Case Study of Indian Companies

Working capital management

The process of managing activities and processes related to working capital. This level of management serves as a check and balances system to ensure that the amount of cash flowing into the business is enough to sustain the company's operations. This is an ongoing process that must be evaluated using the current level of assets and liabilities. Working capital management may involve implementing short-term decisions that may or may not carry over from one earnings period to the next.

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.

Concept of Working Capital Management

Financial Management is that managerial activity which is concerned with the planning and controlling of the firms financial resources. Financial management focuses on finance manager performing various tasks as Budgeting, Financial Forecasting, Cash Management, Credit Administration, Investment Analysis, Funds Management, etc. which help in the process of decision making. Financial management includes management of assets and liabilities in the long run and the short run. The management of fixed and curre nt assets, however, differs in three important ways: Firstly, in managing fixed assets, time is very important; consequently discounting and compounding aspects of time element play an important role in capital budgeting and a minor one in the management of current assets. Secondly, the large holdings of current assets, especially cash, strengthen firms liquidity position but it also reduces its overall profitability. Thirdly, the level of fixed as well

as current assets depends upon the expected sales, but it is only the current assets, which can be adjusted with sales fluctuation in the short run. Here, we will be focusing mainly on management of current assets and current liabilities. Management of current assets needs to seek an answer to the following question: 1. Why should you invest in current assets? 2. How much should be invested in each type of current assets? 3. What should be the proportion of short term and long-term funds to finance the current assets? 4. What sources of funds should be used to finance current assets?

CONCEPT OF WORKING CAPITAL Working Capital Management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Specifically, Working Capital Management requires financial managers to decide what quantities of cash, other liquid assets, accounts receivables and inventories the firm will hold at any point of time. Working capital is the capital you require for the working i.e. functioning of your business in the short run. Gross working capital refers to the firms investment in the current assets and includes cash, short term securities, debtors, bills receivables and inventories. It is necessary to concentrate on the fact that the investment in the current assets should be neither excessive nor inadequate. WC requirement of a firm keeps changing with the change in the business activity and hence the firm must be in a position to strike a balance between them. The financial manager should know where to source the funds from, in case the need arise and where to invest in case of excess funds.

The dangers of excessive working capital are as follows: It results in unnecessary accumulation of inventories. Thus the chances of inventory mishandling, waste, theft and losses increase.

It is an indication of defective credit policy and slack collection period. Consequently higher incidences of bad debts occur which adversely affects the profits. It makes the management complacent which degenerates into managerial inefficiency Tendencies of accumulating inventories to make speculative profits grow. This may tend to make the dividend policy liberal and difficult to copes with in future when the firm is unable to make speculative profits. Net working capital refers to the difference between the current assets and the current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment within an accounting year and include creditors, bills payable, bank overdraft and outstanding expenses. When current assets exceed current liabilities it is called Positive WC and when current liabilities exceed current assets it is called Negative WC. The Net WC being the difference between the current assets and current liabilities is a qualitative concept. It indicates:

Permanent and variable working capital: The minimum level of current assets required is referred to as permanent working capital and the extra working capital needed to adapt to changing production and sales activity is called temporary working capital. Things to Remember If the ratio is less than one then they have negative working capital. A high working capital ratio isn\'t always a good thing, it could indicate that they have too much inventory or they are not investing their excess cash.

Working Capital Turnover

A measurement comparing the depletion of working capital to the generation of sales over a given period. This provides some useful information as to how effectively a company is using its working capital to generate sales.

A company uses working capital (current assets - current liabilities) to fund operations and purchase inventory. These operations and inventory are then converted into sales revenue for the company. The working capital turnover ratio is used to analyze the relationship between the money used to fund operations and the sales generated from these operations. In a general sense, the higher the working capital turnover, the better because it means that the company is generating a lot of sales compared to the money it uses to fund the sales.

