Embed Size (px)
Citation preview
PROJECT REPORT ON
“WORKING CAPITAL”
A PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF DEGREE OF
MASTER OF BUSINESS ADMINISTRATION(FINANCIAL MANAGEMENT)
TO
BARKATULLAH UNIVERSITYBHOPAL
2008-2010
SUBMITTED BY
BHAWNA SONAIKAR
ORGANISATIONAL GUIDE: INSTITUTIONAL GUIDE Mr. Mukul Chinchalkar Miss Agnes Peter Belly (FACULTY)
1
ACKNOWLEDGEMENT
Success is the outcome of diligence & perseverance, I, Bhawna Sonaikar,
student of Third semester MBA programmed, would, like to ascribe to my
success in completing my summer project’ “Working Capital” to Miss
Agnes Peter Belly and to my project supervisor Mr.Mukul Chinchalkar who
have extended their sincere help in accomplishing my project. I really want
to thank the above mentioned persons for their continuous support &
guidance during the project, with out their help my project would have been
a distant dream.
Bhawna Sonaikar
(Projectee)
MBA II SEM
SIST BHOPAL
2
DECLARATION
I am Bhawna Sonaikar of MBA II semester of Shree Institute of Science &
Technology Bhopal hereby declare that the project report entitled Working
Capital the outcome of my own work and the same has not been submitted
to any University / Institute for the award of any degree or any professional
diploma.
Bhawna Sonaikar
MBA II SEM
SIST, BHOPAL
3
INTRODUCTION OF WORKING CAPITAL
The net working capital of business is its current assets less its current
liabilities.
Current Assets include:
Stock of Raw Material
Work in Progress
Finished Goods
Trade Debtors
Prepayments
Cash Balances
Current Liabilities include:
Trade Creditors
Accruals
Taxation Payable
Dividends Payable
Short term Loans
4
Every business needs adequate liquid resources in order to maintain day to
day cash flows. It needs enough cash to by wages and salaries as they fall
due and to pay creditors if it is to keep its workforce and ensure its
supplies. Maintaining adequate working capital; is not just important in the
short term.
Sufficient liquidity must be maintained in order to ensure the survival
of business in the long term as well. Even a profitable business may fail if
it does not have adequate cash flows to meet its liabilities as tyhey fall a
due. Therefore when business make investment decisions they must not
only consider the financial outlay involved with acquiring the new
machine or the new building etc, but must also take account of the
additional current assets that are usually involved with any expansion of
activity .
Increase production tends to engender a need to hold additional stocks of
raw material & work in progress.
Increased sales usually mean that the level of debtor will increase. A
general increase in the firm’s scales of operation tends to imply a need for
greater level of cash.
5
INTRODUCTION OF COMPANY
The introduction of company can be described in two parts:
Company Details
Company Overview
Company Details:
Company Name: United Engineering Services
(Material Handling Equipments)
Address: Plot No. K-1, Sector – ‘A’,
Sanver Road, Industrial Estate,
Indore (M.P) – 452015
Telephone: 0731-6538578, 272030
Mobile: 09826077201
Email: [email protected]
6
COMPANY OVERVIEW
United Engineering Services was incorporated in the year of 1988 at
Indore, Madhya Pradesh ever since its inception it has be nurtured by the
multitalented personality of respected CEO, Mr. Mukul Chinchalkar.
Under his experienced and motivating headship the company has been
leading exporters of material handing equipments like stone crushers and
industrial feeders. The below mentioned feature of company have
constantly help standardize among the most distinguish stone crushers
supply in India.
QUALITY ASSURANCE: To ensure the quality of products, the
company follow a standard quality control system and maintain strict vigil
throughout the production process. The company has promptly inspect of
the quality of raw materials used at our manufacturing unit. Further the
finished products are again scrutinized by our quality control inspection to
prevent any sub standard product to reach the hands of the customer. In
7
addition to it the company take pride to acquire with the fact that the
company have not received any complaints from the customers.
TEAM: The company thrives on the mutual efforts of highly committed
team of engineers technicians, quality, supervisors etc. they are matchless
experts of their own fields who within the sincere efforts have modeled
our company into and overdriving entity of the market. They have acquired
sound knowledge and understanding of the industry and render their
services accordingly.
CUSTOMERBASE: Due to the fact that quality is tradition at company
and to show the tradition, the company have professional companionship
of the country’s renowned companies like that of BHEL, TATA, BIRLA
etc.and many more.
In addition to that the market is also spread in the countries such as Gulf,
Middle East, and East Asia. And due to this, the company is an all
industrial spare manufacture of the country.
Name of CEO: Mr. Mukul Chinchalkar
Establishment: 1988
Primary Business Type: Manufactures and Exporters
Market Cover: Gulf, Middle East, East Asia
8
Products offer: Pre cleaner, Bucket Elevators, Industrial Feeders,
Industrial Crushers, Industrial spare and Industrial Conveyors..
