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CERTIFICATE 
This is to certify that this project µStudy of Working Capital Management¶ is the
work of Mr. SWAPNIL V. THORAT and is being submitted in partial
fulfillment of the requirements of Post Graduate Diploma in Management of
AETS Institute Computer Science.

No part of this project has been submitted prior to this to any college or
institution. The project is based on the working capital management and has
been compiled at CEAT LTD. under the guidance and supervision of the
research guide, D.G.CHAUDHARY SIR

(D.G.CHAUDHARY) (P.P.JOSHI)
Signature Signature
Director

 


 
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ACKNOWLEDGEMENT

It gives me immense pleasure to present this project report on Working Capital
Management carried out at ?
p . In partial fulfillment of Post Graduate
Diploma in Management.

No work can be carried out without the help and guidance of various persons. I
am happy to take this opportunity to express my gratitude to those who have
been helpful to me in completing this pr oject report.

At the outset I would like to thank p

 Head- Treasury for their
valuable advice and guidance during my project completion. I also thanks to all
staff members of account department for help me to complete the winter project

Lastly I would like to thank my parents, friends and well wishers who
encouraged me to do this research work and all those who contributed directly
or indirectly in completing this project to whom I am obligated to.

Ô V
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 DECLARATION

I, SWAPNIL V. THORAT Student of M.M.S 2009-2011 studying at



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declare that the project work entitled ³ p ?

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This project was undertaken as a part of academic curriculum a ccording to the

rules and norms. And it has no commercial interest and motive. It is my original
work. It is not submitted to any other organization for any other purpose.

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Sr.No Topic Page.No

1 The Company 6-8

2 Working Capital Management 9-18

3 Research Methodology 19-30

4 Ratio Analysis 31-41

5 Receivables Management 42-43

6 Inventory Management 44-47

7 Management of Cash 48-51

8 Working capital finance and 52-54

estimation
9 Recommendations and 55
conclusions
10 Bibliography 57

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CEAT Limited was established in the year 1958 and is one of the key players in
the tyre industry in India. The Company, a part of the RPG conglomerate offers
the widest range of tyres to leading Original Equipment Manufacturers (OEMs)
across the world and is also one of the largest tyre makers for the replacement
market in India. The Company has a strong presence in the domestic as well as
the international markets.
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The Company¶s philosophy on Corporate Governance mirrors its belief that
principles of transparency, fairness and accountability towards the stakeholders
are the pillars of a good governance system. The Company believes that the
discipline of Corporate Governance pertains to systems, by which companies
are directed and controlled, keeping in mind long -term interests of shareholders,
while respecting interests of other stakeholders and society at large. It aims to
align interests of the Company with its shareholders and other key stakeholders.
Accordingly, this Company philosophy extends beyond what is being reported
under this Report and it has been the Company¶s constant endeavor to attain the
highest levels of Corporate Governance. This Report is for compl iance of
Clause 49 of the Listing Agreement, which the Company has entered into with
the Stock Exchanges.
  
CEAT produces over 7 million tyres a year and commands around 13% share of
the Indian tyre market. The Company manufactures a wide range of tyres
catering to all user segments. This includes tyres for heavy duty Trucks and
Buses (T&B), Light Commercial Vehicles (LCVs), Earthmovers and Forklifts
(specialty segment), Tractors, Trailers, Passenger Cars (PC), Motorcycles,
Scooters and Auto rickshaws. CEAT earns around 65% of its revenue from the
T&B segment. The Company currently operates 2 plants in Maharashtra, one
in Bhandup and the other in Nasik. It has a robust national network consisting
of 34 regional offices and over 3,500 dealers among which approximately 100
are exclusive dealers running the CEAT Shoppe outlets for passenger cars
segments and ~ 96exclusive dealers running the CEAT HUBs for Truck &


 
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Bus Segments. These initiatives have helped bring the Company closer to its
customers. Keeping pace with the demand for tyres in future, the Company is
implementing a project at Halol, Gujarat with initial capacity of 90 MT per
day with an outlay of approximately Rs. 500 crores. The plant is expected to
be ready for commercial production during the financial year 2010 -11.p
 
CEAT¶s solid brand equity has helped it to achieve a strong footprint in both the
domestic and the international market. It has a presence in over 110 countries.
The Company is also one of the top tyre exporter in the country with exports
valued at more than Rs. 500 crores.
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With the help of a Compounded Annual Growth Rate (CAGR) of more than
8% over 2003-08, size of the domestic tyre industry has grown to around Rs.
20,000 crores. The Indian tyre industry currently comprises of around 40
players in the organized and unorganized sectors, with an aggregate capacity of
over 90 million tyres. However, the top 7 players account for over 85% of the
market share. p

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Dismal performance of the Automobile Industry during theyear under review
has impacted sales to vehicle manufacturers. However, with the visible signs of
revival fromthe fourth quarter of last fiscal, the off take from vehicle
manufacturers is expected to pick up in the second half of2009 -10. Plans of
automobile majors worldwide to set up manufacturing facilities in India are
intact and India is therefore expected to emerge as an automobile manufact uring
and outsourcing hub over the next few years.
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With improved infrastructure, the freight and passenger traffic movement is
expected to remain buoyant in future. This is expected to result into increased
off take in the replacement market. Further improvement in road infrastructure
on completion of mega projects, such as the Golden Quadrilateral, North-South
and East-West Corridors etc, will spur growth in freight and passenger
movement in future, and consequently accelerate the gr owth of tyre business in
India.


