PART A-:

INTRODUCTION:

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 firm’s capital which is blocked on permanent or fixed basis and is called fixed capital.
Funds are also needed for short-term purposes for the purchase of raw material, payment of
wages and other day – to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to that part of
the firm’s 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. An efficient Working Capital Management has a significant
effect toward the creation of a firm’s value. The working capital is an important yardstick to
measure the company’s operational and financial efficiency. Any company should have a right
amount of cash and lines of credit for its business needs at all times.

1
 CONCEPTS OF WORKING CAPITAL:
There are two concepts of working capital:-
• Balance sheet concept
• Operating cycle or Circular flow
On the basis of balance sheet Working capital may be classified in two
ways:

1. ON THE BASIS OF CONCEPT.

2. ON THE BASIS OF TIME.

WORKING CAPITAL

ON THE BASIS OF CONCEPT ON THE BASIS OF TIME

GROSS WORKING PERMANENT WORKING

CAPITAL CAPITAL

& &

NET WORKING TEMPRORY

CAPITAL WORKING CAPITAL

2
GROSS WORKING CAPITAL: Gross working capital also referred to as working
capital means the firm’s investment in current assets.i.e

Net working capital

• NET WORKING CAPITAL: It refers to the difference between current assets and
current liabilities. i.e.
-------
CURRENT ASSETS CURRENT LIABILITIES

CURRENT ASSETS:

Current assets are those assets which in the ordinary course of business can be converted into
cash or held in the business for the short time only.

Constituents of Current Assets:-

• STOCK OF RAW MATERIAL

• WORK IN PROGRESS
• FINISHED GOODS
• TRADE DEBOTRS
• PREPAYMENTS
• CASH BALANCES

3
CURRENT LIABILITIES:

Current Liabilities refers to short term debts of the business. It is money owned by a business
which will need to be repaid within the next 12 months.

Constituents of Current Liabilities:-

• TRADE CREDITORS
• SHORT TERM LOANS
• BANK OVERDRAFTS
• DIVIDEND DUE FOR PAYMENT
• TAX DUE TO PAY WITHIN THE NEXT 12 MONTHS.

The Gross working capital concept is financial or going concern where as Net working capital is
the accounting concept of working capital. Both concepts have its own merits. The Gross
concept is preferred for the following reasons:-
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
sources from where it is made available.
The gross concept takes into consideration the fact that every increase in the funds of the
enterprise would increase its working capital.
It is also useful in determining the rate of return on investment in working capital…

4
The net working capital is preferred for following reason:-

It is qualitative concept which indicates the firm’s ability to meet its operating expenses & short
term liabilities.
It indicates the margin of protection available to the short term creditors i.e. excess of Current
assets over current liabilities.
It is an indicator of the financial soundness of an enterprise.
It suggests the need for financing a part of the working capital requirement out of permanent
sources of funds

• Permanent or Fixed Working Capital: It is the minimum amount, which is required

to ensure effective utilization of fixed facilities and for maintaining the circulation of current
assets. There is always a minimum level of current assets; which is continuously required by
the enterprise. For example, every firm has to maintain a minimum level of raw material,
work in process, finished goods and cash balance. This minimum level of current assets is
called permanent or fixed working capital as this amount is permanently blocked in current
assets. The permanent working capital can be further classified as regular working capital
and reserve working

Fixed working capital

5
Capital required ensuring circulation of current assets from cash to inventories, from inventories
to receivables, from receivable to cash and so on. Reserve working capital is the excess amount
over the requirement for regular working capital, which may be provided for contingencies, may
arise at unstated periods such as strikes, rise in prices, depression etc.

• Temporary or Variable working capital: It is the amount of working Capital which

is required to meet the seasonal demands and some special exigencies. Most of the
enterprises have to provide additional working capital to meet the seasonal demands and
special needs. This type of capital is called seasonal working capital.

Variable working capital

6
Temporary working capital differs from permanent working capital in sense that it is required for
the short periods and cannot be permanently employed gainfully in the business.

