Working Capital - Vicky

WORKING CAPITAL MANAGEMENT
A PROJECT REPORT
SUBMITTED BY
VICKI
ROLL No.1305003861.
In partial fulfillment of the requirement

for the award of the degree
of
MBA
IN
FINANCE
SMU
Sikkim Manipal University
Directorate Distance Education
APRIL 2015
Submitted to:
Learning Centre 01716
MEC Computer Education
Sarwari Bazar, Kullu (H.P.)
Examiners Certification
By
VICKI
Title
Working Capital Management
IS APPORVED AND ACCEPTABLE
INTERNAL EXAMINER
EXTERNAL EXAMINER
NAME:
NAME:
Acknowledgement
An undertaking of this type is a result of contribution received from a number of

people. No amount of words written will be sufficient and adequate to acknowledge
all the people who have provided me with the inspiration, guidance and help during
the preparation of the project. Therefore I extend our deep sense of gratitude
towards them.
The skeleton of this project was in the mind based on the study of various
publications but it gained this shape by the proper and timely guidance of our
teacher.
Last but not the least I would like to thank my parents, who gave constant support
and inspired me throughout this time.
VICKI
ROLL NO. 1305003861
Project Report: Working Capital Management
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BONAFIDE CERTIFICATE
It is hereby certified that this project titled Working Capital Management is the
bonafide work of VICKI who carried out the project work under my supervision.
Signature of Guide
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Declaration by the Student

I, VICKI, the undersigned, a student of Sikkim Manipal University, Learning
code 01716 declare that this project report titled Project Report on Working Capital
Management is submitted in the partial fulfillment of the requirement for the MBA program
of the Sikkim Manipal University Directorate of Distance Education.
This is my original work and has not been previously submitted as a part of
any other degree or diploma of any another Business School or University.
VICKI
MBA (FINANCE)
Sikkim Manipal University
Learning Code 01716
EXECUTIVE SUMMARY
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a. Every business concern needs funds to carry out business operations such
as purchase of raw materials, payment of wages and other day-to-day
expenses, working capital becomes an important and integral part of
business. Working capital is the life blood and nerve centre of a business
because no business can run successfully without an adequate amount of it.
Therefore, to manage working capital in any sector is a challenging job.
b. A good way to judge a companys cash flow prospects is to look at its Working
capital management. Working Capital is also known as operating capital. It
represents the day by day operating liquidity available to a business. The goal
of Working capital management is to ensure that a firm is able to continue its
operations and that it has sufficient ability to satisfy both maturing short-term
debt and upcoming operational expenses.
II.
Many companies still underestimate the importance of working capital management

as a lever for freeing up cash from inventory, accounts receivable, and account
payables. By effectively managing these components, companies can sharply
reduce their dependence on outside funding and can use the released cash for
further investments or acquisitions. This will not only lead to more financial flexibility,
but also create value and have a strong impact on a companys enterprise value by
reducing capital employed and thus increasing asset productivity. And that is
precisely why I preferred to study the concept, in the form of my project work, to all
other temptations. The project is thus a sincere effort from my side to learn more
about the working capital management as whole. Both Primary Data i.e. by
exploratory research, information from employees, finance manager and Secondary
Data i.e. from many reference books.
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INDEX
SR.NO.
TOPIC
PAGE NO.
1.
INTRODUCTION : WORKING CAPITAL
2.
MEANING OF WORKING CAPITAL
10
3.
CLASSIFICATION OF WORKING CAPITAL
13
4.
20
5.
WORKING CAPITAL CYCLE
21
DETERMINANTS OF WORKING CAPITAL

6.
24
REQUIREMENT
7.
WORKING CAPITAL POLICY
25
8.
OVERVIEW OF WORKING CAPITAL RATIO
28
9.
RATIO ANALYSIS
29
10.
CASH MANAGEMENT
44
11.
RECEIVABLES MANAGEMENT
54
12.
PAYABLES MANAGEMENT
63
13.
INVENTORY MANAGEMENT
65
FORMULA FOR CALCULATING

14.
67
ECONOMIC ORDER QUANTITY
15.
CONCLUSION
73
16.
BIBLIOGRAPHY
76
INTRODUCTION:
WORKING CAPITAL
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Working Capital is the amount of capital that a business has available to meet
the day to day cash requirements of its operations. It is concerned with the problem
arise in attempting to manage the current assets, the current liabilities and the inter
relationship that exist between them. Working Capital is the difference between
resources in cash or readily convertible into cash and organizational commitments
for which cash will soon be required or within one year without undergoing a
diminution in value and without disrupting the operation of the firm. It also refers to
the amount of current Assets that exceeds current Liabilities. Working Capital refers
to that part of the firm capital, which is required for financing short-term or current
Assets such as cash, Marketable Securities, Debtors and Inventories. Working
capital is also known as Revolving or Circulating Capital or Short Term Capital. The
goal of working capital management is to manage the firms current assets and
current liabilities in such way that the satisfactory level of working capital is
mentioned. The current should be large enough to cover its current liabilities in
order to ensure a reasonable margin of the safety. Capital required for a business
can be classifies under two main categories:
Fixed Capital
Working Capital
Every business needs funds for two purposes for its establishments and to carry out
day to day operations. Long term funds are required to create production facilities
through purchase of fixed assets such as plant and machinery, land and building,
furniture etc. Investments in these assets are representing that part of firms capital
which is blocked on a permanent or fixed basis and is called fixed capital. Funds are
also needed for short term purposes for the purchasing of raw materials, payments
of wages and other day to day expenses etc. These funds are known as working
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capital. In simple words, Working capital refers to that part of the firms capital which
is required for financing short term or current assets such as cash, marketable
securities, debtors and inventories.
MEANING OF WORKING CAPITAL
Capital required for a business can be classified under two main categories via,
Fixed Capital
Working Capital
Every business needs funds for two purposes for its establishment and to carry out
its day-to-day operations. Long terms funds are required to create production
facilities through purchase of fixed assets such as P&M, land, building, furniture, etc.
Investments in these assets represent that part of firms capital which is blocked on
permanent or fixed basis and is called fixed capital. Funds are also needed for shortterm purposes for the purchase of raw material, payment of wages and other day
today expenses etc.
These funds are known as working capital. In simple words, working capital refers to
that part of the firms capital which is required for financing short- term or current
assets such as cash, marketable securities, debtors & inventories. Funds, thus,
invested in current assts keep revolving fast and are being constantly converted in to
cash and this cash flows out again in exchange for other current assets. Hence, it is
also known as revolving or circulating capital or short term capital.
TYPES OF WORKING CAPITAL

There are two concepts of working capital:
1. Gross working capital
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2. Net working capital

1 .Gross working capital: Gross working capital refers to the firms investment in
current assets .current assets are the assets, which can be converted into cash within
an accounting year or operating cycle. It includes cash, short term securities, debtors
(account receivables or book debts), bills receivables and stock (inventory).
2. Net working capital: Net working capital refers to the difference between current
assets and liabilities are those claims of outsiders, which are expected to mature for
payment within an accounting year. It includes creditors or accounts payables bills
payable and outstanding expenses. Net working copulate can be positive or negative. A
positive working capital will arise when current assets exceed current liabilities and vice
versa.
.
CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories of stock as:
(1) Raw material
(2) Work in process
(3) Stores and spares
(4) Finished goods
6) Temporary investment of surplus funds.
7) Prepaid expenses
8) Accrued incomes.
9) Marketable securities.
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In a narrow sense, the term working capital refers to the net working. Net working capital is
the excess of current assets over current liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES
Net working capital can be positive or negative. When the current assets exceeds the
current liabilities are more than the current assets. Current liabilities are those liabilities,
which are intended to be paid in the ordinary course of business within a short period of
normally one accounting year out of the current assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
1) Accrued or outstanding expenses.
2) Short term loans, advances and deposits.
3) Dividends payable.
4) Bank overdraft.
5) Provision for taxation, if it does not amt. to app. Of profit.
6) Bills payable.
7) Sundry creditors.
The gross working capital concept is financial or going concern concept whereas net
working capital is an accounting concept of working capital. Both the concepts have their
own merits.
The gross concept is sometimes preferred to the concept of working capital for the following
reasons:
1) It enables the enterprise to provide correct amount of working capital at correct time.
2) Every management is more interested in total current assets with which it has to operate
then the source from where it is made available.
3) It take into consideration of the fact every increase in the funds of the enterprise would
increase its working capital.
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4) This concept is also useful in determining the rate of return on investments in working
capital. The net working capital concept, however, is also important for following
reasons:
It is qualitative concept, which indicates the firms ability to meet to its operating
expenses and short-term liabilities.
IT indicates the margin of protection available to the short term creditors.
It is an indicator of the financial soundness of enterprises.
It suggests the need of financing a part of working capital requirement out of the
permanent sources of funds.
CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified in two ways:
On the basis of concept.
On the basis of time.
On the basis of concept working capital can be classified as gross working capital
and net working capital. On the basis of time, working capital may be classified as:
Permanent or fixed working capital.
Temporary or variable working capital
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed working capital is minimum amount which is required to ensure
effective utilization of fixed facilities and for maintaining the circulation of current
assets. Every firm has to maintain a minimum level of raw material, work- inprocess, finished goods and cash balance. This minimum level of current assets is
called permanent or fixed working capital as this part of working is permanently
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blocked in current assets. As the business grow the requirements of working capital
also increases due to increase in current assets.
TEMPORARY OR VARIABLE WORKING CAPITAL
Temporary or variable working capital is the amount of working capital which is
required to meet the seasonal demands and some special exigencies. Variable
working capital can further be classified as seasonal working capital and special
working capital. The capital required to meet the seasonal need of the enterprise is
called seasonal working capital. Special working capital is that part of working
capital which is required to meet special exigencies such as launching of extensive
marketing for conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that
is required for short periods and cannot be permanently employed gainfully in the
business.
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining
the solvency of the business by providing uninterrupted of production.
Goodwill: Sufficient amount of working capital enables a firm to make prompt
payments and makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit standing
can arrange loans from banks and other on easy and favorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital ensures regular supply
of raw material and continuous production.
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Regular Payment of Salaries, Wages and Other Day Today Commitments: It

