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 ABSTRACT
Working Capital is the amount of fund necessary to cover the cost of
operating the enterprise. Management of working capital is considered
to be one of the most important areas day to day management to a firm.
It is concerned with adequacy of current assets. No business can run
without adequate investment in working capital. Current assets are
essential to use fixed assets profitability. For example, a machine cannot
run without availability of raw material. The investment on the purchase
of raw material is identified as working capital.

This paper examines whether significant differences exist among the

working capital practices of the INFOSYS LTD. An attempt has been made
to analyze whether the working capital policies are aggressive or
conservative in nature and whether they are stable over the period of
time (2015-2017)

This project is based on a case study of INFOSYS LTD.

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CHAPTER
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INTRODUCTION
Working Capital is the amount of fund necessary to cover the cost of operating the enterprise.

These items are also referred as circulating capital. Circulating capital means current assets of
a company that are changed in the ordinary course of business from one form to another.

Thus, Working capital is the fund of capital. Which is needed for short-term purposes of raw
material, payment of wages and other day to day expenses etc.

Management of working capital is considered to be one of the most important areas of day to
day management of the firm. It is concerned with adequacy of current assets. No business can
run without adequate investment in working capital. Current assets are essential to use fixed
assets profitability. For example, a machine cannot run without availability of raw material.
The investment on the purchase of raw material is identified as working capital.

The term Working Capital originated with the old Yankee peddler, who would load up his
wagon with goods and then go off on his route to peddle his wares (Brigham and Gapenski
1996). The merchandise was called working capital because it was what he actually sold, or
turned over, to produce the profits. The wagon and horse were the fixed assets. The peddler
generally owned the horse and wagon so, they financed with equity capital. But, he borrowed
the funds to buy the merchandise. These borrowing were called working capital loan, they had
to be repaid after each trip to demonstrate to the bank that the credit was sound. If the
peddler was able to repay the loan, then the bank would make another loan, and banks that
followed this procedure were said to be employing sound banking practices.

The concept of working capital was, perhaps, first evolved by Karl Marx (1867), thought in a
somewhat different form. Marx used the term “variable capital” meaning outlays for payrolls
advanced to workers before the goods they worked on were complete. He contrasted this
with “constant capital”, which according to him, is nothing but “dead labour”, i.e. outlays for
raw materials and other instruments of production by labour in earlier stages which are now
needed live labour to work with in the present stage. This “variable capital” was the wage fund
which remains blocked in terms of financial management, in work-in-progress along with other
operating expenses until it is released through sale of finished goods. Although Marx did not
mention that workers also gave credit to the firm by accepting periodical payment of wages
which funded a portion of work-in-progress, the concept of working capital, as we understand
today was embedded in his “variable capital”.

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 NEED OF STUDY OF
WORKING CAPITAL
MANAGEMENT
1. Strengthen the Solvency:
Working capital helps to operate the business smoothly without any financial problems
for making the payment of short-term liabilities. Purchase of raw materials and payment
of salary, wages and overhead can be made without any delay. Adequate working
capital helps in maintaining solvency of the business by providing uninterrupted flow of
production.

2. Enhance Goodwill:
Sufficient working capital enables a business concern to make prompt payments and
hence helps in creating and maintaining goodwill. Goodwill is enhanced because all
current liabilities and operating expenses are paid on time.

3. Easy Obtaining Loans:

A firm having adequate working capital, high solvency and good credit rating can
arrange loans from banks and financial institutions in easy and favorable terms.

4. Regular Supply of Raw materials:

Quick payment of credit purchase of raw materials ensures the regular supply of raw
materials from suppliers. Suppliers are satisfied by the payment on time. It ensures
regular supply of raw materials and continues production.

5. Smooth Business Operation:

Working capital is really a life blood of any business organization which maintains the
firm in well condition. Any day to day financial requirement can be met without any
shortage of fund. All expenses and current liabilities are paid on time.

6. Ability to Face Crisis:

Adequate working capital enables a firm to face business crisis in emergencies such as
depressions.

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 OBJECTIVES
The present study investigates the relationship of the aggressive and conservative
working capital asset management and financing policies and its impact on
profitability of INFOSYS for a period of 2015-2017. This research:

1. Tries to examine whether significant differences exist among the working

capital practices INFOSYS LTD.

2. To analyse whether the working capital policies are aggressive or

conservative in nature and whether they are relatively stable over the period
of time (2015-2017)

3. To find out liquidity position, profitability position and return on equity of

INFOSYS LTD.

