ABSTRACT

The management oI Working Capital is one oI the most important and challenging aspect oI the
overall Iinancial management. Merely more eIIective and eIIicient management oI working capital can
ensure survival oI a business enterprise. Working Capital Management is concerned with the problems
that arise in attempting to manage the Current Assets, Current Liabilities and the interrelation that exists
between them. This is a two-dimensional study which examines the policy and practices oI cash
management, evaluate the principles, procedures and techniques oI Investment Management, Receivable
and Payable Management deals with analyzing the trend oI working capital management and also to
suggest an audit program to Iacilitate proper working capital management in Indian Tyre Industry. The
study covers a production oI year viz, -2007-June 2011. For the purpose oI investigation both primary and
secondary data is used. The collected data is analyzed by applying research tool which include accounting
tools like Analysis, Cash Flow Analysis, Common Size and Trend Analysis. They reveal that there is a
standoII between liquidity and proIitability and the selected corporate has been achieving a tradeoII
between risk and return. EIIicient management oI working Capital and its components have a direct eIIect
on the proIitability levels oI tyre industry




INTRODUCTION
Working Capital Management reIers to all management decisions and actions that ordinarily
inIluence the size and eIIectiveness oI the working capital. It is concerned with the most eIIective choice
oI working capital sources and the determination oI appropriate levels oI the current assets and their use. It
Iocuses attention to the managing oI current assets, current liabilities and the relationships that exist
between them. In the present day oI rising capital cost and scarce Iunds, the importance oI working capital
needs special emphasis. It has been widely accepted that the proIitability oI a business concern likely
depends upon the manner in which its working capital is managed. The ineIIicient management oI
working capital not only reduces proIitability but ultimately may also lead a concern to Iinancial crises.
On the other hand, proper management oI working capital leads to a material savings and ensures Iinancial
returns at the optimum level even on the minimum level oI capital employed. Both excessive and
inadequate working capital is harmIul Ior a Iirm. Excessive working capital leads to unremunerative use
oI scarce Iunds. On the other hand, inadequate working capital usually interrupts the normal operations oI
a business and impairs proIitability. There are many instances oI business Iailure Ior inadequate working
capital Example. Modi Rubbers. Further, working capital has to play a vital role to keep pace with the
scientiIic and technological developments that are taking place in the area oI tyre industry. Also, the
current Iinancial parameters oI tyre industry are much less than the desired level. In this context, an
attempt has, thereIore, been made to undertake an in depth study on working capital management oI
Indian Tyre Industry.


OB1ECTIVES OF THE STUDY
The primary aim oI our study is to examine and assess management oI working capital oI JK Tyre
industry. In this broader Iramework an attempt will be made to meet out the Iollowing speciIic objectives
oI the study
1. To study the components oI Working Capital Management in J.K.TYRE Industry.
2. To assess at length, prevalent practices oI inventory management, cash management and receivables
management on the proIitability and liquidity oI Iirms in the Tyre Industry.
3. To analyze the relative proportion oI diIIerent sources oI Iinance Ior working capital oI J.K.TYRE
Industry
ABOUT THE ORGANISATION
The advent oI JK Organization on the industrial landscape oI India almost synchronizes with the
beginning oI an era oI industrial awareness - an Endeavour Ior selI reliance and the setting up oI a
dynamic Indian industry. This was way back in the middle oI the19th century. And the rest that Iollowed
is history 'Excellence comes not Irom mere words or procedures. It comes Irom an urge to strive and
deliver the best. A mindset that says, when it is good enough, improve it. It is a way oI thinking that
comes only Irom a power within.




CORE VALUES

JK Organization has been a Iorerunner in the economic and social advancement oI India. It always
aimed at creating job opportunities Ior a multitude oI countrymen and to provide high quality products. It
has striven to make India selI reliant by pioneering the production oI a number oI industrial and consumer
products, by adopting the latest technology as well as developing its own know-how. It has also under
taken industrial ventures in several other countries. JK Organization is an association oI industrial and
commercial companies and charitable trusts. Its member companies, employing nearly 50,000 persons are
engaged in the manuIacture oI a variety oI products and in diverse Iields oI commerce.
Trusts are devoted to promoting industrial, technical and medical research, education, religious
values and providing better living and recreational Iacilities. With the spirit oI social consciousness
uppermost in mind, J.K. Organization is committed to the cause oI human advancement.







VISION
To be amongst the most admired companies in India, committed to excellence
MISSION
O Be a Customer Obsessed Company - Customer First 24x7
O o.1 Tyre Brand in India
O Most proIitable Tyre Company in India
O Motivated and Committed team Ior excellence in perIormance
O Be a Green Company
O eliver Enhanced Value to all stakeholders
O Enhance global presence through Acquisition / JV / Strategic Partnerships



HISTORY OF 1K TYRE & INDUSTRY LTD
Ever since its inception it has been JK Tyre's belieI in the value oI technological superiority that
has made it grown by leaps and bounds. This division produces and sells tyres and tubes under the brand
name "JK Tyre" Ior Truck, Buses, Passenger Cars, Jeeps, Light Commercial Vehicles, Multi Utility
Vehicles and Tractors. The company pioneered Steel Radial Technology in India in 1977and continues to be
the industry leader in the Radial segment in India. JK Tyre is the only Tyre ManuIacturer in the country to
produce high perIormance 'T' & 'H' -rated steel radial tyres. JK Tyre has consciously Iollowed a policy oI
continuously modernizing and expanding its tyre manuIacturing Iacilities to retain its edge in the market
place. Our customer base covers virtually the entire Original Equipment ManuIacturers (OEMs) in India
together with Replacement Market Ior Iour wheeler vehicles, eIense and State Transport Units. Besides
India, we have a worldwide customer base in over 45countries across all 6 continents.

To keep pace with the market demand as well as technological leadership in Indian market,
J.K.Industries acquired Vikrant Tyres Limited, Mysore in 1997. J.K.Industries and Vikrant Tyres Limited
are the only tyre companies in India to have received all three ISO 9001, QS 9000 and ISO14001
certiIicates. This indeed is a true reIlection oI our commitment to system oriented approach. The company
has technical collaboration with M/s Continental AG, Germany, which is among the top Iive tyre
manuIacturers





In the world to keep pace with latest technological developments. To stay at the IoreIront oI
technological advancements a state oI art Research & evelopment Centre, HASETRI, was set up, which
remains the nerve centre Ior with three plants located in Rajasthan, Madhya Pradesh and Karnataka, JK Tyre
is the largest manuIacturer oI truck and bus tyres in India. The truck and bus tyres produced account Ior
nearly74 oI the total tyre business in India, thus giving JK Tyre an undisputed position. Additionally, JK
Tyre is the only manuIacturer oI truck/ bus steel radial tyres, and the second largest manuIacturer oI 4-
wheeler tyres in the country. Also, JK Tyre is the largest exported tyre brand Irom India. It was awarded the
CAPEXIL's Highest Export Award Ior 1997-97 by FIEO. It enjoys preIerred premium brand status in Truck
Bias market in USA and across many markets in AIrica, Middle East and South East Asia.

YEARLY ACHIEVEMENTS
1951- The Company was incorporated as a private limited company in West Bengal
in 14
th
February, 1951 until31stMarch 1970 The company was engaged in the managing
agency business thereaIter the company decided to undertake manuIacturing activities and
obtained a letter oI intent in February 1972 Ior the manuIacture oI automobile tyres and
tubes.
O 1972- The letter oI intent was converted into an industrial license in February Ior the
manuIacture oI 4lakh nos. each automobile tyre and tubes per annum. The company was
converted into a public limited company on 1stApril 1974. the manuIacturing project was
promoted by Straw Products Ltd and J.K. Synthetics Ltd. Co., U.S.A.,(a subsidiary oI
General Tire& Rubber Co., U.S.A.) Ior technical



services Ior a period oI 5years and sales agreement Ior the supply oI technical know-how,
engineering and documentation Ior operational Iacilities (Ior a period oI 8 years
Irom23.08.1973).- Under the collaboration agreement, the company has the right to use on its
products the wording Made in collaboration with General Tire International Co., U.S.A
O 1982- The company`s technical collaboration agreement with General tire International
Co., was renewed Ior a Iurther period oI 5 years.
O 1987- The overall working resulted in substantial proIits despite a 51 days strike as
well as go-slow Irom 14
th
October. The strike had since then been resolved and amicable
settlement was reached. EIIorts were on to launch a new pattern in steel belted radial tyres.
O 1988- ew steel radial tyres Ior Maruti Gypsy and Tata mobile were introduced. The
company proposed to incur an expenditure oI Rs.300 lakhs Ior installation oI latest and
sophisticated R& equipment.
O 1989- Several new patterns and sizes oI tyres were introduced including a semi-lug
ylon tyre, all oI which were well received in the market
O 1990- Han deep Investment Ltd., Hid rive Finance Ltd., Panchanan Investment Ltd.,
and Radial Finance Ltd., J.K. International Ltd., Shivdham Properties Ltd., and J.K. Asia
PaciIic, Ltd., are
O 1991- The J.K. International division expanded its activities by opening its oIIice in
Moscow besides starting company`s subsidiaries in UK &Honkong. The radial tyres Ior
tractors and business launched in the previous years were well received.
O 1992- ew radial tyres Brute` and Ultima` were introduced. The company was in
the process oI developing steel belted radial tyres the prestigious cars in the Mercedes Benz,