 
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The slowdown in the economy during the year under review impacted the
growth of automobile and tyre industry. However, Indian economy is expected
to grow at about 7% over the next five years. Sustained economic growth with
consequential increase in per capita and disposable income will boost demand
for products and services in general. Strong GDP growth is also expected to
enhance agricultural and industrial production which will ensure increased
movement of labour and materials. This will fuel demand forTruck / Bus (T&B)
and farm tyres.
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Currently, the PC segment in India is more than 95% radialised,which is at par
with the world average. However, T&B segments only 10-12% radialised
against the world average of 60%.Radialisation is expected to reach 30% in
Commercial Vehicles (CVs) and 20% in LCVs in approximately three years.
This will improve demand of radial tyres in the country. Indian companies will
have an opportunity to cash in on the steady switch from the traditional cross-
ply tyres to radial tyres in theCV segment. p
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The downturn in the global economy has adversely affected exports from India
during the year under review. However, the demand supply gap in cross-ply
tyres in the international market is expected to continue for the next five to ten
years.The industry therefore, is expected to re-position its manufacturing
facilities, product portfolio and distribution network to meet the new market
demands.
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Decisions relating to working capital and short term financing are referred to as
   


. These involve managing the relationship between
a firm's short-term assets and its x
 x  p  goal of working capital
management is to ensure that the firm is able to c ontinue its operations and that
it has sufficient cash flow to satisfy both maturing short-term debt and
upcoming operational expenses.

Efficient management of working capital is one of the pre-conditions for the

success of an enterprise. Efficient management of working capital means
management of various components of working capital in such a way that an
adequate amount of working capital is maintained for smooth r unning of a firm
and for fulfillment of twin objectives of liquidity and profitability. While
inadequate amount of working capital impairs the firm¶s liquidity. Holding of
excess working capital results in the reduction of profitability. But the proper
estimation of working capital actually required, is a difficult task for the
management because the amount of working capital varies across firms over the
periods depending upon the nature of business, production cycle, credit policy,
availability of raw material, etc. Thus efficient management of working capital
is an important indicator of sound health of an organization which requires
reduction of unnecessary blocking of capital in order to bring down the cost of
financing.

|     



The need for working capital gross or current assets cannot be over emphasized.
As already observed, the objective of financial decision making is to maximize
the shareholders wealth. To achieve this, it is necessary to generate sufficient
profits can be earned will naturally depend upon the magnitude of the sales
among other things but sales cannot convert into cash. There is a need for
working capital in the form of current assets to deal with the problem arising out
of lack of immediate realization of cash against goods sold. Therefore sufficient


 
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working capital is necessary to sustain sales activity. Technically this is refers to
operating or cash cycle. If the company has certain amount of cash, it will be
required for purchasing the raw material may be available on credit basis. Then
the company has to spend some amount for labour and factory overhead to
convert the raw material in work in progress, and ultimately finished goods.
These finished goods convert in to sales on credit basis in the form of sundry
debtors. Sundry debtors are converting into cash after expiry of credit period.
Thus some amount of cash is blocked in raw materials, WIP, finished goods,
and sundry debtors and day to day cash requirements. However some part of
current assets may be financed by the current liabilities also. The amount
required to be invested in this current assets is always higher than the funds
available from current liabilities. This is the precise reason why the needs for
working capital arise.

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Capital required for a business can be classifies under two main categories: p

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Every business needs funds for two purposes for its establishments and to carry
out day to day operations. Long term funds are required to create pr oduction
facilities through purchase of fixed assets such as plant and machinery, land and
building, furniture etc. Investments in these assets are representing that part of
firm¶s capital which is blocked on a permanent or fixed basis and is called fixed
capital.
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In simple words, Working capital refers to that part of the firm¶s capital which
is required for financing short term or current assets such as cash, marketable
securities, debtors and inventories. Funds are also needed for shor t term
purposes for the purchasing of raw materials, payments of wages and other day
to day expenses etc. These funds are known as working capital.

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Working Capital can be classified in following ways:

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On the basis of Balance Sheet concept, working capital can be further classified
into two concepts:

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The term working capital refers to the Gross working capital and represents the
amount of funds invested in current assets. Thus, the gross working capital is
the capital invested in total current assets of the enterprises. The gross working
capital concept is financial or going concern concept.
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Current assets are those assets which are converted into cash within short
periods of normally one accounting year. Example of current assets is:
· Cash in hand and Bank balance
· Bills Receivable
· Sundry Debtors
· Short term Loans and Advances

 
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· Inventories of Stock as:
Raw Materials
Work in Process
Stores and Spaces
Finished Goods
· Temporary Investments of Surplus Funds
· Prepaid Expenses
· Accrued Incomes
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For the year 31 st Dec. 2010
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Inventories

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Sundry Debtors

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Cash and Bank Balances

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Loan and Advances

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Short term Investments
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Net working capital is an accounting concept of working capital. Net working
capital is the excess of current assets over current liabilities or say: p

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Current liabilities are those liabilities which are intended to be paid in the
ordinary course of business within a short period of normally one accounting
year of the current assets or the income of the business. Examples of current
liabilities are: p


 
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· Bills Payable
· Sundry Creditors or Account Payable
· Accrued or Outstanding Expenses
· Short term Loans, Advances and Deposits
· Dividends Payable
· Bank Overdraft
· Provision for Taxation, If does not amount to appropriation of profit.
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For the year ended on 31 st dec.2010

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Acceptances 155,67.00
Sundry Creditors 491,59.76
Interest Accrued but not due 4,06.95
Deposit from Others 55.52
Other Liabilities 102,43.03
Unclaimed Dividends 34.46
Unclaimed Interest and matured Deposits 0.32
Provisions 36,35.82
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When the current assets exceed the current liabilities, the working capital is
positive and the negative working capital results when the current liabilities are
more than the current assets.
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Total Current Assets 1032,48.35
Total Current Liabilities 791,02.86
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On the basis of time, working capital may be classified as:

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The need for current assets arises, as already observed, because of the cash
cycle. To carry on business certain minimum level of working capital is
necessary on continues and uninterrupted basis. For all practical purpose, this
requirement will have to be met permanent as with other fixed assets.
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Any amount over and above the permanent level of working capital is
temporary, fluctuating or variable, working capital. This portion of the required
working capital is needed to meet fluctuation in demand consequent upon
changes in production and sales as result of seasonal changes .Both kind of
working capital ± permanent and fluctuating (temporary) are necessary to
facilitate production and sales through the operating cycle. The amou nt over and
above permanent working capital is temporarily variable or fluctuating.

In the above figure, it is shown that permanent working capital is stable over
time while temporary working capital is fluctuating ±some times increasing and
sometimes decreasing.


