WORKING CAPITAL

MANAGEMENT

CAT-3

PRESENTED BY

-1-
CHAPTER: 2

2.1 INTRODUCTION
2.1.1 CAPITAL

 Capital (political), the area of a country, province, region, or state

regarded as enjoying primary status, usually but not always the seat of
the government.
 Capital (economics), a factor of production which is not wanted for
itself but for its ability to help in producing other goods
 Financial capital, any form of wealth capable of being employed in the
production of more wealth.

 Capital can also represent the accumulated wealth of a business,

represented by its assets less liabilities.
 Capital can also mean stock or ownership in a company.

-2-
 2.1.2 WORKING CAPITAL
Introduction of Working Capital Management

The term working capital is commonly used for the capital required for
day-to-day operations of a business. Generally, two concepts of working
capital are the gross working capital and the net working capital. Gross
refers to the firm's total investment in the current assets. Net supports the
view that working capital is the difference of current assets and current
liabilities. Net working capital may be positive or negative, although
gross working capital is always positive. According to the other school of
thought (Net concept), the working capital refers to the difference
between current assets and current liabilities. It is the excess of current
assets over current liabilities. Current liabilities refer to the claims of
outsiders which are expected to mature for payment within an accounting
year and include creditors for goods, bills payable, bank overdraft,
accrued expenses, etc. A positive net working capital arises when current
assets exceed current liabilities and a negative net working capital arises
when current liabilities exceed current assets. Both aspects have equal
importance for management – the first focuses the attention on the
optimum investment in and financing of the current assets whereas the
second indicates the liquidity position of the firm and suggests the extent
to which working capital needs may be finance by permanent sources of
funds.
The term working capital is commonly used for the capital required for
day-to-day operations of a business. Generally, two concepts of working
capital are the gross working capital and the net working capital. Gross
refers to the firm's total investment in the current assets. Net supports the
view that working capital is the difference of current assets and current

-3-
liabilities. Net working capital may be positive or negative, although
gross working capital is always positive. According to the other school of
thought (Net concept), the working capital refers to the difference
between current assets and current liabilities. It is the excess of current
assets over current liabilities. Current liabilities refer to the claims of
outsiders which are expected to mature for payment within an accounting
year and include creditors for goods, bills payable, bank overdraft,
accrued expenses, etc. A positive net working capital arises when current
assets exceed current liabilities and a negative net working capital arises
when current liabilities exceed current assets. Both aspects have equal
importance for management – the first focuses the attention on the
optimum investment in and financing of the current assets whereas the
second indicates the liquidity position of the firm and suggests the extent
to which working capital needs may be finance by permanent sources of
funds.
A company starting with purchases of raw materials, components on a
cash or credit basis. These materials will be converted into finished goods
after undergoing the stage of work in process. For this purpose, the
company has to make payments towards wages, salaries and other
manufacturing costs. Payments to suppliers have to be make on purchase
in the case of cash purchases and on the expiry of credit period in the case
of credit purchases. Further, the company has to meet other operating
costs such as selling and distribution costs, general, administrative costs
and non-operating costs as well as financial costs. In case the company
sells its finished goods on a cash basis, it will receive cash along with
profit with least delay. When it sells goods on a credit basis, it will pass
through one more stage, viz., accounts receivable and gets back cash
along with profit on the expiry of the credit period.

-4-
Once again, the cash will be used for the purchase of materials and/or
payment to suppliers and the whole cycle termed as working capital or
operating cycle repeats itself. This process also indicates the dependence
of each stage or component of working capital on its previous stage or
component.

The dependence of one component of working capital on its previous

Stage/component is described above highlighting the inter-dependence
among the components of working capital. However, there can be other
kinds of inter-dependence which are not dictated by the usual sequence of
manufacturing and selling operations. For example, in case the
manufacturing process may require a raw material which is in short
supply. Then the company may have to make advance payment in
anticipation of the receipt of that raw material. This will cause an
immediate drain on cash resources unlike a situation where credit
purchase of raw materials can be made. Similarly, if there is an excessive
accumulation of finished goods inventory, the company may have to
provide more liberal credit period and/or relax its existing credit
standards which will increase sundry debtors. In situations of greater need
for cash even providing cash discount as part of the credit terms for sale
which is likely to boost the cash resources, may have to be resorted to.

