Sri Working Capital FINAL

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Introduction of Finance:
Finance is one of the major elements. Which activities the overall growth of the economy, Finance is regard as the lifeblood of a business enterprise This is because in the modem money-oriented economy finance is one the basic foundations of all kinds of economic activities. It is the master key which provides the access to all the sources for being employed in manufacturing and merchandising activities. It has rightly been said that business needs money to take more money. How ever it is also prove that so money will get more money. Only when it is properly managed. Hence efficient management of every business enterprises is closely linked with efficient management of finance.

Meaning of Finance:
Finance is the main business activity, which are concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of a business enterprise. Financial system calls for the effective performance of financial institution, financial Instruments and financial market.

Financial Management:
The Management makes use of various financial techniques device etc. for administrating the financial assets of the firm the most effective way. Financial management therefore means the entire games of management efforts divided to the management of finance, with its sources and services of the enterprise.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

WORKING CAPITAL
Capital required for a business can be classified under two main categories via, 1) 2) Fixed Capital Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part of firm’s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the purchase of raw material, payment of wages and other day – to- day expenses etc. These funds are known as working capital. In simple words, working capital refers to that part of the firm’s capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital. Working capital is commonly defined in accounting and financial analysis as net current assets consisting of inventories, including goods, net receivables, marketable securities, Bank balances and cash in hand.

DEFINITION OF WORKING CAPTIAL:
According to MY Khan and P.K Jain “Working capital refers to manage the firm current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. According to the Shubin “working capital is an amount of fun is necessary to cover the cost of operating the enterprise”. EAST POINT COLLEGE OF HIGHER EDUCATION -2-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Working capital management is concerned with the problems is that arise in attempting to manage the current assets and the current liabilities and their inter relationship they arise between them. Current assets refer to those assets which to ordinary course of business can be or will be turned into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. The major current assets are cash marketable securities accounts receivable and their inception to be paid in the ordinary course of business within a year out of Current Assets or earnings of the concern. The basic Current Liabilities are Bill payables, Bank Overdrafts and Outstanding expenses. The goal of working capital managements is to manage the firms Current Assets. And Current Liabilities in such a way that a satisfactory level of working capital is maintained. Thus the current assets should be large enough to cover its current Liabilities in order to ensure a reasonable margin of safety. Each of the current assts must be efficiently in order to maintain the liquidity of the short term be managed efficiently in order to maintain the liquidity of the short term sources of financing must be continuously managed to ensure that they are obtained and used in a best possible way. Therefore interaction between current assets and current liabilities in the main theme of working capital Management. The current assets should be large enough to cover is current liabilities in order to ensure a reasonable margin of safety. The interaction between current assets and current liabilities in therefore the main theme of the threat of working capital management.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital:Balance sheet concept Operating cycle or Circular flow Concept. On the basis of balance sheet Working capital may be classified in two ways: ON THE BASIS OF CONCEPT. ON THE BASIS OF TIME.

WORKING CAPITAL

ON THE BASIS OF CONCEPT

ON THE BASIS OF TIME

GROSS WORKING CAPITAL

PERMANENT WORKING CAPITAL

&
NET WORKING CAPITAL

&
TEMPRORY WORKING CAPITAL

Gross working capital also referred to as working capital means the firm’s investment in current assets.i.e TOTAL OF CURRENT

ASSETS
Net working capital refers to the difference between current assets and current liabilities. i.e. CURRENT ASSETS CURRENT LIABILITIES

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

CURRENT ASSETS:
Current assets are those assets which in the ordinary course of business can be converted into cash or held in the business for the short time only.

Constituents of Current Assets:STOCK OF RAW MATERIAL WORK IN PROGRESS FINISHED GOODS TRADE DEBOTRS PREPAYMENTS CASH BALANCES

CURRENT LIABILITIES:
Current Liabilities refers to short term debts of the business. It is money owned by a business which will need to be repaid within the next 12 months.

Constituents of Current Liabilities:TRADE CREDITORS SHORT TERM LOANS BANK OVERDRAFTS DIVIDEND DUE FOR PAYMENT TAX DUE TO PAY WITHIN THE NEXT 12 MONTHS.

On the basis of time concept
Working capital can be classified as gross working capital and net working capital. On the basis of time, working capital may be classified as: a. Permanent or fixed working capital.

b. Temporary or variable working capital

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Permanent or 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. Temporary or Variable Working Capital Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal need of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing for conducting research, etc. Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

In Fig. 1, permanent working capital is stable of fixed over time while the temporary or variable working capital fluctuates. In fig.2, permanent working capital is also increasing with the passage of time due to expansion of business but even then it does not fluctuate as variable working capital which sometimes increases and sometimes decreases.

Operating cycle or Circular Flow Concept
The circular flow concept of working capital is based upon this operating or working capital cycle or a firm. The cycle starts with the purchase of raw materials and other resources and ends with the realization of cash from the sale of finished goods. It involves purchase of raw material and stores its conversion into stock of finished goods through work-in-progress with progressive increasment of labor and service costs, conversion of finished stock into sales debtors and receivables and ultimately realization of cash and this cycle continues again form cash to purchase of raw material and so on. The time duration required to complete one cycle determines the requirements of working capital longer the period of cycle, larger is the requirements of working capital.

Receivable conversion period (RCP) Cash received form Debtors and paid to suppliers Of raw materials

Raw material storage conversion period (RMSCP)

Sales of finished Goods Finished Goods Produced Finished goods conversion Period (FGCP)

Raw materials introduced into process

Work in process Conversion period (WIPCP)

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Chart Showing Operating Cycle

The Need of Working Capital:
Working capital is needed for the following purposes: 1. 3. 4. 5. For the purpose of raw material, components and spares. To incur day-to-day expenses and overload costs such as office expenses. To meet the selling costs as packing, advertising, etc. To provide credit facilities to the customer. and finished stock. FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS 1. NATURE OF BUSINESS: The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments. 2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of working capital. 3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating inventories it will require higher working capital. EAST POINT COLLEGE OF HIGHER EDUCATION -8-

2. To pay wages and salaries

6. To maintain the inventories of the raw material, work-in-progress, stores and spares

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progressive increment of labor and service costs before the final product is obtained. So working capital is directly proportional to the length of the manufacturing process. 5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger working capital than in slack season. 6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital. 7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover wuill needs lower amt. of working capital as compared to a firm having a low rate of turnover. 8. CREDIT POLICY: A concern that purchases its requirements on credit and sales its product / services on cash requires lesser amt. of working capital and vice-versa. 9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital. 10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large amt. of working capital.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend. 12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital requirements. Generally rise in prices leads to increase in working capital. Others FACTORS: These are: ü ü ü ü ü ü ü Operating efficiency. Management ability. Irregularities of supply. Import policy. Asset structure. Importance of labor. Banking facilities, etc.