Peugeot, aewoo race and Opel Astra. A new pattern developed Ior Bus and tucks 'PE-T8
was well received in the market`.
O 1994- The company maintained its pace oI growth, despite steep rise in raw material
and input costs and competition. The company eIIected an all round cost reduction and
attained higher capacity utilization at both the Tyre plants at Jaykaygram and Banmore.- The
T-rated Ultima tyres launched Ior new generation cars Iound its acceptance in CM
aewoo`s Ceilo`. Also J.K. steel radial was chosen Ior Mercedes Benz India. Subsidiaries oI
the Company
O 1995- The company undertook to develop steel radials Ior GM`s Astra`. Pal`s
Peugeot` Fiat`s, UO` and M&M`s Ford`.- The company launched a premium truck Tyre
Jet Trek` 39 which was introduced to meet the need oI the heavy load market.- The new
tractor rear tyre SOA` was well received in the market.
O 1996- uring this period, a new car tyre Jet rive XS, the widest nylon car tyre oI
Maruti 800 was launched. Along with new semi-lug and heavy duty lug tyre Ior trucks, anew
lug tyre Ior super heavy load applications Jet Trak-39 was also introduced. In the radial
category, Ultima XR Radial, a terrain tyre was introduced. All these products were well
received in the market.- Both the tyre plants operated to Iull capacity. In line with JK Tyre,
the radials unit introduced the dual contact high traction and high perIormance Aqua sonic
steel radial car Tyre. The unit also developed also developed India`s Iirst and only H-rated
Ultima Xs` especially Ior Mercedes-Benz Cars.



O 2000- The company proposes to reduce its debt by Rs.125crore in the current Iiscal
Irom the current level oI Rs.635 crore by way oI loan repayment.- The company and Indian
Oil Corporation have entered into a marketing alliance Ior installing digital air pressure
gauges and setting up sales and services outlets at IOC petrol stations throughout the country.
O 2001- Raghupati Singhania managing director oI J.K. Industries has been appointed
the 19
th
Chairman oI Automotive Tyre ManuIacturers association, the representative body oI
Tyre industry in India.
O 2002- J.K. Industries Ltd. has inIormed BSE that CRISIL has assigned a P1rating to
the Commercial Paper programmer oI the company.
O 2003- J.K. Industries Ltd. has a new Marketing irector in Mr. Ajay Kapila. BeIore
joining J.K. Industries Ltd., Mr. Kapila was Senior Vice-President (sales and Marketing) at
Kinetic Engineering Ltd. He was also irector on board and operational head oI Kinetic`s
direct selling arm-Kinetic Marketing Services Ltd.
O 2004- J.K. Industries Ltd. has inIormed that its securities are delisted Irom elhi
Stock Exchange Association Ltd (SE) w.e.I. January 29, 2004.
O 2007- J.K. Industries Ltd. has inIormed that the name oI the company has been
changed Irom J.K. Industries Ltd. To J.K. Tyre & Industries Ltd. w.e.I. April 02, we the
people oI J.K. Tyre will have organization committed to quality in everything we do. We will
continuously anticipated and understand our customers` requirements. Convert these into
perIormance standards Ior our products and services and meet these standards every time. Full
customer satisIaction-both internal and external is our motto.



1K ORGANISATION - A CENTURY OF TRUST
Innovation and passion to perIorm have always been the driving Iorces at J K
Organization. J. K. Organization, is one oI the leading Private Sector Groups in India,
Was founded over 100 years ago - it's been a century oI multi-business, multi-product
and multi-location business operation.

1K TYRE- WHEELS TO THE NATION

JK Tyre has Iive Modern plants in India which are
strategically located at
O Mysore, Karnataka (3)
O Banmore, Madhya Pradesh
O Kankroli, Rajasthan

JK Tyre pioneered radial technology in India way back in 1977, and is the Radial Leader in the
country -eing the only tyre manufacturer offering the entire range of 4 wheeler radials i.e. Ior Trucks
& Buses, LCVs, Cars and Farm. With strong adherence to quality and customer service we are not only a
leading brand in India but also a strong global player with a presence in 77 countries across 6 continents
oIIering a wide range oI products backed by world class technology. JK Tyre enjoys a premium brand
status in various advanced markets, including the USA and Australia.





OUR FIRSTS - LEADING THE WAY
Ever since its inception, JK Tyre has been a leader
rather than a Iollower. We have garnered many
Firsts to our credit like;
O First Indian tyre company to introduce All Steel
Truck & Bus Radials in India in 1999
O !ioneered Radial technology in India by
introducing passenger radials in 1977
O First Indian tyre company to be
recognized a 'SU!ERBRAND' by Global Advertising ProIessionals
O First in India to launch 'Eco-friendly - Green tyre'
O First in India to launch Dual Contact - Aqua sonic tyre
O First to launch 'Asymmetric tyre
O First in India to launch high performance tyre -
H rated - Speed oI above 190 kms upto 210 kms
V rated - Speed oI above 210 kms upto 240 kms
rated - Speed oI above 240 kms. Upto 300 kms.
O World's Iirst tyre manuIacturer to get "S 9000 certification Ior all its multi-location
operations
O World's Iirst tyre manuIacturer to get ISO 9001 certification Ior its entire operations.





CUSTOMER SATISFACTION - OUR CREDO
Customer SatisIaction has always been our prime Iocus. We are indeed proud oI our highly experienced
and proIessional team Ior winning the trust oI customers and building strong relationships with them.
O Our 115 company owned stocking points serve over 4000 dealers across the country.
O We have set up 130 1K Tyre Steel Wheels - a unique concept in car tyre retailing which
provides value added services like wheel balancing, alignment and tyre care to customers.
O Our Truck Radial Care Centers oIIer aIter-sales service Ior Truck/Bus Radials, which
operate on 365 days / 24 hours basis. A large number oI such centers have been set up along all major
ational Highways.
O JK Tyre has been among the top two tyre companies in respect oI Customer SatisIaction, as
per JK Power Asia PaciIic Study, Ior many years.
R & D
TECHNOLOGY OUR DRIVING FORCE
We have always been pushing the limits oI possibilities. Our research centers have been our nerve
centers Ior extensive research and development.
These are:
O Mr.Hari Shankar Singhania
Elastomer and Tyre Research Institute (HASETRI)
- Jaykaygram, Kankroli (Rajasthan) and Faridabad
(Haryana)
O r.Raghupati Singhania Center oI Excellence Ior Tyre and Vehicle Mechanics - Chennai
(Tamil adu)



MOTORS!ORTS - !UTTING INDIA ON THE FAST TRACK
JK Tyre is synonymous with
Motorsports in India. By investing in
InIrastructure and instituting
championship, JK Tyre has taken upon
ItselI to put India on the world
Motorsports map.

FUTURE !LANS
India is Iast emerging as a global automobile hub particularly Ior small cars. It oIIers immense
Opportunities Ior JK Tyre to grow its business both organically and inorganically.
We have been constantly exploring ways oI increasing our presence in diIIerent world markets,
through alliances and acquisitions in tyre and related business. In all our endeavors, our core Iocus is on
customer delight. Enlarging the customer base, providing them with better quality oI services and more
value added products, will continue to be the key areas oI our thrust.
SOCIAL RES!ONSIBILITY AND COMMUNITY SERVICE
As a responsible corporate organization, JK Tyre is committed to social and community service. Giving
back to society and the environment is one oI our core principles. We have implemented many
programmes in order to enrich people in and around our workplaces. In order to provide an all round
development and growth, our social programs are diversiIied to include
O Healthcare
O Education
O Environment initiatives
O Sports programmes

HEALTH CARE
We have been running and supporting a number oI
health programmes not only Ior our employees, but
also Ior people living in and around the areas we
operate Irom. Some oI our eIIorts in this area are:
O Free Medical Camps were
organized at our Tyre Plants in
collaboration with various reputed
hospitals in rural areas
O Where no medical Iacilities are available.
O Around 1000 people availed the beneIit oI general medical treatment.
O Eye Camps were organized at Banmore. Almost 2500 people Ior tested and 500 eye
operations were conducted.
O Programmes on Development of Mentally Retarded Children was supported by
donations and contributions made by employees oI Vikrant Plant at Mysore. This was
organized in collaboration with the
istrict Hospital.
O In collaboration with Population
Foundation oI India, we adopted 60 villages in the
Rajsamand istrict oI Rajasthan Ior running
a !opulation Control !rogrammes titled
O "!arivartan". Services such as
Ante-atal and post - natal Check-ups,

