PROJECT REPORT

ON

FOR

BY

ATISH SHARMA

1

ACKNOWLEDGEMENTS

A project is golden opportunity for learning and self development. I considered myself

is very lucky and honored to have so many wonderful people lead me through in

completion of this project.

My grateful thanks to Mr. Vishal Dhiman, finance department who in spite of being

extraordinarily busy with his duties, took time out to hear, guide and keep me on the

correct path. I do not know where I would have been without him. I humble ‘thank you’

sir.

Ms. Navneet Kaur, HR department monitored my progress and arranged all facilities to

make life easier. I choose this moment to acknowledge her contribution gratefully.

Prof. Sugandha Shethi whose patience I have probably tested to the limited. She was

always so involved in the entire process, shared her knowledge, and encouraged me to

think. Thank you dear madam..

Last but least there were so many who shared valuable information that helped in the

successful completion of this project.

Atish sharma

2

DECLARATION

I Atish Sharma of school of management studies Punjabi university patiala, hereby

declare that I have completed a summer project on “working capital management” in

the Academic year 2013-2014. The information submitted is true and original to the

best of my knowledge.

Signature of the Student

Atish sharma

3

PREFACE

In today’s era of cut-throat competition, Master of Business Administration (M.B.A) is

sure to have an edge over their counterparts MBA education brings its students in direct

contact with the real corporate world through industrial training. The MBA program

provides its students with an in depth study of various managerial activities that are

performed in any organization. A detailed analysis of managerial activities conducted in

various departments like production, marketing, finance, human resources, export-

imports, credit dept, etc. gives the student a conceptual idea of what they are expected

to manage , how to manage and how to obtain the maximum output through minimum

inputs and how to minimize the wastage of resources.

I have undergone my comprehensive training at HCL CAREER DEVELOPMENT

CENTRE. It is one of the leading IT educational centers in the country. I feel great

pleasure to present this report work after my training at HCL CAREER

DEVELOPMENT CENTRE that produced to be golden opportunity for me by

enriching my knowledge by comparing my theoretical knowledge with the managerial

skill and application.

4

OBJECTIVES OF THE STUDY

Since working capital management is one of the most important aspects of

finance, it enables to study in-depth the methods involved in it; so that as a

student of finance it gives me a chance to study the financial perspectives of the

industry. It offers scope to understand various aspects of finance and all these

aspects are reflected in this report. The estimation of required working capital

differs from organization to organization. So doing this project in an industry

will help in knowing more about the working capital, its preparation and

execution.

The study has the following

objectives:-

1. To see whether the working capital in “HCL”

is an effective one.

2. To find out the extent of the need and adequacy of the working capital of the

firm.

3. To evaluate or analyze the organizational financial discipline and fiscal

soundness.

4. To find out the variance attained in related to projected and actual figure.

5. To see the liquidity position of the company.

6. To see the changes in the working capital.

7. To see the components of working capital is properly maintained.

8. To determine the requirements of working capital.

5

EXECUTIVE SUMMARY

Working capital management refers to the administration of all aspects of current

assets, namely cash, marketable securities, debtors and stock (inventories) and current

liabilities. The financial manager must determine levels and composition of current

assets. He must see that right sources are tapped to finance current assets, and that

current liabilities are paid in time. He must see that right sources are tapped to finance

current assets, and that current liabilities are paid in time. There are many aspects of

working capital management, which make it an important function of the financial

manager:

• Time: working capital management requires much of the financial manager’s time.

• Investment: working capital represents a large portion of the total investments in

assets.

• Significance: working capital management has great significance for all firms but it is

very critical for small firms.

• Growth: the need for working capital is directly related to the firm’s growth.

Investment in current assets represents a very significant portion of the total investment

in assets.

Working capital management is critical for all firms. A small firm may not have much

investment in fixed assets, but it has to invest to in current assets. Small firms in India

face a severe problem of collecting their debtors. Banks have their own policies to

assess the working capital of the firm to finance them with the shortage. Bank of

Maharashtra adopts certain method for financing their customer’s working capital

requirements. There are certain recommendations from the committees for the banks to

finance the working capital needs of their clients. It may, thus, be concluded that all

precautions should be taken for the effective and efficient management of working

capital. The finance manager should pay regular attention to the levels of current assets

and the financing of current assets.

6

INDEX

S. No Particulars Page

No.1. Economy overview 11

2. Industry overview 14

3. Company overview

HCL introduction

Leadership of HCL

HCL infosystem

HCL Career Development Centre

Findings

SWOT analysis

20

22

24

30

33

35

4. Working capital

Introduction

Definitions

37

5. Types of working capital

Basis of concept

Basis of time

41

6. Operating and cash cycle 45

7. Importance of working capital 54

8. Significance of working capital 56

9. Strategies to overcome the problem 59

10. Factor determining working capital 59

11. The need or objects of working capital 62

12. Management of working capital 63

13. Aims of working capital management 65

14. Principles of working capital management 66

15. Forecasting/ estimation of working capital requirements 67

16. Factor requiring consideration while estimating working

capital

74

7

17. Performa – working capital estimating 75

18. Working capital financing policies 78

19. Conclusion 84

20. Questionnaire of working capital 85

21. Bibliography 88

8

ECONOMY OVERVIEW

9

With recent global developments contributing to a significant rebalancing of portfolios

as a result of rapidly changing risk perceptions and appetites, the Indian

macroeconomic environment has looked turbulent during the past year. After a

promising start to the decade in 2010-11, with achievements like maintaining GDP

growth rate around 8 percent, bringing down fiscal deficit to 4.8 percent of GDP as

well as containing current account deficit to 2.6%, the fiscal year 2011-12 has been

challenging for the Indian Economy.

The year started on a note of optimism through impressive growth in exports and high

levels of foreign exchange inflows, only to moderate as the year progressed through

continued monetary tightening in response to the untamed inflationary pressures.

Gradually, high levels of inflation gave way to a slow-down in the growth.

Additionally, as fiscal conditions worsened over the year, export numbers were revised

in light of data discrepancies leading to a widening of trade deficit. In light of a

perceivably weak macroeconomic environment, a well-planned economic revival

policy from the Government’s part is required to get back the Indian Economy on the

path to stable and prosperous growth.

Global winds Performance of major advanced economies has been a point of concern as

the economic outlook of the Euro Area continues to be grim in the shadow of a

protracted sovereign debt crisis. Japan is still trying to cope up with the economic

impact of natural calamities which is having an impact on its export partners. Despite

some modest signs of improvement in the US, the European debt problem has

unquestionably remained as a dominant global factor and a source of volatility in asset

and currency markets all over the world. By contrast, emerging market economies have

generally shown reasonable robustness – mainly on account of their domestic drivers

and increasing linkages with each other. Nevertheless a slowdown in advanced

economies is a point of concern as it impacts the investment and exchange rate channel

of the domestic economy.

India is still growing at a rapid pace in comparison to other countries; however that

should not deter from the opportunity to push through further reforms, create

infrastructure and generate economic opportunities. Current state of the Indian

10

economy A balancing act India is still growing at a rapid pace in comparison to

countries; however that should not deter from the opportunity to push through further

reforms, create infrastructure and generate economic opportunities.

Current State Of The Indian Economy

The Domestic growth story- While the rest of the world has been grappling with the

after effects of the European debt crisis, the Indian economy in 2011-12 has also seen

moderation in growth. Quarterly growth rates have consistently fallen in 2011-12 and

for the first time since the global crisis of 2008, GDP growth rates in India has declined

below 7 percent to reach 6.1 percent in the third quarter of 2011-12. Earlier

expectations in the range of 8 percent to 8.5 percent have been reduced gradually and

now the Economy is expected to grow at less than 7 percent. GDP grew at a modest 7.3

percent during the first half of the financial year but turbulent global conditions coupled

with a weak industrial sector has resulted in a slowdown in GDP growth in the second

half of the year. With the exception of Services, GDP growth and its two main

components - Agriculture and Industry have recorded lower growth in 2011-12 as

compared to the last year.

An Outward Analysis

A potential Eurozone default could spell doom for both the Indian Service and Industry.

Eurozone accounts for nearly 15 percent of merchandise trade and is the biggest market

for the Indian IT/IT-eS segment after the USA. Despite increasing close linkages &

interdependence of the Indian economy on the global economy, the impact of global

instability on Indian exports has been minimal as recently, the economy was able to

explore new markets and diversify its export destination.

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INDUSTRY OVERVIEW

The IT sector has led to employment opportunities, both direct and indirect, of nearly

2.8 million and around 8.9 million respectively. This growth is expected to increase to

more than 14 million (direct and indirect) by 2015.

Overview

12

The IT & ITES sector includes IT services, engineering design and R&D services,

ITES (IT-enabled services) or BPO and hardware.

Today IT and ITES sectors lead the economic growth in terms of employment, export

promotion, revenue generation and standards of living. As per NASSCOM estimates,

IT/ITES sector (excluding hardware) revenues are estimated at USD 87.6 billion in FY

2011-12; and the industry is expected to grow by 19 per cent during FY 2012-13.

The IT/ITES sector has led to employment opportunities, both direct and indirect, of

nearly 2.8 million and around 8.9 million respectively. This growth is expected to

increase to more than 14 million (direct and indirect) by 2015 and to around 30 million

by 2030.

The market size of the industry is expected to rise to USD 225 billion by 2020

considering India's competitive position, growing demand for exports, Government

policy support, and increasing global footprint.

IT/ITeS industry has led India's economic growth and this sector's contribution to the

national GDP has risen from 1.2 per cent in 1997-98 to an estimated 7.5 per cent in

2011-12.

IT/ITES industries are highly localized and clustered in seven cities as of today. These

are: Bangalore, Hyderabad, Chennai, Gurgaon/Noida/New Delhi, Kolkata, Mumbai and

Pune. Infrastructure limits and scarcity of land has recently led to expansion to newer

places like Ahmadabad, Bhubaneswar, Chandigarh, Coimbatore, Jaipur, Kochi,

Madurai, Mangalore, Mysore and Trivandrum.

Introduction The Terms:

Information Technology (IT) is defined as the design, development, implementation

and management of computer-based information systems, particularly software

applications and computer hardware. Today, it has grown to cover most aspects of

computing and technology.  The largest firms globally include IBM, HP, Dell and

Microsoft.

13

The Information Technology-Enabled Services (ITES) industry provides services that

are delivered over telecom or data network to a range of external business areas.

