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KIRATPUR BIJNOR (U.P.) Submitted to

Uttar Pradesh Technical University (Lucknow) In partial fulfillment of the requirement For the award of the degree of

Dr. Raghavendra Dwivedi

PLACE : GZB 0903870007

Ankit Rajput
University Roll No.-



It gives me immense pleasure to present this project report on working capital management carried out at Rama Paper Mills Ltd. in partial fulfillment of post graduate course MBA. No work can be carried out without the help and guidance of various persons. I am happy to take this opportunity to express my gratitude to those who have been helpful to me in completing this project report At the outset I would like to thank Mr. Jitendra Mittal sir Head of Account Dept. for their valuable advice and guidance during my project completion, also Mr. Ravinder Rajput sir (Head of bill passing dept.) and Mr. Ravi Sharma, Arun Sharma sir for timely help concerning various aspects account department for help me to complete the summer internship program. I would like be failing in my duty if I do not express my deep sense of gratitude to Dr. Raghavendra Dwivedi sir without his guidance it wouldnt have been possible for me to complete this project work. Lastly I would like to thank my Parents, Friends, and well wishers who encouraged me to do this research work and all those contributed directly or indirectly in completing this project to whom I am obligated to.

Ankit Rajput MBA II Sem.



(Ankit Rajput)



Before Investing in any kind of Business, First we have to do Financial Analysis of that particular Company and for making our investment successful we are suppose to do different kind of analysis of that particular company. So that decisions are called as Investing Decisions So Financial Analysis is very Important Activity before investing anywhere. I have tried to put my best effort to complete this task on the basis of skill that I have achieved during the last one year study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to my by the reader.

Table of Contents
Chapter No. I II III IV V A Particular Certificate Acknowledgement Declaration Preface Contents Page No. 2 3 4 5 6

Company Profile
Paper Industry History in India Company History Vision & Mission Competitors Organization Structure Products Address 10 11 13 14 15 17 19 21 22


Objective of the Study Scope of the Study

Literature Review
1 Working Capital Management Introduction Need for working capital Types of working capital Operating cycle 2 Working capital Components Cash Management Inventory Management Receivable Management 24 25 26 29 31 36 41

Research Methodology


Introduction Types of research Financial Highlights & Analysis Share Capital Sales Turnover Profit Fixed Assets Dividend Payment E

43 44 46 47 48 49 50

Data analysis & Interpretations

1 Working capital Analysis Working Capital level Working capital trend analysis Current Assets analysis Current Liabilities analysis Changes of working capital Operating Cycle Working capital leverage 2 Working Capital Ratio Analysis Introduction Role of ration analysis Limitation of ratio analysis Classification of ratio Efficiency ratio Liquidity ratio 3 Working Capital Finance and Estimation Introduction Sources of working capital finance Working capital loan and interest

52 53 54 57 59 61 64 67 71 71 72 73 74 80

86 86 89

Estimation of working capital F Conclusions and recommendations Conclusion Limitation of the study Recommendations Bibliography Appendix Balance Sheet Profit & Loss A/C


92 94 95 96 97 99


Paper Industry History in India

Paper industry in India is the 15th largest paper industry in the World. It provides employment to nearly 1.5 million people and contributes Rs.25 billion to the government kitty. Paper industry is primarily depend upon forest based raw materials. The first paper mill in India was set up at Sreerampur, West Bangal in the year 1812. It was based on grasses and jute as raw material. Large scale mechanized technology of paper making was introduced in India in early 1905. The Indian pulp and paper industry at present is very well developed and established. Now, the paper industry is categorized as Forest-based, agrobased and other (Waste paper, Secondary fibers and market pulp). In 1951, there were 17 paper mills, and today there are about 515 units engaged in the manufacture of paper and paper-boards and newsprint in India. Those paper industries, which have capacity above 24,000 Tone Per Annum, are designated as large-scale paper industries. Indian paper Industry has been de-licensed under the Industries (Development & regulation) Act, 1951 with effect from 17th July, 1997. The Interested entrepreneurs are now required to file and Industrial Entrepreneurs memorandum (IEM) with the Secretariat for Industrial Assistance (SIA) for setting up a new paper unit or substantial expansion of the existing unit in permissible location.

Company Profile
RPML is large paper manufacturing enterprise in U.P. RPML was founded by Shri Pramod Agarwal in the year 1985, and started the production from the year 1987, ushering in the paper indigenous paper industry in U.P., a dream that have been more than realized with a well recognized record of performance. It has been earning profit continuously since 199495.


At the beginning Time Company was Pvt. Ltd. and in the year 1994 it converted into a public (Ltd.) company. The site of unit is well located, excellent connectivity by road and rail transport makes availability of raw material and inputs easy and also brings finished products markets in close proximity. The company is professionally managed by well-qualified, highly motivated and experienced personnel. It employs around 500 people including skilled semiskilled and unskilled workforce. The company has built a residential colony for its employees which have 36 livable units for its executive and 100 units for workers. RPML manufactures over 10 products under 4 major products group and caters to core sectors of the Indian economy viz, News paper printing Organization, Publication and Industry etc.

The wide network of RPML is, Ram Singh Steels Pvt. Ltd, Harsal Vikas Sasthan, Ram Fin Fortune Pvt. Ltd, Rama Institute of Higher Education and Ram Filling Station. It Services its customers and provides them with suitable product, system and Service efficiently and at competitive prices. The quality and reliability of its products due to emphasis on design and manufacturing to international standards by acquiring and adopting some of the best technologies from leading company in the India, together with technologies developed in its own R&D centers. RPML has acquired certification to quality management system ISO 9001:2000, and environmental management system ISO 14001. 6 MW Bio- mass based co-generation Project of the company had been registered with United Nations Framework Convention on Climate Change (UNFCCC) under Kyoto Protocol for getting the benefit of carbon credits under clean Development mechanism (CDM)

In the year 2007 of September Company established a power plant and generate electricity power. By it company is capable to manufactures paper on lower cost in compare to competitor firms. For reducing the accident at machine and fraud, company prohibited the cell phone in to the mill area.



To celebrate all things paper the wonder and the legacy.

Establish leadership in whatever we do at home and abroad.

Achieve continued growth through sustained innovation for total customer satisfaction and fair return to all other stakeholders. Meet this objective by producing quality products at optimum cost and marketing them at reasonable price.

Guiding Principle
Toil and sweat to manage our resources of men, material and money in and integrated efficient and economic manner. Earn profit keeping in view commitment to social responsibility and environmental concern.

Quality Perspective
Make quality a way of life.

Work Culture
Experience: work is life, life is work



Mohit Paper Mills Ltd. Hemkund Paper Mills Baddri Kehdar Paper Mills Charu Paper Mills Pvt. Ltd.

Subsidiary Firms of the Company

Ram Singh Steels Pvt. Ltd. (Kotdwar) Harshal Vikas Sansthan (Kiratpur) Ram Fin Fortune Pvt. Ltd. Rama Filling Station Rama Institute of Higher Education


Finance Management Structure

BOARD OF DIRECTORS Shri Pramod Agarwal Shri Arun Goel : :

Chairman & Managing Director Executive Director


Shri Amar Mittal Shri Prabhat Agarwal Shri H. S. Bhim Rao MANAGERS Mr. Sanjeev Kumar Dixit Mr. Pankaj Mishra Mr. Amit Agarwal Mr. Vikas Rastogi Mr. U.P Srivastava Mr. Bhanupratap Singh Mr. Sunil Singh COMPANY SCRETARY Shri Pankaj Misra AUDITORS Shiam & Co. Chartered Accountant Muzaffarnagar (U.P.)

