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Arss Project Study
Arss Project Study
Arss Project Study
A Project report
on
Submitted by
Roll no-PGDM9040
AT-Naranpur,belagachhia,cuttack
APPROVED BY AICTE
(2009-2011)
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
CERTIFICATE
This is to satisfy that the summer project work of Mr. Prakash kumar sahoo Titled
Working capital management is an original work and this work has not been
submitted elsewhere in any form. The indebtness to other works/publications has
been duly acknowledged at the relevant places. The project work was carried out
during 02.05.2009 to 02.07.2009 in ARSS infrastructure projects private limited
Date:
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
ACKNOWLEDGEMENT
No work can be carried out without the help and guidance of various persons. I
am happy to take this opportunity to express my gratitude to those who have
been helpful to me in completing this project report.
At the outset I would like to thank Mr. R.R. SINGH sir Head of Dept.
(Accounts) for their valuable advice and guidance during my project
for timely help concerning various aspects of project. I also thanks to all staff
members of account department for help me to complete the summer internship
program.
Lastly I would like to thank my parents, friends and well wishers who
encouraged me to do this research work and all those who contributed directly
or indirectly in completing this project to whom I am obligated to.
DECLAIRATION
DATE:
PLACE:
Prakash kumar sahoo
PGDM
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
CONTENTS
Certificate I
Acknowledgement II
Declairation III
Contents IV
List of tables V
List of Charts VI
1 WORKING CAPITAL MANAGEMENT
1.1 Introduction
1.2 Need of working capital
1.3 Gross W.C and Net W.C
1.4 Types of working capital
1.5 Determinants of W.C
2 RESEARCH METHODOLOGY
2.1 Introduction
2.2 Types of Reserch methodology
2.3 Objective of he study
2.4 Scope and limitation of the study
5.1 Introduction
5.2 Role of ratio analysis
5.3 Limitations of ratio analysis
5.4 Classifications of ratios
5.5 Efficiency ratio
5.6 Liquidity ratio
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
6.1 Introduction.
6.2 Sources of working capital finance.
6.3 Working capital loan and interest.
6.4 Estimation of working capital.
8
Appendices
8.1 Bibliography
8.2 Balance sheets
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
CHAPTER-1
1) Introduction
2) Need of working capital
3) Gross w.c & Net w.c
4) Types of working capital
5) Determinants of working capital
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
1.1) Introduction
“More business fails for lack of cash than for want of profit”. Efficient management
of working capital is one of the pre-conditions for the success of an enterprise.
Efficient management of working capital means management of various components
of working capital in such a way that an adequate amount of working capital is
maintained for smooth running of a firm and for fulfilment of twin objectives of
liquidity and profitability. While inadequate amount of working capital impairs the
firm’s liquidity. Holding of excess working capital results in the reduction of the
profitability. But the proper estimation of working capital actually required, is a
difficult task for the management because the amount of working capital varies across
firms over the periods depending upon the nature of business, production cycle, credit
policy, availability of raw material, etc.
and current liabilities in such way that the satisfactory level of working capital
is mentioned. The current assets should be large enough to cover its current liabilities
in order to ensure a reasonable margin of the safety.
Definition:-
1. According to Guttmann & Dougall-
Excess of current assets over current liabilities .
1. According to Park & Gladson-
The excess of current assets of a business (i.e. cash, accounts receivables,
inventories) over current items owned to employees and others (such as salaries &
Wages payable, accounts payable, taxes owned to government) .
