitability in the short run but at a risk of its insolvency.
On the other hand, too much focus on liquidity will be at the expense of
profitability.
There are three main areas in working capital management and the
project focuses on the following:
Receivables management
Cash management
Inventory management
By using the financial statements of P.P, an analysis has been carried out
to understand the trends that have been followed. Also a comparative
study is carried out with respect to the v

company s competitors to further understand its position in the


market .Based on the above study, certain recommendations are made.

The financial statements (mainly balance sheet along with profit


& loss accounts) are used to work out various ratios which help us in
better understanding the organisations working capital management.
The key variables used in the analysis are inventories days,
accounts receivables days, accounts payable days and cash
conversion cycle. These ratios are then compared with industry s
standard to get an insight to understand the nuances of the working
of the organisation.

ACKNOWLEDGEMENT

With the deep sense of gratitude, I wish to acknowledge the support and
help extended by all the people, in successful completion of this project work.
I express my gratitude to our Principal DR.O.P MIDHA for his consistent
support, Head of the Department RBIM for his encouragement. I would like to
thank all the faculty members who have been a strong source of inspiration
through out the project directly or indirectly.

Signature-

TABLE OF CONTENTS
DECLARTION
.2
EXECUTIVE
SUMMARY....3,4,5
ACKNOWLEDGEMENT
6

LIST OF TABLES

..

CHAPTER--I
1.1 COMPANY
PROFILE10,11

1.2 VISION13,14

1.3 Quality Policy15

1.5ENVIRONMENT POLICY16

CHAPTER--II

WORKING CAPITAL MANAGEMENT ((17-36))

2.1 INTRODUCTION TO WORKING CAPITAL


MANAGEMENT.

2.1.1 Meaning of working


capital
..
2.1.2 Scope of working capital:

2.1.2 Receivable
Management

2.1.3 Inventory
Management

2.1.5 Liquidity and Cash


Management
..
2.1.6 Need of
WCM
.
2.1.7 WORKING CAPITAL
RATIO
.
8

2.1.8 RECOMMENDATIONS AND THE WAY


FORWARD.

CHAPTER--III

JUSTIFICATION OF STUDY..37,38
RESEARCH METHODOLOGY:-39,44

LIMITATIONS OF THE STUDY..45,46

RECOMMENDATIONS\SUGGESTIONS47

BIBLIOGRAPHY 48

10

COMPANY PROFILE

Paramount Polish Processors Private Limited was registered on 06


October, 2000. Paramount Polish Processors Private Limited's Corporate
Identification

Number

(CIN)

is

U72200DL2000PTC108065,

Registeration Number is 108065.


Their registered address on file is 102, Thaper Arcade47, Kalu Sarai,
New Delhi - 110016, Delhi, India.
Paramount Polish Processors Private Limited currently have 3 Active
Directors / Partners: Debjit Patra, Aneesh Khurana, Reetika Khurana,
and there are no other Active Directors / Partners in the company except
these 3 officials.
Paramount Polish Processors Private Limited is currently in Active
Status.

11

Company Name
PARAMOUNT POLISH PROCESSORS PRIVATE LIMITED
U72200DL2000PTC108065
Registration Date
06/10/2000
Registeration No.
108065
Address
102, Thaper Arcade47, Kalu Sarai, New Delhi - 110016, Delhi, India

12

13

VISION..

Customer orientation: -

Customer focus is a paramount .We will always try


and exceed customer expectation, be it in terms of
products or services, quality or care.

Faster learning: -

We will foster an atmosphere of continuous learning


where best practices are adopted and used to create
global bench marks.

Cost competitiveness: -

14

We will be the best in class technically in order to offer


unmatched

product and services at optimum cost. This

will help us create sustainable profitability.

Human resource excellence: -

we will provide employers with an inspiring work


environment and exciting carrier options, while
encouraging team work and demonstrating care.

Social and environmental responsibilities:-

we will never compromise on our ethics and


integrity even at the cost of business .we will
continually strive to demonstrate our commitment to
the environment and society we live and work in.

15

QUALITY POLICY
We shall build Quality as integral part of the system
such the quality is right as first time and all the time.
We believe that Quality improvement is limitless and
therefore it is continuous.
We shall comply with all relevant requirement of
product Quality.
Our concern for Quality is for entire concern and not
just for the product.
We will satisfy the customer fully and continuously.
We have established frame work for reviving the
Quality objectives .

