Project On Working Capital

Working Capital Management
1. INTRODUCTION
1.1 Theoretical Background
Financial management is that managerial activity which is concerned

with planning and controlling of the firm’s financial resources.
The subject of financial management is of immense interest to both

academicians and practicing managers. Financial management provides them
with conceptual and analytical insights to make those decisions skillfully.
Meaning of Financial Management:
From the various definitions of the term business finance given below,
it can be concluded that the term business finance mainly involves raising of
funds, and their effective utilization keeping in view the over all objectives of
the firm.
Definition:
According to “Financial management is concerned with the efficient use

of an important economic resource namely capital funds”.
-SOLOMAN
According to him “Financial management is concerned with managerial

decisions that result in the acquisition and financing of long-term and short-
term creditors of the firm. As such it deals with the situations that require
selection of specific assets, the selection of specific liability as well as the
problem of size and growth of an enterprise. The analysis of these decisions
is based on the expected inflows and outflows of funds and their effects upon
managerial objectives”.
-“PHILLIPTUS”
Scope of Finance:
1 K.M.M.I.P.S., Tirupati
A firm creates manufacturing capacities for production of goods; and

provides service to customers. They sell their goods or service to earn profit.
They raise funds to acquire manufacturing and other facilities. Thus the three
most important activities of a business firm are:
• Production.
• Marketing.
• Finance.
A firm secures what ever capital it needs and employees it (finance

activity) in activities which generate returns on invested capital (Production
and Marketing activities).
Meaning and Types of Financial Statements:
A financial statement is an organized collection of data according to

logical and consistent accounting procedures. Its purpose is to convey an
understanding of some financial aspects of a business firm.
Thus the term “Financial Statement’s “generally refers to two basic

statements.
• Income Statement.
• Balance Sheet.
Nature of Financial Statement:
Financial statements are prepared for the purpose of presenting a

periodical review or report by the management and deal with the state of
investment in business and result achieved during the period under review.
From this it is clear that financial statements are affected by three things.
• Recorded Facts.
• Accounting Conventions.
• Personal Judgments.
Recorded Facts:
Only those facts which are recorded in the business books will be
reflected in the financial statements.
Accounting Conventions:
It will not reflect the true position of the business as the actual position
of the business will definitely be better as compare to the position depicted
from the financial statement.
Personal Judgment:
Personal judgment of the accountant again will reflect the preparing of

financial statements.
The following points reflect truly the nature of financial statements of

business entities.
 These are reports or summarized reviews about the performance,

achievements and weakness of the business.
 These are prepared at the end of the accounting period so that various
parties may take decision of their future actions in respect of the
relationship with the business.
 These statements are prepared as per accounting concepts and
conventions.
 It is influenced by the personal judgment of the accountant these
judgments may relate to valuation of inventory depreciation of fixed
assets and while making distinction between “Capital and Revenue”.
Importance of Financial Statements:
The information given in the financial statement is very useful to a

number of parties as given below:
1) Owners:
The owners provide funds for the operations of a business and they
want to know whether their funds are being properly utilize/not. The financial
statements prepared from time to time satisfy their curiosity.
2) Creditors:
Creditors want to know the financial positions of a concern before
giving loans (or) granting credit. The financial statements help them in judging
such position.
3) Investors:
Prospective investors, who want to invest money in a firm, would like to
make an analysis of the financial statement of that firm to know how safe
proposed investment will be.
4) Employees:
Employees are interested in the financial position of a concern they
serve, particularly when payment of bonus depends upon the size of the
profits earned. They correct so they become interested in the preparation of
correct profit and loss account.
5) Government:
Central and state Government are interested in the financial
statements because they reflect the earning for a particular periods for
purpose of taxation. Moreover, these financial statement are used for
compiling statistics concerning business which, in turn, help in compiling
nation Accounts.
6) Research Scholars:
The financial statements being a mirror of the financial position of a

firm are of immense value to the research scholar who wants to make a study
into financial operations of a particular firm.
7) Consumers:
Consumers are interested in the establishment of goods accounting
controls so that cost of production may be reduce with the resultant reduction
of the prices of goods they buy.
8) Managers:
Management is the art of getting things done through others. This
requires that the subordinates are doing work properly. Financial statements
are on aid in this respect because they serve the manager is appraising the
performance of the subordinate.
Techniques of Analysis:
The following technique can be used in connection with analysis and

interpretation of financial statements.
 Comparative Financial Statements.

 Common Size Statements.
 Trend Percentage Analysis.
 Funds Flow Statements.
 Cash Flow Statements.
 Working Capital Analysis.
 Ratio Analysis.
Working Capital:
The study of working capital are prepared for the purpose of presenting
a periodical review or report by the management and deal with the state of
investment in business and result achieved during the period under review.
They reflect the financial position and operating strengths or weaknesses of
the concern by properly establishing relationships between the items of the
ratio analysis estimates and revised estimates.
Working capital can be under taken either by the management of the
firm. The nature of analysis differs depending upon the purpose of the
analysis, the analysis is able to say how well the firm could utilize the
resource of the society in generation of goods and services.
Hence, it is overall responsibility of the management to see that the
resources of the firm are used most efficiently and effectively and that firm’s
financial position is good.
If a firm wants to increase its profitability, it must also increase its risk.
If it is to decrease risk, it must decrease its profitability. The trade off between
these variables is that regardless of how the firm increases its profitability
through the manipulation of working capital. The consequence is a
corresponding increase in risk as measured by the level of working capital.
Working capital in simple terms is the amount of funds which business

concerns have to finance its day-to-day operations. It can also be regarded as
that proportion of company’s total capital which is employed in short-term
operations.
Concepts of working capital:
Working capital can be defined through its two concepts, namely:
(a) Gross working capital (b) Net working capital.
Gross working capital:
Gross working capital refers to the firm’s investment in current assets.

Current assets are the assets which can be converted into cash within an
accounting year and include cash, short term securities, debtors, (accounts
receivable or book debts) bills receivable and stock (inventory).
Net working capital:
Net working capital refers to the difference between current assets and
current liabilities are those claims of outsiders which are expected to mature for
payment within an accounting year and include creditors (accounts payable), bills
payable, and outstanding expenses. Net working capital can be positive or
negative. A positive net working capital will arise when current assets exceed
current liabilities.
A negative net working capital occurs when current liabilities are in

excess of current assets.
Importance of Working Capital
Investment is fixed assets only is not sufficient to run the business.