Variable working capital

Fixed working Capital

Sometimes fixed capital may vary with the expansion, diversification and growth of business and
then it is fixed for the long period

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• ON THE BASES OPERATING WORKING CAPITAL CYCLE:

The Circular flow of concept of working capital is based upon this operating or working capital
cycle of a firm. The cycle starts with the purchase of raw material & other resources and ends
with the realization of cash from the sale of finished goods.
“The period of time which elapses between the point at which cash begins to be expended on the
production of a product and the collection of cash from the customer”

The operating cycle of a manufacturing company involves three phases:

• Acquisition of resources such as raw material, labour, power & fuel etc.
• Manufacture of the product which includes conversion of raw material into work in
progress into finished goods.
• Sales of the product either for cash or credit. Credit sales create book debts for collection.

The diagram is concerned with day to day activities; have funds constantly flowing into and out
of them.

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The chain starts with the firm buying raw material 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 firm’s work in progress (WIP).
• Work will continue on the WIP until it eventually emerges as the finished product.
• As production progresses, labour costs and overheads will need 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, trade debtors, cash and trade creditors shown the in and out of
the fund.
• The business will have to make payments to government for taxation.
• Fixed assets will be purchased and sold.
• Lessors 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 may provide loan finance, loans will need to be repaid from
time to time
• Interest obligations will have to be met by the business.

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PART B-:

WORKING CAPITAL CYCLE OF D&T PUMPCRETE COMPANY:

10
SOURCES OF FINANCE:

Firstly, we will consider different sources of finance from which the company gets its working
capital.

• TRADE CREDIT: - Trade credit is the credit extended by the supplier in the normal course
of business. PVT LTD has strong financial base it has got very good reputation in the market.
It is considered to be one of best paymaster among the suppliers, who in turn do not hesitate
in extending normal credit period to the company. In purchase of raw material no credit is
allowed, but while purchasing the material in bulk quantity the company tries to obtain
maximum discounts offered by suppliers, such as quantity & cash discount.

• ADVANCES: - Advances also form a part of working capital at D&T PVT LTD. An advance
from customers against orders is a short term source of finance for D&T PUMPCRETE PVT
LTD. Parties makes the advance payment before receiving the material.

• FIXED DEPOSIT: - Fixed deposit is another source of finance for the company. The
company has fixed deposits scheme with option for quarterly payment of interest or payment
of interest at the time of maturity along with principle amount. However in both the cases
maximum rate of interest is 10.5% for a deposit for 3 years and minimum rate of interest is
9.5% for a deposit for 1 year. In cumulative scheme interest is being compounded at monthly
basis. Company makes regular payment of interest as well as of principle amount. The entire
fixed deposit scheme is computerized.

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• WORKING CAPITAL BORROWINGS FROM BANKS: Commercial banks are the
most important source of short term finance. The major portion of working capital is
provided by commercial banks. They provide a wide variety of loans tailored to meet the
specific requirements of a concern. The different form in which the banks normally provide
loans and advances are as follows:-

• CASH CREDIT
• PACKING CREDIT IN INDIAN RS. & IN FOREIGN CURRENCY
• FOREIGN BILLS NEGOTIATION
• DISCOUNTING OF INLAND BILLS UNDER LETTER OF CREDIT
• SHORT TERM LOANS

a) Cash Credit: Cash credit is an arrangement by which a bank allows his customers to borrow
money up to certain limit against hypothecation of inventories, receivables etc. The company can
operate cash credit account within sanctioned credit limits. For this bank charges interest on the
last balance of everyday. D&T PUMPCRETE PVT LTD has the following banks from which it
takes the cash credit.

