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Working Capital Management
Working Capital Management
Working Capital Management
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Gross Working Capital
The net working capital refers to the difference between current assts and
current liabilities. Positive or negative. Positive net working capital will
arise when current assets exceed current liabilities. A negative net
working capital occurs when currents liabilities are in excess of current
assets.
The need for the working capital or current assets to form the day-to-day
business activities cannot be over emphasized. We can hardly find a
business firm that does not require any amount of working capital. Indeed
different requirement of the working capital. It is well known that any
firm aims at maximizing shareholders wealth. To attain this, a firm
should earn a steady amount of profit, which requires successful sales
activity. Current assets are needed because sales cannot convert into Cash
instantly since there is always an operating cycle involved in the
conversion of sales into cash. I opted this topic to identify the various
sources to get working capital to met the day-to-day operations and the
maximum utilization of the working capital in a profitable means.
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NEED FOR WORKING CAPITAL
The objective of financial management i.e. maximization of wealth of
shareholder, cannot be attained if the operations of the firm are not
optimized. Thus every firm must have adequate working capital. It
should have neither the excessive working capital nor inadequate
working capital. Both the situations are risky and may have dangerous
outcome. The excessive working capital when the investment in working
capital is more than the required level, may result in:
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Scope of the study:
2. To study the financial ratios etc., this covers the purview of the
working capital.
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Research methodology & Database:
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MANAGEMENT OF WORKING CAPITAL OF ITL
Introduction:
The management of the working capital is vital importance to companies
and forms a major workload function of finance manager and accountant.
It is the amount of fund, which a company must have to finance its day-
to-day operations.
The term current assets refer to those assets in which the ordinary course
of business can be or will be converted in to cash within a year, without
undergoing a diminishment in value and disrupting the operations of the
firm. The major current assets are cash, marketable securities, accounts
receivables and inventories. The term current liabilities are those
liabilities that are intended at their inception to be paid in the ordinary
course of business with in a year out of the current assets or earning of
the concern. The current liabilities include accounts payable, bills-
payable, bank overdrafts and outgoing expenses. Management of
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working capital therefore is the management of current assets and
liabilities of the company.
IMPORTANCE OF WORKING CAPITAL
We will hardly find a running business firm, which does not require same
amount of working capital. Even a fully equipped manufacturing firm is
sure to collapse if it cannot meet any of the following requirements:
3. The capacity to wait for the market for its finished products sale.
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Neglect of management of working capital needs may result in technical
insolvency and even liquidation of business unit. Inefficient working
capital is dangerous for the organization.
Production policy
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A firm marked by pronounces seasonal fluctuation in its sales may
pursue a production policy, which may reduce the sharp variations in
working capital requirements. For example a manufacturer of air coolers
may maintain a steady production throughout the year rather than
intensity the production activity during the peak business season. Such a
production policy may dampen the fluctuations in working capital
requirements.
Market conditions
Conditions of supply
The inventory of raw materials, spares, and stores depends on the
conditions of supply. If the supply is prompt and adequate, the firm can
manage with small inventory. However, if the supply is unpredictable
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and scant then the firm, to ensure continuity of production, Would have
to acquire stocks as and when they are available and carry larger
inventory on an average. A similar policy may have to be followed when
the raw material is available only seasonally and production operations
are carried out round the year.
permanent working capital
The magnitude of the current assets depends upon the firm’s operating
cycle. The operating cycle is a continuous process and the need for
current assets is also continuous. But the level of current assets needed is
not always same. It increases or decreases over time. However, there is
always minimum level of current assets, which is continuously required
by a firm to carry out its business operations. The minimum level of
current assets is called permanent working capital.
The working capital required over and above the permanent working
capital depends upon the changes in production and sales are called
fluctuating or variable working capital. There may be changes either
increase or decrease in working capital. Working capital is variable
mostly in seasonal goods manufacturing companies.
Operating cycle
The time that elapses between the purchase of raw material and
collection of cash for sales is called operating cycle.
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Operating cycle period
The length or time duration of the operating cycle of any firm can be
defined as the sum of its inventory conversion period and the receivable
conversion period.
