WORKING CAPITAL MANGAMENT (COMPARATIVE STUDY)

Working capital management refers to a companys managerial accounting strategy designed to monitor and
utilize the two components of working capital, current assets and current liabilities , to ensure the most
financially efficient operations of the company. The primary purpose of working capital management is to
make sure the company always maintains sufficient cash flow to meet its short-term operating costs and
short-term debt obligations.

CONCEPT OF WORKING CAPITAL MANAGEMNT

There are two concepts of working capital viz. quantitative and qualitative. Some people also define the two
concepts as gross concept and net concept. According to quantitative concept, the amount of working capital
refers to total of current assets. What we call current assets?
1)Smith called, circulating capital. Current assets are considered to be gross working capital in this
concept. The qualitative concept gives an idea regarding source of financing capital. According to qualitative
concept the amount of working capital refers to excess of current assets over current liabilities.
2 )L.J. Guttmann defined working capital as the portion of a firms current assets which are financed from
longterm funds.

STRUCTURE OF WORKING CAPITAL

The different elements or components of current assets and current liabilities constitute the structure of
working capital which can be illustrated in the shape of a chart as follows:
 IMPORTANCE OF WORKING CAPITAL MANAGEMENT
For smooth running an enterprise, adequate amount of working capital is very essential. Efficiency in this
area can help, to utilize fixed assets gainfully, to assure the firms longterm success and to achieve the
overall goal of maximization of the shareholders, fund. Shortage or bad management of cash may result in
loss of cash discount and loss of reputation due to non-payment of obligation on due dates. Insufficient
inventories may be the main cause of production held up and it may compel the enterprises to purchase raw
materials at unfavourable rates. Like-wise facility of credit sale is also very essential for sales promotions. It
is rightly observed that many a times business failure takes place due to lack of working capital.Adequate
working capital provides a cushion for bad days, as a concern can pass its period of depression without much
difficulty. O Donnel et al. correctly explained the significance of adequate working capital and mentioned
that to avoid interruption in the production schedule and maintain sales, a concern requires funds to finance
inventories and receivables. The danger of excessive working capital are as follows:

Heavy investment in fixed assets A concern may invest heavily in its fixed assets which is not
justified by actual sales. This may create situation of over capitalisation.
Reckless purchase of materials- Inventory is purchased recklessly which results in dormant slow
moving and obsolete inventory. At the same time it may increase the cost due to mishandling, waste,
theft, etc.
Speculative tendencies - Speculative tendencies may increase and if profit is increased dividend
distribution will also increase. This will hamper the image of a concern in future when speculative
loss may start.
Liberal credit - Due to liberal credit, size of accounts receivables will also increase. Liberal credit
facility can increase 10 bad debts and wrong practices will start, regarding delay in payments.
Carelessness - Excessive working capital will lead to carelessness about costs which will adversely
affect the profitability.

NEED FOR WORKING CAPITAL:-

The basic objective of financial management is to maximize shareholders wealth. This is possible
only when the company earns sufficient profit. The amount of such profit largely depends upon the
magnitude of sales.

However, sales do not convert into cash instantaneously. There is always time gap between the sale of goods
and receipt of cash.

Working capital is required for this period in order to sustain the sales activity.

PAUCITY OF WORKING CAPITAL

Paucity of working capital is also bad and has the following dangers:
Implementation of operating plans becomes difficult and a concern may not achieve its profit target.
It is difficult to pay dividend due to lack of funds.
Bargaining capacity is reduced in credit purchases and cash discount could not be availed.
An enterprise loses its reputation when it becomes difficult even to meet day-to- day commitments.
Operating inefficiencies may creep in when a concern cannot meet it financial promises.
Stagnates growth as the funds are not available for new projects.
A concern will have to borrow funds at an exorbitant rate of interest in case of need
Sometimes, a concern may be bound to sale its product at a very reduced rates to collect funds which
may harm its image.
 OPERATING CYCLE
The duration of time required to complete the following sequence of events, in case of manufacturing firm,
is called the operating cycle:
1. Conversion of cash into raw materials.
2. Conversion of raw materials into work-in progress.
3. Conversion of work in process into finished goods.
4. Conversion of finished goods into debtors and bills receivables through sales.
5. Conversion of debtors and bills receivables into cash.
The length of cycle will depend on the nature of business. Non manufacturing concerns, service concerns
and financial concerns will not have raw material and work-in-process so their cycle will be shorter.
Financial Concerns have a shortest operating cycle.
OPERATING CYCLE FOR MANUFACTURING CONCERNS
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DURATION OF THE OPERATING CYCLE