Therefore working capital or investment in current assets is a must for the
purchase of raw materials and for meeting the day-to-day expenditure on
salaries, wages, rents etc. The main advantages of adequate working capital
are as follows:
 If proper cash balance is maintained a Company can avail the

advantage of cash discounts by paying cash for the purchase of raw
materials in the discount period, which results in reducing the cost of
production.
 Adequate working capital creates a sense of security, confidence and

loyalty not only through out the business itself but also its customers,
creditors and business associates.
 A firm can raise funds from the market, purchase of goods on credit
and borrow short-term funds from banks etc. If investors and borrowers
are confident that they will get their due interest and payment of
principle in time.
 Certain contingencies like financial crises due to heavy losses;
business oscillation etc. can be easily overcome, if the company
maintains adequate working capital.
 A continuous supply of raw material, research programs, innovation
and technical developments and expansion programs can successfully
be carried out if working capital is maintained in the business. It will
increase the production efficiency, which in turn increase the efficiency
and morale of the employees, lower the cost and create image in the
community.
Determinants of Working Capital

A large number of factors, each having a different importance,
influence working capital needs of firms. Also, the importance of factors
changes for a firm over time. Therefore, an analysis of relevant factors should
be made in order to determine total investment in working capital. The
following are the factors which generally influence the working capital
requirements of the firm.
• Nature of the Business
• Sales and Demand Conditions
• Technology and Manufacturing Policy
• Credit Policy
• Availability of Credit
• Operating Efficiency
• Price Level Changes
Operating cycle:
Operating cycle is the time duration required to convert sales, after the
conversion of resources into inventories, into cash. The operating cycle of a
manufacturing company involves three phases.
 Acquisition of resources such as raw material, labour, power and fuel

etc.
 Manufacture of the product which includes conversion of raw material
into work-in-progress into finished goods
 Sale of the product either for cash or on credit. Credit sales create
account receivable for collection.
The firm is required to invest in current assets for smooth,

uninterrupted functioning. It needs to maintain liquidity to purchase raw
materials and pay expenses such as wages, salaries and other
manufacturing, administrating and selling expenses as there is hardly a
matching between cash inflows and outflows.
Stocks of raw material and work-in-process are kept to ensure smooth

production and to guard against non-availability of raw material and other
components. The firm holds stock of finished goods to meet the demands of
customers on continuous basis and sudden demand from some customers.
Debtors are crated because goods are sold on credit for marketing and
competitive reasons.
The operating cycle can be measured as follows:
 RMCP – Raw material Conversion Period

 WIPCP – Work-in-progress Conversion Period
 FGP – Finished Goods Conversion Period
 SDCP= Sundry Debtors Conversion Period
 SCCP= Sundry Creditors Conversion Period
Operating Cycle=RMCP+WIPCP+FGCP+SDCP-SCPP
Purchases Payment Credit Sale Collection
RMCP+WIPCP+FGCP
Inventory Conversion Period Receivable Conversion Period
Payables Net Operating Cycle

Gross Operating Cycle
Permanent and Variable Working Capital
The minimum level of current assets which is continuously required by

the firm to carry on its business operations is referred to as permanent or
fixed working capital. Depending upon the changes in production and sales,
the need for working capital over and above permanent working capital will
fluctuate.
The extra working capital needed to support the changing production

and sales activities is called fluctuating, or variable working capital. Both are
necessary to facilitate production and sale through operating cycle, but
temporary working capital is created by the firm to meet liquidity requirements
that will last only temporarily.
Amount of
Working
Capital Temporary
Fixed
Time
Amount of
Working
Capital Temporary
Fixed
Time
From the above two graphs it is shown that permanent working capital
is stable over time, while temporary working capital is fluctuating. The
permanent working capital is increasing over a period if the firm’s requirement
for working capital is increasing.
Operating cycle
Operating cycle=RMCP+WIPCP+FGCP+SDCP-SCPP
RMCP=Raw Material Conversion Period
WIPCP=Work-in-progress Conversion Period
FGCP=Finished Goods Conversion Period
SDCP=Sundry Debtors Conversion Period
SCCP=Sundry Creditors Conversion Period
Working capital cycle/operating cycle
Cash
Debtors Raw- Mat
Receivables
Materials
Finished Work-
in-
Goods
process
2. RESEARCH
DESIGN
2.1 Need for the Study
Working capital management is a very significance aspect in the
management of finance of any organization. By checking the level of working
capital can easily identify the liquidity and profitability position of the firm
 The level of current assets and current liabilities determines the level of
working capital
 The composition of current assets and current liabilities
 Financing of current asset and current liabilities are utmost importance

and significant in the financial management of the business but also its
credit squeeze this fact has been justified by many industries which
have failed frequently due to faulty management of working capital,
especially with regard to effect of various suggestions and regulations
laid by Tandon Chore Marathe committee is very necessary
2.2 Scope of the study

The basis scope of the study is to understand & determine working
capital techniques/procedure adopted by the department. The study also
includes an observation of different year’s financial statements of RTPP its
financial position.
2.3 Objectives of the Study
• To the study working capital management system in the company.

• To measure the liquidity question of the company by using working
capital ratios.
2.4 Research Methodology
Research Methodology can be defined as methodical,

unbiased and complete investigation of subject matter to
established principles investigation of a problem discuss pertinent
information to help solve it. The term methodical refers to carefully
planned procedures.
Research design analytical
It is a process of formulating Research on the other hand it is

a process of carrying by analyzing the data.
2.5 Period of the Study
The data of the RTPP covers a period of five financial years i.e 2003-2008
2.6 Limitations of the Study
 Time is one of the limiting factor of the study the duration of training was
one month which was too short period to study the whole organization.
 Second limiting factor is the busy schedule of the executives. As a result
of which is very difficult to get minute information about the organization.
 Sum aspects of financial information were not available because of the
confidentiality of RTPP.
3. PROFILES
3.1 INDUSTRY PROFILE
The new economic policies and five year plans in India after independence
passed the way for the growth of Economy, per capita consumption of
electricity is considered as one of the parameters to measure the
development of the company. The economy and welfare of the people
depends on the industrialization. The electricity is required for
industrialization of the country.
In India to meet the growing demand for electricity and shortage of

resources, opened way for the private sector participation in power generation
in the year 1991. Subsequently, globalization has brought sweeping changes
with mixed results across the globe. Further the electricity act 2003 was given
asset by the president of India on 26th May, 2003 and came in to force on 10th
June, 2003 repealing the earlier Indian electricity act1910, Electricity (supply)
Act, 1948 and Electricity, Regulatory, Commissions Act, 1998. The laws
consolidate the laws relating to Generation, Transmission, Distribution,
Trading and use of Electricity.
It aims at creative measures conductive for development of electricity

