A

Project Report
On

“A STUDY ANALYSIS OF WORKING CAPITAL

MANAGEMENT”
At

“SRK INDUSTRIES”
By
“MR. PRASANNA UDAY JAKATI”
Under the guidance of
“DR.MURARI PREMNATH SHARMA”
Submitted to

“SAVITHRI BAI PUNE UNIVERSITY”

In partial fulfillment of the requirement for the
award of the degree of
Master of Business Administration (MBA)
Through

Dr Vithalrao Vikhe Patil Foundation's

Institute of Business Management & Rural

Development,
Ahmednagar-414111.
(Year 2016 - 2018)

1
 DECELERATION

I hereby declare that this Project Report entitled “A STUDY on WORKING

CAPITAL management” is written by me and submitted to Savitribai Phule
Pune University through Dr Vithalrao Vikhe Patil Foundation’s Institute of
Business Management and Rural Development Vilad Ghat Ahmednagar
for the award of the Degree of Master of Business Administration in the
faculty of management. I further declare that, this has not been submitted, in
full or in part, to any other university for any degree or whatsoever.

(Mr.Prasanna Uday Jakati)

MBA II (Finance)

Date:

Place :Ahmednagar.

2
 ACKNOWLEDGEMENT

“Coming Together is Beginning,

Keeping Together is Progress &

Working Together is Success.”

The project is a great source of learning and a good experience

as it made me aware of professional culture and conducts that exist in an organization.
Inspiration and guidance are valuable in all aspects of life especially in an academic
field.
I express my sincere thanks to Mr. Mahesh Tawale, without
whose supervision and inspiration, I could not have completed my project. His
guidance proved to be valuable in solving many of my difficulties. Special thanks to
who give me the opportunity to do the project in SRK Industries.
I express my gratitude to Dr. Murari Sharma My Internal
Guide, IBMRD, Under Whose Supervision And Guidance It Has Become Possible
For Me to bring out this work successfully.
Also I would like to express my heartfelt thanks to the team
members of Finance Department and all my friends and who helped me in the
successful completion of this project. I will always carry fond memories of these
training days.

- Mr.Prasanna Uday Jakati

3
 CONTENTS

LESSONS TOPICS PAGE NO.

CHAPTER-1 INTRODUCTION 7-16

1.1 Executive summery 8

1.2 Meaning / Define 9
1.3 Important of Study 10
1.4 Objective of study 12
1.5 Scope 13
1.6 Research Methodology 14
1.7 Data collection 15
1.8 Limitation 16

CHAPTER-2 COMPANY PROFILE 17–23

2.1 Introduction 18
2.2 History 20
2.3 Vision & Mission 21
2.4 Products Profile 24

CHAPTER-3 DATA ANALYSIS INTERPRETATIONS 24 – 43

CHAPTER-4 FINDINGS ,SUGGESTIONS,CONCLUSION 44-51

4
Sr. no. TOPICS Page no.

1 Raw material holding period 24

2 Finished goods holding period 26

3 Debtors collection period 27

4 Gross operating cycle 29

5 Payment deferral (creditors) period 31

6 Net operating cycle 32

7 Current assets 34

8 Proportion of current assets 35

9 Current liabilities 38

10 Proportion of current liabilities 38

11 Net working capital 40

12 Comparison between sales and net working capital 43

13 Comparison between proportion sales and net working 45

capital
14 Comparison between operating cycle and net working 46
capital
15 Current ratio 48

16 Acid test ratio 50

17 Working Capital Turnover Ratio 52

18 Inventory Turnover Ratio 54

5
19 Debtors Turnover Ratio 56

20 Creditors Turnover Ratio 58

21 Operating Profit Margin Ratio 60

22 Proportion of short term and long term funds 66

6
 CHAPTER1

INTRODUCTION

7
1.1Executive Summery

Working capital management is significant in financial management

due to the fact that it plays a vital role in keeping the wheels of a business enterprise
running. Working capital management is concerned with short-term financial
decisions. Shortage of working capital may cause many businesses to fail. Lack of
efficient and effective utilization of working capital leads to earn low rate of return.
The need for skilled working capital management has thus become greater in recent
years.

A firm invests a part of its capital in fixed assets and jeeps a part of it
for working capital i.e. for meeting its day to day requirements. We will hardly find
any firm which does not require any amount of working capital for its normal
operations. The requirement of working capital varies from firm to firm depending
upon the nature of business, production policy, conditions of sale and purchase etc.

Working capital to a company is like the blood to human body. It is the

most vital ingredient of a business. Working capital management if carried out
effectively efficiently and consistently will assure good health of an organization.

8
1.2 Meaning / Define
In simple terms working capital means is that the amount of funds that a company
require finance for its day-to-day operations. Working capital states that the period of
debtors, receivables etc for a company to raise finance from them at the earliest.
Finance manager should develop sound techniques of managing current assets.
Working capital management involves managing the relationship between a
firm's short-term assets and its short-term liabilities. The goal of working capital
management is to ensure that the firm is able to continue its operations and that it has
sufficient cash flow to satisfy both maturing short-term debt and upcoming
operational expenses.

The following should be effective in working capital management:

Cash management: Identify the cash balance which allows for the business to meet
day to day expenses, but reduces cash holding costs.

Inventory management: Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials—and minimizes reordering
costs—and hence in Lactases cash flow. Besides this, the lead times in production
should be lowered to reduce Work in Process (WIP) and similarly, the Finished
Goods should be kept on as low level as possible to avoid over production.