: : : : : : : : : :

Director Director Director Personnel Manager Finance Manager Marketing Manager Production Manager (Unit-I) Production Manager (Unit-II) Production Manager (Unit-III) Production Manager (Unit-IV)

Unit I: A multi-cylinder mould plant to manufacture coated/ uncoated varieties of duplex board of medium quality. This is used to make small packaging / small cartoons used by pharmaceuticals, soaps, paste, apparels, tea and other similar industries. Products LWC Duplex Board LWC Premium Duplex Board

GSM 230-410 230-410

Unit II: A fouddinier Wire part MF machine manufactures writing/ Printing, News print and craft grades of paper. Products Deluxe Cream Wove Super Deluxe Cream Wove Prime Cream Wove Super Deluxe Newsprint GSM 50-80 54-80 54-80 48+ Brightness 60+ 66+ 72+ 60+

Unit III: A high speed MF machine manufacture Newsprint and also capable of making other varieties of paper such as writing/ printing paper. The plant has been imported from Germany through Bon Engineering Sweden. It is a second hand refurnished machine. Products Standard Newsprint Deluxe Newsprint GSM 48 48 Brightness 45+ 52+

Unit IV: A new established plant manufactures the tissue and poster paper. The uses of tissue paper in various type product packaging. Products Tissue Paper Poster Paper

GSM 40+ 51+



Social Responsibility and Environmental Responsibility

While discharging commercial functions, the company has not forgotten its responsibilities towards society and environment. The company is virtually a zero discharge unit. All effluent is fully treated and entire water is recycled and re-consumed. A waste in the shape of sludge having left out fibers in converted into Millboard and sold in the market that yields a good price for waste. Millboard manufacturing equipments have been installed for this conversion. The companys endeavor is to make wealth from waste and proud to be associated with the national cause of conserving its forest reserve and making environment green and clean by consuming waste paper.

Address of the Company

REGISTERED OFFICE & WORKS 4th KM Stone, Najibabad Road, Kiratpur-246731 Dist. Bijnor (U.P.) e-mail works@ramapaper.com Website www.ramapaper.com



CORPORATE OFFICE 12/22 IInd Floor, East Patel Nagar New Delhi 110008 E-mail delhi@ramapaper.com REGISTRAR & TRANSFER AGENT Indus Portfolio (P) Limited ISIN INE425E01013 G-65, Bali Nagar, New Delhi SEBI Registration No. INR000003845 COST AUDITORS Aseem Jain & Asso. Cost Accountant, New Delhi BANKERS Bank of Baroda State Bank of India Punjab National Bank

Objective of the Study

Study of the working capital management is important because unless the working capital in managed effectively, monitored periodically at regular interval to remove bottlenecks if any company cannot earn profits and increase its turnover. With this primary objective of the study the following further objectives are framed for a depth analysis 1. 2. 3. 4. To study the working capital management of RPML. To study the optimum level of current assets and current liabilities at the company. To study the liquidity position through various working capital related ratios. To study the working capital components such as Receivables accounts, Cash management, Inventory position.

5. 6. 7.

To study the way and means of working capital finance of the RPML. To estimate the working capital requirement of RPML. To study the operating and cash Cycle of the company.



Scope of the Study

Scope of the Study The scope of the study is identified after that during the study is conducted. The study of working capital is based on tools like Trend Analysis, Ratio Analysis, Working Capital Leverage, Operating Cycle etc. Further the study is based on last 5 years annual reports of RPML. And even factors like Competitors Analysis, Industry Analysis were not considered while preparing this project.





There are two concepts of Working capital:

Gross Working capital

It refers to the firms investment in total current or circulating assets. 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) and stock (inventory)

Net Working Capital

The term Net Working Capital has been defined in two different ways: (i) It is the excess of current assets over current liabilities. This is, as matter of fact, the most commonly accepted definition. Some people define it as only the difference between current assets and current liabilities. The former seems to be a better definition as compared to the latter. (ii) It is that portion of a firms current assets which is financed by longterm funds. Current Liabilities: 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.

For example, a business requires investment in current assets such as cash, accounts receivable and short-term investment etc, to the extent of Rs. 15,000. A part of this requirement can be financed by the firm by purchasing on credit or postponing certain payments or, in other words, by creation of current liabilities such as accounts payable, outstanding expenses, etc. Suppose the amount of current liabilities comes to Rs. 10,000. This means the business still needs Rs. 5,000 for its working purposes. This amount will have to be financed from long-term sources

of funds as indicated in the in the definition of Net Working Capital given above. It may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is no precise way to determine the exact amount of gross or net working capital for any firm. The data and problems of each company should be analyzed to determine the amount of working capital.


It has already been stated on the above that the basic objective of financial management is to maximize shareholders wealth. This is possible only when the company earns sufficient profit. The amount of such profit largely depends upon the magnitude of sales. However, sales do not convert into cash instantaneously. There is always a time gap between the sale of goods and receipt of cash. Working Capital is

required for this period in order to sustain the sales activity. In case adequate working capital is not available for this period, the company will not be in a position to purchase raw materials, pay wages and other expenses required for manufacturing the goods to be sold. For that organization maintain its operating cycle.


Permanent Working Capital



This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. In other words, it represents the current assets required on a continuing basis over the entire year. Tandon committee has referred to this type of working capital as core current assets. The following are the characteristic of this type of working capital: 1. Amount of permanent working capital remains in the business in one form or another. This is particularly important form the point of view of financing. The suppliers of such working capital should not expect its return during the life-time of the firm. 2. It also grows with the size of the business. In other words, greater the size of the business, greater is the amount of such working capital and vice versa.

Permanent working capital is permanently needed for the business and therefore it should be financed out of long-term funds. This is the reason why the current ratio has to be substantially more than 1 as explained in the Chapter Ratio Analysis.

Temporary Working Capital

The amount of such working capital keeps on fluctuating from time to time on the basis of business activities. In other words, it represents additional current assets required at different times during the operation year. For example, extra inventory has to be maintained to support sales during peak sales period. Similarly, receivable also increase and must be financed during period of high sales. On the other hand investment in inventories, receivables, etc. will decrease in periods of depression. Suppliers of temporary working capital can expect its return during off season when it is not required by the firm. Hence, temporary working

capital is generally financed from short-term source of finance such as bank credit. Working capital is fixed over a period of time, while temporary working capital is fluctuating. The permanent working capital is increasing over a period of time with increase in the level of business activity. This happens in case of a growing company.

Permanent & Temporary working capital



Permanent & Temporary working capital (If the size of firm increases)

Operating Cycle
From the above, it is clear that working capital is required because of the time gap between the sales and their actual realization in cash. This time gap is technically termed as operation cycle of the business. In case of a manufacturing company, the operation cycle is the length of time necessary to complete the following cycle of events: (i) Conversion of cash into raw material (ii) Conversion of raw materials into work-in-process (iii) Conversion of work-in-process into finished goods (iv) Conversion of finished goods into accounts receivable, and (v) Conversion of accounts receivable into cash. This cycle will be repeated again and again The operation cycle of manufacturing business can be shown as in the following chart.


