CHAPTER-1

1.1 INTRODUCTION

Every enterprise should know about the activities carried on by it and the financial importance
of its operations. So it becomes necessary to keep a systematic record of what happens in the
organisation from time to time. The financial score of an enterprise is kept by the Accounting System.

Accounting plays a key role in every organisation. It is the process of recording .classifying,
summarizing and interpreting financial information about the concern. Accounting systematically
writes the history of an organisation.

Working capital may be regarded as the life blood of a business .In Accounting working capital
is the difference between inflow and outflow of funds. Its effective provision can do much to ensure
the success of a business while its inefficient management can lead not only to the loss of profit but
also to the ultimate downfall of the concern .A study of working capital is major importance to
internal and external analysis because of its close relationship with the current day to day operation of
a business.

1.1.1 ORGANIZATION PROFILE

Travancore Titanium Products Limited, Thiruvanathapuram, is one of the leading public

sectors under the government of Kerala. The company is one of the major establishment in India
producing titanium dioxide pigment .There are about 1076 employees working in the company .The
major share capital KSID(7.90%),pearless (10.88%) ,public (0.28%).

The unit was promoted by the late divan of Travancore ,Sir C.P.Ramaswamy Iyer ,in
collaboration with the British Titan Products Co.Ltd UK,presently known as tioxide group Ltd.In the
year 1946 (18-12-1946) the company was functioning under a managing agency namely Indian Titan
Products Co.Ltd.,till 1960 when the government of Kerala took over the administrative control .

The production was commenced in the year 1951.The initial capacity of the plant was just 5
tonnes per day. In 1960,the production capacity of the plant was raised to 10 tonnes per day and in
1973 to 45 tonnes per day. Total production in the year 95-96 was 12943 metric tonnes. During 1956
a new sulphuric acid plant was commissioned with pollution control measures like double catalyst
double Absorption System, Scrubbers etc,its production capacity being 300 tones per day. Now the
company facing competition from other companies in India and abroad.

1.1.2 RESEARCH PROBLEM

“A STUDY OF THE WORKING CAPITAL MANAGEMENT IN TRAVANCORE

TITANIUM PRODUCTS LIMITED THIRUVANTHAPURAM .“

1.1.3 SCOPE OF STUDY

This report is related to study of working capital management and covers the following
aspects.

1. History of the firm.

2. Conceptual background of the study.

3. Past five year’s financial statements for the purpose of analysis and interpretation.

1.1.4 OBJECTIVES OF THE STUDY

The study is conducted mainly to achieve the following objectives.

1. To study the working capital position of the firm.

2. To study the sources of working capital of the firm.

3. To understand the profitability of the firm.

4. To study the working capital concepts, tools and technicians applied in working
capital management.

5. To draw meaningful conclusions and put forward suggestions if any.

1.1.5 RESEARCH METHODOLOGY

All information’s required to conduct the study has been collected from primary and
secondary sources.
Primary sources:

The information’s collected from the interviews conducted with the concerned officers

Secondary sources:

The secondary data includes the information’s collected from:

1. Annual report of the company related to the past five years.

2. Magazines.

3. Other records of the company.

 CHAPTER-2

REVIEW OF LITERATURE

INTRODUCTION

Working capital can be regarded as the life blood of every business. It is considered as the
funds available for meeting day to day requirements of an enterprise. It refers to the amount involved
or invested in inventories or stock of raw materials, semi-finished or finished products, amount
receivable, marketable securities, cash on hand and at bank.

Working capital is also known as revolving or circulating capital. Because capital in all these
forms are changed in the ordinary course of business from one form to another ,from cash to
inventories ,from inventories to receivables and book debts ,from receivables to work debts and then
back into cash. A part of the fixed or permanent capital is invested in assets which are kept in the
business permanently or for a long period for the purpose of earning profit. Another part of permanent
capital left in the business for supporting day to day normal operation is known as working capital.

Working capital, as it’s invested is generally for shorter period compared to fixed capital is
also known as short term capital.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital. They are:-

1. Gross working capital

2. Net working capital

1. Gross working capital

Gross working capital refers to the firm’s investment in current assets.

2. Net working capital

Net working capital refers to the difference between current assets and current liabilities .it
helps in comparing the liquidity of the firm over time. The net working capital may be either positive
or negative.A positive working capital arises when the current assets are in excess of the current
assets.
DEFINITIONS

In general working capital has been defined in two ways.