The duration of the operating cycle is equal to the sum of the duration of each of these stages less the credit
period allowed by the suppliers of the firm. In symbols,
O=R+W+F+DC
Where,
O = duration of operating cycle.
R = raw material storage period.
W= work-in-process period.
F= finished goods storage period. D=debtors collection period, and
C = creditors payment period.
The components of the operating cycle may be calculated as follows:
R= Average stock of raw materials and stores/ Average raw material and stores consumption per day
W= Average work-in-process inventory/ Average cost of production per day
F=Average finished goods inventory Average cost of goods sold per day per day
D=Average book debts/ Average credit sales per day
C= Average trade creditors/ Average credit purchase per .

Types of working capital:-

Can be divided into two categories on the basis of time: -

1. Permanent working capital

2. Temporary or Variable working capital

1. PERMANENT WORKING CAPITAL:-

This refers to that minimum amount of investment in all current assets which is required at all times
to carry out minimum level of business activities. It represents the current assets required on a continuing
basis over the entire year.

Tandon committee has referred to this type of working capital as core current assets.

The following are the characteristics of this type of working capital:-

1. Amount of permanent working capital remains in the business in one form or another. This is
particularly important from the point of view of financing. The suppliers of such working capital
should not expect its return during the lifetime of the firm.

2. It also grows with the size of the business.

Permanent working capital is permanently needed for the business and therefore it should be financed out of
long-term funds.
This is the reason why the current ratio has to be substantially more than 1.
 2.TEMPORARY OR VARIABLE WORKING CAPITAL:-

The amount of such working capital keeps on fluctuating from time to time on the basis of business
activities.

In other words, it represents additional current assets required at different times during the operating year.

Temporary

Amount of working permanent

Capital (Rs.)

Time

Temporary

Amount of working permanent

Capital (Rs.)

Time
 A COMPARATIVE STUDY OF WORKING CAPITAL MANAGEMENT OF
Raymond and Vardhman Textiles

Introduction
Working capital is life blood of several businesses. In the financial management, working capital
Management is one of the most important and challenging aspect. Firm survival is also depending upon only
more efficient and effective management of working capital. Working capital means it is an amount of short
term capital which is used for day to day operation of the company. The difference between the current
assets and current liabilities is known as working capital. In the other words the excess of current assets than
current liabilities is called working capital.

Net working capital = Current assets current liabilities Current assets are short - lived investments that
are continually being converted into other assets, while current liabilities are those liabilities which firms are
accountable to pay within a year.

Current Assets= Inventories + Trade Debtors + Loans & Advances +Cash & Bank Balance
Current Liabilities=Sundry Creditors +Trade Advances +Short term Borrowings +Provisions.
Management of working capital is an essential task of finance management because it play vital part of any
business firm because it is directly affect the firms profitability and liquidity. Liquidity presents the ability of
company to pay its short -term debts. Liquidity of a company is connected with the capacity of a firm to
perform its short term liabilities. With the help of proper management of working capital firm can build up
its the solvency, improve its goodwill, and its also can face out all the business operations smoothly and
its also can be able to face out crisis. So that It is the duty of financial managers to keep an optimal level of
current assets to its total assets; because firm profitability can be affected negatively by holding too many
current assets while few current assets can create low liquidity and stock out situation for a firm.

So that the aims of Working capital management is at maintaining a balance between liquidity and
profitability at the same time as conducting the day to day operations of business.The main purpose of any
firm is to maximize profit along with maintaining liquidity. Increasing profits at the cost of liquidity can
create serious issues for the firm. Thus, there should be a balance between the two, liquidity and profitability.
In order to properly understand the needs of working capital and its role in textile industries this study has
selected two textile industries one is Raymond and second is vardhman textile. Textile industry is leading
sector in Indian economy. In India Textile industry is one of biggest revenue earner than all other industrial
sectors. This sector provide 45 million people as direct employ and Indian textile sector covers 61%
international textile market and 22% of global market. Textile sector contributes 14% in industrial products
and 4% to GDP.
In this study the researcher tries to compare between Raymond and Vardhman textiles and its main business
is also textile. For this study researcher applied the method of ratio analysis because Ratio analysis is
recognized as one of the most powerful tool of financial analysis. It is a process of establishing and
interpreting quantitative relationship between figures and group of figures. Ratios are best indicators of
financial strength, soundness, position and weakness of a firm. Ratio can help the management in its basic
functions like forecasting, planning, coordinating, control and communication. If ratios are properly
analyzed and interpreted the management can rise the value of firm.

