Working Capital Management B.anitha

WORKING CAPITAL MANAGEMENT
INTRODUCTION
Working capital is often referred to as life blood of an organization as it is the money used for carrying day to day activities of an organization. The management of fixed and current assets is similar to that of fixed assets in the sense that in both cases a firm analyses their effects on its return and risk. The management of fixed and current assets, how ever, differs in three important ways first in managing fixed assets, time is a very important factor, Consequently, discounting and compounding techniques play a significant role in capital budgeting and a minor one in the management of current assets. Second, the large holding of current assets, especially cash, strengthens the firms liquidity position (and reduces riskiness), but also reduces the overall profitability. Thus, a risk-return trade off is involved in holding current assets. A level of fixed as well as current assets depends upon expected sales, but it is only current assts which can be adjusted with sales fluctuations in short run. Working capital is probably the most often used financial management concept verbally and misused practically. Independent of the nature of an organization have failed or become sick mainly due to the mismanagement of this vital working capital. This study on WORKING CAPITAL has done for SREE RAYALASEEMA GREEN ENERGY LTD which is located at LAKSHMI PURAM, KURNOOL.
ST. JOHNS COLLEGE OF ENGG & TECH
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OBJECTIVES OF THE STUDY

o To study the existing system of working capital management in SREE RAYALASEEMA GREEN ENERGY LTD. o To examine feasibility of present system of managing cash, debtors and inventory in the SREE RAYALASEEMA GREEN ENERGY LTD. o To analysis the financial performance of the company with reference to its working capital components. o Suggesting a better way if any for improving management of working capital.
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NEED FOR THE STUDY

In any of the organization working capital plays an important role. Under (or) over estimation of working capital affects the profitability and liquidity of the company financial position. Especially in power industry operating cycle will be more days, so they need more working capital and estimation is very difficult. So it is very much needed to analyze the efficiency of working capital management in those industries.
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SCOPE OF THE STUDY

The study confines itself to working capital management of SREE RAYALASEEMA GREEN ENERGY LTD, Kurnool. The study therefore excludes the non-financial areas such as production, marketing, personal from its premises. The scope is limited to the operations of SREE RAYALASEEMA GREEN ENERGY LTD, Kurnool only.
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RESEARCH METHODOLOGY DATA COLLECTION:

The study is based entirely on the data that has been collected. This data for every study is as types Primary Data Secondary Data
Primary data:
The information collected directly without any reference is primary data. In the study it is through conversation with concerned officers or staff members, and individual observations and inferences.
Secondary data:
The secondary data used in this study have been taken from published annual reports of the company, various text books and websites. TOOLS FOR ANALYSIS: The tools used for the analysis are ratio analysis, tables and graphs.
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LIMITATIONS OF THE STUDY

The following are the limitations of the analyzing the financial statements. Analyzing data, they are as follows. The study covers only the working capital management of the company with the help of secondary data collected from the office. The data collected is based on financial statements, which may have certain limitations. Limitations of ratio analysis are also limitations of my study.
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INDUSTRY PROFILE
Innovation new things and utilizing the waste to create things is important for under developed and developing countries. Utilization of waste hunk & all other waste material for producing the useful things indicated the development point of the country. The factors of productions like land, labour capital & organization should be properly mixed to achieve the success. In every production unit (or) office administration some resources are important for their smooth running like electricity i.e., power play important tool for deciding the yearly budget. Historically the pattern of electricity i.e., power is strong in economic growth during periods.
Power:
In India, cost of power constitutes 70% of the cost of production. Such importance by the power.
Process:
SRGEL is a thermal power plant using Biomasses as fuel against coal or oil as in case of conventional power plants. Biomasses mean agri wastes and are renewable sources of energy, while are normally also posted by the farmers and agro industries by burning it. The biomass burn with improper combustion could result in release of carbon monoxide. The conventional fuels like coal and oil used in power generation also release Carbon Monoxide, which is a major cause for the green house effect. But biomass used as fuel in the power plants is fixed under proper combustion, hence carbon dioxide is released in place of carbon monoxide, SRGEL has installed steam generating unit (Boiler) of 5.4 MW capacity and Turbo Generator of 7.5 MW Capacity. In boiler biomass fuels are burnt and steam is generated which is used for rolling the turbine and there by power is generated. There is a 2.1 MW spare capacity in turbine. SRGEL is envisaging to establish a sponge iron plant, there by this spare capacity of Turbine can be utilized to the extent of 100%.
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BIOMASS ENERGY AND CO-GENERATION (NON-BAGASSE) IN INDUSTRY The industrial sector today consumes approximately 35% of total electricity generated in the country. At the same time, high quality stable power is required to attain the higher growth rate projected for this sector. Majority of industries in India require both electrical and thermal energy. Today, they either buy power from the State Electricity Boards, or generate their own power largely through diesel generators and meet their thermal energy requirements through captive means mostly utilizing fossil fuels such as coal, oil or natural gas. As fossil fuels are limited, and have adverse environmental impact, it would be appropriate to use non-conventional energy sources including biomass resources such as crop residues and agro-industrial wastes for generation of energy in the industries mainly through biomass gasification technology for meeting their total / partial requirements for both electrical and thermal energy. There are several industries such as sugar, paper and pulp, textiles, fertilizers, petroleum, petrochemicals and food processing, etc. which require electrical as well as thermal energy for their operations. These requirements can either be met through different energy sources, or from a single source, which is capable of generating electricity as well as producing thermal energy. Simultaneous production of power and thermal energy from a single fuel source is termed as co-generation. The power generated from such co-generation plants can be used for meeting the captive requirements and the surplus power produced can be exported. Industrial co-generation has in the past not received adequate attention, as cheap power and fuel were abundantly available. However, with increasing tariffs, and unreliable supply of grid power, there is considerable opportunity for the industrial sector to tap the potential for producing electricity and thermal energy in the co-generation mode. As per certain estimates, there is a potential for power generation of about 15,000 MW (including sugar industry) through co-generation in various core industries in the country. In particular, there is significant potential in breweries, caustic soda plants, textile mills,
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distilleries, fertilizer plants, paper and pulp industry, solvent extraction units, rice mills, petrochemical plants, etc. Furthermore, co-generation projects based on conventional fuels such as coal, oil, lignite, gas and un/semi-utilized wastes / rejects like colcothar, coal rejects and refinery mud, etc. can also be installed in industry for meeting their power and energy requirements. The Ministry has notified a Scheme on Biomass Energy and Co- Generation (nonbiogases) in industry with the following objectives: To encourage the deployment of biomass energy systems in industry for meeting thermal and electrical energy requirements. To promote decentralized / distributed power generation through supply of surplus power to the grid. To conserve the use of fossil fuels for captive requirements in industry. To bring about reduction in greenhouse gas emissions in industry To create awareness about the potential and benefits of alternative modes of energy generation in industry. The scheme has a provision for providing Central Financial Assistance for encouraging setting up Biomass Gasifies and Biomass Co-generation (non-biogases) projects in the industries for meeting their thermal and electricity requirements.
Electricity from Biomass:

The term "biomass" encompasses diverse fuels derived from timber, agriculture and food processing wastes or from fuel crops that are specifically grown or reserved for electricity generation. Biomass fuel can also include sewage sludge and animal manure. Some biomass fuels are derived from trees. Given the capacity of trees to regenerate, these fuels are considered renewable. Burning crop residues, sewage or manure - all wastes that are continually generated by society -- to generate electricity may offer environmental benefits in the form of preserving precious landfill space or may be grown and harvested in ways that cause environmental harm.
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At present, most biomass power plants burn lumber, agricultural or construction/demolition wood wastes. Direct Combustion power plants burn the biomass fuel directly in boilers that supply steam for the same kind of steam-electric generators used to burn fossil fuels. With biomass gasification, biomass is converted into a gas - methane - that can then fuel steam generators, combustion turbines, combined cycle technologies or fuel cells. The primary benefit of biomass gasification, compared to direct combustion, is that extracted gasses can be used in a variety of power plant configurations. In terms of capacity, biomass power plants represent the second largest amount of renewable energy in the nation. Because biomass technologies use combustion processes to produce electricity, they can generate electricity at any time, unlike wind and most solar technologies, which only produce when the wind is blowing or sun is shining. Biomass power plants currently represent 11,000 MW - the second largest amount of renewable energy in the nation.
The environmental impacts:

Whether combusting directly or engaged in gasification, biomass resources do generate air emissions. These emissions vary depending upon the precise fuel and technology used. If wood is the primary biomass resource, very little SO 2 comes out of the stack. NOx emissions vary significantly among combustion facilities depending on their design and controls. Some biomass power plants show a relatively high NOx emission rate per kilowatt hour generated if compared to other combustion technologies. This high NOx rate, an effect of the high nitrogen content of many biomass fuels, is one of the top air quality concerns associated with biomass. Carbon monoxide (CO) is also emitted - sometimes at levels higher than those for coal plants. Biomass plants also release carbon dioxide (CO2), the primary greenhouse gas. However, the cycle of growing, processing and burning biomass recycles CO2 from the atmosphere. If this cycle is sustained, there is little or no net gain in atmospheric CO2. Given that short rotation woody crops (i.e., fast growing woody plant types) can be planted, matured and harvested in shorter periods of time than natural growth forests, the managed
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production of biomass fuels may recycle CO2 in one-third less time than natural processes. Biomass power plants also divert wood waste from landfills, which reduces the productions and atmospheric release of methane, another potent greenhouse gas. Another air quality concern associated with biomass plants is particulates. These emissions can be readily controlled through conventional technologies. To date, no biomass facilities have installed advanced particulate emission controls. Still, most particulate emissions are relatively large in size. Their impacts upon human health remain unclear. The collection of biomass fuels can have significant environmental impacts. Harvesting timber and growing agricultural products for fuel requires large volumes to be collected, transported, processed and stored. Biomass fuels may be obtained from supplies of clean, uncontaminated wood that otherwise would be land filled or from sustainable harvests. In both of these fuel collection examples, the net environmental plusses of biomass are significant when compared to fossil fuel collection alternatives. On the other hand, the collection, processing and combustion of biomass fuels may cause environmental problems if, for example, the fuel source contains toxic contaminants, agricultural waste handling pollutes local water resources, or burning biomass deprives local ecosystems of nutrients that forest or agricultural waste may otherwise provide.
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KPS GROUP PROFILE