RANGE: The Company manufacturing and offering wide range of
material handling conveyors & subsystem manufacturing from high quality
material, the range is known for its high operational efficiency and long
lasting functional services. The range has wide application area that
includes fertilizers, food processing, automobiles, flow mills, distillates
and many more fields. Beside designing & manufacturing the company has
also offering services relating to installations commissioning as per client
requirements the range includes:
Belt Conveyors
Bucket Elevators
Screw Conveyors
Crushers
Feeders
Belt feeders
Control gate
Belt flow Conveyors
Roller Conveyors.
9
PRODUCTS: Hence described earlier the following products are in the
usual manufacturing range:
1. Rollers for belt Conveyors
2. Rollers for Roller conveyors
3. Pulleys for Belt Conveyors
In general the rollers are of variety of lengths for different applications.
According to the width of conveyors belts and the roller conveyors
applications these are normally of following divators and lengths. The
below mentioned table is a brief description. These are some rollers which
are either of rubber lugging or with the rubber rings.
10
RESEARCH METHODOLOGY
STATEMENT OF PROJECT
Evaluation, analysis & interpretation of working capital management
of United Engineering Services.
Suggesting ways to improve its working capital utilization.
OBJECTIVE OF RESEARCH
Estimation of working capital requirement
Evaluation of working capital management
Evaluation of Liquidity position & working capital utilization
Analysis of relationship between working capital and profitability
Analysis & sources of working capital
Analyzing the level of current assets with relation to current liabilities.
11
COLLECTION OF DATA:
Data has been collected from various sources like:
Annual reports of last three years
Manual of concerned departments
Consultants and personnel of United Engineering Services.
Internet sites like www.google.com,
METHODS OF QUANTATIVE ANALYSIS
Calculation of net working capital requirements.
Ratio analysis
Operating cycle & cash cycle
Cash flow analysis
Determining the Financing mix
Statistical tools like graphical presentation
12
ASSUMPTIONS
Year is taken of 365 days
All purchases have been taken as credit purchases and all sales have
been taken as credit sales.
In the absence of relevant data the data from internet site is taken as
the relevant information.
LIMITATIONS
The data is mostly secondary in nature
Data has been recalculated & regrouped wherever necessary
In the absence of sufficient data personnel judgment have been taken
on reasonable assumption.
In the absence of sufficient data in-depth study of cash, Receivables
and inventory management was not possible.
13
THEORY OF WORKING CAPITAL
MEANING OF WORKING CAPITAL:
Capital required for a business can be classifies under two main categories:
Fixed Capital
Working Capital
Every business needs funds for two purposes for its establishments and to
carry out day to day operations. Long term funds are required to create
production facilities through purchase of fixed assets such as plant and
machinery, land and building, furniture etc. Investments in these assets are
representing that part of firm’s capital which is blocked on a permanent or
fixed basis and is called fixed capital. Funds are also needed for short term
purposes for the purchasing of raw materials, payments of wages and other
day to day expenses etc. These funds are known as working capital. In
simple words, Working capital refers to that part of the firm’s capital which
is required for financing short term or current assets such as cash,
marketable securities, debtors and inventories.
CONCEPTS OF WORKING CAPITAL:
There are two concepts of working capital:
14
Balance Sheet concepts
Operating Cycle or circular flow concept
BALANCE SHEET CONCEPT:
There are two interpretation of working capital under the balance sheet
concept:
Gross Working Capital
Net Working Capital
The term working capital refers to the Gross working capital and represents
the amount of funds invested in current assets . Thus, the gross working
capital is the capital invested in total current assets of the enterprises.
Current assets are those assets which are converted into cash within short
periods of normally one accounting year. Example of current assets is:
Constituents of Current Assets:
Cash in hand and Bank balance
Bills Receivable
Sundry Debtors
Short term Loans and Advances
Inventories of Stock as:
Raw Materials
Work in Process
15
Stores and Spaces
Finished Goods
Temporary Investments of Surplus Funds
Prepaid Expenses
Accrued Incomes
The term working capital refers to the net working capital. Net working
capital is the excess of current assets over current liabilities or say:
Net Working Capital = Current Assets – Current Liabilities.
NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:
When the current assets exceed the current liabilities, the working capital is
positive and the negative working capital results when the current liabilities
are more than the current assets. Current liabilities are those liabilities which
are intended to be paid in the ordinary course of business within a short
period of normally one accounting year of the current assets or the income of
the business. Examples of current liabilities are:
CONSTITUENTS OF CURRENT LIBILITIES:
Bills Payable
Sundry Creditors or Account Payable
Accrued or Outstanding Expenses
Short term Loans, Advances and Deposits
16
Dividends Payable
Bank Overdraft
Provision for Taxation, If does not amount to appropriation of profits
The gross working capital concept is financial or going concern concept
whereas net working capital is an accounting concept of working capital.
