A Study of “Working Capital Management” at Vijaya Milk Production Pvt Ltd,

Venkateswarapuram, Nellore Dt.

Introduction:-

Working Capital Management

Working capital may be regarded as lifeblood of a business. The success of business

is depends upon the efficiency of Working capital, while its inefficient management can

lead not only to loss profits but also the ultimate downfall of what otherwise might be
considered as a promising concern. A study of Working capital is of major importance to
internal & external analysis because of its close relationship with the current day-to-day
operations of business.

In the words of “Ralph Kennedy” and “Steward MC Muller”, inadequacy of

mismanagement is the leading cause of risk in business which U related to current operations
and represented at any one time by the operating cycle of such items as against receivables,
Raw material stores, Work in process, finished goods, bins receivables and cash. In
accounting “working capital is the difference between the inflow and outflow of funds”, it is
also called net cash inflow. It is defined as the excess of current assets and current liabilities
and provisions”.

In other words “net current assets or net working capital”. This definition of working
capital is qualitative in character. Working capital represents the total of all current assets. In
other words it is called gross Working capital or circulating capital of current capital.” The
current liabilities and provisions excess assets, the difference is referred to as negative
Working capital The use of the circulating capital instead of Working capital indicates that
the flow is circular in nature. The beginning of business venture, c,mash is provided by
owners and lenders. This is used for purchasing of fixed assets, which is not to be sold
throughout the year during the normal course of business. Remaining cash will be used for
Working capital to meet the current requirement of a business enterprise such as the purchase
to service. Raw material etc., when receivables are collected.
Principles of working capital management

Principle of risk variation

Risk refers to the inability of firm to maintain sufficient current assets to pay full its
obligations. If working capital is varied relative to sales, the amount of risk that a firm
assumes is also varied, and the opportunity for again or loss is increased. In other there is
definite relationship between the degree of risk and the rate of between. A firm assumes
more risk the opportunity for gain or loss increase working capital relative to sales decreased
the degree or rest increase.
Thus, Working capital group the amount of risk goes down, the opportunity for gain or
loss is likewise adversely affected. The good of management should; however be that level
of Working capital which would optimize a firm’s rate or return. This live the incremental by
associated with the decrease in Working capital investment greater than the increment gain
associated with that investment.

Principal of cost of capital

The different source of finance, for each source has a different cost of capital. It
should be remembered that the cost of capital moves insecurely with risk. Thus additional
risk capital results in the decline in the cost of capital.

Principal of equality position

According to this principle, the amount of Working capital invested in each
component should be adequately justified by a firm’s equality position. Every rupee invested
in the Working capital should contribute to new work of the firm.

Principle of maturity of payment

A company should make every effort to relate maturities of payment to is flow of
internally generated funds. There should be the least disparity between the maturities a
firm’s short-term debt instruments and its flow of internally generated funds because a
greater risk in generated with greater disparity. A margin of safety should. However be
provided for short tem debt payment.

In the words of Shubin, “working capital is the amount of funds necessary to cover the cost of
operating the enterprise. “
 According to Genesten berg, “ Circulating capital means current assets of a company
that are changed in the ordinary course of business from to another, as for example, from cash
to inventories, inventories to receivables, receivables into cash.