1.2) Need of working capital management
The need for working capital gross or current assets cannot be over emphasized. As
already observed, the objective of financial decision making is to maximize the
shareholders wealth. To achieve this, it is necessary to generate sufficient profits can
be earned will naturally depend upon the magnitude of the sales among other things
but sales 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 cash, it will be required for purchasing the raw material may
be available on credit basis. Then the company has to spend some amount for labour
and factory overhead to convert the raw material in work in progress, and ultimately
finished goods. These finished goods convert in to sales on credit basis in the form
of sundry debtors. Sundry debtors are converting into cash after expiry of credit
period. Thus some amount of cash is blocked in raw materials, WIP, finished goods,
and sundry debtors and day to day cash requirements. However some part of current
assets may be financed by the current liabilities also. The amount required to be
invested in this current assets is always higher than the funds available from current
liabilities. This is the precise reason why the needs for working capital arise
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
A
M A
O M
U O
N U
T N
Temporary or variable working capital T
Of
Of
W
O W
R O
K R
I K
N I
G N
G permanent or
C
C
A
P A
P
fixed working capital
I
T I
A T
L A
L
TIME TIME
11
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Graph shows that the permanent level is fairly castanet; while temporary
working capital is fluctuating in the case of an expanding firm the permanent
working capital line may not be horizontal. This may be because of changes in
demand for permanent current assets might be increasing to support a rising level of
activity.
1.5) Determinants of working capital
increasing size.
7) Operating efficiency
If the business is carried on more efficiently, it can operate in profits which
may reduce the strain on working capital; it may ensure proper utilization of
existing resources by eliminating the waste and improved coordination etc.
13
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
CHAPTER-2
Research Methodology
1)Introduction
2)Types of research methodology
3)Objective of the study
4)Scope and limitation of the study
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
2.1) Introduction
Research methodology is a way to systematically solve the research problem. It may
be understood as a science of studying now research is done systematically. In that
various steps, those are generally adopted by a researcher in studying his problem
along with the logic behind them. It is important for research to know not only the
research method but also know methodology. The procedures by which researcher go
about their work of describing, explaining and predicting phenomenon are called
methodology. Methods comprise the procedures used for generating, collecting and
evaluating data. All this means that it is necessary for the researcher to design his
methodology for his problem as the same may differ from problem to problem.
Data collection is important step in any project and success of any project will
be largely depend upon now much accurate you will be able to collect and how
much time, money and effort will be required to collect that necessary data, this
is also important step.
Data collection plays an important role in research work. Without proper data
available for analysis you cannot do the research work accurately.
2.2) Types of data collection
There are two types of data collection methods available.
1) Primary data
The primary data is that data which is collected fresh or first hand, and for first
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
time which is original in nature. Primary data can collect through personal
interview, questionnaire etc. to support the secondary data.
Inventory position
5. To study the way and means of working capital finance of the ARSS infrastructure
projects pvt. Ltd.
6. To estimate the working capital requirement of ARSS infrastructure projects pvt.Ltd
7. To study the operating and cash cycle of the company.
1) Limited data:-
This project has completed with annual reports; it just constitutes one part of data collection i.e.
secondary. There were limitations for primary data collection because of confidentiality.
2) Limited period:-
This project is based on five year annual reports. Conclusions 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
3) Limited area:-
Also it was difficult to collect the data regarding the competitors and their financial information.
Industry figures were also difficult to get.
17
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
CHAPTER-IV
18
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
The consideration of the level investment in current assets should avoid two danger points
excessive and inadequate investment in current assets. Investment in current assets should be
just adequate, not more or less, to the need of the business firms. Excessive investment in
current assets should be avoided because it impairs the firm‟s profitability, as idle investment
earns nothing. On the other hand inadequate amount of working capital can be threatened
solvency of the firms because of its inability to meet its current obligation. It should be
realized that the working capital need of the firms may be fluctuating with changing business
activity. This may cause excess or shortage of working capital frequently. The management
should be prompt to initiate an action and correct imbalance.
B) Current
Liabilities
Current liabilities 42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152
Provision 7,535,964 9,823,827 35,261,598 92,135,009 172,295,570 258,380,043
Total of B 50,168,731 131,472,347 141,025,428 951,070,095 1,320,224,186 1,705,834,194
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
a period of time. Such analysis enables as to study the upward and downward trend in current
assets and current liabilities and its effect on the working capital position.
“Analysis 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.