OPERATING CYCLE OR CIRCULATING CASH FORMAT:
Working Capital refers to that part of firm’s capital which is
required for financing short term or current assets such as cash,
marketable securities, debtors and inventories. Funds thus invested
in current assets keep revolving fast and being constantly
converted into cash and these cash flows out again in exchange for
other current assets. Hence it is also known as revolving or
circulating capital. The circular flow concept of working capital is
based upon this operating or working capital cycle of a firm. The
cycle starts with the purchase of raw material and other resources
17
And ends with the realization of cash from the sales of finished
goods. It involves purchase of raw material and stores, its
conversion into stocks of finished goods through work in progress
with progressive increment of labor and service cost, conversion of
finished stocks into sales, debtors and receivables and ultimately
realization of cash and this cycle continuous again from cash to
purchase of raw materials and so on. The speed/ time of duration
required to complete one cycle determines the requirements of
working capital longer the period of cycle, larger is the
requirement of working capital.
18
Receivable conversion period Raw material storage (RCP) conversion period (RMSCP)
Cash received form Debtors and paid to suppliers Of raw materials
Sales of finished Raw materials Goods introduced into process
Finished Goods Produced
Finished goods conversion Work in process Period (FGCP) Conversion period (WIPCP)
19
The gross operating cycle of a firm is equal to the length of the inventories
and receivables conversion periods. Thus,
Where,
RMCP = Raw Material Conversion Period
WIPCP = Work –in- Process Conversion Period
FGCP = Finished Goods Conversion Period
RCP = Receivables Conversion Period
However, a firm may acquire some resources on credit and thus defer
payments for certain period. In that case, net operating cycle period can be
calculated as below:
Further, following formula can be used to determine the conversion periods.
Raw Material Conversion Period = Average Stock of Raw Material.
Raw Material Consumption per day
Work in process Conversion Period = Average Stock of Work-in-Progress
Total Cost of Production per day
20
Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP
Net Operating Cycle Period = Gross Operating Cycle Period – Payable Deferral period
Finished Goods Conversion Period = Average Stock of Finished Goods
Total Cost of Goods sold per day
Receivables Conversion Period = Average Accounts Receivables
Net Credit Sales per day
Payable Deferral Period = Average Payable
Net Credit Purchase per day
CLASSIFICATION OR KIND OF WORKING CAPITAL:
Working capital may be classified in two ways:
On the basis of concept
On the basis of time
Om the basis of concept, working capital is classified as gross working
capital and net working capital. The classification is important from the
point of view of the financial manager.
On the basis of time, working capital may be classified as:
Permanent or Fixed working capital
21
Temporary or Variable working capital.
t
On the basis of concept On the basis of time
Net Working Capital
Permanent or Fixed Working Capital
22
Gross Working Capital
Temporary orVariable Working Capital
Kinds of Working Capital
1. PERMANENT OR FIXED WORKING CAPITAL :
Permanent or fixed working capital is the minimum amount which is
required to ensure effective utilization of fixed facilities and for maintaining
the circulation of current assets. There is always a minimum level of current
assets which is continuously required by the enterprises to carry out its
normal business operations.
2. TEMPRORAY OR VARIABLE WORKING CAPITAL:
Temporary or variable working capital is the amount of working capital
which is required to meet the seasonal demands and some special
Seasonal Working Capital
23
Reserve Working Capital
Regular Working Capital
Special Working Capital
exigencies.Varibles working capital can be further classified as second
working capital and special working capital. The capital required to meet the
seasonal needs of the enterprises is called the seasonal working capital.
Temporary working capital differs from permanent working capital in the
sense that is required for short periods and cannot be permanently employed
gainfully in the business
IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING
CAPITAL:
Working capital is the life blood and nerve centre of a business . just a
circulation of a blood is essential in the human body for maintaining life,
working capital is very essential to maintain the smooth running of a
business. No business can run successfully without an adequate amount of
working capital. The main advantages of maintaining adequate amount of
working capital are as follows:
Solvency of the Business
Goodwill
Easy Loans
Cash discounts
Regular supply of Raw Materials
Regular payments of salaries, wages & other day to day commitments.
24
Exploitation of favorable market conditions
Ability of crisis
Quick and regular return on investments
High morals
THE NEED OR OBJECTS OF WORKING CAPITAL:
The need for working capital cannot be emphasized. Every business needs
some amount of working capital. The need of working capital arises due to
the time gap between production and realization of cash from sales. There is
an operating cycle involved in the sales and realization of cash. There are
time gaps in purchase of raw materials and production, production and sales,
And sales, and realization of cash, thus , working capital is needed for the
following purposes:
For the purchase of raw materials , components and spaces
To pay wages and salaries
To incur day to day expenses and overhead costs such as fuel, power
and office expenses etc.
To meet the selling costs as packing, advertising etc.
To provide credit facilities to the customers.
To maintain the inventories of raw materials, work –in- progress,
stores and spares and finished stock.
25
FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT:
The working capital requirements of a concern depend upon a large number
of factors such as nature and size of the business, the characteristics of their
operations, the length of production cycle , the rate of stock turnover and the
state of economic situation. However the following are the important factors
generally influencing the working capital requirements.
NATURE OR CHARACTERSTICS OF A BUSINESS : The
nature and the working capital requirement of enterprises are
interlinked. While a manufacturing industry has a long cycle of
operation of the working capital, the same would be short in an
enterprises involve in providing services. The amount required also
varies as per the nature, an enterprises involved in production would
required more working capital then a service sector enterprise.