The Vision:To empower ourselves with excellence and to thus, grow and reach the pinnacle of market leaders.
The Mission:To provide products and services of international standards through pioneering innovations while keeping insight, our responsibility towards the society we dwell in.
Chairmans forward:The new age enterprise has thrown open the doors to a world of seamless opportunities. Time & space barriers no longer hold any significance. Thanks to the pervasiveness of IT and the advent of the internet, theres never been more to learn or to utilize or to provide knowledge and its acquisitions is at hand. It is indeed heartening that India has kept pace with the sweeping charges in global economy. Throwing open its doors to globalization has meant the advent of multinational corporate giants. The Indian economy is already gearing itself both qualitatively and quantitatively to put up a fierce competition. Given our manpower and national resources base, there is little that can stop us from emerging winners. Having proved our credentials as quality services or products provides in fields as varied as energy, steel, sugar, and IT set to make our mark in other sector too. The success of our initial forays in this direction has invested us with the confidence to undertake projects of greater dimension and magnitude in the future.
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We are the KPS Group of industries of Gooty, Anantapur district, A.P.The group interest includes oil milling, power generation, plantation, sugar manufacturing and transformers manufacturing. The group has their solvent extraction plants at Kurnool, plantation projects at Pattikonda-Kurnool district and sugar plant at Nandyal Kurnool district and transformers manufacturing unit at Gooty-Anatapur district. The group companies has industrial track record of over 40 years which has started its carrier as a small oil miller and has established the II biggest oil complex in Rayalaseema region first being agro tech ltd. The group established seed decorticators, oil mills edible oil refining plant and 2 solvent extraction plants. it is an accepted phenomena that the margins in the edible oil industry are very thin, the risks of price fluctuations is very high and is subjected to various Governments controls and seasonal factors. Further, no other commodity has so many substitutes as the oil industry has with so many negative features, the group has sustained continuous growth and meticulous commitment towards financial institutions / banks. It has been successfully competing with cheap imports of de oiled cake in region. It has effectively encountered many crises. The various corporate Organizations of the group and their capability is as under: Sree Rayalaseema Green Steloy Limited. Sree Rayalaseema Sugar & Energy Limited. Sree Rayalaseema Green Energy Limited-Transformer Division. Madhu Solvent Extractions Private Limited. Venkateswara Industries Limited. Sree Balajee TMT Rod mills Private Limited.
SREE RAYALASEEMA GREEN STELOY LIMITED:

Sree Rayalaseema Green Steloy limited (SRGSL) is incorporated for the purpose of establishing Mini integrated steel plant at Kurnool. In the I phase of implementation, 100 TPD sponge iron plant by DRI method along with waste heat recovery boiler of 10 ton capacity are being installed at a total project cost of over Rs 19 crores in this term
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loan of Rs 12.60 crores was sanctioned
by syndicate bank, Nandyal. The major raw
materials required are iron ore, coal and dolomite. Iron ore are available in veldurty mandal (25 kms radius from plant) is available with close family circles and Bellary (120kms from plant). Coal is available with singareni collieries and imported coal from Chennai port, dolomite is available locally. Technology for the plant is sourced from industrial projects and services, popuri consultants & HIQ power associates (p) limited with whom the group has been associated since last 5 years. During the manufacturing of sponge iron in the kiln (main equipment) waste gases are released to the tune of about 22000 to 26000 NM3 per hour at a temperature of 950* C to 1000* C . Normally these gases are being cooled and are let out into atmosphere involving substantial costs. The same gasses are passes through a waste heat recovery boiler that generates steam and the gasses will be cooled. The steam from the waste heat recovery boiler can be used for further requirements SRGSL proposes to sell the steam generated to Sree Rayalaseema Green Steloy Ltd, by which SRGSL would earn additional revenue of RS.650 to 700 per ton of sponge iron produced, totaling to RS 2.58 crores in III of operation, apart from saving substantial costs for cooling the gasses. Major utility in SRGSL is power which is available in adjacent SRGEL as the unit was set up was adjacent to SRGSL if a green field power generation unit is to set up for waste heat recovery gasses an amount of RS 10 crores would have to be additionally invested apart from other major formalities like having power purchase agreement with power buyers etc.., would have to be complied. Further, it would be unviable to operate a 2 MW power plant as the investment per MW is almost double and the operation and maintenance cost of generation are almost equivalent to that of an independent power producer with much higher capacity. The net additional cost of a waste heat recovery boiler systems is just 1/3rd of cost of a new power plant without any operation cost the revenue earned is equivalent to that of installing a power plant. Apart from this existing infrastructure of SRGEL can be used for SRGSL.
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KPS groups envisaging to put up the plant is one of the most successful industrial group in rayalseema area who have been always been successful in the endeavor of putting up and successfully running various industries viz., edible oil ,biomass power, taking over of sugar plant and transformer unit.
Sree Rayalaseema Sugar & Energy Limited:

Sree Rayalaseema Sugar & Energy Limited(SRSEL) is a company floated by KPS Group on acquition of Nandyal Co- Operative sugars limited,Nandyal,a 1600 TCD Sugar plant spread over 125 acres of prime land at Nandyal. The unit was under Co-Operative sector and closed for the last 7 years before acquition by SRSEL. This is the first sugar unit that is revived after private acquition among the Co- operatives that were privatized. The unit being an existing unit on bank of K.C.Canal, is blessed with best infrastructure like water, transportation(both Road & Rail),power etc., and major irrigation sources like K.C. Canal, Telugu Ganga Canal, SRBC the unit is having very good potentiality for cane development in and around 50 Kms radius. Apart from this, the unit has special allocation of 1TMC of water from velugodu Balancing Reservoir through special canal viz., Sugar cane canal .With respect to the Power requirements, one 1.8 MW Co- generation plant is existing with the plant to meet the entire power requirements of the plant. The first season of operation has been completed in the year 2003.The acquition formalities were completed in October 2003 and immediately the unit was brought into operation out of the cane that was grown with the support of SRSEL since 2002. In the first year of operation 70000 MTs of cane was crushed with 9% recovery, and quality of sugar was comparable to the best unit of the industry. As there is no other sugar mill in the region, sugar realization has been highest compared to that of any sugar mill in A.P & Karnataka. Apart from this, the surplus bagasse of SRSEL will be supplied o its sister concern Sree Rayalaseema Green Energy Ltd, where bagasse is used as fuel to boiler. SRSEL is envisaging to crush 100000 MTs of sugar cane in 2004-05 season with a recover between 9.5% to 10.00%.
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On reviving the unit, SRSEL has created employment opportunities to around 1500 people directly and indirectly to around 1000 people, thereby a substantial contribution to rural development in the region. The project was financed by Syndicate Bank, Nandyal with a term loan of Rs.311.00 lakhs out total project cost of 925.84 lakhs and 250 lakhs CC limits.
SREE RAYALASEEMA GREEN ENERGY LIMITED TRANSFORMER DIVISION

Having its origin and base from the multi resource self sourcing company Sree Rayalaseema Green Energy Ltd, (SRGEL), transformers division of SRGEL is achieving very good results. The unit situated In Gooty, Anatapur district of AP. Two main highways NH-7 and NH-32 are passes through the town. The unit was setup in an area of 10 acres facilitating stock of materials as well as finished goods with all amenities available. The unit having capacity of manufacturing 500 transformers per month of various rating from 10 KVA to 160 KVA. The unit was has successfully completed 4000 Nos of 15 KV distribution transformers under HVDS systems to APSPDCL. The unit has bagged an order from APNDPCL to supply 3300 Nos of 25 KV distribution transformers has already supplied 1500 Nos to them. The unit also bagged another order from APNPDCL to supply 1000 Nos of 25 KVA transformers. The unit has no term loan and has only SOD of 100 lakhs and bills discounting facilitity of 88 lakhs from syndicate bank, Nandyal. In tiny town of Gooty, where neither industrial development nor agricultural development, the unit has created employment thereby contributed substantially to the society. opportunities to more than 250 members
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M/S MADHU SOLVENT EXTRACTIONS PVT.LTD MSEPL has established a 125 TPD solvent extraction plant at gooty in1991 with a total capital outlay of RS 200 lakhs. The plant was successfully commissioned in1991 and there after exported its produce of deoiled cake to various Middle East countries. M/S VENKATESWARA INDUSTRIES LIMITED. (VIL) VIL is an in-house developed solvent extraction plant of 50 TPD which runs on the surplus consumables of madhu solvent extractions pvt.ltd. The plant was established in 1996 with total capacity out lay of RS 125.00 lakhs.
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COMPANY PROFILE
Sree Rayalaseema Green Energy Limited:
Sree Rayalaseema Green Energy Ltd is a 5.5 MW Biomass power plant, promoted by KPS Group situated in Kurnool of A.P. The unit is first of its kind in the region. The unit has been put into operation in a record time of 9 months against projection of 18 months gestation and norm of 24 months. The unit has started its operations from 2001 and ever since commencement of its operation, the unit has recorded a Plant Load Factor (PLF) of more than 95%.The following are the PLFs achieved during the last 3 years of operation and fuel consumptions per annum. Years 2001-02 2002-03 2003-04 PLF (%) 95.40% 97.20% 99.00% Fuel Consumption(M.Ts)_ 56613 59087 52427
Being situated on riverbank of Hundri, the unit is blessed with abundant water source. unlike most of other Biomass power plants, the unit is having potentiality of multi biomasses availability like Paddy Husk, GN shell, Sunflower waste, Jowar Husk, Castor shell, Bengal gram Husk, Cotton & Chilly Stalk etc., The unit is having the advantage of III party sale, and wheeling its power to private parities there by achieving better realization. The unit is financed by IREDA with 1500 lakhs of term loan out of total project cost of 2030 lakhs. Repayment of IREDAS term loan has commenced and installments of Rs.53.00 lakhs each have been repaid as scheduled. The company has been regular in payment of interest and installments.
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WORKING CAPITAL MANAGEMENT Being situated in rural areas where various agri wastes are either burnt for disposal at cost by farmers, the unit has provided an opportunity to farmers to earn additional money by way of selling their biomasses. Apart from this, the unit has generated employment opportunities to 200 members directly and to 150 members indirectly. SRGEL is a Thermal power plant using Biomasses as fuel against coal or Oil as in case of conventional power plants. Biomass means agri wastes are renewable source of energy which are normally disposed by the farmers and agro industries by burning it. The biomass burnt with improper combustion could result in release of Carbon Monoxide. The conventional fuels like Coal and Oil used in power generation also release Carbon Monoxide, which is a major cause for the green house effect. But, biomass used as fuel in the power plants is fired under proper combustion; hence, carbon dioxide is released in place of carbon monoxide. SRGEL has installed steam generating unit (Boiler) of 5.4 MW capacity and Turbo generator of 7.5 MW capacity .in boiler biomass fuels are burnt and steam is generated which is used for rolling the Turbine and thereby power is generated. There is a 2.1MW spare capacity in Turbine. SRGEL is envisaging to establish a Sponge Iron Plant, there by this spare capacity of turbine can be utilized to the extent of 100%. The following are the advantages for SRGEL on establishing Sponge Iron plant With Waste heat recovery boiler system. A 100 TPD sponge iron plant with waste heat recovery boiler system (which is envisaged) would generate 9 tons of steam per hour, which is sufficient for generating 2 MW power. As there is spare capacity in turbine, steam from Sree Rayalaseema industries (SRIL) would be directly connected to the turbine along with SRGEL steam that would generate 2 MW of additional power without incurring any major capital expenditure. generation. Alternatively, purchase of fuel from the market can be reduced by 40% there by having better bargaining capacity and sustaining capability during off season. His would lead to substantial decrease in overall cost of power
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Capital unit entirely, can be resolved in main categories viz, fixed capital and working capital. The working capital of a business enterprise can be said to that portion of its financial resources, which is put to a variable operative purpose. Working capital is defined as excess of current assets over liabilities and provisions. But as per accounting technology, it is the different between the inflow and outflow of funds, in the annual survey of industries (1961) working capital is defined to include stock of material fuels semi finished goods including work in progress and finished goods and be products, cash in hand, and back and the algebraic sum of sundry as presented by Factory payments ex: Rent, Wages, Interest and Dividend Purchase of goods and services Working capital management is concerned with the problems that arise in attempting to manage the current assets, and the current liabilities, and their inter relationships their arise between them. The current assets refers to those assets, which to the ordinary curse of business can be, or will be turned into cash within one year without undergoing a diminution in value and with out disrupting the operations of the firm. The major current assets are cash, marketable securities, accounts receivables, and their inception to be paid in the ordinary course of business within a year, out of current assets or earnings of the concern. The basic current liabilities are Bills Payables, Bank Overdrafts, and Outstanding expenses. The goal of working capital management is to manage the firms current assets, and current liabilities in such a way that a satisfactory level of working capital is maintained.
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WORKING CAPITAL MANAGEMENT Thus, the current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety, each of the current assets must be managed efficiently in order to maintain the liquidity of the short term sources of financing must be continuously managed to ensure that they are obtained and used in a best possible way. Therefore, interaction between current assets and current liabilities in the main theme of working capital management. Profits are earned with the help of assets which are partly fixed and partly current. Working capital some times refereed to as CIRCULATING CAPITAL. WORKING CAPITAL is also called as CIRCULATING CAPITAL
Capital required for a business can be classified under two main categories viz, (i) (ii) Fixed Capital, and Working Capital Every business needs funds for two purposes-for its establishment and to carry out its day-to-day operations. Long-term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, furniture, etc. Investments in these assets represent that part of firms capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the purchase of raw materials, payment of wages and other day-to-day expenses, etc. These funds are known as working capital. In simple words, working capital refers to that part of the firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories.
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WORKING CAPITAL MANAGEMENT Funds, thus, invested in current assets keep revolving fast and are being constantly converted into cash and this cash flow out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short-term capital. Working capital management involves the relationship between a firms short term assets and its short term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that is it has sufficient ability to satisfy both maturing short term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivables, and payable, and cash, to pay current liabilities as they fall due. This implies a clearly designed risk policy to determine the required liquidity level.
DEFINITIONS: Working capital is the amount of funds necessary to cover the cost of operating the enterprise. ---- SHUBIN.
Circulating capital means current assets of a company that are changed in the ordinary course of business from one firm to another, as for example from cash to inventories, inventories to receivables into cash. ---- GENSTENBERG.
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Need for Working capital:

To maximize the share holders wealth, a firm should earn sufficient returns largely depends upon the magnitude of sales. The firm has to invest enough funds in current assets for the successful sales activity. Current assets are needed, as sales do not convert into cash instantaneously. There is always a gap termed as operating cycle of the business. Conversion of cash into a raw material. Conversion of raw material into work in progress. Conversion of work in progress into finished goods. Conversion of finished goods into accounts receivables and Conversion of accounts receivables into cash accounts receivables.
IMPORTANCE OF WORKING CAPITAL:

Working capital is considered as the central nervous system of a business enterprise. The presence of an adequate amount of working capital in a business is an indication of its liquidity. In other words, it is the extent of cushion or margin of safety available to meet the current obligations in the ordinary course of business without any difficulty. Working capital management is to manage the firms current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. Prudent management of working capital is very important for the success of an enterprise. It aims at protecting the purchasing power of assets and maximizing the return on investment. Management is required to be vigilant on maintaining appropriate levels in the various working capital accounts. Operating Cycle Concept A new concept which is gaining more and more importance in recent years is the Operating Cycle Concept of working capital. The operating cycle refers to the average time elapses between acquisition of raw materials and the final cash realization.
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Cash is used to buy raw materials and other stores. So cash is converted into raw materials and stores inventory. Then, the raw materials and stores are issued to the production departments. Wages are paid and other expenses are incurred in the process and work-in-process comes into existence. Work-in-process becomes finished goods. Finished goods are sold to customers on credit. In the course of the customers pay cash for the goods purchased by them. Cash is retrieved and the cycle is completed. Operating Cycle Consists of Four Stages The raw materials and stores inventory stages. The work-in-progress stage. The finished goods inventory stage. The receivable stage.
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Importance of Operating Cycle Concept The application of operating cycle concept is mainly useful to ascertain the requirement of cash working capital to meet the operating expenses of a going concern. The concept is based on the continuity of the flow of values in a business operation. This is an important concept because the longer the operating cycle, the more working capital the firm needs management must ensure that this cycle does not become too long. This concept more precisely measures the working capital fund requirements, traces its changes and determines the optimum level of working capital requirements.
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OPERATING CYCLE CALCULATIONS

ITEMS 1. RAW MATERIAL CONVERTION PERIOD Raw material consumptions Raw material consumption per day Raw material inventory Raw material inventory holding 2. WORK IN PROGRESS CONVERTION PERIOD Cost of production Cost of production per day Work in progress inventory Work in progress inventory holding days 3. FINISHED GOODS CONVERTION PERIOD Cost of goods sold Cost of goods sold per day Finished goods inventory Finished goods inventory Finished goods inventory holding days 4. COLLECTION PERIOD Credit sales Sales per day Debtors Debtors out standing days 5. CREDITORS DEFERRAL PERIOD Credit purchases Purchases per day Creditors Creditors out standing days RS xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx RS
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
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Classification or kinds of working capital Working capital may be classified in two ways. On the basis of concept On the basis of time
On the basis of concept working capital may be classified as permanent or fixed working capital and temporary or variable working capital.
Kinds of working capital
On the basis of time ON THE BASIS OF CONCEPT
GROSS WORKING CAPITAL
NET WORKING CAPITAL
PERMANENTOR FIXED WORKING CAPITAL
TEMPORARY OR VARIABLE WORKING CAPITAL
REGULAR WORKING CAPITAL
RESERVE WORKING CAPITAL
SEASONAL WORKING CAPITAL
SPECIAL WORKING CAPITAL
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Capital On the basis of concept GROSS WORKING CAPITAL: Simply called as working capital, refers to the firms investment in current assets are the assets which can be converted into cash within an accounting year and include cash, short term securities, debtors, bills receivables and stock. OPTIMUM LEVEL OF INVESTMENT IN CURRENT ASSETS The level of investment in current assets should avoid excessive in adequate investment in current assets. Excessive investment impairs firms profitability aside investment earns nothing. Inadequate investment threatens solvency. If it fails to meet its current liabilities. FINANCING CURRENT ASSETS The firm should make arrangements for rising funds when need arises due to increasing level of business activity or for any other reason. If surplus funds arise the firm should make on arrangement to invest in short term securities. Both sources of working capital and investment avenues where idle funds may be invested temporarily should be known to the financial manager. NET WORKING CAPITAL It is the excess of current assets over current liabilities. It is that portion of a firms current assets which is financed by long -term funds. Net working capital focuses its attention on two aspects of current assets management. 1. LIQUIDITY POSITION Current assets should be more the current liabilities in order to meet the current obligations. The excess of current assets over current liabilities constitute a margin/ buffer for maturing obligations. A weak liquidity positions to threat to the solvency of the company.
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DEPT OF MBA
2. FINANCING POSITION: Net working capital shows the extent of working capital needs to be financed by the permanent sources. There should be a judicious mix of long term and short term funds for financing current assets. On the basis of time Permanent or fixed working capital Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets for example a firm has to maintain a minimum level of raw materials, work-in-process, finished goods and cash balances. This can further classified into Regular working capital Reserve working capital Regular fixed working capital required to ensure circulation of current assets from cash to inventories to receivables and from receivables to cash and so on. Reserve fixed working capital is the excess amount over the requirement for regular working capital, which may be provided for contingencies that may arise at unstated periods such as strikes, rise in prices, depression etc. Temporary or variable working capital Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demand and some special exigencies, this can be classified as Seasonal working capital Special working capital The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Seasonal working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc.
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DEPT OF MBA
Fig 2. Permanent or fixed Working capital
Fig.3 Temporary or variable Working capital
Fig 2. Permanent working capital is stable or fixed over time. While temporary or variable working capital fluctuates. Fig 3. Permanent working capital is also increasing with passage of time due to expansion of business but even then it does not fluctuate as variable working capital with sometime increases and sometimes increases and decreases. FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS The working capital requirements of a concern depend upon a large number of factors such as nature and size of business, the character of their operations, the length of production cycles, the rate of stock turnover and the state of economic situation. It is not possible to rank them because all such factors are of different importance and the influence of individual factors changes for a firm over time. However, the following are important factors generally influencing the working capital requirements.
30
DEPT OF MBA
FACTORS DETERMININGS WORKING CAPITAL REQUIREMENTS 1. Nature of Character of Business 2. Size of Business/Scale of Operations 3. Production Policy 4. Manufacturing Process/Length of Production Cycle 5. Seasonal Variations 6. Working Capital Cycle 7. Rate of Stock Turnover 8. Credit Policy 9. Business Cycle 10. Rate of Growth of Business 1. Nature or Character of Business. The working capital requirements of a firm basically depend upon the nature of its business. Public utility undertakings like Electricity, Water Supply and Railways need very limited working capital because they offer cash sales only and supply services, not products, and as such no founds are tied up in inventories and receivables. On the other hand trading and financial firms require less investment in fixed assets but have to invest large amounts in current assets like inventories, receivables and cash ; as such they need large amount of working capital. The manufacturing undertakings also require sizable working capital along with fixed investments. Generally speaking it may be said that public utility undertaking require small amount of working capital, trading and financial firms require relatively very large amount, whereas manufacturing undertakings require sizable working capital between these two extremes.
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DEPT OF MBA
2. Size of Business/Scale of Operations. The working capital requirements of a concern are directly influenced by the size of its business which may be measured in terms of scale of operations. Greater the size of a business unit, generally larger will be the requirements of working capital. However, in some cases even a smaller concern may need more working capital due to high overhead charges, inefficient use of available resources and other economic disadvantages of small size. 3. Production Policy. In certain industries the demand is subjected to wide The production could be kept either steady by fluctuations due to seasonal variations. The requirements of working capital, in such cases depend upon the production policy. accumulation inventories during slack periods with a view to meet high the peak season or the production could be curtailed during the slack season and increased during the peak season. If the policy is to keep production steady by accumulating inventories it will requires higher working capital. 4. Manufacturing Process/Length of Productions cycle. In manufacturing business, the requirements of working capital increase in direct proportion to length of manufacturing process. Longer the process period of manufacture, larger is the amount of working capital required. The longer the manufacturing time, the raw materials and other supplies have to be carried for a longer period in the process with progressive increments of labour and service costs before the finished product is finally obtained. Therefore, if there are alternative processes of production, the process with the shortest production period should be chosen. 5. Seasonal Variations. In certain industries raw materials is not available throughout the year. They have to buy raw materials in bulk during the season to ensure an uninterrupted flow and process them during the entire years. A huge amount is, thus blocked in the form of material inventories during such season, which gives rise to more working capital requirements. Generally, during the busy season, a firm requires larger working capital than in the slack season.
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DEPT OF MBA
6. Working Capital Cycle. In a manufacturing concern, the working capital cycle starts with the purchase of raw material and ends with the realization of cash from the scale of finished products. This cycle involves purchase of raw materials and stores, its conversion into stocks of finished goods through work-in-progress with progressive increment of labor and service costs, conversion of finished stock into sales, debtors and receivable and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on. The speed with which the working capital completes one cycle determines the requirements of working capital-longer the period of the cycle larger are the requirement of working capital.
DEBTORS (RECEIVABLES)
CASH
FINISHED GOODS
RAW MATERIALS
WORK-IN- PROGESS
Working capital/operating cycle of a manufacturing concern
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DEPT OF MBA
7. Rate of Stock Turnover. There is a high degree of inverse co-relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover. For example, in case of precious stone dealers, the turnover is very slow. They have to maintain a large variety of stocks and the movement of stocks is very slow. Thus, the working capital requirements of such a dealer shall be higher than that of a provision store. 8. Credit Policy. The credit policy of a concern in its dealings with debtors and creditors influence considerably the requirements of working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of working capital as very huge amount of funds are bound to be tied up in debtors or bills receivables. 9. Business Cycle. Business cycle refers to alternate expansion and contraction in general business activity. In a period of boom i.e., when the business is prosperous, there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business, etc. On the contrary in the times of depression i.e., when there is a down swing of the cycle, the business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying idle. 10. Rate of Growth of Business. The working capital requirements of a concern increase with the growth and expansion of its business activities. Although, its is difficult to determine the relationship between the growth in the volume of business and the growth in the working capital of a business, yet it may be concluded that for normal rate of expansion in the volume of business, we may have retained profits to provide for more working capital but in fast growing concerns, we shall require larger amount of working capital.
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DEPT OF MBA
IMPORTANCE OR ADVANTAGES OF ADEQUATE WORKING CAPITAL. Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows: 1. Solvency of the business. Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. 2. Goodwill. Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. 3. Easy loans. A concern having adequate working capital. High solvency and good credit standing can arrange loans form banks and others on easy and favorable terms. 4. Cash discounts. Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs. 5. Regular supply of raw materials. Sufficient working capital ensures regular supply of raw materials and continuous production. 6. Regular payment of salaries, wages and other day-to-day commitments. A company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which raises the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits. 7. Exploitation of favorable market conditions. Only concerns with adequate working capital can exploit favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices.
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT 8. Ability to face crisis. Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital. 9. Quick and regular return on investments. Every Investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates a favorable market to raise additional funds in the future. 10. High morale. Adequacy of working capital creates an environment of security, confidence, and high morale and creates overall efficiency in a business. EXCESS OR INADEQUATE WORKING CAPITAL Every business concern should have adequate working capital to run its business operations. It should have either redundant or excess working neither capital nor inadequate or shortage of working capital. Both excess as well short working capital positions are bad for any business. However, out of the two, it is the inadequacy of working capital which is more dangerous from the point of view of the firm. Disadvantages of Redundant or Excessive Working Capital 1. Excessive Working Capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments. 2. When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more changes of theft, waste and losses. 3. Excessive working capital implies excessive debtors and defective credit policy which may cause higher incidence of bad debts. 4. It may result into overall inefficiency in the organization.
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT 5. When there is excessive working capital, relations with banks and other financial institutions may not be maintained. 6. Due to low rate of return on investments, the value of share may also fall. 7. The redundant working capital gives rise to speculative transactions. Disadvantages or Dangers of Inadequate Working Capital 1. A concern which has inadequate working capital cannot pay its short-term liabilities in time. Thus, it will lose its reputation and shall not be able to get good credit facilities. 2. It cannot buy its requirements in bulk and cannot avail of discounts, etc. 3. It becomes difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lack of working capital. 4. The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business. 5. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds. 6. The rate of return on investments also falls with the shortage of working capital.
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DEPT OF MBA
INVENTORY MANAGEMENT
Inventory is the third major component of current assets. Inventories are stock of the product a company is manufacturing for sale and components that make up the product. Every enterprise needs inventory for smooth running of its activities. It serves as a link between production and distribution process. The various forms in which inventories exits in manufacturing company are raw materials, work in progress and finished goods.
TYPES OF INVENTORIES:
The common types of inventories for most of the business firms may be classified as finished goods, wok in progress and raw materials.
RAW MATERIALS:
The raw materials include the materials, which are used in production process, and every manufacturing firm has to carry certain stock of raw material in stores. These units of raw materials are regularly issued / transferred to production department. Inventories of raw material are held to ensure at the production is not interrupted by a shortage of these materials. The amount of raw material to kept by a for expanse on a number of factors, including the speed with which raw materials can be ordered and procured and uncertainly in supply of raw material these raw materials. Its purpose is to uncouple the production function from the purchasing function i.e., to make these two functions independent of each other show that lays and the firm can satisfies its needs for raw materials out of the inventory lying in the stores.
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DEPT OF MBA
WORK IN PROGESS:
It refers to the raw materials engaged in various phases of production schedule. The degree of completion may be varying for different units. Some units might have been just introducing: while some others may be 40% completed, others may be 90% complete. The work in progress in refers to partially produced goods. The value of work in progress includes the raw material costs, the direct wages, expenses already incurred, and over heads, if any. So, the work in progress inventory contains partially produced / completed goods.
FINISHED GOODS:
These are the goods, which are either being purchased by the firm or are being produced or processed in firm. These are just ready for sale to customers. Inventory of finished goods arise because of the time involved in production process and the need to meet customers demand promptly. If the firm do not maintain sufficient finished goods inventory, they run the risk of losing sale, has the customers who are unwilling to wait may turn to competitors. The purpose of finished goods inventory is to uncouple the production and sales function so that it is not necessary to produce the goods before sales can occur and therefore sales can be made directly out of inventory.
OBJECTIVES:
The main objectives of inventory management are operational and financial. The operational objectives means that the materials and spares should be available in sufficient quantity so that work is not interrupted for want of inventory. The financial objectives means that investment in inventories should not remain idle and minimum working capital should be locked in it. The following are the objectives of the inventory managements: To ensure continuous supply of materials spares and finished goods. To avoiding both over stocking and under stocking of inventory. To maintain investments in inventories at the optimum level as required by the operational and sales activities.
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT To material cost under control. To eliminate duplication in ordering and replenishing stocks. To design proper organization for inventory management. To minimize losses through deterioration, pilferage, wastages and damages. To ensure right quality goods at reasonable price. To ensure perpetual inventory controls so that materials shown in stock ledgers should be actually lining the stocks. To facilitate furnishing of data for short and long term planning and control of inventory.
NEEDS TO HOLD INVENTORIES:

The question of managing inventories arises only when the company holds inventories. Maintaining inventories involves typing of companys funds and incurrence of storage and handling costs. If it is expensive to maintain inventories, while to companys hold inventories? There are three general motives for holding inventories.
TRANSACTION MOTIVE:
Transaction motives emphasize the need to maintain inventories to facilities smooth production and sales operations.
PRECAUTIONARY MOTIVE:
Precautionary motives necessitates holding up inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors.
SPECULATIVE MOTIVE:
Speculative motive influence the decision to increase or reduce inventory level to take advantage of price fluctuations.
40
DEPT OF MBA
VALUATION METHODS:
The fundamental basis of major valuation methods is the accounting flow inventories not their physical flow operationally. This mean that when apiece of material is charged to production or taken to inventory it need not necessarily beat a cost at which it is acquired but at a cost determined by a particular accounting mode. This has the advantage of standardizing the costing system and the accounting methods of valuation are now discussed below in order of their usage performance.
FIRST IN-FIRST-OUT (FIFO):This is the most widely used method valuation under this method, it is assumed that materials are issued to production (or cost of gods sold in case of trade0 in order of their receipt in store. This implies that inventory cost will be computed on the assumption that goods sold or materials consumed are those remaining in the stock shall represent the latest purchase or production. The latter means period end inventory value will be closer to market value. FIFO is a simple easily orders stand able system and compatible to a variety of organization which made its use so widespread. It is invariable or prone to quick obsolescence which deals in goods perishable or prone to quick obsolescence. The following example will make the operation of the system clear.
LAST-IN-FIRST-OUT (LIFO):-
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT This method is just the opposite if LIFO method. Here materials are charged to production (or cost of goods sold) in reverse order of their receipts to store. In intends to match current cost of materials. Hence that remains at stock gets valued at order prices.
The LIFO system rests heavily on-well-acknowledged matching principle of accounting. The profit taken is real profit and not an illusory one as happens with FIFO under situation of inflationary price rises. During an inflationary period stocks at hand will be sold at a higher price than what was contemplated when this were first purchased. It may be observed from table that under LIFO system cost of goods sold is more.
CRITICAL REVIEW:Considerable research has been made in the motivation to use LIFO system of inventory accounting since the system was first approved for usage in the United States in 1934. The research gained momentum when the Reserve Act of 1939 first allowed the use of LIFO for tax accounting in the United States. Buffers and Milan observed as early as 1949 that the opportunity to reduce tax liabilities has by far been the most powerful motivation for widespread adoption of LIFO since 1939. the present tax stated of an enterprise may also have a bearing on the motivation to adopt LIFO system. A firm which is not in tax paying status because it is making losses presently on the contrary it increases the losses. The variability in inventory levels also affects the benefits of LIFO system.
ECONOMIC ORDER QUANTITY (EOQ):One the major inventory management problems to be resolved are now many inventories should be added when inventory is replenished. If the firm is buying raw materials, it has to be purchased on each replanshishement. If the firm is planning a production run the issue is how much production to schedule these problems are called order
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT quantity problems and the task of the firm is to determine the optimum or economic order quantity. ORDERING COSTS CARRYING COSTS
ORDERING COSTS:
The term ordering costs is used in case of raw materials and includes enter costs of acquiring raw materials. They include costs incurred in the following activities requisitioning, purchase ordering transporting receiving inspecting and storing ordering costs increase in proportion to the number of order placed. Alternatively it may be argued that as the number orders increases the critical and staff and clerical force released now can be used in other departments. Ordering costs increase with the number orders, thus more frequently the inventory is acquired, higher the firms ordering costs. On the other hand, if the firm maintains large inventory levels, there will be few orders placed and ordering costs will be relatively small.
CARRYING COST:Costs incurred for maintaining a given level of inventory are called carrying cost. They include storage insurance taxes deterioration and obsolescence. The storage costs comprise cost of storage insurance costs comprise cost of storage space, stores handling costs and electrical specialties and staff service cost incurred in recording and providing special specialties such as fencing lines racks etc., under this provides ordering and carrying costs. ORDERING COSTS Requisitioning Order placing Transportation CARRYING COSTS Warehousing Handling Clerical and Staff
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT Receiving Inspecting and Storing Clerical and Staff insurance Deterioration and obsolescence
CASH MANAGEMENT
INTRODUCTION: Cash is required to meet a firms transaction and precautionary needs. A firm needs cash to make payment for acquisition of resources and services for the normal conduct of business. It keeps additional funds to meet any emergency situation some firms may also maintain earn taking advantages of speculative changes in prices input and output. The term cash include coin, currency and cheques held by the firm & balances in its bank accounts. Near cash items such as marketable securities (or) earn items such as marketable securities (or) bank time deposits are also included in cash. The financial manager should maintain cash position in such a way that it should not be excessive and inadequate. Cash is the most significant and least productive asset. It is significant as it is used to pay firms obligations. It is least productive because idle cash earns nothing and it does not produce goods for sale unlike fixed assets or inventories. Therefore adequate cash is to be maintained to keep the firm sufficiently liquid and to use excess an in some profitable way. Cash is the important current asset for the operations of the business. Cash is the basic input needed to keeps the business running on a continuous basis; it is also the ultimate
44
DEPT OF MBA
WORKING CAPITAL MANAGEMENT output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firms manufacturing operations while excessive cash will simply remain idle, without contributing anything to wards the firms without contributing anything to wards the firms profitability. Thus, a major function of the financial manager is to maintain a sound cash position.
CASH MANAGEMENT IS CONCERNED WITH THE MANAGING OF:

1) Cash flows into and out of the firm. 2) Cash flows within the firm, and 3) Cash balances held by the firm at a pint of time by financing deficit or investing surplus cash.
CASH MANAGEMENT CYCLE

Cash Collections
Business Operations Deficit Surplus Information Control Cash Payments Barrow Invest
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT It can be represented by a cash management cycle as shown above figure. Sales generate cash, which has to be disturbed out. The surplus cash to management seeks to accomplish this cycle at a minimum cost. At the same, it also seeks to achieve liquidity and control. Cash management assumes more importance than other current assets because cash is the holds. It is significant because it is used to pay the firms obligations. However, cash is unproductive. Unlike fixed assets or investors, it does not produce goods for sale. Therefore the aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way. The management of cash is also important because it is difficult to predict cash flows accurately, particularly the inflows and that there is no perfect coincidence between the inflows. Because payments for taxes dividends or seasonal inventory buildup. At other times, cash inflows will be more than cash payments because there may be large cash sales and debtors may be realized in large sums promptly. Cash management is also important because cash constitutes the smallest portion of the total current assets. In order to resolve the uncertainty about cash flows prediction and lack of synchronization between cash receipts and payments the firm should develop appropriate strategies for cash management. The firm should evolve strategies regarding the following FOUR FACTES of cash management.
1. Cash Planning:
Cash inflows and outflows should be planned to project cash surplus or deficit for each period of the planning period. Cash budget should be prepared for this purpose.
2. Managing the cash flows:

The flow of cash should be properly managed. The cash inflows should be accelerated while, as far as possible. The cash, outflows should be decelerated.
3. Optimum cash level:
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances.
4. Investing Surplus Cash:

The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balances between alternate short-term investment opportunities such as bank deposits, marketable securities, or inter corporate lending.
MOTIVES FOR HOLDING CASH:

The firms needed to hold cash may be attributed to the following three motives: The transactions motive The precautionary motive The speculative motive
1) Transaction Motive:
The transactions motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments for purchases, wages, salaries, other operating expenses, taxes, dividends etc. The need to hold cash would not arise if there were perfect synchronization between cash receipts and cash payments. I.e., enough cash is received when the payment has to be made. 2) Precautionary Motive: The precautionary motive is the need to hold cash to meet contingences in the future. It provides a cushion or buffer withstand. Some unexpected emergency. The precautionary amount of cash depends upon the predictability of cash flows. If cash flows can be predicted with accuracy, less cash will be maintained for an emergency. 3) Speculative Motive:
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT The speculative motive relates to the holding of cash for investing in profit-making opportunities as and when they arise. The opportunity of make profit may arise when the security prices change. The firm will hold cash, when it is expected that interest rates will rise and security price will fall the security prices change. The firm will hold cash, when it is expected that interest rates will raise security price will fall. Securities can be purchased when the interest rate is expected to fall; the firm will benefit by the subsequent fall in interest rates and increase in security price.
OBJECTIVES OF CASH MANAGEMENT:

The basic objectives of cash management are two fold. A. To much the cash disbursement needs [Payment Schedule] B. To minimize funds committed to cash balances. The first one indicate the company have to make payment of cash on a continuous supplies of goods, employees also to meet an anticipated cash expenses so keeping large cash balance. The second one says to minimize cash balance, So that large funds will remain idle. The aim of cash managed should be to have an optimum amount of cash balance.
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DEPT OF MBA
MANAGEMENT OF ACCOUNT RECEIVABLES

ACCOUNT RECEIVABLES
Credit arises when a firm sells its products or services on credit and does not receive cash immediately. It is an essential marketing tool, acting as bridge for the movement of goods through production and distribution stages to customers. Trade credit creates receivable or book debts which the firm as expected to collect in the near future and also it is used as a marketing tool to expand the firm a sales. Under the percent domination of credit economic credit terms out as a prominent provide force as completion in market grows. Credit firms should stand among side price and delivery schedule as a means for promoting sales. Trade credit is considered as an essential marketing tool acting as bring for the management of goods through production & distribution stages to customers finally.
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT Debtors one of the positive component of working capital occupy a significant position usually next to inventory and accordingly need special attention for ensuring the optimum use of working capital.
CREDIT POLICY:
Credit policy is used to refer to the combination of 4 decision variables.
1. Credit Standard: Credit Standards are criteria to decide the types of customers to
whom goods could be sold on credit. If a firm has more slow paying customers its investment in account receivables will increase. The firm will also be exposed to higher risk of default.
2. Credit Term: Specify duration of credit and term of payment by customer. This is a time
period for making payments.
3. Collection Effort: Determine the actual collection period the lower the collection period
the lower the investment in account receivables and vice- versa.
4. Account receivables: With the simply means on extension of credit of the customer
allowing them a reasonable period of time of to pay for the goods supplied to them.
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DEPT OF MBA
TABLE 1 Statement showing the changes in working capital 2006-07 to 2007-08

2006-07 Particulars CURRENT ASSETS (A) Inventories Sundry Debtors Cash and Bank Balances Loans & Advances TOTAL : CURRENT LIABILITIES (B) 112322.53 176059.92 14181.87 90225.00 392789.50 109475.52 137167.46 43586.10 116367.63 406596.71 29404.23 26142.45 2847.01 38892.45 (Amount in Rs) 2007-08 (Amount in Rs) Rs 000s Effective on Working Capital Increase Decrease
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT Current Liabilities and provisions TOTAL : Working Capital (A-B) Net increase in Working Capital TOTAL
239514.74 239514.74 153274.75 24904.60 178179.35
228417.36 228417.36 178179.35
11097.38
24904.60 178179.35 66644.06 66644.06
INTERPRETATION: The total current assets increased by Rs.392789.50 to Rs.406596.71 in the year 200607 to 2007-08. The current liabilities decreased by Rs.239514.74 to Rs.228417.36 in the year 200607 to 2007-08. The net increase in working capital RS 24904.6 thousands is an application of funds.
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DEPT OF MBA
TABLE - 2 Statement showing the changes in working capital 2005-06 to 2006-07

2005-06 Particulars CURRENT ASSETS (A) Inventories Sundry Debtors Cash and Bank Balances Loans & Advances TOTAL : CURRENT LIABILITIES (B) Current Liabilities and provisions 86198.35 73763.52 31957.50 55316.38 247235.75 112322.53 176059.92 14181.87 90225.18 392789.50 26124.18 102296.40 34908.80 17775.63 (Amount in Rs) 2006-07 (Amount in Rs) Rs 000s Effective on Working Capital Increase Decrease
143615.54
239514.74
95899.20
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DEPT OF MBA
TOTAL : Working Capital (A-B) Net increase in Working Capital TOTAL
143615.54 103620.21 49654.55 153274.76
239514.74 153274.76 49654.55 153274.76 163329.38 163329.38
INTERPRETATION: The total current assets increased by Rs.247235.75 to Rs.392789.50 in the year 200506 to 2006-07. The current liabilities increased by Rs.143615.54 to Rs.239514.74 in the year 200506 to 2006-07. The net increase in working capital of RS 49654.55 thousands is an application of funds.
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DEPT OF MBA

2004-05 Particulars CURRENT ASSETS (A) Inventories Sundry Debtors Cash and Bank Balances Loans & Advances TOTAL : CURRENT LIABILITIES (B) Current Liabilities and provisions TOTAL : Working Capital (A-B) 17740.16 90621.00 32641.34 41387.75 182390.25 86198.35 73763.52 31957.50 55316.38 247235.75 68458.19 13928.63 16857.48 683.84 (Amount in Rs) 2005-06 (Amount in Rs) Rs 000s Effective on Working Capital Increase Decrease
96788.91 96788.91 85601.34
143615.54 143615.54 103620.21
46826.63
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT Net increase in Working Capital TOTAL
18018.87 103620.21 103620.21
82386.82
18018.87 82386.82
INTERPRETATION: The total current assets increased by Rs.182390.25 to Rs.247235.75 in the year 200405 to 2005-06 The total current liabilities increased by Rs.96788.91 to 143615.54 in the year 200405 to 2005-06. The net increase in working capital Rs18018.87 thousands is an applications of funds.
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DEPT OF MBA

2003-04 Particulars CURRENT ASSETS (A) Inventories Sundry Debtors Cash and Bank Balances Loans & Advances TOTAL : CURRENT LIABILITIES (B) Current Liabilities and provisions TOTAL : Working Capital (A-B) Net decrease in Working Capital TOTAL 110651.24 16299.38 21249.42 24557.47 77548.33 139654.60 17740.16 90621.00 32641.34 41387.75 182390.25 1440.78 69371.58 8083.87 36160.58 (Amount in Rs) 2004-05 (Amount in Rs) Rs 000s Effective on Working Capital Increase Decrease
29003.36 29003.36 110651.24
96788.91 96788.91 85601.34 25049.90 110651.24
67785.55
25049.90 103946.13 103946.13
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DEPT OF MBA
INTERPRETATION: The total current assets increased by Rs.139654.60 to Rs.182390.25 in the year 200304 to 2004-05. The total current liabilities increased by Rs.29003.36 to Rs.96788.91 in the year 2003-04 to 2004-05. The net decrease in working capital RS 25049.90 thousand is sources / inflow of funds.
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DEPT OF MBA

2002-03 Particulars CURRENT ASSETS (A) Inventories Sundry Debtors Cash and Bank Balances Loans & Advances TOTAL : CURRENT LIABILITIES (B) Current Liabilities and provisions TOTAL : Working Capital (A-B) Net decrease in Working Capital TOTAL 116606.55 9161.13 17383.94 21841.35 101407.07 149793.49 16299.38 21249.42 24557.47 77548.33 139654.60 7138.25 3865.48 2716.12 23858.74 (Amount in Rs) 2003-04 (Amount in Rs) Rs 000s Effective on Working Capital Increase Decrease
33186.94 33186.94 116606.55
29003.36 29003.36 110651.24 5955.31 116606.55
4183.58
5955.31 23858.74 23858.74
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DEPT OF MBA
WORKING CAPITAL MANAGEMENT INTERPRETATION: The total current assets decreased by Rs.149793.49 to Rs.139654.60 in the year 200203 to 2003-04. The total current liabilities decreased by Rs.33186.94 to Rs.29003.36 in the year 2002-03 to 2003-04. The net decrease in working capital of RS 5955.31 thousands is sources / inflow of funds.
RATIO ANALYSIS
60
DEPT OF MBA
CURRENT RATIO:Current ratio may be defined as the relationship between current assets and current liabilities. This ratio also known as working capital ratio. It is used to measure short term financial position or liquidity of a firm. It is calculated as Current Assets Current Ratio = Current Liabilities
COMPONENTS:The two components of this ratio is Current Assets & Current Liabilities i.e Current Assets includes cash (those assets can be easily converted into cash) with in a short period of time generally, one year. Such as marketable securities, bill receivables, sundry debtors, inventories, work in progress, prepaid expenses. Current liabilities which are payable within a short period, includes Outstanding Expenses, bills payable, sundry creditors accrued expenses, short-term advances, income tax payable, dividend payable, bank over draft may take or may not take as a current liability depends up on the choice.
61
DEPT OF MBA
STATEMENT SHOWING THE CURRENT RATIO OF SRGEL DURING 2002-08