O Immunization, Growth Monitoring oI Children upto 5 years, identiIication and treatment oI
various diseases and other common ailments are provided Iree oI cost. This has signiIicantly
reduced Maternal and Child Mortality rates. The programmes also regularly counsel the
community members on issues oI Family WelIare and Population Control, including Iree
distribution oI contraceptives.
O "!ushpawati Singhania Research Institute" (!SRI) which is a Super Specialty Hospital Ior
igestive, Liver and Renal iseases, elhi is an initiative by JK Tyre. The Institute organizes a
number oI health care programmes like, Free Medical-checkups, Blood onation Camps etc.
O We provide all support to TCI and the Bill & Melinda Gates Foundation in their endeavor to
spread awareness Ior HIV /AIDS. Centers have been set up on the ational Highway / Transport
agar to help and council truck drivers who are considered to be highly vulnerable to the diseases.
So Iar, more than 1, 25,000 people have attended the clinics, oI which 25 were treated Ior
sexually transmitted inIections. We also support "Infotainment Melas" which are held near these
clinics, where education is combined with entertainment Ior spreading the message Ior HIV/AIS
awareness.
EDUCATION
We recognize the great importance oI education Ior building the Iuture oI our country, and are
committed to its contribution. With this belieI, Lakshmipat Singhania School at 1aykaygram was
established. It gives us great pride to note that our students have excelled and are recognized Ior their
eIIorts in Rajasthan. We also help and support various educational institutions who are involved in
providing quality education Ior the children in villages. This includes Iree distribution oI books,
computers etc. We are also helping raise the level oI education amongst the elders by initiating Adult
Literacy !rogrammes in remote and backward villages. Example: small villages adjoining Mysore
(Karnataka), Kankroli (Rajasthan) Banmore (Madhya Pradesh) etc.

Children Career Counseling is provided Ior almost 500 children in Mysore. 10 Ekal Vidyalayas are
active in remote villages oI Rajasthan. Mid ay Meal programmes are given to a number oI schools.
We have so Iar spread our programs across 33 locations beneIiting more than 3,500 people.
J K Tyre having contributed 7500 adults moving towards literacy as oI June 2011, out oI 20,000 plus Ior
the J K Group as a whole.

ENVIRONMENT

Environment Management is taken up as a critical Iunction at all our locations. Massive plantation
programmes have been organized at all the manuIacturing locations to improve ecology. Some oI these
initiatives are:
O In the last Iive years, 1, 00,000 Trees have been planted.
O In an eIIort to increase greenery in the surrounding villages, pu-lic parks have -een
adopted.
O Assistance is provided to Government authorities Ior maintenance of civic amenities like
parks, bus shelters, etc.




O !u-lic conveniences have been constructed by our Company at village schools in Mysore.
O eighboring villages have been adopted and temporary water huts are provided during
summer months.
O We arrange the spraying of special chemicals on large water bodies so that water
evaporation can be reduced and it can be conserved during the long summer months.
S!ORTS

Our various sporting activities not only encourage a team spirit amonst our employees, but is also
extended to sports enthusiasts oI the neighboring areas. Apart Irom conducting diIIerent innovative sports
events, we also promoting indoor and outdoor sports Iacilities Ior our employees. J.K.TYRE also
sponsored Indian 1aycees Gwalior Alankaran Samaroh 2007 wherein eminent personalities oI
diIIerent Iields were honoured. JK Tyre is also known Ior its eIIorts in the Iield oI Motor Sports, having
started the annual events Ior "1K Tyre National Racing Championship" in 1997 and "1K Tyre National
Karting Championship" in 2000. We are extremely proud oI this initiative as it has nurturing talent such
as, arain Karthikeyan, Karun Chandhok, and Aarman Ebrahim, and many others. And putting India on
the World Car Racing Map.
1K Tyre has five Modern plants in India which are strategically located at
O Mysore, Karnataka (3)
O Banmore, Madhya !radesh
O Kankroli, Rajasthan



JK Tyre has also enhanced its global reach by taking over Tornel a renowned Mexican company,
which has 3 plants in Mexico. All these plants are equipped with World`s most advanced manuIacturing
and testing machines.

ABOUT BANMORE TYRE !LANT
Started its production in 1991 and the Iirst tyre rolled out 25thmarch 1991.The initial capacity oI
the plant was 4.5 mt/ day. Radial tyre production in passenger and light commercial vehicle segment was
added in 1996. The plant is continuously improving its capacity, particularly in radial segment. Present
radial capacity is 9000 tyre/ day. Total investment is in last three years Ior in capacity in radial tyre is
apporx Rs117 crore. The expansion oI radial plant is still on. Our customer`s base virtually covers the
entire Original equipment manuIacturers |OEM| in India together with replacement market Ior Iour
wheeler, deIense and state transport undertaking. Besides India, we have worldwide customers base
exporting to more then60 countries. Plant manages their process through documented procedures based
upon ISO/TS16949QMS and ISO 14001 EMS |Ior plant only|.These described only all the activities in
structured manner to be perIormed at all BU & SSU level. These procedures are audited at least twice in
six months, once each by internal and external auditors. These audits ensure that systems are eIIectively
Iunctioning and continual improvement is achieved.

UNDERSTANDING THE WORKING CA!ITAL
Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital

Every business needs Iunds Ior two purposes Ior its establishment and to carry out its day- to-day
operations. Long terms Iunds are required to create production Iacilities through purchase oI Iixed assets
such as p&m, land, building, Iurniture, etc. Investments in these assets represent that part oI Iirm`s capital
which is blocked on permanent or Iixed basis and is called Iixed capital. Funds are also needed Ior short-
term purposes Ior the purchase oI raw material, payment oI wages and other day to- day expenses etc.
CONCE!T OF WORKING CA!ITAL
There are two concepts oI working capital:
1. Gross working capital
2. et working capital
The gross working capital is the capital invested in the total current assets oI the enterprises current
assets are those Assets which can convert in to cash within a short period normally one accounting year.




CONSTITUENTS OF CURRENT ASSETS
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories oI stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods
6. Temporary investment oI surplus Iunds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.
In a narrow sense, the term working capital reIers to the net working. et working capital is the
excess oI current assets over current liability, or, say:
NET WORKING CA!ITAL CURRENT ASSETS - CURRENT LIABILITIES.
et working capital can be positive or negative. When the current assets exceeds the current liabilities
are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in
the ordinary course oI business within a short period oI normally one accounting year out oI the current
assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES
1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. ividends payable.
4. Bank overdraIt.
5. Provision Ior taxation, iI it does not amt. to app. oI proIit.
6. Bills payable.
7. Sundry creditors.
The gross working capital concept is Iinancial or going concern concept whereas net working capital is
an accounting concept oI working capital. Both the concepts have their own merits. The gross concept is
sometimes preIerred to the concept oI working capital Ior the Iollowing reasons:
1. It enables the enterprise to provide correct amount oI working capital at correct time.
2. Every management is more interested in total current assets with which it has to operate then the
source Irom where it is made available.
3. It take into consideration oI the Iact every increase in the Iunds oI the enterprise would increase its
working capital.
4. This concept is also useIul in determining the rate oI return on investments in working capital.
The net working capital concept, however, is also important Ior Iollowing reasons:
4It is qualitative concept, which indicates the Iirm`s ability to meet to its operating expense
and short-term liabilities.

4 IT indicates the margin oI protection available to the short term creditors.
4 It is an indicator oI the Iinancial soundness oI enterprises.
4 It suggests the need oI Iinancing a part oI working capital requirement out oI the permanent
sources oI Iunds.
CLASSIFICATION OF WORKING CA!ITAL
Working capital may be classiIied in two ways:
On the -asis of concept.
On the -asis of time.
On the basis oI concept working capital can be classiIied as gross working capital and net working capital.
On the basis oI time, working capital may be classiIied as:
!ermanent or fixed working capital.
Temporary or varia-le working capital
!ERMANENT OR FIXED WORKING CA!ITAL
Permanent or Iixed working capital is minimum amount which is required to ensure eIIective
utilization oI Iixed Iacilities and Ior maintaining the circulation oI current assets. Every Iirm has to
maintain a minimum level oI raw material, work- in-process, Iinished goods and cash balance. This
minimum level oI current assets is called permanent or Iixed working capital as this part oI working is
permanently blocked in current assets. As the business grow the requirements oI working capital also
increases due to increase in current assets.