• HDFC BANK
• CORPORATION BANK
• UNION BANK OF INDIA
• BANK OF INDIA
• STATE BANK OF INDIA
• PUNJAB NATIONAL BANK

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b). Packing Credit: Packing credit is also popularly known as pre shipment credit. It is
sanctioned by commercial banks to boost exports. It is available at confessional rate of interest as
compared to rates charged by banks on cash credit account. Packing credit is available in Indian
Rupees as well as in foreign currency. Packing credit account is nullified against presentation of
export documents to the bank.
c).Foreign Bills Negotiation: After submission of export documents to the bank the pre
shipment credit is converted into post shipment credit. Usually export documents are drawn at
sight, or against acceptance. Tenure of documents depends on factors like country, product
exported etc. Company negotiates the export documents and avail post shipment credit from the
banks, which gets liquidated after realization of export documents. At the time of negotiation
bank charges interest for the unexpired period from the company along with negotiation charges.
d).Discounting of Inland Documents Drawn Under Letter of Credit: The company supplies
goods to the customers against inland letter of credit drawn in favor of OCM by customer. After
dispatch of material to the customer the presents the documents to the bank for discounting and
receives the amount from the bank.

e.)Short term loans: Working capital borrowings from banks are secured by the hypothecation
of entire present and future tangible assets of the company and also personally guaranteed by the
directors of the company.

f). Letter Of Credit: - A Letter Of Credit popularly known as L/C is an under taking by a bank
to honor the obligation of its customer up to a specified amount, should the customer failed to do
so. In case the customer fails to pay the amount, on the due date, to its supplier the bank assumes
the liability of its customers for the purchases made under the L/C Arrangement. OCM also
accepts the payment from their customers on behalf of L/C, so it becomes the source of finance
for them.

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NEED FOR WORKING CAPITAL:

The main objective of financial management is to maximize the shareholders wealth. And for
this it is important to generate sufficient profits. The extent to which these profits can be earned
depends upon the magnitude of sales however do not convert into cash instantly. There is
invariable time gap between the sales of good and the receipt of cash. Therefore there is need of
working capital in form of current assets to deal with the situation arising of the lack of
immediate realization of the cash against goods sold. There is an operating cycle involved in the
sales and the realization of cash.

During this time lag working capital is required for the following reasons:

• Purchase of raw material, components and spares.

• To pay wages and salaries.
• To incur day to day expenses and overhead cost such as fuel, power and office expenses.
• To meet the selling cost like packaging, advertising etc.
• To provide credit facility to customer…
• To maintain the inventories of raw material, work in progress, stores and spares and
finished goods.

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FACTORS DETERMINING THE WORKING CAPITAL:

The working capital requirements of a concern depend upon a large number of factors such as
nature and size of business, the character of their operations, the length of production cycle etc.
however, the following are important factors generally influencing the working capital
requirements:

• Nature or character of business: The working capital requirements of a firm basically

depend upon the nature of its business. Public utility undertaking like electricity, water
supply and railway 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, and cash; as such they need large amount of working capital.

• Size of Business/Scale of Operations: The working capital requirements of a concern

are directly influenced by the size of its business which may be measured in terms of
scale of operations. Greater the size of a business unit, generally larger 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
Resources and other economic disadvantages of small size. E.g. Retail stores require a
variety of goods to satisfy varied and continuous demand of their customers.

• Manufacturing Process/Length of Production Cycle: In manufacturing business, the

working capital requirements increase in direct proportion to the length of manufacturing
process. Longer the process period of manufacturing time, the raw materials and other
supplies have to be carried for a longer period manufacturing in the process with
progressive increment of labor and services costs before the finished product is finally

15
 obtained. Therefore, if there are alternative processes of production, the process with the
shortest production period should be chosen.

• Production Policy: In certain industries the demand is subject to wide fluctuations due
to seasonal variations. The working capital requirements, 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 season
or the production could be curtailed during the slack season and increased during the
peak season. If the policy is to keep production steady by accumulating inventories it will
require higher working capital.

