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Chapter 1 Introduction
WORKING CAPITAL MANAGEMENT
The success of business, among other things depends upon the manner in which itscapital is managed in the dynamic business setting, the composition of working capital
mismanaged, in the dynamic business setting, the difference between the current assets
and current liabilities. Constantly changes in relation to the level of activity of the
business concern and rates at which the current assets of current liabilities keep
changing in relation to each other and other things are significant factors also
continuous review and direction of the financial manager.
It is the task of the financial maintain an appropriate level of working capital that is
enough current assets to pay off current liabilities neither excess nor less because
excessive working capital leads to interruption in the smooth functioning of the business
concern.
There are numerous instances in the history of business world where inadequacy of
working capital has led to business failures when a firm finds it difficult to meetings day
to day.
Operating expenses essential out lays may have to be postponed for want of funds,
operating plans will go out of gear & enterprise objectives on investment slumps the
suppliers & creditors of the firm may have to wait longer to raise their dues & will
hesitate to extend further credit to the firm.
Thus efficient management of working capital in an important prerequisite for successful
working of a business concern it reduces the chances of business failure generates a
felling of security and confidence in the minds of personnel in the organization it
assurance solvency of steady of the organization.
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Chapter 2 Research Methodology
Rationale for selecting the topic:
Study is important from the following point of view-
1. The project is helpful in knowing the companies position of funds maintenance and
setting the standards for working capital inventory levels, current ratio level, quick ratio,
current amount turnover level & web torn turnover levels.
2. This project is helpful to the managements for expanding the dualism & the project
viability & present availability of funds.
3. This project is also useful as it companies the present year data with the previous
year data and there by it show the trend analysis, i.e. increasing fund or decreasing
fund.
4. The project is done entirely as a whole entirely. It will give overall view of the
organization and it is useful in further expansion decision to be taken by management.
Need & Importance Of the study
1.Their projects is helpful in knowing the companies position of funds maintenance and
setting the standards for working capital inventory levels, current ratio level, quick ratio,
current amount turnover level & web torn turnover levels.
2. This project is helpful to the managements for expanding the dualism & the project
viability & present availability of funds.
3. This project is also useful as it companies the present year data with the previous
year data and there by it show the trend analysis, i.e. increasing fund or decreasing
fund.
4. The project is done entirely as a whole entirely. It will give overall view of the
organization and it is useful in further expansion decision to be taken by management.
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Objectives of the Study:
The objective of the study is
1.Their projects is helpful in knowing the companies position of funds maintenance and
setting the standards for working capital inventory levels, current ratio level, quick ratio,
current amount turnover level & web torn turnover levels.
2. This project is helpful to the managements for expanding the dualism & the project
viability & present availability of funds.
3. This project is also useful as it companies the present year data with the previous
year data and there by it show the trend analysis, i.e. increasing fund or decreasing
fund.
4. The project is done entirely as a whole entirely. It will give overall view of the
organization and it is useful in further expansion decision to be taken by management.
Hypothesis
1) The company has a good liquidity position and does not delay its commitment in case
of both its creditors and debtors.
2) The company being mostly dependent on the working capital facilities, it is
maintaining very good relationship with their banks and their working capital
management is well balanced.
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Research Methodology:
Secondary Data :
The study of the project is purely depends on secondary data.
Secondary data was collected various reports / annual reports, documents charts,
management information systems, etc in PRAGA. And also collected various
magazines, books, newspapers and internet.
In marking observations identifying problems and suggesting certain remedies such
emphasis was given on the basis of opinions gathered during the personal discussions
and with the personal experience gained during the academic study of M.B.A course.
Limitation Of The Study:
The scope is limited to the Praga tools Ltd, Hyderabad company .
The scope of the study is limited to collecting the financial data published in the
annual reports of the company with reference to the objectives stated above and an
analysis of the data with a view to suggest favorable solution to various problemsrelated to financial performance.
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Chapter 3 Machine Tools Industry An Overview
India ranks nineteenth in production and sixteenth in consumption of machine tools in
the world. The Indian machine tool industry averaged more than 35 percent growth in2004-05. Imports exceeded production in the year 2004 with us$356 million worth
machine tools being imported while the production was only us$225 million. Machine
tools from I percent of Indies engineering industry and contributes 0.3 Percent of total
machinery exports.
The Indian machine tool industry currently consists about 450 manufacturing units of
which approximately 33 percent (150 units) Fall under the organized category. Further
ten Major Indian companies constitute also most 70 percent of the total production. The
government Owned Hindustan Machine tools Limited (HMT) alone accounts for Nearly
32% of Machine tools Manufactured in India Approximately 75% of the Indian Machine
tool producers have received the coveted. 150 certification while the large organized
players cater to Indians Heavy and Medium industries, the small scale sectors meets
the demand of ancillary and other units
World wide the total modify locations are 3,336. First highest modify location country isUnited States in 1333 lowest Modify location countries are Belarus, Bosnia and
Merzegovina, Bulgaria, Croatia, Malta, Russian Federation in only one Modify Location.
51 modify location are located in India. Modern Machine Tool in Indias leading
Industrial Magazine on machine tools and Ancillary industries. Published in affectation
with the countrys apex Body for the machine tools industry. Indian machine tool
Manufactures association (IMMA)
With a healthy readership base of over 2 lakhs, this Premium quarterly magazine is
regularly referred to by the key decision makers in the machine tool, cutting and other
manufacturing Industries that include CEOs. Directors, senior managers, as well as
engineers and shop. Floor technical personal apart from students. It serves as the
bench mark and with word it this ever growing sector of Indian industry.
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In addition to manufactures, this publication also reaches out to exporters, dealers,
distributors, R&D personnel Educational institution, consultants, industry associations
and trade commissions almost every entry in the industry.
Modern machine tools provide an intelligent balanced and cohesive insight into the
machine tools and ancillary industries in India in terms of the death editorial content. It
includes the latest trends and technologies highly useful technical articles and case
studies. Business strategies views and vision of industry leaders and one of the largest
ranges of machines tools/cuttings tools. This apart, there is exhaustive coverage of the
current national and international news, upcoming projects, tenders, events and much
more that help the readers to effectively manage their business in a facilitator and guide
for this burgeoning industry.
Modern machine tools strives to facilitate effective interaction among several fatuities of
the machine tool, cutting and user industries by enabling them in reaching out to their
prospects buyers and sellers through better trade contacts and more business
opportunities.Machine tool industry has undergone a radical shift in its paradigm
thinking, the Indian machine tool industry is now recognized as a provider of low-cost
high quality learn manufacturing solutions. The industry resiliently supports all its users
to enhance productivity as well as improve competitiveness, for the betterment of the
final customer. Being an integral sector, growth of the machine tool industry has an
immense bearing on the entire economy, especially Indias manufacturing industry. And
is even more crucial for development of the countrys strategic segments such as
Defense, railways, space and atomic energy.
World over too, industrialized-advanced countries have created market inches on the
back of a well- developed and supportive machine tool sector. In India as well,
indigenous machine tools have the highest impact on capital output ratios. Machine tool
consumption of Rs. 1,000 Crore truly supports the advancement of the countrys
engineering sector, output of which is estimated to be worth over Rs. 1,50,000 crore.
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2.2 Manufacturing range:
The Indian machine tool industry manufactures almost the complete range of metal
cutting and metal forming machine tools complete range of metal-cutting and metal-
forming machine tools.
Customized in nature, the products from the Indian basket comprise and conventional
machine tools as well as computer numerically controlled (CNC) machines. There are
other variants offered by Indian manufactures too, including special purpose machines,
robotcsrobotics, handling systems and TPM friendly machines.
Efforts within the industry, are now on to better the features of CNC machines, and
provide further value additions at lower costs, to meet specific requirements of users.