industry promoting competition therein, protecting interest of consumers and
supply of power to all areas, ensuring transparent policies regarding subsides,
protection of efficient and environmental benign policies. The bill facilitated the
freedom to the private sector to generate power necessary for industries. As
per the provisions of the new electricity act the central government shall from
time prepare the national electricity policy and tariff policy in consultation with
state Government and the authority. The appropriate condition shall specify
the items and conditions for determination of tariff and in doing so will be
guided amongst other things b the national electricity policy and tariff policy.
It is hoped that this will lead to uniformity in the principles to be adopted

for pricing of the power as between central generating stations, sate owned
companies and IPPS, so as to provide a level playing field. APGENCO
Corporation in Andhra Pradesh, which is allowed to generate electric power to
meet the needs of the state. The study undertaken at APGENCO at RTPP,
Kalama aims at studying the financial position of the financial position of the
APGENCO for expansion.
Reforms in State Electricity Board
The Reforms process turned active only in the 1996 with the adopted
of “the common minimum nation action plan for power” at the chief minister’s
conference. This action plan which laid the foundation for reforms in State
Electricity Boards (SEB’S) has the following salient features.
 Formulation of a national energy policy.

 Setting up on central and state electricity regulatory commission
 Rationalizations of retail tariffs.
 Private sector participation in power distribution.
 Streaming the role of central agencies concerned with project
approvals.
 Autonomy and improvement in management and physical
parameters of SEB’S.
In took another 18 months before the reforms process got into

implementation mode with the promulgation of the electricity regulating
commission’s ordinance by the president of India on April, 25th 1998. This
ordinance primarily gave legal shape to the two cardinal features of the
common minimum action plan- establishment of regulatory commission and
nationalization of retail tariff.
This provision invited considerable flak from the prefer power lobby and
was unceremoniously shelved when the ordinance was passed into an act of
parliament on 2nd July, 1998 reducing SERC’S to toothless tigers as for as
rationalization of retail tariff was concerned. However the clause requiring the
State Government to compensate the person affected by the grant of subsidy
in the manner state commission may direct was retained, thereby giving some
vestige of authority to the regulations.
Experience of Reforms Process in Few States

At the time the ERC act was enacted by parliament, two states like
Orissa and Haryana already had their electricity reforms legislation in place
Orissa was well into the reform process and Haryana was just then started.
The electricity board in these states has been split into separate entities for
generation, transmission and distribution in accordance with the management
model formula. The user reforms were actively assisted and funded by the
work bank and bilateral agencies. In early 1999, Andhra Pradesh also got on
to the reform bandwagon with a similar package and received the first tranche
of World Bank assistance. In July 1999, the Karnataka electricity reforms act
received the president’s assent and the state also go in to the reform mode on
the same pattern.
The central electricity regulatory commission established in August

1998, has found its fact and is now working on the national electric grid code
and available tariff regime, both having a for reaching a for reaching impact on
the power scenario in the country. As for as states are concerned SERC’S
are can be grouped.
In to various categories depending on the states and relationship with a

statutory, formula and multilateral funded reform process – Orissa, Haryana
and Andhra Pradesh. Based on this analysis a management model formula
was evolved and endorsed by the union ministry of power and this has guided
SEB reforms in Orissa, Haryana and Andhra Pradesh and also Karnataka.
The World Bank and other aid agencies have extensively adopted this formula
while apprising SEB Reforms / Restructuring proposals. Hence, the surprising
uniformity of reform and reconstruction package in all these states.
Adoption of the management model is being set as necessary

precondition for SEB’S if they wish to avail themselves of World Bank/Asian
Development Bank Funds.
Power Sector Reforms in Andhra Pradesh
Introduction:
Andhra Pradesh becomes third state to initiate power sector reforms

and restructuring. Andhra Pradesh State Electricity Board (APSEB) has been
split into two entities, APGENCO, the generation arm and APTRANSCO, the
transmission company with effect from February 1999. In these 40 years the
installed capacity has been increased from 200MW to 646.7 MD. The
consumers have grown up from mete Rs.6.5 Crores to Rs.4800 Crores in
the after reforms process in taken up, the national and international funding
agencies have come up in a big way and APGENCO could complete 2x250
MW KTPS – V stage and Srisailam LBPH. International agencies are now
interested in taking part in VTPS stage IV. It is sure that the two corporations
APGNECO and APTSRANSO will act in tandem and the only competition
between them will be in pursit of excellence and to be of best service to
consumers of all sectors in our state. Towards this endeavor, APGENCO
promises its continued unstinted co-operation and brotherly bonding to
APTRANSO and there is no doubt that both the entities together will flourish
and provide service to the consumers on par with international standards near
future.
The electricity Act, 2003 has come into force with effect from 10th June,
2003 replacing three legislations namely, the Indian electricity Act, 1910, the
electricity (supply) Act 1948 and electricity regulatory commissions Act, 1998.
Lot of thrust is being given by the government for development of power
sector in order to achieve the ultimate objective of “power for all”.
3.2 COMPANY PROFILE
Historical Background of RTPP, KADAPA (DIST).A.P:
A beginning: Almost a central after the invention of electricity it was

introduced in India for commercial use in humble way. For the first time in the
year 1889 a mini hydroelectric power house with a company of 15 KW was
constructed on a small rivulet in Darjeeling District and Electric power was
supplied in its vicinity with in two decades in 1909 a 10 KW diesel set was
installed in Hyderabad for supply of electricity to the king’s palaces. This was
first step in the development of electric power in A.P. (Hyderabad).
Electricity Progress in A.P. (1911-1922):
The electricity department was established in 1911 under the government

mint. Later Hussain Sagar Bund was electrified Saturday 25th October 1913
A.D and street electrification work was started within and outside the
municipal limits of Hyderabad and electricity was provided on the residency
roads. In Hyderabad 10 sub-stations were erected for the distribution of the
city. The tariff was 6 annals (Osmania Sikka) per unit with a minimum of
Rs.5/- O.S per month, programs of expansion to cover the town if the Nizams
at Auranagabad, Raichur, Warangal and Gulbarga etc.
The Government of India framed electricity rules in 1910 so as to

ensure fair distribution and supply of power as well as take all necessary
precaution of power by the consumers and concerned department.
The management of the Secunderabad electricity supply remained with

department. Nearly miles of cable of various sizes and there and half miles of
overheads mains were laid for 26% consumers. The work of changing the
feeding voltage from 3300 to 6600 was completed there were altogether 12
main and feeder lines and 50 subs-stations at the end of the year 1992. The
total number of consumers increased from 2977 to 3328.
APGENCO-R.T.P.P- IT’S VISION AND MISSION
Vision
 To be the power utility in the country and one of the best world.
Mission
 To generate the supply adequate and reliable power in the state of

Andhra Pradesh in the most economic manner.
 To spear head accelerated economic power development by planning,
implementing new power projects within stipulated cost and time.
 To implement renovation and modernization of all existing units and
enhance their performance.
 To operate power stations economically, efficiently and Eco-Friendly.
Core Values
 Excellence in all respects of the company.

