Working Capital Project Final

ABHINANDAN ENGINEERS
EXECUTIVE SUMMARY The project was undertaken at Abhinandan Engineers, Belgaum. The training was undertaken to understand the “Working Capital Management” at Abhinandan Engineers Company. My project conducted at Company consists of two parts: 1. The first part belongs to overall study relating to the organization. 2. The second part belonging to the finance project is specially focused on working capital management. Working Capital plays an important role in the successful operation of business activities. The need for managing working capital is very necessary for any business house. Working capital management is a matter of top priority, as it has a bearing on creditworthiness, liquidity, solvency and profitability. Working capital management is a process of determining quantum of current assets to be held at right time, so as to discharge current liabilities and there by utilizing them to their optimum extent and at the same time increasing overall value of the firm by keeping the liquidity position intact.

Objectives: • • • • To study the pattern & procedure followed regarding working capital management. To study the different components of working capital of the corporation. To understand how effectively the working capital management is in Abhinandan Engineers. To offer suggestions for improving the efficiency in working capital management.

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Methodology of the Study 1. Primary Data: It is collection of first hand information. This data is collected through discussion. The required primary data is collected from the concerned officers of the Abhinandan Engineers, Belgaum. The data collected is processed and presented in the data analysis through various tables and explanations. The tables are analyzed by individual current assets and current liabilities and by calculating working capital for every year. 2. Secondary Data: It is reviewing relevant information, which is already collected and making inferences based on the information collected from secondary data from annual reports of the company. The present study is mainly based on the secondary data. Scope of Study: Scope of the study in General terms is the extent to which it is possible to cover the subject. This study attempts to cover almost all the tools and techniques for the purpose of evaluating working capital management in Abhinandan Engineers, Belgaum Study is limited to the information that could be gathered from personnel and records that were made available.

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ABHINANDAN ENGINEERS

INTRODUCTION:

The ABHINANDAN ENGINEERS is a private limited company directed by, the company is registered with government of India registrar of companies Bangalore. Abhinandan engineers commenced operations in 1997, with the initiative of first generation young entrepreneur Mr. Udaykumar M. Patil with his first confidence steep to manufacture of Die, Pattern making and foundry and all types of engineering CI machined components in Belgaum.

The proprietor of the business is versed in this line of business. Proprietor is currently financed by many institutions, now wishes to expand his business over new horizons. For this proprietor wishes to consolidate his borrowings and achieve economy by cost reduction and savings in “running and interest” costs. The proprietor has been approached with many proposal for Die and Pattern making of one of its kind in the market. The proprietor being one person in and around his vicinity who can undertake such work is very much assured of customers who would flocking to his doorsteps for such Dies and Patterns. He is aware that there is a vast un-catered market which he can tap. This will require additional sources. He is very certain that this market is tapped, he can repay his borrowing well before time. Taking a conservative approach, the project proposals have been worked out by him. Despite the project as proposed in seen to be viable as per the basis and orders on hand. The proprietor is currently engaged in making and selling of casting materials and also die and pattern making on a small scale basis. The proprietor is now venturing into mainly making of dies and pattern in additions to his existing business of making casting. The applicant will also be getting a subsidy of almost Rs 5.76 lakhs by March 2011. The amount will gain the invested into the business of the applicant to achieve better results. The proprietor has ready orders on hand but is not able to cater to the same due to lack of infrastructure. The standing orders will fetch a gross revenue of Rs. 3 lakhs per month on an average to cater this market on a conservative basis with monthly labour turnover of Rs. 3 lakhs itself. The proprietor had invested in infrastructure in form of new VMC machineries worth Rs. 30 lakhs.

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FACTORY UNIT:
The proprietor is already running his business of manufacture of casting materials of die and pattern making and is currently operating from 185, Mahalaxmi Foundry Compound, Udyambag, Belgaum. He has the required infrastructure along with requisite man power requirement to under take the proposed activity of expansion into major die and pattern making activity. The applicant is currently operating on single machinery supplied to him by one of his customer. Who is recovering lease rental on the same for its usage. The proprietor now is desirous of expanding his activity by procuring additional VMC machinery with installation at a cost about 30 lakhs. This new machinery will enable the proprietor to undertake additional order of Rs 3 lakhs per month which will yield a net inflow about 25%. The financial of the same have been explained in the detailed working of the project.

LOCATION:
The company is situated at 185, Mahalaxmi Foundry Compound, Industrial Estate, Udyambag, Belgaum. The raw materials, labour, power and transportation and other infrastructural facilities are easily available for the company this industrial area has been developed by the Karnataka Small Industries Development Corporation LTD. Belgaum. This existing factory building is located in 185, Mahalaxmi Foundry Compound, Industrial Estate Udyambag, Belgaum.

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PROPOSED MACHINERY:
The details of plant and machinery proposed to be installed are given below. Name of the machine 1. BFW Make CHAKRA BMV65T24 2. Toolcraft make Radial type 3. KMT make Pillar type 4. Hydrotech make Hydraulic Press 5. Bench Grinder's Electrocraft make 6. Flexible Shaft Grinder Electrocraft make 7. 4" Angle Grinder Dewalt make 8. 5HP COMPTECH make Compressor 9. Die Grinder Makita make 10. 7" Angle Grinder Atlas Copco make

PRODUCT PROFILE:
Electric motors, which are used mainly in industrial and agricultural sectors, account for a substantial 35 percent of the total electricity consumption in India. One of the ways to address the problem of energy shortage is to reduce demand, mainly by increasing end-use efficiency of appliances used. As per manufacturers’ feedback, sale of energy-efficient motors is approximately two percent of the total sales. The major reason identified for the low sales is the high initial cost. Hence, there is a need to develop technology that can reduce the initial cost of energy-efficient motors. According to motor design experts, using copper die-cast technology instead of aluminium die-cast for rotors is cost effective and will also reduce the size of the motors, without affecting the output.