In such cases, the relative benefits and costs may have to be taken into
consideration before taking decisions.

Working capital management is the device of finance. Working

Capital management is concerned with the problems arise in attempting
to manage the current assets, the current liabilities and the

-5-
interrelationship that exist between them. The term current assets refers 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. The current should be large enough to
cover its current liabilities in order to ensure a reasonable margin of the
safety.

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

-6-
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.

Sources of Working Capital

Trade Credit
An arrangement to buy goods or services on account, that is, without

-7-
making immediate cash payment ,For many businesses, trade credit is an
essential tool for financing growth. Trade credit is the credit extended by
suppliers who let us buy now and pay later. Any time a business man
takes delivery of materials, equipment or other valuables without paying
cash on the spot, you're using trade credit. Effective use of trade credit
requires intelligent planning to avoid unnecessary costs through forfeiture
of cash discounts
or the incurring of delinquency penalties. But every business should take
full advantage of trade that is available without additional cost in order to
reduce its need for capital from other sources.

Bank Financing for Working Capital

Banks are main institution source of working capital finance in India.
After trade credit, bank credit is the most important source of financing
working capital in India. A bank considers a firm sales and production
plane 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 trade limit. Credit limit is the maximum funds
which a firm can obtain from bank system. In practice bank do not lend.
100% credit limit; they deduct margin money.

-8-
 2.1.3 INTRODUCTION TO THE HOTEL
INDUSTRY

According to the British laws a hotel is a place where a

“bonafied” traveler can receive food and shelter provided he is in
a position to for it and is in a fit condition to receive.

Hotels have a very long history, but not as we know today, way
back in the 6 th century BC when the first inn in and around the
city of London began to develop. The first catered to travelers and
provided them with a mere roof to stay under. This condition of the inns
prevailed for a long time, until the industrial revolution in

-9-
England, which brought about new ideas and progress in the business at
inn keeping. The invention of the steam engine made traveling
even more prominent. Which had to more and more people traveling
not only for business but also for leisure reasons. This lead to the actual
development of the hotel industry as we know it today. Hotel today not
only cater to the basic needs of the guest like food and
shelter  provide much more than that, like personalized services etc.
Hotels today are a “Home away from home”.

THE TATA GROUP

- 10 -
 The Tata Group is one of the India’s oldest, largest and most respected
business conglomerates. The Group’s business are spread over seven
business sectors.

The TATA Group comprises of 90 operating Companies in seven

business sectors:

-Services
-Information Systems & Communications
-Engineering
-Materials
-Consumer Products
-Energy
-Chemicals

Jamshetji Tata founded the Group in the mid 19 th century. Today the Tata
Group is rapidly growing business based in India with significant
international operations. The Tata name has been respected in India for
140 years for its adherence to strong values and business ethics. The
Group’s 28th publicly listed enterprises have a combined market
capitalization of some 98.86 billion$, among the highest among Indian
business houses and a shareholder base of 3.5 million.

The Tata family of companies shares a set of 5 core values: Integrity,

Understanding, Excellence, Unity and Responsibility.

The history of Mumbai and The Taj Mahal Palace are dramatically

- 11 -
intertwined. The Hotel is Mumbai’s first harbor landmark (built 21 years
before The Gateway of India) and the sight of the first license bar in the
city. For more than a century the Taj has played an intrinsic part in the
life of the city, hosting Maharajas, dignitaries and eminent personalities
from across the globe. Today it is a Leading Hotel of the World and
favorite destination for discerning business travelers.

A treasure-trove of invaluable memorabilia, there is a story to tell behind

every pillar, a landmark deal in every boardroom, and a storied
celebration under every awning. Come be a part of the legend.