TEM!ORARY OR VARIABLE WORKING CA!ITAL
Temporary or variable working capital is the amount oI working capital which is required to meet
the seasonal demands and some special exigencies. Variable working capital can Iurther be classiIied as
seasonal working capital and special working capital. The capital required to meet the seasonal need oI the
enterprise is called seasonal working capital. Special working capital is that part oI working capital which
is required to meet special exigencies such as launching oI extensive marketing Ior conducting research,
etc. Temporary working capital diIIers Irom permanent working capital in the sense that is required Ior
short periods and cannot be permanently employed gainIully in the business.
IM!ORTANCE OR ADVANTAGE OF ADE"UATE WORKING
CA!ITAL
Solvency of the Business: Adequate working capital helps in maintaining the solvency oI the
business by providing uninterrupted oI production.
Goodwill: SuIIicient amount oI working capital enables a Iirm to make prompt payments and
makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and credit standing can arrange
loans Irom banks and other on easy and Iavorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on
the purchases and hence reduces cost.
Regular Supply of Raw Material: SuIIicient working capital ensures regular supply oI
raw material and continuous production.

Regular !ayment Of Salaries, Wages And Other Day TO Day Commitments:
It leads to the satisIaction oI the employees and raises the morale oI its employees, increases their
eIIiciency, reduces wastage and costs and enhances production and proIits.
Exploitation Of Favora-le Market Conditions: II a Iirm is having adequate working
capital then it can exploit the Iavorable market conditions such as purchasing its requirements in
bulk when the prices are lower and holdings its inventories Ior higher prices.
A-ility To Face Crises: A concern can Iace the situation during the depression.
"uick And Regular Return On Investments: SuIIicient working capital enables a
concern to pay quick and regular oI dividends to its investors and gains conIidence oI the investors
and can raise more Iunds in Iuture.
High Morale: Adequate working capital brings an environment oI securities, conIidence, high
morale which results in overall eIIiciency in a business.
EXCESS OR INADE"UATE WORKING CA!ITAL
Every business concern should have adequate amount oI working capital to run its business operations.
It should have neither redundant or excess working capital nor inadequate nor shortages oI working
capital. Both excess as well as short working capital positions are bad Ior any business. However, it is the
inadequate working capital which is more dangerous Irom the point oI view oI the Iirm.


DISADVANTAGES OF EXCESSIVE WORKING CA!ITAL
1. Excessive working capital means ideal Iunds which earn no proIit Ior the Iirm and business
cannot earn the required rate oI return on its investments.
2. Redundant working capital leads to unnecessary purchasing and accumulation oI inventories.
3. Excessive working capital implies excessive debtors and deIective credit policy which causes
higher incidence oI bad debts.
4. It may reduce the overall eIIiciency oI the business.
5. II a Iirm is having excessive working capital then the relations with banks and other Iinancial
institution may not be maintained.
6. ue to lower rate oI return n investments, the values oI shares may also Iall.
7. The redundant working capital gives rise to speculative transactions
DISADVANTAGES OF INADE"UATE WORKING CA!ITAL
Every business needs some amounts oI working capital. The need Ior working capital arises due to
the time gap between production and realization oI cash Irom sales. There is an operating cycle involved
in sales and realization oI cash. There are time gaps in purchase oI raw material and production;
production and sales; and realization oI cash.




Thus working capital is needed for the following purposes:
For the purpose oI raw material, components and spares.
To pay wages and salaries
To incur day-to-day expenses and overload costs such as oIIice expenses.
To meet the selling costs as packing, advertising, etc.
To provide credit Iacilities to the customer.
To maintain the inventories oI the raw material, work-in-progress, stores and spares and Iinished
stock.
For studying the need oI working capital in a business, one has to study the business under varying
circumstances such as a new concern requires a lot oI Iunds to meet its initial requirements such as
promotion and Iormation etc. These expenses are called preliminary expenses and are capitalized. The
amount needed Ior working capital depends upon the size oI the company and ambitions oI its promoters.
Greater the size oI the business unit, generally larger will be the requirements oI the working capital. The
requirement oI the working capital goes on increasing with the growth and expensing oI the business till it
gains maturity. At maturity the amount oI working capital required is called normal working capital.






There are others factors also influence the need of working capital in a -usiness.
FACTORS DETERMINING WORKING CA!ITAL RE"UIREMENTS
1. NATURE OF BUSINESS: The requirements oI working is very limited in public utility undertakings
such as electricity, water supply and railways because they oIIer cash sale only and supply services not
products, and no Iunds are tied up in inventories and receivables. On the other hand the trading and
Iinancial Iirms requires less investment in Iixed assets but have to invest large amt. oI working capital
along with Iixed investments.
2. SIZE OF THE BUSINESS: Greater the size oI the business, greater is the requirement oI
working capital.
3. !RODUCTION !OLICY: II the policy is to keep production steady by accumulating inventories
it will require higher working capital.
4. LENTH OF !RDUCTION CYCLE: The longer the manuIacturing time the raw material and
other supplies have to be carried Ior a longer in the process with progressive increment oI labor and
service costs beIore the Iinal product is obtained. So working capital is directly proportional to the length
oI the manuIacturing process.
5. SEASONALS VARIATIONS: Generally, during the busy season, a Iirm requires larger working
capital than in slack season.
6. WORKING CA!ITAL CYCLE: The speed with which the working cycle completes one cycle
determines the requirements oI working capital. Longer the cycle larger is the requirement oI WC

7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question oI
working capital and the velocity or speed with which the sales are aIIected. A Iirm having a high rate oI
stock turnover will needs lower amt. oI working capital as compared to a Iirm having a low rate oI
turnover.
8. CREDIT !OLICY: A concern that purchases its requirements on credit and sales its product /
services on cash requires lesser amt. oI working capital and vice-versa.
9. BUSINESS CYCLE: In period oI boom, when the business is prosperous, there is need Ior
larger amt. oI working capital due to rise in sales, rise in prices, optimistic expansion oI business, etc. On
the contrary in time oI depression, the business contracts, sales decline, diIIiculties are Iaced in collection
Irom debtor and the Iirm may have a large amt. oI working capital.
10. RATE OF GROWTH OF BUSINESS: In Iaster growing concern, we shall require large amt.
oI working capital.
11. EARNING CA!ACITY AND DIVIDEND !OLICY:
Some Iirms have more earning capacity than other due to quality oI their products, monopoly
conditions, etc. Such Iirms may generate cash proIits Irom operations and contribute to their working
capital. The dividend policy also aIIects the requirement oI working capital. A Iirm maintaining a steady
high rate oI cash dividend irrespective oI its proIits needs working capital than the Iirm that retains larger
part oI its proIits and does not pay so high rate oI cash dividend.
12. !RICE LEVEL CHANGES: Changes in the price level also aIIect the working capital
requirements. Generally rise in prices leads to increase in working capital.

Others factors: these are:
Operating eIIiciency.
Management ability.
Irregularities oI supply.
Import policy.
Asset structure.
Importance oI labor.
Banking Iacilities, etc
MANAGEMENT OF WORKING CA!ITAL
Management oI working capital is concerned with the problem that arises in attempting to manage
the current assets, current liabilities. The basic goal oI working capital management is to manage the
current assets and current liabilities oI a Iirm in such a way that a satisIactory level oI working capital is
maintained, i.e. it is neither adequate nor excessive as both the situations are bad Ior any Iirm. There
should be no shortage oI Iunds and also no working capital should be ideal. WORKIAC CAPI1AL
MAAACEMEA1 POLICES oI a Iirm has a great on its probability, liquidity and structural health oI the
organization. So working capital management is three dimensional in nature as
1. It concerned with the Iormulation oI policies with regard to proIitability, liquidity and risk.
2. It is concerned with the decision about the composition and level oI current assets.
3. It is concerned with the decision about the composition and level oI current liabilities.


WORKING CA!ITAL ANALYSIS
As we know working capital is the liIe blood and the centre oI a business. Adequate amount oI
working capital is very much essential Ior the smooth running oI the business. And the most important
part is the eIIicient management oI working capital in right time. The liquidity position oI the Iirm is
totally eIIected by the management oI working capital. So, a study oI changes in the uses and sources oI
working capital is necessary to evaluate the eIIiciency with which the working capital is employed in a
business. This involves the need oI working capital analysis.
The analysis of working capital can -e conducted through a num-er of devices, such as:
1. Ratio analysis.
2. Fund Ilow analysis.
3. Budgeting.
1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The technique oI ratio analysis
can be employed Ior measuring short-term liquidity or working capital position oI a Iirm.
The following ratios can -e calculated for these purposes:
1. Current ratio. 6. Payable turnover ratio.
2. Quick ratio 7. Working capital turnover ratio.
3. Absolute liquid ratio 8. Working capital leverage
4. Inventory turnover. 9. Ratio oI current liabilities to tangible net worth
5. Receivables turnover.
.

