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Working Capital - Meaning of Working Capital: All Project Reports
Working Capital - Meaning of Working Capital: All Project Reports
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In a narrow sense, the term working capital refers to the net working. Net working
capital is the excess of current assets over current liability, or, say:
NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.
Net working capital can be positive or negative. When the current assets exceeds the
current liabilities are more than the current assets. Current liabilities are those
liabilities, which are intended to be paid in the ordinary course of business within a
short period of normally one accounting year out of the current assts or the income
business.
CONSTITUENTS OF CURRENT LIABILITIES
1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraft.
5. Provision for taxation , if it does not amt. to app. Of profit.
6. Bills payable.
7. Sundry creditors.
The gross working capital concept is financial or going concern concept whereas net working
capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the following
reasons:
1. It enables the enterprise to provide correct amount of working capital at
correct time.
2. Every management is more interested in total current assets with which it
has to operate then the source from where it is made available.
3. It take into consideration of the fact every increase in the funds of the
enterprise would increase its working capital.
4. This concept is also useful in determining the rate of return on investments
in working capital. The net working capital concept, however, is also
important for following reasons:
It is qualitative concept, which indicates the firm’s ability to meet to its
operating expenses and short-term liabilities.
IT indicates the margin of protection available to the short term creditors.
It is an indicator of the financial soundness of enterprises.
It suggests the need of financing a part of working capital requirement out of
the permanent sources of funds.
1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The technique of ratio
analysis can be employed for measuring short-term liquidity or working capital position
of a firm. The following ratios can be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.
A) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as and when these
become due. The short-term obligations are met by realizing amounts from current,
floating or circulating assts. The current assets should either be liquid or near about
liquidity. These should be convertible in cash for paying obligations of short-term
nature. The sufficiency or insufficiency of current assets should be assessed by
comparing them with short-term liabilities. If current assets can pay off the current
liabilities then the liquidity position is satisfactory. On the other hand, if the current
liabilities cannot be met out of the current assets then the liquidity position is bad. To
measure the liquidity of a firm, the following ratios can be calculated:
1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general liquidity and
its most widely used to make the analysis of short-term financial position or liquidity of
a firm. It is defined as the relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry debtors,
inventories and work-in-progresses. Current liabilities include outstanding expenses,
bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability
to pay its current obligations in time. On the hand a low current ratio represents that the
liquidity position of the firm is not good and the firm shall not be able to pay its current
liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets
double the current liabilities is considered to be satisfactory.
(Rupees in Crore)
Year 2016 2017 2018
Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times
Interpretation :
These ratio shows how rapidly the inventory is turning into receivable through
sales. In 2017 the company has high inventory turnover ratio but in 2018 it has reduced
to 1.75 times. This shows that the company’s inventory management technique is less
efficient as compare to last year.
2. INVENTORY CONVERSION PERIOD:
INVENTORY CONVERSION PERIOD = 365 (net working days)
INVENTORY TURNOVER RATIO
e.g.
Year 2016 2017 2018
Days 365 365 365
Inventory Turnover Ratio 1.5 2.8 1.8
Inventory Conversion Period 243 days 130 days 202 days
Interpretation :
Inventory conversion period shows that how many days inventories takes to
convert from raw material to finished goods. In the company inventory conversion
period is decreasing. This shows the efficiency of management to convert the inventory
into cash.
3. DEBTORS TURNOVER RATIO :
A concern may sell its goods on cash as well as on credit to increase its sales and
a liberal credit policy may result in tying up substantial funds of a firm in the form of
trade debtors. Trade debtors are expected to be converted into cash within a short
period and are included in current assets. So liquidity position of a concern also
depends upon the quality of trade debtors. Two types of ratio can be calculated to
evaluate the quality of debtors.
a) Debtors Turnover Ratio
b) Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)
AVERAGE DEBTORS
Debtor’s velocity indicates the number of times the debtors are turned over during
a year. Generally higher the value of debtor’s turnover ratio the more efficient is the
management of debtors/sales or more liquid are the debtors. Whereas a low debtors
turnover ratio indicates poor management of debtors/sales and less liquid debtors. This
ratio should be compared with ratios of other firms doing the same business and a trend
may be found to make a better interpretation of the ratio.
AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR
2
e.g.
