Working Capital Management Project

COMPREHENSIVE PROJECT STUDY REPORT ON

WORKING CAPITAL MANAGEMENT AND PROFITABILITY AT ATUL AUTO LTD Shapar (Veraval) SUBMITTED TO

SAURASTRA UNIVERSITY IN PARTIAL FULFILLMENT FOR THE AWARD OF THE MBA DEGREE

SUBMITTED BY

!a"e#h S$ D%&ar'"a  A*'+ Ra',h-ra Ra',h-ra SEMESTER IV

AFFILIATED TO SAURASTRA UNIVERSITY1 RA!KOT

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W%r*'. Cap'+al Maa.e/e+ 

PREFACE Today in the era of globalization where in emerging of varied types of trends of technological advancement is taking place to give the end user a product which is better than the best with the changes & development in the field of business economics & corporate world & emergence of various companies in the Indian market user had the cutting edge to invest into various fields in order to get the maximum benefit out of the existing schemes in the regulatory environment. The objective of this report is to understand the Working apital !anagement and "rofitability of #tul #uto $td. through various analyses.

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ACKNOWLEDGEMENT It gives me immense pleasure to present this project report on Working apital !anage !anagemen mentt and "rofitab "rofitabili ility ty carrie carried d out at ATUL AUTO LTD . In partial fulfillment of post%graduate course !..#. 'o work can be carried out without the help and guidance of various persons. I am happy to take this opportunity to express my gratitude to those who have been helpful to me in completing this project report. I would like to thank !r. (itesh "opat sir to help me in granting permission in this organization. I am especially thankful to !r. ).*. #dhiya sir +*ice "resident of ,inance- for their valuable advice and guidance during my project completion. I am also also than thankf kful ul to !r. !r. (ire (iren n 'aya 'ayak k sir sir +( +( /epa /epart rt..- for for gran granti ting ng me permission for this project. I would be failing in my duty if I do not express my deep sense of gratitude to /r. /harmesh 0. aval sir without his guidance it wouldn1t have been possible for me to complete this project work. $ast $astly ly I woul would d like like to than thank k my pare parent nts2 s2 frie friend ndss and and well well wish wisher erss who who encouraged me to do this research work and all those who contributed directly or indirectly in completing this project to whom I am obligated to .

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DECLARATION We2 #nkit ). aichura 0tudents of !# I* +,inance- 3445%3464 studying at M.H.Gardi School of Mana!"!n#$ Anand%ar 2 declare that the project work entitled 7Wor&in Ca%i#al Mana!"!n# and Profi#a'ili#( of A#)l A)#o L#d.$Ra*&o#8 Was carried by us in the partial fulfillment of !# program under the 0aurashtra 9niversity2 ajkot. This project was undertaken as a part of academic curriculum according to the university rules and norms and it has not commercial interest and motive. It is my original work. It is not submitted to any other organization for any other purpose.

/ate : % "lace :%ajkot

;;;;;;;;;;;;;;;;;;;; +a(!,h S. Do'ari(a

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TA-LE OF CONTENT

SR No.

Par#ic)lar,

Pa! No.

.

E/!c)#i0! S)""ar(

1

2.

COMPAN3 INFORMATION

12

4.

6.6 Introduction 6.3 rief (istory 6.< !anaging Team 6.= >roup of ompanies 6.? ,orms of organization and 0ize of 9nit 6.@ Arganization 0tructure 6.B ontribution of 9nit WORKING CAPITAL MANAGEMENT

4= 4? 4@ 4B 45 64 66 2

5.

3.6 Introduction 3.3 'eed of Working apital 2.3 oncept of W.. !anagement 3.= Types of Working apital 3.? Importance of W.. !anagement 3.@ /etermination of Working apital 3.B 0ources of working capital 3.5 Working apital omponents RESEARCH METHODOLOG3

6< 6= 6? 6@ 6C 34 33 3< 46

<.6 Introduction <.3 Abjective of the 0tudy <.< 0cope and $imitation of the 0tudy <.= $inear orrelation o%Dfficient <.?Types of data collection <.@ /ata #nalysis

<@
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

eturn on Investments



Working apital 0ize & $evel #nalysis



Working apital atio #nalysis and omparison with eturn on Investments.

=< =? ?B

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E7ECUTI8E SUMMAR3 #tul #uto $td. is India1s reputed and leading manufacturer of $ight *ehicle Transport. #tul group also in other businesses like #uto ,inance2 two wheeler and = wheeler distributors. /ealing in "etroleum ,uels and "roducts2 Telecommunication and also in eal Dstate. #tul #uto $td. have a very good market share with product differentiation like goods carries2 passenger carries2 special carries. #tul #uto $td. covers the good market share in >ujarat2 9ttaranchal2 ajasthan2 Arissa and 9ttar "radesh. #tul #uto $td. exports their product in 'igeria2 Dgypt2 Eenya2 Tanzania2 and plenty of #frican country. Working capital is life blood of any business organization. This study shows the working capital management of #tul #tuo $td. It includes2 working capital size and level analysis2 working capital ratio analysis and comparison with profitability ratio +AI-. In this study working capital ratios compare with profitability ratio +AI-. With the help of karl pearson1s correlation co%efficient statistical tools and found the relationship between those ratios. Through this we could found working capital impact on profitability of the #tul #uto $td.

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Chap$ 2 C%/pa" I0%r/a+'%

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PRO+ECT AT A GLANCE Na"! of #h! )ni#

9:

ATUL AUTO LTD.

Plan# ;r!i,#!r!d offic!

34

0urvey 'o. 5@2 "lant 'o.6%=2 'ear !icrowave Tower2 'ational (ighway 5%2 0hapar +veraval-2 ajkot F <@4 443.>ujarat.

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$arge 0cale Industry

For" of orani
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"ublic $imited ompany

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)entibhai handra

-an&!r,

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0tate ank of India 0tate ank of 0aurashtra itizens o%op. ank ltd. $axmi *ilas ank $td. (/, ank

A)di#or,

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!aharishi & o. hartered #ccountant. Wednesday

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. INTRODUCTION 34 years ago )entibhai handra has started the business as a manufacturer of automobile% 7hhakara8. The business was started at )amnagar on 0mall base. #fter some years diversification was made and they have started manufacturing of 7/ID0D$ <%W(DD$D08 along with chhakara. With the aim to cover national market they have started emptier plant at 0hapar +*eraval- because of better transportation services and many other things. #t present the company is running under the name 7#T9$ #9TA $I!ITD/8. asically company is producing diesel engine vehicles. It produces <%wheelers like chhakera2 pick%up van2 delivery van and passenger van. 'ow a day1s company is selling its products mainly in #ndhra "radesh2 Earnataka2 >ujarat2 ajasthan2 !" and !aharashtra. 7#T9$ #9TA $I!ITD/8 is leading company as a manufacturer of diesel <%wheelers.

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.2 -RIEF HISTOR3 Today2 when you see or travel by the convenient =Chha&ada you rarely realize who invented this amazing people%friendly transportation vehicle. Well2 we take pride in mentioning our founder1s name F the La#! Mr. +a*i0an'hai Kar,an'hai Chandra. (e was a man of vision. # /reamer. #n Inventor. # 0trategist. #nd an ingenious master%mind who loved challenges. ack in the 6CB41s2 when transportation was a crucial problem especially in rural areas2 he decided to blaze a new trail. (e was thinking of an affordable mode of transportation which can benefit rural folks of 0aurashtra. The road conditions were not good but the need for transportation was increasing day in and day out. #fter thorough research and planning2 he came up with a vehicle which was skillfully engineered from a motorcycle. #nd this is how the first chhakada was developed which later became a way of life for the people of 0aurashtra. The improvements in technologies were done from time to time to make it a sturdy and comfortable vehicle. #nd like father like son2 Mr. +a(an#i'hai Chandra also joined this mission. (e took his illustrious father1s vision further. (e introduced diesel Jchhakada1 with many new features2 and soon 6?42444 chhakadas were rolling all over 0aurashtra making it easy for passengers. An 6st may2 6CC3 the company has started plant at 0hapar +*eraval- in ajkot district to increase its sales and cover entire national market. In the year 6CC@ 7#T9$ #9TA "I*#TD $I!ITD/8 was converted in a "ublic $imited ompany due to extra need of finance. ecause as per the situation and demand of market they entered to launch some new products. #t present the company 7#T9$ #9TA $I!ITD/8 has plant at )amnagar2 ajkot2 (aridwara and in ajasthan also.