SOURCE OF WORKING CAPITAL The company can choose to finance its current assets by • Long term sources • Short term sources • A combination of them. Long term sources of permanent working capital include equity and preference shares, retained earning, debentures and other long term debts from public deposits and financial institution. The long term working capital needs should meet through long term EAST POINT COLLEGE OF HIGHER EDUCATION -10-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

means of financing. Financing through long term means provides stability, reduces risk or payment. And increases liquidity of the business concern. Various types of long term sources of working capital are summarized as follow

1. Issue of shares It is the primary and most important sources of regular or permanent working capital . issuing equity shares as it does not create and burden on the income of the concern. Nor the concern is obliged to refund capital should preferably raise permanent working capital. 2. Retained earnings Retain earning accumulated profits are a permanent sources of regular working capital. It is regular and cheapest. It creates not charge on future profits of the enterprises. 3. Issue of debentures It crates a fixed charge on future earnings of the company. company is obliged to pay interest . management should make wise choice in procuring funds by issue of debentures. 4. Long term debt Company can raise fund from accepting public deposits, debts from financial institutution like banks, corporations etc. the cost is higher than the other financial tools. Other sources sale of idle fixed assets , securities received from employees and customers are examples of other sources of finance. 5. Short term sources of temporary working capital Temporary working capital is required to meet the day to day business expenditures. The variable working capital would finance from short term sources of funds. And only the period needed . it has the benefits of ,low cost and establishes closer relationships with banker. Some sources of temporary working capital are given below; EAST POINT COLLEGE OF HIGHER EDUCATION -11-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

1. Commercial bank A commercial bank constitutes a significant sources for short term or temporary working capital . this will be in the form of short term loans, cash credit, and overdraft and though discounting the bills of exchanges. 2. Public deposits most of the companies in recent years depends on this sources to meet their short term working capital requirements ranging fro six month to three years. 3.Various credits trade credit, business credit papers and customer credit are other sources of short term working capital. Credit from suppliers, advances from customers, bills of exchanges, promissnotes, etc helps to raise temporary working capital 4. Reserves and other funds various funds of the company like depreciation fund. Provision for tax and other provisions kept with the company can be used as temporary working capital. The company should meet its working capital needs through both long term and short term funds. It will be appropriate to meet at least 2/3 of the permanent working capital equipments form long term sources, whereas the variables working capital should be financed from short term sources. The working capital financing mix should be designed in such a way that the overall cost of working capital is the lowest, and the funds are available on time and for the period they are really required. SOURCES OF ADDITIONAL WORKING CAPITAL Sources of additional working capital include the following • • • Existing cash reserves Profits(when you secure it as cash) payables(credit from suppliers)

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

• • •

new equity or loans from shareholder bank overdrafts line of credit long term loans

ADEQUATE WORKING CAPITAL As I stated about keeping adequate working capital is the mantas towards the success of financial management. The term adequate working capital refuters to the amount of working capital to be kept with the organization to met its daily operations. Large investment in fixed assets not sufficient to run a business successfully. Adequate working capital is equally important. Without working capita fixed assets are like a gun, which cannot shoot, as there are no cartridges. It is said that “inadequate working capital is a disastrous: where as redundant working capital is a criminal waste.” It is clear that the company can’t invest all its funds in current assets to increase working capital. At the same time it requires to keep sufficient funds with it. So a proper leverage between both ends is needed to assure proper running of the business. It needs to keep adequate working capital with it. Neither less nor more than needed. ADAVANTAGES OF ADEQUATE WORKING CAPITAL Adequate working capital provides certain benefits to the company they are: 1. Increase in debt capacity and goodwill; Adequate working capital represents the financial soundness of the company. If one company is financially sound it would be able to pay its creditors timely and properly. It will increase companies goodwill. It crests confidence among investors and creditors. Thus a firm with adequate working capital can raise requisite funds from market , borrow short term credit form banks, and purchases inventories of raw material etc., for the smooth operations of its business. EAST POINT COLLEGE OF HIGHER EDUCATION -13-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

2. Increase in production inefficiency With adequate working capital the firm can smoothly carryout research and development actives and thus adds to it production efficiency.

3. Exploitation of favorable opportunities: In the presence of adequate working capital , a company can avail the benefits of favorable opportunities. Adequate working capital will help the company to have bulk purchases, seasonal storage of raw material etc., which would reduce the cost of production, thus adds to its profit. 4. Meeting contingencies adverse changes: A company can easily face certain business and economic crises a company having adequate working capital can successfully meet contingencies such as business oscillations, financial crisis arising from heavy losses etc., 5. Available cash discount: Maintenance of adequate working capital enables a company to avail the advantage of cash discount by making cash payment for to the suppliers of raw materials and merchandise. Obviously it will reduce the cost of production and increase the profit of the company. 7. Solvency and efficiency fixed assets: It helps to maintain the solvency of the company. So that payments could be made in time as and when they fall due. Like wise, adequate working capital also increases the efficiency for fixed assets insofar as their proper maintenance depends upon the availability of funds. 8. Attractive dividend to shareholders:

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

It enables the company to offer attractive dividend to the shareholders so that sense of security and confidence will increase among them . it also increases the market values of its shares.

DANGERS OF INADEQUATE WORKING CAPITAL Having inadequate working capital les to so many of dangers as it doesn’t fulfill its purpose. Some are given below: 1. Loss of goodwill and creditworthiness: As the firm fails to on or its current liabilities it loses it goodwill and creditworthiness among its creditors. Consequently, the firm finds it difficult to procure the requisite funds for its business operations on easy terms, which ultimately results in reduced profitability as well as production interruption. 2. Firm can’t make use of favorable opportunities: The firm fails to undertake the profitable projects, which not only prevent the fir from availing the benefits of favorable opportunities but also stagnate its growth. 3. Adverse effects of credit opportunities: The firm also fails to avail the attractive credit opportunities but also stagnate its growth 4. Operational inefficiencies: In leads the company to operating inefficiencies, as day to day commitments cannot be met. 5. Effects on financial capacity:

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Inadequacy of working capital also weakness the shock absorbing capacity of the firm because it cannot meet the contingencies arising form business oscillations, financial losses, due to shortage of working capital. 6. Non achievement of profit target: The firm cannot implement operational plans due to unavailability of fund. Which will lead to non achievement of profit margin.

7. Low rate of return on capital: Excessive or redundant working capital implies the presence of idle funds that earn no profit to the firm. So it cannot earn a proper rate of return on its total investments, whereas profits are distributed on its total investment, whereas profits are distributed on the whole of its capital. 8. Decline in capital and efficiency: Since the rate of return on capital is low the company tempts to make some adjustment to inflate profit to increase the dividend. Some times these unearned dividend paid out of the company’s capital to keep up the show of prosperity by window dressing of accounts. Certain provision, such as provision for deprecation , repairs and renewals are into made. This leads to decline in operating efficiency of the firm. 9. Loss of goodwill and confidence: Lower rate of return leads to lower dividend available to share holder. This leads to down fall in market value of the company’s share and markets the shareholder lose their confident in company. It is evident form the foregoing discussion that a company must have adequate working capital pursuant to its requirements. It should neither be excessive not inadequate. Both situation are dangerous. While inadequate working capital adversely affects the business operations and profitability . excessive working capital remains idle and earns EAST POINT COLLEGE OF HIGHER EDUCATION -16-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

no profits for the company. So company must assure its working capital is adequate for its operations.