MANAFACTURE PRODUCTION POLICY: Each enterprises in
the manufacturing sector has its own production policy, some follow
the policy of uniform production even if the demand varies from time
to time and other may follow the principles of demand based
production in which production is based on the demand during the
particular phase of time. Accordingly the working capital
requirements vary for both of them.
26
OPERATIONS: The requirement of working capital fluctuates for
seasonal business. The working capital needs of such business may
increase considerably during the busy season and decrease during the
MARKET CONDITION: If there is a high competition in the
chosen project category then one shall need to offer sops like credit,
immediate delivery of goods etc for which the working capital
requirement will be high. Otherwise if there is no competition or less
competition in the market then the working capital requirements will
be low.
AVABILITY OF RAW MATERIAL: If raw material is readily
available then one need not maintain a large stock of the same thereby
reducing the working capital investment in the raw material stock . On
other hand if raw material is not readily available then a large
inventory stocks need to be maintained, there by calling for
substantial investment in the same.
GROWTH AND EXAPNSION: Growth and Expansions in the
volume of business result in enhancement of the working capital
requirements. As business growth and expands it needs a larger
27
amount of the working capital. Normally the needs for increased
working capital funds processed growth in business activities.
PRICE LEVEL CHANGES : Generally raising price level require a
higher investment in the working capital. With increasing prices, the
same levels of current assets needs enhanced investments.
MANAFACTURING CYCLE: The manufacturing cycle starts
with the purchase of raw material and is completed with the
production of finished goods. If the manufacturing cycle involves
a longer period the need for working capital would be more. At
time business needs to estimate the requirement of working
capital in advance for proper control and management. The
factors discussed above influence the quantum of working capital
in the business. The assessment of the working capital
requirement is made keeping this factor in view. Each
constituents of the working capital retains it form for a certain
period and that holding period is determined by the factors
discussed above. So for correct assessment of the working capital
requirement the duration at various stages of the working capital
28
cycle is estimated. Thereafter proper value is assigned to the
respective current assets, depending on its level of completion.
The basis for assigning value to each component is given below:
COMPONENTS OF WORKING CAPITAL BASIS OF VALUATION
Stock of Raw Material Purchase of Raw Material
Stock of Work -in- Process At cost of Market value which is lower
Stock of finished Goods Cost of Production
Debtors Cost of Sales or Sales Value
Cah Working Expenses
Each constituent of the working capital is valued on the basis of valuation
Enumerated above for the holding period estimated. The total of all such
valuation becomes the total estimated working capital requirement.
The assessment of the working capital should be accurate even in the case
of small and micro enterprises where business operation is not very large.
We know that working capital has a very close relationship with day-to-day
operations of a business. Negligence in proper assessment of the working
capital, therefore, can affect the day-to-day operations severely. It may lead
to cash crisis and ultimately to liquidation. An inaccurate assessment of the
working capital may cause either under-assessment or over-assessment of
the working capital and both of them are dangerous.
PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY:
29
The following are the general principles of a sound working capital
management policy:
1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY):
Risk here refers to the inability of a firm to meet its obligations as and when
they become due for payment. Larger investment in current Assets with less
dependence on short term borrowings, increase liquidity, reduces risk and
thereby decreases the opportunity for gain or loss. On the other hand less
investments in current assets with greater dependence on short term
borrowings, reduces liquidity and increase profitability. In other words there
is a definite inverse relationship between the degree of risk and profitability.
30
PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY
PRINCIPLES OF RISK VARIATIONS
PRINCIPLES OF COST OF CAPITAL
PRINCIPLES OF EQUITY PRINCIPLES
PRINCIPLES OF MATURITY OF PAYMENTS
In other words, there is a definite inverse relationship between the risk and
profitability. A conservative management prefers to minimize risk by
maintaining a higher level of current assets or working capital while a liberal
management assumes greater risk by reducing working capital. However, the
goal of management should be to establish a suitable trade off between
profitability and risk.
2. PRINCIPLES OF COST OF CAPITAL: The various source of raising
working capital finance have different cost of capital and the degree of risk
involved. Generally, higher and risk however the risk lower is the cost and
lower the risk higher is the cost. A sound working capital management
should always try to achieve a proper balance between these two.
3.PRINCIPLE OF EQUITY POSITION: The principle is concerned with
planning the total investments in current assets. According to this principle,
the amount of working capital invested in each component should be
adequately justified by a firm’s equity position. Every rupee invested in
current assets should contribute to the net worth of the firm. The level of
current assets may be measured with the help of two ratios:
1. Current assets as a percentage of total assets and
2. Current assets as a percentage of total sales
31
While deciding about the composition of current assets, the financial
manager may consider the relevant industrial averages.
4. PRINCIPLES OF MATURITY OF PAYMENT: The principle is
concerned with planning the source of finance for working capital.
According to the principles, a firm should make every effort to relate
maturities of payment to its flow of internally generated funds. Maturity
pattern of various current obligations is an important factor in risk
assumptions and risk assessments. Generally shorter the maturity schedule
of current liabilities in relation to expected cash inflows, the greater the
inability to meet its obligations in time.
CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:
Growth may be stunted. It may become difficult for the enterprises to
undertake profitable projects due to non availability of working
capital.
Implementations of operating plans may brome difficult and
consequently the profit goals may not be achieved.
Cash crisis may emerge due to paucity of working funds.
Optimum capacity utilization of fixed assets may not be achieved due
to non availability of the working capital.
32
The business may fail to honour its commitment in time thereby adversely
affecting its creditability. This situation may lead to business closure.
The business may be compelled to by raw materials on credit and sell
finished goods on cash. In the process it may end up with increasing cost of
purchase and reducing selling price by offering discounts . both the situation
would affect profitable adversely.
Now avaibility of stocks due to non availability of funds may result in
production stoppage. While underassessment of working capital has
disastrous implications on business overassesments of working capital also
has its own dangerous.
CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING
CAPITAL:
Excess of working capital may result in un necessary accumulation of
inventories.
It may lead to offer too liberal credit terms to buyers and very poor
recovery system & cash management.
It may make management complacent leading to its inefficiency.
Over investment in working capital makes capital less productive and
may reduce return on investment.
33
Working Capital is very essential for success of business & therefore needs
efficient management and control. Each of the components of working
capital needs proper management to optimize profit.
INVENTORY MANAGEMNT: Inventory includes all type of stocks. For
effective working capital management, inventory needs to be managed
effectively. The level of inventory should be such that the total cost of
ordering and holding inventory is the least. Simultaneously stock out costs
should be minimized. Business therefore should fix the minimum safety
stock level reorder level of ordering quantity so that the inventory costs is
reduced and outs management become efficient.
34
RECEIVABLE MANAGEMENT: Given a choice, every business would
prefer selling its produce on cash basis. However, due to factors like trade
policies , prevailing market conditions etc. Business are compelled to sells
their goods on credit. In certain circumstances a business may deliberately
extend credit as a strategy of increasing sales. Extending credit means
creating current assets in the form of debtors or account receivables.
Investment in the type of current assets needs proper and effective
management as, it gives rise to costs such as :
Cost of carrying receivables
Cost of bad debts losses
35
Thus the objective of any management policy pertaining to accounts
receivables would be to ensure the benefits arising due to the receivables
are more then the costs incurred for the receivables and the gap between
benefit and costs increased resulting in increase profits. An effective
control of receivables
Help a great deal in properly managing it. Each business should therefore try
to find out coverage credit extends to its clients using the below given
formula:
Average Credit = Total amount of receivable
(Extend in days) Average credit sale per day
Each business should project expected sales and expected investments in
receivable based on various factor, which influence the working capital
requirement. From this it would be possible to find out the average credit
days using the above given formula. A business should continuously try
to monitor the credit days and see that the average. Credit offer to clients
is not crossing the budgeted period otherwise the requirement of
investment in the working capital would increase and as a result,
activities may get squeezed. This may lead to cash crisis.
CASH BUDGET: Cash budget basically incorporates estimates of
future inflow and outflows of cash cover a projected short period of time
36
which may usually be a year, a half or a quarter year . effective cash
management is facilated if the cash budget is further broken down into
months, weeks or even a daily basis.
There are two components of cash budget are:
1. Cash inflows
2. Cash outflows
The main source for thses flows are given here under:
1. Cash Sales
2. Cash received from debtors
3. Cash received from Loans, deposits etc.
4. Cash receipts other revenue income
5. Cash received from sale of investment or assets.
CASH OUTFLOWS:
1. Cash Purchase
2. Cash payments to Creditors
3. Cash payment for other revenue expenditure
4. Cash payment for assets creation
5. Cash payments for withdrawals, taxes.
6. Repayments of Loan etc.
A suggestive for, at for cash budget is given below:
37
MONTHS PARTICULARS JANUARY FERBUARY MARCH Estimated cash inflows ……………………………… …………………………………. I. Total cash inflows Estimated cash outflows …………………………….. ………………………….. II. Total cash outflows III. Opening cash balances IV. Add/deduct surplus/deflictduring the month ( I-II) V. Closing cash balances (III -IV) VI. Minimum level of cash balance VII. Estimated excess or short fall of cash (V-VI)
DATA ANALYSIS
38
WORKING CAPITAL ESTIMATION
Current assets Loans & advances FY 05-06 FY 06-07 FY 07-08Currents assets Inventories stock in trade 223.94 662.87 1176.85work in progress 2528.4 4563.76 8714.56raw materials 7224.96 8145.37 9242.58stores and spare parts 1131.8 1463.13 1810.73Total Inventories 11109.1 14835.13 20944.72Debtors 5516.14 7402.6 14211.12 Cash & Bank balances 1027.1 8042.12 5225.01(subtracting FCCB issue unutilized -6910.46 -5272.52money as it amounts to long term liability) loans and advances 3249.1 7529.5 8647.1Net current assets 20901.44 30898.89 43755.43Current Liabilities FY 05-06 FY06-07 FY 07-08 Sundry Creditors 1476.37 1589.57 3748.82Creditors for capital expenditure 1456.05 365.64 258.4other liabilities 342.26 645.34 621.04unclaimed dividend 21.33 31.66 35.29sundry deposits 174.14 229.23 321.66advances from customers 217.21 362.59 73.55interest accrued but not due on loan 7.04 20.05 32.12Net current liabilities 3694.404 3244.08 5090.88
INVENTORIES
In the context of United Engineering Services the major increase in the
present three financial years has been of the inventory.