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RESEARCH METHODOLOGY
Methodology of the study refers to the methods used to collect the required
data for research work. The data required has been collected from the
following sources:

1) Secondary Sources:

a. The secondary data helped me a lot. I have collected all the figures
from the Annual Report and Financial Statement of Infosys for the
time period (2015-2017)

b. Record of the company: This helped me to get details regarding

the history of the organization.

c. Library Research: A number of books on finance were referred

to collect theoretical background related finance.

d. A part from here, journals, magazines, online database has been

used for source of information.

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 LITERATURE REVIEW
Mine Aysen Doyran and Juan Delacruz (2011) suggested that Latin America, should take
the presence from the Asian textile industry experience. This paper examines recent statistics
in US textile and clothing trade with selected Latin American and Asian economies, comparing
data on textile exports from the top 10 suppliers between 1995 and 2003. It evaluates the
initial effects of the Agreement on Textiles and Clothing (ATC) of 1995, which provided for a
10-year quota phase-out process for WTO member countries. Since its accession into WTO,
China has replaced Mexico as the top supplier of goods to the US. In addition, a brief
comparison with other international experience of emerging economies is provided in order to
elucidate the relevance of the textile industry in the region and world economy. This empirical
work can be the starting point for policy makers to design long-term policies that are needed
for Latin America to compete successfully in the US market and promote the restructuring of
clothing and textile production at the country level.

Sheela Christina (2011) carried out the study on Financial Performance of Wheels India
Limited-Chennai. The study had an Analytical type of research design supplemented by
secondary data collection method. For this purpose the researcher took the past five years’
data and also checked out for the validity and reliability before conducting the study. The
researcher used the financial tools, namely ratio analysis, comparative balance sheet and
DuPont analysis and also statistical tools such as trend analysis and correlation. Profitability
ratios indicated that there was a decrease in the profit level, utilization of fixed assets and
working capital in the last financial year. Thus the company could take necessary steps to
improve sales and profit. Finally, the study revealed that the financial performance was
satisfactory.

Prasanta Paul (2011) reported that Financial Performance EvaluationA Comparative Study of
Some Selected NBFCs. In this study, five listed NBFCs have been considered for analyzing
comparative financial performance. Different statistical tools like, Arithmetic mean, Standard
Deviation, Coefficient of Variance, Correlation and Analysis of Variance have been used
extensively. Arithmetic Mean (AM) is an ideal measure of central tendency, which is rigidly
defined, easy to calculate, based on all observations and affected least by fluctuations of
sampling, has been applied in this study. It has been used to get a stable average and it is easy
to understand the results of the study.
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Ried Edwardj and Srinivasan Suraj (2010) have made an investigation as to whether the
managers’ presentation of special items within the financial statements reflects the economic
performance or opportunism. Specifically, special items were presented as a separate line
item on the income statement (income statement presentation) to those aggregated within
another line item with disclosure only in the footnotes (footnote presentation). The study was
motivated by an interest to setting standards in performance reporting and financial
statement presentation, as well as prior research investigating managers’ presentation choices
in other contexts. Empirical results reveal that special items receiving an income statement
presentation are less persistent, relative to those receiving footnote presentations. These
results are consistent across numerous alternative specifications. The overall findings are
consistent with managers using the income statement versus footnote presentation to assist
users in identifying those special items that are most likely to differ from other components of
earnings - that is, for informational, as opposed to opportunistic and motivations.

Niranjana Devi. K (Oct 2010) This study looked at working dimension of the companies. The
result of the study with respect to the four objectives, namely the types of Working Capital
Policies, the factor that determines the Working Capital, the structure and utility of Working
Capital and the impact of Working Capital on profitability were examined.

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 LIMITATIONS OF THE STUDY
Working capital management is an effective tool for management control. The
following is the limitations which I observed in “INFOSYS LIMITED”

Since the report is exclusively made from secondary source of data. The direct
observation is literally impossible.

There was no scope for gathering sufficient financial information as it is

confidential during the time allotted for the project the internal audit is going on
and they could not spare much time for the detailed discussion on the subject.

They themselves have not maintained the data so accurately but seem to be
sufficient for the project.

These limitations were mainly due to the organizational setup of the company.

