WC in Tata Steel

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A PROJECT REPORT ON
“A STUDY ON WORKING
CAPITAL MANAGEMENT IN
TATA STEEL LTD.”
Submitted by:
NAME: XXXXXX
REGISTRATION NO: XXXXXXXXX
A project report submitted in partial

Fulfillment of the requirements for the degree of
PGDBFM from
NMIMS, INDIA
REGISTRATION number - XXXXXXXX Page 1

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STUDENT DECLARATION
I hereby declare that this project entitled:

“A STUDY OF WORKING CAPITAL MANAGEMENT
IN TATA STEEL LTD.”
Submitted in partial fulfillment of the requirements for the degree of PGDBFM
to NMIMS University, India, is my original work and not submitted for the
award for any other degree, diploma, fellowship, or any other similar title or
prizes.
Place: Your name
Date: 03/05/2019 (Signature)

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TABLE OF CONTENTS
S.NO PARTICULARS PAGE NO.
1 INTRODUCTION 4-6
2 RESEARCH METHODOLOGY 7-9
3 ORGANISATIONAL ANALYSIS 10-14
4 ANALYSIS & INTERPRETATION OF DATA 15-66
5 ROLE OF WORKING CAPITAL IN TATA STEEL
LTD. 67-73
6 OBJECTIVES, LIMITATIONS & CONCLUSION 74-77
7 BIBLIOGRAPHY 78-79

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Introduction

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INTRODUCTION
Working capital management involves the relationship between a firm's short-

term assets and its short-term liabilities. The goal of working capital
management is to ensure that a firm is able to continue its operations and that it
has sufficient ability to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable, and cash.
Working Capital Management is the process of planning and controlling the

level and mix of current assets of the firm as well as financing these assets.
Specifically, Working Capital Management requires financial managers to
decide what quantities of cash, other liquid assets, accounts receivables and
inventories the firm will hold at any point of time. Working capital is the capital
you require for the working i.e. functioning of your business in the short run.
Efficient management of working Capital is one of the pre-conditions for the

success of an enterprise. Efficient management of working capital means
management of various components of working capital in such a way that an
adequate amount of working capital is maintained for smooth running of a firm
and for fulfillment of twin objectives of liquidity and profitability.

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While inadequate amount of working capital impairs the firm's liquidity,

holding of excess working capital results in the reduction of the profitability.
But the proper estimation of working capital actually required, is a difficult task
for the management because the amount of working capital varies across firms
over the periods depending upon the nature of business, scale of operation,
production cycle, credit policy, availability of raw materials, etc. For this
significant amount of funds is necessary to invest permanently in the form of
various current assets.
For instance, due to time lag between sale of goods and their actual realisation
in cash, adequate amount of working capital is always required to be made
available for maintaining the desired level of sales. Empirical results show that
ineffective management of working capital is one of the important factors
causing industrial sickness (Yadav, 1986).
Modern Financial management aims at reducing the level of current assets

without ignoring the risk of stock outs (Bhattacharya, 1997). Efficient
management of working capital is, thus, an important indicator of sound health
of an organisation which requires reduction of unnecessary blocking of capital
in order to bring down the cost of financing.

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RESEARCH
Methodology

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Research Methodology
MEANING OF RESEARCH:-
Research as “the manipulation of things, concepts of symbols for the purpose of
generalizing to extend, correct or verify knowledge, whether that knowledge
aids in construction of theory or in the practice of an art.”
The Research Methodology followed for further work can be primarily

classified into two stages namely Exploratory and Descriptive. The stepwise
details of the research are as follows:
Stage - I
Exploratory Study: Since we always lack a clear idea of the problems one will
meet during the study, carrying out an exploratory study is particularly useful. It
helped develop my concepts more clearly, establish priorities and in improve
the final research design.
Exploratory study will be carried out by conducting:

Secondary data analysis which included studying the website
(https://www.tatasteel.com/) of TATA STEEL LTD. and also going through the
various articles published in different sources (magazines, books, internet,
newspapers).
Stage – II
Descriptive Study: After carrying out initial Exploratory studies to bring clarity
on the subject under study, Descriptive study will be carried out to know the
actual working capital management method being followed by TATA STEEL
LTD.

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The knowledge of working capital management process is needed to document

the process and suggest improvements in the current system to make it more
effective. The tools used to carry out Descriptive study included both
monitoring and Interrogation.

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ORGANISATIONAL
Analysis

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COMPANY PROFILE
Tata Steel was established in India as Asia’s first integrated private steel
company in 1907. With this, we also developed India’s first industrial city at
Jamshedpur. Today, we are among the leading global steel companies. Our
annual crude steel capacity across Indian operations is nearly 13 MnTPA and
we registered a turnover of US $7889 Mn in FY 2018.
We also set up our second greenfield steel plant in the eastern state of Odisha;
commissioning the first phase (3 MnTPA) of 6 MnTPA capacity in 2016. We
possess and operate captive mines that help us maintain cost-competitiveness
and production efficiencies through an uninterrupted supply of raw material.
This is how we ensure that we remain the lowest cost producer of steel in Asia.
We touch the lives of millions of people across the world every day with the
steel that we produce. And it is highly likely that Tata Steel has affected your
life today, though you may not know it.
From the vehicle you drive, to the house you live in; from the bridges you cross,
to the hand tools that you use; we strive to deliver unparalleled quality through
our customised value-added solutions to make your life easier.
This is made possible by our commitment to a culture of continuous

improvement, through which we drive operational excellence in processes,
products and people.

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Tata Steel is currently the world’s second-most geographically diversified steel

producer. We are one of the few steel operations that are fully integrated – from
mining to the manufacturing and marketing of finished products.
Continuous improvement in our product and service portfolio, along with

success in value creating initiatives for customers, allows us to serve global
growth markets. Today, we operate in 26 countries and have a commercial
presence in over 50 countries with employees across five continents. And the
numbers are growing.
Our Raw Material operations are spread across India and Canada which help us
to be self-sufficient in steel production. Key manufacturing functions are
performed by the raw materials and iron-making groups, while Shared Services
provides maintenance support for a smooth production. In India, our
downstream business activities are structured into strategic business units such
as Ferro-alloys and Minerals, Tubes, Wires, Bearings, Agrico, Industrial By-
products Management & Tata Growth Shop.

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ABOUT TATA STEEL

Vision:
We aspire to be the global steel industry benchmark for Value Creation and
Corporate Citizenship.
Mission:
Consistent with the vision and values of the founder Jamsetji Tata, Tata Steel
strives to strengthen India’s industrial base through effective utilization of staff
and materials. The means envisaged to achieve this are cutting edge technology
and high productivity, consistent with modern management practices.
Tata Steel recognizes that while honesty and integrity are essential ingredients
of a strong and stable enterprise, profitability provides the main spark for
economic activity.
Overall, the Company seeks to scale the heights of excellence in all it does in an
atmosphere free from fear, and thereby reaffirms its faith in democratic values.
THE CORE VALUES THAT DEFINE US

Integrity
We will be fair, honest, transparent and ethical in our conduct; everything we do
must stand the test of public scrutiny.
Excellence
We will be passionate about achieving the highest standards of quality, always
promoting meritocracy.

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Unity
We will invest in our people and partners, enable continuous learning, and build
caring and collaborative relationships based on trust and mutual respect.
Responsibility
We will integrate environmental and social principles in our businesses,
ensuring that what comes from the people goes back to the people many times
over.
Pioneering
We will be bold and agile, courageously taking on challenges, using deep
customer insight to develop innovative solutions.
Ethics
Ethical behaviour is intrinsic to our business and has been part of our legacy
since inception, as envisioned by our Founder, Jamsetji Tata. He believed that a
business must operate in a manner such that it respects the rights of all its
stakeholders and creates overall value for society.