Based on the perception of the current trends, and emerging demands, CNC segment
could be the driver of growth for the machine tool industry in India.
2.3 Current trends :
A slowdown in the Indian economy since mid-1999 had its fallout on prospects of Indian
machine tool manufactures. The Indian machine tool industry is besieged by lack of
adequate business opportunities that has stemmed from sluggish demand in the home
market of all user industries.
Output by domestic metal working machine tool manufacturers in 2001 calendar year
declined by 14 pr cent to Rs.5, 137 million marking the fourth yeast of decline, since
1997, for the Indian machine tool industry. Much of this fall was due to subdued
investment by all the major users segments of machine tools, except the Defense
industry, primarily because of a higher capital expenditure outlay.
While decrease in domestic production was dormant in case of conventional
metalworking machine tools computer numerically conventional metalworking machine
tools, computer numerically controlled (CNC) machine tool manufacturers too suffered,
although marginally. Lathes, machining centers, special purpose machines, and grinding
machines were among the machine tools that sustained much of the order inflow during
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2001.even though these segments registered decline, in comparison with the previous
corresponding year.
2.4 Export Performance:
In view of an imminent slowdown in the Indian economy, most Indian machine tool
manufactures focused on potential overseas markets for business opportunities.
Sustenance on Indian market alone did not look feasible enough.
Further, there has off late been a perceptible change in the image of the made in India
brand in overseas markets particularly true for Indian-built machine tools. Enhanced
features, competitive pricing, and marketing focus has increased demand for Indian
made machine tools in overseas markets, particularly in Europe, United states, and
East-Asian regions. And this is what Indian machine tool manufactures are hoping to
leverage so as to post an optimistic export turnover in the next few years.
Indian-made machine tools are currently exported to over 50 countries: major ones
being United states, Italy, Brazil. Germany and the middle East. Lathes and automats,
presses, electro-discharge machines, and machining centers formed the bulk of export
orders for Indian manufactures. These machines from the Indian basket are generally
favored in overseas markets primarily due to their cost-competitiveness, as compared to
that available elsewhere compared to those available elsewhere.
This vision of the Indian machine tool industry is now to step out and establish a relative
presence in, other potential markets. World-over, market leaders have been those who
have looked to increase their market presence beyond their national frontiers.
2.5 Industry Structure
Machine tool industry in India comprises about 450 manufactures with 150 units in the
organized sector. Almost 70 percent of production in India is contributed by ten major
companies of this industry. And over three-quarters of total machine tool production in
the country comes out of ISO certified companies. Many machine tool manufacturers
have also obtained CE marking certification, in keeping with requirements of the
European markets. The industry has an installed capacity of over Rs. 10,000 million and
employs a workforce totaling 65,000 skilled and unskilled personnel.
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Machine tool industry in India is scatted all over the country. The hub of manufacturing
activities, however, is concentrated in places like Mumbai and Pune in Maharashtra;
Batala, Jullunder and Ludhiana in Panjab; Ahmedabad, Baoada, Jamnagar, Rajkot and
Surendranagar in Gujarat, Combatore and Chennai (Madras) in Tamilandu: some parts
in East India; and Bangalore in Karnataka.
Bangalore is considered as the hub for the Indian machine tool industry. The city, for
instance, house HMT machines Tools limited, a company that manufactures nearly 32
percent of the total machine tool industrys output.
2.6 User Industries Services
The industrys prospects mainly depend on growth of engineering industries. The user
sectors of machine tools are the automotive, automobile and ancillaries, Railways,
Defense, Agriculture, steel, Fertilizers, Electrical, Electronics, Telecommunication,
textile machinery, ball & roller bearings, industrial values, power-driven pumps, multi-
product engineering companies, earth moving machinery, compressors and consumer
durable like washing machines, refrigerators, television sets, watches, dish-washers,
vacuum cleaners, air conditioners, etc.
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CHAPTER 4 ORGANISATION PROFILE
3.1 INTRODUCTION
Praga is once of the leading machine tool manufacturing units in India established in theyear 1943, Pragas production are well known in the field of machine tools the company
in organized in four divisions via the machine tools forge foundry and CNC division
which pulsated with the activities of 697 employees turning out a wide range of
production the four divisions equipped with the modern facilities for design development
of manufacture of machine tools, are manned by qualified personnel with proven record
of technical knowledge and exquisite craft smashup acquitted over a period of year.
Praga is proud of its diverse of machine tools the cutler& tools venders milling machines
copy lathes thread rolling machines & Praga CNC machines which keep pace with the
ever changing technology in addition the company also manufactures a wide of
industrial forgings for railway automotive & ordnance applications.
Pragas wriest investment has been in its excellent collaboration with world famous
names like Jones & shipman of UK for surface grinding and cutter of tool vendors gamin
of France for milling machines scoffers of grace for thread rolling machines Georgefinisher of Switzerland for coping lather Mitsubishi Heavy industries of Japan for
machining centers of Kayo spiky of Japan for CNC lather the collaboration have
culminated in Praga producing machine tools of the highest quality conforming to
international standards by virtue of their dependability prevision engineering & proven.
PROFILE OF PRAGA
The Praga Tools is one of the oldest, machine Tools industries in India and has entire its
golden jubilee year in 1993-94. The company has incorporated has the joint stock
company is 1943 has a private company with objective of manufacturing, instruments
with the Technical assistance of a few Czechoslovakia Engineers. The company was
incorporated in Many 1943 as a public limited company in private sector. The name
PRAGA symbolizes the technical co-operation extended in the initial phase by some
Czechoslovakian engineers who suggested the naming of the company as PRAGA after
their capital city PRAGUE (PRAGA).
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In March 1995, the Government of India acquired the controlling interest in the company
by acquiring majority shares and placed the administrative control under the ministry of
commerce and industry from May 1995 to December 1963. The managing agents M/S
united industrial corporation limited initially managed the company. Administrative
control of the company has been transferred from the defense minister to the
department of public enterprise under ministry of industry on the 25 th of April 1986.
Presently the company enjoys the status of being a subsidiary of HMT LTD. Bangalore
when a paid up capital of the company was transferred in its name from the
government.
The company has four manufacturing nits located with in the twin cities of Hyderabad at
Kavadiguda at Secunderabad it manufactures a wide range of machine Tools,
accessories and defiance items. A unit of forge and foundry divisions is located at
Kukatpally Hyderabad where manufactures castings and forgings are.
A CNC project was established with advance technology like numerical control
machines like automobiles CNC lathes, VNC mailing machines etc are manufactures
with the qualified personnels in the fields of engineering of technology.
The company has manpower of 2000 employees turning out wide range of products.
The company has organized into four divisions viz., the machine Tools division (MT-I),
machine Tools II (MT-II), forge and foundry division, and the CNC division.
Performance Praga machine tools ate penetrating large segments of foreign markets
including UK CIC Canada, Bulgaria, Indonesia, Germany, Japan.
PRAGA is even mote proud of the fact that it has contributed to the development of thee
machine tools industry in the development of the machine tools industry in the country
and the creation of a vast band of skilled technicians thus Praga to day in name of
techno, within the machine tool industry.
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3.2 CORPORATE VISION OF PRAGA TOOL
VISION STATEMENT:
Praga tools to be the provider of choice for total machine tools solution to customers
and a significant provider of service in Indian industry of oversees too the strong market
position in to be sustained by the provision of integrated products and services and the
aggressive marketing of machine tool knowledge expensive and support services.
COMPANY STATRATEGY:
1. To maintain good customer relation
2. Providing after seller service
3. Increasing the book order position
4. To maintain good quality and loyalty of the customers on their products
5. Maintain better research and development activities
6. Relation to company and other customer services through conducting the
product exhibition within the company preview
QUALITY VALUE:
Commitment of the management of the quality at all stager.
To create quality culture among all employees to maintain quality leadership in all
products.