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CHAPTER

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CONCEPTIONAL Framework
Concept
There are two possible interpretations of working capital concept:

1. Balance Sheet concept (value based)

2. Operating cycle concept (time based)

1. Balance sheet concept

This can be classified in two ways:

Balance sheet concept

a.Gross working capital

b.Net working capital

a) Gross working capital: It is capital invested in total current
assets of a firm.
Thus, Gross working capital = Current asset

b) Net working capital: This is the excess of total current assets

over total current liabilities.
Thus, Net working capital = Current assets – Current liability.

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NOTE:-
Current assets: Those assets which can be easily converted into cash within a short
period say an accounting year.
Current liability: Those liabilities which are usually paid within a short period say an
accounting year.

2. Operating Cycle Concept

Working capital cycle refers to the length of time between the firms paying cash for
materials for entering into production process and the inflow of cash from debtors
(sales), for example, each is covered into materials, materials into WIP, WIP into finished
goods, finished goods into debtors, debtors into cash and again cash to raw materials.
This cycle goes on and this is called operating cycle.

Operating cycle concept

a)permanent or b)temporary or
fixed working variable working
capital capital

I.Regular I.Seasonal
working capital working capital

II.Reverse II.Special working

working capital capital

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 a) Permanent working capital
It refers to the hard core working capital which is that minimum level of
investments in the current assets that is carried by the business at all times to
carry out minimum level of its activities.

It remains permanently blocked in current assets and is more or less stable

Its parts:

I. Regular Working Capital: It is that part of permanent working capital

which is required to ensure the circulation of current assets.
II. Reserve working capital: It is that part of permanent working capital
which is required to meet contingencies that may arise any time during
the course of business.

b) Temporary working Capital:

It refers to that part of total working capital which is required over and above
permanent working capital. It is also referred as variable working capital.

Its parts

I. Seasonal working capital: It is that part of temporary working capital

which is required to meet the seasonal demands of the firm.
II. Special Working Capital: It is that part of temporary working capital
which is required to meet the special demands of the firm.

IMPORTANCE OF WORKING CAPITAL

I. Risk and uncertainty involved in managing the cash flows.

II. Uncertainty in demand and supply of goods, escalation in cost both operating and
financing costs.

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DETERMINANTS OF WORKING CAPITAL
1. Nature of business

The working capital requirement of the firm is closely related to the nature of its
business. A service firm, like an electricity undertaking or a transport corporation, which
has a short operating cycle and which sells predominantly on cash basis, has a modest
working capital requirement. On the other hand, a manufacturing concern like a
machine tools unit, which has a long operating cycle and which sells largely on credit,
has a very substantial working capital requirements.

2. Seasonality of operations

Firms, which have marked seasonality in their operations usually, have highly fluctuating
working capital requirements. If the operations are smooth and even throughout the
year the working capital requirement will be constant and not be affected by the
seasonal factor.

3. Operating cycle

Time taken from the stage when cash is put into the stage when cash is released.

Thus, the working capital requirement of the firm is determined by a host of factors.
Every consideration is to be weighted relatively to determine the working capital
requirements. Further, the determination of working capital requirement is not once a
whole exercise; rather a continuous review must be made in order to assess the working
capital requirement in the changing situation. There are various reasons, which may
require the review of the working capital requirement e.g., change in sales volume, etc

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 Working Capital Investment
The size and nature of investment in current assets is a function of different factors such as
type of products manufactured, the length of operating cycle, the sales level, inventory
policies, unexpected demand and unanticipated delays in obtaining new inventories, credit
policies and current assets.
1. Policy A represents aggressive approach.
2. Policy B represents conservative approach.
3. Policy C represents a moderate approach.
Optimal level of working capital investment
Risk of long term versus short term debt

FINANCING OF WORKING CAPITAL

A. Long Term Sources
I. Equity Share Capital: IN India for a long term periods it is a main source of
procuring working capital.

II. Issue of Debentures: In the modern era debentures are considered to be an

important source of procuring the finance. Interest rates has to be paid on
debentures and is refunded after specific period.

III. Retained Earnings: It is the cheapest and most convenient means of procuring
finance under the means company is not required to bare compulsory burden of
interest payment.

IV. Preference Share Capital: It is also one of the cheapest and most convenient
means of procuring finance. Company is just required to bear dividend on
preference shares.

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 B. Short Term Sources

I. Commercial banks: The commercial banks, for pr4oviding working capital to the
industries, mostly grant the financial help. The commercial banks also contribute
to the working capital by purchasing shares and debentures.

II. Public deposits: In our country, a major portion of the working capital is procured
through public deposits. Under this system common masses deposit their money
for a specific period on a certain rate of interest.