2. FUND FLOW ANALYSIS
Fund Ilow analysis is a technical device designated to the study the source Irom which additional
Iunds were derived and the use to which these sources were put. The Iund Ilow analysis consists oI:
a. Preparing schedule oI changes oI working capital
b. Statement oI sources and application oI Iunds.
It is an eIIective management tool to study the changes in Iinancial position (working capital)
business enterprise between beginning and ending oI the Iinancial dates.
3. WORKING CA!ITAL BUDGET
A budget is a Iinancial and / or quantitative expression oI business plans and polices to be pursued
in the Iuture period time. Working capital budget as a part oI the total budge ting process oI a business is
prepared estimating Iuture long term and short term working capital needs and sources to Iinance them,
and then comparing the budgeted Iigures with actual perIormance Ior calculating the variances, iI any, so
that corrective actions may be taken in Iuture. He objective working capital budget is to ensure availability
oI Iunds as and needed, and to ensure eIIective utilization oI these resources. The successIul
implementation oI working capital budget involves the preparing oI separate budget Ior each element oI
working capital, such as, cash, inventories and receivables etc.




ANALYSIS OF SHORT - TERM FINANCIAL !OSITION
The short term creditors oI a company such as suppliers oI goods oI credit and commercial banks
short-term loans are primarily interested to know the ability oI a Iirm to meet its obligations in time. The
short term obligations oI a Iirm can be met in time only when it is having suIIicient liquid assets. So to
with the conIidence oI investors, creditors, the smooth Iunctioning oI the Iirm and the eIIicient use oI
Iixed assets the liquid position oI the Iirm must be strong. But a very high degree oI liquidity oI the Iirm
being tied up in current assets. ThereIore, it is important proper balance in regard to the liquidity oI the
Iirm. Two types oI ratios can be calculated Ior measuring short-term Iinancial position or short-term
solvency position oI the Iirm.
1. LI"UIDITY RATIOS.
2. CURRENT ASSETS MOVEMENTS RATIOS.
A) LI"UIDITY RATIOS
Liquidity reIers to the ability oI a Iirm to meet its current obligations as and when these become
due. The short-term obligations are met by realizing amounts Irom current, Iloating or circulating assts.
The current assets should either be liquid or near about liquidity. These should be convertible in cash Ior
paying obligations oI short-term nature. The suIIiciency or insuIIiciency oI current assets should be
assessed by comparing them with short-term liabilities. II current assets can pay oII the current liabilities
then the liquidity position is satisIactory. On the other hand, iI the current liabilities cannot be met out oI
the current assets then the liquidity position is bad. To measure the liquidity oI a Iirm, the Iollowing ratios
can be calculated:
1. CURRENT RATIO 2. "UICK RATIO 3. ABSOLUTE LI"UID RATIO


1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure oI general liquidity and its most
widely used to make the analysis oI short-term Iinancial position or liquidity oI a Iirm. It is deIined as the
relation between current assets and current liabilities. Thus,
CURRENT RATIO CURRENT ASSETS
CURRENT LIABILITES
1he two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry debtors, inventories and
work-in-progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the Iirm is liquid and has the ability to pay its
current obligations in time. On the hand a low current ratio represents that the liquidity position oI the Iirm
is not good and the Iirm shall not be able to pay its current liabilities in time. A ratio equal or near to the
rule oI thumb oI 2:1 i.e. current assets double the current liabilities is considered to be satisIactory.
CALCULATION OF CURRENT RATIO
Example (Rupees in crore)
Year 2006 2007 2008
Current Assets 81.29 83.12 13,6.57
Current Lia-ilities 27.42 20.58 33.48
Current Ratio 2.96:1 4.03:1 4.08:1


INTER!RETATION
As we know that ideal current ratio Ior any Iirm is 2:1. II we see the current ratio oI the company
Ior last three years it has increased Irom 2006 to 2008. The current ratio oI company is more than the ideal
ratio. This depicts that company`s liquidity position is sound. Its current assets are more than its current
liabilities.
2. "UICK RATIO
Quick ratio is a more rigorous test oI liquidity than current ratio. Quick ratio may be deIined as the
relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid iI it
can be converted into cash with a short period without loss oI value. It measures the Iirms` capacity to pay
oII current obligations immediately.
"UICK RATIO "UICK ASSETS
CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) ebtors.
A high ratio is an indication that the Iirm is liquid and has the ability to meet its current liabilities
in time and on the other hand a low quick ratio represents that the Iirms` liquidity position is not good. As
a rule oI thumb ratio oI 1:1 is considered satisIactory. It is generally thought that iI quick assets are equal
to the current liabilities then the concern may be able to meet its short-term obligations. However, a Iirm
having high quick ratio may not have a satisIactory liquidity position iI it has slow paying debtors. On the
other hand, a Iirm having a low liquidity position iI it has Iast moving inventories.

CALCULATION OF "UICK RATIO
Example (Rupees in Crore)
Year 2006 2007 2008
"uick Assets 44.14 47.43 61.55
Current Lia-ilities 27.42 20.58 33.48
"uick Ratio 1.6 : 1 2.3 : 1 1.8 : 1
INTER!RETATION
A quick ratio is an indication that the Iirm is liquid and has the ability to meet its current liabilities
in time. The ideal quick ratio is 1:1. Company`s quick ratio is more than ideal ratio. This shows company
has no liquidity problem.
3. ABSOLUTE LI"UID RATIO
Although receivables, debtors and bills receivable are generally more liquid than inventories, yet
there may be doubts regarding their realization into cash immediately or in time. So absolute liquid ratio
should be calculated together with current ratio and acid test ratio so as to exclude even receivables Irom
the current assets and Iind out the absolute liquid assets. Absolute Liquid Assets includes
ABSOLUTE LI"UID RATIO ABSOLUTE LI"UID ASSETS
CURRENT LIABILITES
ABSOLUTE LI"UID ASSETS CASH & BANK BALANCES.
Example (Rupees in Crore)
Year 2006 2007 2008
A-solute Liquid Assets 4.69 1.79 5.06
Current Lia-ilities 27.42 20.58 33.48
A-solute Liquid Ratio 17 : 1 .09 : 1 15 : 1


INTER!RETATION
These ratio shows that company carries a small amount oI cash. But there is nothing to be worried
about the lack oI cash because company has reserve, borrowing power & long term investment. In India,
Iirms have credit limits sanctioned Irom banks and can easily draw cash.
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and earn proIits. The eIIiciency with
which assets are managed directly aIIects the volume oI sales. The better the management oI assets, large
is the amount oI sales and proIits. Current assets movement ratios measure the eIIiciency with which a
Iirm manages its resources. These ratios are called turnover ratios because they indicate the speed with
which assets are converted or turned over into sales. epending upon the purpose, a number oI turnover
ratios can be calculated. These are
1. Inventory Turnover Ratio
2. ebtors Turnover Ratio
3. Creditors Turnover Ratio
4. Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results iI current assets include high amount oI
debtors due to slow credit collections and moreover iI the assets include high amount oI slow moving
inventories. As both the ratios ignore the movement oI current assets, it is important to calculate the
turnover ratio.


1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO
Every Iirm has to maintain a certain amount oI inventory oI Iinished goods so as to meet the
requirements oI the business. But the level oI inventory should neither be too high nor too low. Because it
is harmIul to hold more inventory as some amount oI capital is blocked in it and some cost is involved in
it. It will thereIore be advisable to dispose the inventory as soon as possible.
INVENTORY TURNOVER RATIO COST OF GOOD SOLD
AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually a
high inventory ratio indicates an eIIicient management oI inventory because more Irequently the stocks
are sold the lesser amount oI money is required to Iinance the inventory. Whereas low inventory turnover
ratio indicates the ineIIicient management oI inventory. A low inventory turnover implies over investment
in inventories, dull business, poor quality oI goods, stock accumulations and slow moving goods and low
proIits as compared to total investment.
AVERAGE STOCK O!ENING STOCK + CLOSING STOCK
2

Example (Rupees in Crore)
Year 2006 2007 2008
Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times


INTER!RETATION
This ratio shows how rapidly the inventory is turning into receivable through sales. In 2007 the
company has high inventory turnover ratio but in 2008 it has reduced to 1.75 times. This shows that the
company`s inventory management technique is less eIIicient as compare to last year.
2. INVENTORY CONVERSION !ERIOD:
INVENTORY CONVERSION !ERIOD 365 (NET WORKING DAYS)
INVENTORY TURNOVER RATIO
Example (Rupees in Crore)
Year 2006 2007 2008
Days 365 365 365
Inventory Turnover Ratio 1.5 2.8 1.8
Inventory Conversion !eriod 243 days 130 days 202 days
INTER!RETATION
Inventory conversion period shows that how many days` inventories take to convert Irom raw
material to Iinished goods. In the company inventory conversion period is decreasing. This shows the
eIIiciency oI management to convert the inventory into cash.
3. DEBTORS TURNOVER RATIO
A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit
policy may result in tying up substantial Iunds oI a Iirm in the Iorm oI trade debtors. Trade debtors are
expected to be converted into cash within a short period and are included in current assets. So liquidity
position oI a concern also depends upon the quality oI trade debtors. Two types oI ratio can be calculated
to evaluate the quality oI debtors.
A) De-tors Turnover Ratio B) Average Collection !eriod


DEBTORS TURNOVER RATIO TOTAL SALES (CREDIT)
AVERAGE DEBTORS
ebtor`s velocity indicates the number oI times the debtors are turned over during a year.
Generally higher the value oI debtor`s turnover ratio the more eIIicient is the management oI debtors/sales
or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor management oI
debtors/sales and less liquid debtors. This ratio should be compared with ratios oI other Iirms doing the
same business and a trend may be Iound to make a better interpretation oI the ratio.