8000
Working capital indices
6851.9
7000
6000
5000
w.c indices
4000
2938.49
3000
2000 1563.61
1000 518.56
228.78
100
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
years
working capital indices Exponential (working capital indices)
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Observations:
The net working capital of ARSS Infrastructure Projects Limited is continuously increasing from
2004-05 as the indices shows in the figure. The working capital indices of 2009-10 compared to
2004-05 is as 68 times because the current assets are increasing continuously where as the current
liabilities are not as increased as current assets. There is sudden increase in current assets of 2007-
08 compared to its previous year i.e. 2.98 times. In 2007-08 the company has taken four projects in
road, five projects in railway, one project in irrigation of rupees worth 72686 lacs, 29113 lacs, and
6636 lacs continously. While in 2008-09, the company has taken only three projects of rupees worth
18098 lacs. The no of projects taken in FY 2009-10 are ....... so the value of current assets
increased. However the current liabilities of the company increased only 38.56 crores. In current
liability of the company two things are included i.e. sundry creditors and the provisions (taxes,
fringe benefit tax, dividend, tax on proposed dividened). The company is bidding for good projects
because it has sufficient amount of reserves and surplus as well as inventories that means it is using
its long term securities as well as short term securities for it‟s bidding and execution of the projects.
Current asseets:
Total assets are basically classified in two parts as fixed assets and current assets. Fixed
assets are in the nature of long term or life time for the organization. Current assets convert in
the cash in the period of one year. It means that current assets are liquid assets or assets
which can convert in to cash within a year.
Balances
Loans and 48,575,716 81,219,576 205,984,507 506,967,157 557,410,278 1,406480936
Advances
Total of A 127,270,647 307866661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501
(Gross
W.C.)
C.A 100 241.89 424.96 1694.96 2817.51 5491.28
indices
6000
Current assets indices 5491.28
5000
4000
C.A indices
3000 2817.51
2000 1694.96
1000
424.96
241.89
100
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years
Analysis of current assets components enable one to examine in which components the
working capital fund has locked. A large tie up of funds in inventories affects the profitability
of the business or the major portion of current assets is made up cash alone, the profitability
will be ........... because cash is non earning assets.
22
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Observation:
The current assets increases as the sales increase. The excess of current assets is always
positive for the company but it is not always good. It may adversely affect the profitability of
the firm. There are certain investments for which company pay interest. From the table of
composition of current assets, there is good amount of inventory available except one year
(2006-07). Excess amount of inventory is good for the company because the company is
diversifying its business into different sectors and there is no certainty about the projects
(time of the projects) in certain sectors. The loans and advances of the firm are in zigzag way.
The loans and advances should be minimum as the high loans create a greater amount of
interest. The company was doing well from 2006-07 to 2008-09 as the company had taken
four projects in road, five in railway, and one in irrigation. But in 2009-10 it has increased
because of the ARSS took good projects. The company is doing better in sundry debtors in
previous two years. The company had taken its amount from its debtors. Cash and bank
balances is good for all the years.
23
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Current liabilities
Current liabilities mean the liabilities which the company have to pay in current financial year. It
includes sundry creditors means supplier whose payment is due but not paid yet, thus creditors
called as current liabilities.Current liabilities also include short term loan and provision as tax
provision. Current liabilities also includes bank overdraft. For some current assets like bank
overdrafts and short term loan, company has to pay interest thus the management of current
liabilities has importance
3500
3000
2500
C.L indices
1000
500
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years
24
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Observation
In current liabilities of the company only the sundry creditors and the provision (provision for
taxation, fringe benefit tax, dividend and proposed dividend) are included. Current liabilities
show continues growth each year except in 2006-07 and 2009-10 because company creates
the credit in the market by good transaction. To get maximum credit from supplier which is
profitable to the company it reduces the need of working capital of firm. As a current liability
increased in the year 2007-08 by 574.39% it also increased the working capital size in the
same year. But company enjoyed over creditors which may include indirect cost of credit
terms in future.
Current liabilities show continues growth each year because company creates the credit in the
market by good transaction. To get maximum credit from supplier which is profitable to the
company it reduces the need of working capital of firm. As a current liability increase in the year
2006-07 by 35% it reduce the working capital size in the same year. But company enjoyed over
creditors which may include indirect cost of credit terms.