Literature review

For the research the researcher has study one research paper and title of thats paper was trend in working
capital management and its impact on firms performance: an analysis of Mauritian small manufacturing
firms this paper was presented by kesseven padachi. in this research he has took 58 small manufacturing
companies and covered the period for research 1997 -98 to 2002-03. For the analysis In this research he has
adopted the method of correlation analysis and regression analysis. In this research he justify that due to
poor performance of management higher amount of capital is engaged in different kinds of assets so that the
companies cannot achieves its goal
Another paper was presented by M.A. Zariyawati, M.N. Annuar and A.S. Abdul Rahim .and the title of their
research was Working capital management and corporate performance : case of Malaysian for the research
they have selected panel data of 1828 firms for the period of 1996-2006.for further study they have followed
the method of regression analysis. After the whole process of research they have concluded that there was
Strong negative significant relationship between CCC and profitability of the firms.
Another paper was presented by Vedavinayagam Ganesan (2007) and the title of his research was An
Analysis of working capital management efficiency in telecommunication equipment industry in this
research he took 349 telecommunication equipment companies as sample and covering the period 2001-2007
and for the research he adopted the method of Anova,correlation and regression analyses. The conclusion of
his research was that days working capital negatively affect firms profitability.
Another paper on relation between working capital management efficiency and ebit plays by Azagalah
Ramchandrah, Muraildhran. It was aim and analysis the relationship between working capital management
efficiency , and earnings before interest and taxes performance utilization and efficiency of the paper
industry in India it performance remarkable well during the period, however, less remarkable profitable
firms wait longer to pay their bills. Of peruse a decreases in cash conversion cycle.
Another paper was presented by Asghar ali and syed atif ali and the title of their study was working capital
management is it really affects the profitability? Evidence from Pakistan the study showed a positive
impact of working capital management on profitability, working capital on total assets and impact of total
assets on profitability of 15 companies of 3 different sectors of Pakistan. Considering the results it is evident
that efficient management of working capital can lead a firm towards profitability. The firms should improve
their receivables and other currents assets components for sufficient working capital. Efficient management
of inventories enhances the profitability of firms. It is concluded that firms with higher working capital have
higher ratio of profitability and firms with higher total assets also have higher ratio of profitability. The firms
having sufficient working capital also have enough total assets. So it is observed that firms having sufficient
proportion of working capital have positive effect on total assets and profitability of the firms.
A.k Sharma and corresponding author satish Kumar had presented another research paper on topic of the
effect of working capital management on firm profitability: Empirical evidence from India. The main aim
of this article is to examine the effect of working capital on profitability of Indian firms. Researchers
collected data as a sample 263 nonfinancial firm from 500 firms listed at the Bombay Stock (BSE) and
covering the period 2000 to 2008.for the analysis they adopted the method OLS multiple regression. The
findings of their study was significantly depart from the various international studies conducted in different
markets. The results reveal that working capital management and profitability is positively correlated in
Indian companies.
The study further reveals that inventory of number of days and number of days accounts payable is
negatively correlated with a firms profitability, whereas number of days accounts receivables and cash
conversion period exhibit a positive relationship with corporate profitability. The present study contributes to
the existing literature by examining the effect of working capital management on profitability in the context
of an emerging capital market such as India.
Another survey by B. Bagchi, B Khamrui and the title of their study was relationship between working
capital management and profitability: A study of selected FMCG companies in India. in this research they
have selected ten FMCG companies from India and covered data from 2000-2001 to 2009-2010. For the
analysis they have adopted The method of correlation multiple regression analysis and t test. After following
all the method they have conclude that among these companies there was absent of positive relationship
between firms profitability and variables of the working capital management.
OBJECTIVES OF THE STUDY
The specific objectives of the study are:
To analysis the concept and importance of working capital and the concept of ratio, utility of ratio
analysis.

To calculate the financial performance through Ratio Analysis of Raymond textile and Vardhman
textile ltd, on comparative basis in terms of short term.