1. Working capital is the excess of current assets over current liabilities.

Working capital = current assets –current liabilities.

2. Working capital is the aggregate of current assets

Working capital = current assets

In the words of GESTENBERG “Circulating capital means current assets of a company that are
changed in the ordinary course of business from one form to another, for e.g., from cash to
inventories, inventories to receivables, receivables into cash.”

According to BONNEVILLE “Any acquisitions of funds which increase the current assets increase
working capital also, for they are one and the same.”

In the words of WESTON &BRIGHAM “Working capital refers to a firm’s investment in short term
assets like cash, short term securities, accounts receivables and inventories.”

TYPES OF WORKING CAPITAL

1. Permanent working capital

Permanent working capital is the minimum amount of current asset which is needed to
conduct a business even during the dullest season of the year. This amount varies from
year to year, depending upon the growth of a company and the stages of the business
cycle in which it operates. It is the amount of funds required to procure the goods and
services which are necessary to satisfy demand at a particular point.

2. Temporary or variable working capital

It represents the additional assets which are required at different times during the
operating year i.e. additional inventory, extra cash etc. It is temporarily invested in
current assets.
 3. Balance sheet working capital

The balance sheet working capital is the one which is calculated from the items appearing
in the balance sheet. Gross working capital which is represented by the current assets and
net working capital which is represented by the excess of current assets over current
liabilities are examples of the balance sheet working capital.

4. Cash working capital

Cash working capital is one which is calculated from the items appearing in the profit and
loss account. It shows the real flow of money or values at a particular time and is
considered to be the most realistic approach in working capital management.

WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that arises in attempting to
manage the current assets, the current liabilities and the inter –relationship that exist between them.
The goal of working capital management is to manage the firm’s current assets and current liabilities
in such a way that a satisfactory level of working capital is maintained.

In order to ensure success of a business organisation there should be effective provision of

funds and adequate working capital. While the inefficient management of funds and adequate working
capital can not only lead to the losses of profits but also to the ultimate downfall of the business.

The management of working capital is of vital importance to ensure the success of a business.
A business should maintain a sound working capital. However there should not be an executive level
of investment in working capital. Working capital management, influence an organisation to a great
extent.

The effective management of working capital needs good planning as well as immediate
reaction to the changes for cash and prevailing economic conditions. To carry on a business a certain
minimum level of working capital is necessary on a continuous and uninterrupted basis. Thus
requirement of working capital will have to be met permanently as in case of other fixed assets.
DETERMINANTS OF WORKING CAPITAL

There are no rules or formulae to determine the working capital requirements of a firm. The
need for working capital is not always the same. It varies from year to year or even month to month
depending upon a number of factors. The amount of working capital required for any business
enterprise depends upon the following factors.

1. Nature and size of the business

The amount of working capital is basically related to the nature and volume of the
business. Trading and financial firms have a very less investments in fixed assets but
require a large amount of money to invest in working capital.

2. Seasonal variations

Strong movements create special problems of working capital in controlling the

internal financial swings. A great many companies have to carry on seasonal business
such as sugar mills and oil mills, they require larger amount of working capital in the
season to purchase the raw materials in large quantities and utilize them throughout the
year.

3. Time consumed in manufacture

The average time taken in the process of manufacture is also an important factor in
determining the amount of working capital. The longer the period of manufacture, the
larger the inventory required. Though the capital goods industries manage to minimise
their investment in inventories of working capital by asking advances from the customers
as work proceeds on their orders.

4. Turnover of circulating capital

Turnover means the ratio of annual gross sales to average working assets. The faster
the sales, the larger the turnover. Conversely the greater the turnover, the larger the
volume of business to be done with a given amount of working capital. It will require
lesser amount of working capital inspite of large sales because of greater turnover.

5. Labour intensive v/s capital intensive industries

In labour intensive industries, larger working capital is required because of regular

payment of heavy wage-bills and more time taken in completing the manufacturing
 process. Conversely the capital intensive industries require lesser amount of working
capital because of the heavy investment in fixed assets and shorter period in
manufacturing process.