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ANALYSIS &
INTERPRETATION
OF DATA

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CONCEPT OF WORKING CAPITAL
Concept of working capital includes meaning of working capital and its nature.
Working capital is the investment in current assets. Without this investment, we
cannot operate our fixed assets properly. For getting good profits from fixed
assets, we need to buy some current assets or pay some expenses or invest our
money in current assets.
For example, we keep some of cash which is the one of major part of working
capital. At any time, our machines may need repair. Repair is revenue expense
but without cash, we cannot repair our machines and without machines, our
production may delay. Like this, we need inventory or to invest in debtors and
other short term securities.
On the basis of Concept, we can divide our working capital into two parts:

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DEFINITIONS:
Many scholars’ gives many definitions regarding term working capital some of
these are given below.
According to Weston & Brigham

“Working capital refers to a firm’s investment in short-term assets cash, short
term securities, accounts receivables and inventories.
Mead Mallott & Field

“Working capital means current assets”.

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Bonnerille
“Any acquisition of funds which increases the current assets increases working
capital for they are one and the same”.
Gross Working Capital

Gross working capital is the amount of funds invested in various components of
current assets. Current assets are those assets which are easily / immediately
converted into cash within a short period of time say, an accounting year.
Current assets include Cash in hand and cash at bank, Inventories, Bills
receivables, Sundry debtors, short term loans and advances.
This concept has the following advantages:-

i. Financial managers are profoundly concerned with the current assets.
ii. Gross working capital provides the correct amount of working capital at
the right time.
iii. It enables a firm to realize the greatest return on its investment.
Net working capital refers to the difference between the current assets and the
current liabilities. Current liabilities are those claims of outsiders, which are
expected to mature for payment within an accounting year and include creditors,
bills payable, bank overdraft and outstanding expenses. When current assets
exceed current liabilities it is called Positive WC and when current liabilities
exceed current assets it is called Negative WC. The Net WC being the
difference between the current assets and current liabilities is a qualitative
concept.
It indicates:
 The liquidity position of the firm

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 Suggests the extent to which the WC needs may be financed by

permanent sources of funds
It is a normal practice to maintain a current ratio of 2:1. Also, the quality of

current assets is to be considered while determining the current ratio. On the
other hand a weak liquidity position poses a threat to the solvency of the
company and implies that it is unsafe and unsound. The Net WC concept also
covers the question of judicious mix of long term and short-term funds for
financing the current assets.
Permanent / Fixed Working Capital

Permanent or fixed working capital is minimum amount which is required to
ensure effective utilization of fixed facilities and for maintaining the circulation
of current assets. Every firm has to maintain a minimum level of raw material,
work- in-process, finished goods and cash balance. This minimum level of
current assts is called permanent or fixed working capital as this part of working
is permanently blocked in current assets. As the business grow the requirements
of working capital also increases due to increase in current assets.
a) Initial working capital

At its inception and during the formative period of its operations a company
must have enough cash fund to meet its obligations. The need for initial
working capital is for every company to consolidate its position.
b) Regular working capital

Regular working capital refers to the minimum amount of liquid capital
required to keep up the circulation of the capital from the cash inventories to
accounts receivable and from account receivables to back again cash. It consists

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of adequate cash balance on hand and at bank, adequate stock of raw materials
and finished goods and amount of receivables.
Temporary / Fluctuating Working Capital

Temporary / Fluctuating working capital is the working capital needed to meet
seasonal as well as unforeseen requirements. It may be divided into two types.
a) Seasonal Working Capital

There are many lines of business where the volume of operations is different
and hence the amount of working capital varies with the seasons. The capital
required to meet the seasonal needs of the enterprise is known as seasonal
Working capital.
b) Special Working Capital

The Capital required to meet any special operations such as experiments with
new products or new techniques of production and making interior advertising
campaign etc, are also known as special Working Capital.

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IMPORTANCE- WORKING CAPITAL

MANAGEMENT
1. Solvency of the business: Adequate working capital helps in maintaining the
solvency of the business by providing uninterrupted of production.
2. Goodwill: Sufficient amount of working capital enables a firm to make

prompt payments and makes and maintain the goodwill.
3. Easy loans: Adequate working capital leads to high solvency and credit
standing can arrange loans from banks and other on easy and favorable terms.
4. Cash discounts: Adequate working capital also enables a concern to avail

cash discounts on the purchases and hence reduces cost.
5. Regular Supply of Raw Material: Sufficient working capital ensures

regular supply of raw material and continuous production.
6. Regular payment of salaries, wages and other day to day commitments:

It leads to the satisfaction of the employees and raises the morale of its
employees, increases their efficiency, reduces wastage and costs and enhances
production and profits.
7. Exploitation of favorable market conditions: If a firm is having adequate

working capital then it can exploit the favorable market conditions such as
purchasing its requirements in bulk when the prices are lower and holdings its
inventories for higher prices.

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8. Ability to Face Crises: A concern can face the situation during the
depression.
9. Quick and regular return on investments: Sufficient working capital

enables a concern to pay quick and regular of dividends to its investors and
gains confidence of the investors and can raise more funds in future.
10. High morale: Adequate working capital brings an environment of

securities, confidence, high morale which results in overall efficiency in a
business.

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ADEQUACY & INADEQUACY OF WORKING

CAPITAL
ADEQUACY OF WORKING CAPITAL:
Working capital should be adequate so as to protect a business from the adverse
effects of shrinkage in the values of current assets. It ensures to a greater extent
the maintenance of a company’s credit standing and provides for such
emergencies as strikes, floods, fire etc.
It permits the carrying of inventories at a level that would enable a business to

serve satisfactorily the needs of its customers. It enables a company to operate
its business more efficiently because there is no delay in obtaining materials etc;
because of credit difficulties.
The dangers of excessive working capital are as follows:

1. It results in unnecessary accumulation of inventories. Thus the chances of
inventory mishandling, waste, theft and losses increase
2. It is an indication of defective credit policy and slack collection period.
Consequently higher incidences of bad debts occur which adversely
affects the profits.
3. It makes the management complacent which degenerates into managerial
inefficiency
4. Tendencies of accumulating inventories to make speculative profits grow.
This may tend to make the dividend policy liberal and difficult to copes
with in future when the firm is unable to make speculative profits.
INADEQUATE OF WORKING CAPITAL:

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When working capital is inadequate, a company faces many problems. It

stagnates the growth and it becomes difficult for the firm to undertake profitable
projects for non-availability of working capital funds. Difficulty in
implementing operating plans and achieving the firm’s profit targets. Operating
inefficiencies creep in when it becomes difficult even to meet day-to-day
commitments.
The dangers of inadequate working capital are as follows:

1. It stagnates growth .It becomes difficult for the firms to undertake
profitable projects for non-availability of the WC funds.
2. It becomes difficult to implement operating plans and achieve the firms
profit targets
3. Operating inefficiencies creep in when it becomes difficult even to meet
day-to-day commitments.
4. Fixed assets are not efficiently utilized. Thus the rate of return on
investment slumps.
5. It renders the firm unable to avail attractive credit opportunities etc.
6. The firm loses its reputation when it is not in position to honor its short-
term obligations. As a result the firm faces a tight credit terms.
Fixed assets are not utilized efficiently thus the firm’s profitability would
deteriorate. Paucity of working capital funds renders the firm unable to avail
attractive credit opportunities. The firm loses its reputation when it is not in a
position to honor it short-term obligations thereby leading to tight credit terms

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FACTORS INFLUENCING WORKING CAPITAL

REQUIREMENT
All firms do not have the same WC needs .The following are the factors that
affect the WC needs:
1. Nature and size of business: The WC requirement of a firm is closely
related to the nature of the business. We can say that trading and financial firms
have very less investment in fixed assets but require a large sum of money to be
invested in WC. On the other hand Retail stores, for example, have to carry
large stock of variety of goods little investment in the fixed assets. Also a firm
with a large scale of operations will obviously require more WC than the
smaller firm.
The following table shows the relative proportion of investment in current

assets and fixed assets for certain industries:
2. Manufacturing cycle: It starts with the purchase and use of raw materials
and completes with the production of finished goods. Longer the manufacturing
cycle larger will be the WC requirement; this is seen mostly in the industrial
products.