VISION, VALUES AND GAMEPLAN

VISION
Embrace Talent and harness Expertise to Leverage standards of
Excellence in the Art of Hospitality to grow our International Presence,
increase Domestic Dominance and create Value for all Stakeholders

VALUES
People- Diversity, Integrity & Respect- People are our greatest asset and
a key to our success. We respect diversity of people, idea, cultures and
honor the value of individuals in a team.
Passion for Excellence- We believe in perfection to achieve excellence.
We continuously improve processes to surpass global benchmarks.

- 12 -
Exceed Expectation- By exceeding expectation of all stakeholders and
protecting the interest of our shareholders and playing by the rules.
Innovation- We encourage innovation, embrace change growth through
knowledge and learning.
Sense of urgency and accountability- We accept responsibility and
deliver on promises with sense of urgency and agility.
Social Responsibility- We commit to improve the quality of life of the
communities we serve and our concern for environment by returning to
society what we earn.
Joy at work- We recognize and respect each other in all interactions and
set the example for our guests, busine4ss associates and colleagues. We
encourage a fair environment that supports equal opportunity to attract,
develop and retain the best talent and Endeavour to have fun too.

GAME PLAN
The Indian hotels company limited is the largest Hotel, leisure and
hospitality company in south Asia.
The company’s hotel business emphasizes the global operation of hotels
and resorts in the luxury, upper-upscale and economy segments .The
Company’s brand names include Taj hotel resorts and palaces, Vivanta
by Taj hotels and resorts ,the gateway hotels and resorts and ginger
hotels.
Dedicated to the highest standards of hospitality, services and continuous
innovation for over a hundred years, the Taj group includes owned,
leased and managed hotels totaling 108 hotels, in 12 countries, on 5
continents with 12913 rooms.

- 13 -
Our aim is to be recognized as one of the top global hotel groups
providing exceptional customer satisfaction in each of our hotels.
The growth strategy of or group is to operate 20,000 Rooms, in 25 major
destinations around the world and achieve a group Turnover of US$
2billion, with 33% share from international operations, by 2014.

2.2 OBJECTIVES

 To Study the working capital management of Taj Mahal Palace

and Oberoi Hotel.

 To study the liquidity position of both the hotels through various

working capital related ratios.

- 14 -
 2.3 METHODOLOGY

 The project is based on secondary data. Past five years data has
been taken for the analysis of Taj Mahal Palace and Oberoi Hotel.
Data has been collected from various sources like internet, Annual
report etc.
 Further charts, graphs, tables and working capital ratios has been
taken for the analysis

- 15 -
 2.4 LIMITATION

 The project is based only on secondary data.

 Data was available for five years only.

- 16 -
Chapter 3
3.1 Analysis and Findings

Below are the ratios of 2 Hotels (Taj Mahal Palace and Oberoi hotel) for
the period of 5 years:

Current Ratio:
The current Ratio is the ratio of current liabilities it is calculated as: -
Current Ratio = Current assets
Current Liabilities

The current assets include cash and Bank Balance, Marketable securities,

- 17 -
Bills Receivable, Inventories, Loans and advances, Advances Payment
and prepaid expenses.

The current liabilities include creditors, bills payable bank overdraft

short-term loans, outstanding expense & income tax payable, unclaimed
divided and proposed dividend.

The current ratio measures the ability of the firm to meet its current
liabilities. The current assets get converted into cash into the operational
cycle of the firm and provide the fund needed to pay current liabilities
.

Table 1
Current Ratio
  2007 2008 2009 2010 2011
Taj hotel 0.67 0.03 0.425 0.58 0.68
Oberoi 0.49 0.46 0.31 0.33 0.37

Diagram 1

- 18 -
Interpretation:

If we analyze the five year data and graph from table 1 and table 1, Taj
hotel has shown good trend compare to Oberoi. In 2006 the ratio 0.67
which shows that the current ratio is approximately not equal to 2:1, it
indicates the unnecessarily investment in the current assets in the form of
debtors and cash balance. From 2007 the ratio of Taj hotel has shown
adown trend and has maintained not more than 1

Oberoi holds comparatively bad position as reflected by the low ratio

which means that the liquidity position of the firm is not good and shall
not be able to pay its current liabilities.