leads to the satisfaction of the employees and raises the morale of its employees,
increases their efficiency, reduces wastage and costs and enhances production
and profits.
Exploitation of Favorable Market Conditions: If a firm is having adequate working
capital then it can exploit the favorable market conditions such as purchasing its
requirements in bulk when the prices are lower and holdings its inventories for
higher prices.
Ability to Face Crises: A concern can face the situation during the depression.
Quick And Regular Return On Investments: Sufficient working capital enables a
concern to pay quick and regular of dividends to its investors and gains
confidence of the investors and can raise more funds in future.
High Morale: Adequate working capital brings an environment of securities,
confidence, high morale which results in overall efficiency in a business.
EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate amount of working capital to run its
business operations. It should have neither redundant or excess working capital nor
inadequate nor shortages of working capital. Both excess as well as short working
capital positions are bad for any business. However, it is the inadequate working capital
which is more dangerous from the point of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL
1. Excessive working capital means ideal funds which earn no profit for the firm and
business cannot earn the required rate of return on its investments.
2. Redundant working capital leads to unnecessary purchasing and accumulation
of inventories.
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3. Excessive working capital implies excessive debtors and defective credit policy
which causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks and
other financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also fall.
7. The redundant working capital gives rise to speculative transactions
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working
capital arises due to the time gap between production and realization of cash
from sales. There is an operating cycle involved in sales and realization of cash.
There are time gaps in purchase of raw material and production, production and
sales, and realization of cash. Thus working capital is needed for the following
purposes:
For the purpose of raw material, components and spares.
To pay wages and salaries
To incur day-to-day expenses and overload costs such as office expenses.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customer.
To maintain the inventories of the raw material, work-in-progress, stores and

spares and finished stock.
For studying the need of working capital in a business, one has to study the
business under varying circumstances such as a new concern requires a lot of
funds to meet its initial requirements such as promotion and formation etc. These
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expenses are called preliminary expenses and are capitalized. The amount
needed for working capital depends upon the size of the company and ambitions
of its promoters. Greater the size of the business unit, generally larger will be the
requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and
expensing of the business till it gains maturity. At maturity the amount of working
capital required is called normal working capital. There are others factors also
influence the need of working capital in a business.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
1. NATURE OF BUSINESS: The requirements of working is very limited in public
utility undertakings such as electricity, water supply and railways because they
offer cash sale only and supply services not products, and no funds are tied up in
inventories and receivables. On the other hand the trading and financial firms
requires less investment in fixed assets but have to invest large amt. of working
capital along with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the
requirement of working capital.
3. PRODUCTION POLICY: If the policy is to keep production steady by
accumulating inventories it will require higher working capital.
4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw
material and other supplies have to be carried for a longer in the process with
progressive increment of labour and service costs before the final product is
obtained. So working capital is directly proportional to the length of the
manufacturing process.
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5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires

larger working capital than in slack season.
6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes
one cycle determines the requirements of working capital. Longer the cycle larger
is the requirement of working capital.
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RATE OF STOCK TURNOVER: There is an inverse co-relationship between

the question of working capital and the velocity or speed with which the sales are
affected. A firm having a high rate of stock turnover wuill needs lower amt. of
working capital as compared to a firm having a low rate of turnover.
8.
CREDIT POLICY: A concern that purchases its requirements on credit and

sales its product / services on cash requires lesser amt. of working capital and
vice-versa.
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9.
BUSINESS CYCLE: In period of boom, when the business is prosperous, there

is need for larger amt. of working capital due to rise in sales, rise in prices,
optimistic expansion of business, etc. On the contrary in time of depression, the
business contracts, sales decline, difficulties are faced in collection from debtor
and the firm may have a large amt. of working capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require

large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning
capacity than other due to quality of their products, monopoly conditions, etc.
Such firms may generate cash profits from operations and contribute to their
working capital. The dividend policy also affects the requirement of working
capital. A firm maintaining a steady high rate of cash dividend irrespective of its
profits needs working capital than the firm that retains larger part of its profits and
does not pay so high rate of cash dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also affect the working
capital requirements. Generally rise in prices leads to increase in working capital.
Others FACTORS: These are:
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
Banking facilities, etc.
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Management of working capital is concerned with the problem that arises in attempting to
manage the current assets, current liabilities. The basic goal of working capital
management is to manage the current assets and current liabilities of a firm in such a way
that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor
excessive as both the situations are bad for any firm. There should be no shortage of funds
and also no working capital should be ideal. WORKING CAPITAL MANAGEMENT
POLICES of a firm has a great on its probability, liquidity and structural health of the
organization. So working capital management is three dimensional in nature as
1. It concerned with the formulation of policies with regard to profitability, liquidity
and risk.
2. It is concerned with the decision about the composition and level of current
assets.
3. It is concerned with the decision about the composition and level of current
liabilities.
WORKING CAPITAL ANALYSIS
As we know working capital is the life blood and the centre of a business. Adequate
amount of working capital is very much essential for the smooth running of the
business. And the most important part is the efficient management of working capital
in right time. The liquidity position of the firm is totally effected by the management of
working capital. So, a study of changes in the uses and sources of working capital is
necessary to evaluate the efficiency with which the working capital is employed in a
business. This involves the need of working capital analysis.
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WORKING CAPITAL CYCLE

In manufacturing concern, working capital cycle starts with the purchase of raw materials
and ends with realization of cash from the sale of finished goods. 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.
The upper portion of the diagram above shows in a simplified form the chain
of events in a manufacturing firm. Each of the boxes in the upper part of the diagram
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can be seen as a tank through which funds flow. These tanks, which are concerned
with day-to-day activities, have funds constantly flowing into and out of them.
The chain starts with the firm buying raw materials on credit.
In due course this stock will be used in production, work will be carried out on the
stock, and it will become part of the firms work-in-progress.
Work will continue on the WIP until it eventually emerges as the finished product.
As production progresses, labor costs and overheads need have to be met.
Of course at some stage trade creditors will need to be paid.
When the finished goods are sold on credit, debtors are increased.
They will eventually pay, so that cash will be injected into the firm.
Each of the areas- Stock (raw materials, WIP, and finished goods), trade debtors,
cash (positive or negative) and trade creditors can be viewed as tanks into and
from which funds flow.
Working capital is clearly not the only aspect of a business that affects the amount of
cash.
The business will have to make payments to government for taxation.
Fixed assets will be purchased and sold
Lessons of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form of cash
Some shares may be redeemed for cash

Dividends may be paid
Long-term loan creditors (existing or new) may provide loan finance, loans will need
to be repaid from time-to-time, and
Interest obligations will have to be met by the business
If you.......
Then......
Collect receivables
(debtors) faster
You release
cash from
the cycle
Collect receivables
(debtors) slower
Your
receivables
soak up
cash
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Get better credit (in

terms of duration or
amount) from suppliers
You increase
your cash
resources
Shift inventory (stocks)

faster
You free up
cash
Move inventory (stocks)

slower
You
consume
more cash
Unlike, movements in the working capital items, most of these non-working capital
cash transactions are not every day events. Some of them are annual events (e.g.
tax payments, lease payments, dividends, interest and, possibly, fixed asset
purchases and sales). Others (e.g. new equity and loan finance and redemption of
old equity and loan finance) would typically be rarer events.
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DETERMINENTS OF WORKING CAPITAL REQUIREMENT

The working capital needs of a firm are influenced by numerous factors. The important ones
are:
Nature of business
Seasonality of operations
Production policy
Market conditions
Conditions of supply
NATURE OF BUSINESS:
The working capital requirement of a firm is closely related to the nature of its business. A
service firm, like electricity undertakes or a transport corporation, which has a short
operating cycle and which sells predominantly on cash basis, has a modest working capital
requirement. On the other hand, a manufacturing concern like a machine tools unit, which
has a long operating cycle and sells largely on credit, has a very substantial working capital
requirement.
SEASONALITY OF OPERATIONS:
Firms which have marked seasonality in their operations usually have highly fluctuating
working capital requirement. To illustrate, consider a firm manufacturing ceiling fans. The
sale of ceiling fans reaches a peak during the summer months and drops sharply during the
winter period. The working capital requirement of such a firm is likely to increase
considerably in summer months decrease significantly during the winter period. On the
other hand, a firm manufacturing a product like lamps which have fairly even sales round
the year tends to have stable working capital requirements.
WORKING CAPITAL POLICY
Two important issues in formulating the working capital policy are:
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1 .What should be the ratio of the current assets to sales?