 
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The basic objective of financial management is to maximize shareholder¶s
wealth. For this it is necessary to generate sufficient profits. The extent to it,
which the profit can be earned, largely depends on the magnitude of sales.
However sales do not convert into cash instantly. There is invariable the time
gap between the sales of goods and receipts of cash. There is, therefore, a need
for working capital in the form of Current Assets to deal with the pr oblem
arising. Out of the lack of immediate realization of cash again goods sold.
Therefore, sufficient working capital is necessary to sustain sales activity.
Working capital is needed for the following purpose:
1. For the purchase of raw material, compon ents and spares.
2. To incur day to day expenses and overhead costs such as fuel, power and
office expenses, etc.
3. To meet selling costs as packing, advertisement etc.
4. To provide credit facilities to the customers.
5. To maintain the inventories of ra w material, work in progress, stores and

 
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spare and finished goods.
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Working capital requirements of a concern depends on a number of factors,
each of which should be considered carefully for determining the proper amount
of working capital. It may be however be added that these factors affect
differently to the different units and these keeps varying from time to time. In
general, the determinants of working capital which re common to all
organization¶s can be summarized as under:

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Working capital requirement of a firm are basically influenced by nature of
business. Trading and financial firms require a large sum of money to be
invested in working capital to carry large stocks of a variety of goods to sa tisfy
varied and continuous demands of their customers. Manufacturing and
construction firms have to invest substantially in working capital. In contrast,
Public utilities may have limited need for working capital because they may
have only cash sales and supply services, not product. So such concern have to
make adequate investment in current assets depending upon the total assets
structure and other variables.
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In very small company the working capital requirement is quit high due to high
overhead, higher buying and selling cost etc. as such medium size business
positively has edge over the small companies. But if the business start growing
after certain limit, the working capital requirements may adversely affect by the
increasing size.
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If the company is the operating in the time of boom, the working capital
requirement may be more as the company may like to buy more raw material,
may increase the production and sales to take the benefit of favorabl e market,
due to increase in the sales, there may more and more amount of funds blocked
in stock and debtors etc. similarly in the case of depressions also, working
capital may be high as the sales terms of value and quantity may be reducing,
there may be unnecessary piling up of stack without getting sold, the receivable
may not be recovered in time etc.
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In some business like machine tools industry, the time gap between the
acquisition of raw material till the end of final production of finished products


 
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itself is quit high. As such amount may be blocked either in raw material or
work in progress or finished goods or even in debtors. Naturally there need of
working capital is high. p
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Some companies need to keep large amount of working capital due to their
irregular sales and intermittent supply. Similarly companies using bulky
materials also maintain large reserves¶ of raw material inventories. This
increases the need of working capital. Some companies manufacture and sell
goods only during certain seasons. Working capital requirements of such
industries will be higher during certain season of such industries period.
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Production policies of the organization effe ct working capital requirements very
highly. Seasonal industries, which produces only in specific season requires
more working capital. Some industries which produces round the year but sale
mainly done in some special seasons are also need to keep more wo rking
capital.
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If the business is carried on more efficiently, it can operate in profits which may
reduce the strain on working capital; it may ensure proper utilization of existing
resources by eliminating the waste and improved coordination etc.

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Some time due to competition or custom, it may be necessary for the company
to extend more and more credit to customers, as result which more and more
amount is locked up in debtors or bills receivables whi ch increase the working
capital requirement. On the other hand, in the case of purchase, if the credit is
offered by suppliers of goods and services, a part of working capital
requirement may be financed by them, but it is necessary to purchase on cash
basis, the working capital requirement will be higher.
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The profitability of the business may be vary in each and every individual case,
which is in turn its depend on numerous factors, but high profitability will
positively reduce the strain on working capital requirement of the company,
because the profits to the extend that they earned in cash may be used to meet
the working capital requirement of the company.

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The quantum of working capital of a company is signific antly determined by its

 
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current assets policies. A company with conservative assets policy may operate
with relatively high level of working capital than its sales volume. A company
pursuing an aggressive amount assets policy operates with a relatively lower
level of working capital.

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Effective co ordination between production and distribution can reduce the need
for working capital. Transportation and communication means. If developed
helps to reduce the working capital requirement.


 
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Research methodology is a way to systematically solve the research problem. It
may be understood as a science of studying now research is done
systematically. In that various steps, those are generally adopted by a researcher
in studying his problem along with the logic behind them. It is important for
research to know not only the research method but also know methodology.
³The procedures by which researcher go about their work of describing,
explaining and predicting phenomenon are called methodology.´
Methods comprise the procedures used for generating, collecting and evaluating
data. All this means that it is necessary for the researcher to design his
methodology for his problem as the same may differ from problem to problem.
Data collection is important step in any project and success of any project will
be largely depend upon now much accurate you will be able to collect and how
much time, money and effort will be required to collect that necessary data, this
is also important steps. Data collection plays an important role in research work.
Without proper data available for analysis you cannot do the research work
accurately.
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There are two types of data collection methods available.
1. Primary data collection
2. Secondary data collection

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The primary data is that data which is collected fresh or first hand, and for first
time which is original in nature. Primary data can collect through personal
interview, questionnaire etc. to support the secondary data.
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The secondary data are those which have already collected and stored.
Secondary data easily get those secondary data from records, journals, annual
reports of the company etc. It will save the time, money and efforts to collectthe
data. Secondary data also made available through trade magazines, balance -
sheets, books etc.
This project is based on primary data collected through personal interview of

 
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head of account department, head of SQC department and other concerned staff
member of finance department. But primary data collection had limitations such
as matter confidential information thus project is based on secondary
information collected through five years annual report of the company,
supported by various books and internet sides. The data collection was aimed at
study of working capital management of the company .
Project is based on
1. Annual report of CEAT LTD. 2005-06
2. Annual report of CEAT LTD. 2006-07
3. Annual report of CEAT LTD. 2007-08
4. Annual report ofCEAT LTD. 2008-09
5. Annual report of CEAT LTD. 2009-10

?„ „
„Ô

Study of the working capital management is important because unless the
working capital is managed effectively, monitored efficiently planed properly
and reviewed periodically at regular intervals to remove bottlenecks if any the
company cannot earn profits and increase its turnover. With this primary
objective of the study, the following further objectives are framed for a depth
analysis.
1. To study the working capital manag ement of CEAT Ltd.
2. To study the optimum level of current assets and current liabilities of the
company.
3. To study the liquidity position through various working capital related ratios.
4. To study the working capital components such as receivables accounts, cash
management, Inventory position .
5. To study the way and means of working capital finance of the CEAT Ltd.
6. To estimate the working capital requi rement of CEAT Ltd.
7. To study the operating and cash cycle of the company.