To maintain quality leadership in all products and services.
Total customer satisfaction through quality goods and services.
Total quality through performance leadership.
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3.3 MANUFACTURING FACILITIES
The company has two manufacturing units the order manufacturing unit is located at
Kavadiguda in Secunderabad, the heart of the city these unit houses the machine toils
division and the corporate head office and accompanies and area of slightly over 1
acres the company.
Has its second manufacturing has is at balanagar in Hyderabad, about 5 to 6 kilometers
from Hyderabad, airport the CNC division forge shop of foundry division are located in
the balanagar unit the total and available with the currently utilized by the CNC division
forge shop and foundry division leaving a surplus of nearly 100 acres.
3.4 PRODUCT RANGE:
The company has three manufacturing division viz., can pavilion forge shop and foundry
division.
MACHINE TOOLS DIVISION:
The major products manufactured by the company in its machine toll division are cutler
of fool grinders, milling machines, thread rotting machine, lather chuckn etc. There
products were developed with the technical assistance of the world-renowned machine
tool manufacture by entering into collaboration agreements with M/s. Escofier, SA,
France, M/s. F. Pratt and Co. and U.K. There machines enjoy good reputation in the
market.
FORCE DIVISION:
Railway Duplication
Auto dialer pants
Tractors links
Other carting
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BOUNDARY DIVISION:
Carting for companies machine tools:
The sophisticated machines like CNC machining center sideway, grinding machines,
universal grinding machines, jigs boring machine with coordinated system been added
at a cost of Rs. 1,107.05 lacks.
PRAGAS VALUES:
Underlying our minion in a set of core corporate valued which deliver praga priorities.
This set of values creates an overall framework for determining our derived future and
developing plans to achieve it.
We take advantage of existing synergies and foreseeing higher level of competitiveness.
Safety in the priority value for all aspects of our business.
SWOT Analysis:
STRENGTHS:
Proven products and brand image.
High brand loyalty of customer.
High market shares in few of the products categories.
Skilled work force.
ISO 9001 accredited company.
WEEKNESS:
Limited product gage.
Low volume production.
Out dead technology.
Inadequacy of working capital.
Aberrance of MIS.
Board needs to be board bared and must include.
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Financial expensive.
Obralete machinery.
High man power cost.
Poor marketing plants.
OPPORTUNITIES:
Prospects of improved in auto and automotive sector.
Export potential for exports of machines.
Foreign and components(with up gradation)
THREATS:
Dwindling market for some of the products server.
Competition from imports of latest technology machines.
A threat from second hand machine imparts.
Shrinking resources of traditional customers, defense and railways.
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Chapter 5 Conceptual & Methodological
Frame Work
4.1 NATURE OF WORKING CAPITAL
Working capital management in concerned with the problem that arises in attempting to
manage the current assets current liabilities and the inter relationship the exist between
them the term current assets refers to those assets which in ordinary course of business
can be or will be turned into cash within one year without undergoing diminution in value
and without undergoing in value and without disrupting the operations of the firm.
The major current assets are cash marketable securities accounts receivable and
inventory, current liabilities those liabilities, which are intended at their inception to be
paid in the ordinary course of business with in a year current liabilities are amount
payable, bills payable bank overdraft and outstanding expenses.
4.2 DEFINITION OF WORKING CAPTIAL:
According to MY Khan and P.K Jain Working capital refers to manage the firm current
assets and current liabilities in such a way that a satisfactory level of working capital is
maintained.
According to the Shubin working capital is an amount of fun is necessary to cover the
cost of operating the enterprise.
Working capital management is concerned with the problems is that arise in attempting
to manage the current assets and the current liabilities and their inter relationship they
arise between them.
Current assets refer to those assets which to ordinary course of business can be or will
be turned into cash within one year without undergoing a diminution in value and without
disrupting the operations of the firm.
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The major current assets are cash marketable securities accounts receivable and their
inception to be paid in the ordinary course of business within a year out of Current
Assets or earnings of the concern. The basic Current Liabilities are Bill payables, Bank
Overdrafts and Outstanding expenses.
The goal of working capital managements is to manage the firms Current Assets. And
Current Liabilities in such a way that a satisfactory level of working capital is maintained.
Thus the current assets should be large enough to cover its current Liabilities in order to
ensure a reasonable margin of safety. Each of the current assts must be efficiently in
order to maintain the liquidity of the short term be managed efficiently in order to
maintain the liquidity of the short term sources of financing must be continuously
managed to ensure that they are obtained and used in a best possible way..Therefore
interaction between current assets and current liabilities in the main theme of working
capital Management.
The current assets should be large enough to cover is current liabilities in order to
ensure a reasonable margin of safety. The interaction between current assets and
current liabilities in therefore the main theme of the threat of working capital
management.
The two concepts of working capital are:
4.3 Methodological Framework
The data for the period 2001-2005 used in this study have been taken from primary and
secondary sources. The necessary primary data have been collected from corporate
office of the organization; secondary data have been collected from the financial
statements published in the report of the PRAGA TOOLS LTD.
Data was analyzed through various established techniques of working capital and
personal observation. Editing the data, clarification and tabulation of the financial data
collection from the above mentioned source have been done as per the requirements of
the study. Data has been analyzed using various comparative statements and working
capital ratios.
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The data is analyzed in the chapter-4 Analysis of Working Capital
PRAGA TOOLS LTD under the following head.
1. Trends in Net Working Capital
2. Working Capital Ratios
a) Current Ratios
b) Quick or Acid test Ratio
c) Current Assert Turnover Ratio
d) Current Asserts to Total Asserts Turnover Ratio
e) Working Capital Turnover Ratio
3. Cash Management
a) Percentage of Cash to Current Asserts
4. Receivables Management
a) Debtors Turnover Ratio
b) Debtors Collection Period
5. Inventory Management
a) Inventory to Total Current Asserts
b) Inventory Turnover Ratio
c) Inventory Holding Period in Days
4.4 NEED FOR WORKING CAPITAL:
Working capital is the amount of funds necessary to cover the cost of operating the
enterprise. Working capital in a going concern is revolving funds; it consists of cash
receipts from sales which are used to cover the cost of current operations.
The need of working capital arises because of time gaps in manufacturing and
marketing cycle of business operations. This time gap is due to time gaps
between Cash and purchase of Raw-Materials.
a) Purchase and production
b) Production and sales
c) Sales and Realization of cash.
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During these intervals, the company should have ready working or operating funds to
keep their business going. Thus every business concern should have sufficient liquidity
funds as its disposal to buy Raw-Materials, stores etc to pay wages to personnel and to
meet incidental expenses with the installed plant equipment, tools and other fixed
assets, the concerned would be able to produce finished goods by spending cash or
Raw Materials, intermediate goods Labor remuneration etc. The goods so produced ill
swell into inventories or stock soon, the stock will take the form of debtors or Bill
Receivable on maturity.
There is therefore, a need for working capital, because the production Sales and cash
payment and realization of cash are not instantaneous, the company needs cash to
purchase Raw material and to meet expenses as there may not be helps to meet future
agencies.
The stocks or Raw materials are kept in order to assure smooth production and protect
against the risk of Non availability of raw material. Similarly, stocks of finished goods
have to be carried to meet the demands of the customers on continuous basis and
sudden demand. Thus, an adequate amount of funds has to be invested in current
assets for smooth and uninterrupted. Production and sales process, which is refers to as
operating cycle or cash cycle. The operating cycle determines the need for working
capital.
The operating cycle represents the period during which investment of one unit of remain
blocked till recovery out of revenue, in other words, the operating cycle refers to the time
necessary to complete.
a) Conversion of cash into Raw Material.
b) Conversion of Raw Material into finished goods.
c) Conversion of finished goods into cash sales or credit sales.
d) Conversion to credit sales or receivable into cash.