AVERAGE DEBTORS O!ENING DEBTOR+CLOSING DEBTOR
2
Example (Rupees in Crore)
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Average De-tors 17.33 18.19 22.50
De-tor Turnover Ratio 9.6 times 8.3 times 7.5 times

INTER!RETATION
This ratio indicates the speed with which debtors are being converted or turnover into sales. The
higher the values or turnover into sales. The higher the values oI debtors turnover, the more eIIicient is the
management oI credit. But in the company the debtor turnover ratio is decreasing year to year. This shows
that company is not utilizing its debtor`s eIIiciency. ow their credit policy become liberal as compare to
previous year


4. AVERAGE COLLECTION !ERIOD:
AVERAGE COLLECTION !ERIOD NO. OF WORKING DAYS
DEBTORS TURNOVER RATIO

The average collection period ratio represents the average number oI days Ior which a Iirm has to
wait beIore its receivables are converted into cash. It measures the quality oI debtors. Generally, shorter
the average collection period the better is the quality oI debtors as a short collection period implies quick
payment by debtors and vice-versa.
AVERAGE COLLECTION !ERIOD 365 (NET WORKING DAYS)
DEBTORS TURNOVER RATIO
Year 2006 2007 2008
Days 365 365 365
De-tor Turnover Ratio 9.6 8.3 7.5
Average Collection !eriod 38 days 44 days 49 days

INTER!RETATION
The average collection period measures the quality oI debtors and it helps in analyzing the
eIIiciency oI collection eIIorts. It also helps to analysis the credit policy adopted by company. In the Iirm
average collection period increasing year to year. It shows that the Iirm has Liberal Credit policy. These
changes in policy are due to competitor`s credit policy.


5. WORKING CA!ITAL TURNOVER RATIO
Working capital turnover ratio indicates the velocity oI utilization oI net working capital. This ratio
indicates the number oI times the working capital is turned over in the course oI the year. This ratio
measures the eIIiciency with which the working capital is used by the Iirm. A higher ratio indicates
eIIicient utilization oI working capital and a low ratio indicates otherwise. But a very high working capital
turnover is not a good situation Ior any Iirm.

WORKING CA!ITAL TURNOVER RATIO COST OF SALES
NET WORKING CA!ITAL
WORKING CA!ITAL TURNOVER SALES
NETWORKING CA!ITAL

Example (Rs In Crore)
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Networking Capital 53.87 62.52 103.09
Working Capital Turnover 3.08 2.4 1.64
INTER!RETATION
This ratio indicates low much net working capital requires Ior sales. In 2008, the reciprocal oI this
ratio (1/1.64 .609) shows that Ior sales oI Rs. 1 the company requires 60 paisa as working capital. Thus
this ratio is helpIul to Iorecast the working capital requirement on the basis oI sale.


INVENTORIES
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Inventories 37.15 35.69 75.01

INTER!RETATION
Inventories is a major part oI current assets. II any company wants to manage its working capital
eIIiciency, it has to manage its inventories eIIiciently. The graph shows that inventory in 2005-2006 is
45, in 2006-2007 is 43 and in 2007-2008 is 54 oI their current assets. The company should try to
reduce the inventory upto 10 or 20 oI current assets.
CASH BNAK BALANCE
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Cash Bank Balance 4.69 1.79 5.05
INTER!RETATION
Cash is basic input or component oI working capital. Cash is needed to keep the business running
on a continuous basis. So the organization should have suIIicient cash to meet various requirements. The
above graph is indicate that in 2006 the cash is 4.69 crore but in 2007 it has decrease to 1.79. The result oI
that it disturbs the Iirms manuIacturing operations. In 2008, it is increased upto approx. 5.1 cash
balance. So in 2008, the company has no problem Ior meeting its requirement as compare to 2007.


DEBTORS
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
De-tors 17.33 19.05 25.94

INTER!RETATION
ebtors constitute a substantial portion oI total current assets. In India it constitute one third oI
current assets. The above graph is depict that there is increase in debtors. It represents an extension oI
credit to customers. The reason Ior increasing credit is competition and company liberal credit policy.

CURRENT ASSETS:
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Current Assets 81.29 83.15 136.57
INTER!RETATION
This graph shows that there is 64 increase in current assets in 2008. This increase is arising
because there is approx. 50 increase in inventories. Increase in current assets shows the
liquidity soundness oI company.
CURRENT LIABILITY:
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Current Lia-ility 27.42 20.58 33.48



INTER!RETATION
Current liabilities shows company short term debts pay to outsiders. In 2008 the current liabilities
oI the company increased. But still increase in current assets is more than its current liabilities.

NET WOKRING CA!ITAL:
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
et Working Capital 53.87 62.53 103.09

INTER!RETATION
Working capital is required to Iinance day to day operations oI a Iirm. There should be an
optimum level oI working capital. It should not be too less or not too excess. In the company there is
increase in working capital. The increase in working capital arises because the company has expanded its
business.
RESEARCH METHODOLOGY
The methodology, I have adopted Ior my study is the various tools, which basically analyze critically
Iinancial position oI to the organization:
I. COMMON-SIZE !/L A/C IV. COM!ARTIVE BALANCE SHEET
II. COMMON-SIZE BALANCE SHEET V. TREND ANALYSIS
III. COM!ARTIVE !/L A/C VI. RATIO ANALYSIS

The above parameters are used Ior critical analysis oI Iinancial position. With the evaluation oI
each component, the Iinancial position Irom diIIerent angles is tried to be presented in well and
systematic manner. By critical analysis with the help oI diIIerent tools, it becomes clear how the
Iinancial manager handles the Iinance matters in proIitable manner in the critical challenging
atmosphere, the recommendation are made which would suggest the organization in Iormulation oI a
healthy and strong position Iinancially with proper management system.
ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:
Financial statement is a collection oI data organized according to logical and consistent accounting
procedure to convey an under-standing oI some Iinancial aspects oI a business Iirm. It may show position
at a moment in time, as in the case oI balance sheet or may reveal a series oI activities over a given period
oI time, as in the case oI an income statement.
Thus, the term financial statements` generally refers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the proIit and loss Account.






OB1ECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board oI America (APB) states
The following o-jectives of financial statements: -
1. To provide reliable Iinancial inIormation about economic resources and obligation oI a business
Iirm.
2. To provide other needed inIormation about charges in such economic resources and obligation.
3. To provide reliable inIormation about change in net resources (recourses less obligations) missing
out oI business activities.
4. To provide Iinancial inIormation that assets in estimating the learning potential oI the business.

LIMITATIONS OF FINANCIAL STATEMENTS:
Though Iinancial statements are relevant and useIul Ior a concern, still they do not present a Iinal
picture a Iinal picture oI a concern. The utility oI these statements is dependent upon a number oI Iactors.
The analysis and interpretation oI these statements must be done careIully otherwise misleading
conclusion may be drawn.



FINANCIAL STATEMENTS SUFFER FROM THE FOLLOWING
LIMITATIONS
1. Financial statements do not given a Iinal picture oI the concern. The data given in these statements
is only approximate. The actual value can only be determined when the business is sold or liquidated.
2. Financial statements have been prepared Ior diIIerent accounting periods, generally one year,
during the liIe oI a concern. The costs and incomes are apportioned to diIIerent periods with a view to
determine proIits etc. The allocation oI expenses and income depends upon the personal judgment oI the
accountant. The existence oI contingent assets and liabilities also make the statements imprecise. So
Iinancial statement are at the most interim reports rather than the Iinal picture oI the Iirm.
3. The Iinancial statements are expressed in monetary value, so they appear to give Iinal ad accurate
position. The value oI Iixed assets in the balance sheet neither represent the value Ior which Iixed assets
can be sold nor the amount which will be required to replace these assets. The balance sheet is prepared on
the presumption oI a going concern. The concern is expected to continue in Iuture so Iixed assets are
shown at cost less accumulated depreciation. Moreover, there are certain assets in the balance sheet which
will realize nothing at the time oI liquidation but they are shown in the balance sheets.
4. The Iinancial statements are prepared on the basis oI historical costs or original costs. The value oI
assets decreases with the passage oI time current price changes are not taken into account. The statement
are not prepared with the keeping in view the economic conditions. the balance sheet loses the
signiIicance oI being an index oI current economic realities. Similarly, the proIitability shown by the
income statements may be representing the earning capacity oI the concern.