Year 2016 2017 2018
Sales 166.0 151.5 169.5
Average Debtors 17.33 18.19 22.50
Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times
Interpretation :
This ratio indicates the speed with which debtors are being converted or turnover
into sales. The higher the values or turnover into sales. The higher the values of debtors
turnover, the more efficient is the management of credit. But in the company the debtor
turnover ratio is decreasing year to year. This shows that company is not utilizing its
debtors efficiency. Now their credit policy become liberal as compare to previous year.
4. AVERAGE COLLECTION PERIOD :
Average Collection Period = No. of Working Days
Debtors Turnover Ratio
The average collection period ratio represents the average number of days for
which a firm has to wait before its receivables are converted into cash. It measures the
quality of debtors. Generally, shorter the average collection period the better is the
quality of debtors as a short collection period implies quick payment by debtors and
vice-versa.
Average Collection Period = 365 (Net Working Days)
Debtors Turnover Ratio
Year 2016 2017 2018
Days 365 365 365
Debtor Turnover Ratio 9.6 8.3 7.5
Average Collection Period 38 days 44 days 49 days
Interpretation :
The average collection period measures the quality of debtors and it helps
in analyzing the efficiency of collection efforts. It also helps to analysis the credit
policy adopted by company. In the firm average collection period increasing year to
year. It shows that the firm has Liberal Credit policy. These changes in policy are due
to competitor’s credit policy.
5. WORKING CAPITAL TURNOVER RATIO :
Working capital turnover ratio indicates the velocity of utilization of net
working capital. This ratio indicates the number of times the working capital is
turned over in the course of the year. This ratio measures the efficiency with
which the working capital is used by the firm. A higher ratio indicates efficient
utilization of working capital and a low ratio indicates otherwise. But a very
high working capital turnover is not a good situation for any firm.
Working Capital Turnover Ratio = Cost of Sales
Net Working Capital
e.g.
Year 2016 2017 2018
Sales 166.0 151.5 169.5
Networking Capital 53.87 62.52 103.09
Working Capital Turnover 3.08 2.4 1.64
Interpretation :
This ratio indicates low much net working capital requires for sales. In
2018, the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the
company requires 60 paisa as working capital. Thus this ratio is helpful to forecast the
working capital requirement on the basis of sale.
INVENTORIES
(Rs. in Crores)
Year 2015-2016 2016-2017 2017-2018
Inventories 37.15 35.69 75.01
Interpretation :
Inventories is a major part of current assets. If any company wants to manage its
working capital efficiency, it has to manage its inventories efficiently. The graph shows
that inventory in 2015-2016 is 45%, in 2016-2017 is 43% and in 2017-2018 is 54% of
their current assets. The company should try to reduce the inventory upto 10% or 20%
of current assets.
CASH BNAK BALANCE :
(Rs. in Crores)
Year 2015-2016 2016-2017 2017-2018
Cash Bank Balance 4.69 1.79 5.05
Interpretation :
Cash is basic input or component of working capital. Cash is needed to keep the
business running on a continuous basis. So the organization should have sufficient cash
to meet various requirements. The above graph is indicate that in 2016 the cash is 4.69
crores but in 2017 it has decrease to 1.79. The result of that it disturb the firms
manufacturing operations. In 2018, it is increased upto approx. 5.1% cash balance. So
in 2018, the company has no problem for meeting its requirement as compare to 2017.
DEBTORS :
(Rs. in Crores)
Year 2015-2016 2016-2017 2017-2018
Debtors 17.33 19.05 25.94
Interpretation :
Debtors constitute a substantial portion of total current assets. In India it constitute
one third of current assets. The above graph is depict that there is increase in debtors. It
represents an extension of credit to customers. The reason for increasing credit is
competition and company liberal credit policy.
CURRENT ASSETS :
(Rs. in Crores)
Year 2015-2016 2016-2017 2017-2018
Current Assets 81.29 83.15 136.57
Interpretation :
This graph shows that there is 64% increase in current assets in 2018. This increase
is arise because there is approx. 50% increase in inventories. Increase in current assets
shows the liquidity soundness of company.
CURRENT LIABILITY :
(Rs. in Crores)
Year 2015-2016 2016-2017 2017-2018
Current Liability 27.42 20.58 33.48
Interpretation :
Current liabilities shows company short term debts pay to outsiders. In 2018 the
current liabilities of the company increased. But still increase in current assets are more
than its current liabilities.