Debtors management: Identify the appropriate Lacedit policy, i.e. Lacedit terms,
discounts etc. which will attract customers, such that any impact on cash flows and
the cash conversion cycle will be offset by inLaceased revenue and hence Return on
Capital. Debtors Lacedit period should be less than 90 days to achieve good working
capital ratio and position of the company.

9
1.3 Important of Study

Proper management of working capital is very important for the success of an

enterprise. “It aims at protecting the purchasing power of assets and maximizing the
return on Investment. The manager of administration of current assets to a very large
extent determines the success of the operations of a firm. Constant management is
required to maintain appropriate levels in the various working capital accounts. A
study of working capital is of major importance to internal and external analysis
because of its close relationship to current day-to-dayoperations of business,
Inadequacy or mismanagement of working capital isthe leading cause of business
failures. Shortage of working capital, so oftenadvanced as the main cause of failure of
Industrial concerns, is nothing butthe clearest evidence of mismanagement, which is
so common. The current assets and current liabilities flow round in a business like an
electric current. The working capital plays the same role in the business as the role of
the heart in the human body. Just as the heart gets blood and circulated the same in the
body, in the same enterprise, adequate amount ofworking capital is pre-requisite. The
adequacy of cash and current assetstogether with their efficient handing virtually
determine the survival ordemise of a concern. Inadequate working capital is a
business ailment as compared to the availability of excess working capital may
leadcarelessness.

About costs and therefore, to inefficiency of operations. Many atimes business

failure takes place due to lack of working capital. If aconcern maintains an adequate
amount of working capital, it enjoys a goodLacedit rating and gets discount on
payment. It will ensure proper functioningof the business operations and help in the
maximization of threat of return.A business house can maximize its rate of return on
the capital investedprovide in keeps pace with the scientific and technological
developmentstaking place in the field to which it pertains. As soon as some
technologicaland scientific development takes place, a business enterprise in order
toaccelerate its profitability should immediately introduce the same to itsproductive
process. In reality, however the sufficiency of working capitalwill determine the
course of decision in this regard.

10
 Working capital helps to operate the business smoothly without any financial
problem for making the payment of short-term liabilities. Purchase of raw materials
and payment of salary, wages and overhead can be made without any delay. Adequate
working capital helps in maintaining solvency of the business by providing
uninterrupted flow of production. Quick payment of Lacedit purchase of raw
materials ensures the regular supply of raw materials from suppliers. Suppliers are
satisfied by the payment on time. It ensures regular supply of raw materials and
continuous production. A firm having adequate working capital, high solvency and
good Lacedit rating can arrange loans from banks and financial institutions in easy
and favorable terms.

11
1.4 Objective of Study

1. To study Working Capital and its affecting factors.

2. To study and analyze Operating Cycle
3. To analyze Working Capital with the help of ratios
4. To study Working Capital financing patterns

12
1.5 Scope of Study

The scope of study was extended for three years viz.

1) 2014-15
2) 2015-16
3) 2016-17

13
1.6 Research Methodology

Decretive Research:
Deceptive research helped me to find out facts and details of the SRK
Industries. I have been enquired directly to senior executives and senior employees
about what has happened and what is happening in the company.

Data Collection: I have been collected data through both primary and secondary.
Primary data from Questionnaire, Observation and Personal interview with Account
executives and senior employees.

Secondary data from annual reports and company websites.

Areas of Data Collection: I was visiting different company to collect data. I have
done survey other than SRK Industries.

Time Frame: I have done this research activity in two months.

14
1.7 Data Collection

Research Tools:

Bar Charts and Line Chart for Interpretation

Area of Study:

Finance

Sources of Data:
There were mainly two major sources of data namely;

Primary Data:
Primary data has been obtained through personal discussions with managers and
senior officials of the organization; observations and questionnaire both open ended
and closed ended.

Secondary Data:
Secondary data has been obtained from published reports like the annual reports of
the company, balance sheets, and profit and loss account, websites, records such as
files, reports maintained by the company.

15
1.8 Limitation

1. Most of the information used in the analysis was from secondary sources.
2. Confidential data was not allowed to be accessed or published in the project
report.
3. Time duration for the analysis was very short therefore detailed analysis was
not possible.
4. Due to time constrain all the measures were not considered for analysis.

16
 CHAPTER 2
COMPANY PROFILE

17
2.1 Introduction of Company

We are one of the leading manufacturers of Plastic in Maharashtra (INDIA) since last
4 years. We have a wide range of Quality Plastic Components; Manufactured under
highly experienced team, available in ready stock as you will observe from the details
enlisted ahead.

Infrastructure:

We are approved by

Newly Installed High Mechanized Machineries Manufactured

from Worlds Best Machinery Manufacturers

High production and Supply capacity.

High Accuracy Calibration Instruments and Testing

Machinery.

Fully Mechanized Material Handling facilities having cranes

18
Applications:

We Serve Services to the requirements of the following industry segments,

Battery Companies

Sugar factories

Hardware Merchants

Automobile Part Manufacturers

Agriculture equipments and implements Manufacturers Engineering Industry.

19
2.2 History of Company

We are one of the leading manufacturers of Plastic components in Maharashtra

(INDIA) Since last 4 years. We have a wide range of Quality plastic Products;
Manufactured under highly experienced team, available in ready stock as you will
observe from the details enlisted ahead.

Flexible manufacturing plans; we can accommodate customer's urgent requirements.

We can also Mfg. Products as to Customers Specific requirement i.e Various Sizes etc
World Class Quality Raw material Grades is used in Process for Manufacturing
plastic Products. We have a dedicated and expertise team of qualified & experienced
personnel ensuring timely supply of material to customer requirements. We fight
competition, not on price but on total customer satisfaction, on all aspects of our
dealing.