Thus, it is said Management must know the length of time required to convert cash into
resource used by the firm, the resource into the resource used the firm the resource into
final product. The final product into receivable bank into cash.
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This is the operating cycle of an enterprise.
Thus, it is said Management must know the length of time required to convert cash into
resource used by the firm, the resource into the firm the resource into final product. The
final product into receivable bank into cash. This is the operating cycle of an enterprise.
The pattern of operating cycle depends upon the nature of the enterprise. The financial
institution may have a shorter cycle while trading concern has and extended one. The
usual operating cycle of manufacturing concern is shown. In real business situation, the
operating or cash flow cycle in not as simple and smooth going as the depicted above. A
going concern by nature undergoes the process of liquidity the besides, a circular flow
among working capital itself, all process of liquidity valued added to the product of the
firm.
Therefore, we can say that, working capital in needed not only for financing current
assets but also to meet various other requirements like payment of dividends, interest
etc. Therefore, it is recovery for a product financial manager to provide correct amount
of working capital at the time to provide for operating reach.
5.5 SCOPE OF WORKING CAPITAL MANAGEMENT
Since a firm has to maintain a sound working position and there should be optimum
investment in working capital, effective management involves manages of current
assets and current liability. Current asserts management involves management of
current assets like Cash.
Marketable Securities, Account Receivable, inventories etc. effective in order to
maintain liquidity of the firm. The process of current asserts management can be as
follow management of cash and Marketable Securities.
a) Management of cash and Marketable Securities.
b) Management of Cash.
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Current liability management is concerned with the management of curr3ent
liabilities like, trade Credit or Account Payable, Accruals etc. which represents
short term financial source and must be cautiously management to ensure that
they are obtained and used in the best way possible.
4.6 OBJECTIVES OF WORKING CAPITAL
The main if working capital management in to attain trade off between profitability and
risk. Here risk refers to the profitability that a firm will become technically involvement
that is unable to pay obligation promptly. Risk is commonly measured by using either
the amount of net working capital of the current ratio. Thus more the net working capital
the more liquidity is associated with increasing levels of risks.
To have higher profit the firm may have to sacrifice solvency that is take the risk of
technical insolvency and maintain relatively low level of current assets. When the firm
does so, its profitability would improve but greater risk of technical insolvency.
Thus, if a firm wants to increase profitability it must also increases its risk and if it want
to decrease risk, it must decrease profitability. Thus, working capital management
involves trade off between risk and profitability.
4.7 COMPONENTS OF WORKING CAPITAL
The main components of working capital are currents assets & currents liabilities.
A. CURRENT ASSETS:
Current assets comprised items that would get converted in to cash in short term, within
a year, through the business operations current asserts include.
Inventories including stock of raw material, work in progress, finished goods & factory
supplies. Packing, shipment material, office supplies etc
Loan & advances, other balances; include sundry debtors, bills receivables and others
including loans and advances, prepaid expenses etc.
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Marketable securities including government securities and semi government securities,
cash and bank balances.
B. CURRENT LIABILITIES:
Current liabilities are those which are expected to fall due of mature for payment in short
period of one year and they represent short term source of funds. They include:
C. SHORT TERM BORROWINGS:
Include bank borrowings other than those against own debentures and other mortgages,
trade creditors and other labializes sundry creditors, outstanding expenses and
advances received etc.
Provision for taxation, dividends and other current provisions.
4.8 GROSS WORKING CAPITAL:
Gross working capital in represented by the sum total of all current assets of the enter
price adequate funds have to be provided to sustain the movement of the row material
through the work in process to the finished goods stage and then to receivables and up
to realization of cash.
NET WORKING CAPITAL:
Net working capital in excess of current assets over current liabilities the concept of net
working capital highlights the character of serves from which the funds have been
obtained to support that position of current liabilities.
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NEED FOR WORKING CAPITALS
Business firms aim at maximizing the wealth of shareholders. In its endeavor to
maximize shareholders wealth a firm should earn sufficient return from its operation
earning a steady amount of profits required successfully sales activity. The firm has to
invest enough funds in current assets for the success of sales activity current assets are
needed because sales dont convert into cash instantaneously there is always an
operating cycle involved in the conversion of sales into cash.
PERMANENT AND TEMPORARY WORKING CAPITAL:
The above figure shows permanent level is fairly constant, while temporary working
capital is fluctuating some times increasing and some time decreasing in accordance
with seasonal demands, in the case an expanding firm the permanent working capital
may not be horizontal. This is because the demand for permanents current asserts
might be increasing or decreasing support a rising level of activity. In that the line should
be a rising one.
23
PRORIETORS
FUNDS
CREDITORS
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PERMANENT AND TEMPORARY WORKING CAPITAL.
Both kinds of working capital are necessary to facilitate the sale process through the
operation cycle. Temporary working capital is created is created to meet liquidity
requirements that are purely transient nature.
4.9 THE DANGERS OF EXCESSIVE WORKING CAPITAL
1. It results in unnecessary accumulation of inventories thus chances of inventory
mishandling waste theft and losses increases.
2. It is an indication of defective credit policy and slack collection period.
Consequently higher incidence of bad debts results, which adversely effect
degenerated into management co placement, which degenerated into managerial
inefficient.
3. Excessive working capital makes management complacent, which degenerates
into managerial efficiency.
Permanent
Temporary or
Fluctuating
TIME
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4. Tendencies of accumulating inventories to make speculation profits grow this
may tend to make dividend policy liberal and difficult to cope with in future when
the firm is unable to make speculative profits.
INADEQUATE WORKING CAPTIAL
1. It stages growth and become difficult for the firm to undertaken profitable projects
for non-availability of working capital funds.
2. It becomes difficult to implement operating plans and achieve the firms profit
target.
3. Operating inefficiencies creep in when it becomes difficult even to meet day-to-
day commitments.
4. Fixed assets are not efficiently utilized for the lack of working capital funds thus
the firms profitability would deteriorate.
5. Paucity of working capital funds renders the firm unable to avail attractive credit
opportunities etc.
6. The firm losses its reputation when it is not in position to honor its short term
obligation as result the firm faces tight credit terms.
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4.10 ROLE OF FINANCIAL MANAGER IN WORKING CAPITAL MANAGEMENT:
1. Working capital management requires must of the finance manger time as it
represent a large position of investment is assets.
2. Working capital management requires much of the finance management time as
it represent larger position of investment in assets.
3. Action should be taken to curtail unnecessary investment in current assets.
4. All precautions should be taken for the effective and efficient management of
working capital.
5. Larger firms have to manage their current assets and current liabilities very
carefully and should see that the work should be done properly in order to
achieve predetermined organization goals.
6. The financial manger should pay special attention to the managements of current
assets on continuing basis.
FUNDS FLOW STATEMNET
Funds flow analysis design effective management toll to study how funds have been
procured for the business and how they have been employed. The statement of
variation in working capital is based fundamentally on the same approach used for the
preparation of funds flow statement. This technique helps to analyses changes in
working capital between dated or two balance sheets. The comparison of current assets
and current liabilities as shown in the balance sheet at the beginning and the ending of a
specific period.
The statement of changes in working capital reveals to manage to way in which working
capital was obtained and use with this insight management to can prepare the estimates
of the working capital flows. A project statement of changes in working capital is very
much useful in the firm long planning.
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CONCEPT OF FUND
The working capital flow or fund arises when the net affect of a transaction is to increase
or decrease the amount of working capital a firm will have same transactions that will
change net working capital and same that will cause no change in net working capital
transaction which change net working capital include most of items of the profit & loss
account and those business events which simultaneously effect both current and not
current balance sheet items. On the other based transaction, which do not increase or
decrease working capital include those which effect only current accounts or only non
current accounts.