Examples of such business process outsourcing (BPO) include customer service, web-

content development, back office management and network consultancy etc.

Factors leading to growth in the IT/ITes sector are:

Low operating costs and tax advantage.

Favourable government policies.

Technically qualified personnel easily available in the country.

Rapid adoption of IT technologies in major sectors as Telecom, Manufacturing and

BFSI.

Strong growth in export demand from new verticals and non-traditional sectors as

public sector, media and utilities.

Use of new and emerging technologies such as cloud computing.

SEZ as growth drivers; as more of SEZs are now being set up in Tier II cities and

about 43 new tier II/III cities are emerging as IT delivery locations.

All these factors have given IT/ITES industry in India a strong competitive position

with high market share.

Employment Trends

As per the Economic Survey 2011-12, the IT/ITeS industries has added 7.96 lakh jobs

in one year, in the period ending September 2011. According to NASSCOM, employee

base in the rural areas is expected to increase by over 10 times by 2013-14, compared to

5000 in 2009-10.

According to a customer poll conducted by Booz and Co, India is the most preferred

destination for engineering off shoring, which is an encouraging foreign company to

offshore complete product responsibility to Indian ITES companies.

Hyderabad is fast becoming the IT/ITEs hub of India with new players hankering to get

a foothold here, and existing players continuing to hire aggressively. Large companies

such as Infosys, TCS, Genpact, Deloitte, Face book, Bank of America, Thomson

Reuters, Amazon, Google, Cognizant, Franklin Templeton among others, are growing

14

their presence in the state. According to Andhra Pradesh Government's estimates, the

total IT/ITES sector hiring for 2012-13 could be at about 50,000 professionals.

Internet Trends

More recently, online retailing, cloud computing and e-commerce are leading to rapid

growth in the IT industry. Online shopping is fast gaining popularity with the

emergence of internet retailing and e-commerce.

According to the Internet and Mobile Association of India (IAMAI) the number of

Internet users in the country is more than 121 million, out of which 17 million are

online shoppers. Increasing internet penetration and affordability for personal

computers has led to this rapid numbers, and these are expected to triple by 2015.

According to IAMAI, online sales of branded apparel almost doubled in volume to 4.99

million pieces during April 2012, as against 2.54 million in the same month a year ago.

Also, E-ticketing continued to grow with irctc.com recording 5.56 million bookings in

April, 2012, as compared to 2.26 million bookings in April 2011.

Government Initiatives

In the twelfth Five Year Plan (2012-17), the Department of Information Technology

proposes to strengthen and extend the existing core infrastructure projects to provide

more horizontal connectivity, build redundancy connectivity, undertake energy audits

of State Data Centers (SDCs) etc.

The core infrastructure including fiber optic based connectivity will be leveraged and

additional 150,000 Common Service Centers (CSCs) will be setup to create the right

Governance and service delivery ecosystem at the Panchayats.

PEST Analysis IT Industry-

 

Political:

15

1. Tax rates in India for the hardware sector are 20%-30% plus which creates obvious

possibilities for the further reform and faster growth.

2. 10Year Special Economic Zones programs and tariffs change to promote the

hardware production.

3. 26 new projects as a part of a national E-Government Plan.

4. Tax initiative by government to ask state government to fix VAT at 4% in the hope

of attracting investors.

5. Manufacturing Associations of IT (MAIT) an Electronic Industry

Association of India (ELSINA) are also pressing for reduction in land acquisitions

rights by stamp duty exemptions.

Economic:

1. To lower prices.

2. In last 18months there is growth in sales in PCs and computer hardware, mainly due

But as per the trade cycle rotation there will be a possible slowdown in demand.

3. IT plays a important role in bringing 50%of rural household to the banking

innovation.

4. IBM, Dell, Lenovo has announced new investment to expand capacity

5. Compound Annual Growth Rate is 15% between2005-2010.

6. Due to the depreciation of the Rupee in comparison to Dollar the software

and outsourcing has suffered negatively due poor exchange rate.

7. Industry contributes up to 7% in GDP.

Social:

1. Only 1.3% of people in India own a computer.

2. Age Distribution:- 45% of the population is under 25.

3. Regional imbalance and low incomes.

4. Inward Investment can lead to better job opportunities.

5. Still Abroad is the fascination among the IT professionals to work.

6. IBM, Wipro and Infosys recruit 15000-20000graduates each year.

7. Business practices varies region wise

16

Technological:

1. Plans by AMD to set up the country’s 1st chip fabrication (an investment up to

US$3bn) to stimulate local production and lower prices.

2. Multimedia features and Entertainment to bring bollywood among the masses.

3. Lenovo to build in TV tuner cards capable of connecting to a TV antenna.

4. During the year Satyam entered into an agreement with US based G-LOG, to offer a supply

chain management and supply chain execution solutions to its customer.

17

COMPANY OVERVIEW

Hindustan Computers Limited

Hindustan Computers Limited, also known as HCL Enterprise, is one of India's largest

electronics, computing and information Technology Company. Based in Noida, near

Delhi, the company comprises two publicly listed Indian companies, HCL

Technologies and HCL Info systems.

18

HCL was founded in 1976 by Shiv Nadar, Ajay Chowdhry and four of their colleagues.

HCL was focused on addressing the IT hardware market in India for the first two

decades of its existence with some sporadic activity in the global market. In 1981, HCL

seeded a company focused on addressing the computer training industry, NIIT, though

it has currently divested its stake in the company. In 1991, HP took minority stake in

the company (26%) and the company was known as HCL HP for the five years of the

joint venture. On termination of the joint venture in 1996, HCL became an enterprise

which comprises HCL Technologies (to address the global IT services market) and

HCL Infosystems (to address the Indian and APAC IT hardware market). HCL has

since then operated as a holding company.

HCL Technologies is a global IT Services company headquartered in Noida, a suburb

of Delhi, India led by Mr Vineet Nayar, HCL Technologies, along with its subsidiaries,

had consolidated revenues of US$ 5 billion, as of 2010, and employed more than

60,000 workers. HCL offers services including software-led IT solutions, remote

infrastructure management, Engineering and R&D Services and BPO. The company

provides services across industries including Financial Services, Retail & Consumer,

Life Sciences & Healthcare, Aerospace & Defense, Automotive, Telecom and Media,

Publishing and Entertainment, amongst others. HCL’s key services include:

Custom Application Services

Enterprise Application Services

Enterprise Transformation Services

Infrastructure Management

Engineering and R&D Services

Business Processing outsourcing

19

Leadership of HCL

SHIV NADAR20Mr. Shiv Nadar established HCL as a startup in 1976 Acknowledged as a visionary by the IT

industry and his peers; Mr. Shiv Nadar has often made daring forays based on his conviction

of the future. Albeit a more recent entrant in the software services space, HCL is already

among top Indian IT software majors and a force to reckon with for global technology

Founder and Chairman – HCL, Shiv Nadar Foundation

Type

Public

BSE: 500179

BSE: 532281

Industry IT Services

Founded August 11, 1976

HeadquartersDelhi metropolitan area

Noida, India

Key people

Shiv Nadar, Founder-Chairman and Chief Strategy

Officer, HCL Technologies

Roshni Nadar, CEO HCL Corp.[1]

Ajai Chowdhry - Founder-Chairman and CEO, HCL

Infosystems , Vineet Nayar - CEO, HCL Technologies.

Jagadeshwar Gattu- Vise President of HCL.

Revenue ▲ US$5.0 billion (2009)

Employees 62,000+ (2010)

Website HCL.in

Leadership-

21

AJAI CHOWDHRY

An engineer by training, Ajai Chowdhry is one of the founder members of HCL, India's

leading Technology and IT Enterprise.Ajai took over the reins of HCL Infosystems, the

flagship company of the group, as President and CEO in 1994. He was appointed the

Chairman of HCL Infosystems in November 1999. Under Ajai's stewardship, the company's

turnover has grown to US$ 2.7 billion for the last 12 months from US$ 89 Million in 1994.

Mr. Shiv Nadar established HCL as a startup in 1976 Acknowledged as a visionary by the IT

industry and his peers; Mr. Shiv Nadar has often made daring forays based on his conviction

of the future. Albeit a more recent entrant in the software services space, HCL is already

among top Indian IT software majors and a force to reckon with for global technology

Founder at HCL Chairman – Board Of Governor at IIT- Patna

HCL Infosystems Limited An Overview About The Company

HCL Infosystems is no flash in the Information Technology pan. Founded in 1976, the

firm has climbed into pantheon of India's corporate giants on the strength of its IT

products and services. HCL Infosystems specializes in IT hardware (PC's and servers,

as well as networking, imaging and communications products), and system integration

services serving the domestic Indian market. In addition to its consumer products, the

company provides commercial IT products, facilities management, network services,

and IT security services for clients in such industries as government, financial services,

22

AJAI CHOWDHRY

An engineer by training, Ajai Chowdhry is one of the founder members of HCL, India's

leading Technology and IT Enterprise.Ajai took over the reins of HCL Infosystems, the

flagship company of the group, as President and CEO in 1994. He was appointed the

Chairman of HCL Infosystems in November 1999. Under Ajai's stewardship, the company's

turnover has grown to US$ 2.7 billion for the last 12 months from US$ 89 Million in 1994.

VINEET NAYAR

Vineet Nayar is Vice Chairman and Chief Executive Officer of HCL Technologies Ltd.

(HCLT), an India-based global information technology services company, and author of the

book Employees First, Customers Second: Turning Conventional Management Upside Down

(Harvard Business Press, June 2010).Vineet joined HCL in 1985 after earning his MBA from

one of the leading business management schools in Asia. In 1993, he created the start-up

company, Comnet, where he developed and implemented many of the ideas which are core to

the Employees First, Customer Second (EFCS) philosophy

Vice Chairman & Joint Managing Director

and education. HCL Corporation owns significant stakes in HCL Infosystems (about

44%) and sister company HCL Technologies.

History:

HCL Infosystems Ltd is one of the pioneers in the Indian IT market, with its origins in

1976. For over quarter of a century, we have developed and implemented solutions for

multiple market segments, across a range of technologies in India. We have been in the

forefront in introducing new technologies and solutions.

Milestone:

1976 HCL is born

1977 Forms distribution alliance with Toshiba for

copiers and notebooks

1978 Developed the first indigenous

Microcomputer

1988 Development of fine-grained multiprocessor

Unix operating system

1986 HCL becomes the largest IT company in

India

1989 HCL America is created with Sanmina SCI

as its manufacturing partner.