20
2.3 Vision and Mission Statement

Mission
SRK Industries has four manufacturing units with large-scale high-capacity. High-
efficiency machineries for settled up across Ahmednagar Industrial Area having
quality development facilities with inclusion of labs and tool design shop. Our
cumulative infrastructure is capable of accomplishing the manufacturing of the best
quality and variety products which enables us for offering 50 product variations. Such
diversified distinction and quick responsive methodology shows our capability of
endeavoring our esteemed customer's satisfaction.

Vision
We proudly introduced us an ISO standardized company with having high business
standards. Thanks to globalization and rapid advances in technology, today's
manufacturing environment is increasingly competitive. Our fundamentals business
principle has always been to bring superior quality products at competitive prices to
our valued customers. We stay focused on finding new ways to design, produce and
deliver quality products.

21
2.4 Product Profile

22
23
 CHAPTER 3

DATA ANALYSIS

24
 CONCEPT OF WORKING CAPITAL

There are two concepts of working capital – Gross concept and Net
concept. Gross working capital simply called as working capital, refers to the firm’s
investment in current assets. The gross working capital concept is financial or going
concern concept where as net working capital is an accounting concept of working
capital.

Net working capital refers to the difference between current assets

and current liabilities. Net working capital can be positive or negative. A positive net
working capital will arise when current assets exceeds current liabilities. A negative
net working capital occurs when current liabilities are in excess of current assets. The
consideration of the level of investment in current assets should avoid two danger
points – excessive and inadequate investment in current assets. Investment in current
assets should be neither excess nor short. Idle investment earn nothing but it block
capital, on the other hand, inadequate amount of working capital can threaten
solvency of the firm, if it fails to meet its current obligations.

Working capital needs of the firm may be fluctuating with change in

business activities. The management should be prompt to initiate an action and correct
the imbalance. It indicates the liquidity position of the firm and suggests the extent to
which working capital needs may be financed by permanent sources of funds.
Working capital drives the ordinary operating cycle of business, running expenses,
daily expenses of the firm. In a narrow sense, the term working capital refers to the
net Working capital. Net working capital is the excess of current assets over current
liabilities.

Net working capital = Current assets – Current liabilities

Net working capital may positive or negative. When the current assets
exceed the current liabilities the working capital is positive and the negative working
capital results when the current liabilities are more than the current assets. Current
liabilities are those liabilities, which are intended to be paid in the ordinary course of

25
business within a short period of normally one accounting year out of current assets or
the income of the business.

Gross concept is sometimes preferred to the net concept of working

capital for the following reasons:

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

at the right time. Every management is more interested in the total
current assets with which it has to operate than the sources from where
it is made available.

2. The gross concept of working capital is more useful in determining the

rate of return on investment in working capital. The net working
capital concept, however, is also important for the following reasons:
i) It is qualitative concept, which indicates the firm’s ability to meet its
operating expenses and short – term liabilities.
ii) It indicates the margin of protection available to the short – term creditors,
i.e. the excess of current assets over current liabilities.

WORKING CAPITAL CYCLE:

Operating cycle is the time duration required to convert raw materials

into cash. The operating cycle of a production unit involves three phases:

 Acquisition of resources such as raw material, labour, etc.

 Production of the product.
 Conversion of raw materials into finished products. Sales of the finished
products either for cash or credit.

26
CASH PURCHASE OF PROCESS
ON

RAW MATERIAL RAW

MATERIAL

RECEIVABLES FINISHED WORK –

IN

PRODUCTS PROCESS

Diagram shows Production Cycle. Working capital is required for each and every
stage of production. The current assets are required because the operations do not
convert into cash immediately. Following is the Working Capital Cycle.

27
WORKING CAPITAL CYCLE FOR SRK INDUSTRIES

Marketing Design
Department
Department

Money is received Production Planning and

from Customer Control (PPC)

Material Requirement
Goods are dispatched Planning (MRP)
to Customer
CASH

Purchase of Raw
Production Activity takes
Material
place & RM is converted
into WIP

Raw Material Supply to

Production Department

28
IMPORTANCE OF WORKING CAPITAL

Working capital is the lifeblood and never center of a business. Just as

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

1. Solvency of the business:

Adequate working capital helps in maintaining solvency of the business by
providing uninterrupted flow of production.

2. Goodwill:
Sufficient working capital enables a business concern to make prompt
payments and helps in creating and maintaining goodwill.

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

4. Regular supply of raw material:

Sufficient working capital ensures regular supply of raw materials and
continuous production.

5. Regular payments of day – to – day activity:

Working capital can make regular payments of salaries, wages and other day –
to – day a commitment, which raises the morale of its employees,
increases their efficiently, reduces wastages and costs and enhances
production and profits.

6. Exploitation of favorable market conditions:

Only concerns with adequate working capital can exploit favorable market
condition such as purchasing its requirements in bulk when the prices are
lower and by holding its inventories for higher prices.

29
FACTORS DETERMINING THE WORKING CAPITAL

The working capital requirements of concern depend upon a large

number of factors such as

1. Nature of business:
The Working Capital requirements of a firm basically depend upon the nature of its
business. Public utility undertakings like Electricity, Water Supply and Railways need
very limited working capital because they offer cash sales only and supply services,
not products, and as such no funds are tied up in inventories and receivables. On the
other hand, trading and financial firms require less investment in fixed assets but have
to invest large amounts in current assets like inventories, receivables and cash; as such
they need large amount of working capital.