Inventory conversion period
The raw material conversion period refers to the period for which the raw
material is generally kept in stores before it is issued to the production
department. The work-in-progress conversion period for which the raw
materials remain in the production process before it’s taken out as a
finished unit.
The finished goods conversion period refers to the period for which
finished units remain in stores before being sold to the customers.
It’s the time required to convert the credit sales into cash realization. It
refers to the period between the occurrence of credit sales and collection
of debtors.
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Gross operating cycle = Inventory conversion period + receivables
conversion period.
The firm might be getting some credit facilities from the supplier of raw
materials, wages/ salaries earners etc., this period for which the payments
to these parties are deferred or delayed is known as deferral period.
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Components of working capital
Current Assets:
Current assets defined as either cash or those assets that can be converted
into cash within the current year. The major components of these current
assets are cash and bank balance, inventories, accounts receivable, short-
term deposits, investments, advance payments and prepaid expenses.
Cash and bank balances: Cash and bank balances are most liquid assets.
All payments are made through cash or bank payments.
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Current liabilities:
Liabilities are the claims against the company to be paid in the ordinary
course of business with in a year, out of earnings of the company.
Other liabilities: These include tax payments due with in one year and
proposed dividends and other payments to be made.
Bills payable: Against purchase bills may be accepted and payable with
in a short period of time.
Bank overdraft: With the consonant of the banks a business unit can get
short-term credits and overdrafts. Bank generally allows these credits
keeping the view of credit worthiness of the organization and
management. These are to be repaid in short term to the bank.
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Outstanding expenses: Expenses due but not paid.
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INTEGRATED THERMO PLASTICS LIMITED WORKING
CAPITAL
ITL was started in the year 1994 with a paid up capital of 137 lakhs. Out
of the said amount Rs.129 lakhs has been applied towards purchasing of
fixed assets from time to time.
Since ITL has a long production cycle, it has to hold substantial amount
of cash, investment and Receivable accounts to commensurate with its
requirement.
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COMPANY PROFILE
ESTABLISHMENT:
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Integrated thermoplastics limited has achieved ISO 9001-2000
accreditation on 2003 in implementing and maintaining quality systems
management with the scope of PVC pipes and became a member of
selected brand of elite group of companies. In addition extensive R&D
facilities provide reliable and committed support for new product
development.
TECHNICAL INFORMATION
length of 6 meters with plain ends both the sides and also with self
testing machines in their labs as per the ISI standards for testing of all
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diameters and gets excellent result. We at ITL Pipes are proud to say that
our Quality Control lab to achieve the best quality. Stringent quality
PVC products.
lines all the time, We assure service at any time to enable our equipment
time.
their products like rigid PVC pipes of water, electrical conduits and SWR
pipes to Middle East, Europe, Africa and other Asian countries. Taking
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GENERATING EMPLOYMENT
The dynamic work force is the strong base for the success of the
which helps the company to assign the right job to the right person.
All the workers are dedicated to work and responsible for their work
done.
DISTRIBUTION NETWORK
company has its own dealer’s network with a number of nearly more than
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The company has its own vehicles for transportation which helps the
Sales department to cater the needs of the customers at the right time and
MARKET NETWORK
but their main target market areas are Andhra Pradesh, Karnataka, Tamil
DISTRIBUTION CHANNELS
The company has got two levels of distribution channels they are,
1) Zero Level
2) Single Level
ZERO LEVEL
Manufacturer customer
2 SINGLE level
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PRODUCTS OF THE COMPANY
The ITL has the ISI registration for its products, which speaks of high
1. ITL (ISI) and the other brands which belong to company are
2. SAGAR
3. SAGAR (special)
These brands namely sager and sagar special are characterized as the
Other than the superior quality products with the brand name of ITL.
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SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
Fixed Assets
comprises of the purchase price and any attributable cost of bringing the
asset to working condition less excise duty taken as CENVAT credit, for
Depreciation
rates specified from time to time in Schedule xiv of the Companies Act,
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Investments
thereon.