2. What should be the ratio of short-term financing to long-term financing?
Current Asset In Relation To Sales:

If the firm can forecast accurately its level and pattern lf sales, inventory procurement time,
inventory usage rates level and pattern of production cycle time, spilt between cash sales
and credit sales, collection period, and other factors that impinge on the working capital
components, the investment in current asset can be defined uniquely. When an uncertainty
characteristic the above factors, as it usually does, the investment, the current asset cannot
be specified uniquely. In face of uncertainty, the outlay on current asset would consist of a
base component meant to meet the normal requirements and the safety component meant
to cope with the unusual demands and requirement. The safety component meant to cope
with the unusual demands and requirements. The safety component depends on how
conservative or aggressive is the current asset policy of the firm. If the firm purses a very
conservative or current asset policy it would carry a high level, of current asset in relation to
sales. (This happens because the safety component is substantial). If the firm adopts the
moderate current asset policy, it would carry a moderate level of current asset in relation to
sales. Finally, if the firm follows a highly aggressive current asset policy, it would it will carry
a low level of current assets in relation to sales. What are the likely consequences of the
conservative and aggressive current asset policy?
A conservative current asset policy tends to reduce risk. The surplus current assets under
this policy enable the firm to cope rather easily with the variations with the sales, production
plans, and procurement time. Further, higher the liquidity associated with this policy
diminishes the chances of technical insolvency. The reduction of risk, however, is also
accompanied by lower expected profitability.
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An aggressive current asset policy, seeking to minimize the investment in current asset,
exposes the firm to greater risk. The firm may be unable to cope with unanticipated
changes in the market place and operating conditions. Further, the risk of technical
insolvency becomes greater. The compensation of higher risk, of course, is higher expected
profitability.
Ratio of Short-term Financing to Long-term Financing

Current asset of a firm are supported by spontaneous current liabilities (trade
creditors and provisions), short-term sources of finance (Bank Overdraft). Assuming that the
level of spontaneous current liabilities is determined by extraneous factors (trade practice,
income-tax payment schedule, etc.), the relevant question in current asset financing is,
What should be relative proportion of short-term bank financing, on the other hand, and
long-term sources of finance, on the other?
The two broad policy alternatives, in respects, are:
A conservative current asset financing policy.
An aggressive current asset financing policy.
A conservative current asset financing policy relies less on short-term bank financing
and more on long-term sources like debentures. Indeed, a highly conservative current
asset financing policy would seek to replace even long-term debt buy equity. An aggressive
current asset financing policy on the other hand relies on short-term bank finance and
seeks to reduce dependence on long-term financing.
What are the likely consequences of this alternative?
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A conservative current asset financing policy reduces the risk that the firm will be
unable to repay or replace its short-term debt periodically. It, however, enhances the cost of
financing because the long-term sources of finance, debt and equity, have higher cost
associated with them.
An aggressive current asset financing policy, relying on short-term bank financing, tends to
have opposite effects. It exposes the firm with higher degree of risk, but reduces the
average cost of financing.
Choosing the Working Capital Policy:
The overall working capital policy adopted by the may broadly is conservative,
moderate, or aggressive. A conservative overall working capital policy means that the firm
chooses a conservative current asset policy along with a conservative current asset
financing policy. A moderate overall working capital policy reflects a combination of a
conservative current asset policy and aggressive current asset financing policy or
combination of an aggressive current asset policy and a conservative current asset
financing policy. An aggressive overall working capital policy consists of an aggressive
current asset policy and an aggressive current financing policy.
An overall conservative working capital policy reduces the risk and offer low returns.
An overall moderate working capital policy reduces the risk and low returns. An overall
aggressive working capital policy provides a package of high risk and high return. The
choice of an overall working capital policy would depend on the risk disposition of
management.
OVERVIEW OF WORKING CAPITAL RATIO
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Overview of the working capital ratio

Working capital is defined as:
CURRENT ASSETS - CURRENT LIABILITIES
Working Capital can also be expressed as a ratio:
CURRENT RATIO (Working capital ratio) = CURRENT ASSETS: CURRENT
LIABILITIES
E.g. If current assets are Rs.15, 000 and current liabilities Rs.10, 000, the working capital
ratio is:
15,000: 10,000 = 3:2, or 1.5: 1.
Working capital indicates the liquidity of a business. A business with poor liquidity has
difficulty in paying its everyday expenses, e.g. rent, telephone bills, wages and salaries. If
management does not constantly monitor and manage a businesss liquidity-that is, its
amount of working capital the business can find itself in a difficult situation with its
creditors.
Remember these key points about working capital:
The current assets (cash, inventories / stock and accounts receivable /debtors) in the
business need to be monitored and kept at realistic level.
Current liabilities constitute all the short-term payments that need to be met by the business
(obligations that need to be paid within one year). Short-term loans and accounts payable
are examples.
Most successful businesses keep the working capital ratio as low as possible, and keep
cash circulating, so as to maximize profit.
The size of the working capital ratio depends on the type of industry the business operates
in, and on financial arrangements such as overdrafts and creditor policy.
RATIO ANALYSIS
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It refers to the systematic use of ratios to interpret the financial statements in terms of the
operating performance and financial position of a firm. It involves comparison for a
meaningful interpretation of the financial statements.
In view of the needs of various uses of ratios the ratios, which can be calculated from the
accounting data are classified into the following broad categories
1.
2.
3.
4.
Liquidity Ratio
Turnover Ratio
Solvency or Leverage ratios
Profitability ratios
1. LIQUIDITY RATIO:
It measures the ability of the firm to meet its short-term obligations, that is capacity of the
firm to pay its current liabilities as and when they fall due. Thus these ratios reflect the
short-term financial solvency of a firm. A firm should ensure that it does not suffer from lack
of liquidity. The failure to meet obligations on due time may result in bad credit image, loss
of creditors confidence, and even in legal proceedings against the firm on the other hand
very high degree of liquidity is also not desirable since it would imply that funds are idle and
earn nothing. So therefore it is necessary to strike a proper balance between liquidity and
lack of liquidity.
The various ratios that explains about the liquidity of the firm are
1. Current Ratio
2. Acid Test Ratio / quick ratio
3. Absolute liquid ration / cash ratio
1. CURRENT RATIO:
The current ratio measures the short-term solvency of the firm. It establishes the
relationship between current assets and current liabilities. It is calculated by dividing
current assets by current liabilities.
Current Ratio = Current Asset

Current Liabilities
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Current assets include cash and bank balances, marketable securities, inventory, and
debtors, excluding provisions for bad debts and doubtful debtors, bills receivables and
prepaid expenses. Current liabilities includes sundry creditors, bills payable, short- term
loans, income-tax liability, accrued expenses and dividends payable.
2. ACID TEST RATIO / QUICK RATIO:

It has been an important indicator of the firms liquidity position and is used as a
complementary ratio to the current ratio. It establishes the relationship between quick
assets and current liabilities. It is calculated by dividing quick assets by the current
liabilities.
Acid Test Ratio = Quick Assets

Current liabilities
Quick assets are those current assets, which can be converted into cash immediately or
within reasonable short time without a loss of value. These include cash and bank
balances, sundry debtors, bills receivables and short-term marketable securities.
3. ABSOLUTE LIQUID RATION / CASH RATIO:

It shows the relationship between absolute liquid or super quick current assets and
liabilities. Absolute liquid assets include cash, bank balances, and marketable securities.
Absolute liquid ratio = Absolute liquid assets

Current liabilities
2. TURNOVER RATIO:
Turnover ratios are also known as activity ratios or efficiency ratios with which a firm
manages its current assets. The following turnover ratios can be calculated to judge the
effectiveness of asset use.
1.
2.
3.
4.
Inventory Turnover Ratio

Debtor Turnover Ratio
Creditor Turnover Ratio
Assets Turnover Ratio
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1. INVENTORY TURNOVER RATIO:

This ratio indicates the number of times the inventory has been converted into
sales during the period. Thus it evaluates the efficiency of the firm in managing
its inventory. It is calculated by dividing the cost of goods sold by average
inventory.
Inventory Turnover Ratio = Cost of goods sold

Average Inventory
The average inventory is simple average of the opening and closing balances of
inventory. (Opening + Closing balances / 2). In certain circumstances opening
balance of the inventory may not be known then closing balance of inventory
may be considered as average inventory
2. DEBTOR TURNOVER RATIO:

This indicates the number of times average debtors have been converted into
cash during a year. It is determined by dividing the net credit sales by average
debtors.
Debtor Turnover Ratio = Net Credit Sales

Average Trade Debtors
Net credit sales consist of gross credit sales minus sales return. Trade debtor
includes sundry debtors and bills receivables. Average trade debtors (Opening +
Closing balances / 2)
When the information about credit sales, opening and closing balances of trade
debtors is not available then the ratio can be calculated by dividing total sales by
closing balances of trade debtor
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Debtor Turnover Ratio = Total Sales

Trade Debtors
3. CREDITOR TURNOVER RATIO:

It indicates the number of times sundry creditors have been paid during a year. It
is calculated to judge the requirements of cash for paying sundry creditors. It is
calculated by dividing the net credit purchases by average creditors.
Creditor Turnover Ratio = Net Credit Purchases

Average Trade Creditor
Net credit purchases consist of gross credit purchases minus purchase return
When the information about credit purchases, opening and closing balances of
trade creditors is not available then the ratio is calculated by dividing total
purchases by the closing balance of trade creditors.
Creditor Turnover Ratio = Total purchases

Total Trade Creditors
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4. ASSETS TURNOVER RATIO:

The relationship between assets and sales is known as assets turnover ratio.
Several assets turnover ratios can be calculated depending upon the groups of
assets, which are related to sales.
a)
b)
c)
d)
e)
Total asset turnover.

