Introduction

Working capital management is very important as it deals with the

success of every business. Study of working capital is very much important

as it helps in internal and external analysis because of its close relationship

to day-to-day activities of the business. Mismanagement of the working

capital leads to the business failure.

Working capital is reflected by the fact that financial manager spends more

of his time in managing current liabilities. Arranging short term finance,

negotiating favorable credit terms, controlling the movement of cash,

administration of the accounts receivable etc consumes a great deal of there

time. Its alert administration will help in solving the problems of efficient

working capital management

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 Statement of the problem

This project is conducted to study the various problem faced by business

firms in the management of the working capital. For this purpose I have

selected Hilton motors. The company makes profit through number of years.

While estimating the financial needs for working capital purpose in addition

to those factors that influence the magnitude of working capital the finance

manager have to look up on those components of working capital such as

cash, accounts receivables, inventory and accounts payable since the

efficiency management of working capital depends on the efficiency in the

administration of these components.

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 Significance of the study

The prime importance of the study are:-

• To know the performance of the working capital of Hilton motors

• To know the funds of working capital

• To know the effective utilization of the funds

• To find the problems in the working capital management

• To make solutions for the problems

• To maximize the profit and maintain liquidity in the business

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 Objectives of the study

The study has been undertaken with the following objectives.

• To study the pattern of working capital in Hilton motors

• To analyze the cash management in Hilton

• To analyze the receivable management

• To make suitable suggestions on the basis of the findings and study

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 Methodology

Both secondary and primary data are used for the study. Secondary data

have been obtained from annul reports and other published documents of the

company. Beside information has been collected from various books and

journals connected with the subject. Primary data have been collected from

the final records of the company and through interviews with the officials of

the company.

• Tools of study

For analyzing data ratio analysis has been used

• Period of study

The period of study was one month

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 LIMITATIONS OF THE STUDY

• Findings and suggestions are based on the information given on the

annul reports of the company and are valid only with the figures there

in.

• More over investigator being a student was unable to do a through

study of working capital management due to limited time period.

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 SCHEME OF REPORTING

The report consists of six chapters. The first chapter is an introduction of the

study along with statement of problem, significance of study, objective,

methodology, limitation.

The second chapter consist a brief description of Hilton motors Pvt ltd.

Company history. Its product details plant layout and plant location and a

brief view on financial department and its function and its organization

structure.

Third chapter deals with the detailed study of working capital management

and its effective role in Hilton motors Pvt ltd. Also gives brief theoretical

framework of all ratio related working capital.

Fourth chapter consist of analysis and interpretation of all ratio related

working capital management of Hilton motors.

Fifth chapter consist of the study of computer software used in Hilton

motors for working capital management.

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Sixth chapter deals with my findings, conclusion, suggestions,

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PLANT LAYOUT

The atmosphere of the company is good. A well furnished showroom and

service centre are open to the customers. At there due consideration is given

to the interior decoration. A well organized set up is provided to the

customers to avoid delay in getting the service.

The show room and service centre is outstanding on because of

1. interior decoration

2. charming face of employees

3. speedy handing of customers

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 4. retailed explanation and corporation of executives

5. hospitality

6. delivery at promising time

7. availability of spare parts

8. lighting facilities

Finance department

As the study is mainly concerned with the working capital management at

Hilton motors the more emphasis is given to financial aspect of the

company. Finance is concerned as the life blood of business firm. Finance is

the basic foundation of all kind of economic activities, which is concerned

with the acquisitions and conservation of capital funds and over all

objectives of business firms

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 FUNCTIONS OF FINANCE DEPARTMENT

• To ensure prompt payment of wages to the employees

• To make all strategy payments to sales tax, income tax etc..

• To receive all income due to the company in time.

• To record all the transactions as per the relevant acts, and to

extract trial

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 • Balance, profit and loss account and balance sheet at time.

• To make proper cash planning and to prepare cash flow

statement.