Rs 000s
YEAR
2002-03
CURRENT ASSETS
149793.49
CURRENT LIABILITIES
33186.94
CURRENT RATIO
4.51
2003-04
139654.60
29003.36
4.81
2004-05
182390.25
96788.91
1.88
2005-06
247235.75
143615.54
1.72
2006-07
392789.50
239514.74
1.63
2007-08
406596.71
228417.36
1.78
62
DEPT OF MBA
CURRENT RATIO
6 5 RATIOS 4 3 2 1 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 YEARS
INTERPRETATION:The ratio for the year 2002-03 is 4.51 times, where as in 2003-04 it is increased to 4.81, where as in 2004-05 it is decreased to 1.88, where as in 2005-06 it is decreased to 1.72, where as in 2006-07 it is decreased to 1.63, in 2007-08 it is increased to 1.78. When compared in the years of 2002-08 it has decreased.
63
DEPT OF MBA
LIQUID RATIO:Liquid ratio indicates that a relationship between quick or liquid assets and current liabilities. It is a rigorous measure, and superior to the current ratio. However both the ratios should be used to analysis the liquidity of a firm. An asset is liquid if it can be converted in to cash immediately or reasonable soon without a loss of value.
Liquid Assets Liquid Ratio = -----------------------------Current Liabilities Liquid Assets = Current Assets Stock. COMPONENTS:Liquid assets include cash, debtors after providing for bad and doubtful debt and securities. Current liabilities are creditors, bills payables.
64
DEPT OF MBA
STATEMENT SHOWING THE LIQUID RATIO OF SRGEL DURING 2002-08

Rs 000s
YEAR
LIQUID ASSETS
CURRENT LIABILITIES
33186.94
LIQUID RATIO
4.23
2002-03
140632.36
2003-04
123355.22
29003.36
4.25
2004-05
164650.09
96788.91
1.70
2005-06
161037.40
143615.54
1.12
2006-07
280466.97
239514.74
1.17
2007-08
297121.19
228417.36
1.30
65
DEPT OF MBA
LIQUID RATIO
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 YEARS
INTERPRETATION:The liquid ratio of the firm for the year 2002-03 is 4.23 times, where as in 2003-04 it is increased to 4.25, where as in 2004-05 it is decreased to 1.70, where as in 2005-06 it is decreased to 1.12, where as in 2006-07 it is increased to 1.17, in 2007-08 it is increased to 1.30.
RATIOS
66
DEPT OF MBA
ABSOLUTE LIQUID RATIO:Since cash is most liquid assets, a financial analysis may examine the ratio of cash and its equivalent to current liabilities. Trade investment on marketable securities are equivalent to cash therefore, may be including in computation of its ratio. Absolute Liquid Assets Absolute Liquid Ratio = Current Liabilities Absolute Liquid Assets = Cash and Marketable Securities.
67
DEPT OF MBA
STATEMENT SHOWING THE ABSOLUTE LIQUID RATIO OF SRGEL DURING 2002-08

Rs 000s
YEAR
ABSOLUTE LIQUID ASSETS 21841.35
CURRENT LIABILITIES 33186.94
ABSOLUTE LIQUID RATIO 0.65
2002-03
2003-04
24557.47
29003.36
0.84
2004-05
32641.34
96788.91
0.33
2005-06
31957.50
143615.54
0.22
2006-07
14181.87
239514.74
0.05
2007-08
43586.10
228417.36
0.19
68
DEPT OF MBA
ABSOLUTE LIQUID RATIO

0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2002-03 2003-04 2004-05 2005-06 YEARS 2006-07 2007-08
INTERPRETATION:The standard of absolute liquid ratio is 0.5. The firm maintained this ratio in the year 2002-03 is 0.65 and 2003-04 (0.84), where as in 2004-05 it is decreased to 0.33, where as in 2005-06 it is decreased to 0.2, where as sin 2006-07 it is decreased to 0.05, in 2007-08 it is increased to 0.19.
RATIOS
69
DEPT OF MBA
INVENTORY TURNOVER RATIO:This ratio also known as inventory turnover ratio establishes relationship between sales of goods sold during a given period and the average an amount of inventory held during that given period. This ratio reveals the number of times finished stock is turned over during a given accounting period higher the ratio, the better it is because it shows that finished stock is rapidly tuned over. On the other hand a low stock turnover ratio is not desirable because it reveals the accumulation obsolete stock or the carrying of too much stock. This ratio is composed as follows. Sales Inventory Turnover ratio = ------------------------------Average Inventory
70
DEPT OF MBA
STATEMENT SHOWING THE INVENTORY TURN OVER RATIO OF SRGEL DURING 2003-08
Rs 000s
YEAR
SALES
AVERAGE INVENTORY
17020
INVENTORY TURNOVER RATIO

9.56
2003-04
162650.38
2004-05
402611.55
51969
7.75
2005-06
376050.69
99260
3.79
2006-07
984066.03
110899
8.87
2007-08
1076037.65
109476
9.83
71
DEPT OF MBA
INVENTORY TURN OVER RATIO

12 10 RATIOS 8 6 4 2 0 2003-04 2004-05 2005-06 YEARS 2006-07 2007-08
INTERPRETATION:The inventory turnover ratio is 9.56 in the 2003-04, where as in 2004-05 it is decreased to 7.75, in 2005-06 it is decreased to 3.79, where as in 2006-07 it is increased to 8.87, in 2007-08 its is increased to 9.83, when compared in the years of 2002-08 it has fluctuated.
72
DEPT OF MBA
AVERAGE CONVERSION PERIOD:The average time taken for clearing the stocks. This period is calculated by dividing the number of days by inventory turnover. 365 AVERAGE CONVERSION PERIOD = -----------------------------------------Inventory turnover ratio
STATEMENT SHOWING THE HOLDING PERIOD OF INVENTORY OF SRGEL DURING 2003-08

Rs 000s
INVENTORY YEAR No. OF DAYS TURNOVER RATIO 2003-04 365 9.56
AVERAGE CONVERSION PERIOD (DAYS) 38
2004-05
365
7.75
47
2005-06
365
3.79
97
2006-07
365
8.87
41
2007-08
365
9.83
37
73
DEPT OF MBA
AVERAGE CONVERSION PERIOD

120 100 80 60
DAYS
40 20 0 2003-04 2004-05 2005-06 YEARS 2006-07 2007-08
INTERPRETATION:Inventory conversion period through out under the study in the year 2007-08 the inventory was sold with in 37 days. It is less period compared to other years. In 2003-04 is 38 days, where as in 2004-05 it is increased to 47 days, in 2005-06 it is increased to 97 days, where as in 2006-07 it is decreased to 41 days, in 2007-08 it is decreased to 37 days. When compared in the years of 2002-08 it has fluctuated.
DEBTORS TURNOVER RATIO:-
74
DEPT OF MBA
It indicates the number of times debtors turnover each year. It indicates the efficiency of staff entrusted with collection of debts. The higher the ratio it is better since it would indicates the debtors are being collected more promptly. Debtors should be always being taken at gross value. No provision for bad and doubtful debts should be deducted from them. Net Sales Debtors Turnover Ratio = ------------------------------Average Debtors Opening debtors+ closing debtors Avg Debtors= ----------------------------------------------------2
75
DEPT OF MBA
STATEMENT SHOWING THE PERCENTAGE OF DEBTORS TURNOVER RATIO OF SRGEL DURING 2003-08
Rs 000s
YEAR
SALES
AVERAGE DEBTORS
55935.21 82192.26 124911.72 156613.69 137167.46
DEBTORS TURN OVER RATIO

2.90 4.89 3.01 6.28 7.84
2003-04 2004-05 2005-06 2006-07 2007-08
162650.38 402611.55 376050.69 984066.03 1076037.65
76
DEPT OF MBA
DEBTORS TURNOVER RATIO

9 8 7 6 5 4 3 2 1 0
R A T I O S
2003-04
2004-05
2005-06 YEARS
2006-07
2007-08
INTERPRETATION:Greater the turnover ratio more is the activity debtors turnover ratio is 2.90 times in 2003-04, in 2004-05 it is increased to 4.89 times, where as in 2005-06 it is decreased to 3.01 times, where as in 2006-07 it is increased to 6.28 times, in 2007-08 it is increased to 7.84. When compared in the years of 2003-08 it has increased. This is good to the firm.
AVERAGE COLLECTION PERIOD:-
77
DEPT OF MBA
Average collection period represents the average number of days for which a firm has to wait before it receivables are converted into cash. The ratio can be calculated as follows 365 Average Collection Period = Debtors Turnover Ratio
STATEMENT SHOWING THE DEBTORS COLLECTION PERIOD OF SRGEL DURING 2003-08

Rs 000s
DEBTORS YEAR No. OF DAYS TURNOVER RATIO 2003-04 365 2.90
AVERAGE COLLECTION PERIOD (DAYS) 126
2004-05
365
4.90
75
2005-06
365
3.01
121
2006-07
365
6.28
58
2007-08
365
7.84
47
78
DEPT OF MBA
AVERAGE COLLECTION PERIOD

140 120 100 80 60 40 20 0 2003-04 2004-05 2005-06 YEARS 2006-07 2007-08
INTERPRETATION:The average collection period for the year 2003-04 is 126 days; in 2004-05 it is decreased to 75 days, where as in 2005-06 it is increased to 121 days, where as in 2006-07 it is decreased to 58 days, where as in 2007-08 it is decreased to 47 days. When compared in the years of 2003-08 it has decreased. This is a good sign for integrity and respectability of debtors.
CREDITORS TURNOVER RATIO:-
D A Y S
79
DEPT OF MBA
The ratio shows the relationship between net credit purchases and the average amount of creditors outstanding during the year. The sub ratio of this is the creditors payment period the creditors turnover ratio and credit payment period are inversely related i.e., if creditors turnover increases, credit payment period decreases and vice-versa. A low creditors turnover ratio is advantaging to the firm as it indicates liberal credit terms extended by suppliers. A high creditors turnover ratio is disadvantageous to the firm because it shows that accounts are to be settled rapidly. Purchases Creditors Turnover Ratio = -------------------------------Average Creditors
80
DEPT OF MBA
STATEMENT SHOWING THE CREDITORS TURN OVER RATIO OF SRGEL DURING 2003-08
Rs 000s
YEAR
PURCHASES
AVERAGE CREDITORS 28212.42
CREDITORS TURNOVER RATIO 2.32
2003-04
65365.12
2004-05
237773.84
44002.54
5.40
2005-06
286192.31
104188.59
2.75
2006-07
715546.31
118465.87
6.04
2007-08
771863.97
81184.54
9.51
81
DEPT OF MBA
CREDITORS TURNOVER RATIO