 Honestly, integrity and Ethical Business.
 People as the source of strength.
 Respect for the individual and personal growth.
 Tacking challenges and solving problems.
 Continued self-improvement never being satisfied.
Corporate Objectives
 To operate and maintain power stations at high availability ensuring

minimum cost of generation.
 To add generating capacity, with in prescribed time and cost.
 To maintain the financial soundness of the company by managing
financial operations in accordance with good commercial utility
practices.
 To adopt appropriate human resource development policy leading to
creation if a team of motivated and competent power professions.
Performance Highlights for the Year 2007-08:
• APGENCO has contributed about 50% of energy to the AP state grid
requirement during the year.
• APGENCO has achieved highest generation of 33323.33 million units
since inception surpassing the previous high of 31441.94 million units.
• Thermal power stations have achieved highest generation of 23686
million units surpassing the previous high of 23359.70 million units.
• Hydro power stations have generated 9636.50 million units, highest

after 1994-95.
• APGENCO power stations have recorded the highest daily generation
of 124.33 million units on 20-08-2007 since inception.
• Ramagundam-B Thermal power station has generated 503 million
units, highest after 1977-78 and stood first among APGENCO stations with
91.6% PLF after renovation and modernisation of the unit.
• Ramagundam-B Thermal power station was twice in continuous
operation for more than 100days during the year.
• Kothagudem stage V has achieved 90.4% PLF (Plant Load Factor)
surpassing the last year PLF of 84%.
• Srisailam complex has achieved highest generation of 4626 million
units since inception. Its share in total hydro generation is 49.4%.
• Srisailam left bank power house has achieved highest annual
generation of 2544 million units since inception, surpassing its previous
high of 2512 million units achieved in the previous year 2006-07.
• Srisailam left bank power house units were operated in pu mp mode
and generated 160 million units during the year.
• Tungabhadra Hydro electric scheme has generated 163.9 million units,
highest after 1984-85. (With Joint Venture of Karnataka TB Board )
• The company has achieved an aggregate turn over of Rs.5195.55
crores as against Rs.4324.75 crores for the previous year 2006-07.
• Gross profit before depreciation is Rs.1022.46 crores.
• The depreciation for the year is Rs.69096 crores.
• The company has earned a net profit of Rs.197.64 crores as against a
profit Rs.151.00 crores for the previous year 2006-07.
Power Development in A.P. Opportunity Knocking:
We were standing at the entrance of 21st century and opportunity is

knocking at its door. This end of the century offers us the opportunity to
ensure India’s and in particular use electricity needs for decades to come.
Electricity demand in A.P in estimated to grow at an annual compound

growth rate of around 10% against 6 the national growth rate of 6.8%the
installed capacity of A.P State Electricity Board has grown from 213 MW in
1960-61 to 6124 MW at present (Excluding Central Share).
The available capacity in A.P is 6136.5 MW form central generating

stations. As the capacity addition could not keep pace with the growth in
demand, a shortage of 2000MW in the installed capacity exists now the
growth in demand has been mainly due to extensive rural electrification
program and energisation of agricultural pump sets at me lakh pump sets per
year since 1985-86, besides increase in domestic loads.
APSEB has long been a trendsetter in breaking new paths and

adopting the state-of-THEATRE technology in its power plants. The
technology adopted in the power station has been continuously upgraded
both in the Hydro and Thermal station and also in transmission distribution
and general management to enhance the productivity and improve the
operations.
Rayalaseema Comprise of four districts Kadapa, Kurnool, Anantapur

and Chittor which are considered to be in backward region and the area lags
behind in all respects such as agriculture, industrial and educational prior to
the growth of industrial development agriculture is based and dependent
solely on the rainfall people used to live on agricultural sector. The returns of
agriculture sector were at very low ebb. Owing to the advancement of Science
and Technology some mimes of baryties were found in rocky area of Kadapa,
which necessitated the workers to shift from agriculture to baryties.
Many baryties and mine industries were started subsequently more and
more industries were established in this region added to this, this region is
considered to be hottest region temperature often go up to 50oC in summer.
Therefore the need for electricity to meet the necessity of the in habitants and
the industrial belt of this region was felt, as the supply that was generated by
the agencies was found insufficient. Hence the government established the
Rayalaseema Thermal Power Project (RTPP) in the year 1988.
Rayalaseema Thermal Power Project is one of the major power

generation facilities being developed in Andhra Pradesh to meet the growing
demand for power. The project envisages the installation of 2x20 MW thermal
generation units under stage 1. The first 210MW units are commissioned on
31.03.1994 and second unit on 25.02.1995.
Rayalaseema region is in the southern part of the state and most of the
generating facilities are in the northern part of the state except two major
hydel stations in the central part. The Rayalaseema region therefore gets its
power needs through long EHT lines and frequently faces low voltage
problem particularly during summer when the hydro stations generation goes
down. Priority is therefore given for industrial development and power being
the basic infrastructure, it is necessary to ensure power supplies. In this
context the RTPP is taken up not only improve the base low capacity of the
grid but also to ensure proper voltage profile in the area under all conditions.
Plant Design
1. Location of the Project:
The project is located at a distance of 8 km from Muddanur Railway