The changes in sales and operating expanses may be due to three reasons
1. There may be long run trend of change e.g. The price of row material
say oil may constantly raise necessity the holding of large inventory.
4. Policy changes:-
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.
5. Technology changes:-
The third major point if changes in working capital are changes in technology because changes in
technology to install that technology in our business more working capital is required
A change in operating 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.
25
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
B)Current
liabilities
Current liabilities 1147928616 1447454152 299525536
provision 172295570 258380043 86084473
Total current 1320224186 1705834194 385610008
liabilities
Observation
There is a positive working capital which shows the further growth as the company is
expanding it‟s business into other sectors of the construction. The working capital increased
due to the following reasons:
1) There is 50% increase in the inventories from previous year because the company is taking
new projects in new sectors with good worth.
2) The current liabilities of the firm is very less.
3) The increased total current liabilities is very less compared to the total current assets.
Operating cycle
The need of working capital arrived because of time gap between production of
goods and their actual realization after sale. This time gap is called Operating
26
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
DEBTORS
(RECEIVABLES)
The speed with which the working capital completes one cycle determines the
requirements of working capital-longer the period of the cycle larger is the
rquirement of working capital
Observation:
it‟s joint venture companies do the project but the company incurres the whole
cost. And there is delayed in payment by it‟s joint venture companies. That
comes under the debtors collection period. Common sense tells that longer a
company has money out, the more risk it is taking.But there is one positive
aspect that will boost the confidence among the companies.The company is not
purchasing on credit from it‟s supplier. So in credit deferral period the credit
purchases taken as a whole sundry creditors. These sundry creditors are for the
bank loans, Advances etc. In all the years from 2005 to 2009 the creditors
deferral period is 360 days which is good for the company. The company is
enjoying the money of it‟s creditors.
% Changes in ROCE
Working capital leverage= % Changes in current assets
EBIT
Return on capital employed=
Total assets
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
29
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Introduction
Role of ratio analysis
Limitations of ratio analysis
Classifications of ratio
Efficiency ratio
Liquidity ratio
5.1) Introduction
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as
the indicated quotient of two mathematical expressions and as the relationship
between two or more things . The absolute figures reported in the financial statement
do not provide meaningful understanding of the performance and financial position
of the firm. Ratio helps to summaries large quantities of financial data and to make
qualitative judgment of the firms financial performance
5. The technique of ratio analysis has certain limitations of use in the sense
that it only highlights the strong or problem arias, it dose not provide any
solution to rectify the problem arias .
6. For the intra firm comparison, the comparison may be false because
different firms use different accounting policies as some firms use
LIFO (Last in First out) method while some use FIFO (First inFirst out).
Classification of ratio :-
1) Activity Ratio:
Activity ratio is an indicator of how rapidly a firm converts various accounts into
cash or sales. The sooner management can convert assets into sales or cash, the more
actively the firm run. This ratio is also called Asset Management Ratio. As the assets
basically categorized as fixed assets and current assets and again further the current
assets classified according to individual components of current assets viz.
Inventories, Sundry Debtor, and receivables etc. The important Activity ratios are as
follows
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
A company uses working capital to fund operations and to purchase inventory. These
operation and inventory are then converted into sales revenue for the company. The
working capital turnover ratio is used to analyze the relationship between the cash
used to fund operation and sales generated from these operations. In a general sense,
the higher the working capital turnover, the better because it means that the company
is generating a lot of sales compared to the cash it uses to fund the sales.
Sales
W.C TOR
4.5
4 3.83
3.42 3.35
3.5
3 2.76
2.6
W.C TOR
2.5
2
Mean ()
1.5 1.19
1
0.5
0
Years 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Year
Observations
The working capital turnover ratio of ARSS declined from 2004-05 to 2009-10,
34
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
however it increased in 2008-09. The reciprocal of the ratio is 0.26, 0.29, 0.30, 0.38,
0.36, and 0.52 continuously. It means that for one rupee of sales, the company needs
Rs 0.26, 0.29, 0.30,0.38, 0.36, and 0.52. In previous years the company incurred less
money for sales while in these years specially in 2009-10 it is unable to take projects
in that amount. The company is increasing its sales by increasing in the net working
capital.