2. Size of business / Scale of operation:

The scale of operations directly influences the working capital requirements of

concern. Greater the size of a business unit, generally large will be the requirements
of working capital. However, in some cases even a smaller concern may need more
working capital due to high overhead charges, inefficient use of available sources and
other economic advantages of small size.

3. Production Policy:

In certain industries the demand is subject to wide fluctuations due to seasonal

variations. The requirements of working capital, in such cases, depend upon the
production policy. The production could be kept either steady by accumulating
inventories during slack periods with a view to meet high demand during the peak
seasons or the production could be curtailed during slack season and increased during
peak period. If the policy is to keep production steady by accumulating inventories it
will require higher working capital.

30
 4. Manufacturing process / Length of production cycle:

In manufacturing business, the requirements of working capital increases in direct

proportion to length of manufacturing process. Longer the process of manufacture,
larger is the amount of working capital required.

5. Credit Policy:

The credit policy of a concern in its dealing with debtors and creditors influence
considerably the requirement of working capital.A concern that purchases its
requirements on credit and sells its products / services on cash requirement lesser
amount of working capital. On the other hand, a concern buying its requirements for
cash and allowing credit to its customers, shall need larger amount of working capital
as very huge amount of funds are bound to be tied up in debtors of bills receivables.

Both credit policies of customer and vendor change from customer to customer and
from vendor to vendor depending on relation with company.

31
 CHAPTER 4

DATA
INTERPRETATIONS

32
 ANALYSIS OF OPERATING CYCLE

OPERATING CYCLE

In case of the Century Textile & Industries Limited, nearly

42% of the Current Assets consist of inventory. This is a major factor that affects the
Working Capital of this company. This leads to increase in maintenance costs,
carrying costs and storing costs. Inventory has been marginally decreased from Rs.
490.93 Lac in the year 2005-2006 to Rs. 474.37 Lac in the year 2006-2007.
Therefore, efficient management of inventory will lead to substantial savings in terms
of costs as well as the Working Capital required. In case of receivable management,
the collection period has decreased over a period of time, which signifies that the
company is providing lucrative credit facilities to their debtors. Thus, we can say that:

“It Is Easy To Turn Cash into Inventory…

Challenges Is To Turn Inventory Back To Cash.”

33
OPERATING CYCLE

The time lag between the purchases of raw materials and the collection
of cash for sales is referred to as the Operating Cycle for the company.

The time lag between the payment for raw materials purchases and the
collection of cash from sales is referred to as the Cash Cycle.

CALCULATION OF NET OPERATING CYCLE:

1) Raw Material Holding Period

Raw Material = Average Inventory * 365

Holding Period Annual Cost of Good Sold

Rs. In Lac

Particular 2014-15 2015-16 2016-17

Avg. Inventory 456.04 466.75 482.65

Cost of good sold 2218.99 2319.51 2518.45

Raw Material 75 days 73 days 70 days

Holding Period

34
 75
74
73
72
71 RM Holding
Period
70
69
68
67
2014-15 2015-16 2016-17

Interpretation:

The raw material holding period is showing decreasing trend as the average Inventory and
annual cost of goods sold is continuously increasing from the year 2014-15 to 2016-17 As
raw material holding period decreases, the requirement of working capital is low.

35
2) Finished Goods Holding Period

FG Holding Period = Average FG * 365

Sales

Rs. In Lac

Particular 2014-15 2015-16 2016-17

Avg. FG 108.78 102.41 101.35

Sales 2441.47 2578.27 3140.16

Finished Goods 16 Days 14 Days 12 Days

Holding Period

16

14

12

10

8
FG Holding Peiod
6

0
2014-15 2015-16 2016-17

36
 Interpretation:

The Finished goods holding period is inversely proportional to ratio average finished goods
to sales. So, when the finished goods cost decreases and sales increases then the finished
goods holding period will also decrease. As finished goods holding period increases, the
requirement of working capital is high.

3) Debtors Collection Period

Debtors Collection = Average Debtors * 365

Period Sales

Rs. In Lac

Particular 2014-15 2015-16 2016-17

Avg. Debtors 208.51 188.04 182.59

Sales 2789.12 2962.37 3506.31

Debtors Collection 27 Days 23 Days 19 Days

Period

37
 30

25

20

15 Receivable Holding
Period
10

0
2014-15 2015-16 2016-17

Interpretation:

Debtors Collection Period is inversely proportional to the sales. So, when sale will increase,
the receivable holding period will decrease. As debtors’ collection period decreases, the
requirement of working capital is low.

4) Gross Operating Cycle

Gross Operating Cycle = Raw Material Holding Period

+ Finished Goods Holding Period

+ Debtors Collection Period

38
 Particular 2014-15 2015-16 2016-17

Raw Material 75 Days 73 Days 70 Days

Holding Period

Finished Goods 16 Days 14 Days 12 Days

Holding Period

Debtors Collection 27 Days 23 Days 19 Days

Period

Gross Operating Cycle 118 Days 110 Days 101 Days

120

115

110

105
Gross Operating Cycle

100

95

90
2014-15 2015-16 2016-17

Interpretation:

The gross operating cycle is directly proportional to the Raw material holding period,
finished goods holding period and Receivables holding period. As the cost of goods sold and

39
sale increases, the Raw material holding period, finished goods holding period and
Receivables holding period decreases. As a result of that the gross operating cycle also
decreases. As gross operating period decreases, the requirement of working capital is low.