For example, if a company has current assets of $10 million and current liabilities of $9 million, its working capital is $1 million. When compared to sales of $15 million, the working capital turnover ratio for the period is 15 ($15M/$1M). When used in fundamental analysis, this ratio can be compared to that of similar companies or to the company's own historical working capital turnovers. Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted because sales are recorded at market value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending inventory level to minimize seasonal factors. This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.

Gross Working Capital

The sum of all of a company's current assets (assets that are convertible to cash within a year or less). Gross working capital includes assets such as cash, checking and savings account balances, accounts receivable, short-term investments, inventory and marketable securities. From gross working capital, subtract the sum of all of a company's current liabilities to get net working capital. A company needs just the right amount of working capital to function optimally. With too much working capital, some current assets would be better put to other

uses. With too little working capital, a company may not be able to meet its day-today cash requirements. The correct balance is obtained through working capital management.

VOLTAS LIMITED
Balance sheet of Voltas Particular Mar '12 Mar '11
12 mths 12 mths Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net worth Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Differed Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets

33.07 33.07 0 0 1,330.59 0 1,363.66 177.79 0 177.79 1,541.45

33.07 33.07 0 0 1,238.66 0 1,271.73 93.91 0 93.91 1,365.64

329.94 345.81 165.99 151.21 163.95 4.03 467.41 753.77 1,007.31 205.38 1,966.46 1,171.45 0 3,137.91 0 1,983.29 248.55 2,231.84 906.07 0 1,541.46 194.6 3.18 386.23 755.71 1,002.31 303.38 2,061.40 1,056.46 125.65 3,243.51 0 2,170.99 290.89 2,461.88 781.63 0 1,365.64

Contingent Liabilities

462.68 394.05

Gross Working Capital=Current Assets In, 2011=Rs.3243.51 2012= Rs.3137.91 Net Working Capital= Current Assets-Current Liabilities In, 2011=3243.51-2461.88 =Rs.781.63 2012=3137.91-2231.84 =Rs.906.07

Analysis:Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash.

Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. In this, Current Assets will increase by 105.60; it shows the positiveness of the company. This is increase the liquidity of the company. Companys working capital is increase by 124.44.

LARSEN & TOUBRO (L&T) LIMITED

Balance sheet of L&T
------------------- in Rs. Cr. ------------------

Parti cular Mar '12 Mar '11

12 moths 12 moths Sources Of Funds Total Share Capital 122.48 121.77 Equity Share Capital 122.48 121.77 Share Application Money 0 368.31 Preference Share Capital 0 0 Reserves 25,079.40 Revaluation Reserves 21.14 22.13 Net worth 25,223.02 Secured Loans 1,453.34 Unsecured Loans 8,442.43 6,098.07 Total Debt 9,895.77

21,334.05 21,846.26 1,063.04 7,161.11

Total Liabilities 35,118.79 29,007.37

Application Of Funds Gross Block

10,618.74 8,897.02 Less: Accum. Depreciation 2,952.61 2,220.82 Net Block 7,666.13 6,676.20 Capital Work in Progress 807.94 785 Investments 15,871.90 14,684.82 Inventories 1,776.62 1,577.15 Sundry Debtors 18,729.84 12,427.61 Cash and Bank Balance 1,020.09 1,518.98 Total Current Assets 21,526.55 15,523.74 Loans and Advances 21,445.72 19,499.23 Fixed Deposits 885.17 211.37 Total CA, Loans & Advances 43,857.44 35,234.34 Deffered Credit 0 0 Current Liabilities 30,697.53 26,139.56 Provisions 2,387.09 2,233.43

Total CL & Provisions 33,084.62 28,372.99 Net Current Assets 10,772.82 6,861.35 Miscellaneous Expenses 0 0 Total Assets 35,118.79 29,007.37 Contingent Liabilities 2,500.19 1,647.66 Book Value (Rs) 411.53 352.4

Gross Working Capital=Current Assets In, 2011=Rs.35234.34 2012= Rs.43857.44 Net Working Capital= Current Assets-Current Liabilities In, 2011=35234.34-28372.99 =Rs.6861.35 2012= Rs.43857.44-33084.62 =Rs.10772.82

Analysis:Here, Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. In this, Current Assets will increase by 8622.10; it shows the positiveness of the company. This is increase the liquidity of the company. Companys working capital is increase by 3911.47.