5. There are certain Iactors which have a bearing on the Iinancial position and operating result oI the
business but they do not become a part oI these statements because they cannot be measured in monetary
terms. The basic limitation oI the traditional Iinancial statements comprising the balance sheet, proIit &
loss A/c is that they do not give all the inIormation regarding the Iinancial operation oI the Iirm.
evertheless, they provide some extremely useIul inIormation to the extent the balance sheet mirrors the
Iinancial position on a particular data in lines oI the structure oI assets, liabilities etc. and the proIit & loss
A/c shows the result oI operation during a certain period in terms revenue obtained and cost incurred
during the year Thus, the Iinancial position and operation oI the Iirm.
FINANCIAL STATEMENT ANALYSIS
It is the process oI identiIying the Iinancial strength and weakness oI a Iirm Irom the available
accounting data and Iinancial statements. The analysis is done
CALCULATIONS OF RATIOS
Ratios are relationship expressed in mathematical terms between Iigures, which are connected with
each other in some manner.
CLASSIFICATION OF RATIOS
Ratios can be classiIied in to diIIerent categories depending upon the basis oI classiIication
The traditional classiIication has been on the basis oI the Iinancial statement to which the determination oI
ratios belongs. These are
!rofit & Loss account ratios
Balance Sheet ratios
Composite ratios


WORKING CA!ITAL MANAGEMENT IN INDIAN TYRE INDUSTRY
RESEARCH DESIGN
The present study is Iocused on understanding the impact oI eIIicient working capital management
on the proIitability and liquidity oI the companies. Hence, it`s a case oI purposive sampling requiring an
in-depth analysis oI each selected company. This has led to selection oI Iour companies representing India
Tyre Industry, namely MRF Ltd., Apollo Tyres Ltd., J.K. tyres Ltd. and Ceat Ltd. The study covers a
period oI 8 years (1999-2000 2006-2007) and the data is collected Irom primary and secondary sources.
The data so collected is analyzed by applying various research tools which include accounting tools like
Ratio Analysis, Cash Flow Analysis, Common Size and Trend Analysis.
KEY OBSERVATIONS AND FINDINGS
The Iollowing are the major observations and Iindings oI the study w.r.t each component oI the
working capital oI the sample companies:

INVENTORY MANAGEMENT (A)
Inventory Turnover ratio signiIies the amount oI sale generated with each unit invested in raw
material. The inventory utilization by J.K. and Ceat is quite eIIective but Apollo and MRF need to take
measures to increase to stock turnover. This is possible only by shortening the operating cycle in days
taken Irom the point oI purchase oI raw material to its conversion to the Iinal sale
to the consumers and the money getting back into the organization to be utilized again by the company to
purchase raw materials Ior the next operating cycle.

The raw material holding period identiIies the number oI days the raw material stays in the
company beIore being put into the production process. The raw material holding period oI Ceat
is quite reasonable but Apollo and J.K. Tyres have to reduce the number oI holding days.

J.K .tyres has already started taking the initiative to reduce the number oI holding days Irom 61
days to 30 days. This can be done by avoiding stocking up oI raw materials.
The Iinished goods holding period oI Ceat is very less oI 12 days as compared to Apollo, J.K.
and MRF which is around 18-20 days.

Reducing the number oI holding days whether raw materials or Iinished goods is important as
this will shorten the operating cycle which would increase the working capital turnover
indicating its eIIicient use.

MRF has the highest inventory to current assets ratio oI around 50. This means that a lot oI
money oI MRF is blocked in excess inventory storage which should be reduced.
The ebtors Turnover Ratio oI Apollo is very high which is quite appreciable. This is due to
the Iact that the average collection period oI Apollo is very short oI around an average oI 24
days as compared to others ranging Irom 50 to 55 days.
The average payment period oI MRF is very short which is almost equivalent to its average
collection period. MRF should increase the payment period unless and until early payment
helps in getting heavy cash discounts.
CASH MANAGEMENT
Cash management throws light on the judicious and eIIicient use oI cash (which is the most
liquid asset oI an organization). J.K. seems to have the best cash management system since it is
the policy oI management to invest excess cash into proIitable investment avenues.
Apollo needs to look into its cash management system and bring some changes as there seems
to be unnecessary idle cash lying in the business which could otherwise be used more
productively.

Ceat already has started with remedial measures oI utilizing excess cash into suitable ventures.
The percentage oI cash out oI total current assets oI Apollo is very high ranging Irom 15 -
20 as compared to others ranging Irom 2 - 10. The company needs to utilize the excess
cash and bring down the percentage. This will also help the company to increase its
proIitability

KEY OBSERVATIONS AND SUMMARY
The major observations oI the study are as Iollows:-
The selected sample companies have been Iollowing either an aggressive or conservative
approach:
A!OLLO - Aggressive approach
1.K - Aggressive approach
CEAT - o deIinitive approach
MRF - Conservative approach
All the companies have a positive net working capital except in the case oI Ceat Ltd. in 2005-
2006 and 2006-2007. On an average, the net working capital is largest in MRF Iollowed by
Apollo, J.K. and Ceat.
When quick assets are compared with current liabilities, it is revealed that the Iormer are
insuIIicient to cover current liabilities in case oI J.K. Tyres. For Ceat Ltd. there has been a
sudden decline in quick ratio in the year 2005-2006 and 2006-2007. MRF and Apollo are in
good position to pay oII current debts Irom quick assets.
II standard current ratio is to be taken as 2:1 then Apollo and MRF have current ratios equal to
or more than two. But in case oI J.K. and Ceat the current ratio is less than two which reIlects
a poor liquidity position oI these two enterprises.

There is a standoII between liquidity and proIitability position oI the tyre companies. These
two don`t go hand in hand, as in case oI MRF where liquidity levels are very high as compared
to the industry standards but proIitability levels do not rise up to expectations even though
MRF has the largest market share. There is an inverse relationship between the two as analyzed
Irom Iinancial reports. Higher the liquidity levels, lower would be the proIitability and vice-
versa, thereIore, tyre companies have to maintain a delicate balance between the two.

The eIIicient management oI Working Capital and its components has a direct eIIect on the
proIitability levels oI the tyre companies:-
With increase in working capital turnover oI Apollo and MRF, the net proIit ratio
has also improved
The eIIicient management oI Working Capital and its components has a direct eIIect on the
proIitability levels oI the tyre companies:-
With increase in working capital turnover oI Apollo and MRF, the net proIit ratio
has also improved 14 International Research Journal oI Finance and Economics -
Issue 46 (2010)
An eIIicient receivables management by Apollo has led to short operating cycle
which has led to high debtor turnover ratio and high proIitability levels oI the
company. High collection period Irom debtors oI J.K., Ceat and MRF is apparent
Irom their low TR and Iurther low proIitability levels.
Although J.K. has the highest working capital turnover ratio, much above the industry level, it
shows no eIIect on the proIitability levels. This may be due to over-trading which the company
should look into as early as possible. Also, there is a gradual decline in the liquidity level and
the company should be aware oI a liquidity crises coming up.

The tyre companies have on an average halI oI their total assets in the Iorm oI current assets.
The average ratio oI current assets to total assets is largest Ior MRF Iollowed by Ceat, Apollo
and J.K. OI the total diIIerent components oI current assets, the share oI inventories in total
assets, on an average, is largest Iollowed by receivables and cash. Over a period oI time, the
share oI cash has declined except in case oI MRF. Since inventories occupy a major share in
current assets and its share has increased over a period oI time, the tyre industry should pay
more attention to management oI inventories. The increasing share oI inventories indicates that
current assets seem to have become less liquid.
For Iinancing any working capital requirements, the tyre companies generally preIer:
O Bank overdraIt/Bank cash credit Ior immediate solution.
O Short term loans Irom Banks generally secured by hypothecation oI Inventories and book
debts.
Loans Irom Iinancial Institutions like IBI, IFCI, ICICI by hypothecation oI immovable properties.
The study oI the turnover ratios compiled over a period oI 8 years show that there has been an
improvement in utilization oI current assets


EXHIBIT 1:
Year Apollo J.K. Ceat MRF
2000-01 3.82 3.86 3.83 3.23
2001-02 5.30 7.17 4.34 2.94
2002-03 6.12 -- 5.76 3.67
2003-04 5.75 7.54 6.16 3.92
2004-05 5.67 7.62 7 4.25
2005-06 5.29 7 7 4.69
2006-07 5.75 5.5 8.76 5