5) Payment Deferral (Creditors) Period

Creditors Period = Average Creditors * 365

Purchases

Particular 2014-15 2015-16 2016-17

Creditors Period 45 Days 45 Days 45Days

45

40

35

30

25

20 Creditors Period

15

10

0
2014-15 2015-16 2016-17

Interpretation:

The company’s creditor’s period is constant i.e. for the last three years i.e. from the year
2014-15 to 2016-17. As creditor’s period is constant, the requirement of working capital
will also remain same in all the three years.

40
6) Net Operating Cycle

Net Operating Cycle = Gross Operating Cycle – Creditors Period

Particular 2014-15 2015-16 2016-17

Gross Operating Cycle 118 Days 110 Days 101 Days

Creditors Period 45 Days 45 Days 45 Days

Net Operating Cycle 73 Days 65 Days 56 Days

80

70

60

50

40 Net Operating Cycle

30

20

10

0
2014-15 2015-16 2016-17

Interpretation:

The gross operating period will decrease by increase in cost of goods sold and sale. As a
result of that the Net Operating Cycle will decrease. As net operating cycle decreases, the
requirement of working capital is low.

41
 ANALYSIS OF NET WORKING CAPITAL

1) Current Assets:

Current Assets are which can be converted into cash within an accounting year.

Rs. In Lac

Particulars 2014-15 2015-16 2016-17

Inventories 442.56 490.93 474.37

Sundry Debtors 207.80 168.28 196.90

Cash & Bank Balance 31.09 38.35 139.19

Other CAs 3.74 4.41 6.03

Loans & Advances 200.05 313.61 319.46

Total 885.24 1015.58 1135.95

TABLE SHOWING THE PROPORTION OF CURRENT ASSETS

Particulars 2014-15 2015-16 2016-17

Inventories

Raw Material 17.28 16.84 11.28

WIP 8.41 6.43 5.70

Finished Goods 11.86 13.05 10.90

Others 12.45 12.01 13.88

42
Total Inventories 50 48.33 41.76

Sundry Debtors 23.47 16.57 17.33

Cash & Bank Balance 3.51 3.78 12.26

Other CAs 0.42 0.43 0.53

Loans & Advances 22.59 30.89 28.12

Total 100 100 100

100

Loans & Advances

80

Other CA
60

Cash & Bank Balance

40

Sundry Debtors
20

Inventory
0
2014-15 2015-16 2016-17

Interpretation:

 In the year 2014-15, the investment in inventories, work in progress, finished

goods, other inventories, sundry debtors, cash & bank balance, loans &
advances and in other current assets are 17.28%, 8.41%, 11.86%, 12.45%,
23.47%, 3.51%, 0.42% and 22.59% respectively.

 In the year 2015-16, there was increase in requirement of working capital

because there was increase in fluctuation in prices. Sundry debtors decreased
because cash was received within maturity period. Due to which cash and

43
 bank balance was also increased and advances recoverable in cash were also
increased.

 In the year 2016-17, there was increase in requirement of working capital

because there was increase in fluctuation in prices. Sundry debtors decreased
because cash was received within maturity period. Due to which cash and
bank balance was also increased and advances recoverable in cash were also
increased.

2) Current Liabilities:

Current Liabilities are those claims outsiders, which are expected to mature for
payment within an accounting year.

Rs. In Lac

Particular 2014-15 2015-16 2016-17

Liabilities 326.84 374.09 412.85

Provisions 66.54 122.09 176.17

Total 393.38 496.18 589.02

TABLE SHOWING THE PROPORTION OF CURRENT

LIABILITIES

Particular 2014-15 2015-16 2016-17

Sundry Creditors 78.54 71.07 68.94

Overdrawn Bank Balance as 1.40 1.38 0.39

per books

Proposed Dividend 6.74 6.42 00

44
Other Liabilities 13.32 21.13 30.67

Total Current Liabilities 100 100 100

100
90 Other Liabilities
80
70
60 Proposed Dividend

50
40
Overdrawn Bank Balance
30 as per books
20
10 Sundry Creditors
0
2014-15 2015-16 2016-17

Interpretation:

 In the year 2014-15, Sundry creditors, Overdrawn Bank Balance as per books,
proposed dividend and other liabilities were 78.54%, 1.40%, 6.74% and
13.32%.

 In the year 2015-16, Current liabilities increased as Sundry creditors and tax
provisions were increased due to increase in production.

 In the year 2016-17, Current liabilities increased as Sundry creditors and tax
provisions were increased due to increase in production.

45
CALCULATION OF NET WORKING CAPITAL OF SRK INDUSTRIES .

Net working capital refers to the difference between current assets and current
liabilities.

Net Working Capital = Current Assets – Current Liabilities

Rs. In Lac
Particulars 2014-15 2015-16 2016-17

A] Current Assets

Inventories 442.56 490.93 474.37

Sundry Debtors 207.80 168.28 196.90

Cash & Bank Balance 31.09 38.35 139.19

Other CAs 3.74 4.41 6.03

Loans & Advances 200.05 313.61 319.46

Total 885.24 1015.58 1135.95

B] Current Liabilities

Liabilities 326.84 374.09 412.85

Provisions 66.54 122.09 176.17

Total 393.38 496.18 589.02

C] Net WC 491.86 519.40 546.93

46
 550

540

530

520

510

500 Net Working Capital

490

480

470

460
2014-15 2015-16 2016-17

Interpretation:

 In the year 2014-15, net working capital were 491.86 Lac because Total
current assets were 885.24 Lac due to blockage in inventory and total
liabilities were 393.38 Lac.