Inventories
Sales
and returns.
Miscellaneous expenditure
i) Preliminary Expenditure:
Preliminary and public issue expenses are being written off over a period
of ten year.
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Staff benefits
The company has unabsorbed losses available for set off under the
assets at the year end including related credit for the year have not been
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BOARD OF DIRECTORS
5. Mr.S.V.RAGHU Director
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STATUTORY AUDITORS:
M/s M.T.R. & Associates
Chartered Accountants
Hyderbad-500038
BANKERS
M/S. The Dhanalakshmi Bank Ltd.
Abids Road,
Abids, Hyderabad-500 001
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WORKING CAPITAL OF ITL
Rs. Lakhs
PARTICULA 2001- 2002- 2003- 2004- 2005-
RS 02 03 04 05 06
CURRENT
ASSETS
INVENTORIE 43744 56606 58130 72540 63246
S
BOOK DEBTS 84558 84880 85001 81237 82829
CASH/BANK 845 957 899 1280 473
BALANCES
LOANS AND 14287 12859 11763 11612 9104
ADVANCES
SUB TOTAL 14343 15530 15579 16666 15565
(B) 4 2 3 9 2
CURRENT
LIABILITIES
ADVANCES 29116 28822 31636 32228 44162
FROM
CUSTOMERS
SUNDRY 19484 22543 29738 27610 20637
CREDITORS
OTHER 4295 4549 2824 2612 3353
LIABILITIES
PROVISIONS 10843 8376 8931 11977 16838
SUB TOTAL ( 63738 64290 73129 74427 84990
C)
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From the above table ITL, is having a good Working Capital. By
comparing the Working capital of past 5 years we can that there was a
steady increase from 2001-02 to 2002-03. Although there was a decrease
in 2003-04, the Working Capital has considerably increased in the
financial year 2004-05. And again there is been a decrease in the year
2005-06 where compared to the remaining years it is due to decrease in
cash balances and also due to maintenance of more provisions.
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STATEMENT OF CHANGES IN WORKING CAPITAL
From the above table There is an increase in working capital during this
year as compared to previous year. It is due to increase in inventories and
book debts. With this we can conclude that it is maintaining an efficient
working capital.
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STATEMENT OF CHANGES IN WORKING CAPITAL
THE YEAR 2001-’02 AND 2002-‘03
(Rs
Lakhs)
Particulars 2001 – 2002 – Increas Decrease
‘02 ‘03 e
Current Assets:
Inventories 43744 56606 12862
Book debts 84558 84880 322
Cash/Bank Bal 845 957 112
Loans and 14287 12859 1428
Advances
Total (a) 147343 155302
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Current Liabilities:
Advances From 29116 28822 294
Customers
Sundry Creditors 19484 22543 3059
Other Liabilities 4295 4549 254
Provisions 10843 8376 2467
Total (b) 63738 64290
Net Working 79696 91012
Capital(a-b)
Net Increase In 11316 11316
Working Capital
Total 91012 91012 16057 16057
From the above table during this year there is a significant increase in
working capital as compared to previous year, it is due to increase in
inventories and also due to the reduction in maintenance of provisions.
Overall it has good working capital.
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STATEMENT OF CHANGES IN WORKING CAPITAL
(Rs.in Lakhs)
Particulars 2002-03 2003-04 Increas Decrease
e
Current Assets:
Inventories 56606 58130 1524
Book debts 84880 85001 121
Cash/Bank Bal 957 899 58
Loans and 12859 11763 1096
Advances
Total (a) 155302 155793
Current Liabilities:
Advances From 28822 31636 2814
Customers
Sundry Creditors 22543 29738 7195
Other Liabilities 4549 2824 1725
Provisions 8376 8931 555
Total (b) 64290 73129
Net Working 91012 82664
Capital(a-b)
Net decrease in 8348 8348
Working Capital
Total 91012 91012 11718 11718
From the above table In this year there is a decrease in working capital
as compared to the previous year, it is due to increase in sundry creditors
and also maintenance of more provisions. At last we can conclude that
working capital is unsatisfactory.