Management of Working Capital Management of working capital is concerned with the problem that arises in attempting to manage the current assets, current liabilities. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as both the situations are bad for any firm. There should be no shortage of funds and also no working capital should be ideal. Working Capital Management Polices of a firm has a great on its probability, liquidity and structural health of the organization. So working capital management is three dimensional in nature as 1. It concerned with the formulation of policies with regard to profitability, liquidity and risk. 2. It is concerned with the decision about the composition and level of current assets. 3. It is concerned with the decision about the composition and level of current liabilities. Sources of Working Capital Among the various available for financing working capital needs, a finance manager has to select the best suitable source depending on the working capital needs of the company. Permanent of fixed sources: 1. Issue of shares 2. Issue of debenture EAST POINT COLLEGE OF HIGHER EDUCATION -17-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

3. Public deposits 4. Ploughing back of profits 5. Loans from financial institutions Financing of temporary, variable, or short term working capital The main source of short term working capital is as follows: 1. Indigenous bankers 2. Trade credit 3. Installment credit 4. Advances 5. Accounts receivables credit or factoring 6. Accrued expenses 7. Deferred incomes 8. Commercial paper 9. Commercial banks Working capital Management can be classified into: 1. Cash Management 2. Receivables Management 3. Inventory Management Chart showing Classification of Working Capital Management

Working Capital Management

Cash Management

Receivables Management

Inventory Management

Management of cash:
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Introduction:
Cash is one of the current assets of a business; it is needed at all times to keep the business going. A business concern should always keep sufficient cash for meeting its obligations. Any shortage of cash will hamper the operations of a concern and any excess of it will be unproductive. Cash is the most unproductive of all the assets. While fixed assets like machinery, plant, etc and current assets such as inventory will help the business in increasing its earning capacity, cash in hand will not ad anything to the concern. It is in this context that cash management has assumed much importance.

Motives for holding cash:
1. Transaction motive: the transaction needs of cash can be anticipated because the

expected payments in near future can be estimated. The receipts in future may also be anticipated but the things do not happen as desired. If more cash is needed for payments than receipts, it may be raised through bank overdraft. On the other hand if there are more cash receipts than payments, it may be spent on marketable securities. The maturity of securities may be adjusted to the payments in future such as interest payment, dividend payment, etc
2. Precautionary motive: a firm should keep some cash for contingencies which would

arise or it should be in position to raise finances at a short period. The cash maintained for contingency needs is not productive or it remains ideal. However such cash may be invested in short period or low risk marketable securities which may provide cash as and when necessary.
3. Speculative motive: the speculative motive relates to holding of cash for investing in

profitable opportunities as and when they arise. Such opportunities do not come in a regular manner. These opportunities cannot be scientifically predicted but only conjectures can be made about their occurrence. Cash management needs strategies to deal with various faces of cash. Following are some of its facets: 1. Cash planning: cash planning is a technique to plan and control the use of cash. A projected cash follow statement may be prepared, based on the present business operations EAST POINT COLLEGE OF HIGHER EDUCATION -19-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

and anticipated future activities. The cash inflows from various sources may be anticipated and cash outflows will determine the possible uses of cash. 2. Cash forecasts and budgeting: a cash budget is the most important device for the control of receipts and payments of cash. A cash budget is an estimate of cash receipts and disbursements during a future period of time. It is an analysis of flow of cash in a business over a future, short or long period of time. The short term forecasts can be made with the help of cash flow projections. The finance manager will make estimates of likely receipts in the near future and the expected disbursements in that period. The long term cash forecasts are also essential for proper cash planning. These estimates may be for three, four, five or more years. Long term forecasts indicate company’s future financial needs for working capital. Capital projects, etc

Managing cash flows:
After estimating the cash flows, efforts should be made to adhere to the estimates of receipts and payments of cash. Cash management will be successful only if cash collections are accelerated and cash disbursements, as far as possible are delayed. The following methods of cash management will help:

Methods of accelerating cash inflow
1. Prompt payment by customers 2. Quick conversion of payment into cash 3. Decentralized collections 4. Lock box system.

Methods of slowing cash outflows
1. Paying on last date 2. Payment through drafts 3. Adjusting payroll funds 4. Centralization of payments 5. Interbank transfer These methods help the company to have a proper cash management and able to meet day to day expenses.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Receivables management:
Receivables represents amount owed to the firm as a result of sale of goods or services in the ordinary course of business. These are claims of the firm against its customers and form part of its current assets. The receivables are carried for the customers. The period of credit and extent of receivables depends upon the credit policy followed by the firm. The purpose of maintaining or investing in receivables is to meet competition and to increase the sales and profits.

Dimensions of Receivables Management:
1. Forming of credit policy 2. Executing the credit policy 3. Formulating and executing collection policy
1. Forming of credit policy: for efficient management of receivables, a concern must

adopt a credit policy. A credit policy is related to decisions such as credit standards, length of credit period, cash discount and discount period etc.
2. Executing credit policy: after formulating the credit policy, its proper execution is

very important. The evaluation of credit applications and finding out the credit worthiness of customers should be undertaken that is by collecting credit information, credit analysis, credit analysis, credit decision, financing investments in receivables and factoring.
3. Formulating and executing collection policy: the collection of amounts due to the

customers is very important. The concern should devise procedures to be followed when accounts become due after the expiry of credit period. The collection policy may be termed as strict and lenient. The collection policy should also devise the steps to be followed in collecting overdue amounts. The objective is to collect the dues and not to annoy the customer. The steps should be like sending reminder for payments, personal request through telephone, personal visits to the customers, taking help of collecting agencies and taking legal action.

Inventory Management
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Every enterprise needs inventory for smooth running of its activities. It serves as a link between production and distribution processes. There is generally, a time lag between the recognition of a need and its fulfillment. The greater the time lag, the higher the requirements for inventory. The unforeseen fluctuations in demand and supply of goods also necessitate the need for inventory. It also provides a cushion for future price fluctuations. The investment in inventories constitutes the most significant part of current assets or working capital in most of the undertakings. Thus it is very essential to have proper control and management of inventories. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories.

Objectives of Inventory Management
1. To ensure continuous supply of materials, spares and finished goods so that production should not suffer at any time and the customers demand should also be met. 2. To avoid both over stocking and under stocking of inventory 3. To maintain investments in inventories at the optimum level as required by the operational and sales activities 4. To keep material cost under control so that they contribute in reducing cost of production and overall costs 5. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases.