 In the year 2015-16, net working capital has increased to 519.40 Lac
because total current assets have been increased to 1015.58 due to
blockage in inventory and total liabilities have also increased to 496.18
Lac.

 In the year 2016-17, net working capital has increased to 546.93 Lac
because total current assets have been increased to 1135.95 as in
composition of current assets, cash and bank balance are more and total
liabilities have also increased to 589.02 Lac.

47
COMPARISON BETWEEN SALES AND NET WORKING CAPITAL

Rs. In Lac
Year Sales Net Working Capital

2013-14 2253.52 487.52

2014-15 2441.47 491.86

2015-16 2578.27 519.40

2016-17 3140.16 546.93

4000

3500

3000

2500
Net Working Caital

2000

1500 Sales

1000

500

0
2013-14 2014-15 2015-16 2016-17

48
 Interpretation:

 In the year 2014-15, as sales increases net working capital requirement

also increases because investment in current assets increases in that
blockage in inventories are more than others.

 In the year 2015-16, as sales increases net working capital requirement

also increases because investment in current assets increases in that
blockage in inventory are more than others.

 In the year 2016-17, as sales increases net working capital requirement

also increases because investment in current assets increases in that cash
and bank balance is more than others.

COMPARISON BETWEEN PROPORTION SALES AND NET WORKING

CAPITAL

Year Increase in sales (%) Increase in net working

capital (%)

2014-15 8.34 0.89

2015-16 5.6 5.6

2016-17 21.79 5.3

49
Interpretation:

 Proportion of increase in sales from year 2014-15 was 8.34% and increase
in net working capital was 0.89%. This is a good sign for the company as
increase in sales is more as compared to increase in working capital.

 In the year 2015-16, there is decrease in sales 5.6% but increase in net
working capital by 5.6% which is not a good sign.

 In the year 2016-17, there is increase in sales by 21.79% but decrease in

net working capital by 5.3% which is a good sign for the company because
there are less funds blocked in the current year.

COMPARISON BETWEEN OPERATING CYCLE AND NET WORKING

CAPITAL
Year Operating Cycle (Days) Net Working Capital
(Lac)
2014-15 73 491.86

2015-16 65 519.40

2016-17 56 546.93

Interpretation:

 In the year 2014-15 operating cycle was 73 days and net working capital was
491.86 Lac as working capital was used more efficiently .
 In the year 2015-16, operating cycle decreased to 65 days and net working
capital increased to 519.40 Lac . This is because there is hike in prices in raw
material that resulted into increase in working capital requirement.
 In the year 2016-17, operating cycle again decreased to 56 days and net
working capital is increased to 546.93 Lac. This is because there is hike in
prices in raw material that resulted into increase in working capital
requirement.

50
 ANALYSIS OF WORKING CAPITAL WITH RATIOS

In financial statements, there are some limitations. There is need of analyzing

interpretation of financial statements. This is necessary to find out realistic picture of business
and to analyze the business from various angles like liquidity, profitability, solvency etc. The
most important objective of analysis and interpretation of financial statements are to
understand the strength and weakness of a business firm so as to facilitate the future prospect
of the business firm.
Financial ratio indicates about the financial position of the company. A
company is deemed to be financially sound if it is in position to carry on its business
smoothly and meet the obligations, both short term as well as long term requirement of funds.
Ratio analysis techniques are of great help in analyzing the efficiency of financial operations.
It gives at a glance comparative study of the firm of various years.
This ratio is very useful in inert-firm and intra-firm comparison. Accounting
ratios are of great assistance in locating the weak spot in the business. Ratio analysis of
working capital helps the management in checking upon the efficiency with which the
working capital is being used in business. The analysis of working capital can be done with
the help of following ratios:
1) Current Ratio
2) Acid Test Ratio
3) Working Capital Turnover Ratio
4) Inventory Turnover Ratio
5) Debtors Turnover Ratio
6) Creditors Turnover Ratio
7) Operating Profit Margin Ratio

1) Current Ratio:

This is a current asset to current liabilities ratio. A higher current assets ratio indicates
that there are sufficient assets available with the organization, which can be converted
in the form of Cash. As such higher is the current ratio, better is the situation. A
current ratio of 2:1 is supposed to be ideal.
51
 CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITIES

Rs. In Lac

Year Current Assets Current Liabilities Ratio

2014-15 885.24 393.38 2.25:1

2015-16 1015.58 496.18 2.05:1

2016-17 1135.95 589.02 1.93:1

2.25
2.2
2.15
2.1
2.05
2
Current Ratio
1.95
1.9
1.85
1.8
1.75

Interpretation:

Ideally 2:1 is considered satisfactory. Srk industries ratios are 2.25, 2.05 and 1.93 for
the year 2014-15 to 2016-17 respectively. It is not considered as benchmark as it
differs from industry to industry. Based on industry standard, Srk industries’s current
ratio is below 2. It indicates current liabilities have increase more than the increase in
current assets.

52
 2) Acid Test Ratio:

This is also known as Quick Ratio. When paying capacity of assets of a going concern
is to be tested for their ability to meet short – term obligation. Standard ratio is 1:1.

Acid Test Ratio = Quick Assets

Current Liabilities

Quick Assets = Current Assets – Inventories

Rs. In Lac

Year Current Inventories Quick Current Ratio

Assets Assets Liabilities

2014-15 885.24 442.56 442.68 393.38 1.13:1

2015-16 1015.58 490.93 524.31 496.18 1.06:1

2016-17 1135.95 474.37 661.58 589.02 1.12:1

1.14

1.12

1.1

1.08
Acid Test Ratio

1.06

1.04

1.02
2014-15 2015-16 2016-17

53
 Interpretation:

This ratio should ideally be 1:1. When the ratio goes below 1, it is a danger sign. So,
this ratio must be minimum 1. Above table shows company’s Quick assets are
sufficient to meet its current liabilities. In the year 2014-15 has decreased to 1.06 but
in the year 2016-17, it has increased to 1.12.