Types of Working Capital

There are seven types of working capital.
1. Net working capital
The net Working capital is the difference between current assets and current
liabilities. The concept of networking capital enables a firm to determine low much amount
is left for operational requirement.
2. Gross working capital
Gross Working capital is the amount of funds invested in the various components of
current assets. Advantages of Gross working capital are.
 Gross working capital provided the current amount of Working capital at the right
time.
 It enables a firm to realize the greatest return on its investment.
 It helps in the fixation of various areas of financial responsibility.
 It enables as firm to plan and control fund maximize the returns on investment.
3. Permanent working capital
Permanent working capital is the minimum amount of current assets which is needed
to conduct a business even during the dullest season of the year. This amount various from
year to year. Depending upon the growth of the company.
Permanent working capital has following characteristics.
 It is classified on the basis of time factors.
 It constantly changes from one asset to another and continues to remain in the
business process.
It size increase with the growth of business operations.
4. Temporary (or) variable working capital
It represents the additional assets which we required at different time during the
operation year additional inventory, extra cash etc., seasonal working capital is the additional
amount of assets – particularly cash, receivables and inventory which are required during the
more active business seasons of the year Temporary working capital characteristics are
 It is not always gainful employees, though it may change from one asset to
another, as permanent working capital does and
  It is particularly suited to business of seasonal or cyclical nature.
5. Balance sheet working capital
The balance sheet working capital is one which is calculated from the items appearing
in the balance sheet. Gross working capital which is represented by the excess of current
assets and Net working capital which is represented by the excess of current assets over
current liabilities is example of the balance sheet working capital.
6. Cash working capital
Cash working capital is one which is calculated from the items appearing in the Profit
& loss account it shows the real flow of money or value at a particular time and is considered
to be the most realistic approach in working capital management. It is the basis of the
operation cycle concept which has assumed a great importance in financial management in
recent years. The reason is that the cash working capital indicates the adequacy of the cash
flow, which is an essential prerequisite of the business.
7. Negative working capital
Negative Working capital emerges when current liabilities exceed current assets.
Such a situation is not absolutely theoretical, and occurs when a firm is nearing a crisis of
some magnitude.

Source of working capital

The need of working capital is increased by raising prices of end produce and relative
inputs. Financing of additional working capital requirements in such an environment
becomes a real problem to a finance manager. Commercial Banks play a most
important role in providing Working capital finance especially in the India. In
inflation situation the R.B.I has taken up certain fiscal measures.
The opinion is normally ruled out, because financial institutions do not provide
finance for Working capital requirements. This facility is not applicable for all
companies including small companies also.

Floating or Debentures
 The probability of a successful floatation of debentures seems to be rather merging.
In Indian capital market, floating of debentures has still to gain popularity debentures
issues of companies in private sector, generally fails to attract investor to invest funds
in companies. For this, modes of raising funds by issuing convertible debentures or
bonds is also considered, which may attract a number of investors.
Accepting public deposits

The issue of tapping public deposits is directly related to the image of the company
seeking to invite public deposits. But the problem of low profitability in many
industries is very common.
Issues of Shares
With a view to financing additional working capital needs issued of additional shares
should be one way to raise the equity base. Indian companies find themselves in a
bad shape in this context too. Low profit margins as well as lack of knowledge, about
the company make the success of a capital issue very dim

Factors Determining Working Capital

The following are some of factors determine the account of working capital
1. Nature of Industry
Small companies have smaller proportions of cash, receivables and inventory than
large corporations. This debt becomes more marked in large corporations. A public utility,
Ex: mostly employees fixed assets in its operations while the merchandising department
depends generally on inventory and receivables. Needs of working capital are thus
determined by the nature of an enterprise.
2. Demand of industry
Creditors are interest in the security of loans they want their obligations to be
sufficiently covered. They want the mount to security in assets which are greater than the
liability.
3. Cash requirements
Cash is one of the current assets, which is essential for successful operators of the
production cycle. It should adequate and properly utilized. It would be wasteful to hold
excessive cash. A minimum level of cash always required to keep the operating going.
Adequate cash also maintain good credit relations. Richards Osborn has pointed out that cash
has universal liquidity and acceptability. Unlike illiquid assets, its value is clear-cut and
definite
4. Time
The level of Working capital depends upon the time required to many fracture goods.
If the time is longer, the size of working is great. Moreover the amount of Working capital
depends upon inventory turnover and the unit cost of the goods that are sold. The greater this
cost, the bigg1er is the amount of Working capital

5. Volume of sales
This is the most important factor affecting the size and components of working
capital. A firm maintains currents assets because they are needed to support the operational
activities which result in sales. The volume of sales and size of the Working capital are
directly related to each other. As the volume of sales increase, there is an increase in the
investment of Working capital in the cost of operations, in inventories and in receivables.
6. Terms of purchases and loans
If the credit terms of purchases are more favorable and those of sales less liberal, less
cash will be invented in inventory. When more favorable terms working capital requirements
can be reduced. A firm enjoys greater Credit with bank needs less working capital.