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The scope of the study is identified after and during the study is conducted. The
study of working capital is based on tools like trend Analysis, Ratio Analysis,
working capital leverage, operating cycle etc. Further the study is based on last5
years Annual Reports of CEAT Ltd. And even factors likecompetitor¶s analysis,

  
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industry analysis were not considered while preparing this project.
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Following limitations were encountered while preparing this project:

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This project has completed with annual reports; it just constitutes one part of
data collection i.e. secondary. There were limitations for primary data collection
of confidentiality.
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This project is based on five year annual reports. Co nclusions and
recommendations are based on such limited data. The trend of last five year
may or may not reflect the real working capital position of the company .
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Also it was difficult to collect the data regarding the competitors and their
financial information. Industry figures were also difficult to get.
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The consideration of the level investment in current assets should avoid two
danger points excessive and inadequate investment in current assets. Investment
in current assets should be just adequate, not more or less, to the need of the
business firms. Excessive investment in current assets should be avoided
because it impairs the firm¶s profitability, as idle investment earns nothing. On
the other hand inadequate amount of working capital can be threatened solvency
of the firms because of its inability to meet its current obligation. It should be
realized that the working capital need of the firms may be fluctuating with
changing business activity. This may cau se excess or shortage of working
capital frequently. The management should be prompt to initiate an action and
correct imbalance.

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Inventories p
40607.57 21941.63 34106.00 22121.71 18345.44

Sundry Debtors
37631.61 31870.85 30790.82 26317.07 25322.77

Cash & Bank Balance

13998.91 20151.84 4158.70 4055.13 3961.27
Loan & Advances p
11010.26 7942.64 8142.41 5606.20 6304.06
Short Term
Investments 4300.42 4106.66 960.23 1711.13 1711.13

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Current Liabilities
75467.04 48905.12 52827.32 48964.85 47032.53

Provisions
3635.82 1780.29 2524.81 3513.12 3853.78
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In working capital analysis the direction at changes over a period of time is of
crucial importance. Working capital is one of the important fields of
management. It is therefore very essential for an analyst to make a study about
the trend and direction of working capital over period of time. Such analysis
enables as to study the upward and downward trend in current assets and current
liabilities and its effect on the working capital position.
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today conversion trend, also called secular or long term need is the basic
tendency of population, sales, income, current assets, and current liabilities to
grow or decline over a period of time´

 
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movement in the series. It can be increasing or decreasing.´

Emphasizing the importance of working capital trends, 

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 have pointed out that ³analysis of working capital trends provide as base
to judge whether the practice and privilege policy of the management with
regard to working capital is good enough or an important is to be made in
managing the working capital funds. p

Further, any one trend by it self is not very informative and therefore
comparison with
Illustrated their ideas in these words, ³An upwards trends coupled with
downward trend or sells, accompanied by marked increase in plant investment
specially if the increase in planning investment by fixed interest obligation´

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Inventories 18345.44 22121.71 34106.00 21941.63 40607.57
Sundry Debtors 25322.77 26317.07 30790.82 31870.85 37631.61
Cash & Bank
balances 3961.27 4055.13 4158.70 20151.84 13998.91

Loan & Advances 6304.06 5606.20

8142.41 7942.64 11010.26
Short term
1711.13
Investments 1711.13 960.23 4106.66 4300.42

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Analysis of current assets components enables one to examine in which
components the working capital fund has locked. A large tie up of funds in
inventories affects the profitability of the business or the major portion of


 
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current assets is made up cash alone, the profitability will be decreased because
cash is non earning assets. As we observed that the level of current assets
increasing in accordance with increase in sales & production.

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Inventories 32.96 36.98 43.63 25.5 37.75
Sundry Debtors 45.5 44.0 39.4 37.05 34.99
Cash and Bank Balances 7.11 6.77 5.32 23.43 13.02
Short Term Investments 11.33 9.37 10.41 9.23 10.23
Loan and Advances 3.07 2.86 1.23 4.77 4.0

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It was observed that the size of current assets is increasing with increases in the
sales. The excess of current assets is showing positive liquidity position of the
firm but it is not always good because excess current assets then required, it
may adversely affects on profitability. Current assets include some funds


 
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investments for which company pay interest. Company is managing its Debtors
efficiently which is a source of liquidity. In 2009 there are is significant increase
in cash and bank balances due to encashment of inventory.

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Current liabilities mean the liabilities which have to pay in current year. It
includes sundry creditor¶s means supplier whose payment is due but not paid
yet, thus creditors called as current liabilities. Current liabilities also include
short term loan and provision as tax provision. Current liabilities also includes
bank overdraft. For some current assets like bank overdrafts and sho rt termloan,
company has to pay interest thus the management of current liabilities has
importance.

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Current Liabilities 47032.53 48964.85 52827.32 48905.12 75467.04

Provisions 3853.78 3513.12 2524.81 1780.29 3635.83


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Current liabilities show continues growth each year because company creates
the credit in the market by good transaction. To get maximum credit from
supplier which is profitable to the company it reduces the need of working
capital of firm. As a current liability increase in the year 2009-10 by 44% it
reduce the working capital size in the same year. But company enjoyed over
creditors which may include indirect cost of credit terms.

Changes in working capital

There are so many reasons to changes in working capital as follow

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The changes in sales and operating expanses may be due to three reasons
1. There may be long run trend of change e.g. the price of row material say oil
may constantly raise necessity the holding of large inventory.
2. Cyclical changes in economy dealing to ups and downs in business activity
will influence the level of working capital both permanent and temporary.
3. Changes in seasonality in sales activities
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The second major case of changes in the level of working capital is because of
policy changes initiated by management. The term current assets policy may be
defined as the relationship between current assets and sales volume.