USES AND SIGNIFICANCE OF THE FUND FLOW STATEMENT
1. A Funds Flow statement show how the resource has been obtained and the uses
to which are put it helps in analyzing the financial operations.
2. It helps in determining the financial consequences of business operations.
3. It is useful in judging whether the fund has expanded at too faster rate and
whether financing is trained.
4. It points out the effectiveness with which the management has handled working
capital during the period under review.
5. The statement can assist the financial management in planning intermediate and
long-term finance to obtaining resources in the further and determining how they
are used.
6. It gives an insight into the evaluation of the present situation it provides
certain useful information about the firm financial policies to out side
world.
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The funds flow statement is becoming popular with the management because it helps to
explain why in spite of earn sizeable amount of profits the company is experiencing
difficulty in making payment to creditors the rate of dividend on equi9ty shares cannot
be increased and bank balance is getting thinner.
OBJECTION OF FUND FLOW ANLAYSIS:
1. To indicate the result of current financial position.
2. To lay emphasis on the most significant change that has taken place during
specified period.
3. To show how general expansion in business has been financed or to describe
the sources from which additional funds were derived.
4. To know the relationship between profits from operating distribution of dividing
and rating a new capital or contracting of loans.
5. To give reorganization to the fact that a business exists on flow of funds and is
not a static management.
MANAGEMENT OF CASH
CASH MANAGEMENT:-
Cash is the important assets for the operations of the business cash is the basis input to
keep the business running on continuous basis. Cash shortage will disrupt the firms
manufacturing operations while excessive cash will simply remain ideas without
contribution any thing towards the firms profitable way.
Cash management is concerned with the managing of cash flow into and out of the firm
cash flow with in the firm and cash balances held by the firm at appoint of time by
financing depict investing surplus cash. Cash management is to obtain adequate control
over cash position to keep the firm sufficiently liquidate and to use excess cash in some
profitable way.
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CASH PLANNING:-
Cash planning is technique to plan and control of the use of funds. It protect the financial
condition of them firm by developing a projected cash statement from a forecast of plans
are very crucial and developing the overall operating plans of the firm.
USES OF CASH MANAGEMENT:-
1. It indicates companys future financial need especially for its working capital
requirement.
2. To help to evaluate proposed capital projects.
3. It pinpoints the cash required to finance these projects as well as the cash to be
generated by the company to support them.
4. It helps to improve corporate planning.
5. Cash forecasting helps to future and to formulate projects carefully.
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Chapter 6 Data Analysis & Interpretation
STATEMENT SHOWING CHANGES IN WORKING CAPITAL BETWEEN
31-03-2001 & 31-03-2002 Rs. in Lakhs
S.No. Particulars 31-03-2001 31-03-2002 Increase Decrease
(a)
Current Assets
Inventories 1,44,120.00 1,19,395.00 24,725.00
Sundry debtors 71,970.00 61,278.00 10,692.00
Cash & Bank
balance1,213.00 1,252.00 39.00
Loan &
Advance31,317.00 22,180.00 9,137.00
Total (a) 2,48,620.00 2,04,105.00
(b)
Current
Liabilities
Current
Liabilities 3,41,037.00 3,70,306.00 29,269.00
Provisions 82,424.00 83,160.00 736.00
Total (b) 4,23,461.00 4,53,466.00
Working Capital(a-b)
-
1,74,8,741.00
-
2,49,361.00Net increase in
W.C74,520.00 74,520.00
Total of N.W.C-7,74,841.00
-
1,74,841.00
74,559.00 74,559.00
ANALYSIS:
Above table explaining that working capital shows the continuous increase in the net working
capital through in the year 31-03-2000 to the year of comparing the balance sheet is the year
31-03-2001 to 31-03-2002. So, this is due to the sale of inventory and reducing the debtors and
increasing the current liabilities and provisions.
Rs. in Lakhs
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S.No. Particulars 31-03-2002 31-03-2003 Increase Decrease
(a)
Current
Assets
Inventories 1,19,395.00 72,230.00 47,165.00
Sundry debtors 611,278.00 28,478.00 32,800.00
Cash & Bank
balance1,252.00 7,041.00 5,789.00
Loan & Advance 22,180.00 13,205.00 8,975.00
Total (a) 2,04,105.00 1,20,954.00
(b)
Current
Liabilities
Current Liabilities 3,70,306.00 3,10,123.00 60,183.00
Provisions 83,120.00 71,062.00 12,099.00
Total (b)4,53,466.00
03,81,185.00
Working
Capital
(a-b) -2,49,361.00-
2,60,231.00Net
decreased in
W.C
10,870.00
Total of
N.W.C-2,49,361.00
-
2,49,361.0088,940.00 88,940.00
ANALYSIS:
Above table discloses that working capital shows the continuous increase in the
net working capital through in the year 31-03-2002 to the year of comparing the balance
sheet is the year 31st March. So, this is due to the sale of inventory and reducing the
debtors and decreasing the current liabilities and provisions.
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Table-2
STATEMENT SHOWING CHANGES IN WORKING CAPITAL BETWEEN
31-03-2003 & 31-03-2004.
Rs. in Lakhs
S.No. Particulars 31-03-2003 31-03-2004 Increase Decrease
(a)
Current
Assets
Inventories 72,230.00 50,765.00 21,465.00
Sundry debtors 28,478.00 34,042.00 5,564.00
Other currentAssets
--- 4,932.00 4,932.00
Cash & Bank
balance7,041.00 1,56,398.00
1,49,357.0
0
Loan & Advance 13,205.00 11,368.00 1,837.00
Total (a) 1,02,954.00 2,57,505.00
(b)
Current
LiabilitiesCurrent Liabilities 3,10,123.00 3,77,829.00 67,706.00
Provisions 71,062.00 71,793.00 671.00
Total (b) 3,81,185.00 4,49,562.00
Working
Capital(a-b) -2,60,231.00
-
1,92,057.00Net decreased
in W.C68,174.00 68,174.00
Total ofN.W.C
1,59,853.00 1,59,853.00
ANALYSIS:
The above table discloses in this working capital as that was the Net decrease in working
capital in this year 31-03-2003 to 31-03-2004 is Rs.68,174.00 due to major reasons of adjusting
current assets as increase and the current liabilities decrease but the provision decreased.
Table-3
STATEMENT SHOWING CHANGES IN WORKING CAPITAL BETWEEN
31-03-2004 & 31-03-2005.
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Rs. in Lakhs
S.No. Particulars 31-03-2004 31-03-2005 Increase Decrease
(a)
Current
Assets
Inventories 50,765.00 43,429.00 7,336.00
Other current
Assets4,932.00 5,313.00 381.00
Sundry debtors 34,042.00 36,681.00 2,639.00
Cash & Bank
balance1,56,398.00 51,469.00 1,04,929.00
Loan & Advance 11,368.00 10,466.00 902.00
Total (a) 2,57,505.00 1,47,358.00
(b)
Current
Liabilities
Current Liabilities 3,77,829.00 3,90,548.00 12,719.00
Provisions 71,733.00 57,232.00 14,501.00
Total (b) 4,49,562.00 4,47,780.00Working
Capital(a-b) -1,92,057.00
-
3,00,422.00Net
decreased in
W.C
1,08,365.001,08,365.0
0
Total of
N.W.C-1,92,057.00
-
1,92,057.00
1,25,886.0
01,25,886.00
ANALYSIS:
In this above table of working capital discloses that as the net increase in working capital in
this 31-03-2004 to 31-03-2005 is Rs.1,08,365.00 due to major reasons of adjusting current
assets as increase and the current liabilities decreases but the provision decreased.