Tools and Techniques of Inventory Management:
Effective inventory management requires an effective control system, for inventories. A proper inventory control not only helps in solving the acute problem of liquidity but also increases profits and causes substantial reduction in the working capital of the concern. The following are the important tools and techniques of inventory management and control: 1. Determination of stock levels. 2. Determination of safety stocks EAST POINT COLLEGE OF HIGHER EDUCATION -22-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

3. Selecting a proper system of ordering for inventory 4. Determination of economic order quantity 5. ABC analysis 6. VED analysis 7. Inventory turnover ratio 8. Aging schedule of inventories 9. Preparation of inventory reports 10. Lead time 11. Perpetual inventory system 12. Just In time control system

Conclusions
As working capital management is very important in each and every business. It helps to understand different concepts involved in it and various tools and techniques to analyze the liquidity positions of each firm. It gives a basic idea of working capital cycle as cash is converted to raw materials, raw materials to work in progress, working in progress to finished goods, finished goods into sales, sales to debtors and again debtors to cash. It also helps to analyze whether the investments should be of short term or long term investments also.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Research Design
Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep its workforce and ensure its supplies. Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long-term as well. Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities as they fall due. Therefore, when businesses make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building, etc, but must also take account of the additional current assets that are usually involved with any expansion of activity.

Title of the study
“Effectiveness of Working Capital Management with special reference to MACOLAM Engineering Private Limited”

Statement of Problem
The efficient management of Working Capital is one of the important factors for the success of any organization. Management of Working Capital is one of the important areas EAST POINT COLLEGE OF HIGHER EDUCATION -24-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

with regards to management of cost. Increase in working capital of the business increases the profits. A systematic forecasting of working capital needs and proper management of each of the components of working capital will be extremely beneficial for any company in realizing the organization goals. Therefore there is a need to study the management of working capital in an industry.

Scope of the Study
This study tries to cover all aspects of working capital management in MECOLAM. It studies the important areas to establish a better control over all the components of working capital in an industry. This study also tries to identify optimum working capital requirements for MECOLAM and various sources available for financing working capital in general.

Objective of the study
1. To understand working capital management. 2. To analyze the various items involved in working capital management. 3. To understand the trends exhibited by working capital over the period under the study. 4. To evaluate the working capital position of the company using the tool of ratio analysis
5. To suggest the ways and means to improve the management of working capital at

MECOLAM

Methodology of the study

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

The methodology that has been adopted while collecting the information and interpretation in a meaningful way has been to collect information both from primary and secondary sources:

Tools of data collection
Data had been collected from two sources one from report published by MECOLAM and information has been collected from the executives &library of MECOLAM. The data was processed according to the requirement of the study. They are presented in the form of tables and graphs, where necessary percentages are drawn to generalize the finding, interpretations is done through ratios based upon the analysis inferences are drawn and conclusion made. .

Research design:
The quality of the project work depends on the methodology adopted for the study. Methodology in turn depends on the nature of the project work. The use of proper methodology is an essential part of any research. In order to conduct the study scientifically suitable methods and measures are to be followed. Methodology is nothing but a plan or a strategy of the investigation process that sets out to obtain solution to the study.

RESEARCH TYPE Descriptive research;
Descriptive research is study of existing facts to come to a conclusion. This research is carried out to analyze the past performance of the Mecolam Eng pvt Ltd. A research is a method of and procedure for acquiring information needed to solve the problem. A research design is the basis plan that helps in the data collection or analysis; it specifies the type of information to be collected sources and data collection procedure.

Data sources: The data sources can be classified in to two categories:
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

• Primary data • Secondary data

PRIMARY DATA: The data directly collected by the researcher with respect to the
problem under study, is known as Primary data. Primary data is also the first hand data collected by the researcher for the immediate purpose of the study.

Sources of primary data: Having discussion with different department managers and
officers of the company to get general information about the company and its activities.

SECONDARY DATA:
Secondary data are statistics that already exist. They have been gathered not for immediate use. This may be described as “those data that have been compiled by some agency other than the users”.

Sources of secondary data:
• • • • • Annual report Company manuals Text books News papers Internal sources

Limitations of the study
1. The secondary data collected was only for 5 years. 2. Analysis of data is made of the assumption that information so obtained is correct.

Operational definitions and concepts

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Working capital: The term Working Capital refers to the short-term funds required for financing the duration of the operating cycle in a business, Gross working capital: Gross Working Capital is the firm’s investment in current assets. Net working capital: Net Working Capital is the difference between current assets and current liabilities. Current Assets: Current Assets are those assets which are easily converted into cash within a normal accounting period or within the operating cycle. Current liability: Current Liabilities are those liabilities which are easily converted into cash for the specific normal accounting period or within operating cycle for the disposal of current asset or for the reconstruction of current liability. Inventory: Inventory includes stock of raw materials, spares and store, work in progress and finished goods. Receivable: Receivable is a component of the current asset representing the claims of a firm against customers as a result of credit sales also called debtors. Liquidity: It is the ability of a company to realize value in money. There are two dimensions of liquidity; they are; the time necessary to convert the assets into money and the degree of certainty associated with the conversion ratio or price realized for the asset.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

COMPANY OVERVIEW
Mecolam Engineering Pvt Ltd is a Bangalore based AS9100B (including ISO 9001-2000) certified company with DGQA & DGAQA registration. It has grown since 1982 into a well established company with capabilities in diversified technologies. Currently Mecolam is satisfying the needs of institutional customers in Defence & Non-defence areas. For defence segment Mecolam can source all ttheir requirements. For non-defence segment it provides solutions in Fiberglass, rubber moulded and fabricated component out of insulating material. Mecolam has state of the art facilities with dedicated employees and professionals striving to produce good quality products and services to our customers on time every time. QUALITY ASSURANCE To ensure the quality of products, the company follows a standard quality control system and maintains strict vigil throughout the production process. The company has promptly inspected of the quality of raw materials used at our manufacturing unit. Further the finished products are again scrutinized by our quality control inspection to prevent any sub standard product to reach the hands of the customer. In addition to it the company takes

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

pride to acquire with the fact that the companies have not received any complaints from the customers. TEAM The company thrives on the mutual efforts of highly committed team of engineers technicians, quality, supervisors etc. they are matchless experts of their own fields who within the sincere efforts have modeled our company into and overdriving entity of the market. They have acquired sound knowledge and understanding of the industry and render their services accordingly. CUSTOMERBASE: Due to the fact that quality is tradition at company and to show the tradition, the company having professional companionship of the country’s renowned companies like that of BHEL, TATA, BIRLA etc.and many more.

PRODUCTS RANGE The Company manufacturing and offering wide range of material handling conveyors & subsystem manufacturing from high quality material, the range is known for its high operational efficiency and long lasting functional services. The company products can be classified in two types they are.