QUICK RATIO
The Quick Ratio is sometimes called the "acid-test" ratio and is one of the
best measures of liquidity. It is figured as shown below:

Quick Ratios = Current assets – inventories

Current liabilities – bank over draft

- 19 -
Quick Ratio establish the relationship between quick or liquid assets and
liabilities. An asset is liquid if it can be converted into cash immediately
or reasonable soon without loss of value. Cash is the most liquid asset.
Other assets which are considered to be relatively liquid and include in
liquid assets are debtors and bill receivable and marketable securities.
The Quick Ratio is a much more exacting measure than the Current
Ratio. By excluding inventories, it concentrates on the really liquid
assets, with value that is fairly certain.
An acid-test of 1:1 is considered satisfactory unless the majority of "quick
assets" are in accounts receivable, and the pattern of accounts receivable
collection lags behind the schedule for paying current liabilities.

Table : 2

Quick ratio

  2007 2008 2009 2010 2011

Taj
0.6 0.74 0.33 0.49 0.6
hotels
oberoi 0.38 0.35 0.19 0.23 0.28

- 20 -
Interpretation:
From table 2 and diagram 2 it is clear that Taj Hotel and Oberoi does not
meet the standard ratio of 1:1 and the company has insufficient balance of
payment of current liability.

INVENTORY TURNOVER RATIO :

This ratio tells the story by which stock is converted into sales. Usually, a
high inventory turnover ratio revels the liquidity of the inventory, i.e. how
many times on an average; inventory is sold during the year. Needless to
say that if a firm maintains minimum stock level in order to maximum
sales by quick rotation of inventory; no doubt, the profit will be
maximum since the holding cost of inventory will be minimum.

Inventory turnover Ratios =Cost of goods sold

Average inventory

Table : 3
Inventory Turnover Ratio
  2007 2008 2009 2010 2011
Taj Hotel 34.39 33.08 25.26 24.69 28.59
Oberoi 21.63 22.9 19.4 20.98 23.43

Diagram :3

- 21 -
Interpretation: From table 3 and diagram 3 it is clear that Taj Hotel
have consistent inventory turnover ratio though the ratio is slightly down
in financial year 2007 and 2010 but it is efficient in converting its stock
into sales.
Oberoi display a similar inconsistence in their ratios. The management of
these industries needs to take steps to establish a better efficiency in
managing their inventory.

Efficiency ratio

Working Capital Turnover ratio

It signifies that for an amount of sales, a relative amount of working

capital is needed. If any increase in sales contemplated working capital
should be adequate and thus this ratio helps management to maintain the

- 22 -
adequate level of working capital. The ratio measures the efficiency with
which the working capital is being used by firm. It may thus compute net
working capital turnover by dividing sales by working capital.

Working Capital turnover Ratios =Sales

Net working capital

Table: 4
Working capital turnover ratio
  2007 2008 2009 2010 2011
Taj
51.72 8.01 2.63 6.67 -5.27
Hotel
Oberoi 5.58 11.59 9.74 8.31 15.45

Diagram : 4

- 23 -
Interpretation: From the table 4 and diagram 4 it is clear that Taj Hotel
limited have a huge working capital ratio in 2007 then there is huge fall in
trend to 8.01 and even went negative in 2011. While Oberoi performance
is fluctuating.

Debtors Turnover ratio

Debtors turnover indicates the number of times debtors turnover each

year. Generally the higher the value of debtor’s turnover more is the
management of credit.