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3. Business fluctuation: When there is an upward swing in the economy, sales

will increase also the firm’s investment in inventories and book debts will also
increase, thus it will increase the WC requirement of the firm and vice-versa.
4. Production policy: To maintain an efficient level of production the firm’s

may resort to normal production even during the slack season. This will lead to
excess production and hence the funds will be blocked in form of inventories
for a long time, hence provisions should be made accordingly. Since the cost
and risk of maintaining a constant production is high during the slack season
some firm’s may resort to producing various products to solve their capital
problems. If they do not, then they require high WC.
5. Firm’s Credit Policy: If the firm has a liberal credit policy its funds will
remain blocked for a long time in form of debtors and vice-versa. Normally
industrial goods manufacturing will have a liberal credit policy, whereas dealers
of consumer goods will a tight credit policy.
6. Availability of Credit: If the firm gets credit on liberal terms it will require
less WC since it can always pay its creditors later and vice-versa.
7. Growth and Expansion Activities: It is difficult precisely to determine the

relationship between volume of sales and need for WC. The need for WC does
not follow the growth but precedes it. Hence, if the firm is planning to increase
its business activities, it needs to plan its WC requirements during the growth
period.
8. Conditions of Supply of Raw Material: If the supply of RM is scarce the

firm may need to stock it in advance and hence need more WC and vice versa.

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9. Profit Margin and Profit Appropriation: A high net profit margin

contributes towards the WC pool. Also, tax liability is unavoidable and hence
provision for its payment must be made in the WC plan, otherwise it may
impose a strain on the WC.
Also if the firm’s policy is to retain the profits it will increase their WC, and if
they decide to pay their dividends it will weaken their WC position, as the cash
will flow out. However this can be avoided by declaring bonus shares out of
past profits. This will help the firm to maintain a good image and also not part
with the money immediately, thus not affecting the WC position.
Depreciation policy of the firm, through its effect on tax liability and retained
earning, has an influence on the WC. The firm may charge a high rate of
depreciation, which will reduce the tax payable and also retain more cash, as the
cash does not flow out. If the dividend policy is linked with net profits, the firm
can pay fewer dividends by providing more depreciation. Thus depreciation is
an indirect way of retaining profits and preserving the firms WC position.

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COMPONENTS OF WORKING CAPITAL

Companies must measure risk, develop, and then implement strategies for
maintaining a positive cash flow. This strategy is called a working capital
management strategy. The goal of an efficient working capital management
strategy is to balance current assets against current liabilities so a company may
meet its short-term obligations and maintain operating expenses. Two major
components of a working capital management strategy are current assets and
current liabilities.
Current Assets
Current assets are items that can be turned into cash quickly. Examples of
current assets are cash on hand, short-term investments, inventory and accounts
receivable. Accounts receivable must be collected in a timely manner The
sooner you receive money owed, the sooner it can be reinvested to earn a profit.
Effective inventory management is also essential. The goal is to have enough
inventory to complete orders but not an excess. Excess inventory creates
additional costs such as paying for storage space and inventory spoilage.
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Current Liabilities
A company normally incurs liabilities during the operating period to meet its
operations budget. Examples of current liabilities are inventory purchases,
employee wages, taxes and accounts payable. Unearned revenue is also
considered a current liability, meaning you've been paid for goods or services
but have not yet delivered the product. Generally, current liabilities are expected
to be paid during a one-year time period.
Positive Cash Flow

Positive cash flow is the basis investors and owners use to measure a company's
cash management strategy. A positive cash flow in simple terms means more
money is coming in than going out. Current assets must outweigh current
liabilities to maintain a positive cash flow. Controlling inventory, a current
asset, is an important means of controlling a company's cash flow position.
Short-term notes payable, a current liability, also has an effect on a company's
positive cash flow. Allowing your money to remain invested and draw interest
until needed to pay notes payable is an important means of improving cash
flow.
Analysis
Regular analysis of a company's currents assets and liabilities is necessary to
maintain an effective working capital management strategy. An effective
working capital management strategy will take into account unforeseen events
such as changes in the market and competitor activities. Finding ways of
increasing sales income and collecting on accounts receivable will also improve
a company's working capital. Companies with a positive cash flow can take

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advantage of expansion opportunities as they arise without having to rely on

external financing.

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OPERATING CYCLE AND CASH CYCLE

All business firms aim at maximizing the wealth of the shareholder for which
they need to earn sufficient return on their operations. To earn sufficient profits
they need to do enough sales, which further necessitates investment in current
assets like raw material etc. There is always an operating cycle involved in the
conversion of sales into cash. The duration of time required to complete the
following sequences of events in case of a manufacturing firm is called the
operating cycle:-
1. Conversion of cash into raw material
2. Conversion of raw material into WIP
3. Conversion of WIP into FG
4. Conversion of FG into debtors and bills receivable through sales
5. Conversion of debtors and bills receivable into cash
Each component of working capital namely inventory, receivables and payables

has two dimensions time and money. When it comes to managing working
capital - Time Is Money. Therefore, if cash is tight, consider other ways of
financing capital investment - loans, equity, leasing etc. Similarly, if you pay
dividends or increase drawings, these are cash outflows remove liquidity from
the business.

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Operating Cycle Of Non Manufacturing Firms / Operating Cycle Of Service

And Financial Firms
Operating cycle of non-manufacturing firm like the wholesale and retail

includes conversion of cash into stock of finished goods, stock of finished
goods into debtors and debtors into cash. Also the operating cycle of financial
and service firms involves conversion of cash into debtors and debtors into
cash.
Thus we can say that the time that elapses between the purchase of raw material
and collection of cash for sales is called operating cycle whereas time length
between the payment for raw material purchases and the collection of cash for
sales is referred to as cash cycle. The operating cycle is the sum of the inventory
period and the accounts receivables period, whereas the cash cycle is equal to
the operating cycle less the accounts payable period.

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FINANCING CURRENT ASSETS

LEVEL OF CURRENT ASSETS REQUIRED
An important WC policy decision is concerned with the level of investment in
current assets. Under a flexible policy or conservative policy the investments in
current assets is high. This means that the firm maintains a huge balance of cash
and marketable securities carries a large amount of inventories and grants
generous amount of credit to customers, which leads to high level of debtors.
Under a restrictive policy or aggressive policy the investment in current assets is

low.
Determining the optimum level of current assets involves a trade off between
costs that rise and fall with current assets. The former are referred as carrying
costs and the latter as shortage costs. Carrying costs are mainly in the nature of
cost of financing a higher level of current assets.
Shortage costs are mainly in the form of disruption in production schedule, loss
of sale, and loss of customer goodwill, etc. Normally the total cost curve is
flatter around the optimal level. Hence it is difficult to precisely find the optimal
level.
CURRENT ASSETS FINANCING POLICY

After establishing the level of current assets, we further need to decide what mix
of long-term capital and short-term debt should the firm employ to support it
current assets. Three kind of financing can be distinguished; long term
financing, short term financing and spontaneous financing.