16

ENVIRONMENT POLICY

Ensure continual improve mental performance by


carrying out periodic revive of the action plan.
Prevent pollution and minimize fugitive emissions.
Comply with all applicable legal and regulatory
requirements.
Conserve water, energy and natural resources.
Minimise waste generations utilize the same.
Create environmental awareness and provide clean
and safe environment to employees and community at
large.

17

CHAPTER-I

INTRODUCTION
1.1

MEANING OF WORKING CAPITAL

Working capital (abbreviated WC) is a financial metric which


represents operating liquidity available to a business, organization or
other entity, including governmental entity.
Along with fixed assets such as plant and equipment, working capital is
considered a part of operating capital. Net working capital is calculated
as current assets minus current liabilities. It is a derivation of working
capital that is commonly used in valuation techniques such as DCFs
(Discounted cash flows).
If current assets are less than current liabilities, an entity has a working
capital deficiency, also called a working capital deficit. A company can
be endowed with assets and profitability but short of liquidity if its
assets cannot readily be converted into cash. Positive working capital is
required to ensure that a firm is able to continue its operations and that it
has sufficient funds to satisfy both maturing short-term debt and
upcoming operational expenses. The management of working capital
involves managing inventories, accounts receivable and payable, and
cash
18

Current assets and current liabilities include three accounts which


are of special importance. These accounts represent the areas of the
business where managers have the most direct impact:
Accounts receivable (current asset)
inventory (current assets), and
accounts payable (current liability)
The current portion of debt (payable within 12 months) is critical, because it
represents a short-term claim to current assets and is often secured by long term
assets. Common types of short-term debt are bank loans and lines of

credit. An increase in working capital indicates that the business has


either increased current assets (that it has increased its receivables, or
other current assets) or has decreased current liabilities, for example
has paid off some short-term creditors.

Implications on M&A: The common commercial definition of


working capital for the purpose of a working capital adjustment in
an M&A transaction (i.e. for a working capital adjustment
mechanism in a sale and purchase agreement) is equal to:
19

Current Assets
Current Liabilities excluding deferred tax assets/liabilities,
excess cash, surplus assets and/or deposit balances.
Cash balance items often attract a one-for-one purchase price
adjustment.
Working capital management
Decisions relating to working capital and short term financing
are referred to as working capital management. These involve
managing the relationship between a firm's short-term assets and
its 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.

A popular measure of working capital management is the cash


conversion cycle, that is, the time span between the expenditure for the
purchases of raw materials and the collection of sales of finished goods
20

for example, found that the longer the time lag, the larger the investment
in working capital. A long cash conversion cycle might increase
profitability because it leads to higher sales. However, corporate
profitability might decrease with the cash conversion cycle, if the costs
of higher investment in working capital rise faster than the benefits of
holding more inventories and/or granting more trade credit to customers.
For many manufacturing firms the current assets account for over half of
their total assets.
The management of working capital may have both negative and
positive impact of the firms profitability, which in turn, has negative
and positive impact on the shareholders wealth. The present study
seeks to explore in detail these effects. Firms may have an optimal level
of working capital that maximizes their value. Large inventory and
generous trade credit policy may lead to high sales. The larger inventory
also reduces the risk of a stock-out. Trade credit may stimulate sales
because it allows a firm to access product quality before paying .
Another component of working capital is accounts payables. It is
believed that delaying payment of accounts payable to suppliers allows
firms to access the quality of bough products and can be expensive if a
firm is offered a discount for the early payment. By the same token,
uncollected accounts receivables can lead to cash inflow problems for
the firm.
21

By definition, working capital management entails short term decisions generally, relating to the next one year period - which is "reversible".
These decisions are therefore not taken on

the same basis as Capital Investment Decisions (NPV or related, as


above) rather they will be based on cash flows and / or profitability.
One measure of cash flow is provided by the cash conversion cycle the net number of days from the outlay of cash for raw material to
receiving payment from the customer. As a management tool, this metric
makes explicit the inter-relatedness of decisions relating to inventories,
accounts receivable and payable, and cash. Because this number
effectively corresponds to the time that the firm's cash is tied up in
operations and unavailable for other activities, management generally
aims at a low net count.

In this context, the most useful measure of profitability is Return on


capital (ROC). The result is shown as a percentage, determined by
dividing relevant income for the 12 months by capital employed; Return
on equity (ROE) shows this result for the firm's shareholders. Firm value
is enhanced when, and if, the return on capital, which results from
working capital management, exceeds the cost of capital, which results
from capital investment decisions as above. ROC measures are therefore
22

useful as a management tool, in that they link short-term policy with


long-term decision making. See Economic value added (EVA).