12
10
Inventory TOR
8
5.75 5.9
6 Inventory TOR
3.38
4
2.38
0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years
35
Figure.......Inventory Turnover Ratio
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Observation:
Inventory turnover ratio basically tells about the efficiency of the firm in taking
the project and to accomplish that. The inventory turnover shows how rapidly
the inventory is turning into receivables through sales. A high inventory
turnover ratio is good because the no of days converting the inventories into the
sales will become less. As in 2006-07 the inventory turnover ratio is 12.61
times so the inventory holding days is only 29 days while from 2007-08 to 2009-
10 the inventory turnover ratio decreasing means the no of days in inventory
converting is increasing. This can bad for the organization as this creates
unnecessary tie-up of funds,reduced profit, and increasedcosts.
A firm sells goods and/ or services for cash and credit. When the firm extends
credits to its coustomers, debtors (Accounts Receivables) are created in the
firm‟s accounts. The liquidity position of the firm depends on the quality of
debtors to great extent.
Gross Sales
For an Infrastructure Company like ARSS the gross sales considers as the
contract revenue.
The scrap values are not included in Gross Sales because it further comes into
sales with other income. Average Debtors calculated by opening plus closing
balance divide by 2.Increasing volume of receivables without a matching
increase in sales is reflected by a low receivable turnover ratio. It is indication
of slowing down of the collection system or an extend line of credit being allowed by
the customer organization. The latter may be due to the fact that the firm is losing out to
competition. A credit manager engage in the task of grantingcredit or
monitoring receivable should take the hint from a falling receivable turnover
ratiouse his market intelligence to find out the reason behind such failing trend.
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Debtor turnover indicates the number of times debtors turnover each year.
Generally the higher the value of debtor‟s turnover, the more is the
management of credit.
10
9 7.85
8
6.17
7
6
D.T.R
5 D.T.R
4
3
2
1
0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Year
Observation:
Debtors Turnover ratio indicates the no of times debtors turnover each year.
Higher the value of debtors turnover, the more efficient is the management of
credit because the collection period of the debtors will low. Maximum debtors
turnover ratio in all five years is 16.57 in 2009-10. It increases from 2006-07
also there is sudden jump in collecting the amount of debtors in 2008-09 and in
2009-10. The increased Debtors Turnover Ratio shows the better
management in debtors collection (from it‟s joint venture companies).
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Sales
Current Assets
1
C.A TOR
0.5
0
38 05 06 07 08 09 10
- 20 - 20 - 20 - 20 - 20 - 20
04 05 06 07 08 09
20 20 20 20 20 20
Figure.......CurrentYears
assets turnover Ratio
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Observation:
This ratio is very significant as it shows how fast the current assets turns into
sales. The current asset turnover ratio is in haphazard way but comparing to
2006-07 the ratio is low in recent years. In previous years the ratio was good.
The current asset changes in sales in 155days, 184 days, and 146 days
continuously in 2004-05, 2005-06, and 2006-07. While in 2007-08, 2008-09,
2009-10 the days are 248 days, 207 days, and 250 days continuously. The
increasing no of days of current asset turnover ratio because company can maintain
high level of inventory for upcoming its projects.
Current Ratio:
The current ratio is a crude and quick measure of the firm‟s liquidity. The
current is calculated by dividing current assets by current liabilities:
Current Assets
Current Ratio =
Current Liabilities
Current assets include cash and those assets which can be converted in to cash
within a year,such marketable securities, debtors and inventories. All
obligations within a year are include in current liabilities. Current liabilities
include creditors, bills payable accrued expenses, short term bank loan income
tax liabilities and long term debt maturing in the current year. Current ratio
indicates the availability of current assets in rupees for every rupee of current
liability.
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
This ratio is important as the value of the current assets may decrease or
increase but the value of the current liabilities is always constant. That has to be
paid.