Working capital concept

The working of enterprises requires funds for producing various fixed assets

and for managing day-to-day activities. Funds invested in fixed assets are

permanent in nature and are used for acquisition of plant and machinery,

building, diversification renovation, research and development.

Working capital actually refers to the part of total capital which is available

and used for carrying out the outline of regular business operations. Thus the

capital required for the purchase of raw materials, payment of direct and

indirect expenses, carrying out production, investment in stock and stores,

receivable are to maintain in the form of cash is generally known as

Working Capital.

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Working capital is also known as circulating capital or revolving capital.

This is because working capital is invested, recovered and reinvested

repeatedly during the life time of the concern

Definition

1. “Working Capital is the amount of funds necessary to cover the cost

of operating the enterprise. Working Capital a going concern is an

involving fund. It consists of each receipt from sale which is used to

cover current operation”. Shubin

2. “Working Capital is the excess of current assets over current

liability”. Henry. G. Guttmann & Herblrt. E. Doug all

3. “Working Capital means current assets “. Mean Baker Malot

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 “Working Capital refers to the firm’s investments in short term assets,

cash, short term securities, accounts receivables, and inventories”. Weston

& Brigham

Concept

There are two concepts of Working Capital. Gross concept and Net

concept

1. Gross working capital concept

This is simply called as working capital, which refers to the firms, total

investments in current assets. Current assets are those assets which can be

converted into cash within as a king year and include cash, short term

securities, debtors, bills receivables and stock.

2. Net Working capital

This refers to the difference between the current assets and current

liabilities. Current liabilities are those claims of outsiders which are

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 expected to mature for payment with in an accounting year. Net working

capital can be positive or negative. A positive working capital arises when

current assets exceed current liability. Negative working capital arises

when current liability is excess of current assets.

Classification of working capital

Working capital can be classified into:

• Fixed working capital

• Variable working capital

• Fixed working capital

The need of current capital arises because of the operating cycle. The

magnitude of current asset is needed is not always same, it increases or

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 decreases over time. However, there is always a minimum level of

current asset which is contentiously required by the firm to carry on its

business operation. This amount of current assets is refused as fixed or

permanent working capital. It is again sub divided into two.

Regular working capital

Reserve margin caution working capital

• Variable working capital

The extra working capital needed to support the changing production

and sales activities or the portion of working capital which fluctuate in

turn with the business activities is called variable working capital. It is

again sub divided into two.

Seasonal working capital

Special working capital

Approaches for financing working capital

A firm can adopt different financing policies vis a vis current assets.

This type of financing may be distinguished as:

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 a. Long term

b. Short term

c. Spontaneous financing

The important sources of long term ,financing are equity shares

,debentures, preference shares, retained earnings, and long term

debt from financial institutions.

The short term financing refers to those sources of short term credit

that the firm must arrange in advance. These sources includes short

term loans, commercial papers factory recoverable and public

deposits.

The spontaneous financing refers to atomic sources of short term

funds arising in the normal course of business. The major sources of

such financing are trade creditors , bills payable and outstanding

expense. Spontaneous sources of finance are cost free. Therefore a

firm would like to finance its current assets with spontaneous

sources as much as possible. Every firm is expected to utilize

spontaneous source to the full extent. Thus ,the real choice of

financing current asset (not financial with spontaneous sources) is

between short term versus long term financing depending on the

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 mix of short term and long term financing the approach followed by

company may referred to as:

a. Matching (hedging) approach

b. Conservative approach

c. Aggressive approach

a. Matching approach

The form can adopt a financial plan, which matches the expected life

with the expected life of funds revised to finance assets or otherwise

the malicity of source of funds should be matched with the life of the

assets to be finance. In the matching approach long term financing will

be used to finance fixed assets and permanent current assets short term

financing will be used to finance temporary or variable current asset.