Debtors Turnover ratio = Sales

Debtor

Table : 5

Debtors turnover ratio

  2007 2008 2009 2010 2011
Taj Hotel 7.54 8.48 9.11 7.16 8.28
Oberoi 9.46 9.94 18.71 12.69 11.38

Daigram : 5

- 24 -
Interpretation: After analyzing the table 5 and diagram 5 it can be said
that Taj Hotel is efficient to bring down the sundry debtors from
financial year 2009 to 2010 which means that cash recovered from
debtors can be used for investment plans.

Similarly in Oberoi Hotel Debtors turnover ratio shows increasing trend

from 2007 to 2009 . But from 2010 company managed to bring down the
turnover ratio which shows a good sign as cash recovered from debtors
can be used for investment plans.

Total Assets Turnover ratio

The ratio shows the firm ability in generating sales from all financial
sources committed to total assets.
Total Assets Turnover Ratios = Sales
Total assets
Table 6
Total assets turnover ratio
  2007 2008 2009 2010 2011
Taj 0.34 0.29 0.19 0.2 0.22

- 25 -
Hotel
Oberoi 0.42 0.49 0.44 0.42 0.51

Diagram 6

Interpretation: The above table 6 and diagram 6, indicates that Taj hotel
ratio has been decreased from 2007 to 2010 which indicates that the
company is making insufficient utilization and its efficiency is
decreasing. The ratio reveals idle capacity.

The ratio of Oberoi has been increased from 2007 to 2011 is more or
less consistent which indicates that oberoi hotels are able to utilized their
assets.

Total Debt/Equity ratio

The ratio shows the relation describing the lender contribution for
each rupee of owner’s contribution.
Debts equity ratio is those calculated to know the extent of outsider fund

- 26 -
and shareholder funds used in acquiring the assets for a firm in other
words, it is calculated to measure the relative claim of outsiders and share
holder against the assets of a firm. It is also called as external – internal
equity ratio or debt to net worth ratio.

Debt or outsider fund: An outsider fund refers to long term liabilities.

Some writer are of the opinion that preference share should be considered
as outsiders funds for the reason that dividend payable on these shares is
fixed and the amount of these shares may be redeemed after expiry a
stipulated period. Similarly, there is a controversy regarding current
liabilities also. Some writers are of the opinion that current liabilities
should be considered as outsiders funds for the reason that they represent
the firm obligations to outsiders. However we are of the opinion that debt
equity ratio may be calculated excluding current liabilities because they
are repayable with in a very short period and these liabilities widely
fluctuate during a year. Shareholder funds: Equity share capital +
preference share capital + all accumulated profits (i.e. both revenue and
capital reserves) less accumulated losses. A low debt equity ratio
indicates that the interests of outsiders are safe and guarded and a firm
need not worry about their payment. On the other hand, a high debt
equity ratio indicates that the claims of outsiders are more than the
shareholders, their interests are not safe and they (outsider) have to bear
the probable future losses.

Total Debt/Equity ratio = Sales

Net Worth

- 27 -
 Table 7
Total debt/equity ratio
  2007 2008 2009 2010 2011
Taj
0.73 0.77 0.49 0.62 0.57
Hotel
Oberoi 1.62 1.94 1.65 1.56 1.77

Diagram 7

Interpretation: From table 7 and diagram 7, The ratio of Taj is less than
1 which indicates
that the companies are exposing themselves to large amount of equity.
The above graph indicates that the ratio of Oberoi from
financial year 2007 to 2011 is high and it also means that the company is
in risky position especially if interest rates are on the rise and it has been
aggressive in financing its growth with debt.

- 28 -
4.1 CONCLUSION
Study the working capital management of Taj Mahal Palace and Oberoi
Hotel and to study the liquidity position of both the hotels through
various working capital related ratios.Taj is better than oberoi in many of
the factors which is been taken into consideration from above ratios.

- 29 -
 BIBLIOGRAPHY
Books and Magazine-
 I.M Pandey – Financial Management
 M.Y. Khan and P.K Jain, Financial management.
 K.V. Smith – management of Working Capital.

Websites-
 www.indiainfoline.com
 www.sify.com
 www.moneycontrol.com

- 30 -
 www.scribd.com

- 31 -
- 32 -