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STATEMENT OF CHANGES IN WORKING CAPITAL
(Rs.in
Lakhs)
Particulars 2003 – 2004 – Increas Decrease
‘04 ‘05 e
Current Assets:
Inventories 58130 72540 14410
Book debts 85001 81237 3764
Cash/Bank Bal 899 1280 381
Loans and 11763 11612 151
Advances
Total 155793 166669
Current Liabilities:
Advances From 31636 32228 592
Customers
Sundry Creditors 29738 27610 2128
Other Liabilities 2824 2612 212
Provisions 8931 11977 3046
Total 73129 74427
Net Working 82664 92242
Capital(a-b)
Net Increase In 9578 9578
Working Capital
Total 92242 92242 17133 17133
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STATEMENT OF CHANGES IN WORKING CAPITAL
(Rs.in
Lakhs)
Particulars 2004 – 2005 – Increas Decrease
05 06 e
Current Assets:
Inventories 72540 63246 9294
Book debts 81237 82829 1592
Cash/Bank Bal 1280 473 807
Loans and 11612 9104 2508
Advances
Total (a) 166669 155652
Current Liabilities:
Advances From 32228 44162 11934
Customers
Sundry Creditors 27610 20738 6872
Other Liabilities 2612 3253 641
Provisions 11977 16838 4861
Total (b) 74427 84990
Net Working 92242 70662
Capital(a-b)
Net decrease In 21580 21580
Working Capital
Total 92242 92242 30045 30045
From the above table During this year working capital has shown
adverse balances as compared to previous year. it is due to slash down in
maintenance of inventories and cash balances which has lead to decrease
in current assets to current liabilities. at last it has unsatisfactory working
capital
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1. CURRENT RATIO:
In times
YEAR CURRENT CURRENT RATIO
ASSETS LIABILITIES
2001-02 143434 63738 2.25
The ratio equal to or near to 2:1, i.e., current assets double the current
liabilities is considered to be satisfactory. In the context of ITL, the
current ratio is more than standard. It has always been above 2. Thus it is
an indication of efficiency of the firm of maintaining current assets. But
as on the year 2005-06 there is a slight decrease of 0.2% , as it does not
make much difference.
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2. QUICK RATIO
In times
YEAR QUICK CURRENT RATIOS
ASSETS LIABILITIES
2001- 99690 63738 1.56
02
2002- 98696 64290 1.53
03
2003- 97663 73129 1.33
04
2004- 94129 74427 1.26
05
2005- 92406 84990 1.09
06
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3. ABSOLUTE QUICK RATIO (OR) CASH RATIO
(In times)
YEAR LIQUID ASSETS CURRENT RATIO
LIABILITIES
2001-02 845 63738 0.013
The acceptable norm for this ratio is 50% or 0.5:1 or 1:2, but the
ratios for 2004 as shown in the trend are not according to the standard
norms there is no proper maintenance of cash in the current assets.
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4. INVENTORY TURNOVER RATIO
(In times)
YEAR COST OF RATIO
GOODS AVERAGE
SOLD INVENTORY(OR)C.S
2001-02 104269 41806 2.49
C.S=closing stock
Cost of goods sold=gross turnover net of exercise duty – profit before tax
We can see that the I.T.R of ITL is rapidly decreasing from 2001-02 to
2004-05. This shows that the rate at which the stock is turned over,
during the accounting period, over the past five years is becoming lesser
and lesser. And again at the period of 2005-06 there was an increase by
2.05 %.
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5. INVENTORY CONVERSION PERIOD
From the above we can say that the Inventory Conversion Period has
shown a steady inverse from 2001-02 to 2002-03, although there was a
fall in 2003-04. But in the financial year 2004-05 the conversion period
has increased by 56 days. As then there was a decrease by 40 days in
the year 2005-06.