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.4 MANAGEMENT TEAM -oard of Dir!c#or,

!r. )entibhai ). handra

hairman & !anaging /irector

!r. 0hriharsh 0. )ogalekar

*ice hairman

!r. !ahendra ). "atel

Dxecutive /irector

!r. harat ). handra

/irector

!r. ajesh 0. /hruv

/irector

!r. ajendra (. Eukerja

/irector

A)di#or,

!H0 "urohit ompany & ompany harted #ccounts )amnagar. -an&!r,

6. 3. <. =.

0tate ank Af India itizens o%Aperative ank $axmi *ilas o%Aperative ank 0tate ank Af 0aurashtra

F)nc#ional Mana!r,

1. ,inance !anager

: !r. ). (. #dhiya 3. "ersonal !anager : !r. !.(. /esai <. !arketing !anager : !r. E. !. heriyan =. "roduction !anager : !r. ". ). aval R!i,#!r!d ; Tran,f!r A!n# 0harex India "rivate $td.

.5 GROUP COMPAN3>S 4 8


6. #tul #uto Industries +!anufacturers of /iesel <%Wheelers3. #tul Dngines $td. +!anufacturers of I.. Dngine<. #tul International +Dxport% Import (ouse=. #tul !otor "vt. $td. +!arketing Af !aruti ange of ars& =% Wheelers?. #tul uildcon "vt. $td. +eal Dstate /evelopers & uilders-

@. Ehushbu #uto "vt. $td. +#uto ,inance ompanyB. Ehushbu #uto ,inance $td. +#uto ,inance ompany-

5. 'ew handra !otorcycle (ouse +/istributors of $.!.$.2 *espa 0cooter2 oyal Dnfield !otorcycles #uto "arts-

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.6 FORM OF ORGANI?ATION AND SI?E OF UNIT ,orm or organization can be divided mainly in four categories. There are two other forms also.

-a,ic For", . 2. 4. 5.

0ole "roprietor ship "artnership "rivate $imited ompany "ublic $imited ompany

O#h!r For", . 2.

"ublic sector unit o%operative society

,rom above given all forms of organization 7#T9$ #9TA $I!ITD/8 is a public limited company. There are many features of public limited company some of there are given below2

Charac#!ri,#ic,9 . 2. 4. 5.

,ree transfer of shares. $arge 'o. of !embership. #rtificial $egal "ersonality. $imited liability.

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Si
0mall 0cale Industry $arge 0cale Industry

O#h!r

6. Tiny Industry 3. ottage Industry <. #ncillary Industry The total investment in large%scale industryK must be more than 34 corers and up to 644 corers. Total investment of 7#T9$ #9TA $I!ITD/8 is more than 34 corers. That1s why it is large%scale industry.

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. @ ORGANI?ATION STRUCTURE #uthority and responsibility are the essential element on which type of organization depends. ut there other element also like function2 communication etc. Arganization can be divided in below given six types 2 63<=?@-

$I'D A>#'IL#TIA' $I'D & 0T#,, A>#'IL#TIA' !#TIM A>#'IL#TIA' ,9'TIA'#$ A>#'IL#TIA' "A)DT A>#'IL#TIA' A!!ITTDD A>#'IL#TIA'

,rom above given all type of organization 7#T9$ #9TA $I!ITD/8 had adopted 7$I'D A>#'IL#TIA'8.

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.  CONTRI-UTION OF UNIT ontribution of unit to the industry refers to the share of proportion the company holds in entire industry. 7#T9$ #9TA $I!ITD/8 is manufacturer of <%wheelers so its contribution is towards <%wheelers automobile segment. In <%wheeler passenger van and load carrier they have captured near about 65N to 34N of market. ut if you take diesel <%wheeler as a separate part they are a leading company. In 0aurashtra egion ompany has captured near about ?4N market. ut in >ujarat region and in other state their contribution is less than that.

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Chap$ 5

W%r*'. Cap'+al Maa.e/e+

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2. INTRODUCTION Working capital management is concerned with the problems arise in attempting to manage the current assets2 the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be2 or2 will be2 turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash2 marketable securities2 account receivable and inventory. urrent liabilities ware those liabilities which intended at there inception to be paid in ordinary course of business2 within a year2 out of the current assets or earnings of the concern. The basic current liabilities are account payable2 bill payable2 bank over%draft2 and outstanding expenses. The goal of working capital management is to manage the firm1s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety. # managerial accounting strategy focusing on maintaining efficient levels of both components of working capital2 current assets and current liabilities2 in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short%term debt obligations and operating expenses. D!fini#ion 9 Accordin #o G)##"ann ; Do)all -

7Dxcess of current assets over current liabilities8. Accordin #o Par& ; Glad,on: 7The excess of current assets of a business +i.e. cash2 accounts receivables2 inventories- over current items owned to employees and others +such as salaries & wages payable2 accounts payable2 taxes owned to government-8.

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2.2 NEED OF WORKING CAPITAL MANAGEMENT The need for working capital gross or current assets cannot be over emphasized. #s already observed2 the objective of financial decision making is to maximize the shareholders wealth. To achieve this2 it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales can not convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash2 it will be reOuired for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress2 and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. 0undry debtors are converting into cash after expiry of credit period. Thus2 some amount of cash is blocked in raw materials2 WI"2 finished goods2 and sundry debtors and day to day cash reOuirements. (owever some part of current assets may be financed by the current liabilities also. The amount reOuired to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.

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2.4 CONCEPT OF WORKING CAPITAL MANAGEMENT There are two concepts of working capital management . Gro,, Bor&in ca%i#al

#ccording to this concept2 the total assets are termed as the gross working capital. It is also known as Ouantitative or circulating capital. Total current assets include2 cash2 marketable securities2 account receivables2 inventory2 prepaid expense2 advance payment of tax2 etc. To Ouote Weston and righam2 7>ross working capital refers to firm1s investment in short term assets such as cash2 short term securities2 accounts receivable and inventories.8 This concept helps in making optimum investment in current assets and their financing. #ccording to Walker2 79se of this concept is helpful in providing for the current amount of working capital at the right time so that the firms are able to realize the greatest return on investment. 2. N!# Bor&in ca%i#al

'et working capital refers to the difference between current assets and current liabilities. urrent liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors2 bills payable and outstanding expenses. 'et working capital can be positive or negative Dfficient working capital management reOuires that firms should operate with some amount of net working capital2 the exact amount varying from firm to firm and depending2 among other thingsK on the nature of industries.net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are2 the less net working capital will be reOuired. The concept of working capital was2 first evolved by Earl !arx. !arx used the term Jvariable capital1 means outlays for payrolls advanced to workers before the completion of work. (e compared this with Jconstant capital1 which according to him is nothing but Jdead labour1. This Jvariable capital1 is nothing wage fund which remains blocked in terms of financial management2 in work%in% process along with other operating expenses until it is released through sale of finished goods. #lthough !arx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portioned of W.I."2 the concept of working capital2 as we understand today was embedded in his Jvariable capital1.

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2.5 T3PES OF WORKING CAPITAL

The operating cycle creates the need for current assets +working capital-. (owever the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital.

W%r*'. Cap'+al

Per/ae+ W%r*'. Cap'+al

Inii!" W.C.

R#$%"!& W.C.

Var'a&le W%r*'. Cap'+al

S#!'(n!" W.C.

S)#*i!" W.C.

. P!r"an!n# Bor&in ca%i#al

The permanent working capital refers to that part of the working capital which is necessary for maintaining stock of raw material and finished goods at their normal level and for paying wages and salaries regularly. It is minimum amount of current assets which is needed for the smooth running of business. In other words2 permanent working capital is that which is permanently locked up in current assets. "ermanent working capital is off two kinds: A. Ini#ial Bor&in ca%i#al and -. R!)lar Bor&in ca%i#al A. Ini#ial Bor&in ca%i#al In the initial period of its operation2 a company must have enough money to pay certain expenses. This amount will have to be supplied the owners themselves2 because in the initial years2 credit facilities may not be available from creditors2 bank do not grant loans or overdrafts and credit%sales will have to be made.

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-. R!)lar Bor&in ca%i#al It is the working capital reOuired to continue the regular business operations. It is reOuired for maintaining regular stock of finished goods to meet the customers demands2 to pay regular business expenses etc. egular working capital is the excess of current assets over current liabilities. This part of the working capital needed for smooth operations of the business. T!"%orar( W.C.