• Seasonal Variations: In certain industries raw material is not available throughout the
year. They have to buy raw material in bulk during the season to ensure an uninterrupted
flow and process them during the entire year. A huge amount is, thus, blocked in the form
of material inventories during such season, which give rise to more working capital
requirements. Generally, during the busy season, a firm requires larger working capital
than in the slack season.

• Rate of stock turnover: There is a high degree of inverse co-relationship between the
quantum of working capital and the velocity or speed with which the sales are affected. A
firm having a high rate of stock turnover will need lower amount of working capital as
compared to a firm having a low rate of turnover. For example, in case of precious stone
dealers, the turnover is slow. Thus the working capital requirements of such a dealer shall
be higher than that of a provision store.

• Working Capital Cycle: In a manufacturing concern, the working capital cycle starts
with the purchase of raw material and stores, its conversion into stocks of finished goods
through work in progress with progressive increment of labour and service costs,
conversion of finished stocks into sales, debtors and receivables and ultimately

16
 realization of cash and this cycle continues again from cash to purchase of raw material
and so on.

• Credit policy: Credit policy of the concern its dealings with creditors and debtors
influence the requirement of working capital. Concern that purchases its requirements on
credit requires less working capital and vice- versa.

• Rate of Growth of Business: The working capital requirements of a concern increase

with growth and expansion of its business activities. Although it’s difficult to determine
the relationship between growth in the volume of business and the growth of working
capital in the business, yet in the fast growing concern, we shall require larger amount of
working capital.

• Price Level Changes: Changes in working capital also effect the working capital
requirements. Generally the rising prices will require the firm to maintain larger amount
of working capital, as more funds will require maintaining the same current assets .The
effect of price changes may be different for different concerns.

• Earning Capacity and Dividend Policy: Some firms have more earning capacity than
others due to quality of their products, monopoly conditions etc. such firms with high
earning capacity may generate cash profits from operations and contribute to their
working capital. The dividend policy of a concern also influences the requirements of its
working capital. A firm that maintain a high rate of cash dividend irrespective of its
generation of profits needs more working capital that retains larger part of its profits and
does not pay so high rate of cash dividend.

• Other Factors: Certain other factors such as operating efficiency, management ability,
irregularities of supply, import policy, asset structure, importance of labor, banking
facilities etc, also influence the requirements of working capital.

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METHODS OF WORKING CAPITAL:

The following are the methods of the working capital:

• MATCHING APPROACH:
The firm can adopt a financial plan which matches the expected life of assets with the expected
life of the source of the fund raised to finance assets. Thus a ten year loan may be raised to be
financed with an expected life of ten year. Stock of goods to be sold off in 30 days may be
financed with the 30 days commercial paper or bank loan.

• CONSERVATIVE APPROACH:
A firm in practice may adopt a conservative approach in financing its current as well as fixed
assets. Under the conservative plan the firm finances the permanent assets and also a part of the
temporary assets with long term financing. In the period when the firm has no need for
temporary current assets than the long term fund can be invested in the tangible securities to
conserve the liquidity.

• AGGRESSIVE APPROACH:
An aggressive policy is to be followed by the firm when it used more short term finances than
warranted by matching plan. Under the aggressive approach the firm finances a part of the
permanent current assets with the short term finances. Some extremely aggressive firms may
even finance a part of their fixed assets with the short term finances. The relative short term
finances make the firm more risky.

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PART C:-

RESEARCH METHODOLOGY:

Research Methodology is a way to systematically solve the research problem. It may be

understood as a science of study how research is done systematically. This research on working
capital may be referred to as exploratory research in which problems and findings are generated
from the calculations. When some deduction is made from data then a problem is located
regarding the same and reasons for the same are also searched for. In the end suggestions and
recommendations are made to make research meaningful and worthy to improvise on the same.

DATA COLLECTION:

Data is collected in two ways.