3) Working Capital Turnover Ratio:

This is a sale to working capital ratio. The turnover ratio should be stable if not
increasing over time. On the contrary if it is falling, it indicates longer build up
current assets or fall in level of current liabilities or both. Whatever may be the
reason, the demand for fund will rise, the non – availability of which may lead to
default in payment.

Working Capital = Net Sales

Turnover Ratio
Net working capital

Rs. In Lac
Year Current Current Net Net Sales Ratio
Assets Liabilities Working
Capital
2014-15 885.24 393.38 491.86 2441.47 4.96

2015-16 1015.58 496.18 519.40 2578.27 4.96

2016-17 1135.95 589.02 546.93 3140.16 5.74

54
 5.8

5.6

5.4

5.2
Working Capital
5 Turnover Ratio

4.8

4.6

4.4
2014-15 2015-16 2016-17

Interpretation:

It indicates how efficiently the company is employing its working capital. A

higher working capital turnover indicates that with less working capital, company
is able to sell more. In Srk industries this ratio was 4.96 in 2014-15 and now for
the year 2016-17 it is 5.74. It clearly indicates better utilization of working
capital.

55
 4) Inventory Turnover Ratio:

This indicates many times finished goods stock is moving. Lower ratio indicates
less demand for finished goods and vice – versa.

Inventory Turnover = Cost of goods sold

Ratio
Average Stock

Average Stock = Opening Stock + Closing Stock

Rs. In Lac
Year Cost of Opening Closing Average Ratio
goods sold Stock Stock Stock

2014-15 2219.69 469.52 442.56 456.04 4.87

2015-16 2303.60 442.56 490.93 466.75 4.94

2016-17 2518.45 490.93 474.37 482.65 5.22

56
 5.3

5.2

5.1

Inventory Turnover Ratio

4.9

4.8

4.7

4.6
2014-15 2015-16 2016-17

Interpretation:

This ratio display efficiency of the firm in selling its products. SRK Industries.
Inventory turnover ratio was 4.87 in 2011-12 and now in 2013-14, it s 5.22, which is
good sign and has directly contributed to the profitability of the firm, which is
reflected in improved profit margins.

5) Debtors Turnover Ratio

This is a sale to debtor’s ratio. If sales are regarded as the growth variable of a
business, receivable is the first constraints to such variable. Hence, high debtor’s
turnover ratio indicates less percentage of debtors.

Debtors Turnover Ratio = Sales

Debtors

57
 Rs. In Lac
Year Sales Debtors Ratio

2014-15 2789.12 207.80 13.42

2015-16 2962.37 168.28 17.60

2016-17 3506.31 196.90 17.81

18

16

14

12

10
Debtors Turnover
8 Ratio

0
2014-15 2015-16 2016-17

Interpretation:

Every company sells goods on credit. The credit period may differ from debtor to
debtor. This ratio indicates how many days credit is given to debtors. Higher ratio
indicates efficiency in collection from debtors. Srk industries Debtors turnover
ratio shows increasing trends which indicate that the company has been able to
collect its debtors faster.

58
 6) Creditors Turnover Ratio:

The measurement of the creditor turnover period shows the average time taken to
pay for goods and services purchases by the company. In general the longer the
period achieved the better because a delay in payment means that supplier, which,
if they are operating in a seller’s market, may harm the company, is financing the
operation of the company. If too longer period is taken to pay creditors, the credit
rating of the company may suffer. Thereby making it more difficult to obtain
suppliers in future.

Creditors Turnover Ratio = Credit Purchases

Creditors

Rs. In Lac
Year Purchases Creditors Ratio

2014-15 567.68 308.99 1.83

2015-16 600.58 352.63 1.70

2016-17 606.70 406.09 1.50

59
 2
1.8
1.6
1.4
1.2
1
Creditors Turnover Ratio
0.8
0.6
0.4
0.2
0
2014-15 2015-16 2016-17

Interpretation:

This ratio shows the speed with which payments are made to the suppliers for
purchases made to them. Srk industries creditors’ turnover ratio is decreased from
1.83 to 1.50 in 2016-17. It means that the trade creditors are being paid promptly.

7) Operating Profit Margin Ratio:

This ratio shows what is profit margin. It is calculated to divide EBIT by Sales.
EBIT stands for Earning before Interest and Tax.

Operating Profit Margin Ratio = EBIT

Sales

60
 Rs. In Lac
Year EBIT Sales Ratio

2014-15 177.92 2789.12 0.06

2015-16 244.69 2962.37 0.08

2016-17 421.56 3506.31 0.12

0.1

0.09

0.08

0.07

0.06

0.05
Profit Margin Ratio
0.04

0.03

0.02

0.01

0
2014-15 2015-16 2016-17

Interpretation:

This ratio shows what the ratio of EBIT on sales is. In Srk industries operating
profit margin ratios are 0.05, 0.07 and 0.10 for the year 2014-15 to 2016-17
respectively. As current assets increases, working capital requirement also
increases. Moreover sales increases, the operating profit margin ratio also
increases. Also current assets of the company were sourced from short term funds,
so risk increased and as a result profit margin also increased.