10 8 RATIOS 6 4 2 0 2003-04 2004-05 2005-06 YEARS 2006-07 2007-08
INTERPRETATION:Creditors turnover ratio for the year 2003-04 is 2.32, in 2004-05 it is increased to 5.40, where as in 2005-06 it is decreased to 2.75, in 2006-07 it is increased to 6.04, in 200708 it is increased to 9.51. When compared in the years of 2003-08 it has increased. This is a favorable to the firm.
82
DEPT OF MBA
AVERAGE PAYMENT PERIOD:365 Average Payment Period = -------------------------------------Creditors Turnover Ratio
STATEMENT SHOWING CREDITORS PERIOD OF SRGEL DURING 2003-08

Rs 000s
CREDITORS YEAR No. OF DAYS TURNOVER RATIO 2003-04 365 2.32
AVERAGE PAYMENT PERIOD (DAYS) 158
2004-05
365
5.40
68
2005-06
365
2.75
133
2006-07
365
6.04
60
2007-08
365
9.51
38
83
DEPT OF MBA
AVERAGE PAYMENT PERIOD

180 160 140 120 100 80 60 40 20 0 2003-04 2004-05 2005-06 YEARS 2006-07 2007-08
INTERPRETATION:Creditors payment period are 158 days in 2003-04 and 68 days in 2004-05 and 133 days in 2005-06 and 60 days in 2006-07 and 38 days in 2007-08. There is a continuously decreasing the average payment period which is a good sign & better liquidity position of the firm.
DAYS
84
DEPT OF MBA
NETWORKING CAPTIAL TO CURRENT ASSETS RATIO:Networking capital to current assets ratio that measures the liquidity of a firm this ratio should be at least 50 percent to indicate satisfactory liquidity. Networking Capital NETWORKING CAPTIAL TO CURRENT ASSETS RATIO = --------------------------Current Assets.
STATEMENT SHOWING THE RATIO OF NET WORKING CAPITAL TO CURRENT ASSETS OF SRGEL DURING 2002-08
Rs 000s
YEAR
NET WORKING CAPITAL

116606.55
CURRENT ASSETS
149793.49
RATIO
2002-03
0.77
2003-04
110651.24
139654.60
0.79
2004-05
85601.34
182390.25
0.46
2005-06
103620.21
247235.75
0.41
2006-07
153274.76
392789.50
0.39
2007-08
178179.35
406596.71
0.43
85
DEPT OF MBA
NET W RKINGCA O PITA TO L CURRENT A SSETS

1 RATIOS 0.8 0.6 0.4 0.2 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 YA S E R
INTERPRETATION:The networking capital ratio for the year 2002-03 is 0.77, where as in 2003-04 it is increased to 0.79, in 2004-05 it is decreased to 0.46, where as in 2005-06 it is decreased to 0.41, where as in 2006-07 it is decreased to 0.39, in 2007-08 it is increased to 0.43. When compared in the years of 2002-08 it has decreased. This is not good for the firm.
86
DEPT OF MBA
NETWORING CAPITIAL TURNOVER RATIO:This ratio indicates to what extent the networking capital funds have been employed in the business towards sales. This is calculated as Sales NETWORING CAPITIAL TURNOVER RATIO = ----------------------------------Networking Capital
STATEMENT SHOWING THE NET WORKING CAPITAL TURNOVER RATIO OF SRGEL DURING 2002-08
Rs 000s
YEAR
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
NET WORKING CAPITAL

116606.55 110651.24 85601.34 103620.21 153274.76 178179.35
NET SALES
144885 162650 402612 376051 984066 1076038
RATIO
1.24 1.46 4.70 3.62 6.42 6.03
87
DEPT OF MBA
NET WORKING CAPITAL TO NET SALES

7 6 5 4 3 2 1 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 YEARS
R A T I O S
INTERPRETATION:The contribution of networking capital in generating sales revenue is continuously increasing from 1.24 in 2002-03 to 6.03 in 2007-08.
88
DEPT OF MBA
CASH TO NETWORKING CAPITAL:This ratio indicates the proportion of cash and bank balances maintained by the company in relation to networking capital. It assumes importance, as the level of cash & bank balances decides the liquidity and profitability aspects of the company. The lower the cash to networking capital the greater may be profitability of the concern and vice versa. Cash Cash to Networking Capital Ratio = ---------------------------- X 100 Networking Capital
STATEMENT SHOWING THE PERCENTAGE OF CASH TO NET WORKING CAPITAL OF SRGEL DURING 2003-08
Rs 000s
PARTICULARS
Cash & Bank Balances Networking Capital Cash to Net Working Capital in %
2003-04
2004-05
2005-06
2006-07
2007-08
24557.47
32641.34
31957.5
14181.87
43586.10
110651.24
85601.34
103620.21
153274.76
178179.35
22.19
38.13
30.84
9.25
24.46
89
DEPT OF MBA
CASH TO NET WORKING CAPITAL

45 40 35 30 25 20 15 10 5 0
R A T I O S
2003-04
2004-05
2005-06 YEARS
2006-07
2007-08
INTERPRETATION:The size of cash and bank balances in SREGL from 2003-04 to 2007-08 as a percentage of networking capital. The bank balances were 22.19% of working capital during 2003-04 and 38.13% in 2004-05 and 30.84% in 2005-06 and 9.25 in 2006-07 and 24.46 in 2007-08.
90
DEPT OF MBA
CHANGE IN SALES AND INVENTORY RATIO:-
STATEMENT SHOWING THE CHANGES IN SALES & INVENTORY OF SRGEL DURING 2003-08
Rs 000s
PARTICULARS
2003-04
2004-05
2005-06
2006-07
2007-08
Sales
162650.38
402611.55
376050.69
984066.03
1076037.65
Inventory Change in Sales % Change in Inventory%
16299.38
17740.16
86198.35
112322.53
109475.52
100.00
247.53
231.20
605.01
661.56
100.00
108.83
528.84
689.12
671.65
91
DEPT OF MBA
CHANGE IN SALES AND INVENTORY

800 700 600 500 400 300 200 100 0 CHANGE IN SALES CHANGE IN INVENTORY
P E R C E N T A G E
2003-04 2004-05 2005-06 2006-07 2007-08 YEARS INTERPRETATION:The sales were high during the year in 2007-08, inventory was increased from 200405 to 2006-07 and slight decrease in 2007-08. For study of inventory and change in sales, inventory was not improved and sales are improved. This is so because, the sales has increased from 2003-04 to 2008 expect in 2004-05.
92
DEPT OF MBA
CURRENT ASSETS TO TOTAL ASSETS AND CURRENT ASSETS TO FIXED ASSETS: STATEMENT SHOWING RATIO OF CURRENT ASSETS TO TOTAL ASSETS AND CURRENT ASSETS TO FIXED ASSETS OF SRGEL DURING 2003-04 TO 2007-08
Rs 000s
CURRENT CURRENT ASSETS TOTAL NET ASSETS NET FIXED TOTAL ASSETS NET RATIO %) 2003-04 2004-05 2005-06 2006-07 2007-08 139654.6 182390.25 247235.75 392789.50 406596.71 110651.24 85601.34 103620.20 153274.75 178179.35 76468.17 72562.55 61779.28 56496.82 50766.79 1.26 2.13 2.38 2.56 2.28
CURRENT TOTAL FIXED NET RATIO %) 1.82 2.51 4.00 6.95 8.00
ASSETS TO ASSETS TO
YEARS
ASSETS (IN ASSETS (IN
93
DEPT OF MBA
9 8 7 RATIOS 6 5 4 3 2 1 0 2003-04 2004-05 2005-06 2006-07 2007-08 YEARS CURRENT ASSETS TO TOTAL FIX NET ED ASSETS CURRENT ASSETS TO TOTAL NET ASETS
INTERPRETATION:The proportion of current assets to total net assets has increased from 1.26% to 2.28% in 2007-08 The proportion of current assets to net fixed assets has also showed some trend. It has increased from 1.82% to 8.00%.
CASH RATIO:-
94
DEPT OF MBA
Cash ratio is the relation between cash to current liabilities Cash and Bank Balances Cash ratio = ------------------------------Current liabilities
STATEMENT SHOWING CASH RATIO OF SRGEL DURING 2003-04 TO 2007-08

Rs 000s
CASH AND YEAR MARKETABLE SECRUTIES

2003-04 2004-05 2005-06 2006-07 2007-08 24557.47 32641.34 31957.50 14181.87 43586.10
CURRENT LIABLITIES
29003.36 96788.91 143615.54 239514.74 228417.36
CASH RATIO
0.84 0.33 0.22 0.05 0.19
95
DEPT OF MBA
CASH RATIO
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2003-04 2004-05 2005-06 2006-07 2007-08 YEARS CASH RATIO
R A T I O S
INTERPRETATION:The cash ratio is 0.84 in 2003-04 and decreased 0.33 in 2004-05, where as in 2005-06 it is decreased to 0.22, in 2006-07 it is decreased to 0.05 and slightly increased to 0.19 in 2007-08. When compared in the years of 2003-08 it has decreased. This is not good to the firm.
GROSS WORKING CAPTIAL TURNOVER RATIO:-
96
DEPT OF MBA
This ratio shows the number of times gross working capital (i.e., current assets) is turned over in a stated period. This ratio is calculated as Sales GROSS WORKING CAPTIAL TURNOVER RATIO = ------------------------------Gross Working Capital
STATEMENT SHOWING GROSS WORKING CAPITAL TURN OVER RATIO OF SRGEL DURING 2003-04 TO 2007-08
Rs 000s
GROSS YEAR WORKING CAPITAL

2003-04 2004-05 2005-06 2006-07 2007-08 139654.6 182390.25 247235.75 392789.50 406596.71 162650.38 402611.5 376050.69 984066.03 1076037.65
SALES VALUE
TURNOVER RATIO
1.16 2.20 1.52 2.50 2.64
97
DEPT OF MBA
TURNOVER RATIO
3 2.5 2 1.5 TURNOVER RATIO
RAT I O S
0.5 0 2003-04 2004-05 2005-06 2006-07 2007-08 YEARS
INTERPRETATION:The ratio for the year 2003-04 is 1.16, where as in 2004-05 it is increased to 2.20, in 2005-06 it is decreased to 1.52, where as in 2006-07 it is increased to 2.50, in 2007-08 it is increased to 2.64. When compared in the years of 2002-08 it has increased. This is a good to the firm.
CASH AND BANK BALANCES TO CURRENT ASSETS:
98
DEPT OF MBA
STATEMENT SHOWING THE CASH AND BANK BALANCES TO CURRENT ASSETS RATIO OF SRGEL DURING 2003-04 TO 2007-08
Rs 000s
YEAR
2003-04 2004-05 2005-06 2006-07 2007-08
CASH & BANK BALANCES