In the case of a Trading firm the operating cycle will include the length of time required to convert (i) Cash into inventories, (ii) Inventories into account receivable, (iii) Accounts receivable into cash In the case of a Financing firm the operation cycle includes the length of time taken for (i) Conversion of cash into debtors (ii) Conversion of debtors into cash

Management of different components of Working capital

Working Capital Management involves management of different components of working capital such as cash, inventories, accounts receivable, creditors, etc. A brief description follows regarding the various issues involved in the management of each of the above components of working capital.

It is the duty of the Finance Manager to provide adequate cash to all segments of the organization. He has also to ensure that no funds are blocked in idle cash this will involve cost in terms of interest to the business. A sound cash management scheme, therefore, maintains the balance between the twin objectives of liquidity and cost

Cash Management Models

Several types of cash management models have been recently designed to help in determining optimum cash balance. These models are interesting and are beginning to be used in practice. Two of such models are being given below:

(1) Baumol Model



This model was suggested by William J. Baumol. It is similar to one use for determination of economic order quantity, explained later in the

chapter. According to this model, optimum cash level is that level of cash where the carrying cost and transactions costs are the minimum. Carrying Costs This refers to the cost of holding cash, namely, the interest foregone on marketable securities. They may also be termed as opportunity cost of keeping cash balance. Transaction Costs This refers to the cost involved in getting the marketable securities converted into cash. This happens when the firm falls short of cash and has to sell the securities resulting in clerical, brokerage, registration and other costs. There is an inverse relationship between the two costs. When one increases, the other decreases. Hence, optimum cash level will be at that point where these two costs are equal. Thus, the optimum cash balance is Rs. 15,000. The average cash balance will be taken at Rs. 7,500 (i.e., 15,000/2). In other words, the firm should make four (i.e. 60,000/15000) transactions regarding sales of marketable securities for conversion into cash during the month. This can be verified as follows: NO. of Conversion Average Transaction Opportunity Total Transaction of cash cost Cost Cost securities Balance Rs. Rs. Rs. Rs. Rs. 2 30,000 15,000 20 75 95 4 15,000 7,500 40 37.5 77.5 6 10,000 5,000 60 25 85


The above table shows that the total cost of holding cash is the least when the cash balance is kept at Rs. 15,000. This may, therefore, be taken as the optimum cash balance. As will be seen from the table, the transaction cast and opportunity cast are just equal to each other at this level. There are two limitations of the optimum cash model given in the preceding pages: (i) Cash payments are assumed to be steady over the period of time specified. When the cash payment becomes lumpy, it may be appropriate to reduce the period for which calculations are made so that expenditures during the period are relatively steady; (ii) Cash payments are seldom predictable. Hence, the model may not give 100% correct results.

(2) Miller-orr Model

Baumol model is not suitable in those circumstances when the demand for cash is not steady and cannot be known in advance. Miller-Orr Model helps in determining the optimum level of cash in such circumstances. It deals with cash management problems under the assumption of stochastic or random cash flows by laying down control limits for cash valances. These limits consist of an upper limit (h), lower limit (o) and return point (z). When cash balance reaches the upper limit, a transfer of cash equal to h-z is affected to marketable securities. When it touches the lower limit, a transfer equal to z-o from marketable securities to cash is made. No transaction between cash and marketable securities to cash is made during the period when the cash balance stays between the high and low limits. When cash valance reaches the upper limit, an amount equal to h-z is invested in the marketable securities and cash balance comes down to z level. When cash balance touches the lower limit marketable



securities of the value of z-o are sold and the cash balance again goes up to z level. The upper and lower limits are set on the basis of opportunity cost of holding cash, degree of likely fluctuation in cash balances and the fixed costs associated with securities transactions. The optimal value of z, the return point for securities transactions, can be determined by the following formula: 3b ________ A= 3 4t Where b = fixed cost associated with a security transaction A = variance of daily net cash flows t = interest rate per day on marketable securities The optimal value of his simply 3z. With these control limits set, the Miller-Orr Model of cash management minimizes the total costs (fixed and opportunity) of cash management. Since the method assumes that cash flows are random, the average cash balance cannot exactly be determined in advance. However, it is approximately (z+h) 3, which will be higher than that suggested by Baumols EOQ Model. The Miller-Orr Model assumes the transfer cost as independent of the amount of transfer and the direction. It also assumes that net cash flows are completely stochastic. These assumptions may not be true on many occasions. In general, it may be said that the cash model gives the finance manager a bench mark for judging the optimum cash balance. It does not have to be

used as precise rule governing his behavior. The model merely suggests what would be the optimal balance under a set of assumptions. The actual balance may be more or less if the assumption do not hold good entirely.



Inventories are goods held for eventual sale by a firm. Inventories are thus one of the major elements which help the firm in obtaining the desired level of sales.

Inventories can be classified into three categories: (i) Raw Materials: These are goods, which have not yet been committed to production in a manufacturing firm. They may consist of basic raw materials or finished components. (ii) Work-in-process: This includes those materials which have been committed to production process but have not yet been completed.

(iii) Finished Goods: These are completed products awaiting sale. They are the final output of the production process in a manufacturing firm. In case of wholesalers and retailers, they are generally referred to as merchandise inventory.

Objective of Inventory Management

(i) (ii) Ensuring a continuous supply of materials to production department facilitation uninterrupted production. Maintaining sufficient stock of raw material in period of short supply.

(iii) Maintaining sufficient stock of finished goods for smooth sales operations.

(iv) Minimizing the carrying costs.

Techniques of inventory management

Effective inventory management required and effective control over inventories. Inventory control refers to a system which ensures supply of required quantity and quality or inventories at the required time and at the same time prevent unnecessary investment in inventories. The techniques of inventory control/inventory management are as follows: 1.

Determination of Economic Order Quantity (EOQ)

Determination of the quantity for which the order should be placed is one of the important problems concerned with efficient inventory management. Economic Order Quantity refers to the size of the order which gives maximum economy in purchasing any item of raw material or finished product. It is fixed mainly after taking into account the following costs. (i) Ordering Cost: It is the cost of placing an order and securing the supplies. It varies from time to time depending upon the number of orders placed and the number of items ordered. The more frequently the orders are placed, and fewer the quantities purchased on each order, the greater will be the ordering cost and vice versa.

(ii) Inventory Carrying Cost: It is the cost of keeping items in stock. It includes interest on investment, obsolescence losses, store-keeping cost, insurance premium, etc. The large the value of inventory, the higher will be the inventory carrying cost and vice versa.



The former cost may be referred as the cost of acquiring whiles the latter as the cost of holding inventory. The cost of acquiring decreases while the cost of holding increases with every increase in the quantity of purchase lot. A balance is, therefore, struck between the two opposing factors and the economic ordering quantity is determined at a level for which aggregate of two costs is the minimum. Formula: 1/2 Q= 2U x P S Q U P S = Economic Ordering Quantity = Quantity (units) purchased in a year (month) = Cost of placing an order = Annual (monthly) cost of storage of one unit.