23

1991 Entered into a partnership with HP to form

HCL HP Limited. Developed a custom

Multiprocessor Unix for HP

1994 Tied up with Nokia for mobile phone

distribution and Ericsson for telephone switch

distribution

1996 Partnership with HP ends.

1997 HCL's R&D division is spun off as HCL

Technologies

2001 HCL BPO is created.

2003 HCL become a first company to cross

100,000 unit milestone in the India desktop

market

2005 Joint venture with NEC, Japan.

2006 HCL career development centre launched.

2007 HCL enterprise crosses $4 billion marks.

2008 HCL CDC is ISO 9001:2000 certified.

2009 100 HCL CDC centre signed up.

2010 HCL learning division launched.

24

2011 Ajai Chowdhry conferred with the prestigious

Padma bhushan

Segments:

The company operates under three primary segments namely Computer Systems and

related products and services, Telecommunication & Office Automation and Internet

and related services.

Computer Systems and related products and services: The segment operations

comprise of manufacturing of computer hardware systems, providing comprehensive

Systems Integration, Roll out and Infrastructure Management solutions in different

industry verticals, providing IT services including maintenance & facility management

and ICT training. The subsidiary HCL Insys Pte Limited, Singapore and its step down

subsidiary HCL Infosystems MEA, Dubai along with its subsidiaries form part of the

Computer Systems segment.

Telecommunication & Office Automation: The segment operations comprise of

distribution of telecommunication and other digital lifestyle products, office automation

products and related comprehensive maintenance and allied services. The subsidiary

HCL security Limited and HCL Investment Pte Limited, with its joint venture

Techmart Telecom Distribution FZCO, Dubai, form part of Telecommunication &

Office Automation segment.

Internet and Related Services: The segment provides Internet related services

through the company's wholly owned subsidiary HCL Infinet Limited to business

enterprises. The offerings include Internet access services, virtual private network and

other connectivity services.

Vision and Mission Of HCL-

25

Vision:

Our Vision is to be a global leader in providing the highest level of IT solutions and

services. We strive to exceed our client’s expectations and create a workplace in which

all employees thrive in a collaborative environment that celebrates excellence

Mission:

Conduct our business according to the highest standards of honesty and integrity.

Provide a level of service and support that allows our customers to confidently view

us as their preferred solutions provider

Create a work environment that recognizes the expertise, contributions, and

teamwork of our valued employees

To provide innovative, professional and personalized services to clients, associates

and employees.

We shall be sensitive to the needs of individuals forming a subject of our

intervention.

Methodology Of HCL:

HCL Global Systems has a well-defined model for its outsourced project development

process using a combination of onsite, offsite and offshore processes. This combination

offers high quality, cost-effective service to clients who also benefit from the

significantly lower costs of offshore services combined with local project management.

26

Alliances:

Since our inception, our alliances have played a critical role in our drive for ecosystem-

based innovation. Our service offerings and solutions across industry verticals are

strengthened by alliances with global technology vendors, customers, and niche

solution providers. Our ecosystem consists of close to 100 companies in various

27

technology areas with which we form go-to-market alliances, specialist partnerships for

niche technologies, and teaming partnerships for specific customers.

Partnering with HCL is a mutually beneficial experience

Our ecosystem of alliances allow us to provide best-in-class solutions that meet our

customers' business requirements and helps them

Reduce total cost of ownership,

Reduce risk of implementation, and

Accelerate time to market.

And HCL helps its alliance partners

Generate incremental revenue growth through differentiated solutions and

service offerings,

Extend market and geographic reach, and

Enhance their product and service offerings.

HCL has invested in dedicated alliance partner CoEs that build solution frameworks

and accelerators, and gets certified in partner products. In addition, we invest in joint

solutions with partners to create innovative solutions for customers.

The HCL AMPLIFY framework™ helps us identify, develop, and assess our alliances.

Our strategic alliances are governed and measured at the corporate level with a focus on

joint revenue, value proposition, and alignment with our business goals.

HCL Career Development Centre

Introduction:

HCL Career Development Centre or LEARNING DIVISION is an initiative that

enables individuals to benefit from HCL expertise in the space and become Industry

ready IT professionals. HCL dominates the IT space as a leader. 45,000 gifted

professionals, a colossal US $4 Billion turnover, an international presence in 17

28

countries, and most importantly a deep-rooted commitment to innovate, makes it a true

Technology Giant. HCL CAREER DEVELOPMENT CENTRE career program equips

a student to meet emerging industry challenges with finesse and ease. Opportunities to

grow with HCL CAREER DEVELOPMENT CENTRE are limitless, catapulting a

student to high level controlling positions in Mega Corporate. With top HCL

professionals as the trainers, customized career programs, hands on experience, state of

art infrastructure and world class training program the student's career graph is bound to

follow a steep rise.

 

HCL CAREER DEVELOPMENT CENTRE provides specially designed courses in

high-end software, hardware and networking integration to groom students into

industry-ready professionals. HCL CAREER DEVELOPMENT CENTRE also offers

placement support to all their students who excel in their academics and display a

remarkable performance during the course.

As the training arm of HCL Info systems, HCL CAREER DEVELOPMENT CENTRE

carries forth a legacy of excellence spanning across more than three decades. HCL

CAREER DEVELOPMENT CENTRE is an initiative that enables individuals and

organizations to benefit from HCL's deep expertise in the IT space.

Among the fastest growing IT education brands in India, HCL CAREER

DEVELOPMENT CENTRE offers a complete spectrum of quality training programs

on software, hardware, networking as well as global certifications in association with

leading IT organizations worldwide.

Quality at HCL CDC:

"We shall develop and impart Industry relevant ICT Education to meet the requirement

of customers, Industry and society by continually updating technology content and

improving our process

Certification of quality standards:

"In its pursuit of excellence", the company has developed a quality management system

in line with ISO 9001:2000 standards. 29

Business Excellence Initiatives:

The organization follows a framework developed by EFQM (European Foundation for

Quality Management). Organization policies and strategies are aligned with EFQM

Model. The "Quest of Excellence" is taken as a mission who drives the quality of

Training Delivery and associated services.

Advantage of HCL CAREER DEVELOPMENT CENTRE

At HCL CAREER DEVELOPMENT CENTRE, we pride upon the fact that our

training programs provide students with a sustainable competitive edge that not only

helps them secure the initial placement but rather remains as an asset throughout t heir

career span.

Learn industry nitty-gritty from Top HCL professionals.

Customized and industry specific career program. Hands on experience.

After HCL CAREER DEVELOPMENT CENTRE certification leave behind

your placement worries!

HCL CAREER DEVELOPMENT CENTRE Advantage

HCL Heritage: - HCL CAREER DEVELOPMENT CENTRE combines our

heritage of excellence with cutting-edge IT expertise across multiple IT domains.

ISO 9001:2000 Certification: - Our students share the benefit of ISO 9001:2000

certified training practices and procedures. Must have a attitude and be a self starter. The

right candidate will progress really fast within the organization.

30

Cutting-Edge Courseware: - Our courseware is designed and developed in

consultation with seasoned IT professionals and is continuously updated as per the

changing industry trends.

Global Alliances: - Through partnership with leading technology companies including

Microsoft, Oracle and Red Hat, HCL CAREER DEVELOPMENT CENTRE conducts

certification programs in software, system and network administration offering you a

distinct edge in the job market.

International Recognition: - All our training programs is backed by HCL successful

brand image that is well recognized all across the world.

Hands-on Training: - We place major emphasis upon the application and practical

training aspect of IT training to make the students industry-ready from day one.

Widespread Network: - HCL CAREER DEVELOPMENT CENTRE has set up

premier IT Training centres across the geography of India and the network is growing at a

rapid pace with ambitious global expansion plans on the anvil.

100% Placement Record: - Our dedicated team of placement professionals offers

employment support through regular interface with the industry. CAREER

DEVELOPMENT CENTRE prides upon a 100% placement record with students having

been placed in leading organisations in the IT/non-IT space.

Findings:

1. During my survey well asking that which IT institute do you prefer then out of 100

Customer 30% said that they will prefer HCL learning division. The reason which is

given by them is HCL learning division is one of the good brand in IT firm & by

joining HCL there placement got secure.

31

2. As HCL learning division is providing major type of courses which I have surveyed

the area of interest which I find out of student more towards CCNA. Which is one

of the hardware courses the reasons behind that is most of the student are mainly

concern with hardware or they may be having a degree or diploma in software

which is provided by many other institute.

3. of quantity in HCL which is later on followed by brand name because the student

know that HCL company is known to everyone & is very much obvious that the

courses which provided by HCL will be quality oriented.

When I asked from the student why they like HCL learning division then most of them had

answered that they will get a quality instead

4. During my survey related to its awareness amongst student most of the student

replied they get the information related to HCL learning division is mainly through

newspapers and broachers. As one of the new courses so most of the students are

not aware of these courses so because of very few students can able to know about

the courses to their friends.

5. As HCL is providing various facilities like discount coupons, Bank loans so where

asking which offer is beneficial to students most of them i.e. almost 64% is said that

they will prefer opt for Bank loan instead for discount and coupon the reason which

is got is most of them were having the perception that they will go for loan it will be

the responsibility of HCL to provide the job.

6. The promotion activities of HCL were graded as fair by 80% of the students

because for its facility of loan brand name and courses that is offered.

7. Well I curiously asked for most of the students that why they are choosing the HCL

learning division the answer which I got very much similar which I expected most

of them choosing HCL learning division because HCL having brand and good

reputation in the market. The marker apart from its quality and price.

8. Company was doing various promotional activities like Hand Billing, Road shows,

32

Seminar and area campaign but where asking which was the most prefer by the

students 41% said that area campaign is one of the best way to contact with them

35% were agreed for seminar and 23% for Hand billing this is so because area

campaign the way by which most of the students weather he is from college or

school going or road side one can able to know what exactly HCL learning division

offering them which is not fulfill by seminar or hand billing in a satisfactory

position.

9. After asking which courses mostly preferred by the students the answer which I got

is majority for short term courses which is having duration of six month or one year

minority were asking long term courses which is having duration of two year. This

is so because the majority of students which I surveyed were doing job so they

mostly preferred short term courses over within six month and one year.