W.C .

P!r"an!n# W.C.

Ti"!

2. T!"%orar( Bor&in ca%i#al

It is the part of the working capital which is needed to meet the seasonal demands and special needs. This is called variable working capital because its amount varies according to the extent of extra demand. *ariable working capital is of two types A. S!a,onal Bor&in ca%i#al and -. S%!cial Bor&in ca%i#al. A. S!a,onal Bor&in ca%i#al 0ome business enterprises reOuire a larger amount of current assets during a particular season. ,or instance sugar mills have to purchase sugarcane and employ more people to process it during a particular season.

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-. S%!cial Bor&in ca%i#al In any business enterprise some unforeseen events take place when extra funds are needed to meet with the situation. D.g. during depression prices and sales decline considerably which necessitates extra working funds. /uring inflationary conditions2 prices of raw material and finished goods up2 hence extra money is needed to maintain the same level of stock. 9nforeseen contingencies like strikes and lockouts fire and looting2 etc. also force the management to provide for extra funds.

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2.6 IMPORTANCE OF WORKING CAPITAL MANAGEMENT Working capital is considered as central nervous system of a firm. The importance of working capital management is reflected in the time most spent by financial managers in managing current assets and current liabilities. !aintenance of adeOuate working capital is necessary in order to discharge day to day liabilities and protect the business from adverse effects in times of emergencies. It aims at protecting the purchasing power of assets and maximizes the return on investment. The goal of working capital management is to minimize the cost of working capital while maximizing a firm1s profit. The working capital management is concerned with determination of relevant levels of current assets and their efficient use as well as the choice of financial mix. The efficiency of a firm to earn profits depends largely on its ability to manage working capital. In other words2 working capital management policies have a crucial effect on firm1s liOuidity and profitability. (ence2 working capital has to be effectively planned2 systematically controlled and optimally utilized.

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2.@ DETERMINATION OF WORKING CAPITAL . Na#)r! of '),in!,,

0ome businesses are such2 due to their very nature2 that their reOuirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. #s such2 no founds are blocked in piling inventories and also no funds are blocked in receivables. D.g. public utility services like railways2 infrastructure oriented project etc. there reOuirement of working capital is less. An the other hand2 there are some businesses like trading activity2 where reOuirement of fixed capital is less but more money is blocked in inventories and debtors. 2. L!n#h of %rod)c#ion c(cl!

In some business like machine tools industry2 the time gap between the acOuisition of raw material till the end of final production of finished products itself is Ouit high. #s such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. 'aturally there need of working capital is high. 4. Si
In very small company the working capital reOuirement is Ouit high due to high overhead2 higher buying and selling cost etc. as such medium size business positively has edge over the small companies. ut if the business start growing after certain limit2 the working capital reOuirements may adversely affect by the increasing size. 5. -),in!,, Trad! c(cl!

If the company is the operating in the time of boom2 the working capital reOuirement may be more as the company may like to buy more raw material2 may increase the production and sales to take the benefit of favorable market2 due to increase in the sales2 there may more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also2 working capital may be high as the sales terms of value and Ouantity may be reducing2 there may be unnecessary piling up of stack without getting sold2 the receivable may not be recovered in time etc.

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6. T!r", of %)rcha,! and ,al!,

0ome time due to competition or custom2 it may be necessary for the company to extend more and more credit to customers2 as result which more and more amount is locked up in debtors or bills receivables which increase the working capital reOuirement. An the other hand2 in the case of purchase2 if the credit is offered by suppliers of goods and services2 a part of working capital reOuirement may be financed by them2 but it is necessary to purchase on cash basis2 the working capital reOuirement will be higher. @. S#oc& T)rno0!r

y turnover is meant the ratio of sales to average stock held in business. The greater the turnover2 the larger the volume of business that can be conducted with a given working capital. In other words2 if the turnover is rapid2 burden of working capital is not heavy. . Profi#a'ili#(

The profitability of the business may be vary in each and every individual case2 which is in turn its depend on numerous factors2 but high profitability will positively reduce the strain on working capital reOuirement of the company2 because the profits to the extend that they earned in cash may be used to meet the working capital reOuirement of the company. . A##i#)d! of Mana!"!n#

If the attitude of the management is aggressive and they are primarily risk%takers2 the need for working capital is reduced. . O%!ra#in !ffici!nc(

If the business is carried on more efficiently2 it can operate in profits which may reduce the strain on working capitalK it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.

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2. SOURCES OF WORKING CAPITAL The main sources of working capital are as under: 6. 0hares and /ebentures 3. etained Darnings <. ommercial anks a. $oans b. ank Averdraft c. ash redit =. ommercial "aper ?. ertificate of /eposit @. ommercial ills !arket B. ,actoring 5. Trade reditor or Trade reditors C. "ublic /eposits 64.Indigenous ankers and !oney $enders

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2. WORKING CAPITAL COMPONENTS !ainly three components of working capital management 6. eceivables !anagement 3. Inventory !anagement <. ash !anagement #bove three has eOual importance to manage or handle working capital of any firm. 'ow we discuss detail of above three components.

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. RECEI8A-LES MANAGEMENT The term receivable is defined as 7debt owed to the firm by customers arising from sales of goods or services in the ordinary course of business.8 eceivables or debtors are the one of the most important parts of the current assets which is created if the company sells the finished goods to the customer but not receive the cash for the same immediately. Trade credit arises when firm sells its products and services on credit and dose not receive cash immediately. It is essential marketing tool2 acting as bridge for the movement of goods through production and distribution stages to customers. Trade credit creates receivables or book debts which the firm is expected to collect in the near future. The receivables include three characteristics 6. It involve element of risk which should be carefully analysis. 2. It is based on economic value. To the buyer2 the economic value in goods or services passes immediately at the time of sale2 while seller expects an eOuivalent value to be received later on. <. It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period.

O'*!c#i0! of R!c!i0a'l! Mana!"!n# Ma/i"i
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Con#rol and "anain #h! co,# of #rad! of cr!di# : when there are no credit sales2 there will not be any trade credit cost. ut credit sales increases profits2 it is possible only when the firm is able to keep the costs at minimum. Si
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R!c!i0a'l!, Indic!,

A0!ra! Coll!c#ion P!riod The average collection period measures the Ouality of debtors since it indicate the speed of there collection. The shorter the average collection period2 the better the Ouality of the debtors since a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firm1s credit terms and policy judges its credit and collection efficiency. The collection period ratio thus helps an analyst in two respects. 1. In determining the collectability of debtors and thus2 the efficiency of

collection efforts. 2. In ascertaining the firm1s comparative strength and advantages related to its credit policy and performance.

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2. IN8ENTOR3 MANAGEMENT The term Jinventory1 is used to designate the aggregate of those items of tangible assets which are 6. ,inished goods +Jsaleable13. Work%in%progress +Jconvertible1<. !aterial and supplies +Jconsumable1In financial view2 inventory defined as the sum of the value of raw material and supplies2 including spares2 semi%processed material or work in progress and finished goods. The nature of inventory is largely depending upon the type of operation carried on. ,or instance2 in the case of a manufacturing concern2 the inventory will generally comprise all three groups mentioned above while in the case of a trading concern2 it will simply be by stock% in% trade or finished goods.

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Co"%on!n#, of In0!n#or(

C%/p%e+# %0 Ive+%r"

Ra6 Ma+er'al#

W%r*4'4 pr%.re##

F''#he7 Pr%7-,+

S+%re# a7 Spare#

. RaB Ma#!rial, aw materials are those inputs that are converted into finished goods through manufacturing process. # major input for manufacturing a product. In other words2 they are very much needed for uninterrupted production. 2. Wor&:in:Pror!,, Work%in%progress is that stage of stocks that are between raw materials and finished goods. Work%in%progress inventories are semi%finished products. They represent products that need to under go some other process to become finished goods. 4. Fini,h!d Prod)c#, ,inished products are those products2 which are ready for sale. The stock of finished goods provides a buffer between production and market. 5. S#or! and S%ar!, 0tores and spares inventory +include office and plant cleaning materials like2 soap2 brooms2 oil2 fuel2 light2 bulbs etc.- are those purchased and stored for the purpose of maintenance of machinery.