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Sources of long term financing are shares, debentures, preference share,

retained earnings and debt from financial institution, sources of short term
finance include bank loans, commercial papers and factoring receivables,
whereas, spontaneous source of finance refers to the automatic sources of short
term funds like creditors, bills payable and other outstanding expenses. The
firms to finance its WC requirements may use one of the following three
strategies:
Strategy A: Only long-term sources are used to finance its entire WC

requirements. When the WC requirements are less than the peak level the
balance is invested in liquid assets like cash and marketable securities. However
it leads to inefficient management of funds as you may have to pay high interest
or you could invest it in other places where you could earn good returns.
Strategy B: Long-term financing is used to meet the fixed asset requirements,

permanent WC requirement and a portion of fluctuating WC requirement.
During seasonal upswings, short- term financing is used, during seasonal down
swings surplus is invested in liquid assets. This is also called the conservative
approach.
This is the middle route, where at least you know that you normally wouldn’t
fall short of WC. However you could still make better use of your funds.
Strategy C: Long-term financing is used to meet the fixed asset requirements

and permanent WC requirement while short term financing is used to finance
the fluctuating needs. This is a little riskier strategy, as you may not always be
able to arrange for WC finance as and when you need and hence may cause a
considerable loss in terms of money, reputation, etc.

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Under the aggressive approach, the firm finances a part of its permanent current
assets with short term financing. Sometimes they may even finance a part of
their fixed assets with short-term sources.
Matching Approach / Hedging Approach: It involves matching the expected

life of assets with the expected life of the source of funds raised to finance
assets ex: a ten year loan may be used to finance machinery with an expected
life of ten years.
Using long-term finance for short-term assets is expensive, as the funds will not
be fully utilized. Similarly, financing long term assets with short term financing
is costly as well as inconvenient as arrangement for the new short term
financing will have to be made on a continuing basis. However, it should be
noted that exact matching is not possible because of the uncertainty about the
expected life of assets.

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COST OF FINANCING
In developed countries it has been observed that the rate of interest is related to
the maturity of the debt. This relationship between the maturity of debt and its
cost is called the term structure of interest rates. The curve related to it is called
the yield curve, which is generally upward sloping. Longer the maturity period,
higher is the rate of interest. However, it is opposite in India. The liquidity
preference theory justifies the high rate of interest on debt with long maturity
period. No moneylender would want to take high risk of giving loan, which will
be paid after a long period of time, and hence, the only way to induce him or her
to give loan would be to pay high interest rate, thus, short term financing is
desirable from the point of view of return.
Flexibility: It is easier to repay short-term loans and hence if the firm were of
the opinion that it would require lesser funds in near future, it would be better to
go in for short-term sources.
Risk Of Financing: Long- term sources though expensive are less risky as you
are always assured of at least the minimum funds required by you, on the other

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hand you may not always be able to get finance from short-term sources which
in turn could hamper the functioning of your business. Also though the return
on equity is always higher in case of aggressive policy, it is much more costly.
Short Term Sources of Working Capital Finance

Factoring
Factoring is a traditional source of short term funding. Factoring facility
arrangements tend to be restrictive and entering into a whole-turnover factoring
facility can lead to aggressive chasing of outstanding invoices from clients, and
a loss of control of a company’s credit function.
Installment credit
Installment credit is a form of finance to pay for goods or services over a period
through the payment of principal and interest in regular payments.
Invoice Discounting
Invoice Discounting is a form of asset based finance which enables a business
to release cash tied up in an invoice and unlike factoring enables a client to
retain control of the administration of its debtors.
Income received in advance

Income received in advance is seen as a liability because it is money that does
not correlate to that specific accounting or business year but rather for one that
is still to come. The income account will then be credited to the income
received in advance account and the income received in advance will be debited
to the income account such as rent.
Advances received from a customer

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A liability account used to record an amount received from a customer before a

service has been provided or before goods have been shipped.
Bank overdraft
A bank overdraft is when someone is able to spend more than what is actually
in their bank account. The overdraft will be limited. A bank overdraft is also a
type of loan as the money is technically borrowed.
Commercial papers
A commercial paper is an unsecured promissory note. Commercial paper is a
money-market security issued by large corporations to get money to meet short
term debt obligations e.g. payroll, and is only backed by an issuing bank or
corporation’s promise to pay the face amount on the maturity date specified on
the note. Since it is not backed by collateral, only firms with excellent credit
ratings will be able to sell their commercial paper at a reasonable price.
Trade finance
An exporter requires an importer to prepay for goods shipped. The importer
naturally wants to reduce risk by asking the exporter to document that the goods
have been shipped. The importer’s bank assists by providing a letter of credit to
the exporter (or the exporter’s bank) providing for payment upon presentation
of certain documents, such as a bill of lading. The exporter’s bank may make a
loan to the exporter on the basis of the export contract.
Letter of credit
A letter of credit is a document that a financial institution issues to a seller of
goods or services which says that the issuer will pay the seller for
goods/services the seller delivers to a third-party buyer. The issuer then seeks

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reimbursement from the buyer or from the buyer’s bank. The document is
essentially a guarantee to the seller that it will be paid by the issuer of the letter
of credit regardless of whether the buyer ultimately fails to pay. In this way, the
risk that the buyer will fail to pay is transferred from the seller to the letter of
credit’s issuer.
Long Term Sources of Working Capital Finance

Equity Capital
Shares capital refers to the portion of a company’s equity that has been obtained
(or will be obtained) by trading stock to a shareholder for cash or an equivalent
item of capital value. Share capital comprises the nominal values of all shares
issued (that is, the sum of their “par values”). Share capital can simply be
defined as the sum of capital (cash or other assets) the company has received
from investors for its shares.
Debentures
A debenture is a document that either creates a debt or acknowledges it, and it is
a debt without collateral. In corporate finance, the term is used for a medium- to
long-term debt instrument used by large companies to borrow money. A
debenture is like a certificate of loan evidencing the fact that the company is
liable to pay a specified amount with interest and although the money raised by
the debentures becomes a part of the company’s capital structure, it does not
become share capital. Debentures are generally freely transferable by the
debenture holder.
Loan from financial institution

A loan is a type of debt which it entails the redistribution of financial assets
over time, between the lender and the borrower. In a loan, the borrower initially

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receives or borrows an amount of money from the lender, and is obligated to

pay back or repay an equal amount of money to the lender at a later time.
Typically, the money is paid back in regular installments, or partial repayments;
in an annuity, each installment is the same amount. Acting as a provider of
loans is one of the principal tasks for financial institutions like banks. A secured
loan is a loan in which the borrower pledges some asset (e.g. a car or property)
as collateral. Unsecured loans are monetary loans that are not secured against
the borrower’s assets.
CONCLUSION
The relative liquidity of a firm’s assets structure is measured by the current
ratio. The greater this ratio the less risky as well a less profitable the firm will
be and vice-versa. Also the relative liquidity of a firm’s financial structure can
be measured by short- term financing to total financing ratio. The lower this
ratio, less risky as well a less profitable the firm will be and vice-versa.
Thus, in shaping its WC policy, the firm should keep in mind these two
dimensions; relative assets liquidity (level of current assets) and relative finance
liquidity (level of short- term financing).

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approaches to financing working capital
1. Aggressive approach to financing working capital

The aggressive method is where a company predominantly finance all its
fluctuating current assets and most of its permanent current assets using short
term source of finance and it is only a small proportion of its permanent current
assets that is financed using long-term source of finance.
A company that uses more short-term source of finance and less long-term
source of finance will incur less cost but with a corresponding high risk. This
has the effect of increasing its profitability but with a potential risk of facing
liquidity problem should such short-term source of finance be withdrawn or
renewed on unfavourable terms.
2. Conservative approach to financing working capital

The other extreme method of financing working capital is where a company
decides to use mainly long-term source of finance and very little short-term
source of finance to finance its working capital. This option means that the
company’s finance is going to be relatively high cost (that is sacrificing low
cost finance) but low risk; this will make the company’s profit to be low but
does not run the risk of being faced with liquidity problem as a result of
withdrawal of its source of finance.