10. Lastly I asked that which timing is mostly suits them 47% said that evening is most

suitable for them as I have said earlier that most of them doing job so they don’t

want to hamper their job for this course but as this course was really suited to them

they really want to do it as a part time courses.

SWOT Analysis HCL Technologies-

Strengths:

1. Wide Range of Products and Services like Software Services, Infrastructure

Management which enter into both large and medium size companies.

2. Global Coverage in countries like U.S, Europe, Japan etc

3. Strong employees base of up to 50000Pax.

4. Support sales activities by understanding the customer business better.

5. Keep up to date on what competition is doing.

6. Its revenue has increased from 60.7bn in 2007 from 114bnin2009 which shows

its increasing trend. 

33

Weakness:

1. One of the key weaknesses of HCL is that it has lost projects in continuation like

recently BFSI cuts projects.

2. HCL has always a weakness in TIER1 sectors.

3. Total asset turnover is one of the weaknesses of HCL as they have always failed to

materialize its assets in right direction.

4. Lack of innovation and distribution network especially in case of laptops

has reflected HCL’s weakness.

Opportunities:

1. Acquisitions:-HCL has already done 3 major acquisitions like Liberta. This enables

them to expand and create opportunity for them to wide there spectrum.

2. Key opportunities lie in the countries like Eastern Europe and APAC (Asia-

Pacific Region).

3. Mid Market segment is the opportunity area as againstfortune200 companies.

4. Opportunity of doing better on return on equity from 21.42% by beating Satyam

(26.08%)

5. Increasing its market share from 9.8% vs. 19.7 %( HP)

Threats:

1. One of key threat for HCL and the industry as a whole is the ban of outsourcing

from India due to new regulations from U.S

2. Dip in quarterly Sales by 5% can lead to loss of market share and

product depreciation.

3. Small Players and manufactures are trying to enter into the segment where they can

provide much cheaper products then HCL which will be a rising competition for

HCL to stand.

34

35

Working Capital

Introduction:

In a working capital we focus on short term finance of a company. In a business we

include two terms of finance i.e. short term and long term finance it lies in the timing of

cash flows. Short term financial decisions typically involve cash inflows and outflows

that take place within a year or less. For examples, short term financial decisions are

involved when a firm orders raw material, pays in cash, and anticipate selling finished

goods within one year for cash. On the other hand, long term financial decisions are

involved when a firm buys a machine that is expected to reduce operating costs over,

says, the next seven year.

The types of decisions that fall under the general heading of short term finance are

many; to mention a few:

36

The level of cash the firm should maintain.

The level of short term borrowing to have.

Credit to be extended to customers.

Inventories to be maintained and so on.

Frequently, the term working capital management is used in place of short term

financial decisions and we shall also stick only to this only. We start with the types of

working capital followed by concept and application of operating cycle in estimating

working capital needs. We also discuss the factors affecting working capital

requirements and the policy of financing working capital.

Definition of working capital:

Working capital can be defined as the amount of capital required for the smooth and

interrupted functioning of normal business operations of a company.

Working Capital refers to that part of the firm’s capital, which is required for financing

short-term or current assets such a cash marketable securities, debtors and inventories.

Funds thus, invested in current assets keep revolving fast and are constantly converted

into cash and this cash flow out again in exchange for other current assets. Working

Capital is also known as revolving or circulating capital or short-term capital.

In the words of Shubin, “Working capital is the amount of funds necessary to

cover the cost of operating the enterprise”.

According to Genestenberg, “Circulating capital means current assets of a

company that are changed in the ordinary course of business from one form to

another, as for example, from cash to inventories, inventories to receivables,

receivables into cash”.

37

According to J.S. Mill, “The sum of the current assets is the working capital of a

business”.

It is helpful for us, as a business owner, to think of working capital in terms of five

components:

1. Cash and equivalents. This most liquid form of working capital requires constant

supervision. A good cash budgeting and forecasting system provides answers to key

questions such as: Is the cash level adequate to meet current expenses as they come

due? What is the timing relationship between cash inflow and outflow? When will

peak cash needs occur? When and how much bank borrowing will be needed to

meet any cash shortfalls? When will repayment be expected and will the cash flow

cover it?

2. Accounts receivable. Many businesses extend credit to their customers. If you do,

is the amount of accounts receivable reasonable relative to sales? How rapidly are

receivables being collected? Which customers are slow to pay and what should be

done about them?

3. Inventory. Inventory is often as much as 50 percent of a firm's current assets, so

naturally it requires continual scrutiny. Is the inventory level reasonable compared

with sales and the nature of your business? What's the rate of inventory turnover

compared with other companies in your type of business?

4. Accounts payable. Financing by suppliers is common in small business; it is one of

the major sources of funds for entrepreneurs. Is the amount of money owed

suppliers reasonable relative to what you purchase? What is your firm's payment

policy doing to enhance or detract from your credit rating?

5. Accrued expenses and taxes payable. These are obligations of your company at

any given time and represent a future outflow of cash.

38

Types of working capital:

39

WORKING CAPITAL

BASIS OF CONCEP

T

BASIS OF TIME

Gross Worki

ng Capita

l

Net Workin

g Capital

Permanent /

Fixed WC

Temporary /

Variable WC

Regular WC

Reserve WC

Special WC

Seasonal WC

Basis of concept:-

There are two type of working capital on the basis of concept, namely gross and net

working capital.

Gross working capital is firm’s total investment in current assets. Current assets

are the assets which can be converted into cash within a year. For examples cash,

short term securities, account receivable, bills receivable and inventory.

Net working capital, on the other hand, refers to the difference between current

assets and current liabilities. Current liabilities are those claims of outsiders which

are expected to mature for payment within an accounting year: examples include

accounts payable, bills payable and outstanding expenses.It must be noted that net

working capital could be both positive as well as negative. A positive net working

capital will be arise when current assets exceeds current liabilities. A negative net

working capital occurs when current liabilities are in excess of current assets.

The term working capital is commonly used interchangeably with net working

capital. The definition of working capital given above shows that purpose of current

assets is to provide sufficient cover for current liabilities. However, amount of

working capital, seen from this angle, is obtained from the data contained in the

balance sheet, which merely indicates the financial position of a company as on a

specific date; it only offers a snapshot of current assets and current liabilities as on

the balance sheet date, it fails to capture the true and dynamic picture of working

capital which can be obtained only by combining information from both balance

sheet and income statement.

Working capital is the amount of capital required for the smooth and interrupted

functioning of normal business operations of a company ranging from the procurement

of raw material, converting the same into finished products for sale and realizing cash

along with profit from the accounts receivables that arise from sale of finished goods on

credit. It can be seen that all these aspects are not picked by the balance sheet based

concept to get a true picture of working capital position of a company.

40

Concept of time:-

Permanent Working capital and

Temporary Working capital.

Permanent Working capital

Permanent working capital refers to the minimum amount of all current assets that is

required at all times to ensure a minimum level of uninterrupted business operations.

Some minimum amount of raw materials, work-in-progress, bank balance, finished

goods etc., a business has to carry all the time irrespective of the level of manufacturing

or marketing operations. This level of working capital is referred to as core working

capital or core current assets. But the level of core current assets is not a constant sum

at all the times.

For a growing business the permanent working capital will be rising, for a declining

business it will be decreasing and for a stable business it will almost remain the same

with few variations. So, permanent working capital is perennially needed one though

not fixed in volume. This part of the working capital being a permanent investment

needs to be financed through long-term funds. The permanent working capital can be

further divided into two parts:

Regular working capital

Reserve working capital

It required ensuring circulation of current assets from cash to inventories, from

inventories to receivables and from receivables to cash and so on. Reserve working

capital is the excess amount over the requirement for regular working capital which

may be provided for contingencies that way arise at unstated period such as strikes, rise

in prices, depression, etc.

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Temporary Working capital

The temporary or varying working capital varies with the volume of operations. It

fluctuates with the scale of operations. This is the additional working capital required

from time to time over and above the permanent or fixed working capital.

During seasons, more production/sales take place resulting in larger working capital

needs. The reverse is true during off-seasons. As seasons vary, temporary working

capital requirement moves up and down. Temporary working capital can be financed

through short term funds like current liabilities. When the level of temporary working

capital moves up, the business might use short-term funds and when the level for

temporary working capital recedes, the business may retire its short-term loans.

Variable working capital can be further classified as:

Seasonal working capital

Special working capital

Most of enterprises have to provide additional working capital to meet the seasonal and

special needs. The capital required to meet the seasonal needs of the enterprise is called

seasonal working capital. Special working capital is that part of working capital which

42

Amount Variable Working Capitalof WorkingCapital

Permanent Working Capital

Time

is required to meet special exigencies such as launching of extensive marketing

campaigns for conducting research etc.

Both permanent and temporary working capitals are necessary to facilitate the sales and

production process through operating cycle.

Operating cycle and cash cycle:

The primary concerns in working capital management include firms short run operating

and financing activities. For a typical manufacturing firm, the major short run activities

will consist of the following activities and related decisions:

43

Variable Working CapitalAmount of WorkingCapital

Permanent Working Capital

Time

These activities entail cash inflows and cash outflows; but the cash flows are both

unsynchronized and uncertain. They are unsynchronized because the payment of cash

for raw materials does not take place at the same time as the receipt of cash from sales

of the finished product. They are uncertain because future sales and costs cannot be

precisely predicted. These give rise to what is called as operating cycles and cash cycle.

Operating cycle:

The entire cycle, from the time the firm acquires inventory to the time it collects the

cash, takes 100 days. This is called the operating cycle. The operating cycle is the

length of time it takes to acquire inventory, sell it, and collect for it. This cycle has two

distinct parts- the time it takes to acquire and sell the inventory; a 60 day span in our

case, is called the inventory conversion period; and the time it takes to collect cash for

the sales, 40 days in our case; called as accounts receivable (debtors) conversion period.

Thus, operating cycle is just the sum of the inventory conversion period and accounts

receivable conversion periods:

Operating = inventory conversion + accounts receivable

Cycle period conversion period

100 days = 60 days + 40 days

44

Activity

Buy raw materialPay for purchasesManufacture productsSell the productCollection for sales

Decision

How much to orderWhether to borrow or pay cashChoice of technologyWhether to extend credit or to sell on cashHow to collect

What the operating cycle describes is how a product moves through the current asset

accounts. The product begins life as inventory; it is converted to a receivable when it is

sold, and it is finally converted to cash when we collect for the sales.