7. Inventory turn over

In the inventory turnover is high, the Working capital requirements will be low, with a
better inventory control; a firm is also to reduce its working capital requirements. Which
attempting this it should determine the minimum level of stock which it will have to maintain
through the period of its operations.
8. Receivable turn over
It is necessary to have an effective control of receivables. A prompt collection of
receivables and good faculties for setting payables results into low working capital
requirements.
9. Business turn over
The business turnover of the organization directly calls for systematic planning for
production. The exploitation of the available business can be achieved only when sufficient
raw material are stored and supplied. Hence business turn over will also influence the
working capital.
10. Value of current Assets
A decrease in the real value of current as compared to their book value reduces the
size of the Working capital. If the real value of current assets increases, there is an increase
in the working capital.

11. Variance in sales

A seasonal business requires the maximum amount of working capital for a relatively short
period of time.

The Following Ratios Are Applied To Measure The Working Capital

1. Current ratio

This ratio attempts to measure the ability of a firm to meet its current obligations
or the liquidity of the business. In any operating concern, the current ratio should be 2:1. It is
shown as:
Current assets
Current ratio= --------------------
Current liabilities

2. Quick ratio
This ratio is a more severe and stringent test of a firm’s ability to meet current
obligation. It supplements the current ratio. The firm should have a quick ratio of 1: 1. It’s
shown as
Quick assets
Quick ratio= -----------------------
Current liabilities
3. Cash ratio
It measures the short term debt paying ability. This ratio is obtained by dividing cash
and trade investment or marketable securities by current liabilities.
Cash + Marketable securities
Cash ratio = ------------------------------------
Current liabilities

4. Debtors turnover ratio

It is also called receivable turnover ratio. It also measures the liquidity of the company.
The purpose of this ratio is to discuss the credit collection power and policy at the firm it
indicates the number of terms debtors turnover each year higher the ratio lowers avg. debtors
to the lower credit sales.
Total debtors
Debtors turnover ratio= ---------------------- X 360 days
Annual credit sale
5. Creditors Turnover Ratio
A supplier of goods i.e., creditors is naturally interesting in finding out how much time the
firm is likely to take in repaying its trade creditors. The analysis for creditor’s turnover is
basically the same as of debtors turnover ratio expect that in place of trade debtors the trade
creditors are replaced.
Higher the creditors velocity it is more favorable to the result.

Total creditors
Creditors turnover ratio= --------------------- X 360 days
Annual credit purchases
6. Total assets turnover ratio
 A firm’s ability to produce a large volume of sales for a give amount of assets is the
most important aspect of its pertaining performance. Unutilized and under utilized assets
increase the firms need for costly financing as well as expenses for maintenance and up keep.

Sales
Total assets turnover ratio= ---------------
Total assets

7. Gross profit ratio

It is the relationship between gross profit and sales. This ratio can be obtained by
deducting cost of good sold from sales. Cost of goods sold from in the case of trading
concern is derived stock at finished goods plus purchase and direct expenses less closing
stock.
Gross Profit
Gross profit ratio= ---------------------- X 100
Sales

8. Net profit ratio

This ratio relates net profit to sales and indicates net margin on sales. This is also
expressed in percentages and is also known as net profit margin or net profit margin on sales
Net profit
Net profit ratio = -------------- X 100
Sales
9. Return on total assets
The objective of computing the return on total assets is to find out how effectively the
funds pooled together have been used .return on total assets indicates the productivity of total
assets,
Profit after tax
Return on total assets = -------------------- X 100
Total assets

10. Working capital turnover ratio

This is also known as working capital leverage ratio indicates whether as not working capital
has been efficiently utilized in marketing sales this ratio indicates the number at turns the
working capital is turned over in course of a year a big ratio indicates utilization at working
capital
Sales
Working capital turnover ratio = --------------------------
Net working capital
11. Inventory turnover ratio
Every from has to maintain a certain level of inventory of finished goods so as to be
able to meet the requirements of the business but the level of inventory should neither be too
high nor too low is it harmful to hold more inventory for the following reasons.
(a) it unnecessarily blocks capital which can otherwise be profitably used somewhere else
Cost of goods sold
Inventory turnover ratio = --------------------------
Avg. inventory
12. Fixed assets turnover ratio
Fixed assets turnover ratio is the relationship between sales or cost of goods sold and
fixed capital assets employed in a business.
Net sales
Fixed assets turnover ratio = ----------------
Fixed asset