ABC Analysis
ABC analysis is a technique of exercising selective control over inventory items. The technique is based on this assumption that a firm should not exercise the same degree of control on items which are more costly as compared to those items which are less costly. According to this approach, the inventory items are divided into three categories- A, B, C. Category A may include more costly items, while category B may consist of less costly items and category C of the least costly items. Thus, A, B, C analysis concentrates on important items and therefore is also known control by importance and exception (CIE). This approach is also known as proportional value analysis (PVA), since the items are classified in importance of their relative value. Though no define procedure can be laid down for classifying the inventories in A,B,C categories as this will depend upon a large number of factors, such as nature and varieties of items, specific requirements of the business, etc., yet the following method is generally adopted: (i) The quality of each material expected to be used in a period is estimated; (ii) The value of each of the above items of materials is found out by multiplying the quantity of each item with the price; (iii) The items are then rearranged in the descending order of their value irrespective to their quantities; (iv) A running total of all the values will then be taken; (v) It will be found that a small number of a first few items may amount to a large percentage of the total value of the items. The management ten will have to take a decision as to the percentages of total value or the total number of items which have to be covered by A, B, and C categories.



Category A B C

% of total value 70 25 5

% of total quantity 10 35 55

While exercising control over stores, items of category A should be given the utmost attention. Their levels of stock should be strictly controlled. In case of items category B, ordinary stores routine should be observed but the rules regarding levels of stock may not be so strictly adhered to as those in category A. items of category C may be procedure may be dispersed with. However, stock should be kept under some observation so that fresh supplies may be obtained in time. Order for these materials may also be given in bulk to economize on ordering and handling costs.



Accounts receivable (also popularly termed as receivables) constitute a significant portion of the total current assets of the business next after inventories. They are a direct consequence of trade credit which has become an essential marketing tool in modern business. When a firm sells goods for cash, payments are received immediately and, therefore, no receivables are created. However, when a firm sells goods or services on credit, the payments are postponed to future dates and receivables are created. Usually, the credit sales are made on open account which means that no formal acknowledgements of debt obligations are taken from the buyers. The only documents evidencing the same are purchase order, shipping invoice or even a billing statement. The policy of open account sales facilities business transactions and reduces to a great extent the paper work required in connection with credit sales. Types of customers on the basis of payment The firm may categories its customers, at least, in the following three categories: (a) Good Accounts: that is, financially strong customers (b) Bad Accounts: that is, financially very weak, high risk customers (c) Marginal Accounts: that is, customers with moderate financial health and risk (falling between good and had accounts).



Research Methodology


Research Methodology is a way to systematically solve the research problem. It may be understood as a science of studying new research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them. It is important for research to know not only the research method but also know methodology. The Procedures by which researchers go about their work of describing, explaining and predicting phenomenon are called methodology. Methods comprise the procedures used for generating, collection and evaluating data. All this means that tit is necessary for the researcher to design his methodology for his problem as the same may differ from problem. Data collection is important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect and necessary data, this is also important step.

Types of Data Collection

There are two types of data collection methods available. 1. Primary data collection 2. Secondary data collection

2. Secondary data collection: The secondary data are those which are already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheet, books etc. The project is based on primary data collected through personal interview of head of Account Department, Head of Marketing department and other


concerned staff member of finance department. But primary data collection had limitations such as matter confidential information thus project is based on secondary information collected through six year annual report of the company, supported by various books and internet sides. The data collection was aimed at study of working capital management of the company. Project is based on 1. Annual report of RPML 2004-05 2. Annual report of RPML 2005-06 3. Annual report of RPML 2006-07 4. Annual report of RPML 2007-08 5. Annual report of RPML 2008-09 6. Annual report of RPML 2009-10

Financial Highlights & Analysis




Share capital of the company

Pref. Share Rs.100 each Equity Share Rs.10 each

Financial year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Types of share Pref. share Equity share Pref. share Equity share Pref. share Equity share Pref. share Equity share Pref. share Equity share Pref. share Equity share

Capital in Rs. 5,00,00,000 5,08,14,000 5,00,00,000 7,58,14,000 5,00,00,000 9,66,47,330 5,00,00,000 9,66,47,330 5,00,00,000 9,66,47,330 5,00,00,000 9,66,47,330

No. of new issue share ---------------------2,50,00,000 -------20,83,333 -------------------------------------------

Sale of the company

Sales in Rs.

FINANCIAL YEAR 2004-05 2005-06 2006-07

SALES 69,53,73,871 76,69,76,308 83,90,31,175


GROWTH in % 13.40 10.30 9.40

2007-08 2008-09 2009-10

84,50,05,060 1,07,00,67,988 1,09,10,08,789

.72 26.63 1.96



Profit of the Company

Profit in Rs.

Financial Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Profit before tax 6,03,39,810 8,50,57,450 8,12,25,101 6,53,52,432 4,11,92,266 7,21,740

Profit after tax 4,43,98,810 5,52,01,850 3,77,94,074 3,05,11,398 2,90,35,592 1,03,740

Dividend Payment
Financial Year 2004-05 2005-06 2006-07 Shares Pref. Share Equity Share Pref. Share Equity Share Pref. Share Equity Share

Payment NO NO 6% NO 6% 5%

EPS 8.74 9.42 4.49

2007-08 2008-09 2009-10

Pref. Share Equity Share Pref. Share Equity Share Pref. Share Equity Share


3.16 3.00 3.09

Fixed Assets
Financial Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Assets 27,20,29,372 25,05,26,311 54,78,83,441 50,09,61,901 60,33,77,919 89,64,41,365





Working Capital Analysis



Working capital level:

The consideration of the level investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the need of the business firm. Excessive investment in current assets should be avoided because it impairs the firms profitability, as idle investment earns nothing. On the other hand inadequate amount of working capital can be threatened solvency of the firms because of its inability to meet its current obligation. It should be realized that the working capital need of the firms may be fluctuation with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance.


Size of Working Capital

(In Lac)

Particular 2005-06 2006-07 2007-08 2008-09 2009-10 A Current Assets Inventories 690.45 909.38 461.50 891.18 875.76 Sundry Debtors 1645.67 2064.02 3125.41 3002.97 2951.04 Cash & Bank 20.67 52.80 72.45 74.26 42.50 Balance Other assets 83.46 89.43 97.23 52.53 57.33 Loan& Advance 104.34 382.92 376.18 511.33 774.58 Total of A 2544.59 3498.55 4132.77 4532.27 4701.21 (Gross W.C) B Current Liabilities Current 739.54 872.35 1257.02 1501.70 1694.60 Liabilities Provision 105.95 170.91 77.47 50.78 1.11 Total B 845.49 1043.26 1334.49 1552.48 1695.71 Net W.C (A-B) 1699.10 2455.29 2798.28 2979.79 3005.50

Working Capital Trend Analysis

In working capital analysis directions at changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an analyst to make a study about the trend and direction of working capital over a period of time. Such analysis enables as to study the upward and download trend in current assets and current liabilities and its effect on the working capital position.