24557.47 32641.34 31957.50 14181.87 43586.10
CURRENT ASSETS
139654.6 182390.25 247235.75 392789.50 406596.71
TURNOVER RATIO
17.58 17.89 12.92 3.61 10.71
99
DEPT OF MBA
TURNOVER RATIO
20 18 16 14 12 10 8 6 4 2 0
TURNOVER RATIO
R A T I O S
2003-04 2004-05 2005-06 2006-07 2007-08 YEARS
INTERPRETATION:The ratio of cash and bank balances to current assets has shown in decreasing trend in SRGEL during the study period. It as 17.58% in 2003-04 and decreasing to 3.61% in 200607 and there by slightly increased to 10.7% in 2007-08.
100
DEPT OF MBA
STATEMENT SHOWING INCREMENTAL INVESTMENT IN RECEIVABLES OF SRGEL DURING 2003-08

Rs 000s
SALES YEAR
CURRENT YEAR (NEW) 2003-04 162650.38 PREVIOUS YEAR (OLD) 148850.74
AVG COLLECTION PERIOD

CURRENT YEAR (NEW) 126 PREVIOUS YEAR (OLD) 49
2004-05
402611.55
162650.38
75
126
2005-06
376050.69
402611.55
121
75
2006-07
984066.03
376050.69
58
121
2007-08
1076037.65
984066.03
47
58
101
DEPT OF MBA
ACCOUNT RECEVIABLES
140 120 100 80 60 40 CURRENT YEAR PREVIOUS YEAR
D A Y S
20 0 2003-04 2004-05 2005-06 2006-07 2007-08 YEARS
INTERPRETATION:Average collection period is slightly increased from 2003-04 to 2005-06 and decreased significantly in 2006-07 and 2007-08. The indicates that SRGEL has chosen care in selecting by debtors and continuously making good efforts for recovery of debts.
FINDINGS
102
DEPT OF MBA
WORKING CAPITAL MANAGEMENT The current assets of the company continuously increasing trend. The inventory turnover ratio decreasing 2003-04 to 2005-06 and there by increased. It shows that operating cycle was fluctuated. The current ratio has decreased from 4.51 in 2002-03 to 1.78 in 2007-08 and this is not a good for the company, because it is maintained the less than the standard ratio. The short-term solvency position of the company was decreasing from year to year. It can be seen from decreasing trend of liquid ratio. But it is maintained above standard i.e. 1:1 so the companys liquidity position is satisfied. The debtors turnover ratio has been increased gradually from 2.90 in 2003-04 to 7.84 in 2007-08. It can be seen from the increase in the value of sundry debtors and gradual decrease in the avg collection period. The creditors have been increased from 2.32 in 2003-04 to 9.51 in 2007-08. it can be seen from the increase in the value of sundry creditors and gradual decrease in the average payment period. It indicates that the company is utilizing trade credit finance at its best. Gross working capital turnover ratio increased from 2003-04 to 2007-08. This due to the higher cost of goods sold than the sales. The net working capital is always financed from shareholder / proprietary funds to meet its services. Cash and bank balances vary between 22.19 to 30.84 practices of holding of cash balances in networking capital indicates fluctuation of sales in cash. The current liabilities of the company are showed an increasing trend. It means the company is financing its financial needs from short-term funds. The cash position ratio decreased from 0.84 in 2003-04 to 0.19 in 2007-08, and it is below the standard ratio of 0.5. It indicates fluctuating in company cash position, which is not good for the company.
103
DEPT OF MBA
SUGGESTIONS
The company should improve the current ratio of solvency by raising additional funds most economically. The company should reduce financing its financial needs from short term funds as the short term funds directly affected the profitability of the concern. Efforts are to be made to improve the proportions of cash and bank balances in current assets of the company. The working capital can be further increased by utilizing bank borrowings to meet working capital requirements. It is suggested to the company that it should maintain stable inventory by employing proper inventory controlling techniques. The company should improve the proportion of net working capital in current assets of the company. As the company working capital is not satisfactory so in order to increase its working capital, it is suggested to invest more in fixed assets, such as land & buildings, furniture etc.
104
DEPT OF MBA
CONCLUSION
The SREE RAYALASEEMA GREEN ENERGY LIMITED is maintaining a fairly good level of liquidity. This happens to be a major problem for most of the companies. The study shows on various issues to be addressed. The working capital management should be improved mainly in terms of receivables management and cash management so as to meet its requirements and avoid unfavorable conditions. The company should introduce adequate level of policies so that it gets strength to face intense competition, provide adequate returns to owners, with stands adverse economic conditions and make better use of favorable conditions.
105
DEPT OF MBA
BIBLIOGRAPHY
Financial Management: Working Capital Management: Principles of Management Accounting Analysis I.M.PANDAY, KHAN & JAIN. SHESI K. SHARMA, & GUPTHA. Dr. S.N. MAHESHWARI. COMPANY ANNUAL REPORTS (2003-08) MANUAL.
Website:www.srgel.com
106
DEPT OF MBA
WORKING CAPITAL MANAGEMENT BALANCE SHEET OF SREE RAYALSEEMA GREEN ENERGY LTD PARTICULARS A. SOURCES OF FUNDS a) Share Holders Fund Share Capital Reserves and surplus b) Loan Funds Secured Loans TOTAL B. APPLICATIONS OF FUNDS c) Fixed Assets Gross Block Less: Depreciation Net Block d) Investments e) current assets, loans & advances Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Sub total Less: Current Liabilities & Provisions Net Current Assets f) Miscellaneous Expenditure 16299380.00 21249416.96 24557466.99 77548333.66 139654597.61 29003359.36 110651238.25 28000.00 9161131.50 17383937.94 21841353.38 101407070.37 149793493.19 33186936.22 11606556.97 32000.00 170927112.11 94458945.11 76468167.00 41949159.00 166179170.56 71682988.11 94496182.45 6200.00 173936393.00 229096564.25 166750873.00 211140939.42 21699098.00 33461073.25 21699098.00 2269098.00 2003-2004 2002-2003
TOTAL
229096564.25
211140939
BALANCE SHEET OF SREE RAYALSEEMA GREEN ENERGY LTD
107
DEPT OF MBA
WORKING CAPITAL MANAGEMENT PARTICULARS A. SOURCES OF FUNDS a) Share Holders Fund Share Capital Reserves and surplus b) Loan Funds Secured Loans TOTAL B.APPLICATIONS OF FUNDS c) Fixed Assets Gross Block Less: Depreciation Net Block d) Investments e) current assets, loans & advances Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Sub total Less: Current Liabilities & Provisions Net Current Assets f) Miscellaneous Expenditure TOTAL 86198349.05 73763522.00 31957491.73 55316380.97 247235743.75 143615541.76 103620201.99 2000.00 281100411.87 17740155.00 90621992.00 32641346.36 41387750.94 182391244.30 96788906.47 85602337.83 24000.00 274346396.08 194240445.61 132461161.73 61779283.88 115680926.00 185412407.61 112849859.36 72562548.25 116157510.00 178209130.36 281100411.86 175371341.00 274346396.08 53000000.00 49891281 53000000.00 45975055.08 2005-2006 2004-2005
BALANCE SHEET OF SREE RAYALSEEMA GREEN ENERGY LTD PARTICULARS 2007-2008 2006-2007
108
DEPT OF MBA
A. SOURCES OF FUNDS a) Share Holders Fund Share Capital Reserves and surplus b) Loan Funds Secured Loans TOTAL B. APPLICATIONS OF FUNDS c) Fixed Assets Gross Block Less: Depreciation Net Block d) Investments e) current assets, loans & advances Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Sub total Less: Current Liabilities & Provisions Net Current Assets f) Miscellaneous Expenditure 228417354 178179322 12000 TOTAL 401845273 239514736 153274463 16000 332028213 109475515 137167458 43586069 116367634 406596616 112322528 176059914 14181873 90225184 392789499 211078493 160311708 50766785 172887156 203678942 147182118 56496824 122240926 173237021 401845273 204402179 332028213 53000000 175608252 53000000 74626034
PROFIT & LOSS a/c OF SREE RAYALSEEMA GREEN ENERGY LTD PARTICULARS 2003-2004 2002-2003
109
DEPT OF MBA
A. INCOME Sales Increase/(decrease) in stock Other income TOTAL B. EXPENDITURE: Material consumption Operating expenses Manufacturing expenses Personnel expenses Administration expenses Interest & Financial charges Depreciation Misc. expenditure written off TOTAL C. PROFIT FOR THE YEAR Provision for taxation Provision for differed tax D. NET PROFIT Balance brought forward E. BALANCE CARRIED TO BALANCE SHEET. 65560983.75 32163931.02 8703322.10 4575617.50 9843854.38 16979464.00 22775957.00 40000.00 160607129.75 10983136.25 1118647.42 905616.00 10770104.83 22690968.42 33461073.25 12136818.05 10554150.37 22690968.42 26767078.30 30895796.06 8813901.06 3834121.00 9813771.03 18480341.00 30481161.46 4000.00 129087169.95 13174294.05 1037476.00 162650381.00 6502088.00 2437797.00 171590266.00 144885074.00 -2714768.00 91158.00 142261464.00
110
DEPT OF MBA
A. INCOME Sales Increase/(decrease) in stock Other income TOTAL B. EXPENDITURE: Material consumption Operating expenses Manufacturing expenses Personnel expenses Administration expenses Interest & Financial charges Depreciation Misc. expenditure written off TOTAL C. PROFIT FOR THE YEAR Provision for taxation Provision for differed tax D. NET PROFIT Balance brought forward E. BALANCE CARRIED TO BALANCE SHEET 21899820.51 5188425.85 16194770.50 11751954.00 89780181.13 16025175.72 19611302.38 4000.00 377548630.09 5664530.42 2503378.00 615512.00 3776664.42 45975055.08 49751719.50 231238505.80 35257119.50 12000101.40 14081071.50 55341623.72 18199384.00 18390914.25 4000.00 384512720.17 13622166.83 1802499.00 694314.00 12513981.83 33461073.25 45975055.08 376050690.25 1592146.00 5570324.26 383213160.51 402611549.00 -5313788.00 837126.00 398134887.00
111
DEPT OF MBA
A. INCOME Sales Increase/(decrease) in stock Other income TOTAL B. EXPENDITURE: Material consumption Operating expenses Manufacturing expenses Personnel expenses Administration expenses Interest & Financial charges Depreciation Misc. expenditure written off TOTAL C. PROFIT FOR THE YEAR Provision for taxation Provision for differed tax D. NET PROFIT Balance brought forward E. BALANCE CARRIED TO BALANCE SHEET 775938633 10102894 42190691 25227003 150984504 24883225 13129590 4000 1042460538 113461374 12826470 346815 100982219 74626034 175608252 690446502 4536856 37093720 19181844 184625391 15151805 14720956 4000 968791074 27357492 3104725 482286 24735053 49891282 74626335 1076037653 -688278 80573037 1155922412 984066032 -209050 12291584 996148566
112
DEPT OF MBA

Working Capital Management B.anitha

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Working Capital Management B.anitha

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WORKING CAPITAL MANAGEMENT

ST. JOHNS COLLEGE OF ENGG & TECH