 Defense Products  Fiberglass Products
The range has wide application area that includes fertilizers, food processing, automobiles, flow mills, Defense Products. Distillates and many more fields. Beside designing & manufacturing the company has also offering services relating to installations commissioning as per client requirements. Hence described earlier the following products are in the usual manufacturing range:

Defense Products
o

Composites

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

o o o o o o o o o o o o o o o o o o o o o o o

Sheet metal components Machined components Electronic parts Rubber molded parts Pressed components Injection molded parts Rubber to metal molded parts Aircraft wheel chocks Aircraft sound proofing panels and bags Hydraulic jacks Pistons Cockpit ladders Fluid replenishing Dynamometers RADOMEs for MIG 29 Aircraft Aircraft engine air intake blanking covers Washers Blanks Tab washers Clip retaining Gaskets Mechanism plates Latches etc.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Fiberglass Products EAST POINT COLLEGE OF HIGHER EDUCATION -32-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Compared with other engineering materials, fiberglass is light but tough on weight to weight basis. Production of complex profiles is possible. Bulk production of any fiberglass products can be taken up. Mecolam has facilities for Resin Transfer Moulding Technology (RTM).
o o o o o o o o o o o o o o

RADOMEs Bonnets Bumpers Grilles Fenders Snack trays Wind deflectors Body panels Doors Seats Linings Bath tub Machine guards and covers Medical equipment covers

Data Analysis
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Introduction:
The term Financial Analysis and Interpretation refers to the process the process of determining financial strengths and weaknesses of the firm by establishing a strategic relationship between the components of financial statements and other operating data. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and soundness of a firm. Financial analysis means simplifications of financial data by methodical classification of data given in the financial statements. Interpretation means explaining the meaning of and significance of data so simplified. The analysis and interpretation of financial statements is used to determine the financial position and results of operations as well. Following are the common devices used to analyze the data. They are Ratio Analysis and Trend Analysis

Ratio analysis:
The ratio analysis is one of the most powerful tools of financial analysis. It is the process of establishing and interpreting various ratios (quantitative relationship between figures and groups of figures). It is with the help of ratios that the financial statements can be analyzed more clearly and decisions made from such analysis.

Significance or Importance of ratio analysis:
1. It helps in evaluating the firm’s performance: With the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health, profitability and operational efficiency of the undertaking. Ratio points out the operating efficiency of the firm i.e. whether the management has utilized the firm’s assets correctly, to increase the investor’s wealth. It ensures a fair return to its owners and secures optimum utilization of firms assets

2. It helps in inter-firm comparison: Ratio analysis helps in inter-firm comparison by

providing necessary data. An inter firm comparison indicates relative position. It provides the relevant data for the comparison of the performance of different departments. If comparison shows a variance, the possible reasons of variations may EAST POINT COLLEGE OF HIGHER EDUCATION -34-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

be identified and if results are negative, the action may be initiated immediately to bring them in line.

3. It simplifies financial statement: The information given in the basic financial statements serves no useful purpose unless it s interrupted and analyzed in some comparable terms. The ratio analysis is one of the tools in the hands of those who want to know something more from the financial statements in the simplified manner

4. It helps in determining the financial position of the concern: Ratio analysis facilitates the management to know whether the firm’s financial position is improving or deteriorating or is constant over the years by setting a trend with the help of ratios The analysis with the help of ratio analysis can know the direction of the trend of strategic ratio may help the management in the task of planning, forecasting and controlling.

5. It is helpful in budgeting and forecasting: Accounting ratios provide a reliable data, which can be compared, studied and analyzed. These ratios provide sound footing for future prospectus. The ratios can also serve as a basis for preparing budgeting future line of action.

6. Liquidity position: With help of ratio analysis conclusions can be drawn regarding the Liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they become due. The ability to met short term liabilities is reflected in the liquidity ratio of a firm.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Limitations of Ratio Analysis
The ratio analysis is one of the most powerful tools of financial management. Though ratios are simplest calculate and easy to understand they suffer from some serious limitations: 1. Limited use of a single ratio: a single ratio usually does not convey much of a sense, to make a better interpretation a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any meaningful conclusion.

2. Lack of adequate standards: there are no well accepted standards or rules of thumb for all ratios which can be accepted as norms. It renders interpretation of the ratios difficult.

3. Inherent limitations of accounting: like financial statements, ratios also suffer from the inherent weakness of accounting records such as their historical nature ratios of the past are not necessarily true indicators of the firms.

4. Change of accounting procedure: Change in accounting procedure by a firm often makes ratio analysis misleading.

5. Window dressing: financial statements can easily be window dressed to present a better picture of its financial and profitability position to outsiders. Hence one has to be very careful in making a decision from ratios calculated from such financial statements.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

6. Uncomparable: not only industries differ in their nature but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading. Moreover, comparisons are made difficult due to differences in definitions of various financial terms used in the ratio analysis.

7. Price level changes: while making ratio analysis no consideration is made to the changes in price levels and this makes the interpretation of ratio invalid. 8. Ratios no substitutes: ratio analysis is merely a tool of financial statements. Hence ratios become useless if separated from the statements from which they are computed.

ANALYSIS OF WORKING CAPITAL MANAGEMENT
The chapter contains the analysis of working capital management. Working capital analysis is quite important for smooth running of the business. Here the working capital position is analyzed through the ratio analyze the working capital management the ratio is simple arithmetic expression of the relationship of the indication quotient of two mathematical expressions. In simple language, ratio can be worked out by dividing one number by another. Principles of working capital Concepts There are two concepts of working capital first is gross working capital and second one is net working capital. Gross working capital Gross working capital refers to the firm’s investment in current assets. Current assets are the assets which can be converted into cash within an accounting year and EAST POINT COLLEGE OF HIGHER EDUCATION -37-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

include cash, short-term securities, debtors, bills receivable and stock. Net working capital Net working capital refers to the difference between current assets and current liabilities are those claims of out sider which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses, networking capital can be positive or negative. A positive working capital will be when current assets exceed current liability. A negative working capital occurs when current liabilities are in excess of current assets. The gross working capital concept focuses attention on two aspects of current assets management: 1. 2. How to optimize investment in current assets? How should current asset be financed?

Excessive investment in current asset should be avoided because it impairs the firm’s profitability as the idle investment earns nothing on the other hand inadequate amount of working capital can threaten solvency of the firm because of its inability to meet its current obligation. The net working capital is a qualitative concept. It indicates the liquidity position if the firm and suggest the extent to which working capital needs may be financed by permanent source concept also covers the question of judicious mix of long term and short term funds for financing current asset. For every firm there is a minimum amount if nit working capital which is permanent. There fore a portion of the working capital should be financed with the permanent sources of funds such as equity share capital, debentures long term debt, preference shares capital and retain earning. Management must decide the extent to which current asset should be financed with equity capital and or borrowed capital. In summary it may be emphasized that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is no precise way to determine the exact amount of gross or nit working for any firms. The EAST POINT COLLEGE OF HIGHER EDUCATION -38-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

data and the problem of each company should be analyzed to determine the amount of working capital. Working capital management: Working capital management of an organization assumes greed significance in a competitive environment without a well planned working capital system, the operation of the organization is very difficult, the study of working capital of an institution is a use full tool for solving so many problems in that area. Working capital may be regarded as the life blood of a business. It is the capital required for meeting the day to day operations of the business. It should be adequate neither too lower too high. If an organization has too much working capital that what is actually needed. It represents block up of capital. If it is too low production activities will be held up. So working capital has greater significance in the life of business. Generally working capital is the difference between current asset and liabilities. Analysis of working capital position enables a firm to study, whether an organization can meet its short term obligations with its current assets or not in short it is the capital with which the business is worked over.