Station of South Central Railway on the BROADGUAGE RAILWAY LINE
connecting CHENNAI-MUMBAI. The site new Mekalabayalapalli is distance
from populous towns and the land is government land not put to any use the
site is comparatively nearer to MYLAVARM RESERVIAR, which supplies
water; it is quite near to the existing Railway Lines. Transmission Line of A.P.
grid is also nearby to supply construction power, later for power generated
and supplying reliable power.
2. Cost Estimates:
The total cost of the project was estimated at Rs. 503.71 crores based on
1987 price and now revised to 840 crores and it is financial partly by Asian
Development Bank, Manila and partly by power finance corporation New Delhi
and self finance.The project cost of stage-2 is Rs.1640 croes,actual
expenditure around Rs.1800 croes.
3. Essential Inputs to Projects:
a. Land: An extent of 2621.587 acres of Government Land has been

acquired for the main plant colony ash pond and marshalling yard acres. In
addition to that 52.59 acres of patta land was also acquired.
b. Water Supply: The water required for running of the power station is
being drawn from the Mylavaram Reservior through a 21 km long steal pipe
line. The water flows from Mylavaram to RTPP through gravity. Government
of Andhra Pradesh Irrigation Department has allocated 20 Cusecs of water
per day 1.3 TMC per year from the reservoir for the project.
c. Coal Supply: The power station required about 2.5 million tons of coal
every year, which is being supplied from the SINGARENI COLLIRIES under
long term coal linkage arrangements. The coal is being transported to power
house site by rail over a distance of about 800km by one of the routes.
VIJAYAWADA-GODUR-RENIGUNTLA. An approach Railway line is formed
from Muddanur Railway Station to the project site as a part of the project of
late coal is supplied from MAGANDI COAL FIELDS, TALCHER also (state
Orissa in Eartern India).
d. Evacuation of Power: The power generated at the project is evacuated

through six number 220KV transmission lines to YERRAGUNTLA, KADAPA
and ANATAPUR (2 no’s each).
e. State of Clearances: All the clearances required for the construction of

the project like “NO OBJECTIVE” from Airports, Authority, “NO OBJECTIVE”
from state pollution control board and clearance from environmental angel
were obtained. The planning commission government of India wide letter
dated 9.03.1998 according investment approval for the project at an estimated
cost of Rs. 503.71 Crores for the power station based on 1987 (Revised to
Rs. 840 Crores).
Environmental Development in RTPP
Measures have been taken to check environment pollution by

plantation Viz, Avenue plantation development of green belt Areas, Lawns,
gardens were extended in and around RTPP to establish environmental and

ecological balances as follows:-
SL.NO AREA NO.OF PLANTS
1 Main Plant Area 5500Sq. mts
2 Coal Plant Area 5100Sq. mts
3 D.M.Plant Area(Lawns) 8550Sq. mts
4 Colony Area (Lawns) 770Sq. mts
5 Around Plant Area 775Sq. mts
6 Development of green belt inside 8550Sq.mts
Previously as water from ash pond was let out into the Kalamalla River.
It is now stored in a tank and re circulated back to the plant. As such water
pollution has been effectively controlled and water is being conserved. Also
oxidation pond for treatment of sanitary effluents was commissioned on
03.01.1998.
4. REVIEW OF
LITERATURE
Working capital management involves the relationship between a firm’s
short-term assets and its short-term liabilities. The goal of working capital
management is to ensure that a firm is able to continue its operations and that
it has sufficient ability to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working involves managing
inventories accounts receivable and payable and cash.
Definition
“Working Capital sometime called as Net Working Capital is

represented by the excess of current assets over the current liabilities and
identified the relatively liquid portion to total enterprise capital which constitute
a margin of buffer for maturing obligations within the ordinary operating cycle
of the business”. (AICPA)
Chakrborty (1976) who examined the association between working

capital turnover and profitability in Indian cement, sugar and fertilizer
industries reported a positive relationship Banerjee (1982) carried out a study
on the relationship between liquidity and profitability in which Gentry’s
hypothesis (1976) was tested in the context of Indian corporate working
capital had a bearing on profitability. Sankar and Saha (1987) made an
attempt to assess the relationship between profitability crisis and working
capital management of working capital the profitability of the public
enterprises suffered. An identical study on this issue was also conducted by
Mukherjee (1988) in which twenty central public sector undertakings were
selected following non-profitability sampling technique. In eleven enterprises
out of the selected twenty, liquidity and profitability were found to be adversely
correlated while in the rest the positive correlation between these two
variables was observed.
This study however, concludes that as a whole the liquidity and profitability
were adversely correlated. Panda and sat apathy (1988) carried out a research
stud; regarding the effects of working capital on profitability in Indian cem ent
industry This study revealed that the positive influence of working capital on
profitability of ers the selected companies was highly significant. Vijay kumaran
anc Venkatachalam (1995) conducted on em pirical study on the interrelationship
between workings capital management and profitability, in this study thirty -one
sugar companies in Tamilnadu were selected this study showed that the liquidity
was negatively associated with profitability while the inventory turnover and
debtor's turnover had positive influence on profitability.
A great deal of controversy has always been persisting over whether the
working capital of a film as determined by its investment and financing decisions
affects its profitability on this issue academ icians are sharply divided in two
schools of thoughts. One school of thought argues that working capital is not a
factor o enhancing profitability. Only fixed capital plays a very significant role in
profit generating process. More over, they also opine that there
May be a negative Influence of working capital on profitability the other

school of thought considers tent of fund invested. In working capital as relevant to
the profitability of the firm. They suggest that unless there is a minimum level of
investment in the working capital, which provided vehicle for improving profitability
output an sales cannot be maintained. The inadequacy of working capital rend
fixed assets inoperative which results in reduction in profitability. In the sense,
working capital acts as an explanatory varied in the profit function. Obviously a
large numberof considerations play ital role in the development of agreem ents and
counter arguments in this regard. Before stepping into the em pirical study, a quick
look though the existing literature relationship on the between working capital on
the relationship between working capita! and profitability seems desirable. During
the last four decades there has been a considerable number numbers of studies
made in Indian on the working capital management. Same of these studies are
connected with the evaluation of the interrelation between working capital and
profitability. The following paragraph provided very brief explanation of same of the
studies so far carried out in Indian on the issue.
Units due to unfair price significant. Vijay kumaran and Venkatachalam

(1995 conducted on empirical study on the interrelationship between workings
capita management and profitability. In this study thirty -one sugar companies in
Tamilnadu were selected this study showed that the liquidity was negatively
associated with profitability while the inventory turnover and debtor's turnover
had positive influence on profitability.
5. DATA ANALYSIS
Table No. 5.1 Statement of Change in Working Capital for Year
2003-2004
(Rs. In lakhs)
Particulars 2003 2004 Increase Decrease
Current assets:
Inventories 20620.16 28791.65 8171.49 --
Sundry debtors 114519.55 186041.43 7 1521.88 --
Sundry receivables 30505.53 12624.25 -- 17881.28
Cash and bank balance 4659.61 6202.27 1542.66 --
Loans and advances 49770.66 50504.07 733.41 --
Total Current Assets (A) 220075.51 28416.67
Current liabilities:
Sundry creditors 119037.95 124729.85 -- 5691.90
Deposits and retentions 1 6952.46 17163.62 -- 211.16
Provision for taxation 500.67 592.31 -- 91.64
Interest accrued but not due 9647.07 6112.18 3534.89 --
Other current liabilities 32309.83 1 8801.60 13508.23 --
Total Current Liabilities (B) 178447.98 167399.56
Working capital (A-B) 41627.53 116764.11
Net decrease in W.C 75136.58
Total net W.C 116764.11 116764.11 99012.56 99012.56
(SOURCE: ANNUAL REPORTS)
Interpretation:
The highest current assets in year 2004 is Rs.28416.67lakhs when