39
INVENTORIES
0
5000
10000
15000
20000
25000
FY 05-06 FY 06-07 FY 07-08
stock in trade
work in progress
raw materials
stores and spare parts
Total Inventories
Reasons:
The pile up of inventory that is used in trial run, before hand to be
used in the checking the machinery & the newly installed production
capacity.
The increased inventory to produce more goods so as to utilize the
new plant set up
DEBTORS AND AVERAGE RECEIVABLES
The debtors are increasing heavily in the financial year 06-07 because of a
sales boom that has accounted for huge accounts receivables increase.
40
0
2000
4000
6000
8000
10000
12000
14000
16000
FY 05-06 FY 06-07 FY 07-08
DEBTORS AND AVERAGE RECEIVABLES
Debtors
CASH AND BANK BALANCES
Cash and bank balance as per the balance sheet it is seen to be increasing but
from the above chart it is seen to be decreasing. This discrepancy can be
attributed to the fact that balance sheet figures carry additional cash balance
of unutilized FCCB issue proceeds which amount to long term liability as
well. Thus the actual figures are distorted because the money from FCCB
issue has to be returned and it is a kind of long term loan which the company
has sought for expansion purpose. As a result to find the actual outlay of
cash the unutilized money has been subtracted. Also we should take note of
the fact that the FCCB money can only be used for expansion purpose and
not as money for usual application of working capital.
41
1027.1
8042.12
5225.01
0 2000 4000 6000 8000 10000
FY 05-06
FY 06-07
FY 07-08
CASH & BANK BALANCE
Cash & Bank balances
LOANS AND ADVANCES
Loans & advances are increasing on the part of increased advances that are
given to pile up inventory when the company went for the expansion mode
42
LOANS AND ADVANCES
FY 05-0617%
FY 06-0739%
FY 07-0844%
FY 05-06
FY 06-07
FY 07-08
CURRENT ASSETS includes cash & those assets which can be easily
converted into cash within a short period generally one year such as
marketable securities , bills receivables, sundry debtors, inventories, work in
progress, prepaid expenses etc .The total current assets are the sum of below
contingency i.e.
Current Assets = Stock/ Inventory + Sundry Debtors + Advances +
Cash and bank balances + other current assets
43
CURRENT ASSETS
0 5000 10000 15000 20000 25000
FY 05-06
FY 06-07
FY 07-08loans and advances
Cash & Bank balances
Debtors
Total Inventories
stores and spare parts
raw materials
work in progress
stock in trade
NET CURRENT ASSETS
FY 07-0846%
FY06-0732%
FY 05-0622%
Conclusions: The trend of the current assets in United Engineering Services
throughout the period from 2005-08 are shown in the pie-chart .it is evident
from the table that the current assets in United engineering Services has
increased except in year 2006-07.
44
CURRENT LAIBILITIES
These are those obligations which are payable within a short period of
generally one year and includes outstanding expenses, bills payable, sundry
creditors, accrued expenses, bank overdraft, short term advances, income tax
payable.
TOTAL CURRENT LAIBILITIES
0
500
1000
1500
2000
2500
3000
3500
4000
FY 05-06 FY06-07 FY 07-08
Sundry Creditors
Creditors for capitalexpenditure
other liabilities
unclaimed dividend
sundry deposits
advances fromcustomers
interest accrued but notdue on loan
45
NET CURRENT LAIBILITIES
0
1000
2000
3000
4000
5000
6000
FY 05-06 FY06-07 FY 07-08
Net current liabilities
Conclusion: The trend of Current Liabilities of United Engineering Services
throughout the period from 2005-2008 are shown in the table. It is evident
from the table that it shows increasing trends in the year 2005 to 2008. It
shows that the United Engineering Services has stability in trends of Current
Liabilities.
CREDITORS AND CREDITORS OF CAPITAL EXPENDITURE
Creditors of United Engineering Services limited are increasing from 70 Cr
(FY 05-06) to 18 Cr (FY 06-07) to 12 Cr (FY 07-08). The main reason for
the increase in can be attributed to the heavy purchase of the inventory for
stocking it up for trial run & use before the expansion mode.
46
Creditors for capital expenditure seem to be decreasing over the three years
i.e. from 18Cr (FY 05-06) to 12 Cr (FY 06-07) which is in sync with the
fact that the expansion work that has been in process and all preparations for
that are coming to an end.