In the words of S.P. Gupta, The trend is very commonly used in day-today conversion trend, also called secular or long term need is the basic tendency of population, sales, income, current assets and current liabilities to grow or decline over a period of time. According to R. C.galeziem The trend is defined as smooth irreversible movement in the series. It can be increasing or decreasing. Emphasizing the importance of working capital trend, Man Mohan and Goel have pointed out that analysis of working capital trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds. Further, any one trend by itself is not very informative and therefore comparison with. Illustrated their ideas in these words, an upwards trends coupled with downward trend or sells, accompanied by marked increase in plant investment especially if the increase in planning investment by fixed interest obligation.

Working Capital Size

In Crore

Year Net W.C (A-B) W.C Indices

2005-06 16.99 100

2006-07 24.55 145

2007-08 27.98 165

2008-09 29.79 175

2009-10 30.05 177

Working Capital Indices

Observations: It was observed that working capital is show continues growth each year. It was observed that companys in the year 2009-10 current assets

increased by around 4% and current liabilities increased only by 9% which affect as working capital increased by 1%. In the year 2006-07 net working capital increased to Rs. 24.55 Crore from Rs. 16.99 Crore, the increase in working capital is close to 44.50%. While current assets increased by 37.48% and current liabilities by 23.39%. It shows that management is using long term funds to short term requirements. And it has fallen to Rs. 4101 million in the year 2007 because current assets gone up by only 12%, current liabilities grown by 35%.

This two together pushed down the net working capital to the present level. The fall in working capital is a clear indication that the company is utilizing its short terms resources with efficiency.

Current Assets
Analysis of current assets components enable one to examine in which components the working capital fund has locked. A large tie up of fund in inventories affect the probability of the business or the major portion of current asset is made up cash alone, the profitability will be decreased because cash is non-earning assets.

Components of Current Assets

In Lac

2005-06 2006-07 2007-08 2008-09 2009-10 Particular Inventories Sundry Debtors Cash & Bank balance Other Assets Loan & advance Total C.A Indices of C.A 690.45 1645.67 20.67 83.46 104.34 2544.59 100 909.38 2064.02 52.80 89.43 382.92 3498.55 137

461.50 3125.41 72.45 97.23 376.18 4132.77 162

891.18 3002.97 74.26 52.53 511.33 4532.27 178

875.76 2951.04 42.50 147.44 684.47 4701.21 185


Indices of Current Assets Composition of current assets:

In %

Observation: It was observed that the size of current assets is increasing with increases in the sales. The excess of current assets is showing positive liquidity position of the firm but it is not always good because excess current assets then required, it may adversely affects on profitability. Current assets include some funds investments for which company pay interest. The balance of current assets is highly increased in year 2006-07, because of increase in Inventory & Loan and advance. The balance of current assets also increased in the year 2009-10, while the inventory, Debtors cash & Bank balance reduced, but it increased with the help of Loan and advance. Current assets components show sundry debtors are the major part in current assets it indicates that the inefficient collection management. Over investment in the debtor affects liquidity of firm for that company has raised funds from other sources like short term loan which incurred the interest.

Current Liabilities
Current liabilities mean the liabilities which have to pay in current year. It includes sundry Creditors means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and provision as tax provision. Current liabilities also included bank overdraft. For some current liabilities like bank overdraft and short term loan, company has to pay interest thus the management of current liabilities has importance.


Current Liabilities Size

In Lac

Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Current 739.54 872.35 1257.02 1501.70 1694.60 Liabilities Provisions 105.95 170.91 77.47 50.78 1.11 Total of 845.49 1043.26 1334.49 1552.48 1695.71 C.L Indices of 100 123 158 184 200 C.L

Indices of Current Liabilities

Observation: Current liabilities show continues growth each year because company creates the credit in the market by good transaction. To get maximum credit from suppliers which are profitable to the company it reduces the need of working capital of firm. AS a current liability increase in the year 2006-07 by 23.39%, 27% in the year 2007-08 and in the year 2009-10 it increase 9.74%. But company enjoyed over creditors which may include indirect cost of credit terms.

Change in working Capital

There are so many reasons of changes in working capital as follow: 1. Changes in Sales & Operating expenses: The changes in sales and operating expenses may be due to three reasons (a) There may be long run trend of change e.g. The price of row material say oil may constantly raise necessity the holding of large inventory.


(b) (c)

Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary. Changes in seasonality in sales activities.

2. Policy Changes: The second major case of changes in the level of working capital is because of policy changes initiated by management .The term current assets policy may be defined as the relationship between current assets and sales volume. 3. Technology Changes: The third major point if changes in working capital are changes in technology because changes in technology to install that technology in our business more working capital is required. A change in operating expenses rise of full will have similar effects on the level of working following working capital statement is prepared on the base of balance sheet of last two year.

Statement of Change in Working Capital

In Lac

Particular Current Assets Inventories

2008-09 891.18

2009-10 875.76


Decrease 15.42

Sundry Debtors Cash & Bank balance Other Assets Loan & advance Total A Current Liabilities Current liabilities Provision Total B W.C (Total of A-B) Net increase in W.C Total

3002.97 74.26 52.53 511.33 4532.27 1501.70 50.78 1552.48 2979.79 25.71 3005.50

2951.04 42.50 147.44 684.47 4701.21 1694.60 1.11 1695.71 3005.50 --3005.50 94.91 173.14

51.93 31.76

192.90 49.67 --317.72 25.71 317.72

Observation: Working capital in the year 2009 to 2010 because 1. Sales increased by around 2%, where cost of raw material purchase by 6% and manufacturing expanses reduced by 3.75% 2. Cost of material and manufacturing expanses increased because of inflation, which was 14.86% in Feb 2010 increased from 11.52% in 2009.

Operating cycle
Gross Operating Cycle (GOC) The firms gross operating cycle (GOC) can be determined as inventory conversion period (ICP) plus debtors conversion period (DCP). Formula Gross operating = Inventory conversion + Debtors conversion Cycle period period




Inventory conversion period: ICP is the sum of raw material conversion period (RMCP), work-in-process conversion period (WIPCP) and finished goods conversion period (FGCP) ICP = RMCP + WIPCP + FGCP RMCP = RMI x 360 RMC FGCP= RMI Raw material inventory WIPI Work-in-process inventory FGI Finished goods inventory FGI x 360 CGS RMC Raw material consumption COP Cost of production CGS Cost of goods sold WIPCP= WIPI x 360 COP

Debtors (receivable) conversion period: DCP is the average time taken to convert debtors into cash. DCP represents the average collection period.

Debtors conversion period = Debtors x 360 Credit sales Creditors (payables) deferral period (CDP) CDP is the average time taken by the firm in paying its suppliers (creditors).