However it should be realized that exact matching is not possible

because of the uncertainty he expected life of the asset.

b.Conservative approach

The financing policy of the form is said to be conservative when it

depends more on long term funds for financing needs. Under a

conservative plan, the firm finance its permanent assets and also a part

of temporary current assets with long term financing. In the period

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 when the firm has no need for temporary current asset the idle long term

fund can be invested in tradable securities to conserve liquidity. The

conservative plan relies heavily on long term financing and therefore,

the firm has less risk of facing the problem of shortage of funds.

c. Aggressive approach

a firm may be aggressive in financing its assets. An aggressive policy

is said to be followed by the firm when of uses more short term

financing plans warranted by the matching plan. Under an aggressive

policy , the firm finances a part of its permanent current assets with

term financing. Some extremely aggressive firm may even finance a

part of fixed assets with short term financing. The relatively more use

of short term financing make. The firm more risky and there by high

profitability.

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 Principle of working capital management

• Principles of optimization

According to this principle, the financial arrangements must aim

at selecting the levels of working capital that optimize the firm’s

rate of returns. The financial manager can determine the optimum

working capital after analyzing the factors which determine the

amount of working capital

• Principle of investment in working capital

According to this principle, the amount of working capital

invested in each component should be adequately justified by a

forms equity position. Every rupee invested in the working

capital should contribute to the net worth of the firm

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 • Principle of suitability

Principle of suitability should be followed while financing different

components of working capital. Temporary working capital should

be financed short term borrowings and permanent is financed out of

long term source.

Determinants of working capital

The factors which determine the working capital requirements of a

company are:

• Nature of the business

It is the basic factor which influence the working capitals needs of a

firm because money has to be invested in the fixed as well as

current assets. In huge industries huge sum are invested in fixed

capital but in case of consumer industries the working capital

requirements is higher than public utilities

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 • Size of the business

Another factor for the determinants of the working capital is the size

of the business and scale of operation. If the scale and size of

operation is higher, the working capital requirement is higher.

• Manufacturing cycle

If the manufacturing cycle is large the firm will require more

working capital. If there are different methods to manufacture a

product, the method with shortest manufacturing cycle should be

chosen

• Business fluctuations

In case of most of the product there will be seasonal and cyclical

fluctuations. The variation will affect the working capital

requirements of the company. During the boom period the firm

requires large amount of fixed and working capital but during the

depression period the amount of working capital requirement is

lower

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 • Production policy

The production policy affects the requirement of the working capital

of the firm. A steady production policy will cause inventories to

accumulate during off season period and the firm will be exposed to

the greater inventory cost and risk. Under such circumstances the

firm will arrange its production schedule in accordance with change

inclined for its production.

• Credit policy

Credit policy stands for credit offered customers. The finance

manager can determine the collection period of such debtors. But if

the average collection period is more than the predetermined

collection period a substantiate part of the working capital remains

idle which may affect the production capacity of the firm.

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 • Availability of credits

The working capital requirements of a firm are also affected by

credit terms granted by its creditors. A firm will need less working

capital if liberal credit terms are available to it.

• Expansion

The working capital needs of affirm increases as grows in term of

sales, fixed asset, etc… a growing concern needs fund for

investment in fixed assets in order to increase the production

capacity and sails which will increase the working capital

requirement

• Profit margin and profit appropriation

If the net profit increases year after year then the working capital

will also increase because net profit is a source of fund of firm. The

depreciation policy of the firm will decrease the net profit of the

firm which reduces the tax liability of the firm. Depreciation is the

indirect method of retaining profit and pressuring the firm’s

working capital position.

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 • Price level change

Usually rising price level will require affirm to make higher amount

of working capital. The same level of current asset will increase the

investment when price are moving upwards. If the company is in

apposition to reverse the price of its product at the time of its

increase of price of raw materials etc.

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 Sources of working capital

1. long term sources

2. short term sources

1. long term sources

The long term source of working capital financing involves issue

of shares, issue of debentures, retained profits, sales of fixed

assets, securities from employees’ customers and term loans

• issue of shares

It is the most important source of long term regular working

capital. As far as possible efforts should be made to procure

more amount of regular working capital out of the proceeding of

issue of shares.