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In0!n#or( Mana!"!n# Mo#i0!, !anaging inventories involves block of funds and inventory holding costs. !aintenance of inventory is expensive2 then why to firm hold inventoriesP There are three general motives of holding inventories. . Tran,ac#ion Mo#i0! Transaction motive includes production of goods and sale of goods. It facilitates uninterrupted production and delivery of order at a given time +right time-. 2. Pr!ca)#ionar( Mo#i0! This motive necessitates the holding of inventories for unexpected changes in demand and supply factors. 4. S%!c)la#i0! Mo#i0! This compels to hold some inventories to take the advantage of changes in price and getting Ouantity discount.

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O'*!c#i0!, of In0!n#or( Mana!"!n# In company there should be an optimum level of investment for any asset2 whether it is plant2 cash or inventories. #gain inadeOuate disrupts production and causes losses in sales. Dfficient management of inventory should ultimately result in wealth maximization of owner1s wealth. It implies that while the management should try to pursue financial objective of turning inventory as Ouickly as possible2 it should at the same time ensure sufficient inventories to satisfy production and sales demand. The objectives of inventory management consist of two counterbalancing parts: 6. To minimize the firms investment in inventory 3. To meet a demand for the product by efficiently organizing the firms production and sales operation. This two conflicting objective of inventory management can also be expressed in term of cost and benefits associated with inventory. That the firm should minimize the investment in inventory implies that maintaining an inventory cost2 such that smaller the inventory2 the better the view point .obviously2 the financial manager should aim at a level of inventory which will reconcile these conflicting elements. 0ome objective as follow 6. To have stock available as and when they are reOuired. 2. To utilize available storage space but prevents stock levels from exceeding space available. <. To maintain adeOuate accountability of inventories assets. 4. To provide2 on item F by% item basis2 for re%order point and order such Ouantity as would ensure that the aggregate result confirm with the constraint and objective of inventory control. To keep low investment in inventories carrying cost an obsolesce losses to the minimum.

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Si
2115:16 ==2B@C2344 3@23362CC6

2116:1@ 211@:1 211:1 @B24
211:1 6=?25B43?3 3=2B3<2=45

,inished >oods To#al #al Indic!,

62<6=253C =2C@62B44 6524352@@< 642?5@26@@ @26@?2@== 2$4 2$41@$121 11$5@$111 21$65$64 64 4$@15$22 @$ @$6$415 11 4. 2.1 2@.@ 255.5@ In0!n#or( Indic!,

In0!n#or( co"%on!n#, The firm1s inventory consist following components 6. aw material 3. Work% in%progress <. ,inished goods To analyze the level of raw material inventory and work in progress inventory held by the firm on an average it is necessary to examine the efficiency with whic which h the the firm firm conv conver erts ts raw raw mate materia riall inve invent ntor ory y and and work work in prog progres resss into into finished goods.

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4. CASH MANAGEMENT ash is common purchasing power or medium of exchange. #s such2 it forms the most important component of working capital. The term cash with reference to cash management is used in two senses2 in narrow sense it is used broadly to cover cash and generally accepted eOuivalent of cash such as cheOues2 draft and demand deposits in banks. The broader view of cash also induce hear% cash assets2 such as marketable sense as marketable securities and time deposits in banks. The main characteristics of this deposits that they can be really sold and convert in to cash in short term. They also provide short term investment investment outlet for excess and are also useful for meeting planned outflow of funds. We employ the term cash management in the broader sense. Irrespective of the form in which it is held2 a distinguishing distinguishing feature of cash as assets is that it was no earning power. ompany have to always maintain the cash balance to fulfill the dally reOuirement of expenses.

Mo#i0!, for Holdin Ca,h . Tran,ac#ion Mo#i0! ash balance is necessary to meet day%to%day transaction for carrying on with the operation of firms. Ardinarily2 these transactions include payment for material2 wages2 expenses2 dividends2 taxation etc. there is a regular inflow of cash from operating sources2 thus in case of )I0$ there will be two%way flow of cash% receipts and payments. ut since they do not perfectly synchronize2 a minimum cash balance is necessary to uphold the operations for the firm if cash payments exceed receipts.

#lways a major part of transaction balances is held in cash2 a part may be held in the form of marketable securities whose maturity conforms to the timing of anticipated payments of certain items2 such as taxation2 dividend etc.

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2. Pr!ca)#ionar( Mo#i0! ash flows are somewhat unpredictable2 with the degree of predictability varying among firms and industries. 9nexpected cash needs at short notice may also be the result of following:

6. 9ncontrollable circumstances such as strike and natural calamities. 3. 9nexpected delay in collection of trade dues. <. ancellation of some order for goods due unsatisfactory Ouality. =. Increase in cost of raw material2 rise in wages2 etc. The higher the predictability of firm1s cash flows2 the lower will be the necessity of holding this balance and vice versa. The need for holding the precautionary cash cash bala balanc ncee is also also infl influen uence ced d by the the firm firm1s 1s capa capaci city ty to have have short short term term borrowed funds and also to convert short term marketable securities into cash. 4. S%!c)la#i0! "o#i0! 0peculative cash balances may be defined as cash balances that are held to enable the firm to take advantages advantages of any bargain purchases that might arise. While the precautionary motive is defensive in nature2 the speculative motive is aggressive in approach. (owever2 as with precautionary balances2 firms today are more likely to rely on reserve borrowing power and on marketable securities portfolios than on actual cash holdings for speculative purposes. 5. Co"%!n,a#in Mo#i0! #ccording to I.!. "andey2 the amount of cash to be held for the first two motives2 which are two most important motives2 the following factors must be taken into account:

6. 3. <. =. ?.

The expected expected cash cash inflows inflows and outflows outflows based based on cash budget. budget. The degree degree of deviation deviation betwee between n expected expected and actual actual net cash cash flows. flows. The maturit maturity y structure structure of the firm1s liabilitie liabilities. s. The firm1s firm1s ability ability to borrow at short short notice notice in the event event of any emergency. emergency. The philosophy philosophy of manageme management nt regarding regarding liOuidity liOuidity and and risk of insolvency insolvency..

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Ad0an#a! of Ca,h Mana!"!n# ash does not enter in to the profit and loss account of an enterprise2 hence cash is neither profit nor losses but without cash2 profit remains meaningless for an enterprise owner. 6. # sufficient of cash can keep an unsuccessful firm going despite losses

3. #n efficient cash management through a relevant and timely cash budget may enable a firm to obtain optimum working capital and ease the strains of cash shortage2 fascinating temporary investment of cash and providing funds normal growth. <. ash management involves balance sheet changes and other cash flow that do not appear in the profit and loss account such as capital expenditure.

Si
Par#ic)lar, ash & ank C.A. Indic!,

2115:16 662==62BC5 11

2116:1@ 6@266<25@5 5.6

211@:1 32<5B2C@< 21.2

211:1 <2B?3266B

211:1 652@3523
42.@

@4.

4 8


Ca,h c(cl! Ane of the distinguishing features of the fund employed as working capital is that constantly changes its form to drive Jbusiness wheel1. It is also known as Jcirculating capital1 which means current assets of the company2 which are changed in ordinary course of business from one form to another2 as for example2 from cash to inventories2 inventories to receivables and receivables to cash.

asically cash management strategies are essentially related to the cash cycle together with the cash turnover. The cash cycle refers to the process by which cash is used to purchase the row material from which are produced goods2 which are then send to the customer2 who later pay bills. The cash turnover means the number of time firms cash is used during each year.

4 8


Chap$ 8

Re#ear,h Me+h%7%l%."

4 8


4. INTRODUCTION esearch methodology is a way to systematically solve the research problem. It may be understood as a science of studying now research is done systematically. In that various steps2 those are generally adopted by a researcher in studying his problem along with the logic behind them. It is important for research to know not only the research method but also know methodology. 8The procedures by which researcher go about their work of describing2 explaining and predicting phenomenon are called methodology.8 !ethods comprise the procedures used for generating2 collecting and evaluating data. #ll this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem. /ata collection is important step in any project and success of any project will e largely depend upon now much accurate you will be able to collect and how much time2 money and effort will be reOuired to collect that necessary data2 this is also important step. /ata collection plays an important role in research work. Without proper data #vailable for analysis you cannot do the research work accurately.

4 8


4. 2 O-+ECTI8E OF THE STUD3 0tudy of the working capital management is important because unless the working capital is managed effectively2 monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any the company can not earn profits and increase its turnover. With this primary objective of the study2 the following further objectives are framed for a depth analysis. 1. To study the working capital management of #tul #uto $td. 2. To study the optimum level of current assets and current liabilities of the 3. 4. +.