0
200
400
600
800
1000
1200
1400
1600
FY 05-06 FY06-07 FY 07-08
CREDITORS FOR CAPITAL EXPENDITURE
Creditors for capitalexpenditure
47
RATIO ANALYSIS
FY 05-06 FY 06-07 FY 07-08Current assets 29843.52 47163.72 61410.49current liabilities 7611.44 6597.95 7459.4quick assets 12759.32 14530.46 20880.64quick liabilities 7611.44 6597.95 7459.4Net turnover (sales) 45503 52527.1 81786.93working capital 22232.08 40565.77 53951.09average inventory (average of opening & closing stock of year) 8594.615 14476.465 22666.83cost of goods sold = cost of sales 37398 47018.31 67855.4total assets 87666 124436.12 138465.6total annual expenses -(depreciation +debt expenses) 37313.16 27364.06 23898.65average gross income 97754.89 63633.37 51858PROFIT before interest and taxes 5998 8120.16 14612.92Total interest 747.8 2653.75 5214.77
Net Profit after tax (NPAT) 4115 3893.37 7383.56capital employed (FA+CA-CL ) 89529.68 106917.71 111772.7investment (FA+CA) 97141.12 113515.66 119232.1Fixed assets 67297.6 66351.94 57821.59
LIQUIDITY RATIOS
CURRENT RATIO
Current ratio is defined as the relationship between current assets and current
liabilities. It is a measure of general liquidity & is most widely used to make
the analysis of short term financial position of a firm. Current ratio is the
ratio of current assets to current liabilities. A relatively higher ratio is an
indication that the firm is liquid and has the ability to pay its current
obligations on time. On the other hand a low current ratio indicates that the
48
Liquidity position of the firm is not good and shall not be able to pay its
current liabilities in time. Current Ratio:
The Current ratio is calculated by dividing current assets by current
liabilities:
Current ratio: Current Assets
Current Liabilities
CURRENT RATIO
20%
37%
43% FY 2005-2006
FY 2006-2007
FY2007-2008
FIANANCIAL YEAR
CURRENT ASSETS
CURRENT LAIBILITIES CURRENT RATIO
FY 2005-2006 29843.52 7611.44 3.92FY 2006-2007 47163.72 6597.95 7.14FY2007-2008 61410.49 7459.4 8.23
49
FIANANCIAL YEAR
QUICK ASSETS QUICK LIABILITITES CURRENT LAIBILITIES QUICK RATIO
FY 2005-2006 12759.32 7611.44 1.67FY 2006-2007 14530.46 6597.95 2.2FY2007-2008 20880.64 7459.4 2.78
QUICK RATIO: Quick ratio or liquid ratio is a more rigorous test of
liquidity than the current ratio. The term liquidity refers to the ability of the
firm to pay short term obligations as and when they become due. Quick ratio
may be defined as ration of quick assets to quick liabilities. Liquid assets
include all the current assets excluding inventories & prepaid expenses.
Liquid liabilities mean all liabilities excluding bank overdraft. Inventories &
prepaid expenses are not termed as liquid assets because they cannot be
converted into cash immediately without a loss of value.
50
QUICK RATIO
25%
33%
42% FY 2005-2006
FY 2006-2007
FY2007-2008
CURRENT SCENERIO INTERPRETATION
While interpreting the figures of both the above ratios we should keep in
mind the following one point
United Engineering Services is a manufacturing concern
Since it is manufacturing concern the an excess of inventory as compared to
other industry models such as the services sector is an integral fact. As a
result it is bound to have higher current ratio and quick ratio as compared to
other industries.
The sharp rise of current ratio from 20% (FY 05-06) to 37% (FY 06-07) to
43 %( FY 07-08) Can be attributed to
51
a. Higher pile up of inventory which was to be used up for trial run in
producing new products from the new plant set up.
b. Higher prepaid expenses related to advances given so as to pile up the
inventory so that when the inventory is needed for trial run, it’s
available.
c. An increase in average receivables which was in sync with increased
capacity of production and also increased sales.
An important point to note here is that an excess of cash balance arising out
of idle money coming out of FCCB issue expense has been deducted as
correspondingly it accounts for long term liability (debentures) which have
no effect on working capital management.
The quick ratio is a more important indicator of liquid position of United
Engineering Services as it hardly varies from 25% (FY 06-07) to 33% (FY
07-08). Obviously the effect of inventories has been negated.
EFFICIENCY RATIO
From the perspective of working capital management we would be
discussing three important ratios they are.
Sales to working capital ratio
52
Inventory turnover ratio
Current assets turnover ratio.
SALES TO WORKING CAPITAL RATIO
This ratio is computed by dividing working capital by sales. This ratio helps
to measure efficiency of the utilization of net working capital. It signifies
that for an amount of sales. A relative amount of working capital is needed.