6. Terms of purchase and sales

Terms (cash/credit) of purchase and sales also affect the amount of working capital. If a
company purchase all goods on cash and sells its finished product on credit naturally, it
will require a larger amount of working capital. On the contrary, a concern having credit
facilities and allowing no credit to its customers will require lesser amount of working
capital. Terms and conditions of purchase and sales are generally governed by prevailing
trade practise and by changing economic conditions.

7. Conversions of current assets into cash

The need of having cash in hand to meet the day to day requirement is another
important determinant, e.g. payment of wages and salaries. The greater the cash
requirement, the higher will be the need of working capital. But if a company has ample
stock of liquid current assets it will require lesser amount of working capital because the
company can encash such assets immediately in the open market.

8. Price level changes

Changes in the price level also affect the working capital requirements, generally the
rising price will require the firm to maintain larger amount of working capital as more
funds will be required to maintain the same current assets. The effect of rising prices may
be different for different firms.

9. Business cycle fluctuations

Business cycle fluctuations also affect the requirements of working capital. At times,
when the prices are going up and boom conditions prevail, the tendency of management
is to pile up a big stock of raw materials and to maintain a big stock of finished goods
with an expectation to earn more profits. In a period of boom, there is a need for large
amount of working capital due to increase in sales, rises in sales, rise in prices etc. On the
contrary in the times of depression i.e. when there is a down swing of the cycle, the
business contracts. Sales decline, difficulties are faced in collections from debtors and
firms may have a large amount of working capital lying idle.
 10. Other factors

The other factors such as operating efficiency, management ability, irregularities of

supply , import policy, assets structure, importance of labour , banking facilities etc. Also
influence the regularities of working capital.

SOURCES OF WORKING CAPITAL

The sources of working capital can be classified under two heads.

1. Long term sources

2. Short term sources

1. Long term sources

The long term working capital requirements includes the initial working capital and the
regular working capital. It will be appropriate to meet at least 2/3 if not the whole of the
permanent working capital requirements from long term sources and only for the period
needed.

2. Short term sources

Short term working capital involves financing of day to day operations. Normally the
duration of such requirement does not exceed a year. There are two sources of short term
capital i.e. internal and external.
 Sources of working capital

Long term sources Short term sources

1. Issue of shares

2. Issue of debentures Internal External

3. Retained profits 1. Depreciation of funds 1. Trade creditors

4. Sale of fixed assets 2 .Provision for tax 2. Credit papers

5. Security from employees 3. Accrued expense 3. Bank credit

and customers 4. Customer’s credit

6. Term loans. 5. Public deposits

6. Govt.assistance

OPERATING CYCLE OF WORKING CAPITAL

The duration of time required to complete the following sequence of events in case of
manufacturing firm is called the operating cycle

1. Conversion of cash into work in progress

2. Conversion of raw materials into work in progress

3. Conversion of work in progress into finished goods

4. Conversion of finished goods into debtors and bills receivables through sales.

5. Conversion of debtors and bills receivables into cash.

 OPERATING CYCLE OF A MANUFACTURING FIRM

DEBTOR
SALES
S

FINISHED
CASH
GOODS

RAW WORK IN
MATERIA PROGRE
LS SS

DANGERS OF INADEQUATE WORKING CAPITAL

1. Company may not able to take advantage of cash discounts.

2. It will not be possible for the company to utilize production facilities fully for want of
working capital.

3. The credit worthiness of the company is likely to be jeopardized, because of lack of liquidity.

4. A company may not be able to take advantage of profitable business opportunities.

5. The moderations of equipment and even routine repairs and maintenance facilities may be
difficult to administrate.

6. A company will not be able to pay its dividends because of unavailability of funds

7. A company may have to borrow funds at higher rates of interest.

8. A company cannot afford to increase its cash sales and may have to restrict activities to credit
sales.
 DANGERS OF EXCESS WORKING CAPITAL

1. Excessive working capital makes management complacent which degenerates into managerial
inefficiency.

2. It is an indication of defective credit policy and sleek collection periods, consequently higher
incidents of bad debts adversely affects profits.

3. It results in unnecessary accumulation of inventories. Thus the chances of inventories

mishandling, waste, theft, and losses increase.

4. Tendencies of accumulating inventories to make speculative profit grow. This may tend to
make dividend policy liberal and difficult to cope with in future when the firm is unable to
make speculative profits.