For a typical manufacturing company, the inventory conversion period is the total time

needed for producing and selling the product and includes:

Raw material conversion period.

Work in process conversion period.

Finished goods conversion period.

Cash cycle –

There are number of days that pass before the firm collects cash for

sales, measured from it actually pays for the inventory. Thus, cash cycle is the

difference between the operating cycle and the accounts payment period.

For example, the firm does not pay cash for inventory until 30 days after acquiring it.

The intervening 30 days period is called the accounts payable (creditors) period. Next,

though the firm spends cash on 30th day, it does not collect cash till 100 th day.

Somehow, the firm must arrange to finance the Rs 1000 for 100-30 = 70 days. This

period is called the cash cycle or net operating cycle.

Cash cycle = operating – accounts payable

Cycle period

= 100 days – 30 days

= 70 days

45

Work In Progress

Finished Goods

In diagram, the short term operating activities and cash flows for a typical

manufacturing firm by way of a cash flow time line. As shown, the need for short term

financial management arises from gap between the cash inflows and the cash outflows,

which is related to the lengths of the operating cycle and the accounts payable period.

This gap can be filled either by borrowing or by holding a liquidity reserve in the form

of cash or marketable securities. Alternatively, the gap can be shortened by changing

the inventory, receivable, and payable periods- all of which comprise the areas of

working capital management.

Determining Operating And Cash Cycle:-

Raw material conversion period:-

46

Sundry Debtors (a/c receivables

Wages & Salaries

Cash

Raw material component

Selling + distribution general Administration

Sundry creditors (a/c

payable)

Raw material conversion period is the average time period taken to convert material

into work in process.

A. Annual consumption of raw material component etc.

B. Average daily consumption (A /360)

C. Average stock of raw material = (Opening stock + closing stock)

2

D. Raw material storage period

(C / B) = n1 days

Conversion / work in progress period:

Work in progress conversion period is the average time taken to complete the semi

finished goods convert work in progress into finished goods.

A. Annual cost of production = opening stock of WIP + consumption of raw

material + other manufacturing Cost Such

as wages, salary +

Depreciation – Closing Stock WIP

B. average daily cost of production (A / 360)

C. average stock of WIP = (Opening stock + closing stock)

2

E. average conversion period

(C / B) = n2

Finished goods storage period:

Finished goods conversion period is the average time taken to sell the finished goods.

47

A. Annual cost = opening stock of finished goods + cost of production + Of sales

Excise Duty + selling & distribution cost + general Administration cost

+ financial cost – closing stock Of finished goods

B. Average daily cost of sales (A / 360)

C. Average stock of finished goods = (Opening stock + closing stock)

2

D. Finished goods storage period

(C / B) = n3

Average Collection Periods:

It is the average time taken to convert accounts receivables into cash.

A. Annual credit sales of company

B. Average daily credit sales ( A / 360)

C. Average balance of sundry debtors = (opening stock + closing stock)

2

D. Average collection period

C / B = n4

Average Payment Periods:

It is average time taken to convert accounts payable into cash payment.

A. Annual credit purchase company

B. Average daily credit purchase ( A / 360 )

C. Average balance sundry creditors = ( opening balance + closing balance )

2

D. Average payment period

n5 = C / B

48

Operating cycle = raw material conversion period + work in progress

conversion period + finished goods conversion period +account receivable

conversion period

Operating Cycle = n1 + n2 + n3 + n4

Cash cycle = raw material conversion period + work in progress conversion

period + finished goods conversion period +account receivable conversion

period – accounts payable conversion period

Cash Cycle = n1 + n2 + n3 + n4 – n5

Example-

Particulars

Raw material, component etc.

Work in progress

Finished goods

A/c receivable

A/c payable

Purchases of raw materials

Manufacturing expenses

Depreciation

Custom & excise duties

Selling, administration, financial expenses

Sales

Opening

Balance

3454.84

56.15

637.92

756.45

2504.18

Closing

Balance

4095.41

72.50

1032.74

1166.32

3084.47

10676.10

1146.76

247.72

35025.56

4557.48

54210.65

Calculate operating cycle ?

Answer-

Raw Material Storage Period:

49

A. Annual consumption = opening stock + purchase – closing stock

= 3454.84 + 10676.10 – 4095.41 = 10035.53

B. Average daily consumption = 10035.53/360

= 27.88

C. Average stock of raw material = (3454.84 + 4095.41)/ 2

= 3775.125

D. Raw material storage period = 3775.125 / 27.88

n1 = 135.40 = 135

Conversion Period:

A. Annual cost of production = 56.15 + 10035.53 + 1146.76 + 247.72 -

72.50 = 11413.66

B. Average daily cost of production = 11413.66/360

= 31.70

C. Average stock of Work in progress= (56.15 + 72.50) / 2

= 64.32

D. Average conversion period = 64.32/ 31.70

n2 = 2

Finished goods storage period:

A. Annual cost of sales = 637.92 + 11413.66 + 35025.56 + 4557.48 – 1032.74

= 50601.88

B. Average daily Cost of sales = 50601.88 / 360

= 140.56

C. Average stock of Finished goods = (637.92 + 1032.74) / 2

= 835.33

D. Finished goods Storage period = 835.33/140.56

n3 = 5.9 ≈ 6days

Average collection period:

50

A. Annual credit sales = 54210.65

B. Average daily credit sale = 54210.65 / 360

= 150.59

C. Average balance of Sundry debtors = ( 756.45 + 1166.32) / 2

= 961.38

D. Average collection period = 961.38/ 150.59

n4 = 6.38 ≈ 6 days

Average payment period

A. Annual credit purchase’s company = 10676.10

B. Average daily credit purchases = 10676.10/360

= 29.66

C. Average balance sundry creditors = (2504.18+3084.47)/2

= 2794.32

D. Average payment period = 2794.32/29.66

n5 = 94.21 ≈ 94days

Operating cycle = 135 + 2 + 6 + 6

= 149 days

Net operating/ cash cycle = 135 + 2 + 6 + 6 – 94

= 55 days

Deferred wages :

The firm pays to labor ager a gap of 10 days. The amount could be calculated in the

same way as accounts payable for purchases:

Wages Payment Period = Average Wages Payable * 360/ total

wages

10 = Average Wages Payable * 360/ total

wages

51

Average Wages Payable = 10* total wages / 360

Example-

Number of toys per year = 70000

Labor cost per unit / toy = Rs.19.5

Average wages payable = ?

So,

Wages Payment Period = Average Wages Payable * 360 / Total

Wages

10 = Average Wages Payable * 360 /

(70000*19.5)

Average Wages Payable = 10 * 70000 * 19.5 / 10

= Rs. 37916

Deferred overheads:

One month (30 days), means that overheads are paid after one

month. The amount will be as follows:

Overheads Payment Period = Average Overheads Payable * 360 / Total Overhead

30 = Average Overheads Payable * 360 / Total Overhead

Average Overheads Payable = 30* Total Overheads / 360

Example –

Number of toys per year = 70000

Overheads per unit = Rs. 39

Average over heads payable =?

So,

Overheads Payment Period = Average Overheads Payable * 360 / Total Overheads

52

30 = Average Overheads Payable * 360 / (70000*39)

Average Overheads Payable = 30*70000*39/360

= Rs. 2, 27,50

Importance of Working Capital Ratios:

Ratio analysis can be used by financial executives to check upon the efficiency with

which working capital is being used in the enterprise. The following are the important

ratios to measure the efficiency of working capital. The following, easily calculated,

ratios are important measures of working capital utilization.

Ratio Formulas Result Interpretation

Stock

Turnover

(in days)

Average Stock *

365/

Cost of Goods Sold

= x days On average, you turn over the value of your entire

stock every x days. You may need to break this

down into product groups for effective stock

management.

Obsolete stock, slow moving lines will extend

overall stock turnover days. Faster production,

fewer product lines, just in time ordering will reduce

average days.

Receivables

Ratio

(in days)

Debtors * 365/

Sales

= x days It take you on average x days to collect monies due

to you. If your official credit terms are 45 day and it

takes you 65 days... why?

One or more large or slow debts can drag out the

average days. Effective debtor management will

minimize the days.

53

Payables

Ratio

(in days)

Creditors * 365/

Cost of Sales (or

Purchases)

= x days On average, you pay your suppliers every x days. If

you negotiate better credit terms this will increase.

If you pay earlier, say, to get a discount this will

decline. If you simply defer paying your suppliers

(without agreement) this will also increase - but

your reputation, the quality of service and any

flexibility provided by your suppliers may suffer.

Current

Ratio

Total Current Assets/

Total Current

Liabilities

= x times Current Assets are assets that you can readily turn in

to cash or will do so within 12 months in the course

of business. Current Liabilities are amount you are

due to pay within the coming 12 months. For

example, 1.5 times means that you should be able to

lay your hands on $1.50 for every $1.00 you owe.

Less than 1 times e.g. 0.75 means that you could

have liquidity problems and be under pressure to

generate sufficient cash to meet oncoming demands.

Quick Ratio (Total Current Assets

- Inventory)/

Total Current

Liabilities

= x times Similar to the Current Ratio but takes account of the

fact that it may take time to convert inventory into

cash.

Working

Capital Ratio

(Inventory +

Receivables -

Payables)/

Sales

As % Sales A high percentage means that working capital needs

are high relative to your sales.

Other working capital measures include the following:

Bad debts expressed as a percentage of sales.

Cost of bank loans, lines of credit, invoice discounting etc.

Debtor concentration - degree of dependency on a limited number of customers.

Once ratios have been established for our business, it is important to track them over

time and to compare them with ratios for other comparable businesses or industry

sectors.

54

Significance Of Working Capital:

Investment in fixed assets only is not sufficient to run the business. Working capital or

investment in current assets, howsoever small it is, is a must for purchase of raw

materials, and for meeting the day-to-day expenditure on salaries, wages, rents,

advertising etc., and for maintaining the fixed assets. “The fate of large scale

investment in fixed capital is often determined by a relatively small amount of current

assets.” Working capital is just like a heart of industry if it is weak, the business cannot

prosper and survive, although there is a large body (investment) of fixed assets.

Moreover, not only the existence of working capital is a must for the industry, but it

must be adequate also. Adequacy of the working capital is the lifeblood and controlling

nerve center of a business. Inadequate as well as redundant working capital is

dangerous for the health of industry. It is said, ‘Inadequate working capital is

disastrous; whereas redundant working capital is a criminal waste’. Both situations are

not warranted in a sound organization.