Net asset turnover
Fixed asset turnover
Current asset turnover
Net working capital turnover ratio
A. TOTAL ASSET TURNOVER:

This ratio shows the firms ability to generate sales from all financial resources
committed to total assets. It is calculated by dividing sales by total assets.
Total asset turnover = Total Sales/Total Assets

B. NET ASSET TURNOVER:
This is calculated by dividing sales by net assets.
Net asset turnover = Total Sales

Net Assets
Net assets represent total assets minus current liabilities. Intangible and fictitious
assets like goodwill, patents, accumulated losses, deferred expenditure may be
excluded for calculating the net asset turnover.
C. FIXED ASSET TURNOVER:

This ratio is calculated by dividing sales by net fixed assets.
Fixed asset turnover = Total Sales

Net Fixed Assets
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Net fixed assets represent the cost of fixed assets minus depreciation.
D. CURRENT ASSET TURNOVER:

It is divided by calculating sales by current assets
Current asset turnover = Total Sales

Current Assets
E. NET WORKING CAPITAL TURNOVER RATIO

A higher ratio is an indicator of better utilization of current assets and working capital
and vice-versa (a lower ratio is an indicator of poor utilization of current assets and
working capital). It is calculated by dividing sales by working capital.
Net working capital turnover ratio = Total Sales

Working Capital
Working capital is represented by the difference between current assets and current
liabilities.
3. SOLVENCY OR LEVERAGE RATIOS:

The solvency or leverage ratios throws light on the long term solvency of a firm
reflecting its ability to assure the long term creditors with regard to periodic payment
of interest during the period and loan repayment of principal on maturity or in
predetermined instalments at due dates. There are thus two aspects of the long-term
solvency of a firm.
a. Ability to repay the principal amount when due

b. Regular payment of the interest.
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The ratio is based on the relationship between borrowed funds and owners capital it
is computed from the balance sheet, the second type are calculated from the profit
and loss a/c. The various solvency ratios are
1.
2.
3.
4.
5.
6.
Debt equity ratio

Debt to total capital ratio
Proprietary (Equity) ratio
Fixed assets to net worth ratio
Fixed assets to long term funds ratio
Debt service (Interest coverage) ratio
1. DEBT EQUITY RATIO:

Debt equity ratio shows the relative claims of creditors (Outsiders) and owners
(Interest) against the assets of the firm. Thus this ratio indicates the relative
proportions of debt and equity in financing the firms assets. It can be calculated by
dividing outsider funds (Debt) by shareholder funds (Equity)
Debt equity ratio = Outsider Funds (Total Debts)

Shareholder Funds or Equity
The outsider fund includes long-term debts as well as current liabilities. The
shareholder funds include equity share capital, preference share capital, reserves
and surplus including accumulated profits. However fictitious assets like
accumulated deferred expenses etc should be deducted from the total of these items
to shareholder funds. The shareholder funds so calculated are known as net worth
of the business.
2. DEBT TO TOTAL CAPITAL RATIO:

Debt to total capital ratio = Total Debts
Total Assets
3. PROPRIETARY (EQUITY) RATIO:

This ratio indicates the proportion of total assets financed by owners. It is calculated
by dividing proprietor (Shareholder) funds by total assets.
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Proprietary (equity) ratio = Shareholder funds

Total assets
4. FIXED ASSETS TO NET WORTH RATIO:

This ratio establishes the relationship between fixed assets and shareholder funds.
It is calculated by dividing fixed assets by shareholder funds.
Fixed assets to net worth ratio = Fixed Assets X 100

Net Worth
The shareholder funds include equity share capital, preference share capital,
reserves and surplus including accumulated profits. However fictitious assets like
accumulated deferred expenses etc should be deducted from the total of these items
to shareholder funds. The shareholder funds so calculated are known as net worth
of the business.
5. FIXED ASSETS TO LONG TERM FUNDS RATIO:

Fixed assets to long term funds ratio establishes the relationship between fixed
assets and long-term funds and is calculated by dividing fixed assets by long term
funds.
Fixed assets to long term funds ratio = Fixed Assets X 100

Long-term Funds
6. DEBT SERVICE (INTEREST COVERAGE) RATIO:

This shows the number of times the earnings of the firms are able to cover the fixed
interest liability of the firm. This ratio therefore is also known as Interest coverage or
time interest earned ratio. It is calculated by dividing the earnings before interest
and tax (EBIT) by interest charges on loans.
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Debt Service Ratio = Earnings before interest and tax (EBIT)

Interest Charges
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4. Profitability Ratio:
The profitability ratio of the firm can be measured by calculating various
profitability ratios. General two groups of profitability ratios are calculated.
a. Profitability in relation to sales.
b. Profitability in relation to investments.
Profitability in relation to sales
1. Gross profit margin or ratio
2. Net profit margin or ratio
3. Operating profit margin or ratio
4. Operating Ratio
5. Expenses Ratio
1. GROSS PROFIT MARGIN OR RATIO:
It measures the relationship between gross profit and sales. It is calculated by
dividing gross profit by sales.
Gross profit margin or ratio = Gross profit X 100

Net sales
Gross profit is the difference between sales and cost of goods sold.
2. NET PROFIT MARGIN OR RATIO:

It measures the relationship between net profit and sales of a firm. It indicates
managements efficiency in manufacturing, administrating, and selling the
products. It is calculated by dividing net profit after tax by sales.
Net profit margin or ratio = Earning after tax X 100

Net Sales
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3. OPERATING PROFIT MARGIN OR RATIO:

It establishes the relationship between total operating expenses and net sales. It
is calculated by dividing operating expenses by the net sales.
Operating profit margin or ratio = Operating expenses X 100

Net sales
Operating expenses includes cost of goods produced/sold, general and
administrative expenses, selling and distributive expenses.
4. EXPENSES RATIO:
While some of the expenses may be increasing and other may be declining to
know the behaviour of specific items of expenses the ratio of each individual
operating expense to net sales should be calculated. The various variants of
expenses are
Cost of goods sold = Cost of goods sold X 100

Net Sales
Administrative Expenses Ratio = Administrative Expenses X 100

Net sales
Selling and distribution exp. ratio= Selling and distribution expenses X 100
Net sales
5. OPERATING PROFIT MARGIN OR RATIO:
Operating profit margin or ratio establishes the relationship between operating
profit and net sales. It is calculated by dividing operating profit by sales.
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Operating profit margin or ratio = Operating Profit X 100

Net sales
Operating profit is the difference between net sales and total operating expenses.
(Operating profit = Net sales cost of goods sold administrative expenses
selling and distribution expenses.)
PROFITABILITY IN RELATION TO INVESTMENTS

1. Return on gross investment or gross capital employed
2. Return on net investment or net capital employed
3. Return on shareholders investment or shareholders capital employed.
4. Return on equity shareholder investment or equity shareholder capital
employed.
1. RETURN ON GROSS CAPITAL EMPLOYED:
This ratio establishes the relationship between net profit and the gross capital
employed. The term gross capital employed refers to the total investment made
in business. The conventional approach is to divide Earnings After Tax (EAT) by
gross capital employed.
Return on gross capital employed = Earnings After Tax (EAT) X 100

Gross capital employed
2. RETURN ON NET CAPITAL EMPLOYED:
It is calculated by dividing Earnings Before Interest & Tax (EBIT) by the net
capital employed. The term net capital employed in the gross capital in the
business minus current liabilities. Thus it represents the long-term funds
supplied by creditors and owners of the firm.
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Return on net capital employed = Earnings Before Interest & Tax(EBIT)X100

Net capital employed
3. RETURN ON SHARE CAPITAL EMPLOYED:
This ratio establishes the relationship between earnings after taxes and the
owners funds have been utilized by the firm. It is calculated by dividing Earnings
after tax (EAT) by shareholder capital employed.
Return on share capital employed = Earnings after tax (EAT) X 100

Shareholder capital employed
4. RETURN ON EQUITY SHARE CAPITAL EMPLOYED:

Equity shareholders are entitled to all the profits remaining after the all outside
claims including dividends on preference share capital are paid in full. The
earnings may be distributed to them or retained in the business. Return on
equity share capital investments or capital employed establishes the relationship
between earnings after tax and preference dividend and equity shareholder
investment or capital employed or net worth. It is calculated by dividing earnings
after tax and preference dividend by equity shareholders capital employed.
Return on equity share capital employed

= Earnings after tax (EAT), preference dividends X 100
Equity share capital employed
EARNINGS PER SHARE:

It measures the profit available to the equity shareholders on a per share basis.
It is computed by dividing earnings available to the equity shareholders by the
total number of equity share outstanding
Earnings per share = Earnings after tax Preferred dividends (if any)
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Equity shares outstanding

DIVIDEND PER SHARE:
The dividends paid to the shareholders on a per share basis in dividend per
share. Thus dividend per share is the earnings distributed to the ordinary
shareholders divided by the number of ordinary shares outstanding.
Dividend per share = Earnings paid to the ordinary shareholders

Number of ordinary shares outstanding
DIVIDENDS PAY OUT RATIO (PAY OUT RATIO):

It measures the relationship between the earnings belonging to the equity
shareholders and the dividends paid to them. It shows what percentage shares
of the earnings are available for the ordinary shareholders are paid out as
dividend to the ordinary shareholders. It can be calculated by dividing the total
dividend paid to the equity shareholders by the total earnings available to them or
alternatively by dividing dividend per share by earnings per share.
Dividend pay out ratio (Pay out ratio) = Total dividend paid to equity
shareholders
Total earnings available to equity share
holders
Or
Dividend per share /Earnings per share
DIVIDEND AND EARNINGS YIELD:
While the earnings per share and dividend per share are based on the book
value per share, the yield is expressed in terms of market value per share. The
dividend yield may be defined as the relation of dividend per share to the market
value per ordinary share and the earning ratio as the ratio of earnings per share
to the market value of ordinary share.
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Dividend Yield =
Dividend Per share

Market value of ordinary share
Earnings yield =
Earnings per share

Market value of ordinary share
PRICE EARNING RATIO:

The reciprocal of the earnings yield is called price earnings ratio. It is calculated
by dividing the market price of the share by the earnings per share.
Price earnings (P/E) ratio = Market price of share

Earnings per share
AREA OF WORKING CAPITAL MANAGEMENT

CASH MANAGEMENT
PAYABLES MANAGEMENT
CASH MANAGEMENT
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What is cash?
Cash include cash items in the process of collection, currency and coin, and
balances due from depository institutes. Cash provides flexibility and carries
minimum risk in the short term. The amount of cash held will vary from to firm, to
firm, depending on anticipated needs.
Because cash is considered a non-earning or lo-earning asset, excessive
cash balance can have an adverse effect on earnings. As such, an opportunity
cost associate with maintaining cash balances exits because these founds could
be invested or applied elsewhere to provide a better overall returns. Excessive
balances may also reflect ineffective administration of organization resources of
management. Conversely, account balances that are too low could leave the
organization in a vulnerable position from an available funds standpoint. The
risks and costs of holding these assets must be adequately managed to ensure
the safety and soundness of the organization.
Factors Determining Cash Needs:
1. Synchronization of cash flows: The needs for maintaining cash balance

arises from the non-synchronization of the inflows and outflows of cash: if
the receipts and payments of the cash perfectly coincide or balance each
other, there would be no need for cash balances.
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2. Short costs: Another general factor to be considered in determining cash

needs is the cost associated with a short-fall in the firms cash needs.
Included in the short costs are:
Transaction costs i.e. Brokerage incurred in relation to the sale of some
short term near cash assets such as marketable securities.
Borrowing costs i.e. interest on loan, commitment charges, and other
expenses relating to the loan.
Loss of trade discount i.e .. A substantial loss because of a temporary
shortage of cash.
Cost associated with deterioration of the firms credit rating, which is
reflected in high bank charges on loans, stoppages of supplies, attendant
decline in sales and profits.
Penalty rates by banks to meet a shortfall in compensating balances.
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3. Excess cash balance costs: If large are idle, the implication is that the firm has
missed opportunities to invest those funds and has thereby lost interest which
it would otherwise earned. This loss of interest is primarily the excess cost.
4. Procurement: These costs are generally fixed and are mainly accounted for
salary, storage, handling of securities, etc.
5. Uncertainty and Cash Management:
Finally, the impact of uncertainty on cash management strategy
relevant as cash flows cannot be predicted with complete
accuracy. The first requirement is a precautionary cushion to
cope with irregularities in cash flows, unexpected delays in
collections and disbursement and defaults and unexpected cash
needs.
Understanding Cash Flow:
In its simplest forms, cash flow is the movement of money in and out of our
business. It could be described as the process in which your business uses cash to
generate goods or services for the sale to your customers collects the cash from the
sales, and then completes this cycle all over again.
Inflows:
Inflows are the movement of money into your cash flows. Inflows are most likely
from the sale of your goods or services to your customers. If you extend credit to
your customers and allow them to charge the sale of the goods or services to their
account, then an inflow occurs as you collect on customers accounts. The proceeds
from a bank loan are also a cash inflow.
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Outflows:
Outflows are the movement of money out of your business. Outflows are
generally the result of paying expenses. If your business involves reselling goods,
then your largest outflow is most likely to be for the purchase of retail inventory. A
manufacturing businesss largest outflows will most likely be for the purchases of raw
materials and other components needed for the manufacturing of the final product.
Purchasing fixed assets, paying back loans, and paying accounts payable are also
cash outflows.
Objectives of cash management:

Cash management is one of the key areas of working capital management. The
basic objectives of cash management are twofold:
1) To meet the cash disbursement needs (payment schedule); and
2) To minimize funds committed to cash balances. These are conflicting and
mutually contradictory and the task of cash management is to reconcile
them.
Cash Management Tools:
1) CASH BUDGET :
The cash budget is probably the most important tool in cash
management. It is an advice to help a firm to plan and control the uses of
cash. It is a statement showing the estimated income (cash inflow) and the
expenditure (cash outflow) over the firms planning horizon.
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Periodical comparison of actual performance with budget enables an

enterprise-manager to judge whether the business is progressing towards the
direction envisaged in the long range plan adopted by the enterprise
The purposes of cash budget are:

1) To co-ordinate timings of cash needs. It identifies periods where there
might be short age of cash or an abnormally large cash requirement.
2) It pinpoints the periods when there is likely to be excess cash.
3) It enables a firm which has sufficient cash to take advantage of cash
discounts on its accounts payable, to pay obligations when due, to
formulate dividend policy, to plan financing of capital expansion and to
help unify the production schedule during the year so that the firm can
smooth out costly seasonal fluctuations.
4) Finally, it helps to arrange needed funds on the most favorable terms and
prevents the accumulation of excess funds. With adequate time to study
his firms need, the manager can select the best alternative.
2. CASH FLOW FORECASTING:

Cash is the language to translate strategic plans of business. Cash
flow forecasting is therefore, not an easy exercise. A cash manager must
keep this important fact in the mind, otherwise his actions, while sub serving
the narrow objective of the treasury department, may subvert the goal of
organization itself. It is often found that a finance manager, oblivious of the
need of the organization has invested the surplus cash in a high yielding
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security which has just come by only to discover a week later that high cash
is needed to purchase materials urgently required by the factory. As the
enterprise cannot afford to stop production which is the broad objective of the
business, the finance manager may have to sell out the security, probably at
loss, to buy materials. To prevent situations like this, detail cash forecasting
based on the strategic plan of the business is required to be drawn up.
Different time horizons are used for forecasting with different objectives in
mind.
Long-term Forecasts:
All forecasts beyond one year come under this head. These are needed
for long-range investing and financing of a business in term of the strategic
goals of an enterprise. Purpose of the long-range forecasting is to evaluate the
ability of enterprise to meet specific cash requirement for say, requirement for
say, expansion, modernization, acquisition, etc. if there is a cash gap, how the
enterprise is going to fill it up, whether by capital issues or by contracting
external debt. These are some of the issues that are needed to be resolved in
long-term cash flow forecasts.
It is likely that in the long run, economical and technological
environment will undergo changes. Long-term cash flows forecasts are,
therefore made for possible economic and technological scenario becomes an
input in the long-range plans.
Medium-term Forecasts:
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These forecasts usually cover a period of 12 months, which must fit

well within the long-range plan of the enterprise. This enables the business to
devise tactical plans to realize its strategic goals. It is also called cash
budgeting where short-term financing requirement is focused. The primary
variable for this purpose is the sales forecasts. Several statistical techniques
have been developed like. Moving Average, Exponential Smoothening, Time
Series Analysis, and Regression Analysis to an extent; they project past into
the future.
In spite of availability of all the time tested statistical models, perhaps
the most widely used technique for sale forecasting remain basically
judgmental. When sales personnel are asked to forecast sales for, say, the
next quarter, they often come out with the figure which later turnout to be fairly
accurate, though they may not be able to tell how they have arrived at the
forecasts. Human brains are capable of simultaneously analyzing multiple
qualitative and quantitative data at the rate much faster than a computer.
Hence their conclusions are truly judgmental in the real sense of the term as
these are based on such facts, which no two persons could come out with
same judgmental figure, they may differ in analytical mind.
Short-term forecasts:
This may take the form of weekly or daily forecasts of inflows and
outflows. Finance may know quite accurately average cash flows during a month
or a week but it is difficult for him to determine specific cash flows during a
month or week. It may be difficult but its importance cannot be titled because, on
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the basis of daily cash flow forecasts only a finance manager take a decisions
about cash transfer from one region to other, reduction increase infield balances
and short term investment of surplus cash etc.
1. INVESTMENT OF SURPLUS FUNDS:

Companies often have surplus funds for short periods of time, before
they are required for capital expenditures, loan payment or some other
purpose. These funds may be developed in a variety of ways. At one end of
spectrum is the term deposit in a bank that offers an interest of 10%; at other
end of spectrum is investment in equity share that can produce highly volatile
returns. It lie between several avenues like units, public sector bonds, ready
forwards, Badla financing, inter corporate deposits and bill discounting.
Units of the Unit 1964 scheme:

It is most important mutual scheme in India, the Unit Scheme 1964 of the Unit
trust of India, which permits the investors to withdraw on a continuing basis, and has
a face value of Rs.10. There is a very active secondary market for units. These units
appreciate over a period in a fairly predictable manner.
Ready Forwards:
Under this arrangement, the bank sells and repurchases the same securities
(this mean that company, in turn, buys and sells securities) at prices determined
beforehand. Ready forwards are commonly done under units, public sector bond and
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government securities. The Company earns a return in the form of price difference,
not in the form of interest income.
While ready forward is a fairly same avenue in short run, the recent scams in the
securities market call for caution and circumspection in these transactions. Ideally
the company should have constructive possession of the securities.
Inter-Corporate Deposits:
A deposit made by one company with another, normally for a period up to six
months is referred to as an inter-corporate deposit. Such deposits are of three types:
a) Call Deposits.
b) Three-month Deposits.
c) Six-month Deposits.
As inter corporate deposits represent unsecured borrowing the lending
company must satisfy itself about the credit-worthiness of the borrowing firm.
Bill Discounting:
A bill arises out of a trade transaction. The seller of goods draws the bill on
the purchaser. The bill is payable on demand or after usage period which
ordinarily does not exceed 90 days. On acceptance of the bill by the purchaser
the seller offers it to the bank for discount/purchase. When bank discounts or
purchases the bill it releases the funds to the seller. As bills are a selfliquidating instrument, bill discounting may be considered superior to lending in
the inter-corporate deposit market.
4. CONTINGENCY PLANNING:
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Contingency planning should be a routine part of any organizations business

planning and operations. Contingency planning is basically a process of reviewing an
organizations functions and assessing each areas importance to the viability of the
organization. In the area of cash management, contingency plans can minimize
business disruptions caused by problems that may impair or destroy an
organizations processing and delivery system (i.e. communications equipment,
computer equipment, and fund transfer network). The loss or extended disruption of
the business operation presents substantial financial risk to the organization. Each
organization should asses its own risks and develops strategies accordingly. An
effective contingency plan covers all the bases of the organizations business
operations and should be periodically evaluated and tested for adequacy and
feasibility.
Accounts Receivables:
Accounts receivables represent sales that have not yet been collected as
cash. A businessman sells his merchandise or services in exchange for a customers
promise to pay you at a certain time in the future. If your business normally extends
credit to its customers, then the payment of accounts receivables is likely to be the
single most important source of cash inflows .In the worst case scenario, unpaid
accounts receivable will leave your business without the necessary cash to pay its
own bills. More commonly, late paying or slow paying customers will create
shortages, leaving your business without the cash necessary to cover the own cash
outflow obligations.
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Accounts receivable also represent an investment. That is, the money tied up in
accounts receivables is not available for paying bills, paying back loans, or
expanding your business. The payoff from an investment in accounts receivable
doesnt occur until your customers pay their bills.
Accounts Receivable and Credit Management:
The profitability of a business is dependent upon its ability to successfully sell
its products for more than its costs to produce them. Selling on credit generally
attracts customers and increases sales volume. There are, however, direct and
indirect costs to extending credit which must be weighed against any potential
benefits. A successful credit policy is one in which the costs of granting credit are
offset by the benefits of higher sales.
When the firm ships the good or performs the services without receiving cash, an
account receivable (AR) is generated. The dollar amount of receivables is
determined by the volume of sales and the average length of time between a sale
and receipt of full cash payment, and may be calculated based on the following
simple formula:
AR=Credit Sales per Day x Length of Collection Period
For example, if a business has credit sales of Rs.1000 per day and allows 20 days
for payment, it has a total of Rs.1000 x 20 or Rs.20000 invested in receivables at
any given time (assuming the firms operations are stable). Any changes in the
volume of sales or the length of the collection period will change the receivable
position.
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Credit Policy:
A credit policy refers to the action taken by a business to grant, monitor and collect
cash for outstanding accounts receivables. Four specific factors must be considered
in established an effective credit policy.
a)
b)
c)
d)
Credit Worthiness Standard

Credit period
Collection policy, and
Discount for early payment
First the credit worthiness of the buyer must be evaluated. Most companies measure
credit quality and evaluate a customers probability of default by examining the five
Cs of credit:
a)
b)
c)
d)
e)
Character
Capacity to repay
Capital
Collateral, and
Conditions
A customers character refers to his/her acknowledgement of a moral obligation to

pay the debt as promised. It may be evaluated by examining the customers previous
payment habits. Relevant information may be requested from the customers bank,
previous suppliers or from credit reporting agencies. The capacity to repay is the
subjective judgment of customers ability to repay the loan. An examination of the
financial statements and the business plan of the credit buyer may aid in making the
correct judgment. The analysis of the financial ratios, especially risk ratios such as
the debt-to-asset and the current ratios, will help in measuring capital. Finally, special
attention should be paid to the collateral, which the customer may offer as security,
and to the general economic as well as specific geographical and industry
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conditions. Credit period is the length of time allowed before the credit buyer must
pay for credit purchases. Collection policy refers to the action that the business is
willing to take to collect slow-paying accounts. The length of time a firm is willing to
take to extend credit to its customers and the toughness of the firm in collecting its
receivables may influence sales and ultimately, its profit, while a relaxed collection
policy may increase the percentage of bad debt.
Moreover, an aging schedule must be constructed to show how long accounts
receivable are outstanding by dividing the receivables position in age categories and
showing the percentage of receivables in age group. Then the small business owner
must decide what actions are appropriate for collecting the past due accounts.
Usually, a letter is sent to remind the credit buyer that the account is past due,
followed by a telephone call if payment is further delayed. Finally, the services of a
collection agency may be necessary.
The collection process may be expensive both in terms of out-of-pocket
expense and the loss of business relations. Therefore, making the decision to grant
credit is an important and delicate business function requiring careful handling.
Advice from other business owners and professionals is often helpful.
The last element of the credit policy is cash discount may be considered as an
incentive for credit customers to pay early and it may reduce the average collection
period. It may also attract new customers who look at cash discounts as a form of
price reduction. These benefits however, must be weighed against the dollar cost of
the discount before any decisions are made.
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Accounting Techniques for Receivables Management:

Using the Receivables Aging Schedule:
The accounts receivable aging schedule is a useful tool for analyzing the
makeup of accounts receivable balance of an organization. Analyzing the schedule
allows the firm to spot problems in accounts receivable early enough to protect
business from major cash flow problems.
The aging schedule can be used to identify the customers that are extending the
time it takes to collect accounts receivables is attributable to one customer, then
steps can be taken to see that this customers account is collected promptly.
Overdue amounts attributable to one customer may signal that your business needs
to tighten its credit policy towards new and existing customers.
The aging schedule also identifies any recent changes in the accounts making up
total accounts receivable balance. Almost every business has to deal with customers
that are slow to pay. However, if the makeup of accounts receivable changes, when
compared to the previous month, it should be spotted instantly. The accounts
receivable aging schedule helps the firm to spot these problems in accounts
receivable, and provide the necessary answers early enough to protect it from cashflow problems.
Measuring Average Collection Period:
The average collection period measures the length of time it takes to convert
average sales into cash. This measurement defines the relationship between
accounts receivables and your cash flow. A longer average collection period requires
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a higher investment in accounts receivables. A higher investment in accounts

receivables means less cash is available to cover cash outflows, such as paying
bills.
The average collection period is calculated by:Balance Average Collection Period =Current Accounts Receivables
Average Daily Sales
The average daily sales volume is computed by:Average Daily Sales = Annual Sales
360
Using the annual sales amount and account receivable balance from the prior year is
usually accurate enough for analyzing and managing cash flow. However, if more
recent information is available, such as the previous quarters sales information, then
it should be used instead.
Using the average collection period:- The average collection period is the
average number of days between 1) the date that a credit sale is made, and 2)
the date that the money is received from the customer. The average collection
period is also referred to as the days' sales
in accounts receivable.
The average collection period can be calculated as follows: 365 days in a year
divided by the accounts receivable turnover ratio. Assuming that a company has
an accounts receivable turnover ratio of 10 times per year, the average collection
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period is 36.5 days (365 divided by 10).
An alternate way to calculate the average collection period is: the average
accounts receivable balance divided by average credit sales per day.
If a company offers credit terms of net 30 days, the company may find that its
average collection period is actually 45 days or more. Monitoring the average
collection period is important for a company's cash flow and its ability to meet its
obligations when they come due.
Accounts Receivable to Sales Ratio:
The account receivables to sales ratio helps to identify recent increases in
accounts receivable. Using monthly sales information, the account receivables to
sales ratio can serve as information of the accounts receivables to sales ratio will
quickly point out cash flow problems related to businesss accounts receivable.
The accounts receivable to sales ratio is calculated by:Accounts receivable to sales ratio = Account Receivable
Sales for the Month
Using Accounts Receivable To Sales Ratio:

At first glance, the accounts receivable to sales ratio might not seem like useful
information. But, when it is commuted each month and observed the changes that
occur as the months pass, the accounts receivable to sales ratio can signal potential
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problems in cash flow. For e.g. an increase in accounts receivable to sales ratio from
one month to the next indicates that investment in accounts receivable is growing
rapidly than sales. This is often one of the first signs of a cash flow problem.
Specific Techniques for Speedy Collection of Receivables
1. Prompt Payment by Customers:
One way to ensure prompt payment by the customers is prompt billing. What
the customer has to pay, the period of payment etc should be notified
accurately and in advance. The uses of mechanical devices for billing along
with the enclosure of a self-addressed return envelope will speed-up payment
by customers. Another and more important technique to encourage prompt
payment by customers is the practice of offering trade discount.
2. Early Conversion of Payment in to Cash:
Once the customer make the payment by writing a cheque in favour of the firm,
the collection can be expedited by prompt encashment of the cheque. There is a
time lag between the cheque is prepared and mailed by the customer and the
time in which funds are included in the cash reservoir of the firm. This period of
time is known as deposit float. The collection of accounts receivables can be
considerably accelerated, by reducing transit, processing and collection time.
This is possible if a firm adopts a policy of decentralized collection.
The principal methods of establishing a centralized collection network are:
(a) Concentration Banking and
(b) Lock-Box System
(a) Concentration Banking:
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In this system of decentralized collection of accounts receivable, large firms,

which have a large number of branches at different places, select some of
these, which are strategically located as collection centers for receiving
payments from customers. Instead of all the payments being collected at the
Head office of the firm, the cheques for a certain geographical area are
collected at a specified local collection centre. Funds beyond a predetermined
minimum are transferred daily to a central or disbursing or concentration bank
account. A concentration bank is one with which a firm has a major account
usually disbursement of account.
(b) Lock-Box System:
Here, a firm hires a post-office box at important collection centers .The
customers are required to remit payment to this lock-box. The local banks of
the firm, at the respective places are authorized to open the box and pick-up
the remittances received by the customers. After crediting the account of the
firm ,the bank sends a deposit slips along with the list of payments and other
enclosure, if any, to the firm, by way of proof and record of collection.. This
methods superiority arises from the fact that one step in the collection
process is eliminated with the use of lock-box, the receipt and deposit of the
cheques by the firm.
PAYABLES MANAGEMENT
1. Managing payables
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Creditors are a vital part of effective cash management and should be managed
carefully enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function can
create liquidity problems. There is an old adage in business that if you can buy well
than you can sell well. Management of your creditors and suppliers is just as
important as the management of you debtors. It is important to look after your
creditors-slow payment by you may create ill feeling and can signal that your
company is inefficient.
I. Techniques to Delay Payments

1. Avoidance of Early Payment:
According to the terms of credit, a firm is required to make a payment within a
stipulated period. It entitles a firm to cash discounts. If, however, payments are
delayed beyond the due date, the credit standing may be adversely affected so that
the firms would find it difficult to secure trade credit later. But if the firm pays its
accounts payables before the due date it has no special advantage. Thus, a firm
would be well advised not to make payments early i.e. before due date.
2. Centralized Disbursements:
The head office could make all payments from a centralized disbursement account.
Such an arrangement would enable the firm to delay payments and conserve cash
for several reasons. Firstly, it increases transit time. Secondly, since the firm has only
one centralized bank account, a relatively smaller total cash balance will be needed.
Finally, schedules can be tightly controlled and disbursement made exactly on the
right day.
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3. Float :
A very important technique of slowing down the payment is float. The term float
refers to the amount of money tied up in cheques that have been written, but have
yet to be collected and en cashed. A firm can send remittances although it does have
cash in its bank at the time of issuance of the cheques. Meanwhile, funds can be
arranged to make payment when cheques is presented for collection after a few
days. Float used in this sense is called as cheques kitting. There are two ways of
doing it:
a) Paying from a bank away from the creditors bank
b) Scientific cheques analysis on the basis of past experience, the time lag
between issue and encashment of cheques.
For instance, cheques issued to pay wages and salary may not been cashed
immediately; it may be spread over a few days, say, 25% on one day, 59% on
second day and balance on the third day. This strategy would enable the firm to save
the operating cash.
Accruals :
Finally, a potential tool for stretching accounts payables is accruals which are
defined as current liabilities that represent a service or goods received by a firm but
not yet paid for instance, payroll i.e. remuneration to employees, who renders
services in advance and receive payment later. In a way, they extend credit to the
firm for a period at the end of which they are paid, say, a week or a month. Thus,
less frequent payrolls, i.e. weekly as compared to monthly, are an important source
of accrual. They can be manipulated to slow down the disbursements. Other
examples of accruals are rent and tax.
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MEANING OF INVENTORY
Inventory generally refers to the materials in stock. It is also called the idle resource
of a company. Inventories represent those items which are either stocked for sale or
they are in the process of manufacturing or they are in the form of materials which
are yet to be utilized. It also refers to the stockpile of the products a firm would sell in
future in the normal course of business operations and the components that make up
the product. Inventory is a detailed list of those movable items which are necessary
to manufacture a product and to maintain the equipment and machinery in good
working order. Inventories constitute the most important part of the current assets of
large majority of companies. On an average the inventories are approximately 60%
of the current assets in public limited companies in India. Because of the large size
of inventories maintained by the firms, a considerable amount of funds is committed
to them. It is therefore, imperative to manage the inventories efficiently and
effectively in order to avoid unnecessary investment.
Inventory cost:
Costs associated with inventories are as follows:
1. Stock out cost:
It is an implicit cost of lost sales due to shortage of supplies. It includes such
cost as back order costs, lost profit due to loss of present sales, and also cost of
losing goodwill of the firm which affects future sales and profit. Internal shortage cost
occurs when the requirement of production department is not fulfilled or it is delayed,
resulting in delayed completion, lost production idle time, etc.
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2. Holding cost:
This cost has two part:
a) Cost of physical carrying of inventories like storage cost, insurance, rate and
taxes, handling, shrinking, deterioration and obsolescence;
b) Financial cost of funds engaged in inventories which is generally the
opportunity cost of alternative investment.
`
Holding cost is founded to be proportional to the value of the inventories held,
and hence it is assumed to be a variable cost in inventory management.

3. Purchase or Acquisition cost:
Goods may be purchased directly (e.g. raw material for the manufacturers and
finished products for retailers) or manufactured-in-house. When it is purchased, the
purchase price net of quantity discounts plus freight, insurance, loading, unloading,
etc shall be the acquisition cost. For goods manufactured in-house, the unit cost of
production inclusive of factory overheads shall constitute the acquisition cost.
ECONOMIC ORDER QUANTITY

MEANING
A decision about how much to order has great significance in inventory
management. The quantity to be purchased should neither be small nor big because
costs of buying and carrying materials are very high. Economic order quantity is the
size of the lot to be purchased which is economically viable. This is the quantity of
materials which can be purchased at minimum costs. Generally economic order
quantity is the point at which inventory carrying costs are equal to order costs. In
determining economic order quantity it is assumed that cost of managing inventory is
| Page | 64
made up solely of two parts i.e., ordering cost and carrying cost. The cost
relationships are shown in below figure.
FORMULA FOR CALCULATING ECONOMIC ORDER QUANTITY
Inventory Management Techniques
In managing inventories, the firms objective should be to be in consonance
with the shareholder wealth maximization principle. To achieve this, the firm should
determine the optimum level of inventory. Efficiently controlled inventories make the
firm flexible. Inefficient inventory control results in unbalanced inventory and
inflexibility-the firm may sometimes run out of stock and sometimes pile up
unnecessary stocks.
I.
QUALITY DISCOUNTS:
It is a common practice amongst suppliers to offer quantity discounts as
incentives to buy in larger quantity. The advantages that accrue to the sellers are
lower order processing costs or set-up costs and lesser carrying cost of inventories.
Quantity discounts effectively reduce the unit cost of materials. As the lot sizes are
large, the number of orders will be few and hence, the total ordering costs will be
reduced.
II. MATERIAL REQUIREMENTS PLANNING
Manufacturing can be a highly detailed, highly complex process that requires
specific planning. Material Requirement Planning (or MRP) is an inventory
system that is computer based and used to manage the manufacturing
process. It is designed to assist in the scheduling and filling of orders for raw
materials that are manufactured into finished products.
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a) MPS
Master production scheduling (MPS) is a form of MRP that concentrates
planning on the parts or products that have the great influence on company
profits or which dominate the entire production process by taking critical
resources. These items are marked as A parts (MPS items) and are planned
with extra attention. These items are selected for a separate MPS run that
takes place before the MRP run.
b) BOM
A Bill of Material (B.O.M.) is a hierarchical list of materials (components, sub
assembles, ingredients..) required to produce an item, showing the quantity of
each required item. Other information such as scrap factors may also be
included in the BOM for use in materials planning and costing. An engineering
BOM represents the assembly structure implied by the parts lists on drawings
and drawing tree structure. A manufacturing BOM represents the assembly
build-up the way a product is manufactured.
c) INVENTORY STATUS RECORD