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The conservative method is where a company predominantly finance all its

permanent current assets and most of its fluctuation current assets using long
term source of finance and it is only a small proportion of its fluctuating current
assets that is financed using short-term source of finance.
3. Moderate approach to financing working capital

Between the two extreme approaches to financing working capital is the
moderate (or the matching or balancing) approach. This approach makes
distinction between fluctuating current assets and permanent current assets with
the suggestion that to finance working capital; short-term source of finance
should be used to finance fluctuating current assets, whiles long-term source of
finance should be used to finance permanent current assets. This matches the
source of finance with the character of the current assets.
The financing of working capital approach adopted by a company is very

important since it will have an impact on its profitability and liquidity. It is also
important for companies to consider other factors apart from cost and risk in
making such financing decisions with regards to its working capital financing.

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SIGNIFICANCE OF WORKING CAPITAL

Investment in fixed assets only is not sufficient to run the business. Working
capital or investment in current assets, howsoever small it is, is a must for
purchase of raw materials, and for meeting the day-to-day expenditure on
salaries, wages, rents, advertising etc., and for maintaining the fixed assets.
“The fate of large scale investment in fixed capital is often determined by a
relatively small amount of current assets.” Working capital is just like a heart of
industry if it is weak, the business cannot prosper and survive, although there is
a large body (investment) of fixed assets. Moreover, not only the existence of
working capital is a must for the industry, but it must be adequate also.
Adequacy of the working capital is the lifeblood and controlling nerve center of
a business. Inadequate as well as redundant working capital is dangerous for the
health of industry. It is said, ‘Inadequate working capital is disastrous; whereas
redundant working capital is a criminal waste’. Both situations are not
warranted in a sound organization.
Cash Discount:
If a proper cash balance is maintained, the business can avail the advantage of
cash discount by paying cash for the purchase of raw materials and
merchandise. It will result in reducing the cost of production.
It creates a Feeling of Security and Confidence:

The proprietor or officials or management of a concern are quite carefree, if
they have proper working capital arrangements because they need not worry for
the payment of business expenditure or creditors. Adequate working capital
creates a sense of security, confidence and loyalty, not only throughout the
business itself, but also among its customers, creditors and business associates.

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‘Must’ for Maintaining Solvency and Continuing Production:

In order to maintain the solvency of the business, it is but essential that the
sufficient amount t of fund is available to make all the payments in time as and
when they are due. Without ample working capital, production will suffer,
particularly in the era of cut throat competition, and a business can never
flourish in the absence of adequate working capital.
Sound Goodwill and Debt Capacity:

It is common experience of all prudent businessmen that promptness of
payment in business creates goodwill and increases the debt of the capacity of
the business. A firm can raise funds from the market, purchase goods on credit
and borrow short-term funds from bank, etc. If the investor and borrowers are
confident that they will get their due interest and payment of principal in time.
Easy Loans from the Banks:

An adequate working capital i.e. excess of current assets over current liabilities
helps the company to borrow unsecured loans from the bank because the excess
provides a good security to the unsecured loans, Banks favor in granting
seasonal loans, if business has a good credit standing and trade reputation.
Distribution of Dividend:
If company is short of working capital, it cannot distribute the good dividend to
its shareholders inspite of sufficient profits. Profits are to be retained in the
business to make up the deficiency of working capital. On the other contrary, if
working capital is sufficient, ample dividend can be declared and distributed. It
increases the market value of shares.

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Exploitation of Good Opportunity:

In case of adequacy of capital in a concern, good opportunities can be exploited
e.g., company may make off-season purchases resulting in substantial savings
or it can fetch big supply orders resulting in good profits.
Meeting Unseen Contingency:

Depression shoots the demand of working capital because sock piling of
finished goods become necessary. Certain other unseen contingencies e.g.,
financial crisis due to heavy losses, business oscillations, etc. can easily be
overcome, if company maintains adequate working capital.
High Morale:
The provision of adequate working capital improves the morale of the executive
because they have an environment of certainty, security and confidence, which
is a great psychological, factor in improving the overall efficiency of the
business and of the person who is at the hell of fairs in the company.
Increased Production Efficiency:

A continuous supply of raw material, research programme, innovations and
technical development and expansion programmes can successfully be carried
out if adequate working capital is maintained in the business. It will increase the
production efficiency, which will, in turn increases the efficiency and morale of
the employees and lower costs and create image among the community.

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CASH FORECASTING & BUDGETING
A cash budget is a summary statement of the firms expected cash inflows and
outflows over a projected time period. It helps the financial manager to
determine the future cash needs, to arrange for it and to maintain a control over
the cash and liquidity of the firm. If the cash flows are stable, budgets can be
prepared monthly or quarterly, if they are unstable they can be prepared daily or
weekly.
Cash budgets are helpful in:

 Estimating cash requirements
 Planning short term financing
 Scheduling payments in connection with capital expenditure
 Planning purchases of materials
 Developing credit policies
 Checking the accuracy of long- term forecasts.
Short Term Forecasting Methods

Two most commonly used methods of short- term forecasting are:
i. The receipt and payment method
ii. The adjusted net income method

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The receipt and payment method is used for forecasting limited periods, like
a week or a month, where as, the adjusted net income method is used for longer
durations. The cash flows can be compared with budgeted income and expense
items if the receipts and payment approach is followed. On the other hand the
adjusted net income method is appropriate in showing the company’s working
capital and future financing needs.
i. Receipts and Payment Method: It simply shows the timing and magnitude
of expected cash receipts and payments over the forecast receipts.
The most difficult part is to anticipate the amounts as well as the time when the
receipts will be collected, the reason being that he projection of cash receipts
relies heavily on sales forecasts and the guesses regarding the time of payment
by the customer.

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Evaluation of the method: I

Its main advantages are:
 Provides a complete picture of expected cash flows
 Helps to keep a check over day-to-day transactions
Its main drawbacks are:

 Its reliability is impaired by delays in collection or sudden demand for
large payments and other similar factors.
 It fails to provide a clear picture regarding the changes in the movement
of working capital, especially those related to the inventories and
receivables.
ii. Adjusted net income method: It involves the tracing of working capital
flows. It is also called the sources and use approach. Its two objectives are:
 To project company’s need for cash at some future date.
 To show if the company can generate this money internally, and if not,
how much will have to be either borrowed or raised in the capital market.
It generally has three sections; sources of cash, uses of cash and adjusted net
balance .In preparing the adjusted net income forecasts items like net income,
depreciation, taxes dividends etc can be easily determined from the company’s
annual operating budget. Normally it is difficult to find WC changes, especially
since the inventories and receivable pose a problem.
Its main advantages are:

 Helps to keep a control on working capital
 Helps anticipate financial requirements.

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Its main disadvantages are:

 It fails to trace the flow of cash.
 Not useful in controlling day-to-day transaction
 Long-Term Cash Forecasting
 They are generally prepared for a period of two to five years and hence
provide a broad picture of firms financing needs and availability of
investible surplus in future
Its major uses are:

 Indicate future financial needs
 Helps evaluate proposed capital projects
 Improve corporate planning
OPTIMAL CASH BALANCE

Cash balance is maintained for transaction purposes and an additional amount
may be maintained as a buffer or safety stock. It involves a tradeoff between the
costs and the risk. If a firm maintains a small cash balance, it has to sell its
marketable securities and probably buy them later more often, than if it holds a
large cash balance.
More the number of transactions more will be the trading cost and vice-versa;
also, lesser the cash balance, less will be the number of transaction and vice-
versa. However the opportunity cost of maintaining the cash rises, as the cash
balance increases.