If any increase in sales in contemplated, working capital should be adequate
& thus this ratio helps management to maintain the adequate level of
working capital
Financial Year FY 05-06 FY 06-07 FY 07-08Sales to working capital ratio 2.046727 1.294863 1.51595
53
2.046727
1.294862641.515946
0
0.5
1
1.5
2
2.5
FY 05-06 FY 06-07 FY07-08
SALES TO WORKING CAPITAL RATIO
Sales to working capital ratio
CURRENT SCENERIO INTERPRETATION
As seen from the above table the ratio has decreased from 2 (FY 05-06)
to 1.29 in (FY 06-07) and then increased to 1.5 (FY 07-08). This ratio is
again indicative of the fact that the year in which the expansion took
place the sales did not match up with the scale of expansion. Otherwise it
would have remained intact and not decreased. The slight increase from
1.29 to 1.51 is indicative of the fact that the full impact of expansion is
being slowly realized & sales are slowly increasing.
INVENTORY TURNOVER RATIO
This ration indicates the effectiveness and efficiency of inventory
management. This ratio is calculated as cost of goods sold: average
54
inventory shows how speedily the inventory is turned into accounts
receivables through sales. The higher the inventory turnover ratio (also
called stock velocity) the more the efficient inventory management.
Financial Year FY 05-06 FY 06-07 FY07-08inventory turnover ratio/ stock velocity 4.351329 3.2479138 2.9936
INVENTORY TURNOVER RATIO
0 1 2 3 4 5
FY 05-06
FY 06-07
FY07-08
inventory turnover ratio/stock velocity
CURRENT SCENERIO INTERPRETATION
The stock velocity is decreasing subsequently from 4.35 (FY 06-07) to 2.99
(FY 07-08) which shows inefficiency on the part of inventory management.
Partly the reason for the fall can be attributed to stocking up of inventory
for the trail run & using them in testing the expansion mode machinery.
55
CURRENT ASSETS TURNOVER RATIO
This ratio is indicated by sales upon current assets. This ratio indicates the
efficiency with which the current assets turn into sales & higher current
assets turnover ratio implies by & large a more efficient use of funds in
current assets. Thus, a high turnover rate indicates reduced lock up of funds
in current assets. An analysis of this ratio over a period reflects working
capital management of the firm
Financial Year FY 05-06 FY 06-07 FY07-08current assets turnover ratio 1.52472 1.11371834 1.331807
1.52472
1.11371834
1.331807
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
FY 05-06 FY 06-07 FY07-08
CURRENT ASSETS TURNOVER RATIO
current assets turnoverratio
CURRENT SCENERIO INTERPRETATION
56
The ratio is slightly decreasing from 1.52 (FY 05-06) to 1.11 (FY 06-07)
& then increasing to 1.33 (FY 07-08) which shows that sales increase is
not matched by the increase in current assets in the expansion phase of
United Engineering Services . The reason can be well attributed to the piling
up of trial stock and not full use of the expanded production capacity.
OPERATING RATIOS
Working ratio
Interest coverage ratios
WORKING RATIO
A ratio used to measure a company's ability to recover operating costs
from annual revenue. This ratio is calculated by taking the company's
total annual expenses (excluding depreciation and debt-related expenses)
and dividing it by the annual gross income. A working ratio below 1
implies that the company is able to recover operating costs, whereas a
ratio above 1 reflects the company's inability to do so.
Financial Year FY 05-06 FY 06-07 FY07-08working ratio 0.381701 0.43002689 0.460848
57
WORKING RATIO
0.381701
0.43002689
0.460848
0 0.1 0.2 0.3 0.4 0.5
FY 05-06
FY 06-07
FY07-08
working ratio
CURRENT SCENERIO INTERPRETATION
The ratio consistently has been below 1 which means company can very
well take out its operating costs, though the margin of comfort is slightly
decreasing because of the increase in expenses of the United Engineering
Services
58
COCLUSION
Working capital management is an important aspect of any business. Every
business concern should have adequate working capital to run its business
operation. Every concern should have neither redundant of excess working
capital nor inadequate or shortage of working capital. Both excess as well as
short working capital positions are bad for any business.
The three elements of working capital management are cash management
receivable management and inventory management. If a finance manager
maintains these three elements of working capital management properly
means the concern will get dramatic improvement in their sales volume and
also in business. Working capital policies of a firm have a great effect on its
profitability, liquidity and structured health of the organization.
Every concern should adopt some new tread management strategies that will
help in greater productivity, inventory optimization and also better working
capital management. So, it is noted that working capital is a means to run
business smoothly and profitability. Thus, the concept of working capital
has its own important in a going concern.
59
Good management of working capital is part of good finance management
effective use of working capital will contribute to the operational efficiency
of a department; optimum use will help to generate maximum return.
United Engineering Services is also using “SAP” 6.0 versions which is very
advanced to do every transaction of any organization. ‘SAP’ 6.0 also
applicable for e-transaction.
60
BIBLOGRAPHY
Financial Management theory and practice by Prassanna Chandra
Financial Management theory and practice by Shashi .K. Gupta &
R.K. Sharma.
Www. Google.com, www. Wikepidia.com
61
FINDING AND SUGGESTION
Making available just adequate quantum of working capital. Some of
the existing machinery is new with absolute equipments requiring
modernization and rebuilding.
The company should administrate their credit on the basis of certain
well recognized and established principle of credit administration.
The company should maintain an optimum level of cash in the
business in order to maintain a proper liquidity in the business.
62
63