6
Current Ratio
5.11
5 4.83
4
Current Ratio
3.12
2.99
3
Current Ratio
2.53 2.51
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years
Observation:
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Quick Ratio:
Quick ratios establish the relationship between quick or liquid assets and
liabilities. An asset is liquid if it can be converting in to cash immediately or
reasonably soon without a loss of value. Cash is the most liquid asset other
assets which are consider to be relatively liquid and include in quick assets are
debtors, bills receivable and marketable securities. Inventories are considered as
less liquid. Inventory normally required some time for realizing into cash.
Their value also is tendency to fluctuate. The quick ratio is found out by
dividing quick assetsby current liabilities:-
Quick Ratio =
Current Liabilities
Table.......Quick Ratio
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
3.5
3
Quick Ratio
2.27
2.5
Quick Ratio
1.79
2 1.61 1.67
1.48
1.5
0.5
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years
Figure.......Current Ratio
Observation:
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Receivables Management
Inventory Management
Cash Management
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Receivable Management:
Introduction:-
Receivables or debtors are the one of the most important parts of the current assets which is created
if the company sells the finished goods to the customer but not receive the cash for the same
immediately. Trade credit arises when firm sells its products and services on credit and dose not
receive cash immediately. It is essential marketing tool, acting as bridge for the movement of goods
through production and distribution stages to customers. Trade credit creates receivables or book
debts which the firm is expected to collect in the near future. The receivables include three
characteristics:
1) It involve element of risk which should be analyse carefully.
2) It is based on economic value. To the buyer, the economic value
in goods or services passes immediately at the time of sale, while seller expects an equivalent value
to be received later on.
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
The sales of goods on credit basis are an essential part of the modern competitive economic system.
The credit sales are generally made up on account in the sense that there are formal
acknowledgements of debt obligation through a financial instrument. As a marketing tool,they are
intended to promote sales and there by profit. However extension of credit involves
risk and cost, management should weigh the benefit as well as cost to determine the goal of
receivable management. Thus the objective of receivable management is to promote sales and profit
until that point is reached where the return on investment in further funding of receivables is less
than the cost of funds raised to finance that additional credit.
Table..........Size Of Receivables
Receivables Indices
1095
1200
910
1000
Receivables Indices
800
597
400
202
100
200
0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years
Figure.......Receivables Indices
The average collection period measures the quality of debtors since it indicate
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
the speed of their collection. The shorter the average collection period, the
better the quality of the debtors since a short collection period implies the
prompt payment by debtors. The average collection
period should be compared against the firm‟s credit terms and policy judges its
credit and collection efficiency. The collection period ratio thus helps an analyst
in two respects:
200
150
average collection period
100 Mean (average collection
46 period )
50 22
31
22
2
0
5 6 7 8 9 0
2 00 2 00 2 00 2 00 2 00 2 01
0 4- 0 5- 0 6- 0 7- 0 8- 0 9-
20 20 20 20 20 20
46
years
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Observation
The average collection period increased from 2004-05 to 2006-07 and then it
decreases from 2006-07 to 2009-10. The increasing average collection period shows
the inefficiency of the management in collecting the debtors money while the
decreasing average collection period shows the efficient management and better
credit policy. The reason behind average collection period is high due to debtors
turnover ratio is low. In 2006-07 the company had taken a no of projects but the
company did projects alone. So there is no chance of debting in 2006-07. While in
2007-08 the company had taken 10 projects on the joint venture basis. Company‟s
share is 100% in those projects. In 2008-09 and 2009-10 the company has taken 3
and 5 projects on the joint venture basis so there is case of debting.
Inventory Management:
In financial view, inventory defined as the sum of the value of raw material and
supplies,including spares, semi-processed material or work in progress and finished
goods. The nature of inventory is largely depending upon the type of operation
carried on. A firm neglecting the management of inventories will be jeopardizing its
long term profitability and may fail ultimately. It is possible to reduce the inventory
to a certain level without affecting production and sales, by using simple inventory
planning and controlling technique. The reduction in “excessive” inventories carries a
favourable impact on the company‟s profitability. Maintaining inventories involves
tying up of the company‟s funds and incurrence of storage and handling cost. There
are three components: Raw material, Work in progress; and finished goods involved
in inventory management.