• Primary data
• Secondary data

The primary data refers to the data which is collected directly. It is collected by observations,
interviews, questionnaires etc. it is generally more accurate. It is costly in the terms of time. One
needs to be very careful while collecting this form of data. Here primary data is collected from
the employees of D & T PUMPCRETE PVT LTD. The data related to financial statements and
processes is collected from finance department. Some production data is collected from various
departments.
Secondary data refers to the data which is already collected by somebody. It is generally
collected from websites, magazines, journals etc. here data is collected from annual report of
company for financial analysis. Some data was provided by company itself. And rest of the
required data is collected from books like Prasanna Chandra, I.M Pandey of financial
management. Some of the data is also collected from websites.

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DATA ANALYSIS AND INTERPRETATION:

• Calculation of gross working capital

Stock

PARTICULARS 2007 2008 2009

RAW MATERIAL 29541657 25381734 83170779
WORK IN 39385321 35845838 70624168
PROCESS
FINISHED 173344236 138497501 103458859
STOCK
STORES AND 32494380 3036954 33284652
SPARES
WASTE AND 331750 549592 829249
SCRAP
TOTAL STOCK 275097344 230644319 291367657

Debtors

Particulars 2007 2008 2009

Over 6 months 47784158 55639817 81444414
Other debtors 165657116 120134422 341898394
Less : Provision for doubt 35964581 44008482 41467189
debtors
Total debtors 177476693 131765757 381875624

Cash
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 Particulars 2007 2008 2009
Cash in hand 276837 71645 221360
On current account 745530 4555244 2739552
Fixed deposit 22000 64404693 40162000
Total cash 1044367 69031582 43122912

Loans and Advances:

Particulars 2007 2008 2009

Total loans and advances 35744752 22907167 33635982

Gross working Capital:

Particulars 2007 2008 2009

GWC 489363156 454348825 750002175
Growth rate (base year 2006) - -7.15% 53.26%

Net working capital:

Particulars 2007 2008 2009

Current assets 489363156 454348825 750002175
Current liabilities 205166434 188480460 265573692
NWC 284196722 265868365 484428483
Growth rate - -6.64% 70.45%

INTERPRETATION: In the above calculations it is seen that condition of the company is

becoming better in 2009. Company has recovered from his downfall, or it can be said that
company is still recovering. It can be clearly seen that stock has gone up for the company in the
year 2009 as compared to previous two years. It means company is getting more orders to be
placed in future. The debtors of the company have turned up with positive response, which
earlier in 2008 gone down because of company was running under losses. Cash is now not left

21
idle in 2009, which again is good for company to effectively use its cash in day to day
operations. After a steep fall in gross working capital in year 2008 the company again jumped to
good required working capital. Recession struck badly in 2008 as company mostly deals in
international market. The company witnessed some bad response from his creditors and debtors
also.. Company got business opportunities from abroad and 2009 again company had a sound
working capital to keep operations running. In all the three years 2009 is proving to be better
year in financial terms.

• Calculation of cash position ratio:

Formula = Cash
C.L.

22
 CASH POSITION RATIO:

PARTICULARS 2007 2008 2009

CASH 1044367 69031582 43122912
CURRENT
LIABILITIES 205166434 188480460 265573692
CASH POSITION
RATIO 0.005 0.37 0.16

INTERPRETATION: Cash position ratio in all the three years is not able to reach rule of
thumb. It is matter of worry. In the 2008 ratio was 0.37 which has helped D & T PUMPCRETE
PVT LTD in the time of real need. But as company didn’t ever store much cash in hand, and has
always invested somewhere to prevent cash being idle, which is positive sign for D & T
PUMPCRETE PVT LTD. D & T PUMPCRETE PVT LTD has always returned its loans and other
liabilities in time. Because of this it holds good reputation from long time. So it can be concluded
that cash reserved with company is generally reserved out of every task that needs to be
accomplished in time, but according to rule of thumb firm must have at least ratio of 0.5 where D
& T PUMPCRETE PVT LTD lacks.