compared with the year 2003 is Rs.220075.51lakhs. So in the year 2004 the
company is in sound position. And they didn’t managed effective utilization of
assets. Here the money is blocked not use effectively. Implies there is loss in
the company. But in the year 2003 the asset value is decreased. Here there is
good management of assets. But due to decrease in the current assets we
can say the company is in weak position.
Comparing 2003 and 2004 here we can identified the current asset
value in the year 2003 is less than the current asset value in the year 2004.
From that it is clear that
• There is a good management of current assets. Implies that here is

gain to the company.
• Here block of money does not take place.
• But this source that the company is in weak position.
Table No. 5.2 Statement of Change in Working Capital

for the Year 2004-2005
(Rs. In lakhs)
Current assets:
Inventories 28791.65 22831.69 -- 5959.96
Sundry debtors 186198.50 203161.62 16963.12 --
Sundry receivables 12467.18 10242.06 -- 2225.12
Cash and bank balance 6202.27 1681.45 -- 4520.82
Loans and advances 12739.87 9722.43 -- 3017.44
Total current assets (A) 246399.47 247639.25
Sundry creditors 86965.65 49046.67 37918.98 --
Deposits and retentions 17163.62 17691.49 -- 527.87
Interest accrued but not due 6112.18 8289.46 -- 2177.28
Other current liabilities 25337.85 43097.96 -- 17760.11
Total current liabilities (B) 136171.60 118776.14
Total net W.C 128863.11 128863.11 54882.10 54882.10
Interpretation:
The highest current assets in year 2005 is Rs.247639.25 lakhs when

compared with the year 2004 is Rs.226399.47 lakhs. So in the year 2005 the

Table No. 5.3 Statement of change in Working Capital

(Rs. In lakhs)
Current assets:
Inventories 22831.69 28885.48 6053.79 --
Sundry debtors 203161.62 197944.41 -- 5217.21
Sundry receivables 10242.06 29846.01 19603.95 --
Total current Assets (A) 247639.25 272451.78
Total current liabilities (B) 118776.14 115710.57
Total net W.C 156741.27 156741.27 40100.96 40100.96
Interpretation:



(Rs. In lakhs)
Current assets:
Inventories 28885.48 26239.45 -- 2646.03
Sundry debtors 197944.41 165665.88 -- 32278.53
Cash and bank balance 7072.47 3708.37 -- 3364.08
Loans and advances 8703.41 15655.14 6951.73 --
Sundry creditors 39994.47 62687.38 -- 22692.91
Other current liabilities 45820.78 44691.99 1128.79 --
Total current Liabilities (B) 115710.51 150181.58
Total net W.C 156741.27 156741.27 73888.50 73888.50
Interpretation:


(Rs. In lakhs)
Current assets:
Inventories 26239.45 39388.49 13149.04 --
Sundry debtors 165665.88 148917.78 -- 16748.10
Interest accrued but not due 9853.22 7107.69 2745.53 --
Total current Liabilities (B) 150181.58 202529.67
Total net W.C 110487.34 110487.34 85015.27 85015.27
Interpretation:


Analysis of Working Capital Ratio’s of the Organization:
1. Current Ratio:
The current ratio compares the total current asset with the total current
liabilities. A relative high ratio is an indication that the company is having high
liquidity position and has the ability to pay its current obligation in time as and
when they became due.
The current assets include cash, stock, work in progress, marketable

securities and accounts receivable.
On other hand current liabilities includes account payable, sundry

creditors, accrued income taxes, proposed dividends and borrowings from
financial institutions.
Current assets
Current ratio =
Current liabilities
Table No. 5.6 Current Ratio of the Company from 2003-2008

(RS. in lakhs)
Year Current assets Current liabilities Current

Ratio
2003-04 284163.67 167399.56 1.70
2004-05 247639.25 118776.14 2.09
2005-06 272451.78 115710.21 2.35
2006-07 260668.92 150181.58 1.82
2007-08 289357.15 202529.67 1.44
(Source: Annual Reports)
CURRENT RATIO
2.5
2
Current Ratio
1.5
1
0.5
0
2003-04 2004-05 2005-06 2006-07 2007-08
Years
Interpretation:
Generally 2:1 is considered ideal for the concern ratio. Current assets
should be two times the current liabilities. But this was not ideal for port trust
because A.P GENCO is a service oriented organization. From the above table
and Chart, it can be known that the current ratio is 1.444 in the year 2007-08.
The current ratio in the year 2006-07 is the 1.825.The current ratio is
decreased compared to the last year.
2. Activity Ratio
A. Debtors Turn Over Ratio
The major activity ratio receivables of debtor’s turnover ratio. Allied and
closely related to this is the average collection period. The debtor’s turnover
ratio is test of the liquidity of the debtors of a firm. The liquidity of a firm’s
receivable can be examined in two types of debtor’s turnover ratio:
- Debtors/receivables turnover ratio
- Average Inventory Holding Period
Sales = operating income
Net credit sales
Debtors turn over ratio =
Avg debtors
Average debtors = opening debtors + closing debtors
Table No. 5.7.1 Debtors Turnover Ratio (Rs. In lakhs)
Years Net credit Opening Closing Avg DTOR(times)

sales debtors debtors debtors
2003-04 406990.85 114579.55 186041.43 150280.49 2.71
2004-05 417255.56 186041.43 203161.62 194601.52 2.14
2005-06 388868.06 203161.62 197944.41 200553.01 1.94
2006-07 419999.51 197944.41 165665.88 181805.14 2.31

2007-08 461730.22 165665.88 148917.78 157291.83 2.93
DEBTORS TURN OVER RATIO
3
2.5
Debtors Turn
Over Ratio
2
1.5
1
0.5
0
2003-04 2004-05 2005-06 2006-07 2007-08
Years