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DETERMINANTS OF WORKING CAPITAL

1. Nature of business:
A company’s working capital requirements are basically related to the kinds of
business it conducts. Generally speaking, trading and financial firms require
relatively large amounts of working capital, public utilities comparatively small
amounts, whereas manufacturing concerns stand between these two extremes,
their needs depending upon the character of industry of which they are a part.
2. Production policies:
Depending upon the kind of items manufactured, a company is able to offset the
effect off- seasonal fluctuations upon working capital by adjusting its
production schedules. The choice rests between varying output in order to adjust
inventories to seasonal requirements and maintaining a steady rate of production
and permitting stocks of inventories to build up during off-season periods. It
will thus be obvious that a level production plan would involve a higher
investment in working capital.
3. Manufacturing process:
If the manufacturing process in an industry entails a longer period because of its
complex character, more working capital is required to finance that process. The
longer it takes to make an approach and the greater its cost, the larger the
Inventory tied up In Its manufacture and, therefore, higher the amount of
working capital.
4. Turnover of circulating capital:

The speed with which the circulating capital completes its round I.e., conversion
of cash into inventory of raw material Into Inventory of finished goods.

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Inventory of finished goods into book debts or accounts receivables and book
debt into cash account, plays an Important and decisive role in judging the
adequacy of working capital.
5. Growth and expansion of business:

As a company grows, it is logical to expect that larger amount of working
capital will be required though It Is difficult to draw up firm rules for the
relationship between the growth in the volume of a company’s business and the
growth of its working capital.
6. Business cycle fluctuations:

Requirements of working capital of a company vary with the business variation.
At a time when the price level comes up and boom condition prevail, the
psychology of the management is to pile up a big stock of raw material and
other goods likely to be used in the business operations as there is an
expectation to take advantage of lower prices. The expansion of business units
caused by the inflationary conditions creates demand for more and more capital.
7. Terms of purchase and sales:

A business unit, making purchases on credit basis and selling its finished
products on cash basis, will require lower amount of working capital, on the
contrary, a concern having no credit facilities and at the same time forced to
grant credit to its customers may find itself in a tight position.
8. Dividend policy:
A desire to maintain an established dividend policy may affect working capital,
often changes in working capital bring about an adjustment of dividend policy.
The relationship between dividend policy and working capital is well

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established and very few companies declare a dividend without giving due
consideration to its effects on cash and their needs for cash. A shortage of
working capital often acts as a powerful reason for reducing or skipping a cash
dividend. On the other hand, a strong position may justify continuing dividend
payment.
9. Other determinants:
The following are the other determinants of working capital:
i) Absence of co-ordination in production and distribution policies in a
company results in a high demand for working capital.
ii) The absence of specialisation in the distribution of products may enhance
the need of working capital.
iii) If the means of transport and communication in a country like India are
not well-developed, the industries may face a great demand for working
capital in order to maintain big inventory of raw materials and other
accessories.
iv) The import policy of the Government may also effect the requirement of
the working capital for the companies as they have to arrange for funds
for imposing the goods at specified times.
v) The hazards and contingencies inherent in a particular type of business
decide the magnitude of working capital in terms of keeping liquid
resources.

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Credit Management
Goal of Credit Management

To manage the credit in such a way that sales are expanded to an extent to
which the risk remains within an acceptable limit. Hence for maximizing the
value, the firm should manage its credit to:
 Obtain optimum not maximum value of sales.
 Control the cost of credit and keep it at minimum.
 Maintain investment in debtors at optimum level.
OPTIMUM CREDIT POLICY

The term credit policy refers to those decision variables that influence the
amount of trade credit; i.e. the investment in receivables. Main factors that
affect the credit policy are general economic conditions, industry norms, pace of
technological change, competition, etc.
Lenient or stringent credit policy: Firms following lenient credit policy tend
to sell on credit very liberally, even to those customers whose creditworthiness
is doubtful, where as, the firm following stringent credit policy; will give credit

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only to those customers who have proven their creditworthiness. Firms having
liberal credit policy, attract more sales, and also enjoy more profits.
However at the same time, they suffer from high bad debt losses and from
problem of liquidity.
The concept of probability can be used to make the sales forecast. Different
economic conditions; good bad and average, can be anticipated and accordingly
sales forecast under different credit policies can be made.
You also need to consider the cost of credit extension, which mainly involves
increased bad debts, production cost, selling cost, administration cost, cash
discount and opportunity cost. Credit policy should be relaxed if the increase in
profits from additional sales is greater than the corresponding cost. The
optimum credit policy should occur at a point where there is a trade off between
liquidity and profitability.
The important variables you need to consider before deciding the credit policy
are:
Credit terms: Two important components of credit terms are credit period and
cash discounts. Credit period is generally stated in terms of net period, for e.g.,
net 30’.it means that the payment has to be made within 30 days from day of
credit sale.
Cash discount is normally given to get faster payments from the debtors. The
complete credit terms indicate the rate of cash discount, the period of credit and
the discount period. For ex:’ 3/10, net 30’ this implies that 3 % discount will be

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granted if the payment is made by the tenth day, if the offer is not availed the
payment has to be made by the thirtieth day.
The firm also needs to consider the competitors action, if the competitors also
relax their policy, when you relax your policy, the sales may not go up as
expected.
Credit standards: Liberal credit standard tend to put up sales and vice-versa.
The firms credit standards are influenced by the five C’s:
 Character- the willingness of the customer to pay
 Capacity- the ability of the customer to pay
 Conditions- the prevailing economic conditions
 Capital- the financial reserves of a customer. If the customer has
difficulty in paying from operating cash flow, the focus shifts to its
capital.
 Collateral- The security offered by the customers.
The effect of liberalizing credit standards on profit may be estimated by:
P = change in profit
S = change in sales
V = ratio of variable cost to sales
K = cost of capital
I = increase in receivables investment
b = bad debts loss ratio on new sales

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Collection policy: A collection policy is needed s as to induce the customer to

pay his bills on time and to remind him of payment if the credit period is over
and he has still not paid the bill.
CREDIT PROCEDURE FOR INDIVIDUAL ACCOUNTS

Collection procedure will differ from customer to customer .The credit
evaluation procedure of the individual accounts should involve the following
steps:
i. Credit information: The firm should ensure the capacity and willingness of
the customer to pay before granting credit to him. Following sources may be
employed to get the information:
a) Financial statements: Financial statements like the balance sheet and the
P&L a/c can be easily obtained except in the cases of individuals or
partnership firms. If possible additional information should be sought
from firms having seasonal sales. The credit-granting firm should always
insist on the audited financial statements.
b) Bank references: A firm can get the credit information from the bank
where his customer has it account; he can do so, through its bank, since
obtaining direct information is difficult. Here the problem is that the
customer may provide reference of only those banks with which it has
good relations.
c) Trade references: The firm can ask the customer to give trade references
of people with whom he has or is doing trade. The trade referee may be
contacted to get the necessary information. The problem here is that the
customer may provide misleading references.

