Financial Management

Submitted to:
Dibin K. K
Submitted by:
Rizwan A. k
Fm-1946
MBA-B18
Introduction to Working capital management

Working capital refers to that part of the firm's capital which is required for financing short-
term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus,
invested in current assts keep revolving fast and are being constantly converted in to cash and
this cash flows out again in exchange for other current assets. Hence, it is also known as revolving
or circulating capital or short-term capital.
Working capital management is concerned with the problems arise in attempting to manage the
current assets, the current liabilities and the inter relationship that exist between them.
The term current assets refer to those assets which in ordinary course of business can be, or, will
be, turned in to cash within one year without undergoing a diminution in value and without
disrupting the operation of the firm. The major current assets are cash, marketable securities,
account receivable and inventory.
Current liabilities ware those liabilities which intended at their inception to be paid in ordinary
course of business, within a year, out of the current assets or earnings of the concern. The basic
current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses.
The goal of working capital management is to manage the firm's current assets and current
liabilities in such way that the satisfactory level of working capital is mentioned.

Definition:
1. According to Guttmann & Dougall
"Excess of current assets over current liabilities".
2. 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)".
Capital required for a business can be classified under two main categories via,

1) Fixed Capital
2) Working Capital
Every business need funds for two purposes for its establishment and to carry out its day-to-day
operations. Long terms funds are required to create production facilities through purchase of
fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent
that part of firm's capital which is blocked on permanent or fixed basis and is called

WCM of TRENT LTD.

westside.com
Trent is engaged in retailing of apparels, footwear, accessories, toys, games, food, grocery &
nonfood products. It operates through Westside, Zudio, Star-Hypermarket, Landmark, Booker
Wholesale and ZARA retail formats. Westside - offers apparel, footwear and accessories for men,
women and children, along with furnishings, decor and a range of home accessories.
PROS

• Company is almost debt free.

• Company has been maintaining a healthy dividend payout of 19.63%

CONS

• Company has low interest coverage ratio.

• The company has delivered a poor sales growth of 8.99% over past five years.
• Company has a low return on equity of 1.20% for last 3 years.
• Earnings include another income of Rs.201.60 Cr.
• Company's cost of borrowing seems high

Cash flow (in crores)

Cash from Operating Activity- 374

Cash from Investing Activity- 18
Cash from Financing Activity- (-372)
Net cash flow- 20

INSIGHTS

• Topline Contraction- Sales de-grew by 23.03%. Company witnessed revenue contraction

for the first time in last 3 years.
 • Employee & Interest Expense- Company has spent 9.59% of its operating revenues
towards interest expenses and 11.64% towards employee cost in the year ending Mar 31,
2021.

Ratios
• ROCE- 2%
• Inventory turnover- 3.06%
• Debtor days- 3

By March 2021 report

ANNUAL FY 2021 FY 2020 FY 2019 FY 2018 FY 2017

Return on Equity (%) -6.31 5.14 5.88 5.45 5.48
Return on Capital
2.33 8.79 10.92 11.55 8.65
Employed (%)
Return on Assets (%) -2.55 2.22 3.78 3.72 3.81
Interest Coverage Ratio
0.47 1.80 5.90 6.54 4.29
(x)
Asset Turnover Ratio (x) 45.30 63.30 102.79 92.37 81.55
Price to Earnings (x) -185.19 138.89 123.46 133.33 104.17
Price to Book (x) 11.55 7.13 7.26 7.21 5.70
EV/EBITDA (x) 71.43 25.21 45.78 48.34 48.78
EBITDA Margin (%) 14.40 19.74 10.20 11.37 10.27
Source: The Economic Times

Tips to Improve upon Aspects of Working Capital

Accounts receivables, cash in hand, inventories, marketable securities and prepayments are
current assets that will become cash within 12 months and likewise, account payables, wages to
be paid and unearned revenues are current liabilities that need to be settled within 12 months
of time. Good working capital management involves keeping the current assets consistently
higher than the current liabilities to avoid financial complications or operational problems. Here
are some small tips that can help you manage your working capital in your company more
effectively. Keeping an eye on these can allow your small business to prosper-
1. Take advantage of float – Float or floating capital is basically the difference between book
balance and bank balance. Let’s suppose you have dues of INR 3 lakhs to settle by the 31st of
October. However, only INR 1 lakh is supposed to be paid by the 5th of October. Considering that
you have INR 3 lakhs cash in hand by September 27, you could use INR 2 lakhs as a short-term
deposit if you have no other assured profitable short-term business venture that can pay within
a month. The return could be less than INR 1000, but it’s better than nothing. If you like
investments, you can check the market and invest in equities for a short term for getting better
returns, but this is a riskier approach
2. JIT Inventory – Just-In-Time inventory allows a business to cut down on costs involved in storing
stock. Materials are purchased and received in time for the production line or for sales. Though
this is quite difficult to achieve, if your relationship with the supplier is good, you can manage
this effectively
3. Sales on Credit – Here, your sales play a crucial role. The goal is to shorten the amount of time
your customers can take to pay their bills. You could offer a period of 30 days till their bill is due
and offer a promotion of 3% discount if the same bill is cleared in maybe, 10 days or less. This
allows you to sell more in a short time and pushes your customers to pay earlier to get a discount
of 3%

4. Alternative Funding – This method can include availing working capital from banks, NBFCs,
asset-based lenders, crowdfunding. In most cases, a genuine business idea, long term efficiency
and good revenue generation can get you access to alternative funding rather quickly
5. Timely payments to suppliers – This is the easiest and simplest rule to follow. It goes without
saying that if you pay your suppliers their dues on time, you can negotiate better deals and get
discounts on your purchases
6. Group Purchase – As a small business, you might not always have access to funds to buy stock
at a discounted quantity, or you might not have the available storage to accommodate a bulk of
material that you get at a discount. It is always a good idea to look for other small businesses in
the state or region who do the same trade as you and pool in resources to get the stock from
your supplier. That way, you don’t have to spend a lot and still get to avail the discount
7. Learn the benefits of e-procurement – If you are into electronics, electrical equipment,
garments, gift items and the like, you can look into sites like mytradebox.com where you could
find interesting items with heavy discounts on bulk orders. These can help you source items
quickly at very affordable rates