Interpretation:
The debtor’s turnover shows the relationship between sales and

debtors of firm. Debtor’s turnover indicated the number of times on the
average the debtor’s turnover each year. Generally the higher value of the
debtor’s turnover, the more efficient is the management of assets. A.P.
GENCO is service oriented organisation. From the above table and Chart, it
can be known that the current ratio is 2.935 in the year 2007-08. Current ratio
is 2.310 in the year 2006-07. The ratio was increased compared with last
year.
B. Average Inventory Holding Period:
The second type of ratio of measuring the liquidity of a firm’s debtors is

the average collection period. This ratio is fact interrelated with the dependent
upon, the receivables turnover ratio.
No. of days in a year
Avg inventory holding period =
STOR
Table No. 5.7.2. Average Inventory Holding Period (Rs. In lakhs)
Years No. of days STOR Avg Inventory Holding

in a year period (Days)
2003-04 360 8.19 44
2004-05 360 8.35 43
2005-06 360 7.95 45
2006-07 360 8.39 43
2007-08 360 7.59 47
AVG INVENTORY HOLDING PERIOD
200
150
100
50
0
2003-04 2004-05 2005-06 2006-07 2007-08
INTERPRETATION:
The shorter the average collection period, the better the quality debtors,
as a short collection period implies the prompt payment by debtors. From the
above table and Chart, it can be known that the current ratio is 45 highest
days in the year 2005-06. The average collection period ratio is 43 days in the
year 2006-07.The average collection period ratio is 47 days in 2007-08. The
ratio was decreased compared with last year.
3. Inventory Turnover Ratio:

It indicates the number of times the average stock has turned over
during period. It indicates the efficiency of the firm’s inventory management.
The cost of goods is an expenditure including operating, administration,
project establishment, interest on loans, and depreciation on fixed assets,
provision, for bad debts. The average inventory used in the determination, in
the average of opening and closing inventories. It is calculated by dividing the
cost of goods sold by average inventory.
Cost of goods sold

Inventory stock turnover ratio =
Average stock
Average stock = opening stock+closing stock

______________________
2
Table No. 5.8 Inventory Turnover Ratio (Rs. In Lakhs)
Year Average Cost of goods Inventory turnover

Inventory sold Ratio
2003-04 24705.90 202342.65 8.19
2004-05 25811.67 215658.24 8.35
2005-06 25858.60 205641.06 7.95
2006-07 27562.47 220216.54 7.98
2007-08 32813.97 249104.81 7.59
Inventory Turn Over Ratio
8.4
Inventory Turn 8.2
over ratio 8
7.8
7.6
7.4
7.2
2003-04 2004-05 2005-06 2006-07 2007-08
Years
Interpretation :
Generally a high inventory turnovers indicative of good inventory

management and a low inventory turnover suggests an inefficient inventory
management. Therefore a balance should be maintained between too high
and too low inventory turnovers. From the above table and Chart, it can be
known that the Inventory stock turnover ratio is 7.989 in the year 2006-07.
The average collection period ratio is 8.190 in the year 2007-08. The ratio was
decreased compared with last year.
4. Fixed Assets to Net Worth Ratio

This ratio shows the relation between fixed assets to the net worth.
Fixed assets contains land, capital dredging, building sheds, floating sheds
etc. net worth includes reserves and surplus of Visakhapatnam port trust.
Fixed Assets
Fixed Assets To Net Worth Ratio =
Share holders funds
Table No. 5.9 Fixed Assets to Net Worth Ratio (Rs. In Lakhs.)
Years Fixed Assets Share holders Fixed assets to

funds net worth Ratio
2003-04 934386.36 183495.48 5.09
2004-05 887118.82 189937.22 4.67
2005-06 819643.49 196360.18 4.17
2006-07 760265.67 211579.83 3.59
2007-08 880552.18 230443.60 3.82
FIXED ASSETS TO NET WORTH RATIO
Fixed assts to net

5
worth ratio
4
3
2
1
0
2003-04 2004-05 2005-06 2006-07 2007-08
Years
Interpretation :
From the above table and Chart, it can be known that the Fixed Assets
Net worth Ratio is 3.59 in the year 2006-07. The Fixed Assets Net worth Ratio
is 3.82 in the year 2007-08. The ratio was increased compared with last year.
5. Net Profit Ratio

This ratio indicated the earnings out of every 100 rupees of sales and
the unit make a direct measure of the annual profit. Here, the net profit is
taken as net profit after tax.
Net profit*100
Net Profit Ratio =
Net Sales
Table No. 5.10 Net Profit Ratio (Rs. In Lakhs.)

Years Net profit Net Sales Net profit Ratio
2003-04 1045.87 406990.85 0.25
2004-05 5163.80 417255.56 1.25
2005-06 6303.94 388868.06 1.62
2006-07 15100.62 419999.51 3.59
2007-08 19763.59 461730.22 4.28
NET PROFIT RATIO
Net Profit Ratio

4
3
2
1
0
2003-04 2004-05 2005-06 2006-07 2007-08
Years
Interpretation :
From the above table and Chart, it can be known that the Net profit
Ratio is 3.595 in the year 2006-07. The Net profit Ratio is 4.280 in the year
2007-08. The ratio was increased compared with last year.
6. Working Capital Turn Over Ratio

The difference between current assets and current liabilities is called
net working capital. The net working capital ratio is calculated by dividing net
working capital with net assets or capital employed. Current assets include
cash and bank balances, investment, raw materials, advance payments,
consumable stores and spares, finished goods, stock in process/ semi
finished goods, sundry debtors, prepaid expenses. Current liabilities consists
of account payable, short-term notes payable, current maturates of long term
debt, accrued income tax and other accrued expenses. Net assets include net
working capital and finished assets.
Sales
Working Capital Turns Over Ratio =
Net Current Assets
Table No. 5.11 Working Capital Turn Over Ratio (Rs in Lakhs)
years Sales Net Current assets Working capital

turn over ratio
2003-04 406990.85 116764.11 3.49
2004-05 417255.56 128863.11 3.24
2005-06 388868.06 156741.27 2.48
2006-07 419999.51 110487.34 5.80
2007-08 461730.22 86827.48 2.43
WORKING CAPITAL TURN OVER RATIO
6
5
Working capital
turn over ratio
4
3
2
1
0
2003-04 2004-05 2005-06 2006-07 2007-08
Years
Interpretation :
The ratio is used as a measure of firm’s liquidity. The ratio measures