Creditors deferral period = Creditors x 360 Credit purchases



Net operating cycle (NOC) is the difference between gross operating cycle and payable deferral period. Net Operating = Gross operating Creditors deferral Cycle cycle period

NOC = GOC - CDP Calculation of operating cycle

To calculate the operating cycle of RPML used last 5 years data. Operating cycle of the RPML vary year to year as changes in policy of management about credit policy and operating control. Curren Projecte t Year d Gross Operating cycle 1.Inventory (i) Raw 68 60 Material (ii) WIP 22 25 (iii) Finished 38 128 54 139 Goods 2. Debtors 43 47 Conversion Period 3. Gross 171 186 Operating Cycle (1+2) 4. Payment 35 38 Deferral


Period Net Operating Cycle (3-4)




Working Capital Leverage

One of the important objectives of working capital is by maintaining the optimum level of investment in current assets and by reducing the level of investment in current assets and by reducing the level of investment in current liabilities the company can minimize the investment in the working capital thereby improvement in return on capital employed is achieved. The term working capital leverage refers to the impact of level of working capital on companys profitability. The working capital management should improve the productivity of investment the current assets and ultimately it will increase the return on capital employed. Higher level of investment in current assets than is actually required means increase in the cost of interest charges on short term loans and working capital finance raised from banks etc. and will result in lower return on capital employed and vice versa. Working capital leverage measures the responsiveness of ROCE (Return on Capital Employed) for change in current assets. It is measures by applying the following formula. Working capital leverage = % change in ROCE % changes in current assets Return on capital employed = EBIT Total assets The working capital reflects the sensitivity of return on capital employed to changes in level of current assets. Current assets leverage would be less in the case of capital intensive capital employed is same working capital leverage expresses the relation of efficiency of working management with the profitability of company.

Calculation of working leverages

Year ROCE % 2005-06 2006-07 2007-08 2008-09 2009-10 14.34 8.92





% change in ROCE % change in C.A W.C leverage %

2.30 11.19 20.55

-5.42 37.49 -14.45

-3.06 18.13 -16.87

-2.69 9.67 -27.81

0.37 3.73 9.92

Working capital leverage

Observations: Working capital leverage of the company has increased in the year 200910 as compare to the year 2008-09. Increase in working capital shows the effective current assets management. From the year 2005-06 to Year 2009-10 the current assets has increased continuously by high rate of 11%, 37%, 18%, 7% and 4% respectively. It adversely affects on ROCE, which increase by only rate of .37% in the year 2009-10, that resulted in push down the working capital leverage to 27.81% in the year 2008-09 and grow up 9.92 in the year 2009-10. When investment in current assets is more than requirement that increases the cost of funds raised from short term sources may be bank loan, which affected on profitability of the RPML.


Working Capital Ratio Analysis



Working Capital Ratio Analysis

Introduction Ratio analysis is the potential tool of financial statement analysis. A ratio is defined as the indicated quotient of two mathematical expressions and as the relationship between two or more things. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firms financial performance.

Role of Ratio Analysis

Ratio analysis helps to appraise the firms in the term of there profitability and efficiency of performance, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available to management to impart the basic function like planning and control. As future is closely related to the immediately past, ratio calculated on the basis historical financial data may be of good assistance to predict the future. E.g. on the basis of inventory turnover ratio or debtors turnover ratio in the past, the level of inventory and debtors can be easily ascertained for any given amount of sales. Similarly, the ratio analysis may be able to locate the point out the various arias which need the management attention in order to improve the situation. E.g. current ratio which shows a constant decline trend may be indicate the need for further introduction of long term finance in order to increase the liquidity position. As the ration analysis is concerned with all the aspect of the firms financial analysis liquidity, solvency, activity, profitability and overall performance, it enables the interested persons to know the financial and operational characteristics of an organization and take suitable decision.

Limitation of Ratio Analysis

1. 2. The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparison. Normally, the ratios are calculated on the basis of historical financial statements. An organization for the purpose of decision making may need the hint regarding the future happiness rather than those in the past. The external analyst has to depend upon the past which may not necessary to reflect financial position and performance in future. The technique of ratio analysis may prove inadequate in some situations if there is differs in opinion regarding the interpretation of current ratio. As the ratio calculates on the basis of financial statements, the basis limitation which is applicable to the financial statement is equally. In the case of technique of ratio analysis also i.e. only facts which can be expressed in financial terms are considered by the ratio analysis. The technique of ratio analysis has certain limitation of use in the sense that it only highlights the strong or problem areas; it does not provide any solution to rectify the problem areas.

3. 4.


Classification of Working Capital Ratio

Working capital ratio means ratios which are related with the working capital management e.g. current assets, current liabilities, and liquidity ratio are classified as follows. (a) Efficiency Ratio: The ratios compounded under this group indicate the efficiency of the organization to use the various kinds of assets by converting them form of sale. The ratio also called as activity ratio or assets management ratio. As the assets basically categorized as fixed assets and current assets and the current assets further classified according to individual components of current assets viz. investment and receivables


or debtors or as net current assets, the important of efficiency ratio as follow. 1. 2. 3. 4. Working capital turnover ratio Inventory turnover ratio Receivable turnover ratio Current assets turnover ratio

(b) Liquidity Ratio: The ratios compounded under this group indicate the short term position of the organization and also indicate the efficiency with which the working capital is being used. The most important ratio under this group is follows. 1. 2. 3. Current Ratio Quick Ratio Absolute liquid Ratio

Efficiency Ratio
Working Capital Turnover Ratio: It signifies that for an amount of sales, a relative amount of working capital is needed. If any increase in sales contemplated working capital should be adequate and thus this ratio helps management to maintain the adequate level of working capital. The ratio measures the efficiency with which the working capital is being used by a firm. It may thus compute net working capital turnover by dividing sales by working capital. Working capital turnover ratio = Sales + Net working capital

Working capital turnover


Rs. in Crore.

Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Sales 76.69 83.90 84.50 107.00 109.10 Net W.C 16.99 24.55 27.98 29.79 30.05 W.C Turnover 4.51 3.42 3.02 3.59 3.63

Observations: High working capital ratio indicates the capability of the organization to achieve maximum sales with minimum investment in working capital. Companys working capital ratio shows mostly more than two, except for the year 2005-06 because of excess of cash inventory in current assets. In the year 2007 to 2010 the ratio was around 3 to 4, it indicates that the capability of the company to achieve maximum sales with the minimum investment in working capital. Inventory Turnover Ratio: Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products. It is calculated by dividing the cost of goods sold by average inventory. Inventory turnover ratio = Cost of goods sold Average Inventory


The average inventory is the average of opening and closing balance of inventory in a manufacturing company like RPML, average inventory of Raw material, WIP and finished goods is used to calculate inventory turnover ratio.

Inventory turnover
In Crore

Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Cost of goods sold 60.37 68.86 64.72 87.13 89.01 Average inventory 3.42 6.01 4.29 3.43 3.31 Inventory turnover 17.65 11.45 15.08 25.40 26.89 ratio

Observation: It was observed that inventory turnover ratio indicates maximum sales achieved with the minimum investment in the inventory. As such the general rule high inventory turnover ratio may not necessary indicates the profitable situation. An organization, in order to achieve a large sales volume may sometime sacrifice on profit, inventory ratio may not result into high amount of profit.