RESEARCH METHODOLOGY
The methodology, I have adopted for my study is the various tools, which basically analyze
critically financial position of to the organization:
The above parameters are used for critical analysis of financial position. With the
evaluation of each component, the financial position from different angles is tried to
be presented in well and systematic manner. By critical analysis with the help of
different tools, it becomes clear how the financial manager handles the finance
matters in profitable manner in the critical challenging atmosphere, the
recommendation are made which would suggest the organization in formulation of a
healthy and strong position financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and
comparative analysis, the organization would be able to conquer its in efficiencies
and makes the desired changes.
FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to
logical and consistent accounting procedure to convey an under-
standing of some financial aspects of a business firm. It may show
position at a moment in time, as in the case of balance sheet or may
reveal a series of activities over a given period of time, as in the case
of an income statement. Thus, the term ‘financial statements’
generally refers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following objectives of financial statements: -
1. To provide reliable financial information about economic resources
and obligation of a business firm.
2. To provide other needed information about charges in such
economic resources and obligation.
3. To provide reliable information about change in net resources
(recourses less obligations) missing out of business activities.
4. To provide financial information that assets in estimating the
learning potential of the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still
they do not present a final picture a final picture of a concern. The
utility of these statements is dependent upon a number of factors. The
analysis and interpretation of these statements must be done carefully
otherwise misleading conclusion may be drawn.
Financial statements suffer from the following limitations: -
1. Financial statements do not given a final picture of the concern. The
data given in these statements is only approximate. The actual value
can only be determined when the business is sold or liquidated.
2. Financial statements have been prepared for different accounting
periods, generally one year, during the life of a concern. The costs and
incomes are apportioned to different periods with a view to determine
profits etc. The allocation of expenses and income depends upon the
personal judgment of the accountant. The existence of contingent
assets and liabilities also make the statements imprecise. So financial
statement are at the most interim reports rather than the final picture
of the firm.
3. The financial statements are expressed in monetary value, so they
appear to give final and accurate position. The value of fixed assets in
the balance sheet neither represent the value for which fixed assets
can be sold nor the amount which will be required to replace these
assets. The balance sheet is prepared on the presumption of a going
concern. The concern is expected to continue in future. So fixed assets
are shown at cost less accumulated deprecation. Moreover, there are
certain assets in the balance sheet which will realize nothing at the
time of liquidation but they are shown in the balance sheets.
4. The financial statements are prepared on the basis of historical
costs Or original costs. The value of assets decreases with the passage
of time current price changes are not taken into account. The
statement are not prepared with the keeping in view the economic
conditions. the balance sheet loses the significance of being an index
of current economics realities. Similarly, the profitability shown by the
income statements may be represent the earning capacity of the
concern.
5. There are certain factors which have a bearing on the financial
position and operating result of the business but they do not become a
part of these statements because they cannot be measured in
monetary terms. The basic limitation of the traditional financial
statements comprising the balance sheet, profit & loss A/c is that they
do not give all the information regarding the financial operation of the
firm. Nevertheless, they provide some extremely useful information to
the extent the balance sheet mirrors the financial position on a
particular data in lines of the structure of assets, liabilities etc. and the
profit & loss A/c shows the result of operation during a certain period
in terms revenue obtained and cost incurred during the year. Thus, the
financial position and operation of the firm.
CLASSIFICATION OF RATIOS
Ratios can be classified in to different categories depending upon the
basis of classification
The traditional classification has been on the basis of the financial statement to which the
determination of ratios belongs.
These are:-
Profit & Loss account ratios
Balance Sheet ratios
Composite ratios
Project Description :
Title : Project Report on Working Capital Management
Pages : 90
Description : Project Report on Working Capital Management, Working capital
analysis, Working Capital Management - Meaning & Concept, working capital
Classification, Importance, Advantages and Disadvantages of Working Capital,
Factors determining the working capital requirements & Ratio Analysis
Category : Project Report for MBA
We made this project of various companies like Reliance Industries, Grasim
Industries, Dabur India Ltd. etc., its cost is Rs. 2499/- only without Synopsis and Rs.
2999/- only with synopsis. If you need this project, mail us at this id
: bkm.7899@gmail.com
We will send you a hardcopy with hard binding and a softcopy in CD from courier.
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