Credit policy of the firm: Another factor affecting working capital


management is credit policy of the firm. It includes buying of raw
material and selling of finished goods either in cash or on credit. This
affects the cash conversion cycle.
Management of working capital
Guided by the above criteria, management will use a combination of
policies and techniques for the management of working capital. The
policies aim at managing the current assets (generally cash and cash
equivalents, inventories and debtors) and the short term financing, such
that cash flows and returns are acceptable.
Cash management.
Identify the cash balance which allows for the business to meet day to
day expenses, but reduces cash holding costs.

Inventory management.
Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials - and minimizes
23

reordering costs - and hence increases cash flow. Besides this, the lead
times in production should be lowered to reduce Work in Process (WIP)
and similarly, the Finished Goods should be kept on as low level as
possible to avoid over production - see Supply chain management; Just
In Time (JIT); Economic order quantity (EOQ); Economic quantity.

Debtors management.
Identify the appropriate credit policy, i.e. credit terms which will attract
customers, such that any impact on cash flows and the cash conversion
cycle will be offset by increased revenue and hence Return on Capital
(or vice versa); see Discounts and allowances.
Short term financing.
Identify the appropriate source of financing, given the cash conversion
cycle: the inventory is ideally financed by credit granted by the supplier;
however, it may be necessary to utilize a bank loan (or overdraft), or to
"convert debtors to cash" through "factoring".

1.2 OBJECTIVE

To study and analyse working capital management at Reliance


Infrastructure Ltd. which includes

24

Inventory management
Receivable management
Cash management

The aim is to learn how to manage working capital needs of the


organization and to learn the different ways through which theoretical
learning is applied practically in the organization. The project is aimed
to learn and gain knowledge of the day to day working of the
organization as to how does the different decision are taken and on what
basis. The project will help in gaining the knowledge of different steps
of raising the short term funds and their effective management so as to
ensure adequate availability of funds. The various analyses will help the
management to assess the efficiency of the working capital management
of the company.

25

SIGNIFICANCE OF THE PROJECT

Financial Analysis is the process of identifying the financial strengths


and weaknesses of the firm by properly establishing relationships
between the items of the balance sheet and the profit & loss account.
Financial analysis can be undertaken by management of the firm, viz.
Owners, creditors, investors and others. Ratio analysis is a powerful tool
of financial analysis. A ratio is defined as the indicated quotient of two
mathematical expressions and as the relationship between two or more
things.

Ratios help to summarise large quantities of financial data and to make


qualitative judgement about the firms financial performance.
WORKING CAPITAL MANAGEMENT deals with the management of
current assets. The management of current assets is similar to that of
fixed assets in the sense that in both cases firm analyses their effect on
their return and risk profile. The management of fixed assets and current
assets, however, differ in three aspects. First, in managing fixed assets,
26

time is a very important factor; consequently, discounting and


compounding techniques play a significant role in capital budgeting.
Second, the large holding of current assets, especially cash, strengthens
the firm's liquidity position (and reduces risk). Third, levels of fixed as
well as current assets depend upon expected sales, but it is only current
assets that can be adjusted with sales fluctuations in the short run.
Thus with such importance attached, a due diligence should be given to
proper management of the working capital.

1.3 CONCEPTUALIZATION
There are two concepts of working capital- gross and net.
Gross Working Capital refers to the firm's investment in current assets.
Current assets are the assets which can be converted into cash within an
accounting year and include cash, short-term securities, debtors,
(accounts receivable or book debts) bills receivables and stock
(inventory).

Net Working Capital


27

refers to the difference between current assets and current liabilities.


Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors
(accounts payable), bills payable, and outstanding expenses. Net
working capital can be positive or negative. A positive net working
capital will arise when current assets exceed current liabilities.

NET

WORKING

CAPITAL=CURRENT

ASSETS-CURRENT

LIABILITIES

Also, negative net working capital will arise when current liabilities
exceed current assets.

28

29

30

Working capital : Working capital may be regarded as the life blood of business.
Working capital is of major importance to internal and external
analysis because of its close relationship with the current day-today operations of a business. Every business needs funds for two
purposes.
* Long term funds are required to create production facilities
through purchase of fixed assets such as plants, machineries,
lands, buildings & etc.
* Short term funds are required for the purchase of raw materials,
payment of wages, and other day-to-day expenses.

31

Concept of working capital

Gross Working Capital = Total of Current Asset

Net Working Capital = Excess of Current Asset over Current Liability.