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 • Issue of debentures

Regular working capital can be raised by the issue of debentures or

bonds. The cost of capital is lower in this issue. By issuing

debentures a company can enjoy trade equity, retention of control,

tax benefit.

• Retained profit

Part of the profit is re invested in the business with out paying

dividend to paying fewer dividends. It is an important source of

internal finance.

• Sales of fixed assets

If there is any idle fixed asset in the firm it can be sold out and the

proceeds may be utilized for financing the working capital

requirements

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 • Term loans

Under an agreement bank advances mid term and long term loan for

3-7 years repayable in early or half yearly installments. Banks

provide credit on the basis of the following modes of security such

as hypothecation, pledge, lone etc..

• Security from employees and customers

Certain companies require security deposits from there employees

before giving them employment and from there regular customers

under the terms of service contract. The security deposits are not re

fundable during the period the employee is in service of the firm of

the customer is registered with it.

2. source of short term working capital

Short term financing refers to those short term credit that the

firm must arrange in advance. This may be classified into two

namely

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 • Internal sources: means sources of funds from inside the firms.

Internal source includes, depreciation funds, provision for

taxation , accrued expenses

• External sources: means sources of funds from out side the

firm. it includes normal trade , bank credit, lone from managing

directors , customers credit, government assistance, public

deposits

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 Advantages of adequate working capital

Adequacy of working capital is lifeblood and controlling nerve

center of a business. Inadequate as well as reluctant working capital

is dangerous for the health of the industries. The advantages of

adequate working capital may be as follows:

• It creates a feeling of security and confidence c

• Cash discounts

• Increases production efficiency

• Exploitation of good opportunity

• Sound goodwill and debt capacity

• Meeting unseen contingencies

• High morale

• Distribution of dividend

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 • It increases fixed assets efficiency

• Easy loans from the bank

• Distribution of dividend

Dangers of inadequate working capital

A firm has to face the following adverse consequences from the

in adequate working capital. It stagnates growth it becomes

difficult for the firms to undertake firms to undertake projects for

the non availability of working capital funds.

1. It becomes difficult to implement operating plans and achieve the

firms profit target.

2. It stagnates growth. It becomes difficult for the firm to undertake

profitable projects due to non availability of working capital funds.

3. Paucity of working capital funds disable the firm to avail attractive

credit opportunities etc.

4. The firm losses its reputation when it is not in a position to honour

its short term obligations.

5. Fixed assistance not efficiently utilized due to lack of working

capital funds. thus the firms profitability will deteoroirate.

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 6. Operating inefficiencies creep in when it becomes difficult to meet

day to day commitments.

An enlightened management should therefore , maintain a right amount

of working capital on a continuous basis – only then a proper functioning of

business operations will be ensured. Sound financial and statistical

techniques supported by judgement , should be used to predict the quantum

of working capital needed at different time period.

Danger of redundant or excess working capital

The redundant or excess working capital results in idle funds,which do not

earn any return from the firm. The excessive working capital may pose the

following dangers:

1. It will lead to imbalance between liquidity and profitability.

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2. The excess of working capital may lead to carelessness about the cost of

production.

3.A firm may be tended to one trade and lose heavily.

4.The situation will lead to unnecessary purchase and accumulation of

inventory. So there will be chance of theft , wastage loss etc.

The firm should maintain a sound working capital position. It

should or have adequate working capital to run its business operations. Both

excessive as well as inadequate working capital position are dangerous from

the firms point of view.

Theoretical frame work of ratio

Current ratio

Current ratio may be defined as the relationship between current

assets and current liabilities. The ratio is also known as working capital

ratio. It is measure of general liquidity and is most widely used to make

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 the analysis of short term financial position or liquidity of a firm. It is

calculated by dividing the total of current assets by current liabilities.

Quick ratio

Quick ratio is also known as acid test ratio or liquid ratio is more

rigorous test of liquidity then the current ratio. The term liquidity refers

to the ability of firm of the firm to pay its short obligations as and when

they become due quick ratio may be defined as the relationship

between quick assets and current liabilities. The quick ratio can be

calculated by dividing the total of quick assets by current liabilities.