In the case of Inventory Management, the firm is faced with the problem of meeting
two conflicting needs:
(a) unnecessary tie-up of the firm‟s funds and loss of profits (b) excess carrying cost
(c)risk of liquidity. Another danger of holding excess inventories is deterioration of
the inventories. Maintaining a minimum level of inventories is also dangerous. The
consequences of under-investment in inventories are: (a) production hold-ups (b)
failure to deliver commitments. So the aim of inventory management is:
(3) To maintain sufficient finished goods inventory for smooth sales operation, and
efficient customer service;
Inventory indices
4000 3551.7
3500
Inventory indices
3000
2500
1806.7
2000 Inventory indices
1500
597
1000
100 70.34
500
0
2005-5006 2006-2007 2007-2008 2008-2009 2009-2010
Years
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Figure........Inventory indices
Inventory Components:
The firm‟s inventory consist following components
To analyze the level of raw material inventory and work in progress inventory held by the
firm on an average it is necessary to examine the efficiency with which the firm converts raw
material inventory and work in progress into finished goods.
Table........Inventory components(%)
100
90.03
90
80.31
78.17
80
68.18
70 66.91
60
Raw Material
50 W.I.P
Finished Goods
40 Stores&Spares
31.36
30
19.75
20 17.6
13.57 12.55
10 6.51
4.34
1.73 2.07 1.6 1.84 1.78 1.66
0 0
0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Figure......Inventory components in %
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
100
90.03
90
80.31
78.17
80
68.18
70 66.91
60
50
40
31.36
30
19.75
17.6
20
13.57 12.55
10 6.51
4.34
1.73 2.07 1.84
1.6 1.78 1.66
0 0
0
2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Observation:
As the ARSS Infrastructure Projects Limited is a construction company. And it takes project
of different segment in construction sector like road, railway, irrigation, aviation, marine,
jetty etc. The company‟s inventory work in progress is very high in terms of cash as well as
in terms of % and it increases year by year. The company is taking a no of projects which
The company did not concern about the stores and spares in the period of 2005 and 2006. But
as the stores and spares plays a important role in the construction industry examples for
equipments. So from 2007 onwards the company made a certain account in the inventories. In
2008-09 the recession was happening. The company was unable to good projects because of
the downturn in the industry. As mentioned earlier the company had taken only three projects
in the railway segment in 2008-09. So the raw material remained high and the finished goods
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
remained low.
The reciprocal of inventory turnover gives average inventory holding in percentage term.
When the no of days in a year (said as 360) are divided by inventory turnover, days of
360
DIH =
Inventory Turnover
To examine the efficiency of the firm (how the firm converts raw material into work in
process and work-in-process into finished goods), raw material inventory and work in process
inventory should be known. The raw material inventory should be related to materials
Material consumed
Cost of Production
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Cash Management:
Cash is common purchasing power or medium of exchange. As such, it forms the most
important component of working capital. The term cash with reference to cash management
is used in two senses, in narrow sense it is used broadly to cover cash and generally accepted
equivalent of cash such as cheques, draft and demand deposits in banks. The broader view of
cash includes near cash items, such as marketable securities or bank time deposits. The basic
characteristic of near-cash assets is that they can readily be converted into cash. They also
provide short term investment outlet for excess and are also useful for meeting planned
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
outflow of funds. Irrespective of the form in which it is held, a distinguishing feature of cash
as assets is that it has no earning power. Company have to always maintain the cash balance
to fulfill the dally requirement of expenses. There are four primary motives for maintain the
cash as follow:
(iii) Cash balances held by the firm at a point of the time by financing deficit or investing
surplus cash.