 
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The third major point if changes in working capital are changes in technology
because changes in technology to install that technology in our business more
working capital is required
A change in operating expenses rise or full will have similar effects on the
levels of working following working capital statement is prepared on the base of
balance sheet of last two year.


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Inventories 21941.63 40607.57 18665.94
Sundry
Debtors 31870.85 37631.61 5760.76
Cash and
Bank
Balances 20151.84 13998.91 6152.93
Short Term
Investments 7942.64 11010.26 3067.62
Loan and
Advances 4106.66 4300.42 193.76
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Current
liabilities 48905.12 75467.04 26561.92

Provisions
1780.29 3635.82 1855.53
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Observations
In 2009-10 working capital decreased because
1. Increase in current liabilities is more than increase in current assets.
2. Cost of material is also increased more than sales increase

  ?

The need of working capital arrived because of time gap between productions of
goods and their actual realization after sale. This time gap is called ³ Operating
Cycle´ or ³Working Capital Cycle´. The operating cycle of a company consist
of time period between procurement of inventory and the collection of cash
from receivables. The operating cycle is the length of time between the
company¶s outlay on raw materials, wages and other expanses and inflow of
cash from sales of goods.
Operating cycle is an import ant concept in management of cash and
management of cash working capital. The operating cycle reveals the time that
elapses between outlays of cash and inflow of cash. Quicker the operating
cycleless amount of investment in working capital is needed and it improves
profitability. The duration of the operating cycle depends on nature of industries
and efficiency in working capital management.

  
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Ratio analysis is the powerful tool of financial statements analysis. A ratio is
define as ³the indicated quotient of two mathematical expressions´ and as ³ the
relationship between two or more things´. The absolute figures reported in the
financial statement do not provide meaningful understanding of the
performance and financial position of the firm. Ratio helps to summaries large
quantities of financial data and to make qualitative judgment of the firm¶s
financial performance.


  
 
Ratio analysis helps to appraise the firms in the term of there profitability and
efficiency of performance, either individually or in relation to other firms insane
industry. Ratio analysis is one of the best possible techniques available to
management to impart the basic functions like planning and control. As futureis
closely related to the immediately past, ratio calculated on the basis historical
financial data may be of good assistance to predict the future. E.g. On the basis
of inventory turnover ratio or debtor¶s turnover ratio in the past, the level of
inventory and debtors can be easily ascertained for any given amount of sales.
Similarly, the ratio analysis may be able to loca te the point out the various areas
which need the management attention in order to improve the situation. E.g.
Current ratio which shows a constant decline trend may be indicate the need for
further introduction of long term finance in order to increase the liquidity
position. As the ratio analysis is concerned with all the aspect of the firm¶s
financial analysis liquidity, solvency, activity, profitability and overall
performance, it enables the interested persons to know the financial and
operational characteristics of an organization and take suitable decisions.

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1. The basic limitation of ratio analysis is that it may be difficult to find abases
for making the comparison
2. Normally, the ratios are calculated on the basis of historical financial
statements. An organization for the purpose of decision making mayneed the
hint regarding the future happiness rather than those in the past.
The external analyst has to depend upon the past which may not necessary to


 
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reflect financial position and performance in future.
3. The technique of ratio analysis may prove inadequate in some situations if
there is differs in opinion regarding the interpretation of certain ratio.
4. As the ratio calculates on the basis of financial statements, the basic
limitation which is applicable to the financial statement is equally applicable In
case of technique of ratio analysis also i.e. only facts which can be expressed in
financial terms are considered by the ratio analysis.
5. The technique of ratio analysis has certain limitations of use in the sense that
it only highlights the strong or problem arias, it dose not p rovide any solution to
rectify the problem arias
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Working capital ratio means ratios which are related with the working capital
management e.g. current assets, current liabilities, liquidity, profitability andrisk
turnoff etc. these ratio are classified as follows

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The ratios compounded under this group indicate the efficiency of the
organization to use the various kinds of assets by converting them the form of
sale. This ratio also called as activity ratio or assets management ratio. As the
assets basically categorized as fixed assets and current assets and the current
assets further classified according to individual components of current assetsviz.
investment and receivables or debtors or as net current assets, the important of
efficiency ratio as follow
1. Working capital turnover ratio
2. Inventory turnover ratio
3. Receivable turnover ratio
4. Current assets turnover ratio
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The ratios compounded under this group indicate the short term position of the
organization and also indicate the efficiency with which the working capital is
being used. The most important ratio under this group is follows
1. Current ratio
2. Quick ratio
3. Absolute liquid ratio
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Working capital turnover ratio
It signifies that for an amount of sales, a relative amount of working capital is
needed. If any increase in sales contemplated working capital should be
adequate and thus this ratio helps management to maintain the adequate level of
working capital. The ratio measures the efficiency with which the working
capital is being used by a firm. It may thus compute net working capital
turnover by dividing sales by working capital.

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Sales 195199.32 239061.20 260296.57 275843.13 298997.20
Net W. C. 4758.88 7333.27 22806.03 35328.21 28445.91
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High working capital ratio indicates the capability of the organization to achieve
maximum sales with the minimum investment in working capital. Company¶s
working capital ratio shows mostly more than two, except for the year 2005-06
because of excess of cash balance in current assets which occurred due to
encashment of deposits. In the year 2007 the ratio was around3, it indicates that
the capability of the company to achieve maximum sales with the minimum
investment in working capital.
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Inventory turnover ratio indicates the efficiency of the firm in producing and
selling its products. It is calculated by dividing the cost of good sold by average
inventory:

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The average inventory is the average of opening and closing balance of

inventory in a manufacturing company like CEAT inventory of finished goods
issued to calculate inventory turnover ratio

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Cost of 176483.44 209830.27 223567.36 259582.23 261062.82
goods sold