Receivable Turnover Ratio: The derivation of this ratio is made in following way Receivable turnover ratio = Gross sales Average account receivable

Gross sales are inclusive of excise duty and scrap sales because both may enter into receivables by credit sales. Average receivable calculate by opening plus closing balance divide by 2. Increasing volume of receivables without matching increases in sales is reflected by a low receivable turnover ratio. It is indication of showing down of the collection system or an extend line of credit being allowed by customer organization. The later may be due to the fact that the firm is losing out to competition. A credit manager engage in the task of granting credit or monitoring receivable should take the hint from a falling receivable turnover ratio use his market intelligence to find out the reason behind such failing trend. Debtors turnover indicates the number of times debtors turnover each year. Generally the higher the value of debtors turnover, the more is the management of credit. Debtors turnover ratio = Credit Sales Average Debtors

Calculation of Debtors turnover ratio

In crore

Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Credit Sales 77.44 84.78 85.09 107.19 109.71 Average Debtors 16.45 20.64 31.25 30.02 29.51 Debtors Turnover 4.70 4.10 2.72 3.57 3.71 Ratio

Debtors Turnover Ratio



Observation: It is observed from debtor turnover ratio that debtors turned around the sales were less than 4.25 times. The actual collection period was more than normal collection period allowed to customer. It concludes that over investment in the debtors which adversely affect on requirement of the working capital finance and cost of such finance. Current Assets Turnover Ratio: Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current assets. This ratio includes the efficiency with which current assets turn into sales. A higher ratio implies a more efficient use of funds thus high turnover ratio indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm. Current assets turnover ratio = Sales Current Assets

Calculation of Current Assets Turnover Ratio

(In Crore)

Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Sales 76.69 83.90 84.50 107.00 109.10 Current Assets 25.44 34.98 41.32 45.32 47.01 C.A. Turnover 3.01 2.39 2.04 2.36 2.32 Ratio

Current Assets Turnover Raito

Observation: It was observed that currents turnover ratio does not indicate any trend over the period of time. Turnover ratio was 3.01 in the year 2005-06. It

decreased in the year 2006-07 and 2007-08, because of high cash balance and loan & advance. Cash did not help to increase in sales volume, as cash is non earning assets. In the year 2008-09 company increased its sales with increased investment in current assets, thus current assets turnover increased to 2.36 from 2.04.

Liquidity Ratio
Current Ratio:
The current ratio is calculated by dividing current assets by current liabilities. Current Ratio = Current Assets Current Liabilities Current Ratio indicates the availability of current assets in rupees for every rupee of current liability.

Current Ratio
(In crore)

Particular Current Assets Current Liabilities Current Ratio

2005-06 2006-07 2007-08 2008-09 2009-10 25.44 34.98 41.32 45.32 47.01 8.45 10.43 13.34 15.52 16.95 3.01 3.35 3.09 2.92 2.77

Current Ratio

A higher ratio indicates that there were sufficient assets available with the organization which can be converted in cash, without any reduction in the



value. As ideal current ratio is 2:1, where current ratio of the firm is more than 2:1, it indicates the unnecessarily investment in the current assets in the form of debtors and cash balance. Ratio is higher in the year 2006-07 where cash balance is more than requirement. Quick Ratio: Quick ratio establishes the relationship between quick or liquid assets and liabilities. An asset is liquid if it can be converting in to cash immediately or reasonable soon without a loss of value. Cash is the most liquid assets. Other assets which are considered to be relatively liquid and include in quick assets are debtors and bills receivable and marketable securities. Inventories are considered as less liquid. Inventory normally required some time for realizing into cash. Their value also is tendency to fluctuate. The quick ratios found out by dividing quick assets by current liabilities. Quick Ratio = Quick Current Assets Current Liabilities

Quick Ratio
In Crore

Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Liquid Current 17.49 22.06 32.95 31.29 35.09 Assets Current Liabilities 8.45 10.43 13.34 15.52 16.95 Quick Ratio 2.06 2.11 2.47 2.02 2.07


Quick Ratio

Observation: Quick ratio indicates that the company has sufficient balance for the payment of current liabilities. The liquid ratio of 1:1 is suppose to be standard or ideal but here ratio is more than 1:1 over the period of time. It indicates that the firm maintains the over liquid assets than actual requirement of such assets. In the year 2009-10 company had Rs. 2.07 cash for every 1 rupee of expenses such a policy is called conservative policy of finance for working capital, Rs. 1.07 is the ideal investment which affects on the cost of the fund and return on the funds.

Absolute Liquid Ratio

Even though debtors and bills receivable are considered as more liquid then inventories, it cannot be converted in to cash immediately or in time. Therefore while calculation of absolute liquid assets as like cash in hand, at bank, short term marketable securities are taken into consideration to measure the ability of the company in meeting short term financial obligation. It calculates by absolute assets dividing by current liabilities. Absolute Liquid Ratio = Absolute liquid assets Current Liabilities

Absolute Liquid Ratio



(Rs in Crore)

Particular 2005-06 2006-07 2007-08 2008-09 2009-10 Absolute Liquid 1.04 1.42 1.69 1.26 1.89 Assets Current Liabilities 8.45 10.43 13.34 15.52 16.95 Absolute Liquid .12 .14 .13 .08 .11 Ratio

Cash and Bank to Current Liabilities

Observation: Absolute liquid ratio indicates the availability of cash with company is sufficient because company also has other current assets to support current liabilities of the company. In the year 2009-10 absolute liquid ratio increase because of company carry more cash balance, as a cash balance is ideal assets company has to take control on such availability of funds which is affect on cost of the funds.

Working Finance and


Capital Estimation



Working Capital Finance

Introduction: Funds available for period of one year or less is called short term finance. In India short term finance are used as working capital fianc. Two most significant short term source of finance of working capital are trade credit and bank borrowing. Trade credit ratio of current assets is about 40%, it is indicated by reserve Bank of India data that trade credit has grown faster than the growth in sales. Bank borrowing is the next source of working capital finance. The relative importance of this varies from time to time depending on the prevailing environment. In India the primary source of working capital financing are trade credit and short term bank credit. After determine the level of working capital, a firm has to consider haw it will finance. Following are source of working capital finance.

Source of Working Capital

1. 2. Trade credit Bank Finance

Trade Credit: Trade credit refers to the credit tht a customer gets from suppliers of goods in the normal course of business. The buying firms do not have to pay cash immediately for the purchase made. This deferral of payments is a short term financing called traded credit. It is major source of

financing for firm. Particularly small firms are heavily depend on trade credit as a source of finance since they find it difficult to raised funds from banks or other sources in the capital market. Trade credit is mostly an informal arrangement, and it granted on an open account basis. A supplier sends goods to the buyers accepts, and thus, in effect, agree to pay the amount due as per sales terms in the invoice. Trade credit may take the form of bills payable. Credit terms refer to the condition under

which the supplier sells on credit to the buyer, and the buyer required repaying the credit. Trade credit is the spontaneous of the financing. As the volume of the firms purchase increase trade credit also expand. It appears to be cost free since it does not involve explicit interest charges but in practice, it involves implicit cost. The cost of credit may be transferred to the buyer via the increased price of goods supplied by him. Bank Finance for Working Capital: Banks are main institutional source of working capital finance in India. After the trade credit, bank credit is the most important source of financing working capital in India. A bank considers a firms sales and production plan and desirable requirements. The amount approved by bank for the firms working capital is called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking system. In practice banks do not lend 100% credit limit, they deduct margin money.

Forms of Bank Finance 1. Term Loan 2. Overdraft 3. Cash credit 4. Purchase or discounting of bills Term Loan: In this case, the entire amount of assistance is disbursed at one time only, either in cash or the companys account. The loan may be paid repaid in installments will charged on outstanding balance. Overdraft: In this case, the company is allowed to withdraw in excess of the balance standing in its Bank account. However, a fixed limni8t is stipulated able to overdraw the amount. Legally, overdraft is a demand assistance given by the bank i.e. bank can ask repayment at any paint of time.