III. Government help: For encouraging the industries, government provides some
financial help, e.g. Grants, exemption in taxes, subsidies, etc.

IV. Loans from financial institution: the need of working capital could also be met by
taking loans from various companies, insurance companies, trusts etc.

C. Spontaneous financing of Working Capital

I. Trade Credit: Trade is a spontaneous source of financing because because it arises

automatically as part of the purchase transaction. Like all forms of financing,
trade credit is subject to the risk of buyer default.

II. Outstanding Expenses: Outstanding expenses (or accounts payable) are a “free”
source of working capital because you acquire goods and services you need to run
your business before you have to for pay them.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate working capital to run its business operations. It
should have neither redundant or excess working capital nor inadequate nor shortage of
working capital.
Both excess as well as shortage of working capital situations are bad for any business.
However, out of the two, inadequacy or shortage of working capital is more dangerous from
the point of view of the firm.

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DISADVANTAGES OF REDUNDANT
OR EXCESS WORKING CAPITAL
1. Idle funds, non- profitable for business, poor return on investment.

2. Unnecessary purchasing and accumulation of inventories over required level.

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

4. Overall efficiency in the organization.

5. When there is excessive Working capital, credit worthiness suffers.

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

DISADVANTAGES OR DANGERS OF
INADEQUATE OR SHORT WORKING CAPITAL

1. Cant play off its short term liabilities in time.

2. Economies of scale are not possible.

3. Difficult for the firm to exploit favorable market situation.

4. Day to day liquidity worsens

5. Improper utilization the fixed assets and ROA/ROI sharply.

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 WORKING CAPITAL MANAGEMENT
(WCM)
Management of working capital is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the inter-relationship that exists between
them. In other words it refers to all aspects of administration of current assets and current
liabilities.
Working capital management policies of affirm have a great effect on its profitability, liquidity
and structural health of the organization.

FORECASTING/ESTIMATION OF WORKING
CAPITAL REQUIREMENTS
Factors to be considered are:-

1. Total costs incurred on materials, wages and overheads.

2. The length of time for which raw materials remain in stores before they are issued to
production.

3. The length of production cycle or WIP, i.e. the time taken for conversation of RM into
FG.

4. The average period of credit allowed to customers.

5. The amount of cash required to pay day to day expenses of the business and advance
payment if any.

6. The average period of credit to be allowed to suppliers.

7. Time-lag payment of wages and other overhead.

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 MANAGEMENT OF CASH
IMPORTANCE OF CASH

When planning the short or long term funding requirements of a business, it is more important
to forecast the likely cash requirements than to project profitability etc.

CASH VS PROFIT

Sales and cost and, therefore, profits do not necessarily coincide with their associated cash
inflows and outflows.

The net result is that the cash receipts often lag cash payments and, whilst profits may be
reported, the business may experience a short term cash fall.

For this reason it is essential to forecast cash flows as well as project likely profits.

CALCULATING CASH FLOWS

Project cumulative positive net cash flow over several periods and, conversely, a flow
cumulative negative cash flow.

CASH MANAGEMENT STRATEGIES

1. Cash planning.
2. Cash forecast and budgeting.
3. Receipts and disbursements method adjusted net income method (Sources and uses of
cash)

MANAGEMENT CASH FLOWS

After estimating cash flows, efforts should be made to adhere to the estimates of receipt and
payment of cash.

Cash management will be successful only if cash collections are accelerated and cash
payments (distribution), as far as possible, are delayed.

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METHOD OF ACCELERATING CASH INFLOWS

1. Prompt payment from customers (Debtors).

2. Quick conversion of payment into cash.
3. Decentralized collections.
4. Lock box system (collecting centers at different locations).

METHODS OF DECELERATING CASH OUTFLOWS

1. Paying on the last date.

2. Payment through cheques and drafts.
3. Adjusting payroll funds (Reducing frequency of payments).
4. Centralization of payments.
5. Inter-bank transfers.
6. Making use of Float (Difference between balance in bank pass book and bank column of
cash book)

MANAGEMENT OF RECEIVABLES

Receivables (Sundry Debtors) result from credit sales. A concern is required to allow credit in
order to expand in sales volume. Receivables contribute a significant portion of current assets.
But for investment in receivables the firm has to incur certain costs (opportunity cost and time
value). Further, there is a risk of bad debts also and it is therefore very necessary to have a
proper control and management of receivables.

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