ROLE OF FINANCIAL MANAGER IN WORKING CAPITAL MANAGEMENT
1. Working capital management requires must of the finance manger time as it represent a large position of investment is assets. 2. Working capital management requires much of the finance management time as it represent larger position of investment in assets. 3. Action should be taken to curtail unnecessary investment in current assets. 4. All precautions should be taken for the effective and efficient management of working capital. EAST POINT COLLEGE OF HIGHER EDUCATION -39-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

5. Larger firms have to manage their current assets and current liabilities very carefully and should see that the work should be done properly in order to achieve predetermined organization goals.

6. The financial manger should pay special attention to the managements of current assets on continuing basis.

DATA ANALYSIS AND STASTICAL TOOLS 1.CURRENT RATIO Current ratio may be defined as the relationship between the current assets and current liabilities. This ratio is also known as working capital ratio. Is a measure of general liquidity and is most widely used to make the analysis so a short term financial analysis position or liquidity of a firm. Current ratio = Current assets Current liabilities TABLE – 1 CURRENT RATIO Year 2005 2006 2007 2008 Current assets 36847984 36153263 92809547 103181804 Current liabilities 35698448 27942343 78548588 79813859 Current ratio 1.03 1.29 1.18 1.29

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

2009

145296787

101441134

1.43

CHART – 1 CURRENT RATIO

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2005 2006 2007 2008 2009 1.03 1.29 1.18 1.29 1.43

Interpretation: The above table and graph shows that current ratio for the years 2005-2009 EAST POINT COLLEGE OF HIGHER EDUCATION -41-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

are 1.03, 1.29, 1.18, 1.29 and 1.43 respectively. This shows that there has been a proportionate increase in the current assets over current liability. By this we can interpret that the current ratio is moving towards satisfactory position.

2. LIQUID RATIO/ QUICK RATIO/ ACID TEST RATIO Quick assets are also known as acid test or liquid ratio is a more rigorous test of liquidity than the current ratio. The term “liquidity” refers to ability of a firm to pay its short-term obligation as and when they become due. Quick ratio may be defined as a relationship between the quick/liquid assets and current or liquid liability. Investment are prepaid expenses are not liquid assets. ACID TEST RATIO = LIQUID ASSETS CURRENT LIABILITIES

TABLE – 2 QUICK RATIOS Year liquid assets 2005 2006 2007 Liquid assets 105365 328194 766612 Current liabilities 35698448 27942343 78548588 Liquid ratio 0.0030 0.0118 0.0078

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

2008 2009

2132360 2161488

79813859 10144134

0.0267 0.0213

CHART -2 QUICK RATIOS

0.03 0.025 0.02 0.015 0.01 0.005 0 2005 2006 2007 2008 2009

Liquid ratio 0.003 0.0118 0.0078 0.0267 0.0213

Interpretation: EAST POINT COLLEGE OF HIGHER EDUCATION -43-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

The above table and graph shows that liquid ratio for the years 2005-2009 are 0.003, 0.011, 0.007, 0.026 and 0.028 respectively. This shows that there has been a proportionate increase in the liquid assets and liquid liabilities. By this we can interpret that the liquid ratio is partly moving towards satisfactory position. Generally it is a non satisfactory position.

3. INVENTORY TO WORKING CAPITAL RATIO Inventory to working capital ratio is the ratio is usually expressed as a percentage. This ratio indicates the proportion of the working capital is tied up in the inventories stocks.

Inventory to working capital ratio =

Inventory

Working capital TABLE – 3 INVENTORY TO WORKING CAPITAL RATIO Year 2005 2006 2007 Inventory 27631942 16588890 30200092 Working capital 1149536 8210920 14260959 Ratio 24.04 2.02 2.12

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

2008 2009

35030069 84476591

23367945 43855653

1.50 1.93

CHART – 3 INVENTORY TO WORKING CAPITAL RATIO

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

25

20

15

10

5

0 2005 2006 2007 2008 2009

Ratio 24.04 2.02 2.12 1.5 1.93

Interpretation: The above table and graph shows the ratio of inventory over working capital for the year 2005-2009. They are 24.04, 2.02, 2.12, 1.50 and 1.93 respectively. This shows that the company’s inventory has been increasing year by year except during the year 2003, where it has come down to 1,65,88,890, but the working capital has been gradually increased from 2005-2009. By this we can interpret that the inventory to working capital ratio in a better position.

4. CASH TURN OVER RATIO

CASH TURN OVER RATIO = NET ANNUAL SALES EAST POINT COLLEGE OF HIGHER EDUCATION -46-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

CASH TABLE – 4 CASH TURN OVER RATIO Year 2005 Net annual sales 48677738 105365 Cash Cash turn over ratio 854.64

2006

178725638

328194

2802.35

2007

148355173

766612

2232.38

2008

252906971

2132360

3786.88

2009

188641488

2161488

1846.64

CHART – 4 CASH TURN OVER RATIO

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

4000 3000 2000 1000 0 2005 2006 2007 2008 2009 Cash turn over ratio 854.64 2802.35 2232.38 3786.88 1846.64

Interpretation: From the above table and graph we can interpret that the cash resources of the enterprise are not effectively utilized because it is less than the standard or ideal cash turn over ratio i.e. less than 10%

5. WORKING CAPITAL TURN OVER RATIO EAST POINT COLLEGE OF HIGHER EDUCATION -48-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

This is also known as working capital leverage ratio. This ratio indicates whether the working capital has been efficiently utilized or not in making sales. It expresses the calculated as under:

Working capital turn over ratio = Net annual sales Working capital TABLE – 5 WORKING CAPITAL TURN OVER RATIO Year Net annual sales 2005 2006 2007 2008 2009 48677738 178725638 148355173 252906971 188641488 Working capital 1149536 8210920 14260959 23367945 43855653 Working capital turnover ratio 42.35 21.77 10.40 10.82 4.30

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

CHART – 5 WORKING CAPITAL TURN OVER RATIO

50 40 30 20 10 0 Working capital turnover ratio 42.35 21.77 10.4 10.82 4.3

2005 2006 2007 2008 2009

Interpretation: The ratio indicates the efficient or inefficient utilization of the working capital of the company. Higher the ratio, lower the investment in working capital and the greater are the profit. Lower the ratio, it would be other way. From the above table and graph we can interpret that there is an inefficiency of the management in the utilization of working capital. Since there in a gradual decrease in the working capital turn over ratio of the company from 2005-2009. I.e. in form 42.35 to 4.30.

6. INVENTORY TURN OVER RATIO EAST POINT COLLEGE OF HIGHER EDUCATION -50-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

This ratio establishes the relationship between the cost of goods sold or sales during a given period and the average amount of stock carried during the period. Inventory turn over ratio = Sales Average stock

TABLE – 6 INVENTORY TURN OVER RATIO Year 2005 2006 2007 2008 2009 Inventory turn over ratio 7.38 8.08 6.34 7.75 3.16

CHART – 6 INVENTORY TURN OVER RATIO EAST POINT COLLEGE OF HIGHER EDUCATION -51-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

10 8 6 4 2 0 2005 2006 2007 2008 2009 Inventory turn over ratio 7.38 8.08 6.34 7.75 3.16

Interpretation: From the above table and graph we can analyzes that the inventory that the inventory turnover ratio is very less compared to that of previous years. By this we can interpret that the company’s sales from its stock is very less which indicates a non-satisfactory position.