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6. DEBTORS TURNOVER RATIO
(In
times)
YEAR TURNOVER AVG DEBTORS RATIO
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7.AVERAGE COLLECTION PERIOD
The Average Collection Period i.e., the duration provided for the
collection of debts has been increasing from 216 days in2001-02 to 234
days in 2002-03 but it decreased in 2003-04 to 203 days and again it has
increased to 220 in the year 2004-05 and that after there is a decrease to
171 in financial year 2005-06
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8.CREDITORS TURNOVER RATIO
(In times)
YEAR CREDIT AVG. RATIO
PURCHASES CREDITO
RS
2001-02 65934 16677.5 3.95
Here the Creditors Turnover Ratio was 3.95 in the year 2001-02 and has
decreased rapidly to 2.43 in 2004-05, which shows that the management
is making its payments in time, thus providing its efficiency, and again in
the financial year 2005-06 there was an increase by 3.23 even by this
there no difference in the efficiency of the management.
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9.AVERAGE PAYMENT PERIOD
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10.WORKING CAPITAL TURNOVER RATIO
In times
YEAR TURNOVER WORKING RATIO
CAPITAL
2001-02 132265 79696 1.66
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11.RAW MATERIAL INVENTORY TURNOVER RATIO
Rs. Lakhs
YEAR RAW AVERAGE RATIO
MATERIAL RAW
CONSUMED MATERIAL
INVENTORY
2001-02 63265 8890.5 7.12
The Raw Material Inventory turnover Ratio for the organization has been
increasing at a fast pace from 7.12 in 2001-02 to 8.59 in 2002-03,but in
the subsequent year 2004-05 there was a decrease and again an increase
by 4.60 in the financial year.
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CONCLUSIONS
1. The ratio equal to or near to 2:1, i.e., current assets double the current
liabilities is considered to be satisfactory. In the context of ITL, the
current ratio is more than standard. It has always been above 2. Thus it is
an indication of efficiency of the firm of maintaining current assets. But
as on in the year 2005-06 there is a slight decrease of 0.2% , as it does
not make much difference.
2. The acceptable norm for this ratio is 50% or 0.5:1 or 1:2, but the
ratios for 2004 as shown in the trend are not according to the standard
norms there is no proper maintenance of cash in the current assets.
3.We can see that the I.T.R of ITL is rapidly decreasing from 2001-02 to
2004-05. This shows that the rate at which the stock is turned over,
during the accounting period, over the past five years is becoming lesser
and lesser. And again at the period of 2005-06 there was an increase by
2.05 %.
4.Here the Creditors Turnover Ratio was 3.95% in the year 2001-02 and
has decreased rapidly to 2.43% in 2004-05, which shows that the
management is making its payments in time, thus providing its
efficiency, and again in the financial year 2005-06 there was an increase
by 3.23% even by this there no difference in the efficiency of the
management.
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5. The Average Payment Period has steadily increased from 92 days in
7.The Raw Material Inventory turnover Ratio for the organization has
been increasing at a fast pace from 7.12% in 2001-02 to 8.59% in 2002-
03,but in the subsequent year 2004-05 there was a decrease and again an
increase by 4.60% in the financial year.
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SUGGESTIONS
The Net Working Capital is positive for all the past five years except
in the year 2005-06, therefore surplus amount should be invested in the
short-term bonds.
There has been an increase in the Finished Goods Conversion Period,
which is mainly due to the increase in the manufacturing cycle time.
Thus, it is recommended to reduce the Operating Cycle time to the
possible extent.
ITL is using ABC analysis partly in the inventory control. It is
suggestible to point other methods, such as JIT (Just in Time) and VED
(vital Essential Desirable) for managing inventory, wherever applicable,
so as to reduce the Cycle period and blockage of excess funds in
inventory.
As ITL is following the centralized cash management it would be
better for the company to follow decentralized system, so that the
company can take immediate action to any requirements.
The Company should make more efforts to quickly transform the
accounts receivables into cash, as the collection period is above the ideal
period i.e., 3-4 months or maximum of 120 days.
Compared to the 2003-04 scraps, 2005-06 has been increased to
100%, as this indicated a negative sign. Company has to assess its
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production capability and reasons for pile up of scrap. In addition, it is
advisable to dispose sc
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rap so as to realize revenue to that extent.
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