Sometimes bank over draft is not included in

current liabilities while calculating quick or acid test ratio on the

argument that bank over draft is generally permanenet way of

financing and is not subject to be called on demand. In such cases

quick ratio is found out by dividing the total asset by quick liability.

Gross working capital to fixed assets

The working capital to the fixed assets measures the level of

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 liquidity of the firm. The firm is said to follow a conservative policy

when the ratio is high as liquidity as is high while risk and profitability

are low.

Gross working capital ratio to sales ratio

The ratio in the case the amount of working capital employed per

rupee of sales. A higher ratio indicates higher liquidity but lower

profitability and risk.

Net working capital to net worth ratio

The purpose of net working capital to net worth ratio is to show

the proportions of proprietor’s funds investment in net working capital

to net worth ratio is high, it indicates that the company is in a better

solvency position.

Cash ratio

Although receivables debtors and bills receivables are generally

more liquid than inventors. Yet there may be doubts regarding there

realization into cash immediately or in time. Hence some authorities

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 are of opinion that the absolute liquid ratio should be calculated

together with current ratio and acid test ratio so as to exclude even

receivable from the current assets and find out absolute liquid assets.

Inventory or stock turnover ratio

Every firm has to maintain a certain level of finished goods so as

to meet the requirements of business but the level of inventory should

be never too high nor too low. It is harmful to more inventories for the

following reasons:

1.It unnecessarily block capital which can otherwise be

profitabily used somewhere else.

2.Over stocking will require more godown space, so more rent

will be paid.

3.There are chances of obsolescence of stocks, consumers will

prefer goods of latest design etc.

4.There are chance of deterioration in quality of stocks are held

for more period.

It will be advisable to dispose of inventory as early as possible. So

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 on the other hand too low inventory means loss of business

opportunities. Thus it is very essential to keep sufficient stock in the

business.

Inventory turnover ratio also known as stock velocity ratio

is calculated by dividing sales by inventory.

Inventory to sales ratio

The ratio is calculated by dividing total inventory by sales for

the period. The ratio explains the variation in the level of

investment with the volume of sales.

Inventory to current assets ratio

The inventory to current asset ratio is an important ratio which

indicates amount of inventory per rupee of current asset invested. The

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 ratio indicates the state of liquidity position of current assets.

Debtors turnover ratio and average collection

period

A concern may sell goods on cash as well as credit. Credit

is one of the important elements of sales promotion. The volume of

sales can be increased by following a credit policy but the effect of

liberal credit policy may result in tying up substantial funds of firm in

the form of trade debtor (or receivables). The trade debtors are

expected to be converted into liquidity position of a concern to pay a

short term obligation in time depend upon the quality of trade debtors.

a. Debtors /receivable turnover or debtors

velocity
Debtors turnover indicates the velocity of debt collection of the

firm. In other words it indicates the number of lines average debtors

(receivable) are turned over during a year.

When the informing regarding the opening and closing

balance of the trade debtor and credit sales are not available then

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 debtors turnover ratio can be calculated by .

b.the average collection period

The average collection period of days which the firm has to wait

before it receivable are converted into cash.

c. creditors payable turnover ratio

In course of business operations , as firm has to make credit

purchase and enquire short term liability. The supplier of goods

creditors is naturally interested in finding out how much time the

firm takes in repaying the trade credit the analysis of creditors

turnover ratio is basically as that of debtors over ratio except that

the place of trade debtors trade creditors are taken as one of the

components and the place of average daily sales, average daily

purchase are taken as the other component of ratio.

If the information about credit purchase is not available the figure of

total purchase may be taken as a numerator and if the creditors

given may be taken as find out the ratio. Trade creditors may

include sundry creditors and bills payable. The ratio indicates the

velocity of debt payment by the firm.

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 Average payment period ratio

The ratio gives the average credit period enjoy from the creditor.