@.

company. To study the liOuidity position through various working capitals relate ratios. To study the working capital components such as receivables accounts2 cash management2 Inventory position. To study the way and means of working capital finance of the #tul #uto $td. ompare the working capital ratios with the profitability ratio +AI-.

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4. 4 SCOPE ; LIMITATIONS OF THE STUD3 Sco%! of #h! S#)d( The scope of the study is identified after and during the study is conducted. The study of working capital is based on tools like trend #nalysis2 atio #nalysis2 working capital leverage2 operating cycle etc. ,urther the study is based on last ? years #nnual eports of )ain Irrigation 0ystems $td. #nd even factors like competitor1s analysis2 industry analysis were not considered while preparing this project.

Li"i#a#ion, of #h! S#)d( ,ollowing limitations were encountered while preparing this project: . Li"i#!d da#a

This project has completed with annual reportsK it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality. 2. Li"i#!d %!riod

This project is based on five year annual reports. onclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company. 4. Li"i#!d Ar!a

#lso it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.

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4.5 Lin!ar Corr!la#ion Co:!ffici!n# M!anin orrelation is a measure of finding out the degree of relationship between two or more variables. It means the tendency of the variables to move together. Therefore2 it means the movement of two or more variables in sympathy with another. This movement may be in the same or reverse direction . The number representing the measure +or degree- of linear correlation between two variables is called the coefficient of correlation. It is represented by r. the value of r is greater than or eOual to %6 and smaller than or eOual to 6 .

D!fini#ion The relationship between two variables such that a change in one is accompanied by a positive or a negative change in the other and also a greater change in one is accompanied by a corresponding greater change in the other2 is called correlation.

Pro%!r#i!, of Co!ffici!n# of corr!la#ion9: +6- The coefficient of correlation is an absolute relation measure. +3-The value of coefficient of correlation r is invariant under change in units of measurement of variable M and Q. ,3- The coefficient of correlation between M and Q is eOual to the coefficient

of correlation between Q and M I2 e.K r+x2 y- R r+y2 x-. +=-The value of coefficient of correlation r is always greater than or eOual to %6 and less than or eOual to 6. That is %6 S r S 6. ,+- The coefficient of correlation is invariant under the change of origin and

scale. That is r+x2 y- R r +u2 v-.

4 8


P!ar,on %rod)c#:"o"!n# corr!la#ion co!ffici!n# In statistics2 the "earson product%moment correlation coefficient +sometimes referred to as the "!2 and typically denoted by r- is a measure of the correlation +linear dependence- between two variables M and Q2 giving a value between G6 and 6 inclusive. It is widely used in the sciences as a measure of the strength of linear dependence between two variables. It was developed by Earl "earson from a similar but slightly different idea introduced by ,rancis >alton in the 6554s. The correlation coefficient is sometimes called U"earsons r.U "earsons correlation coefficient between two variables is defined as the covariance of the two variables divided by the product of their standard deviations:

P!ar,on Corr!la#ion A,,)"%#ion, 

That the relationship between M and Q can be epresented by a straight line2 i.e. it is linear.



That M and Q are metric variables2 measured on an interval or ratio scale of measurement.



In using a t distribution to test the significance of the correlation coefficient

That the sample was randomly drawn from the population2 and That M and Q are normally distributed in the population. This assumption is less important as the sample size increases.

.

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4. 6 T3PES OF DATA COLLECTION There are two types of data collection methods available. 6. "rimary data collection 3. 0econdary data collection

. Pri"ar( da#a coll!c#ion "!#hod

"rimary data is that data which is collected fresh or first hand2 and for first time which is original in nature. "rimary data can collect through personal interview2 Ouestionnaire etc. to support the secondary data. 2. S!condar( da#a coll!c#ion

The secondary data are those which have already collected and stored. 0econdary data easily get those secondary data from records2 journals2 annual reports of the company etc. It will save the time2 money and efforts to collect the data. 0econdary data also made available through trade magazines2 balance sheets2 books etc. This project is based on primary data collected through personal interview of head of account department2 head of production department and other concerned staff member of finance department. ut primary data collection had limitations such has matter confidential information thus project is based on secondary information collected through five years annual report of the company. The data collection was aimed at study of working capital management of the company. Pro*!c# i, 'a,!d on

6. #nnual report of #tul #uto $td. 344=%4? 2. #nnual report of #tul #uto $td. 344?%4@ 3. #nnual report of #tul #uto $td. 344@%4B 4. #nnual report of #tul #uto $td. 344B%45 +. #nnual report of #tul #uto $td. 3445%4C

4 8


4.@ DATA ANAL3SIS #fter collection of the data the second step is analyze the data. In this report we use the "rofitability atio +eturn on Investment- and working capital atio. We compare both ratios with the Earl "earson1s correlation co%efficient statistical tool. With the help of primary data and mainly secondary data we could found the below results. 

eturn on Investments



Working apital 0ize and $evel #nalysis Working apital atios #nalysis omparison between Working capital ratios and eturn on Investment.

 

To compare Working capital ratios and eturn on Investment we have used Earl "earson1s correlation co%efficient statistical tool. ecause it is very effective

4 8


Re+-r % Ive#+/e +

4 8


R!#)rn on In0!,#"!n# The profitability of the firm is measured by establishing relation of net profit with the total assets of the company. The ratio indicates the efficiency of utilization of assets in generating revenue. 'et "rofit R!#)rn on In0!,#"!n# R

3!ar 'et "rofit Total #ssets

2115:16 <426??2=CC

ROI

.4 

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M 644

Total #ssets 211@:1 <62=<52C=6 @C425<62C< 5 5.66

211:1 211:1 632@@C25=6 =2?C@2?@= B<<2CC52
R!#)rn on In0!,#"!n#

O',!r0a#ion ,rom year 344=%4? the return on investment were reduced continuously. 'et sales in s. was increase but the no. of unit is reduced because raw material price and product prices hike. It1s happened due to the competition and competitors. In the year 3445%4C the return on investment reduces by C3N as compare to the year 344=%4?. Its shows the inefficient utilization of the available resources.

4 8


4 8


W%r*'. Cap'+al S'9e  Level Aal"#'#

4 8


WORKING CAPITAL LE8EL The consideration of the level investment in current assets should avoid two danger points excessive and inadeOuate investment in current assets. Investment in current assets should be just adeOuate2 not more or less2 to the need of the business firms. Dxcessive investment in current assets should be avoided because it impairs the firm1s profitability2 as idle investment earns nothing. An the other hand inadeOuate amount of working capital can be threatened solvency of the firms because of its inability to meet it1s current obligation. It should be realized that the working capital need of the firms may be fluctuating with changing business activity. This may cause excess or shortage of working capital freOuently. The management should be prompt to initiate an action and correct imbalance.

Si
2115:16

+#mnt. In s.-

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211@:1

211:1

211:1

B32<4@2434 @32C<=2664 662==62BC5 ?@26=?255?

6442=6@2444 5B2
34B2?B=2?
6C<2@4=23B3
6B@2B?C2<4=
212$2$4

2$4$51

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6
C32=CC25
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644253325?4 662=6C2=@5 2$252$4 6$@24$@4

4 8


WORKING CAPITAL TREND ANAL3SIS In working capital analysis the direction at changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an annalist to make a study about the trend and direction of working capital over a period of time. 0uch analysis enables as to study the upward and downward trend in current assets and current liabilities and it1s effect on the working capital position. 7The term trend is very commonly used in day%today conversion trend2 also called secular or long term need is the basic tendency of population2 sales2 income2 current assets2 and current liabilities to grow or decline over a period of time8 7The trend is defined as smooth irreversible movement in the series. It can be increasing or decreasing.8 Dmphasizing the importance of working capital trends2 7analysis of working capital trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds. ,urther2 any one trend by it self is not very informative and therefore comparison with Illustrated their ideas in these words2 7#n upwards trends coupled with downward trend or sells2 accompanied by marked increase in plant investment. Dspecially if the increase in planning investment by fixed interest obligation8

Wor&in Ca%i#al Si
2115:16 6=B2B@@2B?5 11

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211@:1 3=@2B5?2C?= @.1

211:1 3<62
211:1 6C?2@3<2@6< 42.4

4 8


Wor&in Ca%i#al Indic!,

O',!r0a#ion, It was observe that in the year 344@%4B indices is very high because of mismatch of current assets and current liabilities. urrent #ssets increase by 6CN and urrent $iabilities decrease by <4N. #fter year 344@%4B company1s decreased its working capital continuously. y reducing working capital company might be increased its profitability in next years. The fall in working capital is a clear indication that the company is utilizing its short term resources with efficiency.