 The advantages of working capital or adequate working capital may be enumerated as

below: -

 

1. Cash Discount:

If a proper cash balance is maintained, the business can avail the advantage of cash

discount by paying cash for the purchase of raw materials and merchandise. It will

result in reducing the cost of production.

2. It creates a Feeling of Security and Confidence:

55

The proprietor or officials or management of a concern are quite carefree, if they have

proper working capital arrangements because they need not worry for the payment of

business expenditure or creditors.

Adequate working capital creates a sense of security, confidence and loyalty, not only

throughout the business itself, but also among its customers, creditors and business

associates.

3. ‘Must’ for Maintaining Solvency and Continuing Production:

 In order to maintain the solvency of the business, it is but essential that the sufficient

amount t of fund is available to make all the payments in time as and when they are

due. Without ample working capital, production will suffer, particularly in the era of cut

throat competition, and a business can never flourish in the absence of adequate

working capital.

4. Sound Goodwill and Debt Capacity:

It is common experience of all prudent businessmen that promptness of payment in

business creates goodwill and increases the debt of the capacity of the business. A firm

can raise funds from the market, purchase goods on credit and borrow short-term funds

from bank, etc.  If the investor and borrowers are confident that they will get their due

interest and payment of principal in time.

5. Easy Loans from the Banks:

An adequate working capital i.e. excess of current assets over current liabilities helps

the company to borrow unsecured loans from the bank because the excess provides a

good security to the unsecured loans, Banks favor in granting seasonal loans, if

business has a good credit standing and trade reputation.

6.   Distribution of Dividend:

56

If company is short of working capital, it cannot distribute the good dividend to its

shareholders inspite of sufficient profits. Profits are to be retained in the business to

make up the deficiency of working capital. On the other contrary, if working capital is

sufficient, ample dividend can be declared and distributed. It increases the market value

of shares.

7. Exploitation of Good Opportunity:

In case of adequacy of capital in a concern, good opportunities can be exploited e.g.,

company may make off-season purchases resulting in substantial savings or it can fetch

big supply orders resulting in good profits.

8. Meeting Unseen Contingency:

Depression shoots the demand of working capital because sock piling of finished goods

become necessary. Certain other unseen contingencies e.g., financial crisis due to heavy

losses, business oscillations, etc. can easily be overcome, if company maintains

adequate working capital.

9. High Morale:

The provision of adequate working capital improves the morale of the executive

because they have an environment of certainty, security and confidence, which is a

great psychological, factor in improving the overall efficiency of the business and of the

person who is at the hell of fairs in the company. 

10. Increased Production Efficiency:

A continuous supply of raw material, research programme, innovations and technical

development and expansion programmes can successfully be carried out if adequate

working capital is maintained in the business. It will increase the production efficiency,

which will, in turn increases the efficiency and morale of the employees and lower

costs and create image among the community.

57

Strategies to overcome the problem:

• Manage working capital investment or financing such as

• Holding additional cash balances beyond expected needs

• Holding a reserve of short term marketable securities

• Arrange for availability of additional short-term borrowing capacity

• One of the ways to address the problem of fixed set-up cost may be to hold

inventory.

• One or combination of the above strategies will target the problem

Factors Determining Working Capital:

1. Nature of the Business

2. Size of business

3. Production policies

4. Production cycle

5. Credit policy

6. Rapidity of turnover

7. Seasonal fluctuation

8. Price level changes

9. Others factors

1. Nature of the business:

Working capital also depends upon the nature of the business. Public utility concerns like

railway, electricity etc. have a very little need of working capital since most of their

transaction are on cash basis. On the other hand ordinary manufacturing and trading

concerns require sufficient working capital, since they have to invest substantially in

inventories and debtors.

2. Size of Business

58

Size of business is another influencing factor. As size increases, the working capital

requirement is also more and vice versa.

3. Production policies:

The production policies pursued by the management have a significant effect on the

requirement of working capital of the business. The decision about the management

regarding automation, etc. will also have its effect on working capital. On case of

labor intensive industries the working capital requirements will be more. While in

the case of highly automatic plant the requirement of long term funds will be more.

4. Production cycle

The time lapse between feeding of raw material into the machine and obtaining the

finished goods out from the machine is what is described as the length of manufacturing

process. It is otherwise known as conversion time. Longer this time period, higher is the

volume and value of work-in-progress and hence higher the requirement of working

capital and vice versa.

5. Credit policy:

A company which allows liberal credit to its customers may have higher sales

but will need more working capital. A concern that purchases its requirements

on credit and sells its products/services on cash requires less amount of

working capital.

6. Rapidity of turnover:

A company having high rate of turnover will need lower amount of working

capital as compared to a company which has a lower turnover.

7. Seasonal fluctuations:

In case of seasonal industries like sugar and woolen textiles, their working

capital required during the particular season will be higher than other periods.

59

8. Price level changes:

Changes in the price level also affect the working capital requirements. Generally,

the rising prices will require the firm to maintain larger amount of working capital

as more funds will be required to maintain the same current assets.

The effect of rising prices may be different for different firms. Some firms

may be affected much while some others may not be affected at all by the rise

in prices.

9. Other factors:

Certain other factors such as operating efficiency, management ability,

irregularities of supply, import policy, asset structure, importance of labour,

banking facilities, etc. also influences the requirements of working capital.

Excess Or Inadequate Working Capital:

Every business concern should have adequate working capital to run its business

operations. It should have neither redundant or excess working capital nor

inadequate nor shortage of working capital. Both excess as well as shortage of

working capital situations are bad for any business. However, out of the two,

inadequacy or shortage of working capital is more dangerous from the point of view

of the firm.

Disadvantages of Redundant or Excess Working Capital -

Idle funds, non-profitable for business, poor ROI.

 Unnecessary purchasing & accumulation of inventories over required level.

Excessive debtors and defective credit policy, higher incidence of B/D.

Overall inefficiency in the organization.

When there is excessive working capital, Credit worthiness suffers

Due to low rate of return on investments, the market value of shares may fall

60

Disadvantages or Dangers of Inadequate or Short Working Capital -

 Can’t pay off its short-term liabilities in time.

  Economies of scale are not possible.

  Difficult for the firm to exploit favourable market situations

  Day-to-day liquidity worsens

  Improper utilization the fixed assets and ROA/ROI falls sharply

The rate of return on investments also falls with the shortage of working capital.

The need or objects of working capital:

The need for working capital cannot be over emphasized. Every business needs some

amount of working capital. The need for working capital arises due to the 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; and sales and realization of cash. Thus, working capital is needed for the

following purpose:

1. For the purchase of raw materials, components and spares.

2. To pay wages and salaries.

3. To incur day to day expenses and overheads costs such as fuel, power and office

expenses, etc.

4. To meet the selling costs as packing, advertising, etc.

5. To provide credit facilities to the customers.

6. To maintain the inventories of raw material, work in progress, stores and spares and

finished stock.

61

Management Of Working Capital (WCM):

Management of working capital is concerned with the problems that arise in attempting

to manage the current assets, the current liabilities and the inter-relationship that exists

between them. In other words, it refers to all aspects of administration of CA and CL.

management will use a combination of policies and techniques for the management of

working capital. The policies aim at managing the current assets (generally cash and

cash equivalents, inventories and debtors) and the short term financing, such that cash

flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to

meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials - and minimizes

reordering costs - and hence increases cash flow. Besides this, the lead times in

production should be lowered to reduce Work in Process (WIP) and similarly, the

Finished Goods should be kept on as low level as possible to avoid over production -

see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ);

Economic quantity.

Debtors management. Identify the appropriate credit policy, i.e. credit terms

which will attract customers, such that any impact on cash flows and the cash

conversion cycle will be offset by increased revenue and hence Return on Capital (or

vice versa); see Discounts and allowances.

Short term financing. Identify the appropriate source of financing, given the

cash conversion cycle: the inventory is ideally financed by credit granted by the

supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to

"convert debtors to cash" through "factoring"

Working Capital Management Policies of a firm have a great effect on its profitability,

liquidity and structural health of the organization. In this context, working capital

management is three dimensioned in nature:

62

3D Nature of Working Capital Management

I. Dimension first is concerned with the formulation of policies with regard to

profitability, risk and liquidity.

II. Dimension second is concerned with the decision about the composition and

level of current assets.

III. Dimension third is concerned with the decision about the composition and level

of current liabilities.

Aims of Working Capital Management:

1. The goal of working capital management is to manage the firm’s current assets

and current liabilities in such a way that a satisfactory level of working capital is

maintained, to meet the short-term obligations as and when they arise.

2. A significant objective of working capital management is to ensure short-term

liquidity and to see that profitability is not affected by the way current assets

and current liabilities are managed.

63

Dimension IProfitability,

Risk, & Liquidity

Dimension IProfitability,

Risk, & Liquidity

3. The main theme of working capital management is the interaction between the

current assets and the current liabilities and arrives at the optimum level of both.

The optimum level thus arrived must have provision for contingencies.

4. Trade-off between Profitability and Risk: The level of a firm’s Net working

capital has a bearing on its profitability as well as risk. The term profitability

used in this context is measured by profits after expenses. The term risk is

defined as the probability that a firm will become technically insolvent so that it

will not be able to meet its obligations when they become due for payment. The

risk of becoming technically insolvent is measured using Net Working Capital.

The greater the net working capital, the more liquid the firm is and therefore the

less likelihood of it becoming technically insolvent. The relationship between

liquidity, net working capital and risk is such that if either net working capital or

liquidity increases, the firm's risk decreases.

5. Trade-off: If a firm wants to increase its profits, it must also increase its risk.

Inversely, if it decreases risk, its profitability too tends to decrease. The trade-

off between these variables is that regardless of how the firm increases its

profitability through the manipulation of working capital, the consequence is a

corresponding increase in risk as measured by the level of Net working capital.

6. Apart from the profitability – risk – trade-off, another important ingredient of

the theory of working capital management is determining the financing mix.

Financing mix refers to the proportion of current assets that would be financed

by current liabilities and by long-term resources.