THE STATEMENT SHOWING CHANGES IN WORKING CAPITAL BETWEEN
31-3-2005 TO 31-3-2006
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S.No Particulars 31-03-2005 31-03-2006 Increase Decreased
(a) Current
Assets
Inventories 43,429.00 40,255.00 -------- 3,174.00
SundryDebtors 5,313.00 5,837.00 524.00 --------
Cash &
bank
balances 36,681.00 37,282 601.00 -------
Loans &
advances 51,469.00 1,34,653.00 83,184.00 -------
Total (a) 1,47,358.00 2,34,274.00
(b) Current
Liabilities Current
liabilities
3,90,548.0
0 2,71,304.00 1,19,244.00 -------
Provisions 57,232.00 69,406.00 12,174.00
Total
4,47,780.0
0 3,40,710.00
Working capital
(a-b)-
3,00,422.00
-
1,06,436.00Net decrease in
W.C 1,93,986.00 1,93,986.00
Total of N.W.C 1,06,436.00 1,06,436.00
2,09,334.0
0 2,09,334.00
ANALYSIS :-
Lastly in this year the statement of working capital shows the continued decreased in
the net working capital through in the year 31st March 2005 to the year of comparing the
balance sheet is the year 31st March 2006. So, this is due to funds flow statement.
FUND,S FLOW STATEMENT AS ON 31ST MARCH, 2001.
SOURCES AMOUNT APPLICATIONS AMOUNT
Increased in secured
Loans2,39,919.00
Purchased of Fixed
Assets108.00
Increased in Un-secured
Loans 14,062.00
Net increased in working
capital 85,948.00
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Funds Lost in operation 1,67,925.00
Total 2,53,981.00 Total 2,53,981.00
ANALYSIS:
During this year 2000-2001 the funds flow statement the losses of the PRAGA TOOLS
LIMITED is still continuing. The company has mobilized his funds increased figures of
the secured and unsecured loans. The company has adjusting their losses throughthese areas and in this year the purchasing power of the company is also decreased.
FUNDS FLOW STATEMENT AS ON 31ST MARCH, 2002.
SOURCES AMOUNT APPLICATIONS AMOUNT
Increased in secured
Loans2,64,416.00
Purchased of Fixed
Assets33.00
Increased in Un-secured
Loans8,237.00
Net increased in working
capital85,948.00
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Work in Progress 746.00 Funds Lost in operation 1,87,418.00
Total 2,73,399.00 Total 2,73,399.00
ANALYSIS:
In this last year of comparing there is the funds flow statement is still including the
losses from the operation. The company has procured huge amount from borrowing
loans in the from of secured and unsecured loans. The company has Wright off their
losses in operations which is the major thread of the company thats need to be ratifiedby the management of the PRAGA TOOLS Limited.
FUNDS FLOW STATEMENT AS ON 31ST MARCH, 2003.
SOURCES AMOUNT APPLICATIONS AMOUNT
Increased in secured
Loans
4,07,033.00Purchased of Fixed
Assets
652.00
Increased in Un-secured 13,764.00 Net increased in 10,870.00
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Loans working capital
Funds Lost in operation 4,09,284.00
Total 4,20,779.00 Total 4,20,779.00
ANALYSIS:
During this year 2002-2003 the funds flow statement the losses of the PRAGA TOOLS
LIMITED is still continuing. The company has mobilized his funds increased figures of
the secured and un-secured loans. The company has adjusting their losses through
these areas and in this year the purchasing power of the company is also decreased.
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FUNDS FLOW STATEMENT AS ON 31ST MARCH, 2004.
SOURCES AMOUNT APPLICATIONS AMOUNT
Increased in un-secured
Loans13,747.00
Decreased in
secured loans1,05,789.00
Sales of fixed assets 9,211.00
Net decreased in working
capital68,174.00
Funds lost in operations 14,657.00 10,870.00
Total 1,05,789.00 Total 1,05,789.00
ANALYSIS:
During this year 2003-2004 the funds flow statement the losses of the PRAGA TOOLS
LIMITED is still continuing. The company has mobilized his funds from increased figures
of the secured and un-secured loans. The company has adjusting their losses throughthese areas and in this year the purchasing power of the company is also decreased.
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FUNDS FLOW STATEMENT AS ON 31ST MARCH, 2005.
SOURCES AMOUNT APPLICATIONS AMOUNT
Increased in Share Capital
funds.1,700.00
Net increased in
working capital1,08,365.00
Increased secured loans 2,12,657.00Funds lost in
operations1,35,004.00
Increased un-secured
loans13,746.00
Sales of fixed assets 15,266.00
Total 2,43,369.00 Total 2,43,369.00
ANALYSIS:
During this year of comparing there is the funds flow statement is still including in losses
from the operations. The company has procured huge amount from borrowing loans in
the form of secured and unsecured loans. The company has Wright off their losses in
operations in operations which is the major thread of the company thats need tobe
ratified by the management of the PRAGA TOOLS Limited.
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Funds Flow statement as on 31st March 2006
SOURCES AMOUNT APPLICATIONS AMOUNT
Sales of fixed assets2,043.00
Decreased Securityloans 18,45,247.00
Net decreased
working capital 1,93,986.00
Decreased
unsecurity loans 24,806.00Funds lost in
operations 16,74,024.00
Total 18,70,053.00 Total 18,70,053.00
ANALYSIS:-
In this year 2005-2006 the funds flow statement the losses of the PRAGA TOOLS
LIMITED is still continuing. The company has mobilized his funds increased figures of
the secured and unsecured loans. The company has adjusting their losses through
these areas and in this year the purchasing power of the company is also decreased.
Funds Flow statement as on 31st March 2006
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SOURCES AMOUNT APPLICATIONS AMOUNT
Sales of fixed assets
2,043.00
Decreased Security
loans 18,45,247.00Net decreased
working capital 1,93,986.00
Decreased
unsecurity loans 24,806.00Funds lost in
operations 16,74,024.00
Total 18,70,053.00 Total 18,70,053.00
ANALYSIS:-
In this year 2005-2006 the funds flow statement the losses of the PRAGA TOOLS
LIMITED is still continuing. The company has mobilized his funds increased figures of
the secured and unsecured loans. The company has adjusting their losses through
these areas and in this year the purchasing power of the company is also decreased.
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CHART 1
TRENDS IN NET WORKING CAPITAL
0
20
40
60
80
100
120
2002-03 2003-04 2004-05 2005-06
Series1
INTERPRETATION:-
Net working capital had shown an increasing trend since, 2002, which in taken as abase year from 100% to 98.40% in 2006. Which appears to be a normal trend. A careful
analysis into the components of the working capital would reveal the changes in NWC
the current assets decreased in the next years that is 2003-04 and at the next
consecutive assets increased in the next consecutive year to a good extent, but there is
a decreasing trend in the year 2005-06 as the current liabilities are covered their in a
increase in the next two year, 2003-04 & 2004-05 but there is gradual decrease in the
year 2005-06 which is good sign to the company.
This is calculated on the basis of the prevision year i.e. the net working capital shown a
decreasing trend compare to the year 2002-03 then the net working capital increaser
gradually from 2003-04 & 2005-06.
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TYPES OF RATIOS
Several ratios calculated from the accounting data, can be grouped into various classes
according to financial activity or function to be evaluated the parties interested in
financial analysis are short and long term creditors owners and managements short
term creditors main interested is in the liquidity position or short term solvency of the
form long term creditors on the other hand. Are more interested in the long-term
solvency and profitability of the form. Similarly owners are more interested on the form
profitability and conditions. Management is interested in evaluating every aspect of the
forms performance. They have protect interested of all the parties.
The ratios are classified into three types.
(a). Liquidity Ratios
(b). Leverage Ratios
(c). Profitability Ratios
LIQUIDITY RATIOS:-
Liquidity Ratios measure the ability of the firm to meet its current obligations. The
analysis of liquidity needs the preparation of cash budget and cash fund flow statement
but liquidity ratios by establishing relationship between cash and other current asset of
current obligation, provide a quick measures of liquidity. A firm should ensure that it
does not suffer form.