 
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Average 17582.93 20233.57 28113.85 28023.81 31274.6
Inventory
Inventory 10.04 10.37 7.95 9.26 8.34
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It was observed that Inventory turnover ratio indicates maximum sales achieved
with the minimum investment in the inventory. As such, the general rule high
inventory turnover is desirable but high inventory turnover ratio may not
necessary indicates the profitable situation. An organization, in order to achieve
large sales volume may sometime sacrifice on profit, inventory ratio may not
result into high amount of profit.
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The derivation of this ratio is made in following way
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Gross sales are inclusive of excise duty and scrap sales because both may
entering to receivables by credit sales. Average receivable calculate by opening
plus closing balance divide by 2. Increasing volume of receivables without
matching increase in sales is reflected by a low receivable turnover ratio. It is
indication of slowing down of the collection system or an extend line of credit
being allowed by the customer organization. The latter may be due to the fact
that the firm is loosing out to competition. A credit manager engage in the task
of granting credit or monitoring receivable should take the hint from a falling
receivable turnover ratio use his market intelligence to find out the reason
behind such failing trend. Debtor turnover indicates the number of times debtors
turnover each year. Generally the higher the value of debtor¶ s turnover, the
more is the management of credit.
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Gross Sales
195199.32 239061.20 260296.57 275843.13 298997.20

Average
24491.4 25819.92 28553.94 31330.83 34751.23
Debtors
Receivable
7.97 9.25 9.11 8.80 8.60
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It was observed from receivable turnover ratio that receivables turned around
the sales were less than 4 times. The actual collection period was more than
normal collection period allowed to customer. It concludes that over investment
in the debtors which adversely affect on requirement of the working capital
finance and cost of such finance. p
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Current assets turnover ratio is calculate to know the firms efficiency of
utilizing the current assets .current assets includes the assets like inventories,
sundry debtors, bills receivable, cash in hand or bank, marketable securities,
prepaid expenses and short term loans and advances. This ra tio includes the
efficiency with which current assets turn into sales. A higher ratio implies a
more efficient use of funds thus high turnover ratio indicate to reduced the
lockup of funds in current assets. An analysis of this ratio over a period of
timereflects working capital management of a firm.

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Gross Sales 195199.32 239061.20 260296.57 275843.13 298997.20
Current
55645.19 59811.24 78158.16 86013.62 107548.77
Assets
Current 3.50 3.99 3.30 3.20 2.78
Assets
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It was observed that current assets turnover ratio does not indicate any trend
over the period of time. Turnover ratio was 0.92 in the year 2002 -03 and
increase to 1.10 and 1.30 in the year 2004 and 2005 respectively, but it
decreased in the year 2005-06, because of high cash balance. Cash did not help
to increase in sales volume, as cash is non earning asset. In the year
2006-07company increased its sales with increased investment in current assets,
thus current assets turnover ratio increased to 1.39 from 1.1 in the year 2005 -06


 
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The current is calculated by dividing current assets by cur rent liabilities:

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Current assets include cash and those assets which can be converted in to cash
within a year, such marketable securities, debtors and inventories. All
obligations within a year are include in current liabilities. Current liabilities
include creditors, bills payable accrued expenses, short term bank loan income
tax liabilities and long term debt maturing in the current year. Current ratio
indicates the availability of current assets in rupees for every rupee of current
liability.

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Current
Assets 55645.19 59811.24 78158.16 86013.62 107548.77

Current
50886.31 52477.97 55352.13 56685.41 79102.86
Liabilities

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Quick ratios establish the relationship between quick or liquid assets and
liabilities. An asset is liquid if it can be converting in to cash immediately or
reasonably soon without a loss of value. Cash is the most liquid asset .other
assets which are consider to be relatively liquid and include in quick assets are
debtors and bills receivable and marketable securities. Inventories areconsidered
as less liquid. Inventory normally required some time for realizing into cash.
Their value also is tendency to fluctuate. The quick ratio is found out by
dividing quick assets by current liabilities

Quick Ratio = (Current Assets ± Inventory)/ Current Liabilities

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Liquid 37299.75 37689.53 44052.16 64071.99 66941.20
Current
Assets
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50886.31 52477.97 55352.13 56685.41 79102.86

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Quick 0.73 0.71 0.79 1.13 0.84
Ratio


  
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Quick ratio indicates that the company has sufficient liquid balance for the
payment of current liabilities. The liquid ratio of 1:1 is suppose to be standardor
ideal but here ratio is more than 1:1 over the period of time, it indicates thatthe
firm maintains the over liquid assets than actual requirement of such assets.In
the year 2006-07 company had Rs.1.79 cash for every 1 rupee of expenses;such
a policy is called conservative policy of finance for working capital, Rs.0.79 is
the ideal investment which affects on the cost of the fund and returns onthe
funds.
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Even though debtors and bills receivables are considered as more liquid then
inventories, it can not be converted in to cash immediately or in time. Therefore
while calculation of absolute liquid ratio only the absolute liquid assets as like
cash in hand cash at bank, short term marketable securities are taken in to
consideration to measure the ability of the company in meeting short term
financial obligation. It calculates by absolute assets dividing by current
liabilities.

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Absolute 11976.98 11372.46 13261.34 32201.14 21309.59
Liquid
Assets
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50886.31 52477.97 55352.13 56685.41 79102.86

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Absolute 0.23 0.22 0.24 0.56 0.26
Liquid
Assets

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Receivables or debtors are the one of the most important parts of the current
assets which is created if the company sells the finished goods to the customer
but not receive the cash for the same immediately. Trade credit arises when firm
sells its products and services on credit and dose not receive cash immediately.
It is essential marketing tool, acting as bridge for the movement of goods
through production and distribution stages to customers. Trade credit creates
receivables or book debts which the firm is expected to collect in the near
future. The receivables include three characteristics
1) It involve element of risk which should be carefully analysis.
2) It is based on economic value. To the buyer, the economic value in goods or
services passes immediately at the time of sale, while seller expects an
equivalent value to be received later on
3) It implies futurity. The cash payment for goods or serves received by the
buyer will be made by him in a future period.
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The sales of goods on credit basis are an essential part of the modern
competitive economic system. The credit sales are generally made up on
account in the sense that there are formal acknowledgements of debt obligation
through a financial instrument. As a marketing tool, they are intended top
promote sales and there by profit. However extension of credit involves risk and
cost, management should weigh the benefit as well as cost to determine the goal
of receivable management. Thus the objective of receivable management is to
promote sales and profit until that point is reached where the return on
investment in further funding of receivables is less .than the cost of funds raised
to finance that additional credit .