4 8


C)rr!n# A,,!#, Total assets are basically classified in two parts as fixed assets and current assets. ,ixed assets are in the nature of long term or life time for the organization. urrent assets convert in the cash in the period of one year. It means that current assets are liOuid assets or assets which can convert in to cash within a year. C)rr!n# A,,!#, Si
2115:16 B32<4@2434 @32C<=2664 662==62BC5 ?@26=?255?

2116:1@ 6442=6@2444 5B2
211@:1 34B2?B=2?
211:1 6C<2@4=23B3
211:1 6B@2B?C2<4=
To#al of C.A.

212$2$4

2$4$51

465$@@$1@

42$$15

41$@6$4

C.A. Indic!,

11

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5.@

65.4

6.

C)rr!n# A,,!#, Indic!,

4 8


Co"%o,i#ion of c)rr!n# a,,!#, #nalysis of current assets components enable one to examine in which components the working capital fund has locked. # large tie up of funds in inventories affects the profitability of the business or the major portion of current assets is made up cash alone2 the profitability will be decreased because cash is non earning assets.

Co"%o,i#ion of C)rr!n# A,,!#, Par#ic)lar, Inventories 0undry /ebtors ash & ank $oans & #dvances To#al of C.A.

2115:16 2116:1@ 211@:1
'o. in N

211:1 @6.5@ 63.@@ 46.3 3=.35 11

211:1 ?B.=6 66.== [email protected]? 3?.64 'o. in N 11

C)rr!n# A,,!#, Co"%on!n#,

4 8


O',!r0a#ion It was observed that the size of current assets is increasing with increases in the sales. The excess of current assets is showing positive liOuidity position of the firm but it is not always good because excess current assets then reOuired2 it may adversely affects on profitability. urrent assets include some funds investments for which company pay interest. The balance of current assets is maintained in the years 344=%4? and 344?%4@. #s per my view in year 344@%4B is ideal because in this year Inventory was increase and 0undry /ebtors2 ash & ank alance and $oan & #dvances were decrease compare to last two financial years. In the year 344B%45 again Inventory was increase and 0undry /ebtors and ash & ank were decrease but $oans & #dvances increased. ut it was not bed situation for the company. In the year 3445%4C the Inventory was down by B.6CN compare to last year and ash & ank alance and $oans & #dvances were decrease. ut 0undry /ebtors was decrease by C.@=N compare to last year. With the help of omposition of urrent #ssets company try to maintain and increase the inventory level and it1s profitable for the company. In last five years company reduces 0undry /ebtors continuously2 so we can say that company has no more risk regarding ed /ebts.

4 8


C)rr!n# lia'ili#i!, urrent liabilities mean the liabilities which have to pay in current year. It includes sundry creditor1s means supplier whose payment is due but not paid yet2 thus creditors called as current liabilities. urrent liabilities also include short term loan and provision as tax provision. urrent liabilities also includes bank overdraft. ,or some current assets like bank overdrafts and short term loan2 company has to pay interest thus the management of current liabilities has importance.

C)rr!n# Lia'ili#i!, Si
2115:16 ?<2
2116:1@ 6
211@:1 C32=CC25
211:1 B62@3625C5 64244<2<66 $@26$21

211:1 644253325?4 662=6C2=@5 2$252$4

22.42

6.4

5.25

214.6

C)rr!n# Lia'ili#i!, Indic!,

O',!r0a#ion urrent $iabilities graph not shown continuous growth. In the year 3445%4C current liabilities in increase compare to 344@%4B and 344B%45 years. It means company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm.

4 8


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

S#a#!"!n# of chan!, in Wor&in Ca%i#al +#mnt In s.Par#ic)lar, A. C)rr!n# A,,!#, Inventories 0undry /ebtors ash & ank $oans & #dvances Ather #ssets To#al of A -. C)rr!n# Lia'ili#i!, urrent $iabilities "rovision To#al of N!# W.C. A:- N!# D!cr!a,! in W.C.

Chan!, in W.C. Incr!a,! D!cr!a,!

211:1

211:1

6C<2@4=23B3
6B@2B?C2<4=
42$$15

41$@6$4

6$$54

B62@3625C5 64244<2<66 $@26$21 24$46$@6

644253325?4 662=6C2=@5 2$252$4 6$@24$@4 46$2$262

3C23442C?3 62=6@26?B 41$@$1

6@25==2C@5 =2=4@24@4 6=25B@2665 623@<2B@B

46$2$262 6$@$4

To#al

6$@$4

O',!r0a#ion #s per the table data current assets decreased and current liabilities increased so the working capital decreased as compare to the previous year. Inventory decreased by CN and current liabilities increased by =6N as compare to previous year.

4 8


WORKING CAPITAL LE8ERAGE Ane of the important objectives of working capital management is by maintaining the optimum level of investment in current assets and by reducing the level of investment in current assets and by reducing the level of current liabilities the company can minimize the investment in the working capital thereby improvement in return on capital employed is achieved. The term working capital leverage refers to the impact of level of working capital on company1s profitability. The working capital management should improve the productivity of investment in current assets and ultimately it will increase the return on capital employed. (igher level of investment in current assets than is actually reOuired means increase in the cost of Interest charges on short term loans and working capital finance raised from banks etc. and will result in lower return on capital employed and vice versa. Working capital leverage measures the responsiveness of AD +eturn on apital Dmployed- for changes in current assets. It is measures by applying the following formula2

N hanges in AD Wor&in ca%i#al L!0!ra! R

N changes in urrent #ssets DIT

R!#)rn on Ca%i#al E"%lo(!d 

Total #ssets

The working capital leverage reflects the sensitivity of return on capital employed to changes in level of current assets. Working capital leverage would be less in the case of capital intensive capital employed is same working capital leverage expresses the relation of efficiency of working capital management with the profitability of the company.

4 8


Calc)la#ion of Bor&in ca%i#al l!0!ra!,

Par#ic)lar,

2115:16 2116:1@ 211@:1 211:1

211:1

AD N N hange in AD N hange in .#.

66.<5 4.@66 .4

66.6? %3.436 5@.5

B.4< %<@.C?4 .124

3.@4 %@<.46@ :.66

4.B@ %B4.B@C :.@44

W. C. L!0!ra!,

1.14

:1.154

:.52

6.4@

54.44

Wor&in Ca%i#al L!0!ra!

4 8


Wor&in Ca%i#al L!0!ra! Co"%on!n#,

O',!r0a#ion

Working capital leverage increase in 3445%4C as compare to 344=%4? its shows the efficient use of current assets and current liabilities. In year 344@%4B lowest working capital leverages. ompany reduces its current assets and tries to increasing in profitability.

4 8


W%r*'. Cap'+al Ra+'% Aal"#'#  C%/par'#% 6'+h ROI

4 8


INTRODUCTION atio analysis is the powerful tool of financial statements analysis. # ratio is define as 7the indicated Ouotient of two mathematical expressions8 and as 7the relationship between two or more things8. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. atio helps to summaries large Ouantities of financial data and to make Oualitative judgment of the firm1s financial performance.

4 8


ROLE OF RATIO ANAL3SIS atio analysis helps to appraise the firms in the term of there profitability and efficiency of performance2 either individually or in relation to other firms in same industry. atio analysis is one of the best possible techniOues available to management to impart the basic functions like planning and control. #s future is closely related to the immediately past2 ratio calculated on the basis historical financial data may be of good assistance to predict the future. D.g. An the basis of inventory turnover ratio or debtor1s turnover ratio in the past2 the level of inventory and debtors can be easily ascertained for any given amount of sales. 0imilarly2 the ratio analysis may be able to locate the point out the various arias which need the management attention in order to improve the situation. D.g. urrent ratio which shows a constant decline trend may be indicate the need for further introduction of long term finance in order to increase the liOuidity position. #s the ratio analysis is concerned with all the aspect of the firm1s financial analysis liOuidity2 solvency2 activity2 profitability and overall performance2 it enables the interested persons to know the financial and operational characteristics of an organization and take suitable decisions.

4 8


LIMITATION OF RATIO ANAL3SIS 

The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparison



'ormally2 the ratios are calculated on the basis of historical financial statements. #n organization for the purpose of decision making may need the hint regarding the future happiness rather than those in the past. The external analyst has to depend upon the past which may not necessary to reflect financial position and performance in future.