LIQUIDITY OR SHORT TERM SOLVENCY RATIOS:-
Liquidity ratio measures the short-term solvency of the firm. The following are the
important liquidity ratios.
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4.2 WORKING CAPITAL RATIOS:-
Current Assets
Current Ratio = ----------------------
Current Liabilities
TABLE 2
CURRENT RATIO
(In Lakhs)
Year Current Assets Current Liabilities Current Ratios
2002-03 17846.14 4652.24 4.102003-04 15800.00 5117.81 3.09
2004-05 20272.00 11485.00 1.76
2005-06 1377.11 5130.73 2.69
CHART 2
CURRENT RATIO
Current Ratios
0.00
1.00
2.00
3.00
4.00
5.00
2002-03 2003-04 2004-05 2005-06
Year
Ratios
INTERPRETATION:-
Generally 2:1 in considered ideal for a concern from the ratios we can observe that the
ratios are above the standard in the year 2002-03 & 2003-04 but in the year 2004-05 the
firm in not able to maintain a standard level of liquidity so the current assets ratio has
been directed below standard level that is by 1.76 but in the year 2005-06 the company
is able to regain its standard level and can obtain its current assets ratio by 2.69
compared to its current liabilities.
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Quick Assets
Quick or Acid Test Ratio = ------------------------
Current Liabilities
TABLE 3
QUICK RATIO
Year
Quick
Assets
Current
Liabilities
Quick
Ratios
2002-03 10141.00 4352.00 2.33
2003-04 8697.00 5118.00 1.64
2004-05 15335.00 11486.00 1.34
2005-06 9722.00 5130.00 1.89
CHART-3
QUICK RATIO
Quick Ratio
0
0.5
1
1.5
2
2.5
2002-03 2003-04 2004-05 2005-06
Year
Ratio
Series1
INTERPRETATION:
Quick ratio is ascertained by comparing the liquid assets this ratio shows the
immediately available assets which can be easily converted in to cash to meet the short
term solvency of the company the normal value which shows the non availability of
assets for immediate conversion into liquid cash in the later year the figures were a little.
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ABSOLUTE LIQUIDITY RATIO:-
Absolute Liquidity Assets
Absolute Liquidity Ratio = --------------------------------
Current Liabilities
Absolute Liquidity Assets = Cash in hand + Cash at bank + Short term investments
The ideal Absolute Liquidity Ratio is taken as 1:2 or 0.5
S.No Year Absolute Liquid
Assets
Current
Liabilities
Current
Ratio
1 2001-2002 23,432,000.00 453,466,000.00 0.05:1
2 2002-2003 20,246,000.00 381,185,000.00 0.05:1
3 2003-2004 167,776,000.00 449,562,000.00 0.37:1
4 2004-2005 61,935,000.00 447,780,000.00 1.14:1
5 2005-2006 150,900,000.00 340,710,000.00 0.44:1
ANALYSIS:-
The above tables shows the Absolute Liquidity Ratio during the study period the ratio
was 0.08:1 in 2002 and gradually decreases to 0.05 in 2003, which in 2003, which to too
below from the standard 0.05:1 so the company, should try to improve and also maintain
this ratio
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LEVERAGE OR CAPITAL STRUCTURES RATIOS:-
Leverage ratios indicate, the relative interest of owner and creditors in a business. The
significant Leverage ratios are
1. DEBIT EQUITY RATIO:-
The ratio examines the relationship between funds and owners funds of a firm. In other
words it measures the relative claims of creditors and shareholders against the assets of
a business. Debit, usually refers to the long-term liabilities. Equity and performance
share capitals and reserves.
Long Term Liabilities
Debit Equity Ratio = ------------------------------------------
Share Holders Funds
S.No Year Long Term
Liabilities
Share Holders
funds
Debit equity
ratio
1
2001-
2002 1,978,031,000.00 361,731,000.00 5.47
2
2002-
2003 2,398,602,000.00 361,731,000.00 6.63
3
2003-
2004 2,306,560,000.00 361,731,000.00 6.38
4
2004-
2005 2,532,963,000.00 363,431,000.00 6.97
5
2005-
2006 662,910,000.00 1,237,367,000.00 0.54
ANALYSIS:-
A high debt equity ratio means a high claim of outsider on the assets of business and
very highly debt financed from will be under great pressure to pay the interest charges
and it is unfavorable to the firm. A firm with a debt equity ratio of two or less exposes its
creditors to relatively less risk a firm a high debt equity ratio exposes its creditors to
grater risk so this firm should minimize this ratio.
Net SalesWORKING CAPITAL TURNOVER RATIO = -----------------------
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Working Capital
This ratio in computed by dividing net sales by working capital this ratio helps to
measure the efficiency of the utilization of net working capital is needed if any increase
in sales is contemplated working capital should be a adequate and thus this ratio helps
management to maintain the adequate level of working.
CHART-4
WORKING CAPITAL TURNOVER RATIO
Year Net Sales Working CapitalWorking Capital Turnover
Ratio
2002-03 15192.02 13493.9 1.1
2003-04 16283.04 10682.82 1.49
2004-05 23993.07 8786.15 2.56
2005-06 24610.98 8646.38 2.85
CHART -5
INTERPRETATION :
This ratio maker a comparison between net sales and net working capital in order to find
the working capital turnover ratio the working capital turnover ratio for the year 2002-03
in 1.10 hence there is increase in working capital turnover ratio for the next 3 year has
increased in a gradual way in the last year the net sales has been increased and the
working capital in being similarly that of previous year hence the working that of
revious year hence the working that capital turnover ratio is at 2.82 in the year 2005-06.
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4.4 RECEIVABLES MANAGEMENT
1. DEBTORS TURNOVER RATIO:
Debtor constitute an important constitute of current assets & their fore the quality of
debtor to great extent determines a firm liquidity of a firm use two ratio. They are debtors
turnover ratio & debt collection period ratio. This ratio indication the speed with which
debtors receivable are being collected there it is indicative of the efficiency of trade
credit management. The higher the turnover ratio the better the trade credit
management & the better the liquidity of debtors.
TABLE-5
DEBTORS TURNOVER RATIO (In Lakhs)
Year Total Sales Account Receivables Debtors Turnover Ratio
2002-03 15191.02 3803.54 3.99
2003-04 16283.04 4513.34 3.66
2004-05 24948.18 10325.48 2.42
2005-06 25884.26 5143.55 5.03
CHART-5
DEBTORS TURNOVER RATIO
Debtors Turnover Ratio
0
1
2
3
4
5
6
2002-03 2003-04 2004-05 2005-06
Year
Ratio Debtors
Turnover
INTERPRETATION:
From the date of interpretation it in observed that both the rates & account revisable are
going up, we see that in the year 2002-2003 the division was in a very good portion
regarding the collection but in the year 2004-2005 due to increase in the amount of
average payables the ratio has come down drastically.
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2.DEBITORS COLLECTION PERIOD:
Their ratio indication the extent to which the debts have been collected in time it gives
the average debt collection period the ratio is very helpful to the lenders because it
explain them whether borrowers are collating money in a reasonable time an increase in
the period reflects grater blockage of funds in debtors a very long collection period
would imply either power credit selection or and inadequate collection effort.
TABLE-6
DEBTORS COLLECTION PERIOD
(In Lakhs)
Year No of DaysDebtors Turnover
Ratio
Debtors Collection
Period in Days
2002-03 364 3.99 91
2003-04 365 3.66 100
2004-05 365 2.42 151
2005-06 365 5.03 73CHART-6
DEBTORS COLLECTION PERIOD
Interpretation
During the year 2005-2006 average collection period is very low which indicates the
better quality of debtors as the quick payments by them with in a shot period
During the year 2004-2005 average collection period is very high as 151 days which
indicate ting the inefficient performance of the debtor as by late payments.