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Sundry
25322.77 26317.07 30790.82 31870.85 37631.61
Debtors
Indices 100 103.93 121.60 125.90 148.61


 
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The average collection period measures the quality of debtors since it indicate
the speed of there collection. The shorter the average collection period, the
better the quality of the debtors since a short collection period implies the
prompt payment by debtors. The average collection period should be compared
against the firm¶s credit terms and policy judges its credit and collection
efficiency. The collection period ratio thus helps an analyst in two respects.
1. In determining the collectability of debtors and thus, the efficiency of
collection efforts.
2. In ascertaining the firm¶s comparative strength and advantages related toits
credit policy and performanc e.
The debtor¶s turnover ratio can be transformed in to the number of days of
holding of debtors.


 
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The term µinventory¶ is used to designate the aggregate of those items oftangible
assets which are
1. Finished goods (µsaleable¶)
2. Work-in-progress (µconvertible¶)
3. Material and supplies (µconsumable¶)
In financial view, inventory defined as the sum of the value of raw material and
supplies, including spares, semi-processed material or work in progress and
finished goods. The nature of inventory is largely depending upon the type of
operation carried on. For instance, in the case of a manufacturing concern, the
inventory will generally comprise all three groups mentioned above while in
thecae of a trading concern, it will simply be by stock- in- trade or finished
goods.

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In company there should be an optimum level of investment for any asset,
whether it is plant, cash or inventories. Again inadequate disrupts productionand
causes losses in sales. Efficient management of inventory should ultimately
result in wealth maximization of owner¶s wealth. It implies that while the
management should try to pursue financial objective of turning inventory as
quickly as possible, it should at the same time ensure sufficient inventories to
satisfy production and sales demand. The objectives of inventory management
consist of two counterbalancing parts:
1. To minimize the firms investment in inventory
2. To meet a demand for the product by efficiently organizing the firms
production and sales operation.
This two conflicting objective of inventory management can also be expressedin
term of cost and benefits associated with inventory. That the firm should
minimize the investment in inventory implies that maintaining an inventorycost,
such that smaller the inventory, the better the view point .obviously, thefinancial
manager should aim at a level of inventory which will re concile theseconflicting
elements. Some objective as follow
1. To have stock available as and when they are required.
2. To utilize available storage space but prevents stock levels fromexceeding
space available.


 
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3. To maintain adequate accountability of i nventories assets.
4. To provide, on item ± by- item basis, for re-order point and order such
quantity as would ensure that the aggregate result confirm with the constraint
and objective of inventory control.
To keep low investment in inventories carrying cost an obsolesce losses to the
minimum.

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Raw 6716.24 10277.85 18659.72 6553.97 20898.56
Material
W.I.P. 2004.70 2224.78 2252.06 1720.79 3660.25
Finished 8003.40 8080.44 11480.27 11888.49 13276.47
Goods
Other 1621.10 1538.64 1713.95 1778.38 2772.29
Inventory
Total 18345.44 22121.71 34106.00 21941.63 40607.57
Indices 100 117.07 185.90 119.60 221.34

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The manufacturing firm¶s inventory consist following components

I) Raw material
ii) Work- in-progress
iii) Finished goods
To analyze the level of raw material inventory and work in progress inventory
held by the firm on an average it is necessary to examine the efficiency with
which the firm converts raw material inventory and work in progress into
finished goods.

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The reciprocal of inventory turnover gives average inventory holding in
percentage term. When the numbers of days in year are divided by inventory
turnover, we obtain days of inventory holding (DIH).

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Inventory 10.04 10.37 7.95 9.26 8.34
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Days of 36 35 46 39 44
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Cash is common purchasing power or medium of exchange. As such, it forms
the most important component of working capital. The term cash with reference
to cash management is used in two senses, in narrow sense it is used broadly to
cover cash and generally accepted equivalent of cash such as cheques, draft and
demand deposits in banks. The broader view of cash also induce hear - cash
assets, such as marketable sense as marketable securities and time deposits in
banks. The main characteristics of this deposits that they can be really sold and
convert in to cash in short term. They also provide short term investment outlet
for excess and are also useful for meeting planned outflow of funds. We employ
the term cash management in the broader sense. Irrespective of the form in
which it is held, a distinguishing feature of cash as assets is that it was
nonearning power. Company have to always maintain the cash balance to fulfill
the dally requirement of expenses. There are four primary motive for maintain
the cash as follow
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There are four motives for holding cash as follow
1. Transaction motive
2. Precautionary motive
3. Speculative motive
4. Compensating motive
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Cash balance is necessary to meet day-to-day transaction for carrying on with
the operation of firms. Ordinarily, these transactions include payment for
material, wages, expenses, dividends, taxation etc. there is a regular inflow of
cash from operating sources, thus in case of JISL there will be two-way flow of
cash- receipts and payments. But since they do not perfectly synchronize,
minimum cash balance is necessary to uphold the operations for the firm if cash
payments exceed receipts.
Always a major part of transaction balances is held in cash, a part may be held
in the form of marketable securities whose maturity conforms to the timing of
anticipated payments of certain items, such as taxation, dividend etc.


 
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Cash flows are somewhat unpredictable, with the degree of predictability
varying among firms and industries. Unexpected cash needs at short notice may
also be the result of following:
1. Uncontrollable circumstances such as strike and natural calamities.
2. Unexpected delay in collection of trade dues.
3. Cancellation of some order for goods due unsatisfactory quality.
4. Increase in cost of raw material, rise in wages, etc.
The higher the predictability of firm¶s cash flows, the lower will be the
necessity of holding this balance and vice versa. The need for holding the
precautionary cash balance is also influenced by the firm¶s capacity to have
short term borrowed funds and also to convert short term marketable securities
into cash.
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Speculative cash balances may be defined a s cash balances that are held tenable
the firm to take advantages of any bar gain purchases that might ariseWhile the
precautionary motive is defensive in nature, the speculative motive aggressive
in approach.
However, as with precautionary balances, firms today are more likely to rely
onreserve borrowing power and on marketable securities portfolios than on
actualcash holdings for speculative purposes.