This file maintains inventory records so that the company may subtract the
amount on hand from the gross requirements, the amount on hand from the
gross requirement, thus identifying the net requirements at any time. The
inventory status file (ISF) also contains important information on such things as
stock needs for certain items and lead times. The ISF plays a critical role in
support of maintaining the MPS and helping to minimize inventory.
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III.
KANBAN
Kanban (kahn-bahn) is a Japanese word that when translated literally means

visible record or visible part. In general context, it refers to a signal of some kind.
Thus, in the manufacturing environment, kanbans are signals used to replenish the
inventory of items used repetitively within a facility. The kanban system is based on
a customer of a part pulling the part from the supplier of that part. The customer of
the part can be an actual consumer of a finished product (external) or the production
personnel at the succeeding station in a manufacturing facility (internal). Likewise,
the supplier could be the person at the preceding station in a manufacturing facility.
The premise of kanbans is that material will not be produced or moved until a
customer sends the signal to do so.
IV.
INVENTORY HOLDING UNDER JIT
The just-in-time inventory control system, originally developed by Taichi Ohno of

Japan, simply implies that the firm should maintain a minimal level of inventory and
rely on suppliers to provide parts and components just- in time to meet its
assembly requirements. This may be contrasted with the traditional inventory
management system which calls for maintaining a healthy level of safety stock to
provide a reasonable protection against uncertainties of consumption and supplythe traditional system may be referred to as a just-in-case system.
Enterprise Resource Planning has proved to be revolution for the effective control
of working capital in an organization. ERP is a software package used by
manufacturers, suppliers to manage supply chains and business processes. ERP
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packages consist of modules, each handling a different business process that are all
linked and have a common look and feel.
The different modules of ERP package are: Manufacturing and Operations Modules
Engineering Modules, Documentation Modules
Finance Modules and Customer Relationship Module, etc.
An ERP system manages the information needs of all company functions, including
financial system, human resources and payroll, logistics and distribution, purchasing,
sales, and manufacturing. It consists of a single database and application that allow
employees in different department to access and act on that data.
Using the same information management software company-wide eliminates a data
integration problem that arises when a company operates a purchasing system
from one vendor, an inventory management system from another, and a
manufacturing control system from a third. Dealing with a single software vendor
also facilities software upgrades and maintenance.
To make things easier from mid-sized and small business, some ERP systems offer
packages that are preconfigured according to standard business modules or
provide more limit functionality. This works for large manufacturing companies that
make products using well define, industry-standard planning and control systems
that dont change much over a long period of time.
But for many coating producers, todays rapidly changing business environment is
one where only the fittest survive and they are most flexible.
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An ERP system contains the following different types of data

Master data:
The main information that business deals with these include customers,
suppliers and products, as well as your own organizational entities such as
sales sites and warehouses, sources of finance, etc.
Transactional Data:
The information processed by the system functions in the normal flow of
business. These include sales quotes and orders, shipments, purchase
orders, invoices and so on.
Historical Data:
The results of business events retained for analysis and purposes. Behind the
scenes are the little sets of data that make the system work.
Basic codes:
It is used as attributes for master or transactional objects, such as countries,
languages or product groups.
Parameterized codes:
Marketing information such as customer types, order types, tax codes and
currencies, these codes also contain control settings that affect how the
information they are associated with will be processed.
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Thus, an ERP package can be used for effective working capital management
by linking the financial modules to manufacturing and logistics and to the
people who deal with analytical results for policy formulation.
CONCLUDING ANAYSIS
The working capital position of the company is sound and the various sources
through which it is funded are optimal.
The company has used its dividend policy, purchasing, financing and
investment decisions to good effect can be seen from the inferences made
earlier in the project.
The debts doubtful have been doubled over the years but their percentage on
the debts has almost become half. This implies a sales and collection policy
that get along with the receivables management of the firm.
The various ratios calculated are an indicator as to the fact that the profitability
of the firm and sales are on a rise and also the deletion of the inefficiencies in
the working capital management.
CONCLUSION
I had the opportunity to study the intricacies of a financial world, which runs in each
and every business, the topic Working Capital Management
Even though your business may be fortune 500 conglomerates or a neighborhood
trading organization, this is one aspect where the slightest in difference may decide
the health of an organization.
DEFINATION
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Working Capital is defined as the excess of current assets over current liability and
provision.
Mission
The prime mission of Working Capital Management is to maintain a proper balance
within the firms funds invested in existing resources so to ensure the firms long-term
survival, growth and profitability.
PURPOSE
The purpose why financial experts, organization and students of management
accounting consider Working Capital as a lifeline of the organization because it is
important for the smooth day to day functioning of the organization. Also working
capital is of major importance to internal and external analysis because of its close
relationship with the current day-to day operations of a business. Its effective
provision can do much to ensure the success of business, while its inefficient
management can lead not only to loss of profit but also to the ultimate downfall of
what otherwise might be considered a promising concern.
KALEIDOSCOPE
Working Capital is a broad umbrella under whose grant many aspects of financial
and management, Receivables Management, Inventory Management and Financing
of Working Capital. Various cash management tools include Cash budget, cash flow
forecasting, planning the investment and the contingency planning for liquidity crisis.
| Page | 71
A sound credit policy ensures effective collections from the debtors. Now a days
concentration banking and lock-box system are the most widely used by the
company for smooth collection.
As per payables are concerned the company that I visited never had problems in this
regard. Managing inventory is a juggling act. This is an area where a huge amount of
working capital has been blocked by the firms. Almost all manufacturing firms face
this problem. However, with the introduction of MRP, JIT, EOQ, KANBAN this
problems seems to be resolved to some extent. But according to industry experts it
cannot be absolutely perfect in any scenario.
Mostly firms depend upon trade credit and cash credit loans from banks, which are
obtained after basic procedure of assessing the working capital requirement of the
firm.
BALANCING ACT
A current shift in the trend of replacing manual by technology has taken place. Using
computers, data is stored to determine the inventory at any given level or stage
.Transmission of data as well as money takes place in seconds, Electronic
Transmission of data along with interface with each and every organization allows a
company to determine whether it has a realistic figure of Working Capital or not.
Enterprise Resources Planning Along with SAP has emerged as a major player in
the technology market, tailor made software products like these and in-house
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softwares developed by the organizations themselves suit individual requirements of

organization in the modernization.
ORBIT
Working Capital Management acts as a stimulant and a motivational aspect for
production. Nearly every aspect of management gets embossed with Working
Capital Management If at the right time Working Capital is made effectively available
the three are no bound to which the company can achieve growth. Thus we can sum
it up saying that Working Capital Management is the critical path breaking aspect
which when effectively used acts as a vehicle to cut down costs significantly and
ensures healthy profits.
BIBLIOGRAPHY
Following sources have been sought for the preparation of this report:
Financial Statements (Annual Reports)
Company Magazines and Journals.
Text books on Financial Management
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WORKING CAPITAL MANAGEMENT

In partial fulfillment of the requirement

An undertaking of this type is a result of contribution received from a number of

Project Report: Working Capital Management

Project Report: Working Capital Management

Declaration by the Student

Many companies still underestimate the importance of working capital management

Project Report: Working Capital Management

INTRODUCTION : WORKING CAPITAL

MEANING OF WORKING CAPITAL

CLASSIFICATION OF WORKING CAPITAL

WORKING CAPITAL MANAGEMENT

WORKING CAPITAL CYCLE

DETERMINANTS OF WORKING CAPITAL

WORKING CAPITAL POLICY

OVERVIEW OF WORKING CAPITAL RATIO

FORMULA FOR CALCULATING

Project Report: Working Capital Management

MEANING OF WORKING CAPITAL

TYPES OF WORKING CAPITAL

Project Report: Working Capital Management

2. Net working capital

Project Report: Working Capital Management

Project Report: Working Capital Management

Project Report: Working Capital Management

Regular Payment of Salaries, Wages and Other Day Today Commitments: It

For the purpose of raw material, components and spares.

To pay wages and salaries

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

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

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and

Project Report: Working Capital Management

Project Report: Working Capital Management

5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires

RATE OF STOCK TURNOVER: There is an inverse co-relationship between

CREDIT POLICY: A concern that purchases its requirements on credit and

BUSINESS CYCLE: In period of boom, when the business is prosperous, there

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require

Project Report: Working Capital Management

WORKING CAPITAL MANAGEMENT

Project Report: Working Capital Management

WORKING CAPITAL CYCLE

Project Report: Working Capital Management

Some shares may be redeemed for cash

Project Report: Working Capital Management

Get better credit (in

Shift inventory (stocks)

Move inventory (stocks)

Project Report: Working Capital Management

DETERMINENTS OF WORKING CAPITAL REQUIREMENT

Project Report: Working Capital Management

1 .What should be the ratio of the current assets to sales?

Current Asset In Relation To Sales:

Project Report: Working Capital Management

Ratio of Short-term Financing to Long-term Financing

What are the likely consequences of this alternative?

Project Report: Working Capital Management

OVERVIEW OF WORKING CAPITAL RATIO

Project Report: Working Capital Management

Overview of the working capital ratio

Project Report: Working Capital Management

Current Ratio = Current Asset