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INTERPRETATION:-
From the above figure given in the table we can interpret that the inventory to the cost of
goods sold for the year 2002-03 in 1-39 their ratio has been increasing continuously in
an exponential manner in all the year which in a good sign to the company. This shows
the effective utilization of the inventory by the company.
In the year 2002-03 the percentage of inventory in current assets 42.17% which is not
beneficial sign to the company. In the next year has increased by nearly 3% more than
the previous year at that time the company retained not to block the current assets with
inventory, in the year 2004-05 it has decreased drastically to 24%. In the following year
this has increased by 5% but this is not sufficient on the increase in the recent past was
much more than that.
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3. INVENTORY HOLDING PERIOD (IN DAYS):
Days in Year
Inventory Holding Period (in days) = ----------------------------------
Inventory Turnover Ratio
The ratio represents the length of time required for conversion of investments in
inventoried for conversion of investments in invests airier to cash of a firm as a result,
the firm will be able to forecast its working capital requirements.
TABLE-8
INVENTORY HOLDING PERIOD (IN DAYS) (In Lakhs)
Year No. of DaysInventory Turnover
RatioCollection Period
2002-03 365 1.93 189 Days
2003-04 365 1.39 263 Days
2004-05 365 2.27 161 Days
2005-06 365 3.29 111 Days
CHART-8
INVENTORY HOLDING PERIOD
Collection Period in Days
0
50
100
150
200
250
300
2002-03 2003-04 2004-05 2005-06
Year
Days Collection
Period in
Days
INTERPRETATION:
In general the inventory ratio of any company should be as low as foible. The reason
being the occurrence of the blockage of money due to holding of the inventory. The
figure shows in the year 2004-05 and 2005-06 also would have been for the company if
they were similar to the velour in the year 2002-03 & 2003-04.
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7. AVERAGE COLLECTION PERIOD:-
The ratio is another device to measure the quality of debtors. It shows the nature of the
firm credit policy to the shorter period. The better the quality of debtors since the short
term collecting period implies prompt payment by debtors and excessively long period
implies a too long and liberal and inefficient credit and collection performance where as
too low period indicates a very strict credit and collection period.
Months in a Year
Average Collection Period = ----------------------
Debtors Turnover
S.No. Year No. of Months in a
year
Debtors
Turnover Ratio
Average
Collection period
1. 2001-
2002
12.00 1.26 9.52
2. 2002-
2003
12.00 0.81 14.81
3. 2003-
2004
12.00 2.31 4.76
4. 2004-
2005
12.00 2.52 4.76
5. 2005-
2006
12.00 3.17 3.79
ANALYSIS:-
The table shows that the average collection period of the company the average
collection period was 9.52 month in 2002, which is decreased to 4.76 in the month of
2005 it shows the company is unable to collect the money in proper time or company is
extending more credit period to the customer. The company should try to reduce this
credit period.
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Chapter 7 Findings & Suggestions
FINDINGS
1. The company is not having sufficient working capital2. Inventories are decreased by year by year
3. Loans & advances are decreases by year by year
4. current liabilities are more than current assets.
5. The working capital is negative working capital
6. Current liabilities are decreased by ever year but in 2003-04 to 14.12% and again
in 2004-2005 decreased from 14-42% to 13.39%
7. long term liabilities are increased by every year but in 2003.04 year long term
liabilities are decreased from 76.356 to 73.989 and again increased from 74.98%
to 7-8-76%
8. The Quick Ratio > 1 which shows the sound short-term solvency.
9. The suggested current ratio is 2:1. But it is not fixed as it various from; industry.
Here in this case the current ration is more than 1 and it is enough to meet the
current liability.
10.When comparing Working capital is compared with net sales it is in increasing
trend indicating the effective utilization of the net working capital.11. The debtors turnover ration is high and it shows the better trade credit
management.
12. Debtors collection period is very less which shows the better trade credit
management.
13.Debtors collection is very less it shows the better collection of funds from
debtors.
14. Inventory holding period is less; it shows the better management of inventory.
15.Through the preparation of funds flows statement analysis it is cleared that the
Company is losing its funds through its operating. But the positive Elements is
the losses through its operations and its decreasing year by year. That is when
the losses where in the year 2000-01.
16. It is understand that from the year 2000-01 to the year 2004-05 there was
decreased in working capital position in the major circumstances this cleared that
company is trying to procure the funds all the times in order to compensate on
wipe on the losses.
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17. It is to be observed that the companys new worth is decreases considerably.
Through this increase in procurement of secured loans.
18.The decrease in figures of sources and applications from the year 20001-01 to
the year 20002-03 makes at clear that the company is no activity increasing or
standardizing of its operations.
CONCLUSION
The company is performing exceptionally in the global market followed by the domestic
market. It is an up coming one with good and innovative ideas and believed in improving
all the areas of its operations. The company has a good liquidity position and does not
delay its commitment in case of both its creditors and debtors. The company being
mostly dependent on the working capital facilities, it is maintaining very good
relationship with their banks and their working capital management is well balanced.
SUGGESTIONS
1. The manpower needs to be assessed in relation to production and sales. The
excess of employees should be removed through various measures like VRS,
retirements and destructing the requirement of new employees.
2. There are various global challenges that are faced by every company n the
present competitive environment and PRAGA TOOLS is not any exemption. To face
the present global challenges the human resources department should be develop to
improve various skills among the employees specially the motivational skills and
having the regular training for the employees about various developments in the
market.
3. The marketing department should be restructured on profit center and product
line basis. The new marketing strategy should also make efforts to regain the agents
in Germany and UK. They should also make efforts to regain the defiance and
railways and find new markets for expansion.
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4. There are various development taking in the industry to change it the company
should develop a full fledged research and development department for bringing
technological change and improvement in design and process.
5. The policy of development new market with the accreditation of ISO 9001 and
C.E. making for certain products should be continuous as it will help in development
the confidence of foreign buyers.
6. The sundry debtors should be efficiently managed so that the outstanding are to
be cleared at short intervals. The company should appoint on different areas on a
success fees basis to collect the debtors.
7. The cost of holding inventory is too high so the inventory holding period is to be
reduced and to build up inventory in anticipation of export orders from Russia and
Germany.
8. The company has to make new joint venture with other companies in order to
reduce the losses.
9. The current assets should be managed more effectively so as to avoid
unnecessary blocking of capital that could be used for other purposes.
10. The Working Capital requirement is to be assessed based on the norms
circulated by RBI for the machine tools industry.
11. The inventory turnover ratio has decreased considerably from the year 2001-02
to 2004-05. This was due to the huge average stock holding even when there was a
decrease in sales figure this clears that inventory should be managed appropriately
moreover it was improved in the year 2003-04.
12. The company has maintained proper records showing full particulars, quantitative
details and solutions of fixed assets are indicated for major items in the register, the
managements during the year has conducted a random verification in respect of
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fixed assets, which in our opinion is reasonable, having regard to the size of the
company and the nature of tits assets.
13. The management has physically verified the stock of finished goods and work in
progress at the end of the year.
14. In respect of service activities there is a reasonable system for recording receipts
issues and consumption of materials and stores and collection of materials
consumed to the relative jobs, commensurate with the size and nature of its
business.
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BIBILOGRAPHY
BOOKS
Financial management Khan and Jain, Tata Mcgrw Hill
Financial management Prasanna Chandra, Tata Mcgrw Hill
Management accounting R.K. Sharma and K. Gupta
Financial Management and polices V.K. Bhalla, ANMOL Publication
Pvt., Ltd.,
Financial Management K. Rajeswari, Sultan chand & sons
Catalogues & Boucher PRAGA Tools Ltd.,
Web sites
www. Pragatools.org
www.machinetoolsindustry.com
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