RESEARCH METHODOLOGY
SCOPE OF THE STUDY
The present study is restricted to a comparative analysis between two textiles industries
DATA COLLECTION
To attain the aforementioned objectives data is collected from secondary sources, like annual reports,
journals, and related other research papers
DATA ANALYSIS
The gathered data is analyses through ratio analysis and only important tables are used for data discussion as
per research need and which are taken for data analysis.
Measurement of Variables
Ratio Analyses: Ratio analysis is one of the most important and widely used tools of analyzing the working
capital and its management.
The various ratios that will be calculated are as follows
1) Liquidity Ratios: These ratios threw light on the liquidity position of the concern. The
following ratios were calculated:

i. Current Ratio: Current Ratio = Current Assets/ Current Liabilities

ii. Quick Ratio: Quick Ratio = Current Assets Inventory/ Current Liabilities

iii.
2) Activity Ratios: These ratios measure the effectiveness with which an organization manages
its resources on assets.
3)
They are also called the turnover ratios because they indicate the speed with which assets are converted or
turned over into sales. The various ratios calculated are as follows:
a) Debtors Turnover Ratio: = Total Sales/Average Debtors
b) Average Collection Period: = 365/Debtors Turnover Ratio

c) Inventory Turnover in days: = Inventory/cost of goods

sold*365 3) Others:
a) Working capital Turnover Ratio= Net sales/ Net Working capital
b) Current Asset to Total Asset Ratio= Current assets/Total Asset
From the above graph, it can be seen that Raymond recorded the highest Current Ratio in 2010 whereas in
2006, Raymond had the highest Current Ratio. Also the Current Ratio for Vardhaman has been constantly
above 1 for all the years, whereas; Raymond has two occasions where its Current Ratio was below 1 and
thats for the years 2012 and 2013.

The above chart displays that the Quick Ratio for Vardhaman has been the highest in the years 2006 and
2009. The lowest was in 2015 which is below 1. We can also see that it was the lowest for Raymond for 2
consecutive years, 2012 and 2013.

We can see that the Debtors Turnover Ratio for Vardhaman has been the highest since 2006 compared to that
of Raymond. Raymond has the ratio below 6 for all the years and on the other hand Vardhaman has a ratio of
over 7 for all the years
The Average collection period chart above shows that Raymond has the highest average compared to
Vardhaman for all the years. The highest average collection period for went above 80 in the year 2010. The
average collection period for Vardhaman has been lesser than 50 for all the years.

As per the above figure, it can be clearly seen that Raymond has a higher Inventory Turnover Ratio when
compared to Vardhaman for all the years except for the year 2009. Both the companies where at equilibrium
for the year 2009.

The above figure shows that the working capital turnover has been the highest
for Raymond for all the years except for the year 2015 where Vardhaman had a
higher ration than Raymond. Also, Raymond had the highest ratios for the years
2012 and 2013 and years 2010 and 2011 had lesser ratios for Vardhaman.
It can be seen that until 2009, the current asset to the total asset ratio for Vardhaman kept on decreasing and
in 2010 it took a small jump and then again decreased for another two years 2011 and 2012 and since then it
has increased. Raymond on the other hand Raymonds current asset to total asset ratio was somewhat
constant until 2010 and then jumped up for the next three years and again dipped a little in 2014 and went
high in 2015.
Limitations of the study
The ratios have been calculated, analyses and interpreted for the period under study i.e.2006 to 2015. Ratios
are calculated on the basis of historical financial statements.
Therefore, future performance of the manufacturing units not reflected. The financial statements are subject
to window-dressing. It will affect the results in the process of analysis. The absolute figures may prove
decorative as ratio analysis is primarily quantitative analysis and not qualitative analysis. Many people may
interpret the results in different ways as ratio is not an end by itself. Anyhow, every effort has been made to
draw conclusions to all firms facing similar situations. But non- availability of certain financial data makes
difficulty on comparative analysis.
Conclusion
Working capital management is one of the most important aspect for financial decisions in any business unit.
The researcher had tried to carry out a comparative analysis on working capital management. The graph of
current ratio of Raymond Ltd. Has registered mix trend during the ;last ten years, which was highest in 2006
and lowest in 2014, where as current ratio of Vardhman Ltd. Was strong and sound in comparison of
Raymond Ltd. It is seen in the graph of debtors ratio that Raymond Ltd. Has less recovery time than that of
Vardhman Ltd. It also indicated that Raymond company has no more risk from debtors in compared with
Vardhman. Inventory ratio indicated that Raymond Ltd has faster turnover of raw material than that of
Vardhman. Turnover ratio of Raymond Ltd had remained stable during the study period, where as Vardhman
Ltd showed mix trend in relation to inventory ratio which indicated that Raymond Ltd has continuous
production and sales of its products.From above discussion, it can be concluded that Raymond Ltd has sound
and more effective working capital system than Vardhman Ltd has. Raymond Ltd has maintained all ideal
level of working capital and constant increase is sign of healthy position of business from the view point of
capital.