Cash Credit: In practice the operations in cash credit facility are similar to those of overdraft facility except the fact that the company need not have a formal current account. Here also a fixed limit is stipulated beyond which the company is not able to withdraw the amount. Bills Purchase / Discounted: This form of assistance is comparatively of recent origin. This facility enables the company to get the immediate payment against the credit bills/ invoice raised by the company. The bank hold the bills as a security tell the payment is made by the customer. The entire amount of bill is not paid to the company. The company gets only the present worth of amount of bill from of discount charges .On maturity, Bank collects the full amount of bill from the customer. In this case the exporter and the importer are unknown to each other. Under these circumstances, exporter is worried as to whether he will get goods or not. In this case, the importer applies to his Bank in his country to open a letter of credit in favor of the exporter whereby the importers Bank undertakes to pay the exporter or accept the bills or draft drawn by the exporter on the exporter fulfilling the terms and condition specified in the letter and condition specified in the letter of credit.

Working Capital Loan & Interest

Banks have been certain norms in granting working capital finance to companies. These norms have been greatly influenced by recommendation of various committees appointed by the Reserve Bank of India from time to time. The norms of working capital finance followed by Bank since mid-70 were mainly based on the recommendations of the Tandan Committee. The Chore Committee made further recommendations to strengthen the procedure and norms for working capital finance by Banks.

Format of Working Capital Loan and Interest

Particular W.C term loan from Bank Consortium of Bank W.C demand Loan Foreign current demand Loan Cash credit account Export packing credit Foreign bill discounted from bank Letter of credit Total Interest on W.C Amount -------------------------------------------------------------------------------------------



RPML takes huge working capital loan to fulfill the requirement of working capital, thus company had paid huge amount of interest on working capital loan. Company raised the funds for working capital through terms loan from bank and working capital loan from consortium of banks. RPML also used cash credit account but cash credit in not cost free source of working capital because it involves implicit cost. The supplier extending trade credit incurs cost in the form of opportunity cost of funds invested in accounts receivables. The annual opportunity cost of forgoing cash discount can be very high. Therefore RPML should compare the opportunity cost of trade credit with the cost of other sources of credit while making its financial decisions.Estimation of

Working Capital
After considering the various factors affecting the working capital needs, it is necessary to forecast the working capital requirements. For this purpose, first of all estimation of all current assets should be followed by the estimation of all current liabilities. Difference between the estimated Current Assets and Current Liabilities will represent the working capital requirement. The estimation of working capital of RPML is based on few assumptions such a follows. 1. 2. 3. 4. 5. Gross sales will increase by 40% Receivables collection period will be 90 days as per standard fixed by company. Unnecessary balance of cash may reduce by finance management. For working capital finance company can use maximum trade credit. Inventory holding period can be 60 days instead of present 95 days.


Working capital management is important aspect of financial management. The study of working capital management of Rama Paper Mills Ltd. has revealed that the current ratio was as per the standard industrial practice but the liquidity position of the company should an increasing trend. The study has been conducted on working ratio analysis working capital leverage, working capital components which helped the company to manage its working capital efficiency and affectively. 1. 2. 3. 4. Working capital of the company was increasing and showing positive working capital per year. It shows good liquidity position. Positive working capital indicates that company has the ability of payment of short terms liabilities. Working capital increased because of increment in the current assets is more than increase in the current liabilities. Company current assets were always more than requirement it affect on profitability of the company.


Current assets are more than current liabilities indicate that company used long term fund for short term requirement, when long term funds are more costly then short term funds. Current assets components shows sundry debtors were the major part in Current assets it shows that the inefficient receivables collection management.





In the year 2009-10 working capital not increased as previous years because of the expenses as manufacturing expenses and increases the price of raw material as increased in the inflation rate. Inventory was supporting to sales, thus inventory turnover ratio was increasing but company increased the raw material holding period. Study of the cash management of the company shows that company lost control on cash management in the year 2009-10 were cash came from fixed deposit and Funds, company failed to make proper investment of available cash.

8. 9.


Limitation of the Study

Following limitations were encountered while preparing this project. 1. Limited Data: This project has completed with annual reports, it just constitutes one part of data collection i.e. Secondary. There were limitations for primary data collection because of confidentiality. 2. Limited Period: This project is based on six year annual reports conclusion and recommendations are based on such limited data. The Trend of last six year may or nay not reflect the real working capital position of the company. 3. Limited Area: Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.

Recommendation can be used by the firm for the betterment increased of the firm after study and analysis of project report on study and analysis of working capital. I would like to recommend. 1. Company should raise funds through short term sources for short term requirement of funds, which comparatively economical as compare to long term funds.


2. 3. 4.

Company should take control on debtors collection period which is major part of current assets. Company has to take control on cash balance because cash is nonearning assets and increasing cast of funds. Company should reduce the inventory holding period with use of zero inventory concepts.

Over all, company has good liquidity position and sufficient funds to repayment of liabilities. Company has accepted conservative financial policy and thus maintaining more current assets. Company is increasing sales value per year which supported to company for sustain 2nd position in U.P. state.


I. M. Pandey, Financial Management, Vikas Publishing house (9th edition) Dr. P. Periasamy, Working Capital Management, Himalaya Publishing House (1st edition) RPML Manual www.ramapaper.com www.google.com www.ask.com www.wickipedia.com www.answer.com



Balance Sheet
Rama Paper Mills Limited Kiratpur (Bijnor) Balance Sheet as at 31st March, 2010
Particular Source of Funds Share Holders Funds Share Capital Reserve & Surplus Loan Fund Secured Loans Unsecured Loans Deferred Tax Current Year

146647330 258352632 698685318 38974000 Total Rs.

404999962 737659318 110424000 1253083280

Application of Funds Fixed Assets Gross Block 1257630415 Less: Depreciation 361189050 Net Block 896441365 Add: Capital Working in Prog. Including advance 56090961 952532326

Current Assets, Loan & Advances Inventories 87576064 Sundry Debtors 295104348 Cash & Bank Balance 4250640 Loan & Advances 83192094


470123146 Less: Current Liabilities & provision Net Current Assets 169572192 300550954 Total Rs.




Particular Income Sales Less: Excise Duty Other Income Accretion/ (Decretion) in Stocks Total. Rs. Expenditure Raw Material Consumed Manufacturing Expenses Staff Costs Administrative Expenses Selling & Distribution Expenses Finance Charges Depreciation 1,09,71,71,452 61, 62,663

Current Year

1,09,10,08,789 2,17,134 44,96,243 1,09,57,22,166 58,07,65,782 30,87,12,039 4,09,75,267 2,15,66,911 2,49,42,428 6,73,42,176

Total Rs. PROFIT FOR THE YEAR Paid/provision for tax Current tax 1,11,510 Mat credit Entitlement (1,11,510) Fringe Benefit Tax Deferred Tax 61800 PROFIT AFTER TAX Add: Profit brought forward from previous year

5,06,95,823 1,09,50,00,426 7,21,740

61800 1,03,740 14,15,18,222