OTHER RATIOS:

• Current ratio:

Year C.A. C.L. Ratios

2007 489363456 205166434 2.38 :1
2008 454348825 188480460 2.41 :1

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 2009 750002175 265573692 2.82 :1

• Quick ratio:

Year Quick Assets C.L. Ratios

2007 214265812 205166434 1.04 :1
2008 223704506 188480460 1.18 :1
2009 458634518 265573692 1.17 :1

INTERPRETATION: Both the above ratios are speaking for good financial health. The
current ratio in all the three years is above rule of thumb i.e. 2:1, which is considered to be
satisfactory for the firm. Quick ratio is also above the rule of thumb, i.e. 1:1 which again is
satisfactory far the company. This also covers the shortcomings of the cash ratio. These all ratios
show that liquidity is sound and tells that company is fully able to meet any current obligations.

• CALCULATION OF INVENTORY TURNOVER RATIO:

Inventory Turnover Ratio = Cost of Sales

Average Inventory
Conversion period = 365
Inventory Turnover Ratio

24
Inventory turnover ratio (ITR) establishes the relationship between the sales during
a period and the average amount of inventory carried during that period.

Particulars 2007 2008 2009

Sales 436858856 522133945 966065240
Opening stock 1444170 173344236 138497501
Closing stock 1649795254 138497501 103458859
Average inventory 87394203 151738513 120978180
ITR 4.99 times 3.44 times 7.99 times

INTERPRETATION: Inventory turnover ratio has improved as compared to previous two

years. Inventory conversion period seems to be reduced in the year 2009. It is good for the
company. Here it is definitely beneficial as sales made were high and stock was also high in
2009. So company is getting good response from market for its products and it is more efficient
in converting raw material to finished good.

• CALCULATION OF DEBTOR TURNOVER RATIO:

Debtors turnover ratio = Sales

Average debtors
Collection Period = 365
Debtor’s turnover ratio

Percentage of debtor’s turnover in NWC

Particulars 2007 2008 2009

Debtors 177476693 131765757 381875624
NWC 284196722 265868365 484428483

25
 percentage 62.4 49.5 78.8

Particulars 2007 2008 2009

Debtors 177476693 131765757 381875624
Sales 436858856 52133945 966065240
DTR (Times) 2.46 0.397 2.53

PARTICULARS 2007 2008 2009

DTR 2.46 3.96 2.53
AVERRAGE 148 DAYS 92 DAYS 144 DAYS
COLLECTION
PERIOD

INTERPRETATION: DTR ratio is best in year 2008. But it is not that it was profitable for
the firm. In the year 2008 company didn’t had much to collect from outside because of lack of
business. So leaving 2008, 2009 seems to be better than other good business year that is 2007.
More of the collection is to be made from foreign. This is another reason for long collection
time. Overall it is not good for company.

PART D:-

CONCLUSION:

After studying the components of working capital management system .It is found that the
company has a sound and effective policy and its performance is very good, even in this bad
recession situation. Company has managed to pose good profit. Company is competing well are
the domestic as well as at international level. Company has shown increase in current ratio,
growth rate in gross working capital, net working capital in the year 2009.sales of company and
debtors have also increased in 2009 as compared to 2007-2008.So we can say that the position of
company is good. All the ratios were speaking for strong financial output brought to the
company in the year 2009. The company is matured one and it has contributed well in the
countries growth and development and will continue to perform and contribute to the whole

26
nation In conclusion we can say that the companies management is effective one and knows well
the management of finance. That’s why its working capital management system is very good.

BIBLIOGRAPHY

Text Book:

• Grewals, T.S, Financial Analysis, publisher – S. Chard Sons ltd.

• Kothari C.R. “Research Methodology Method & Techniques” Wishwa Prakashan , Daryaganj ,
New Delhi-110 002

• Gupta S. P. “Financial Management,” 2003, Sahitya Bhawan Publications, New Delhi.

Journals & Magazines:

27
 • Business Today

• Company’s annual report

• Company’s published journals

Web Sites:
• www.centurytextind.com

• www.centurypaperindia.com

• www.google .com

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