7. DEBTORS TURN OVER RATIO

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

It indicates the number of times average debtors (receivables) are turned over during a year. It is a ratio between Net Sales and Average debtors. It indicates the efficiency of credit management. Higher the debtors’ turnover ratio higher will be the efficiency. Debtors turn over ratio = Total sales Debtors TABLE – 7 DEBTORS TURN OVER RATIO Year 2005 Sales 48677738 Debtors 6033662 Debtors turn over ratio 8.068

2006

178725638

7829764

22.83

2007

148355173

32934250

4.50

2008

252906971

48077941

5.26

2009

188641488

39315856

4.80

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

CHART – 7 DEBTORS TURN OVER RATIO

25 20 15 10 5 0 2005 2006 2007 2008 2009 Debtors turn over ratio 8.068 22.83 4.5 5.26 4.8

Interpretation: From the above table and graph we can interpret that the debts utilized by the company because the number of times the debt has been collected by the company in decreasing, i.e. in 2006 it was 22.83 times and goes on decreasing to 4.5, 5.26 where as in 2009 it was only 4.80 times.

8. DEBTORS TO CURRENT ASSETS RATIO EAST POINT COLLEGE OF HIGHER EDUCATION -54-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Debtors to current assets ratio =

Debtors Current assets

X 100

TABLE – 8 DEBTORS TO CURRENT ASSETS RATIO Year 2005 Debtors 6033662 Current assets 36847984 Percentage 16.37

2006

7829764

36153263

21.66

2007

32934250

92809547

35.49

2008

48077941

103181804

46.60

2009

39315856

145296787

27.06

CHART- 8 DEBTORS TO CURRENT ASSETS EAST POINT COLLEGE OF HIGHER EDUCATION -55-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

50 40 30 20 10 0 2005 2006 2007 2008 2009 Percentage 16.37 21.66 35.49 46.6 27.06

Interpretation: From the above table and graph we can interpret that the percentage of company’s debt. Has been increasing in initial stage has been decreased 46.60 %{ 2008} to 27.06% {2009}, which indicates the company’s careless debt collection.

9.

WORKING CAPITAL TO NET WORTH RATIO

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Working capital to net worth =

Working capital Net worth

X 100

TABLE – 9 WORKING CAPITAL TO NET WORTH RATIO Year Working capital 2005 2006 2007 2008 2009 1149536 8210920 14260959 23367945 43855653 14388913 15203090 20803793 26990495 39338637 Net worth Working capital turn over ratio 7.99 54.01 68.55 86.58 111.48

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

CHART – 9 WORKING CAPITAL TO NET WORTH RATIO

120 100 80 60 40 20 0 2005 2006 2007 2008 2009 Ratio 7.99 54.01 68.55 86.58 111.48

Interpretation: The above table and graph shows the ratio of working capital to net worth for the year 2005-2009 are 7.99, 54.01, 68.55, 86.58 and 111.48. This shows that there has been a gradual increase in working capital as well as the net worth of the company. By this we can interpret that there has been a positive mode towards company’s working capital to net worth ratio.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

10. AVERAGE DEBTORS COLLECTION PERIOD The Debtors / Receivable Turnover ratio when calculated in terms of days is known as Average Collection Period or Debtors Collection Period Ratio. The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash.

AVERAGE DEBTIRS COLLECTION PERIOD

= No. of days in a year Debtor turn over ratio

TABLE – 10 AVERAGE DEBTORS COLLECTION PERIOD YEAR No of days in a year 2002 2003 2004 2005 2006 365 365 365 365 365 Debtors Turnover ration 8.068 22.83 4.50 5.26 4.80 45.24 15.99 81.11 69.39 76.04 Period

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

CHART – 10 AVERAGE DEBTORS COLLECTION PERIOD

100 80 60 40 20 0 2005 2006 2007 2008 2009 Debtors Turnover ration 45.24 15.99 81.11 69.39 76.04

Interpretation: From the above table and graph we can interpret that the actual period of credit allowed by the company is increasing i.e. during 2007 it was 81.11 which shown the highest period of credit allowed where as during the year 2009 it is 76.04, which shows the second highest. I.e. there is an inefficient credit collection period by the company.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

11.

CURRENT ASSET TURN OVER RATIO This gives the relationship between net sales and current assets. Current asset turn over ratio = sales Current assets

TABLE – 11 CURRENT ASSET TURN OVER RATIO Current Year 2005 2006 2007 2008 2009 Sales 48677738 178725638 148355173 252906971 188641488 assets 36847984 36153263 92809547 103181804 145296787 1.32 4.94 1.60 2.45 1.30 Ratio

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

CHART – 11 CURRENT ASSET TURN OVER RATIO
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Ratio 2005 2006 2007 2008 2009

Interpretation: This ratio indicates the contribution of current asset to sales. There is no standard current asset turnover ratio. Yet the inference is that a high current asset turn over ratio is an indication of a better utilization of current asset. On the other hand a low current asset turn over ratio suggests that the current asset have not been utilized effectively.

12. Cash in current asset Ratio
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Cash in Current asset ration=

Total cash Total current assets

TABLE – 12 CASH IN CURRENT ASSET RATIO

YEAR 2005 2006 2007 2008 2009

Total Cash 105365 328194 766612 2132360 2161488

Total Current Assets 36847984 36153263 92809547 103181804 145296787

Ratio 2.86 9.08 8.26 0.021 1.49

CHART – 12 CASH IN CURRENT ASSETS RATIO EAST POINT COLLEGE OF HIGHER EDUCATION -63-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

10 8 6 4 2 0 2005 2006 2007 2008 2009 Ratio 2.86 9.08 8.26 0.021 1.49

Interpretation: From the above table and graph we can interpret that the percentage of cash utilized under current asserts is very less, I.e. 2.86, 9.08, 8.26, 0.21, 1.49 which indicates inefficient cash utilization.

13. STOCK TO CURRENT ASSETS This gives the relationship between the stock and current assets. EAST POINT COLLEGE OF HIGHER EDUCATION -64-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Stock to current Assets ratio =

Stock Current assets

X 100

TABLE – 13 STOCK TO CURRENT ASSETS YEAR 2005 2006 2007 2008 2009 Stock 27663194 2 16588890 30200092 35030069 84476591 36153263 92809547 10318180 4 14529678 7 58.14% 45.88% 32.54% 33.95% Current Assets 36847984 74.99% Average

CHART – 13 STOCK TO CURRENT ASSETS

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

80.00% 60.00% 40.00% 20.00% 0.00% 2005 2006 2007 2008 2009

Average 74.99% 45.88% 32.54% 33.95% 58.14%

Interpretation: We can interpret that the percentage of stock utilized by the company in more in 2009 i.e. 58.14 compared to that of previous two years. It indicates that the company’s stock utilization is more which generally indicates an unhealthy business.