4.1.2 CURRENT RATIO

Current ratio is calculated by dividing current assets by current


liabilities:
Current assets include cash and those assets that can be converted into
cash within a year, such as marketable securities, debtors, inventories,
32

loans and advances. All the obligations maturing within a year are
included in current liabilities.
Current liabilities include creditors, bills payable, accrued expenses,
short term bank loan, income tax liability and long-term debt maturing
in the current year.
Significance
It indicates the availability of current assets in rupees for every one
rupee of current liability. A ratio of greater than one means that the firm
has more current assets than current claims against them. In India, the
conventional rule is to have a ratio of 1.33(internationally it is 2).
The current ratio represents the margin of safety for the creditors. The
higher the current ratio, the greater the margin of safety; the larger the
amount of current assets in relation to current liabilities, the
more the firms ability to meet its current obligations.

DEBTORS TURNOVER
A Firm sells goods for cash and credit. Credit is used as a marketing tool
by a no. of companies. When the firm extends credits to its customers,
debtors (accounts receivables) are created. Debtors are convertible into
cash over a short period of time, therefore included in the current assets.
33

Debtors turnover is found by dividing credit sales by average debtors.


Average debtors are nothing but the average of the opening and closing
balances of debtors.

34

WORKING CAPITAL TO NET WORTH RATIO

Similar to the previous ratio, WC to Net Worth ratio is used to


represent the relationship between the shareholders money and the
35

net worth. Similar to previous ratio, for FY11 the ratio of 0.15 shows
that for each rupee of net worth, the company needs Re. 0.15 of
working capital. This gap will be met from bank borrowings and
long term sources of funds

RECOMMENDATIONS AND THE WAY FORWARD


The following recommendations are made to the authorities at reliance
infrastructure in order to maintain and improve on their current
performance. The recommendations made are based purely on my
understanding of the situation. Some of the major things which I would
like the authorities to take notice of include:

Current ratio is slightly on a lower side against the industry


standard of 1.33 followed in India.

Current ratio indicates the ability of a company to stay afloat irrespective


of the prevailing market situations. Internationally, a current ratio of 2:1
is accepted. The investors also seek this ratio in order to examine
whether the company has adequate current resources so that it does not
default on its obligations and is able to generate sufficient returns to
maximize shareholder s money.

36

Debtors turnover ratio needs a tune up as against creditors


turnover.
This ratio helps to examine whether the management of the concerned
organisation is not being complacent in recovery of its debts on time.
Generally it is required that debtors turnover ratio be high as compared
to creditors turnover which implies that the firm is generating
Generally it is required that debtors turnover ratio be high as compared
to creditors turnover which implies that the firm is generating sales
adequate enough to cover its production cost. If we look at the situation
for reliance infra, the ratios were fine enough until FY09 but then
afterwards the debtor s turnover took a dip but because of adequate
liquidity the management is able to take care of its obligations as for
now. But if a proper solution is not formulated then it can become a huge
problem which will affect not only the performance of the firm but may
also deteriorate the confidence of the investors in the company.

The inventory turnover ratio for reliance infra has been a success story for
the last couple of years so the management should do everything possible thing to
maintain this inclination in the coming years and try to encourage its human
resources to keep up the good work.

With many a projects in line and at different levels of execution, it is required


that all the aspects are dealt with equal importance whether it is the case of long
term ratios or the short term ratios. The company has so many projects in line for
which it will require funds. With stellar performance in various sectors it has the
confidence of investors. So the management just need to continue on the good
work.
37

JUSTIFICATION OF STUDY

The study in itself is a problem of how best to manage capital of a


company i.e. PARAMOUNT POLISH PROCESSORS PVT Ltd.
Therefore, needs for conducting the study are as follows:Due to time between production and sales, every company has to
maintain a substantial portion of working capital to run its operation
smoothly.
In case of manufacturing companies it is required to maintain about 40%
- 50% of their capital as current and remaining in the form of fixed
assets for the large scale production of product Investment in current
assets and the level of current liabilities have to gear quickly to change
in sales. To be sure, fixed assets investment and long term financial
position are also responsive to variation in sales.

38

OBJECTIVE OF THE STUDY

The objectives aim to highlight the reasons how important is the financial system
and financial statement for an organization or company. There are various
objectives of the study are as follows:
To find ratio of the firm for the year 2014.
To study short term financial position.
To study long term financial position.
To study earning per share of the firm.
To find correlation between turnover and profits of the firm.
To study the trend of the gross revenue and profits of the firm.