The firm‟s need to hold cash may be attributed to the following three motives:
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 and salaries,
operating expenses, taxes, dividends etc. There should be a proper channel between the cash
inflow and cash outflow in the firm. For periods when cash payments exceed cash receipts,
the firm should maintain some cash balance to be able to make required payments. Usually
the firm maintains such accounts to meet anticipated payments whose timings is not perfectly
The precautionary motive is the need to hold cash to meet contingencies in the future. It helps
in the future. The precautionary amount of cash depends upon the predictability of cash
flows. If cash flows are predicted with accuracy, less cash will be maintained for emergency.
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
If the firm is able to borrow at short notice there will less need for precautionary balance.
Generally the precautionary balance held in marketable securities and relatively less in cash.
The speculative motive relates to the holding of cash for investing in profit making
opportunities as and when they arise. As the firm can postpone materials‟ purchasing when
the price of materials is high. And make purchase in future when the price of materials falls.
The primary motives to hold cash and marketable securities are: the transactions and the
precautionary motives.
Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither
profit nor losses but without cash, profit remains meaningless for an enterprise owner.
2. An 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 shortage, fascinating
3. Cash management involves balance sheet changes and other cash flow that do not appear
55
WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
5000
3755.02
4000
0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
Years
Observation:
The cash and bank balances of ARSS was continuously increasing from 2005-06 to 2009-10.
The reason of increasing cash and bank balances was the increasing no of projects with their
value. The company entered into new areas and earned increasing profits. There was a sharp
increase in cash and bank balances in 2007-08 from it‟s previous year (i.e. 212.23%
increase). There was increase due to 10 projects of railway, road, irrigation taken.
Cash Cycle:
One of the distinguishing features of the fund employed as working capital is that constantly
changes its form to drive „business wheel‟. It is also known as „circulating capital‟ which
means current assets of the company, which are changed in ordinary course of business from
one form to another, as for example, from cash to inventories, inventories to receivables and
receivables to cash.
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Introduction:
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
Funds available for period of one year or less is called short term finance. In India short term
finance are used as working capital finance. Two most significant short term sources of
finance for working capital are trade credit and bank borrowing. Trade credit ratio of current
assets is about 40%, it is indicated by Reserve Bank of India data that trade credit has grown
faster than the growth in sales. Bank borrowing is the next source of working capital finance.
The relative importance of this varies from time to time depending on the prevailing
environment. In India the primary source of working capital financing are trade credit and
short term bank credit. After determine the level of working capital, a firm has to consider
2) Bank Finance
1) Trade credit:
Trade credit refers to the credit that a customer gets from suppliers of goods in the normal
course of business. The deferral of payment in short term financing is called trade credit. It is
major source of financing for firm. Particularly small firms are heavily depend on trade credit
as a source of finance since they find it difficult to raised funds from banks or other sources
in the capital market. Trade credit is mostly an informal arrangement, and it granted on an
For ARSS infrastructure Projects Limited the sundry creditors are the trade credit finance
2) Bank finance:
Banks are main institutional source of working capital finance in India. After trade credit,
bank credit is the most important source of financing working capital in India. A banks
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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.
considers firm‟s contract revenue and services and desirable levels of current assets in
determining its working capital requirements. The amount approved by bank for the firm‟s
working capital is called credit limit. Credit limit is the maximum funds which a firm can
obtain from the banking system. In practice banks do not lend 100% credit limit; they deduct
margin money.
There are two types of loans involved as bank finance in ARSS Infrastructure Projects
Limited.
1) Secured loans in which the term loan, working capital loan; and loan from NBFCs. The
working capital loan is secured by way of mortgages of land and building and hypothecation
2) Unsecured loans in which the loans from banks and from others are included.
(Amount in crores)
Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
W.C loan 12.34 23.04 48.33 139.06 288.54
Interest 1.64 2.89 7.34 23.99 46.33
3500000000
3000000000 2885494519
2500000000
2000000000
1500000000 1390672703
W.C loan
1000000000 Mean (W.C loan)
483320993
500000000 230446691
61 123413232
0
06 07 08 09 10
- 20 - 20 - 20 - 20 - 20
05 06 07
Fugure.........Working 08 09
20 20 20 20 2Capital
0 size