Cash to working capital ratio

The ratio indicates amount of cash employed per rupee of working

capital. In other words cash to working capital indicates the cash

investment required for every rupee of working capital contributed.

Cash to sales ratio

The growth in sales is greatly accompanied by large cash and bank

balance. there exist a positive correlation between sales and cash

holdings. It means that as the sales increase the cash balance also

increases and vice versa.

Debt-equity ratio

Debt –equity ratio also known as external equity ratio is calculated

to measure the relative claims of outsiders and the owner’s against

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 the firms assets. The ratio indicates the relationship between the

external equity and the outsiders fund and internal equity all the

share holders fund. Debt –equity ratio is the ratio between outsiders

fund and share holder fund. Two basic components of the ratio are

outsiders fund(external equity) and share holders fund(internal

equity).

Profitability ratio

The following ratios are known as great profitability ratios:

1.gross profit ratio

2.net profit ratio

Gross profit ratio
Gross profit measures the relationship of gross profit to net sales.

And usually represented as a percentage. Thus it is calculated by

dividing gross profit by sales.

Net profit ratio

Net profit ratio establishes a relationship between net profit

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 (after tax) and sales and indicates the efficiency of management

in manufacturing selling administrating and other activities of

the firm.

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 Current ratio of Hercules automobiles
pvt.ltd.

year Current asset Current ratio

liabilities
2006
2007
2008
2009

The Current ratio may be used to reveal how well a firm could meet a

sudden demand to pay off its short term creditors. It is otherwise

known as working capital ratio and is used extensively for its practical

significance.

The ratio of 2:1 is considered ideal. The ratio is more useful

as an indication of the trend of the company’s working capital

Management over a period of time. It also provides future information

on companies liquidity position.

A relatively high ratio is an indication that the firm

is liquid and has the ability to pay its current obligation in time and

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 when they become due. On the other hand a relatively low current ratio

indicates that the liquidity position of firm is not good and the firm

shall not be able to pay its current liabilities in time.

It is revealed from the table that

ratio of current assets over current liability of Hercules automobiles

shows something extraordinary. The ratio of current assets to current

liability in 2006 was 2.29:1 and a sudden increase in 2007 that is

13.28:1 and a decrease in the years 2008 and 2009 i.e,7.97:1 and 5.11:1

respectively. The ratio of current assets to current liabilities indicates

the investment in current assets required for every rupee of current

liabilities attained. The ratio of 2:1 is considered ideal. But during the

period of study ,Hercules has attained far beyond this ratio. Since

generally accepted current ratio is2:1 the liability position of the

company is very much satisfactory and company would be easily able

to pay its current liabilities.

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 Interpretation of quick ratio of Hercules
automobiles
The standard ratio is 1:1. Through out the four years study the ratio

falls below the standard ratio, but in the year 2007 and 2009 we can

see that the ratio is above the standard ratio. The ratio is quick asset s
to

current liabilities indicates the investment in quick asset required for

every rupee of current liability

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 Interpretation of Gross working capital to
fixed assets of Hercules automobiles
It is revealed from the table that the ratio of gross working capital to

fixed asset is showing a decrease through out the years. The figures are

decreasing from 4.498to 3.77to 2.07 to1.317.

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 Interpretation of gross working capital to sales
ratio
It is revealed from the table that here the ratio of gross working capital

to sales ratio is almost constant from 2006 to 2008 and in 2009 there is

a decrease. The ratio of current assets to sales indicates the investment

in current assets required for every rupee of sales attained. In general

we can say that it was showing a good liquidity position.

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 Interpretation of Net working capital to net
worth ratio
The investment in the net working capital shows a decreasing trend

during the period of study. The net working capital has increased from

35065927 to 17278316 and then a slight decrease to 161003811.63.

the ratio of net working capital to net worth indicates the investment in

working capital required for every rupee of proprietor’s fund. Here the

ratio shows a decreasing trend that reveals solvency position of the

company is not adequate.

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