CHANGES IN WORKING CAPITAL OF 2008-09

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

PARTICULARS Current assets Inventories Sundry debtors Cash and bank Balance Other current Assets

2008

2009

INCREASE

DECREASE

35030069 42643178 2132360 1643023

84476591 35988533 2161488 5835756 16834419 145296787 101441134 101441134 43855653

49446522 6654645 29128 4192733 4898755

Loans and advances 21733174 {A} TOTAL CURRENT ASSETS Current liabilities {B}TOTAL CURRENT LIABILITIES NET WORKING CAPITAL {A-B} INCREASE IN WORKING CAPITAL 103181804 79813859 79813859 23367945 20487708 43855653

21627275

20487708 43855653 53668383 53668383

FINDINGS EAST POINT COLLEGE OF HIGHER EDUCATION -67-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Working capital management is an essential part of financial management. Here we studied various ratios relating to measurement of the working capital such as current ratio, quick ratio, debtor’s turnover etc from 2005-2006 to 2008-2009.The major findings are given below Table 1 and chart 1 show about the current ratio, where there is proportionately increase in the current assets over current liabilities. Table 2 and chart 2 shows Liquid ratio what is partly increasing i.e. in liquid assets over liquid liabilities. There is fluctuating position. Table 3 and chart 3 shows Inventory over working capital for the year 2005-2009. They are 24.04, 2.02, 2.12, 1.50 and 1.93 respectively. This shows that the company’s inventory has been increasing year by year except during the year 2003, where it has come down to 1,65,88,890. Table 4 and chart 4 shows cash turn over ratio, which is the ratio is less than 10%. Table 5 and chart 5 shows there is a gradual decrease in working capital turn over ratio of the company from 2002-2006 i.e. from 42.35 to 4.30. Table 6 and chart 6 shows Inventory turn over ratio. It is clearly stated that only during 2006 company’s inventory turn over ratio is said to be effectively utilized which is shown 8.08, where as during the year 2009 it is 3.16. Table 7 and chart 7 shows debts has been ineffectively utilized by the company because the number of times the debt has been collected by the company is decreasing, that is 2006 it was 22.83 times where as in 2009 it was only 4.80. Table 8 and chart 8 shows debts collection has been fluctuating year by year. Table 9 and chart 9 shows working capital to net worth ratio, which is gradually increasing i.e. working capital as well as net worth of company.

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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Table 10 and chart 10 shows actual period of credit allowed by the company, which was increased during the year 2007, that is 81.11 which shows the highest and in 2009 it is 76.04 the second highest. Table 11 and chart 11 shows, current asset turn over ratio in 2006 is high i.e. 4.94 and gradually decreases. Table 12 and chart 12 shows, the percentage of cash utilized under current assets is very less. Table 13 and chart 13 shows, the stock utilization is comparatively more from previous years.

SUGGESTION:

EAST POINT COLLEGE OF HIGHER EDUCATION -69-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

The study conducted is to analyze the working capital needs of “MECOLAM ENGINEERING PVT LTD” Ltd from 2005 to 2008.The findings of the study are quit interesting. The study is done in the fields of Current ratio, Quick ratio, Debtors turnover, Inventory turnover, Working capital turnover etc. Avoid unnecessary liability to make current ratio of 2:1 with equal or more but

 year.

not less than the ideal ratio. Company should increase in working capital ratio year by



Company can try to improve their inventory management by calculating the

stock quantity serial of each major type if material at frequent internal and placing the orders accordingly so that the unnecessary blockage of funds in inventory can be avoided. Average collection period of the organization should be given more attention a



strict credit policy should be adopted. The firm should take steps to recover the debts. Company should keep minimum balance of cash and if more cash is kept it will



 be idle.



Proper control should be exercised at all levels of its operation, through which

the cost can be reduced considerably. The marketing department has to think of undertaking promotional activities to



increase the turn over which will help to reduce the increased investment in finished stock, which is a component of inventory. Sweep out the idle time both in the operation of men and machine.



CONCLUSIONS
EAST POINT COLLEGE OF HIGHER EDUCATION -70-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

The project study includes the over all view of the working capital management operations. The study reveals the current asset financing at the Mecolam engineering pvt limited. Hence for analyzing the data, accounting ratios have been used. It discloses the relevant information’s about different area of working capital management. This study report includes the working capital cycle and analysis which reveals the raw material inventory period, work in progress period and finished goods storage period.

Mecolam Engineering Private Ltd PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

31ST MARCH 2009 Particulars
INCOME Sales and Related Income Less: Excise Duty Other Income EXPENDITURE Cost of Materials Excise Duty Other Expenditures Interest Depreciation PROFIT/(LOSS) BEFORE TAX Less: Provision for Taxation Current tax Income tax relating to earlier years(Net) Deferred Tax Fringe Benefit Tax PROFIT/(LOSS) AFTER TAX Add: Balance brought forward from previous year BALANCE CARRIED TO BALANCE SHEET 12 82,035,649 408,287 66,420,407 271,617 1,192,756 150,326,716 16,684,469 5,950,000 326,367 (317,994) 391,693 10,334,403 16,202,306 26,536,709

Schedule

As at 31-03-09
188,641,488 21,707,765 166,933,720 79,455 167,013,185

As at 31-03-08
252,863,884 34,784,926 218,078,958 195.748 218,274,706 122,442,627 (175,001) 85,527,794 56 1,208,955 209,004,431 9,270,275 3,650,000 _ (679,026) -6,299,301 9,903,005 16,202,306

13 14

26,537,409

Mecolam Engineering Private Ltd
EAST POINT COLLEGE OF HIGHER EDUCATION -72-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

BALANCE SHEET AS AT 31ST MARCH, 2009 Particulars
I. SOURCES OF FUNDS Shares Holder’s Funds-Capital -Reserves & Surplus Loan Funds Loan -Secured

Schedule 1 2 3

As at 31-03-09 9,000,070 26,537,409 2,898,160 902,998 39,338,637

As at 31-03-08 9,000,070 16,203,006 566,427 1,220,992 26,990,495 16,231,853 7,026,501 9,205,352 35,030,069 42,643,178 2,132,360 1,643,023 21,733,174 103,181,804 79,813,859 5,582,802 85,396,661 17,785,143 26,990,495

Deferred Tax Liability(Net) IIAPPLICATION OF FUNDS FIXED ASSETS Gross Block Less: Depreciation Net Block A: Current Assets, Loans & advances: Inventories Sundry Debtors Cash & Bank Balances Other Current Assets Loans & Advances B:Less: Current Liabilities & Provisions Liabilities Provisions Net Current Assets (A-B) Accounting Polices & Notes to Accounts 15

4

15,896,161 7,722,973 7,873,188

5 6 7 8 9 10 11

84,476,591 35,988,533 2,161,488 5,835,756 16,834,419 145,296,787 101,441,134 12,390,204 113,831,338 31,465,449 39,338,637

BIBLIOGRAPHY: EAST POINT COLLEGE OF HIGHER EDUCATION -73-

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

1) FINANCIAL MANAGEMENT

:

Prasanna Chandra

2) FINANCIAL MANAGEMENT

:

I.M. PANDEY

3) MANAGEMENT ACCOUNTING

:

S.N.Maheswari

WWW.MECOLAM.COM WWW.GOOGLE.COM

EAST POINT COLLEGE OF HIGHER EDUCATION -74-