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Cash does not enter in to the profit and loss account of an enterprise, hence cash
is neither profit nor losses but without cash, profit remains meaningless for an
enterprise owner.
1. A sufficient of cash can keep an unsuccessful firm going despite losses
2. An efficient cash management through a relevant and timely cash budgetmay
enable a firm to obtain optimum working capital and ease thestrains of cash
shortage, fascinating temporary investment of cash andproviding funds normal
growth.
3. Cash management involves balance sheet changes and other cash flowthat do
not appear in the profit and loss account such as capitalexpenditure.

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Cash and


  
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Bank 3961.27 4055.13 4158.70 20151.84 13998.91
Balances
Cash & 100 102.37 104.98 508.72 353.39
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Indices

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One of the distinguishing features of the fund employed as working capital is
that constantly changes its form to drive µbusiness wheel¶. It is also known as¶
circulating capital¶ which means current assets of the company, which are
changed in ordinary course of business from one form to another, as for
example, from cash to inventories, inventories to receivables and receivables to
cash.


 
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Basically cash management strategies are essentially related to the cash cycle
together with the cash turnover. The cash cycle refers to the process by which
cash is used to purchase the row material from which are produced goods,which
are then send to the customer, who later pay bills. The cash turnovermeans the
number of time firms cash is used during each year.


 
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Funds available for period of one year or less is called short term finance. In
India short term finance are used as working capital finance. Two most
significant short term sources of finance for working capital are trade credit and
bank borrowing. Trade credit ratio of current assets is about 40%, it is indicated
by Reserve Bank of India data that trade credit has grown faster than the growth
in sales. Bank borrowing is the next source of working capital finance. The
relative importance of this varies from time to time depending on the prevailing
environment. In India the primary source of working capital financing are trade
credit and short term bank credit. After determine the level of working capital,
affirm has to consider how it will finance. Following are sources of working
capital finance.
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1) Trade credit
2) Bank Finance
3) Letter of credit
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Trade credit refers to the credit that a customer gets from suppliers of goods in
the normal course of business. The buying firms do not have to pay cash
immediately for the purchase made. This deferral of payments is a short term
financing called trade credit. It is major source of financing for firm.
Particularly small firms are heavily depend on trade credit as a source of finance
since they find it difficult to raised funds from banks or other sources in the
capital market. Trade credit is mostly an informal arrangement, and it granted
on an open account basis. A supplier sends goods to the buyers accept, and thus,
in effect, agrees to pay the amount due as per sales terms in the invoice. Trade
credit may take the form of bills payable. Credit terms refer to the condition
under which the supplier sells on credit to the buyer, and the buyer required to
repay the credit. Trade credit is the spontaneous source of the financing. As the


 
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volume of the firm¶s purchase increase trade credit also expand. It appears to be
cost free since it does not involve explicit interest charges, but in practice, it
involves implicit cost.
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Banks are main institutional source of working capital finance in India. After
trade credit, bank credit is the most important source of financing working
capital in India. A banks considers a firms sales and production plane and
desirable levels of current assets in determining its working capital
requirements. The amount approved by bank for the firm¶s working capital
installed credit limit. Credit limit is the maximum funds which a firm can obtain
from the banking system. In practice banks do not lend 100% credit limit; they
deduct margin money.
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1. Term Loan
2. Overdraft
3. Cash credit
4. Purchase or discounting of bills

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In this case, the entire amount of assistance is disbursed at one time only, ther e
in cash or the company¶s account. The loan may be paid repaid in installments
will charged on outstanding balance.
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In this case, the company is allowed to withdraw in excess of t he balance
standing in its Bank account. However, a fixed limit is stipulated by the Bank
beyond which the company will not able to overdraw the account. Legally,
overdraft is a demand assistance given by the bank i.e. bank can ask repayment
at any point of time.
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In practice, the operations in cash credit facility are similar to those of those of
overdraft facility except the fact that the company need not have a formal
current account. Here also a fixed limit is stipulated beyond which the company
is not able to withdraw the amount.
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This form of assistance is comparatively of recent origin. This facility
enablesthe company to get the immediate payment against the credit bills /

 
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invoice raised by the company. The banks hold the bills as a security till the
payment is made by the customer. The entire amount of bill is not paid to the
company. The company gets only the present worth of amount of bill from of
discount charges. On maturity, bank collects the full amount of bill from the
customer.
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In this case the exporter and the importer are unknown to each other. Under
these circumstances, exporter is worried about getting the payment from the
importer and importer is worried as to whether he will get goods or not. In this
case, the importer applies to his bank in his country to open a letter of credit in
favor of the exporter whereby the importers bank undertakes to pay the exporter
or accept the bills or draft drawn by the exporter on the exporter fulfilling the
terms and conditions specified in the letter of credit.
Banks have been certain norms in granting working capital finance to
companies. These norms have been greatly influenced by the recommendation
of various committees appointed by the Reserve Bank of India from time
totime. The norms of working capital finance followed by bank since mid -
70were mainly based on the recommendations of the Tondan committee. The
Chore committee made further recommendations to strengthen the
procedureand norms for working capital finance by banks.


 
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Recommendation can be use by the firm for the betterment increased of the firm
after study and analysis of project report on study analysis of working capital. I
would like to recommend.

1. Company should take control on debtor¶s collection period which is major

part of current assets.

2. Company has to take control on cash balance because cash is non earning
assets and increasing cost of funds.

3. Company should reduce the inventory holding period with use of zero
inventory concepts.

Over all company has good liquidity position and sufficient funds to repayment
of liabilities. Company has accepted conservative financial policy and thus
maintaining more current assets balance .


 
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