The techniOue of ratio analysis may prove inadeOuate in some situations if there is differs in opinion regarding the interpretation of certain ratio.



#s the ratio calculates on the basis of financial statements2 the basic limitation which is applicable to the financial statement is eOually applicable In case of techniOue of ratio analysis also i.e. only facts which can be expressed in financial terms are considered by the ratio analysis.



The techniOue of ratio analysis has certain limitations of use in the sense that it only highlights the strong or problem arias2 it dose not provide any solution to rectify the problem arias.

4 8


EFFICIENC3 RATIO . Wor&in ca%i#al #)rno0!r ra#io It signifies that for an amount of sales2 a relative amount of working capital is needed. If any increase in sales contemplated working capital should be adeOuate and thus this ratio helps management to maintain the adeOuate level of working capital. The ratio measures the efficiency with which the working capital is being used by a firm. It may thus compute net working capital turnover by dividing sales by net working capital.

Sal!, Wor&in Ca%i#al T)rno0!r Ra#io 

3!ar,

N!# Wor&in Ca%i#al

0ales

2115:16 C5C263C2C=3

2116:1@ 623C4235=26
211@:1 6236B2B<<2C@C

211:1 54<2CBB2BB=

211:1 626@526B=2?=5

'et W.

6=B2B@@2B?5

6=32?<@2@CC

3=@2B5?2C?=

3<62
6C?2@3<2@6<

4.5

6.

W.C. TOR

@.@

.16

5.4

4 8


R!la#ion '!#B!!n Wor&in Ca%i#al T)rno0!r and ROI

3!ar

W.C. TOR

ROI

344=%4? 344?%4@ 344@%4B 344B%45 3445%4C

@.@C C.4? =.C< <.=B ?.C@

B.B< B.6< =.?? 6.B< 4.?C

C%4rela+'% (r) : ;$<<

O',!r0a#ion9 ,rom the above figure we can say that the Working apital Turnover was fluctuated year by year. The highest ratio in 344?%4@ and low in 344B%45 year. It means that company fails to use of working capital efficiently in the 344B%45. ut in the year 3445%4C company increase the ratio by B3N. ompany decreased inventory2 cash & bank balance and sundry debtors as compare to previous year and increased current liabilities as compare to previous year. orrelation between working capital turnover and return on investment is 4.@@ it means relation between them is partial positive. Working capital turnover ratio leads towards profitability so2 we can say that effective utilization of working capital resources is very essential for maintain and improve profitability of the business.

4 8


2. In0!n#or( #)rno0!r ra#io Inventory turnover ratio indicates the efficiency of the firm in producing and selling its product. This ratio indicates the effectiveness and efficiency of the inventory management. The ratio shows how speedily the inventory is turn into cash or receivables through sales. It is calculated by dividing the cost of good sold by average inventory.

Co,# of Good, Sold In0!n#or( T)rno0!r Ra#io 

A0!ra! In0!n#or(

In0!n#or( T)rno0!r 3!ar, ost of >oods 0old #verage Inventory In0!n#or( TOR

2115:16

2116:1@

211@:1

211:1

211:1

C==2B==2
6233?26C@2<@@

626@C26@62536

B5=25@<25B=

626@323
?52<@42B=<

5@2<@62464

6?<2CC?23B4

3442?5C2=4@

65?26562B55

@.

5.

.6

4.

@.2

In0!n#or( T)rno0!r Ra#io

4 8


R!la#ion '!#B!!n In0!n#or( T)rno0!r and ROI

3!ar

344=%4? 344?%4@ 344@%4B 344B%45 3445%4C

In0!n#or( TOR [email protected] 6=.6C B.?C <.C6 @.35

ROI

B.B< B.6< =.?? 6.B< 4.?C

C%rrela+'% (r) : ;$=5

O',!r0a#ion It was observed that Inventory turnover ratio indicates maximum sales achieved with the minimum investment in the inventory. #s such2 the general rule high inventory turnover is desirable but high inventory turnover ratio may not necessary indicates the profitable situation. #n organization2 in order to achieve a large sales volume may sometime sacrifice on profit2 inventory ratio may not result into high amount of profit. ompany1s inventory level is high as compare to the sales. 0o the turnover ratio may be decline and profitability also decreases. Inventory turnover ratio and eturn on investment have strong correlation. 0o it means that Inventory strongly affects the profitability of #tul #uto $td.

4 8


4. R!c!i0a'l! T)rno0!r Ra#io eceivable turnover ratio provides relationship between credit sales and receivables of a firm. It indicates how Ouickly receivables are converted into sales. Sal!, R!c!i0a'l! T)rno0!r Ra#io 

A0!ra! AC. R!c!i0a'l!,

R!c!i0a'l! T)rno0!r Ra#io Par#ic)lar, 0ales #vg. /ebtors R!c. TOR

2115:16 C5C263C2C=3 ?@2C?42B4B .4@

2116:1@ 623C4235=26
211@:1 6236B2B<<2C@C 5=2?3B2B5B

211:1 54<2CBB2B=4 @42@
211:1 626@526B=2?=5
.

5.5

4.2@

4.22

R!c!i0a'l! T)rno0!r Ra#io

4 8


R!la#ion '!#B!!n R!c!i0a'l! T)rno0!r and ROI

3!ar

R!c!i0a'l! TOR

ROI

344=%4? 344?%4@ 344@%4B 344B%45 3445%4C

6B.<@ 6B.6B 6=.=6 6<.3@ <6.33

B.B< B.6< =.?? 6.B< 4.?C

C%rrela+'% (r) : 4 ;$><

O',!r0a#ion ,rom 344=%4? to 344B%45 there were no huge difference in eceivable turnover ratio. ut in 3445%4C this ratio increase by 54N as compare to 344=%4? it was highest changes in last ? years period of time. ompany decreases average debtors so the collection turnover ratio increment possible. ompany increased the receivable turnover ratio but it was not affected to the positive profitability indices. (ere inverse correlation between receivable turnover ratio and return on investment. It indicates that receivables failed to give positive impact in profitability of the #tul #uto $td.

4 8


5. C)rr!n# A,,!#, T)rno0!r Ra#io urrent assets turnover ratio is calculate to know the firms efficiency of utilizing the current assets .current assets includes the assets like inventories2 sundry debtors2 bills receivable2 cash in hand or bank2 marketable securities2 prepaid expenses and short term loans and advances. This ratio includes the efficiency with which current assets turn into sales. # higher ratio implies a more efficient use of funds thus high turnover ratio indicate to reduced the lock up of funds in current assets. #n analysis of this ratio over a period of time reflects working capital management of a firm.

Sal!, C)rr!n# A,,!#, T)rno0!r Ra#io 

A0!ra! AC. R!c!i0a'l!,

C)rr!n# A,,!#, T)rno0!r Ra#io Par#ic)lar, 0ales urrent #ssets. C. A. TOR

2115:16 C5C263C2C=3 343253B256<

2116:1@ 623C4235=26
211@:1 6236B2B<<2C@C
211:1 54<2CBB2B=4 <632CBB24B=

211:1 626@526B=2?=5 <4B25@?2C<6

5.

5.44

4.54

2.6

4.

C)rr!n# A,,!#, T)rno0!r Ra#io

4 8


R!la#ion '!#B!!n C)rr!n# A,,!#, T)rno0!r and ROI

3!ar

344=%4? 344?%4@ 344@%4B 344B%45 3445%4C

C.A. TOR =.5B =.<< <.=< 3.?B <.BC

ROI

B.B< B.6< =.?? 6.B< 4.?C

C%rrela+'% (r) : ;$?>

O',!r0a#ion urrent #ssets turnover ratio decreased every year compare to 344=%4?. In 344= %4? ratio was highest and in 344B%45 the ratio of current assets is very low because of high inventory. In year 3445%4C this ratio increased by =BN. ut it has not given any positive impact on the profitability. urrent assets ratio not indicates any particular trend over the period of time. (ere strong correlation between current assets turnover and return on investment. Its indicate that company use the current assets effectively. Dffective utilization of current assets helps to create healthy profit.

4 8


6.6 LIJUIDIT3 RATIO . C)rr!n# Ra#io urrent assets include cash and those assets which can be converted in to cash within a year2 such marketable securities2 debtors and inventories. #ll obligations within a year are include in current liabilities. urrent liabilities include creditors2 bills payable accrued expenses2 short term bank loan income tax liabilities and long term debt maturing in the current year. urrent ratio indicates the availability of current assets in rupees for every rupee of current liability.