the firm’s potential reservoir of funds. From the above table and Chart, it can
be known that the Working capital turn over ratio is 3.563 in the year 2006-07.
The Working capital turn over ratio is 5.185 in the year 2007-08. The ratio was
increased compared with last year.
7. Liquidratio
The Liquid ratio is calculated by deducting inventories from current
assets and dividing the remainder by current liabilities. Inventories are
typically the least liquid of a firm’s current assets and assets on which losses
are most likely to occur in the event of liquidation. Therefore, this measure of
the firm’s ability to payoff short-term obligations without relying on the scale of
inventories is important.
The term liquid assets refer to current assets, which can be converted
into cash immediately or at a short notice without diminution in value. Included
in this category of current assets are
- Cash and Bank balances
- Short term marketable securities and
- Debtors or receivables
Liquid Assets
Liquid Ratio =
Liquid Liabilities
Liquid Assets =Total Current Assets – (Stock+prepaid expenses)
Liquid Liabilities= Total Current Liabilities- (Bank Overdraft)
Table No. 5.12 Liquid Ratio (Rs. In Lakhs.)
Year Current Assets Current Liabilities Inventory Liquid Ratio
2003-04 28463.67 166807.25 28791.65 1.53
2004-05 247639.25 118776.14 22831.69 1.89
2005-06 272451.75 115710.21 28885.48 2.10
2006-07 260668.92 150181.58 26239.45 1.56
2007-08 289357.15 203529.67 39388.49 1.23
LIQUID RATIO
2.5
Liquid Ratio
2
1.5
1
0.5
0
2003- 2004- 2005- 2006- 2007-
04 05 06 07 08
Years
Interpretation:
The exclusion of inventory is based on the reasoning that it is not

Eastland readily convertible into cash. Prepaid expenses by their very nature
are not available to pay off current debts. From the above table and Chart, it
can be known that the current ratio is decreased in the year 2007-08
compared to year 2006-07.
6. FINDINGS
 The average inventory holding period of the APGENCO is more during
2003-04 compare with the previous year. It means funds were blocked up
in inventory which leads to interest on capital blocked up inventory.
 From the observation it is clear that equity share capital is fixed for
years. There is preference share capital in APGENCO and debt capital is
increased in the year 2007-08.
 From the analysis the net profit ratio was increased year by year.
 The Earning per share also increased year by year.
 From the analysis it is clear that the current ratio is decreased from the
year 2005-06. The ideal current ratio between current assets and current
liabilities should be 2:1.
 The A.P. GENCO has to maintain a good liquid balance to meet its
obligations because the absolute liquid ratio is decreasing year by year.
 From the analysis we understood that inventory turn over ratio is

decreased from the year 2004-05.
 The study reveals that the companies met working capital increased
from 2000-01 to 2004-05.
 In the year 2006-07 the current assets was 260668.92 and current
liabilities was 150181.58.
7. SUGGESTIONS .
 From the above Observation is clear that no dividend is paid to equity

share holders so necessary techniques and methods are to be taken to
increase the profits.
 It is suggested that implementing the techniques of costs of control and

cost of reduction.
 The over all liquidity position of APGENCO is satisfactory assets

liquidity has declined from 41.14% in 2001-02 to11.24% in 2003-04.
 The average holding period of APGENCO is more during 2003-04.So

necessary steps are to be taken to reduce the inventory levels of
APGENCO.
 The operating expenses should be in control by using proper

techniques to get be better profits by controlling the operating
expenses
8. CONCLUSION
The working capital management system followed by APGENCO
shows a satisfactory position. Proper working capital management is used to
establish a cause and effect, relationship between variables to help the
management in making effective strategic planning to forecast the future and
take necessary steps to reach the organizational goals. Various crucial areas
that need attention were identified and practical suggestions were given to
improve performance.
BIBLIOGRAPHY
• PRASANNA CHANDRA, FINANCIAL MANAGEMENT, 5th

Edition, 2002, TATA-McGraw HILL, New Delhi.
• S.P. JAIN, K.L. NARANG, ADVANCED ACCOUNTANCY, 10th

Edition, 2003, Kalyani Publisher, Ludhiana.
• I.M. PANDEY, FINANCIAL MANAGEMENT, 8th Edition, 2002,

Vikas Publishing House Private Limited, New Delhi.
Journals:
 The ICFAI Journal of Applied Finance
 Finance India (India Institute of Finance)
Website:
www.apgenco.co.in
Annual Reports of RTPP:
1. 2003-2004
2. 2004-2005
3. 2005-2006
4. 2006-2007
5. 2007-2008

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Working Capital Management

Financial management is that managerial activity which is concerned

The subject of financial management is of immense interest to both

Meaning of Financial Management:

According to “Financial management is concerned with the efficient use

According to him “Financial management is concerned with managerial

A firm creates manufacturing capacities for production of goods; and

A firm secures what ever capital it needs and employees it (finance

Meaning and Types of Financial Statements:

A financial statement is an organized collection of data according to

Thus the term “Financial Statement’s “generally refers to two basic

Nature of Financial Statement:

Financial statements are prepared for the purpose of presenting a

Personal judgment of the accountant again will reflect the preparing of

The following points reflect truly the nature of financial statements of

 These are reports or summarized reviews about the performance,

Importance of Financial Statements:

The information given in the financial statement is very useful to a

The financial statements being a mirror of the financial position of a

The following technique can be used in connection with analysis and

 Comparative Financial Statements.

They reflect the financial position and operating strengths or weaknesses of

the concern by properly establishing relationships between the items of the

ratio analysis estimates and revised estimates.

Working capital can be under taken either by the management of the

resource of the society in generation of goods and services.

Hence, it is overall responsibility of the management to see that the

financial position is good.

Working capital in simple terms is the amount of funds which business

Concepts of working capital:

Working capital can be defined through its two concepts, namely:

(a) Gross working capital (b) Net working capital.

Gross working capital:

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

Net working capital:

A negative net working capital occurs when current liabilities are in

Importance of Working Capital

Investment is fixed assets only is not sufficient to run the business.

 If proper cash balance is maintained a Company can avail the

 Adequate working capital creates a sense of security, confidence and

Determinants of Working Capital

• Nature of the Business

• Sales and Demand Conditions

• Technology and Manufacturing Policy

• Price Level Changes

 Acquisition of resources such as raw material, labour, power and fuel

The firm is required to invest in current assets for smooth,

Stocks of raw material and work-in-process are kept to ensure smooth

The operating cycle can be measured as follows:

 RMCP – Raw material Conversion Period

Purchases Payment Credit Sale Collection

Inventory Conversion Period Receivable Conversion Period

Payables Net Operating Cycle

Permanent and Variable Working Capital

The minimum level of current assets which is continuously required by

The extra working capital needed to support the changing production

RMCP=Raw Material Conversion Period

WIPCP=Work-in-progress Conversion Period

FGCP=Finished Goods Conversion Period

SDCP=Sundry Debtors Conversion Period

SCCP=Sundry Creditors Conversion Period

Working capital cycle/operating cycle