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d) Credit bureau reports: Advanced countries have credit bureau

organizations, which specialize in providing credit information. There is a
strong need to develop such an organization in our country.
e) Price and yields on securities: For listed companies, valuable inferences
can be obtained from the stock marker data. Higher the price earnings
multiple and lower the yield on bonds, other things being equal, lower
will be the credit risk.
f) Experience of the firm: Trading of the company with others or with
same Co. done before can be examined so as to get the necessary
information and take further decision.
ii. Credit investigation: The factors that affect the extent and nature of credit
investigation are:
 The type of customer, whether new or old.
 The customer’s business line, background and related trade risks.
 The nature of the product-durable or perishable.
 Size of order and expected future volumes of business with him.
 Company’s credit policies and practices.
A performance report of each trade customer should be maintained and up dated
regularly. Whenever the firm experiences a change in the customers paying
habit, his file can be thoroughly checked. The intensity or the depth of credit
review will depend on the quality of customer account and the credit involved.
Though credit investigation involves cost, credit decision without adequate
investigation can be more expensive in terms of collection cost or loss due to
bad debt.
iii. Credit analysis: The credit information supplied should be properly

analyzed. The ratios should be calculated to find out the liquidity position and

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should be compared with the industry average. This will tell us whether the
downfall if any is because of general industrial environment or due to internal
inefficiencies of the firm. For judging the customer the credit analyst may use
quantitative measure like the financial ratios and qualitative assessments like
trustworthiness etc.
Credit analyst may use the following numerical credit scoring system:
 Identify factors relevant for credit evaluation.
 Assign weights to these factors that reflect their relative
importance.
 Rate the customers on various factors, using the suitable rating
scale.
 For each factor multiply the factor rating with the factor weight to
get the factor score.
 Add all the factor score to get the over all customer rating index
 Based on the rating index, classify the customer.
On basis of this the credit granting decision is taken. If p is the probability that
the customer will pay, (1-p) the probability that he defaults, REV the revenue
from sales, (COST) the cost of goods sold, the expected profit for the action
offer credit is: p (REV-COST) - (1-p) COST
iv. Credit limits: The next logical step is to determine the amount and duration
of credit. It depends upon the customer’s creditability and the financial position
of the firm. A line credit is the maximum amount of credit, which the firm will
extend at a point of time. A customer may sometimes demand a credit higher
then his credit line, which may be granted to him if the product has a high
margin or the additional sales help to use the unutilized capacity of the firm.

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The normal collection period should be determined keeping in mind the

industry norm.
v. Collection procedure: The firm should clearly lay down the collection
procedures for the individual accounts, and the actions it will resort to if the
payments are not made on time. Permanent customers need too be handled
carefully; else the firm may lose them to the competitors. In order to study
correctly the changes in the payment behavior of customers, it is necessary to
look at the pattern of collections associated with credit sales.

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Operating Working Capital Ratios

1. Working Capital
= Current Assets – Current Liabilities
An indication of a firm’s ability to grow, expand, and take advantage of
opportunities.
A working capital ratio of less than 1.0 is a strong indicator that there will be
liquidity problems, while a ratio in the vicinity of 2.0 is considered to represent
good short-term liquidity.
NOTE: The working capital ratio can be misleading if a company’s current

assets are heavily weighted in favor of inventories, since this current asset can
be difficult to liquidate in the short term. This problem is most obvious if there
is a low inventory turnover ratio.
The working capital ratio will look abnormally low for those entities that are
drawing down cash from a line of credit, since they will tend to keep cash
balances at a minimum, and only replenish their cash when it is absolutely
required to pay for liabilities.
In these cases, a working capital ratio of 1:1 or less is common, even though the
presence of the line of credit makes it very unlikely that there will be a problem
with the payment of liabilities.
2. Working Capital Turnover

= Sales / Working Capital

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Indicates how efficiently working capital is being used to generate sales. The
higher the number the better.
A high turnover ratio indicates that management is being extremely efficient in

using a firm's short-term assets and liabilities to support sales. Conversely, a
low ratio indicates that a business is investing in too many accounts receivable
and inventory assets to support its sales, which could eventually lead to an
excessive amount of bad debts and obsolete inventory.
Note: An extremely high working capital turnover ratio can indicate that a
company does not have enough capital to support it sales growth; collapse of
the company may be imminent. This is a particularly strong indicator when the
accounts payable component of working capital is very high, since it indicates
that management cannot pay its bills as they come due for payment.
An excessively high turnover ratio can be spotted by comparing the ratio for a
particular business to those reported elsewhere in its industry, to see if the
business is reporting outlier results.
3. Accounts Payable Turnover

= Purchases / Accounts Payable
Indicates how quickly payables are being paid. Since accounts payable often
times is similar to cost-free financing, to a point, usually a slower rate is
preferred. That is, when financing is cheap or free, repayment of the debt
should be extended for as long as possible. "Cost of Goods Sold" might be
substituted for "Purchases."

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A change in the turnover ratio can also indicate altered payment terms with
suppliers, though this rarely has more than a slight impact on the turnover ratio.
If a company is paying its suppliers very quickly, it may mean that the suppliers
are demanding very fast payment terms, or that the company is taking
advantage of early payment discounts.
Note: Companies sometimes measure the accounts payable turnover ratio by

only using the cost of goods sold in the numerator. This is incorrect, since there
may be a large amount of administrative expenses that should also be included
in the numerator. If a company only uses the cost of goods sold in the
numerator, this creates an excessively high turnover ratio.
4. Day's Payables
= 365 Days / Accounts Payable Turnover
To calculate Day's payables, simply take the number calculated by the
"Accounts Payable Turnover, and divide it by 365 days. This will indicate the
average number of days the firm is taking to pay its accounts payables. e.g. If
the terms of accounts payable are such that outstanding accounts payable are to
be paid in 60 days, then the day's payables should also be close to 60 days.
The calculation assumes that trade accounts payable arise from the purchase of
inventory and the costs of producing products held for sale. When inventory is
sold the inventory account is reduced and the cost of goods sold account is
increased. By its nature, the calculation assumes that daily sales, and therefore
daily cost of sales, are consistent throughout the operating cycle. For seasonal
and/or high growth companies the calculation is of lesser use.
5. Accounts Receivable Turnover

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= Credit Sales / Accounts Receivable

Indicates how quickly customers are paying on their accounts. Accounts
receivable is a big use of cash and so a rapid turnover is good. i.e. The bigger
the number, the better. (usually). "Sales" might be substituted for "Credit
Sales."
It is useful to track accounts receivable turnover on a trend line in order to see if

turnover is slowing down; if so, an increase in funding for the collections staff
may be required, or at least a review of why turnover is worsening.
Note: Some companies may use total sales in the numerator, rather than net
credit sales. This can result in a misleading measurement if the proportion of
cash sales is high, since the amount of turnover will appear to be higher than is
really the case.
A very high accounts receivable turnover number can indicate an excessively

restrictive credit policy, where the credit manager is only allowing credit sales
to the most credit-worthy customers, and letting competitors with looser credit
policies take away other sales.
A final issue is that the beginning and ending accounts receivable balances are
for just two specific points in time during the measurement year, and the
balances on those two dates may vary considerably from the average amount
during the entire year. Therefore, it is acceptable to use a different method to
arrive at the average accounts receivable balance, such as the average ending
balance for all 12 months of the year.
6. Day's Receivables

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= 365 Days / Accounts Receivable Turnover

Indicates the number of days on average customers are taking to pay on their
accounts.
A change in the turnover ratio can also indicate altered payment terms with
suppliers, though this rarely has more than a slight impact on the turnover ratio.
If a company is paying its suppliers very quickly, it may mean that the suppliers
are demanding very fast payment terms, or that the company is taking
advantage of early payment discounts.
Note: Companies sometimes measure the accounts payable turnover ratio by

only using the cost of goods sold in the numerator. This is incorrect, since there
may be a large amount of administrative expenses that should also be included
in the numerator. If a company only uses the cost of goods sold in the
numerator, this creates an excessively high turnover ratio.
7. Inventory Turnover
= Cost of Goods Sold / Inventory
Indicates how rapidly inventory is being sold. Usually, the faster inventory is
sold, the more profitable the firm will be. Firms with rapid turnover might
include grocery stores, donut shops, etc. A larger inventory turnover number is
usually preferred over a smaller number.
When there is a low rate of inventory turnover, this implies that a business may
have a flawed purchasing system that bought too many goods, or that stocks
were increased in anticipation of sales that did not occur. In both cases, there is
a high risk of inventory aging, in which case it becomes obsolete and has little
residual value.