39

RESEARCH METHODOLOGY:-

TYPES OF RESEARCH

1 Descriptive research
2 Analytical research
3 Qualitative research
4 Quantitative research

DESCRIPTIVE OR EX-POST FACT RESEARCH:40

To conduct the research work accurately, we conducted the descriptive research. It includes
surveys & fact-finding inequity of different kinds.

ANALYTICAL RESEARCH: _

In it we have to use the fact & information already available & analyses of these to make an
evaluation of project.

QUALITATIVE RESEARCH:-

In selecting the appropriate research design of the study & the type of data needed, the choice of
data collection techniques is four grouped.

It is done for:1

Consumer needs.

Consumers preferences for brand.

In depth understanding of consumers.

Availability for consumer.

41

QUANTITATIVE RESEARCH:Quantitative research is obtained to rate the different aspects on parameter i.e. image of brand,
brand equity, expectation of customers, awareness among customer for scheme, switch ability of
customers etc.

METHODOLOGY:-

The project include both primary & secondary source of data. The data collected through these
sources has organized, analyzed & interpret so as to draw conclusion &to arrive at appropriate
recommendations.

1. A primary source of data includes the personal interview from various accounts officers in the
enterprise.

2. The secondary sources of data include annual report, website of ACC Ltd. Company which
contains the details which is helpful for making my project report.

STEPS IN RESEARCH METHODOLOGY:-

42

1. COLLECTION OR DATA
2. ORGANISATION F DATA
3. PRESENTATION OF DATA
4. ANALYSIS OF DATA
5. INTERPRETATION OF DATA

1. COLLECTION OF DATA:Both the primary & secondary data has been collected from the market & company. The
company provided the secondary data & primary data is collected through the medium of faceto-face interaction & interview from various persons in the enterprise.

2. ORGANISATION OF DATA:
Data once collected the further processing is done, the data collected by me are carefully done
through in a useful & relevant manner &properly organized.

3. PRESENTATION OF DATA:The data collection is of no use unless & until it is given in the presentable form. Thus after
proper organization the data is given in presentable form with the complete details, with the help
of bar diagram, pie carts etc.

43

4. ANALYSIS OF DATA:-

THE DATA IS CAREFULLY ANALYZED KEEPING IN THE CONSIDERATION


BOTH THE PROS & CONS FOR THE PURPOSE OF ARRIVING AT CONCRETE
CONCLUSION.

5. INTERPRETATION OF DATA:-

After carefully analyzed the data, it has been aptly interpreted in order to give concrete
conclusion & proper recommendation.

44

DATA COLLECTION
Data Sources:
There are two types of data were taken into consideration i.e. Secondary data and primary data.
The secondary data has been used to make the analysis because we have no much sufficient time
and resources to collect the primary data.

Secondary Data:
Secondary data is that data which is collected for other purpose. This is indirect collection of data
from sources containing past or recent past information like annual reports, balance sheet, books,
newspapers and magazines etc.
Collecting the Information:
For this research methodology, we were collecting information with the help of annual reports,
balance sheets and other companys publications.

Analyse The Information:

45

In this research methodology the next step is to extract the pertinent finding from the collected
data. We tabulated this collected data and develop the means of analyzing the data. There are so
many tools for financial analysis but we mainly concentrate on the RATIO Analysis and
supportive information taken from the other means i.e. comparative financial statements with its
major components viz. common size statement, comparative financial statement.

LIMITATIONS OF THE STUDY

Except the supreme power, the Almighty, no one is impeccable


and prowess enough to accomplish anything without any faults
and limitations.
A research is no exception. No study is devoid of certain
shortcomings. Some problems encountered in this study are
under mentioned:
Some officers were too busy to give a sincere response to
investigators & hence their response may not relate to real
picture.
46

Manager some time denied disclosing some important


financial matters, which can be helpful in this study.
The time period given to me for the completion of the
project was short in such a short span of time it is difficult
to complete any project in detail.

Some information related to the study, which had been


collected from the company was rounded off because of
some influence.

47

RECOMMENDATIONS\SUGGESTIONS

Company is not utilizing its resources up to the maximum


Customer base remains the same
SAP is not implemented properly as the employees are not
trained to use the same
Company is not looking for increase in the plant capacity.
Implementation of new policies by Holcim is disturbing the
workforce in adapting to the new work-culture.
The company is more dependent on outsiders fund.
Current Ratio is 0.89:1. Company needs bit improvement in
it so that to make it 2:1.

48

49