Principles Of Working Capital Management /Policy:

64

1. Principle of risk variation:-

Risk here refers to the inability of a firm to meet its

obligation as and when they become due payment. Larger investment in current assets

with less dependence on short term borrowings increase liquidity, reduces dependence

on short term borrowings increases liquidity, reduces risk and thereby decrease the

opportunity for gain or loss. On the other hand less investment in current assets with

dependence on short term borrowings, reduce liquidity and increase profitability.

In other words, there is a definite inverse relationship between the degree of 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 the management should

be to establish a suitable tradeoff between profitability and risk.

2. Principle of cost of capital:-

The various sources of raising working capital finance

have different cost of capital and degree of risk involved. Generally, higher 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:-

This principle is concerned with planning the total

investment 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.

65

PRINCIPLES OF WORKING CAPITAL

MANAGEMENT

Principle of Risk Variatio

n

Principle of

Cost of Capital

Principle of

Equity Position

Principle of Maturity of

Payment

Every rupee invested in current 4assets should contribute to net worth of the firm. The

level of current assets may be measured with the help of two ratios:

I. Current assets as a percentage of total assets.

II. Current assets as a percentage of total sales.

While deciding about the composition of current assets, the financial manager may

consider the relevant industrial average’s.

4. Principle of maturity of payment:-

This principle is concerned with planning the

sources of finance for working capital. According to this principle, 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 inability to meet its

obligations in time.

Forecasting / Estimation Of Working Capital Requirements:

“Working capital is the life blood and controlling nerve centre of a business.” No

business can be successfully run without an adequate amount of working capital. To

avoid the shortage of working capital at once, an estimate of working capital

requirements should be made in advance so that arrangement can be made to procure

adequate working capital.

Methods of forecasting working capital requirements-

The following methods are usually followed in forecasting working capital

requirements of a firm:

1. Percentage of sales method

2. Regression analysis method (average relationship between sales and working

capital)

3. Cash forecasting method

66

1. Percentage of sales method:-

This method of estimating working capital requirements

is based on the assumption that the level of working capital for any firm is directly

related to its sales value. If past experience indicates a stable relationship between the

amount of sales and working capital, then this basis may be used to determine the

requirements of working capital for future period. If sales for the year 2007 amounted

to ₨ 30, 00,000 and working capital required as ₨ 6, 00,000; the requirement of

working capital for the year 2008 on an estimated sales of ₨ 40, 00,000 shall be ₨

8,00,000; i.e. 20% of ₨ 40,00,000. The individual items of current assets and current

liabilities can also be estimated on the basis of the past experience as a percentage of

sales. This method is simple to understand and easy to operate but it cannot be applied

in all cases because the direct relationship between sales and working capital may not

be estimated.

Example- the following information has been provided by a company for the year

ended 30.6.2008.

Liabilities ₨ Assets ₨

Equity share capital

8% debenture

Reserve and surplus

Long term loan

Sundry creditors

2,00,000

1,00,000

50,000

50,000

80,000

4,80,000

Fixed assets less depreciation

Inventories

Sundry debtors

Cash and bank

3,00,000

1,00,000

70,000

10,000

4,80,000

Sales for the ended 30.6.2008 amounted to ₨ 10,00,000 and it is estimated that the

same will amount to ₨ 12,00,000 for the year 2008-09.

You are required to estimate the working capital requirements for the year 2008-09

assuming a linear relationship between sales and working capital.

Solution- 67

Estimating of working capital requirements

Actual

2007-08

(₨)

%age to sales

2007-08

Estimate

2008-09

(₨)

Sales 10,00,000 100 12,00,000

Current assets:

Inventories

Sundry debtors

Cash and bank

Total current assets (CA)

1,00,000

70,000

10,000

1,80,000

10

7

1

18

1,20,000

84,000

12,000

2,16,000

Current liabilities:

Sundry creditors

Total current liabilities (CL)

80,000

80,000

8

8

96,000

96,000

Working capital (CA-CL) 1,00,000 10 1,20,000

2. Regression analysis method (average relationship between sales and working

capital):-

This method of forecasting working capital requirements is based upon

the statistical technique of estimating or predicting the unknown value of a dependent

variable from the known value of an independent variable. It is the measure of the

average relationship between two or more variables, i.e.; sales and working capital, in

terms of the original units of data.

The relationship between sales and working capital is represented by equation:

Where, y = working capital (dependent variable)

a = intercept of the least square

68

y = a + bx

b = slope of the regression line

x = sales (independent variables)

For determining the value ‘a’ and ‘b’ two normal equations are used which can be

solved simultaneously:

Example- The sales and working capital figures of Suvidha ltd. for a period of 5 years

are given as follows:

Year Sales

(in lakhs)

Working capital

(in lakhs)

2003-04

2004-05

2005-06

2006-07

2007-08

60

80

120

130

160

12

15

20

21

23

You are required to forecast the working capital requirements of the company for the

year 2008-09 taking the estimated sales of ₨ 200 lakhs.

Solution-

The relationship between sales and working capital can be represented by:

y = a + bx

Year Sales Working Xy x2

69

∑y = na + b∑x

∑xy = a∑x + b∑x2

(x) capital (y)

2003-04

2004-05

2005-06

2006-07

2007-08

60

80

120

130

160

12

15

20

21

23

720

1200

2400

2730

3680

3600

6400

14400

16900

25600

n = 5 ∑x =550 ∑y = 91 ∑xy = 10730 ∑x2 = 66900

∑y = na + b∑x

∑xy = a∑x + b∑x2

Putting the values in the above equations:

91 = 5a + 550b (1)

10730 = 550a + 66900b (2)

Multiplying equation (1) with 110, we get:

10010 = 550a + 60500b (3)

Subtracting equation (3) equation (2)

720 = 0 + 6400b

b = 0.1125

Putting the value of b in equation (1)

91 = 5a + 550 * 0.1125

91 = 5a + 61.875

5a = 29.125

a = 5.825

Now, putting the value of ‘a’ and ‘b’ in the equation y = a + bx (where y and x are

estimated working capital and estimated sales respectively)

y = a + bx

y = 5.825 + 0.1125 * 200

y = 27.825

70

Thus, when estimated sales for 2008-09 are ₨ 200 lakhs, the amount of estimated

working capital shall be ₨ 27.825 lakhs.

3. Cash forecasting method:-

This method of estimating working capital

requirements involves forecasting of cash receipts and disbursements during a future

period of time. Cash forecast will include all possible sources from which cash will be

received and the channels in which payments are to be made so that a consolidated cash

position is determined.

This method is similar to the preparation of a cash budget. The excess of receipts over

payments represents surplus of cash and the excess of payments over receipts causes

deficit of cash or the amount of working capital required. The following example

explains the cash forecasting method of estimating working capital requirements.

71

Examples- Texas manufacturing company Ltd. is to start production on 1 January

2009. The prime cost of a unit is expected to be ₨ 40 out of which ₨ 16 is for

materials and ₨ 24 for labor. In addition, variable expense per unit are expected to

be ₨ 8 and fixed expense per month ₨ 30000. Payment for material is to be made

in the month following the purchases. One third of sales will be for cash and the rest

on credit for settlement in the following month. Expense are payable in the month

in which they are incurred. The selling price is fixed at ₨ 80 per unit.

The numbers of units manufacturing and sold are expected to be as under:

January 900

February 1200

March 1800

April 2100

May 2100

June 2400

Draw up a statement showing requirements of working capital from month to month,

ignoring the question of stocks.

Statement Showing Requirement Of Working Capital

Jan.

₨

Feb.

₨

March

₨

April

₨

May

₨

June

₨

72

Payments:

Materials

Wages

Fixed expenses

Variable expenses

Receipts:

Cash sales

Debtors

Working capital required

(payments-receipts)

Surplus

Cumulative

Requirements of working

capital:

Surplus working capital

-

21600

30000

7200

58800

24000

-

24000

34800

-

34800

14400

28800

30000

9600

82800

32000

48000

80000

2800

-

37600

19200

43200

30000

14400

106800

48000

64000

112000

-

5200

32400

28800

50400

30000

16800

126000

56000

96000

152000

-

26000

6400

33600

50400

30000

16800

130800

56000

112000

168000

-

37200

-

30800

33600

57600

30000

19200

140400

64000

112000

176000

-

35600

-

66400

Working note:

As payment for material is made in the month following the purchase, there is no

payment for material in January. In February, material payment is calculated as 900

* 16 = ₨14400 and in the same manner for other months.

Cash sales are calculated as:

For January 900 ‘80’1/3 = ₨24000 and in the same manner for other months.

Receipts from debtors are calculated as:

For Jan. – Nil because cash from debtors is collected in the month following the

sales.

For Feb. – 900’80’2/3 = ₨ 48000

For March – 1200’80’2/3 = ₨ 64000, and so on.

73

Factors requiring consideration while estimating working capital:

The estimating of working capital requirement is not an easy task and large numbers of

factors have to be considered before starting this exercise. For a manufacturing

organization, the following factors have to be taken into consideration while making an

estimate of working capital requirements:

Factors to be considered-

• Total costs incurred on materials, wages and overheads

• The length of time for which raw materials remain in stores before they are issued

to production.

• The length of the production cycle or WIP, i.e., the time taken for conversion of

RM into FG.

• The length of the Sales Cycle during which FG are to be kept waiting for sales.

• The average period of credit allowed to customers.

• The amount of cash required to pay day-to-day expenses of the business.

• The amount of cash required for advance payments if any.

• The average period of credit to be allowed by suppliers.

• Time – lag in the payment of wages and other overheads

• The average amount of advance received, if any

From the total amount blocked in current assets estimated on the basis of first seven

item of given above, the total of the current liabilities, i.e., the last three items, is

deducted to find out the requirements of working capital.

In case of purely trading concerns, points 1, 2 and 3 would not arise but all other factors

from points 4 to 10 are to be taken into consideration.

In other to provide for contingencies, some extra amount generally calculated as a fixed

percentage of the working capital may be added as a margin of safety.

Suggested proformas for estimation of working capital requirements are given as

below:

74

Proforma - Working Captial Estimates:

1. Trading Concern-

2. Manufacturing concern –

75

STATEMENT OF WORKING CAPITAL REQUIREMENTS

Amount (Rs.)

Current Assets(i) Cash ----(ii) Receivables ( For…..Month’s Sales)---- ----(iii) Stocks ( For……Month’s Sales)----- ----(iv)Advance Payments if any ----Less : Current Liabilities(i) Creditors (For….. Month’s Purchases)- ----(ii) Lag in payment of expenses -----_WORKING CAPITAL ( CA – CL ) xxxAdd : Provision / Margin for Contingencies -----

NET WORKING CAPITAL REQUIRED XXX

STATEMENT OF WORKING CAPITAL REQUIREMENTS

Amount (Rs.)