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When there is a high rate of inventory turnover, this implies that the purchasing
function is tightly managed. However, it may mean that a business does not
have the cash reserves to maintain normal inventory levels, and so is turning
away prospective sales. The latter scenario is most likely when the amount of
debt is unusually high and there are few cash reserves.
8. Day's Inventory
= 365 Days / Inventory Turnover
Indicates on average how long inventory sits on a firm's shelves.
The days' sales in inventory figure is intended for the use of an outside financial
analyst who is using ratio analysis to estimate the performance of a company.
The metric is less commonly used within a company, since employees can
access detailed reports that reveal exactly which inventory items are selling
better or worse than average.

NAME
ROLE OF WORKING
CAPITAL IN TATA
STEEL LTD

NAME
ROLE OF WORKING CAPITAL IN TATA STEEL

LTD.

NAME

NAME
CURRENT ASSETS
Rs. In crores
YEARS Mar-18 Mar-17 Mar-16 Mar-15 Mar-14
CURRENT 34,643.9 20,110.40 14,421.49 11,849.1 11,564.60
ASSETS 1 7
INTERPRETATION:
Current assets of TATA STEEL in increasing year after year. TATA STEEL
has a lot of working capital blocked in the form of current assets. However, it
can be converted into cash easily whenever required.

NAME
CURRENT LIABILITIES
Rs. In crores
YEARS Mar-18 Mar-17 Mar-16 Mar-15 Mar-14
CURRENT 25,607.34 23,056.33 21,087.99 16,623.79 18,881.78
LIABILITIE
S
INTERPRETATION:
Current Liabilities of TATA STEEL in not stable and is fluctuating year after
year. There is a marginal Increase in current liabilities as compared to last year.
TATA STEEL should make more efforts to reduce the same to some extent so
that current ratio may be improved.

NAME
WORKING CAPITAL
YEARS 18-Mar 17-Mar 16-Mar 15-Mar 14-Mar
CURRENT 34,643.91 20,110.40 14,421.49 11,849.17 11,564.60
ASSETS
CURRENT 25,607.34 23,056.33 21,087.99 16,623.79 18,881.78
LIABILITIE
S
WORKING 9,036.57 -2,945.93 -6,666.50 -4,774.62 -7,317.18
CAPITAL
INTERPRETATION:
A positive result means the company has enough current assets and money left
over after paying its current liabilities. A negative result means the company
does not have enough current assets to pay its current liabilities, which means it
may need additional funds.
As we can see from the above calculations, Tata Steel was having negative
working capital for last few years which was not a good sign for a big

NAME
organization like Tata but last year the story was totally different. It was having
positive working capital with a good margin but this trend should continue for
upcoming years to be strong in long run.

NAME
OBJECTIVES,
Limitations &
CONCLUSION

NAME
OBJECTIVES
Every business whether big, medium or small, needs finance to carry on its
operations and to achieve its target. In fact, finance is so indispensable today
that it’s rightly said to be the lifeblood of an enterprise. Without adequate
finance, no enterprise can possibly accomplish its objectives.
The term working capital refers to that part of firm’s capital which is required
for financing short term or current assets such as cash, marketable securities,
debtors and inventories funds invested in current assets keep revolving fast and
are being constantly converted in to cash and this cash flows out again in
exchange for other current assets.
With this primary objective of the study, the following further objectives are
framed for a depth analysis.
1. To study the working capital management of TATA STEEL Pvt. Ltd.
2. To study the optimum level of current assets and current liabilities of
the company.
3. To study the liquidity position through various working capital related
ratios.
4. To study the working capital components such as receivables
accounts, cash management, Inventory position.
5. To study the way and means of working capital finance of the TATA
STEEL Pvt. Ltd.
6. To estimate the working capital requirement of TATA STEEL Pvt.
Ltd.
7. To study the operating and cash cycle of the company.

NAME
Limitations
 In view of the limited time available for the study, only the working
capital management process could be studied.
 Merely asking questions and recording answers may not always elicit the
actual information sought.
 Due to continuous change in environment, what is relevant today may be
irrelevant tomorrow.

NAME
Conclusion
Working capital management is important aspect of financial management. The
study of working capital management of TATA STEEL Pvt. Ltd. has revealed
that the current ratio was as per the standard industrial practice but the liquidity
position of the company showed an increasing trend. The study has been
conducted on working capital ratio analysis, working capital leverage, working
capital components which helped the company to manage its working capital
efficiency and affectively.
 Working capital of the company was increasing and showing positive
Working capital per year. It shows good liquidity position.
 Positive working capital indicates that company has the ability of
payments of short terms liabilities.
 Working capital increased because of increment in the current assets is
more than increase in the current liabilities.
 Company’s current assets were always more than requirement it affect on
profitability of the company.
 Current assets are more than current liabilities indicate that company used
long term funds for short term requirement, where long term funds are
most costly then short term funds.
 Current assets components shows sundry debtors were the major part in
current assets it shows that the inefficient receivables collection
management.

NAME
BIBLiOGRAPHY

NAME
Bibliography
 https://www.tatasteel.com/
 http://warmah.com/
 www.wiki.com
 www.svtuition.org
 www.wikipedia.org
 http://marketinvoice.com/
 http://www.bms.co.in/
 http://www.angelfire.com/ri2/rohitksingh/3.htm
 http://www.yourarticlelibrary.com

WC in Tata Steel

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A project report submitted in partial

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I hereby declare that this project entitled:

Place: Your name

Date: 03/05/2019 (Signature)

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Working capital management involves the relationship between a firm's short-

Working Capital Management is the process of planning and controlling the

Efficient management of working Capital is one of the pre-conditions for the

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While inadequate amount of working capital impairs the firm's liquidity,

Modern Financial management aims at reducing the level of current assets

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The Research Methodology followed for further work can be primarily

Exploratory study will be carried out by conducting:

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The knowledge of working capital management process is needed to document

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This is made possible by our commitment to a culture of continuous

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Tata Steel is currently the world’s second-most geographically diversified steel

Continuous improvement in our product and service portfolio, along with

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ABOUT TATA STEEL

THE CORE VALUES THAT DEFINE US

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CONCEPT OF WORKING CAPITAL

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According to Weston & Brigham

Mead Mallott & Field

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Gross Working Capital

This concept has the following advantages:-

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 Suggests the extent to which the WC needs may be financed by

It is a normal practice to maintain a current ratio of 2:1. Also, the quality of

Permanent / Fixed Working Capital

a) Initial working capital

b) Regular working capital

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Temporary / Fluctuating Working Capital

a) Seasonal Working Capital

b) Special Working Capital

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IMPORTANCE- WORKING CAPITAL

2. Goodwill: Sufficient amount of working capital enables a firm to make

4. Cash discounts: Adequate working capital also enables a concern to avail

5. Regular Supply of Raw Material: Sufficient working capital ensures

6. Regular payment of salaries, wages and other day to day commitments:

7. Exploitation of favorable market conditions: If a firm is having adequate

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9. Quick and regular return on investments: Sufficient working capital

10. High morale: Adequate working capital brings an environment of

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ADEQUACY & INADEQUACY OF WORKING