Gujarat Narmada-valley Fertilizers Co. Ltd. (GNFC) Balance sheet of GNFC

Particular Source of Funds Share Capital Reserves & Surplus Shareholders Funds Secured Loans Unsecured Loans Total Debt Total Liabilities Application of Funds Fixed Assets Gross Block 3247.27 3084.25 Less : Accumulated Depreciation 2029.55 1910.12 Provision for impairment of Assets 4.78 4.78 Net Fixed Assets 1212.94 1169.35 Capital Work In Progress 1606.68 1029.8 Total Fixed Assets 2819.62 2199.15 Investments 86.63 89.51 Current Assets Inventories 463.53 405.03 Sundry Debtors 437.48 80.11 Cash & Bank Balances 183.69 323.39 Loans & Advances 1478.09 1354.42 Total Current Assets 2562.79 2162.95 Current Liabilities & Provisions Current Liabilities 448.18 344.9 Provisions 1383.64 1242.15 Total Current Liabilities & Provision 1831.82 1587.04 Net Current Assets 730.97 575.91 Miscellaneous Expenditure written off 0 0 Total Assets 3426.41 2634.1 2011 2010 155.42 2131.45 2286.87 920.89 218.64 1139.53 3426.41 155.42 1923.63 2079.05 290.01 265.05 555.06 2634.1

Gross Working Capital=Current Assets In, 2011=Rs.2162.95 2012= Rs.2562.79 Net Working Capital= Current Assets-Current Liabilities In, 2011=2162.95-1587.04 =Rs.575.91 2012=2562.79-1831.82 =Rs.730.97

Analysis:A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Here, in 2012s net CA is greater than the year 2011, which is show the company is progressive. In this, Current Assets will increase by 399.84; it shows the positiveness of the company. This is increase the liquidity of the company. Companys working capital is increase by 155.06.

Contingent Liabilities Book Value (Rs)

Bharat Heavy Electricals limited (BHEL)

2,424.33 2,324.26 103.67 411.71

Balance sheet of BHEL

Parti culars

Gross Working Capital=Current Assets Sources Of Funds

Mar '12 Mar '11 12 mths 12 mths

Total Share Capital 489.52 489.52 In, 2011=Rs.61214.87 Equity Share Capital 489.52 489.52 Share Application Money 0 0 2012= Rs.60669.93 Preference Share Capital 0 0 Reserves 24,883.69 19,664.32 Net Working Capital= Current Assets-Current Liabilities Revaluation Reserves 0 0 Net worth 25,373.21 20,153.84 In, 2011=61214.87-46499.95 Secured Loans 0 0 Unsecured Loans 123.43 163.35 =Rs.14714.92 Total Debt 123.43 163.35 Total Liabilities 25,496.64 20,317.19

2012=60669.93-41279.38

Application Of Funds Gross Block =Rs.19390.55

9,729.62 8,049.30 Less: Accum. Depreciation 5,409.83 4,648.82 Net Block 4,319.79 3,400.48 Capital Work in Progress 1,324.63 1,762.62 Investments 461.67 439.17 Analysis:Inventories 13,444.50 10,963.03 Sundry 26,336.13 27,354.62 In Debtors this, Current Assets will decrease by 544.94; it shows the positiveness of the Cash and Bank Balance 6,671.98 1,430.15 company. This is increase the liquidity of the company. Total Current Assets 46,452.61 39,747.80 Companys working capital is increase by 4675.63. Loans and Advances 14,217.32 13,267.07 Fixed Deposits 0 8,200.00 Total CA, Loans & Advances 60,669.93 61,214.87 Deffered Credit 0 0 Current Liabilities 33,638.01 31,469.58 Provisions 7,641.37 15,030.37 Total CL & Provisions 41,279.38 46,499.95 Net Current Assets 19,390.55 14,714.92 Miscellaneous Expenses 0 0 Total Assets 25,496.64 20,317.19