C)rr!n# A,,!#, C)rr!n# Ra#io 

Par#ic)lar, urrent #ssets. urrent $iabilities C)rr!n# Ra#io

C)rr!n# Lia'ili#i!,

2115:16 343253B256< ??24@624??

2116:1@ 3CB2C5<26
211@:1
211:1 <632CBB24B= 562@3?234C

211:1 <4B25@?2C<6 66323=32<65

4.@

.2

4.2

4.4

2.5

4 8


R!la#ion '!#B!!n C)rr!n# Ra#io and ROI

3!ar

344=%4? 344?%4@ 344@%4B 344B%45 3445%4C

C)rr!n# Ra#io <.@5 6.C3 <.35 <.5< 3.B=

ROI

B.B< B.6< =.?? 6.B< 4.?C

C%rrela+'% (r) : 4 ;$2=

O',!r0a#ion The current ratio indicates the availability of funds to payment of current liabilities in the form of current assets. # higher ratio indicates that there were sufficient assets available with the organization which can be converted in cash2 without any reduction in the value. #s ideal current ratio is 3:62 where current ratio of the firm is more than 3:62 it indicates the unnecessarily investment in the current assets. atio is higher in the 344B%45 because current liability decreased by 3=N. orrelation between current ratio and return on investment is negative. To improve the profitability company must decrease the current ratio because some unnecessary investment in current assets blocked the money.

4 8


2. J)ic& Ra#io Vuick ratios establish the relationship between Ouick or liOuid assets and liabilities. #n asset is liOuid if it can be converting in to cash immediately or reasonably soon without a loss of value. ash is the most liOuid asset .other assets which are consider to be relatively liOuid and include in Ouick assets are debtors and bills receivable and marketable securities. Inventories are considered as less liOuid. Inventory normally reOuired some time for realizing into cash. Their value also be tendency to fluctuate. The Ouick ratio is found out by dividing Ouick assets by current liabilities

C)rr!n# A,,!#, : In0!n#or( J)ic& Ra#io 

C)rr!n# Lia'ili#i!,

J)ic& Ra#io Par#ic)lar, $iOuid . #. urrent $iabilities J)ic& Ra#io

2115:16 6<42?362BC< ??24@624??

2116:1@ 6CB2?@B26
211@:1 6=B24C<2?<4 64B2553266@

211:1 66C2
211:1 6<6264@2@3B 66323=32<65

2.4

.2

.4@

.5@

.

J)ic& Ra#io

4 8


R!la#ion '!#B!!n J)ic& Ra#io and ROI

3!ar

344=%4? 344?%4@ 344@%4B 344B%45 3445%4C

J)ic& Ra#io 3.
ROI

B.B< B.6< =.?? 6.B< 4.?C

C%rrela+'% (r) : ;$@=

O',!r0a#ion Vuick ratio indicates that the company has sufficient liOuid balance for the payment of current liabilities. The standard liOuid ratio is 6:6 but here liOuid ratio is more than 6:6 over the period of ? years2 it indicates that the firm maintains the over liOuid assets than actual reOuirement of such assets. (ere2 correlation between Ouick ratio and return on investment is moderate. 0uch a policy is called conservative policy of finance affects on the cost of the fund and return on the funds.

4 8


4. A',ol)#! Li)id Ra#io Dven though debtors and bills receivables are considered as more liOuid then inventories2 it can not be converted in to cash immediately or in time. Therefore while calculation of absolute liOuid ratio only the absolute liOuid assets as like cash in hand cash at bank2 short term marketable securities are taken in to consideration to measure the ability of the company in meeting short term financial obligation. It calculates by absolute assets dividing by current liabilities. A',ol)#! Li)id A,,!#, A',ol)#! Li)id Ra#io



C)rr!n# Lia'ili#i!,

A',ol)#! Li)id Ra#io Par#ic)lar, #bsolute $iOuid atio

urrent $iabilities A',ol)#! Li)id Ra#io

2115:16

2116:1@

211@:1

211:1

662==62BC5

6@266<25@B

32<5B2C@<

<2B?3266B

652@3523
??24@624??

6??2==@2==6

64B2553266@

562@3?234C

66323=32<65

1.15

1.122

1.15@

1.@@

1.21

211:1

A',ol)#! Li)id Ra#io

4 8


R!la#ion '!#B!!n A',ol)#! Li)id Ra#io and ROI

3!ar

344=%4? 344?%4@ 344@%4B 344B%45 3445%4C

A',ol)#! J)ic& Ra#io 4.345 4.64= 4.433 4.4=@ 4.6@@

ROI

B.B< B.6< =.?? 6.B< 4.?C

C%rrela+'% (r) : ;$5<

O',!r0a#ion #bsolute liOuid ratio indicates the availability of cash with company is sufficient because company also has other current assets to support current liabilities of the company. In the year 344=%4? the ratio high. ecause cash was law as compare to current liabilities. orrelation between #bsolute $iOuid atio and eturn on investment is low. ut its not any drastic impact on profitability.

4 8


Chap$ >

F'7'.#1 ,%,l-#'% a7 Re,%//e7a+' %

4 8


Findin,$ Concl),ion and S)!,#ion

Working capital management is important aspects of financial management. The study of working capital of #tul #uto $td. (as reviled that the efficiency and liOuidity ratios were as per the standard industrial practices but liOuidity position of the company showed an increasing trend. The study has been conducted on working capital ratios analysis2 working capital leverage2 working capital size a level analysis and comparison with profitability ratio +eturn on Investmentwhich helped the company to manage its working capital efficiency and affectively.



eturn on investment of the company reduced year by year. 0o the profitability of the firm automatically down. ompare to year 344=%4? with 3445%4C return on investment down by C3N.



Working capital size of #tul #uto $td. not indicate any specific trend and fluctuate every year. ompany decrease the working capital size in year 3445%4C as compare to previous year. (ere lack of combination between current assets and current liabilities so the profitability was reduced.



urrent assets are more than current liabilities indicates that company use long term funds for short term reOuirements2 where long term funds are most costly than short term funds.



ompany has a more inventories in total current assets. It is very good because inventory is essential for the smooth business operation. ompany increases the current liabilities size and tries to maintain liOuidity ratios as per standard industrial practices.

4 8




#tul #uto $td. Increase the working capital leverage but it1s failed to increased profitability.

4 8




Working capital turnover ratio leads towards profitability. Working capital turnover ratio and AI have a positive correlation +4.@@-. It means that changes in working capital turnover directly effect on profitability of the business. Thus2 working capital turnover is very important for the business.



orrelation between inventory turnover ratio and return on investment near to perfect. If there is a positive change in inventory turnover ratio it gives positive sign in profitability of the company and vice versa. 0o company should keep the inventory as per the sales. aw material is major part of the inventory. ompany reOuired reducing the raw material size and holding period so2 company need less funds for working capital and increase the profitability.



There is a negative correlation between receivable turnover ratio and return on investment. It is due to the strict credit policy of the #tul #uto $td. It has given negative impact on the sales of the company. ompany should develop liberal credit policy so2 it will help in increasing sales and also the profitability of the firm.



"ositive correlation of current assets turnover ratio and return on investment. It means that current assets plays vital role in profitability. ompany1s current assets were always more than reOuirement it affect on profitability of the company. The higher current assets turnover ratio implies more efficient use of the funds.



urrent ratio of the company in last years above the ideal current ratio. It indicates company1s good liOuidity position and also indicates unnecessary investment in current assets. orrelation with return on investment is F 4.6C and it is negative. It means that our funds have blocked in unnecessary current assets.

4 8




Vuick ratio of #tul #uto $td. also above the ideal ratio. We found moderate correlation between Ouick ratio and return on investment. (ere company reOuire to reduce some investment in current assets so the cost of fund reduce and profitability increase.



orrelation between absolute liOuid ratio and return on investment is weak. This ratio did not match with ideal ratio and it was below as compare to ideal ratio. Its not big impact on profitability of the #tul #uto $td. as per our view it is good because cash is less performing assets in working capital.

#tul #uto $td. working capital shows the good liOuidity position. "ositive working capital indicates that company has the ability of the payments of short terms liabilities. Working capital of #tul #uto $td. not indicates any trend for particular period of time. #ll over working capital management of the company is average and its impact on profitability is average.

4 8


Working Capital Management Project

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