Current Assets(i) Cash ----(ii) Receivables ( For…..Month’s Sales)---- ----(iii) Stocks ( For……Month’s Sales)----- ----(iv)Advance Payments if any ----Less : Current Liabilities(i) Creditors (For….. Month’s Purchases)- ----(ii) Lag in payment of expenses -----_WORKING CAPITAL ( CA – CL ) xxxAdd : Provision / Margin for Contingencies -----

NET WORKING CAPITAL REQUIRED XXX

3. Columnar form:

An alternative proforma for estimating of working capital

requirements in columnar form given below:

76

STATEMENT OF WORKING CAPITAL REQUIREMENTSAmount (Rs.)

Current Assets(i) Stock of R M( for ….month’s consumption) -----(ii)Work-in-progress (for…months) (a) Raw Materials ----- (b) Direct Labour ----- (c) Overheads -----(iii) Stock of Finished Goods ( for …month’s sales) (a) Raw Materials ----- (b) Direct Labour ----- (c) Overheads -----(iv) Sundry Debtors ( for …month’s sales) (a) Raw Materials ----- (b) Direct Labour ----- (c) Overheads -----(v) Payments in Advance (if any) -----(iv) Balance of Cash for daily expenses -----(vii)Any other item -----

Less : Current Liabilities(i) Creditors (For….. Month’s Purchases) -----(ii) Lag in payment of expenses -----(iii) Any other -----WORKING CAPITAL ( CA – CL )xxxxAdd : Provision / Margin for Contingencies -----

NET WORKING CAPITAL REQUIRED XXX

77

STATEMENT OF WORKING CAPITAL REQUIREMENTS

Current Assets Period Total Raw Work In Finished Debtors Cash& Week Material Progress Goods Bank Rs. Rs. Rs. Rs. Rs. Rs.1. Raw materials:In stockIn work in progressIn finished goodsCredit to debtorsDirect labor:In work in progressIn finished goodsCredit to debtorsOverheads:In work in progressIn finished goodsCredit to debtorsCash and bank

Total current assets

B. Current liabilities Period Total For Raw For For Week Material Wages Overheads Rs. Rs. Rs. Rs.

5. Credit by suppliers6. Lag in payment of wages7. Overheads (B) Total current liabilities

Working capital Requirements ( A – B )

WORKING CAPITAL FINANCING POLICIES:-

A growing firm can be thought of as having a total assets requirement consisting of the

current assets and long term assets and long term assets for its efficient operations. The

total assets requirement may exhibit change over time for many reasons, such as

general growth trend, seasonal variations around the trend, and unpredictable day to day

and month to month fluctuations. These fluctuations are depicted in diagram. It seldom

happens that net working capital goes to zero. As discussed earlier, companies have

some permanent working capital, which is the net working capital on hand at the low

point of the business cycle. Then, as sales increase, net working capital must be

increased, and this addition is the temporary part of net working capital. The manner in

which the permanent and temporary portions of net working capital are financed is

called as working capital financing policies. Broadly speaking, a company can follow

three approaches namely, maturity matching approach, aggressive approach, and

conservative approach. We briefly discuss each of these as follows:

Seasonal Variation

Rupees

Total assets

Requirement

General growth in

Long term assets &

Permanent &current assets

Time

1. Maturity Matching / Self-Liquidating Approach:-

78

Maturity matching means to match asset and liability maturities. As shown in panel ‘a’

of figure the maturity matching approach focuses on matching maturity of assets and

liability. This strategy minimizes the risk that the firm will be unable to pay off its

maturing obligations. To illustrate, suppose a company arises a one year loan to and

uses the funds obtained to build and equip a plant. Obviously, cash flow from the plant

(that is profits and depreciation) would not be enough to pay off the loan at the end of

only one year, therefore the firm would be force to renew the loan. However, if the

lender refuses to renew the loan, the company would be in trouble. However, if the

plant had been financed with long term debt, the required loan payments would have

been better matched with cash flows from the plant, and the renewal would not be

needed.

As a limiting case, the company could try to match exactly the maturity of all of its

assets and liabilities. For example, inventory expected to be sold in 30 days could be

financed with a 30 days bank loan; and a 20 year building could be financed with a 20

year mortgage and so on. In simple words, the source of finance use has same maturity

as the life of the assets for which the financing has been done. The policy looks quite

useful as it minimizes the wastage of funds. However, the risk that this policy entails is

that if the cash from the assets do not take place on time, the firm would not be able to

pay back and forced into renewal situation. The cost of funds for the renewal case could

be unattractive, and might it the profit of the company.

79

2. Aggressive Approach:-

Here, as shown in panel ‘b’ of figure, a relatively

aggressive company finances all of its long term assets and a part of permanent net

working capital with long term assets and rest permanent working capital with short

term debt. The term ‘relatively’ has been used because there can be different degrees of

aggressiveness. For example, the dashed line in panel ‘b’ could have been drawn below

the line showing long term assets, indicating that all of the permanent net working

capital even some part of long term assets have been financed with short term debt; this

would be a highly aggressive position, and the firm would be very much exposed to

dangers from rising interest rates as well as to loan renewal problems. However,

because short term debt is generally cheaper than long term debt, some companies are

ready to sacrifice safety for the chance of better profit.

80

3. Conservative Approach:-

As shown in panel ‘c’ of figure the dashed line is

above the line showing permanent net working capital, meaning that long term sources

have been employed to finance all permanent assets and also to meet some of the

temporary requirements. The peak requirements could be met out of small amount of

short term debt; but it also finances a part of the seasonal needs by putting the money in

marketable securities. The humps above the dashed line represent short term financing,

while the troughs below the dashed line represent investing in marketable securities.

This approach, as the name suggests, is a very safe, conservative working capital

financing policy as there is no risk of going out of liquidity. However, since long term

debt is normally costlier, investments in cash and marketable securities are zero net

present value investments at best, the safety comes at the cost of lower profits.

81

Three alternative working capital investment policies

82

• Policy C represents conservative approach

• Policy A represents aggressive approach

• Policy B represents a moderate approach

Method Of Data Collection

83

Sal es ($)

Current Assets ($)

Po

licy C

Po

licy A

Po

licy B

The collection is the process of enumeration together with the proper recording

of results. The success of an enquiry is based up on the proper collection of data.

The data may be classified as primary and secondary.

Primary Data

Primary data are those, which are collected for the first time, and they are

original in character. This study covers the enquiry regarding the inventory data.

Under this research the data collected personally.

Secondary Data

Secondary data are those that are already collected by someone for some purpose

and are available for the present study. The covers various sources of secondary

data including published and unpublished sources like news papers, published

books, magazines etc…,

Limitations Of The Study

Working capital management is an effective tool for management control. The

following is the limitation which I observed in “TI CYCLES OF INDIA LIMITED”.

Since the report is exclusively made from secondary source of data, the direct

observation is literally impossible.

There was no scope for gathering sufficient financial information as it is

confidential.

During the time allotted for the project the internal audit is going on and they

84

could not spare much time for the detailed discussion on the subject.

They themselves have not maintained the data so accurately but seem to be

sufficient for the project.

These limitations were mainly due to the organizational setup of the company. The

company’s Corporate Office is located at Parrys, where all the data are available; but it

is accessible to me.

• Conclusion:

Any change in the working capital will have an effect on a business's cash flows. A

positive change in working capital indicates that the business has paid out cash, for

example in purchasing or converting inventory, paying creditors etc. Hence, an increase

in working capital will have a negative effect on the business's cash holding. However,

a negative change in working capital indicates lower funds to pay off short term

liabilities (current liabilities), which may have bad repercussions to the future of the

company.

WORKING CAPITAL QUESTIONNAIRE

This questionnaire is to be used entirely for the purpose of conducting a study. The

information provided by you shall be kept confident. I therefore shall appreciate your

cooperation for being frank an expressive in your answers.

Name: - Age: - Education:

Income level: - Occupation: Contact No:

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1. To financial analysts, "working capital" means the same thing as __________.

o Total Assets

o Fixed assets

o Current assets

o Current assets minus current liabilities

2. The amount of current assets required to meet a firm's long-term minimum needs is

referred to as __________ working capital.

o Permanent

o Temporary

o Net

o Gross

3. The amount of current assets that varies with seasonal requirements is referred to as

__________ working capital.

o Permanent

o Temporary

o Net

o Gross

4. To financial analysts, "net working capital" means the same thing as __________.

o Total assets

o Fixed assets

o Current assets

o Current assets minus current liabilities

5. Companies may adopt an aggressive or a conservative working capital policy. An

aggressive policy means that a company

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o Holds high levels of cash and inventories

o Has a low level of flexibility

o Faces a low level of risk

o Expects a lower level of profitability

6. Given the following information, what is the cash conversion cycle in days of PP

plc?

£000

Total sales 276

Costs of goods sold 200

Purchases 120

Stocks 37

Debtors 43

Creditors 15

o 78.8 days

o 125.6 days

o 60.2 days

o 170.0 days

7. Which of the following would be consistent with a hedging (maturity matching)

approach to financing working capital?

o Financing short term needs with short term funds

o Financing short term needs with long term debt

o Financing seasonal needs with long term funds

o Financing some long term needs with short term funds

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8. Having defined working capital as current assets, it can be further classified

according to __________.

o Financing method and time

o Rate of return and financing method

o Time and rate of return

o Components and time

9. Varies inversely with profitability.

o Liquidity

o Risk

o Blue

o False

10. Ideally, which of the following types of assets should be financed with long-term

financing?

o Fixed assets only

o Fixed assets and temporary current assets

o Fixed assets and permanent current assets

o Temporary and permanent current assets.

BIBLOGRAHY

BOOK NAME AUTHOR NAME

FINANCIAL MANAGEMENT Shashi K. Gupta & R.K. Sharma

FINANCIAL MANAGEMENT I.M. Pandey

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ACCOUNTING FOR MANAGEMENT T. Ramachandran

MANAGEMENT ACCOUNTING R.S.N. Pillai & Bagavathi

FINANCIAL MANAGEMENT Navdeep Aggerwal

Websites Search-

• www.wiki.com

• www.google.com

• www.hcl.com

• www.hclcdc.in

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