61
 FINANCING PATTERN

The basic objective of working capital management is that there should be an

optimum investment in working capital. There should not be either excessive working
capital or shortage of working capital. In order to decide the optimum investment in
working capital, there is need to consider different policies of working capital. The
different policies are:

There are three broad policy options i.e.

a) Conservative current assets financing policy

b) An aggressive current asset financing policy
c) Moderate current assets financing policy

In conservative current asset financing policy, a firm relies more on

long term financing such as shares, debentures, preference shares, long term debt and
retained earnings. In this method, as the emphasis is on long term financing, the firm
has less risk of facing problems of shortage of funds.

An aggressive policy is said to be followed by a firm, when it relies

heavily on short term bank financing and other short term sources. Even some part of
fixed assets is financed by short term funds. The policy exposes the firm to a higher
degree of risk but reduces the average cost of financing. Consecutive current assets
financing policy reduces the risk but has a higher cost of financing.

There is one more way which is called as hedging approach. In this

approach long term sources are used for financing fixed assets and permanent current
assets while short term funds are funds used for financing temporary or variable
current assets. However exact matching is not possible because of the uncertainty
about the expected lives of the assets. The different approaches explained above are
shown in the following diagrams.

62
 Short term

Aggressive funds

Approach

Permanent CA

Long term

Fixed Assets funds

Time

Short term

Funds

Conservative

Approach

Permanent CA

Long term

Fixed Assets funds

Time

63
 Short term

Funds

Hedging

Approach

Permanent CA

Long term

Fixed Assets funds

Time

64
 TABLE SHOWING PROPORTION OF SHORT TERM AND LONG TERM
FUNDS

Rs. In Lac

Year 2014-15 2015-16 2016-17

Current Assets 885.24 1015.58 1135.95

Current Liabilities 393.38 496.18 589.02

Long term funds 491.86 519.40 546.93

Long term funds (%) 55.56% 51.14% 48.15%

Short term funds (%) 44.44% 48.86% 51.85%

Interpretation:

 In 2014-15, company followed conservative policy as current assets were

sourced from long term funds.

 In 2015-16, company followed conservative policy as current assets were

sourced from long term funds.

 In 2016-17, company followed aggressive policy as current assets were

sourced from short term funds.

65
CHAPTER 5

FINDINGS

66
5.1 Findings

1) FACTORS AFFECTING WORKING CAPITAL

 The working capital requirement of the company is mainly affected by size of

the company.
 Working capital requirement of Srk industries has increased every year
because of there was hike in prices.
 The major element of working capital of the company is debtors, creditors and
stock.

2) OPERATING CYCLE

 The NET OPERATING PERIOD is showing decreasing trend.

 The optimum utilization of inventory Reduces the average inventory cost, and
optimum sales will Increase the annual cost of goods sold, which reduces the cost of
holding goods.

 The net operating cycle is continuously decreasing but the requirement of net working
capital increasing as there was hike in prices.

3) WORKING CAPITAL WITH ITS RATIOS

 The working capital requirement of the company is showing increasing trend.

 Based on industry standard, Srk industries current ratio is below 2. It indicates

current liabilities have increase more than the increase in current assets.

 Srk industries is maintaining quick ratio greater than 1. Hence, the short –
term liquidity position of company is strong. It indicates good repayment
capacity of current liabilities. Company is investing more amounts in Liquid
assets, thus improving its short – term liquidity position.

 A higher working capital turnover indicates that with less working capital,
company is able to sell more.

67
4) FINANCING PATTERN

 The company follows aggressive policy as current assets were sourced from
short term funds which helped to increase in profit.

68
5.2 SUGGESTIONS
 The company should try to keep the net operating cycle period low by
minimizing raw material holding period, finished goods holding period and
debtors turnover ratio.

 Currently, Current Ratio of Srk industries is 1.93 which is as good as standard.

Company should take measures so that its Current Ratio is maintained and it’s
not too below from standard by increasing current assets.

 Srk industries has its quick ratio more than standard ratio. This is because
current assets have increased so company should try to reduce inventories.

 Srk industries used aggressive policy, so company is earning more profit at the
cost of higher risk. So company should be cautious while taking risk.

69
5.3 CONCLUSION

Thus, to conclude through the project study it is clear that

management of working capital is an essential task of financial management. The
management must be such that company should not have excessive funds, which
may be lying idle, nor should it have fewer funds, which may result in bottleneck
during production. Thus, it is the duty of Finance Department to estimate proper
working capital requirements in the organizations and utilize the funds in the best
optimal manner.

Thus it can be stated that management of working capital could

enable the organization to reap the benefits as and when they come and thus, also
enable the organization to consolidate its position in the market.

A good working capital management would improve the

organization’s sales, profit, and liquidity position and mind share of the
consumers.

70
5.4 Bibliography

Ref Books:

 Research Methodology- R.C. Kothari.

 Research Methods In Business- Dhruv Shah, Rupal Jain.
 Research Methodology- Michal Vaz, Madhu Nair.
 Financial Management – Prasanna Chandra.

Journals:

 CAMS Journal of Business Studies and Research ISSN : 0975-7953 July-

September
 Asian Journal of Management Research Volume 4 Issue 2, 2014
 International Journal of Economics and Financial Issues, Vol. 2, No. 4, 2012,
pp.488-495
 Proceedings of the 3rd International Conference on Management and
Economics (ICME 2014)

Annual Reports:

 SRK industries Annual Report from 2015-16 to 2016-17

Websites:

 www.google.com
 www.wikipedia.com
 www.fm-magazine.com
 www.accountingtools.com
 www.varshagroup.net

71