!ERFORMANCE HIGHLIGHTS
JK Tyre & Industries (JK Tyre) reported 23 growth in net sales to Rs1, 051cr (Rs854cr), which
was below our expectations. This was largely because oI lower-than-expected perIormance at the
operating Iront due to a substantial increase in raw material cost. The company reported an OPM oI 7.8
on account oI the qoq increase in raw material cost. et proIit at Rs26.7cr (Rs13.6cr) came in below our
expectations. Management is optimistic about generating good volumes in FY2010 on the back oI strong
demand, capacity expansion across segments and the Tornel acquisition. The stock is currently available
at attractive valuations oI 4.2x and 3.7x FY2011E and FY2012E EPS, respectively. We maintain Buy on
the stock
FY2010 FINANCIAL !ERFORMANCE
JK Tyre reported net sales oI Rs 3,678cr on a standalone basis Ior FY2010 and Rs 4, 571cr on a
consolidated basis. et proIit came in at Rs163cr on a standalone and at Rs224cr on a consolidated basis.
The numbers are not comparable with the previous Iiscal as previous Iiscal numbers are Ior eighteen
months. The tonnage stood at 56,700MT Ior 4QFY2010 and
2, 40,000MT Ior FY2010.
OUTLOOK AND VALUATION
In FY2010, the tyre industry beneIited largely Irom the increased original equipment manuIacturer
(OEM) demand and spike in replacement demand. Going ahead, we are positive on the sector as OEM oII-
take is expected to improve, beneIitting the overall auto industry`s volume growth. However, the recent
run-up in raw-material prices is a concern and expected to exert some pressure on the company`s
operating margin. On account oI the lower-than-expected 4QFY2010 perIormance, we estimate the
company to generate EPS oI Rs43.2 (Rs45.5) in FY2011E and Rs48.4 (Rs53.5) in FY2012E. We maintain
Buy on JK Tyre with a revised Target Price oI Rs242 (Rs267), at which the stock would trade at 5x, 3.3 xs
and 0.8x FY2012E EPS, EV/EBITA and P/BV, respective







MARGINAL TO!-LINE GROWTH; STRIKE AFFECTS SALES
JK Tyre reported 23 yoy growth in net sales to Rs1, 051cr (Rs854cr) in 4QFY2010. In tonnage
terms, the company registered 11.2 yoy growth in volume to 56,700MT in 4QFY2010 (51,500MT in
3QFY2010 and 51,000MT in 4QFY2009). JK Tyre announced a hike in prices in 3QFY2010 and
4QFY2010 to pass-through the raw-material cost increase. An average oI ~5 hike across the segments
was applicable Irom January 2009 to abbreviate the increase in raw-material costs. The average
procurement price oI rubber in 4QFY2010 stood at Rs145/Kg compared to Rs119/Kg in 3QFY2010.

O!M BELOW EX!ECTATION DUE TO INCREASED RAW MATERIAL COST
The company`s operating proIit increased 14.5 yoy to Rs82.2cr (Rs71.8cr). However, on a qoq
basis, OPM dropped by 449bp yoy to 7.8 (11.7 in 3QFY2010), which was below our estimates. This
was primarily on account oI the 586bp qoq jump in raw-material cost. The company attributed the
substantial contraction in OPM to change in product mix and higher rubber prices. OPM growth was also
partially arrested by the spike in other expenditure, which comprised discounts and other selling and
distribution expenses. The company also hiked prices by 5 in 4QFY2010 and has guided on subsequent
price hikes in the event oI increasing rubber prices. Management has guided to sustain margins oI 10
10.5 in FY2011E.

NET !ROFIT BELOW EX!ECTATIONS AT Rs 26.7Cr
For 4QFY2010, JK Tyre recorded a 96.1 yoy increase in net proIit to Rs26.7cr (Rs13.6cr), which was
below our estimates, primarily on account oI a low base oI last year and signiIicant payback in working
capital loans leading to a Iall in interest costs (debt on books oI standalone entity is Rs860cr).


CA!ACITY EX!ANSION !LANS

Currently, JK Tyre is running at almost Iull capacity and is partially unable to meet increasing
OEM demand. ThereIore, the company has major expansion plans on the anvil across segments, with most
oI the capacities coming on board Irom 2011E2012E. The company`s total capacity post the expansions
is slated at 12.6mn tyres annually. The company incurred a capex oI Rs315cr Ior FY2010 and has lined up
a capex oI Rs750cr Ior FY2011E. The company has overall capital expenditure plans oI Rs930cr in the
next two years, out oI which Rs776cr is Ior a GreenIield Iacility at Chennai, which could be operational
by 2012. This Iacility will produce 25 lakh passenger car radials, 2 lakh bus radials and 2 lakh truck
radials. The remaining capex will be used Ior expanding the Iacility at the Mysore plant Irom 8 lakh to 10
lakh radials at a cost oI Rs154 cr. The expansion is expected to be completed by March 2011.
Consequently, the company`s domestic capacity will reach 1.25cr tyres a year in 2012. JK Tyre is
currently expanding its oII-road tyre (ultra large-size tyre) capacity by 3,000 tyres a year to 42,000 tyres
per year, primarily Ior Bharat Earth Movers (BEML), at a cost oI Rs120cr.

The company has, in Iact, delivered the Iirst batch oI its ultra large-size tyres to BEML ahead oI
schedule. JK Tyre has completed its truck and bus radial (T&BR) capacity expansion plan, with an
investment oI Rs315cr, and will have increased capacity Irom 307,000 tyres to 800,000 tyres per year by
October 2010. This capacity has been running at almost 100 capacity utilization in ovember and
ecember 2009. ThereIore, management plans to increase its radial capacity by another 4 lakh tyres to 12
lakh tyres per year over the next three years.





MANAGEMENT OUTLOOK

Management is positive about the auto industry`s growth, including the commercial vehicle and
the passenger vehicle segments, and has planned capacity expansions to meet the demand arising Irom the
uptrend in the auto industry in general. With new international players entering the compact car segment
particularly, management expects the industry to witness ~18 annual growth in the passenger car radial
segment over the next couple oI years. Management is also optimistic on an upturn in the CV cycle and
oII-take Irom its strong clients, Ashok Leyland and Tata Motors. Further, management expects the T&BR
segment to register 810 annual growth over the next couple oI years. The acquisition oI Tornel, which
is majorly into truck, LCV, Iarm and industrial tyres in the bias category and truck, LCV and high-speed
passenger car tyres, has given JK Tyre a strong hold in the

South American market, which will help increase contribution Irom the company`s international
business ebt levels Ior the company as in March 2010 have gone down Irom Rs1,100cr to Rs860cr on a
standalone basis, and Irom Rs1, 382cr to Rs1, 158cr on a consolidated basis. The company continues to
maintain cash at a normal level oI Rs5060cr.Production volumes Ior JK Tyre Ior FY2011E could be up
by 2025 as demand Irom passenger cars, trucks and buses remains robust. Currently, demand Ior tyres
is exceeding the supply. The company should also beneIit Irom Iull capacity utilization at the Kankroli
tyre plant in FY2011E. The disruption in operations last year due to the illegal strike by workmen led to a
decline oI Rs300cr in sales and a loss oI Rs3035cr at the EBITA level.







OUTLOOK AND VALUATION

In FY2010, the tyre industry beneIited largely Irom the substantial increase in OEM demand and
spike in replacement demand. Going ahead, we are positive on the sector as OEM oII-take is expected to
improve, beneIitting the overall auto industry`s volume growth. However, the recent run-up in raw-
material prices is a concern and expected to exert some pressure on the company`s operating margin. On
account oI the lower-than-expected 4QFY2010 perIormance, we estimate the company to register EPS oI
Rs43.2 (Rs45.5) in FY2011E and Rs48.4 (Rs53.5) in FY2012E.





















!ROFIT & LOSS ATATEMENT CONSOLIDATED Rs Cr








BALANCESHEET CONSOLIDATED Rs Cr







CASH FLOW STATEMENT CONSOLIDATED Rs Cr














KEY RATIOS







CONCLUSION
The present study reIlects that the proper management does aIIect positively on the proIitability
levels oI the sample companies. The companies over the years have realized the importance oI eIIicient
working capital management and have worked in bringing about a productive change in WCM techniques.
The results reveal that there is a standoII between liquidity and proIitability and the selected corporate has
been achieving a tradeoII between risk and return

























REFERENCES
Books
1] Anthony, R.. et.al.(1998). Management Accounting Taxes and cases Illinois. Richard .
Irwin Inc.
2] Agarwal .P. and Mangal S.K.(1988). Readings in Financial Management Jaipur: Rupa
Publishers.
3] Bhalla, V.K. (1987). Financial Management, elhi; Khosla Publishing House.
4] Chaddha R.S. (2002). Inventory Management in India, Mumbai Allied Publication.
5] Gupta M.C., ProIitability Analysis. (1989). Jaipur, Pointer Publishers.
6] Gupta, S.P. (2002). Statistical Methods, ew elhi: Sultan Chand & sons.
7] Horward, L.R., Working Capital: Its Management and control. (1987). London: Mconald and events
Ltd.
RE!ORTS/OFFICIAL !UBLICATIONS
1] Annual reports oI selected Companies oI the selected period.
Periodicals/Journals/Bulletins
1] The Journal oI Industries and Trade Lok Udyog, ew elhi.
2] The Indian Accounting journal and Finance
3] The Accounting Review
WEBSITES
1] www.ICAI.org
2] www.mrItyres.com
3] www.ceatyres.com
4] www.apollotyres.com
5] http://www.jktyres.com/