PRODUCTS:
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Using raw C.I.Casting various components for electric motors and alternators various types of terminal boxes and covers. For power transmission unit various types of gear boxes centers, top and bottom bearing housing, gear cases, shafts. Bearing housing for automobile industry back plates, face plates, drums. etc are manufactured by the company. 1. Electric motors

MANUFACTURING PROCESS:
The manufacturing process involves finished grinding, turning, boring, milling, salting, shaping, drilling, taping, burnishing and painting etc by using lathes, milling machines, drillings, balancing machines. All the parameters mentioned by customers in their components, drawings are firstly shaped and finished on the above mentioned machines. Then finally these components are inspected and checked by measuring instruments like bore gauges, verniers, micrometers, height and depth gauges.

THE MAIN CUSTOMERS OF THE COMPANY: 1) Indotech Machines Pvt Ltd., Indore. 2) Alucast Auto Parts Ltd., Belgaum.

3) Surya Project Management Pvt Ltd., Belgaum. 4) Trio Enterprises, Kolhapur. 5) Shree Gajanan Alloys., Belgaum. 6) ARS Foundries Pvt Ltd., Belgaum. 7) Meritech. Pune. 8) Tulsi Castings & Machining Ltd., Sangli. 9) Soundcast Alloys Pvt Ltd., Belgaum. 10) Perfect Actuators & Controls Pvt Ltd., Hubli. 6

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11) Joshi Jampala Engineering Pvt Ltd., Satara. 12) Prakash Iron Works, Belgaum. 13) Rajmane Industries Pvt Ltd., Bangalore. 14) Sharma Group, Belgaum.

EXECUTIVE SUMMARY: THE QUALITY:
The stringent quality control procedure is followed at Abhinanadan Engineers. Top class testing instruments in the well equipped material testing laboratory has ably supported the quality control activity. The results are visible.

THE COMMITMENT:
Abhinanadan Engineers with a open mind approach are always willing to accept new developments and technologies to ensure the strict adherence to the delivery schedule on time, every time. Restricting itself to a limited type of casting, Abhinanadan Engineers ensures 100% focuses, on every minute’s quality needed.

QUALITY POLICY:
• • • • • Abhinanadan Engineers shall always strive for customer satisfaction. We shall endeavor to be build in quality in our product to the at most satisfaction to our customers. We shall motivate and empower our employees and bring in a feeling of ownership in them. We shall strive for continuous improvement in QMS to achieve our goal of providing a quality product at a competitive price and on time. We believe that with this goal we shall be able to excel in competitive markets.

COMPANY POLICY

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“We set to be the most preferred partner in manufacturing and supply of engineering products as well as production of tooling manufacturing like metallic patterns and the jigs & fixtures required to develop the particular component. Our motto is to give our entire efforts to get customer satisfaction & to prove our self as a one of good & renowned tooling manufacturer. Offer better customer service

STRATEGIC OBJECTIVES:
• • To provide products of the highest quality and value. To achieve cost effectiveness in the Abhinandan Engineers and machine shops through establishment of world class manufacturing facilities. To strive for employ empowerment, team work and motivation.

DESIGNS AND INNOVATIONS:
All products are manufactured, as per customer design/ drawing AFBPL has no rights to change any specifications.

SERVICE AGREEMENTS WITH CUSTOMER:
There is no service agreement with customer as not involved in after sales activities.

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VISION AND MISSION: The corporate vision is to become one of the most vibrant, self reliant, financially viable, and steady growth oriented corporate. The corporate mission is: • • • • • • • Improve productivity and profitability. Provide financial stability on long term. Register steady growth in terms of percentage of capacity utilization, production of income and overall profitability. Provide safe working conditions in the company. Introduction of modern and effective management apart from achieving day to day production target. Promote harmonious and cordial industrial relationship. Promote Human Resource Development.

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ORGANISATION STRUCTURE SWOT ANALYSIS SWOT analysis is a analysis of STRENGTH, WEAKNESS, OPPORTUNITY AND THREATS of the Company. This is used to analysis the company environment will help each and every company to know the present situation of the company. STRENGTH:  This is only a reputed Company in Belgaum.  It has been producing the product as the standard specified by the Government of Karnataka.  Fully computerized environment.  Its continuous and larger production unit in India.  Product quality is the strength of the company.  The work environment is full of excitement, creativity, and innovative atmosphere. WEAKNESS:  Absenteeism is the main problem in the Company.  Huge sound and air pollution in the production department.  Workers are not well qualified. OPPORTUNITY:  Company is having the excellent growth opportunity.
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 Company is having the good hold in the market so it will help to earn more profit.  In the capacity of the plant is the increasing direction. THREATS:  Huge power consumption and power failure.  Foreign currency fluctuation.

INTRODUCTION TO FINANCIAL MANAGEMENT Finance is defined as the money at the time when it is required. Every firm needs finance whether it is small, medium, and big to carry in its operation and to a show its targets. And it is rightly said that finance is lifeblood of an enterprise. Without adequate finance, no enterprise can possibly accomplish its objective. Management is a vital function control with all aspects of business management, have become a sort of pre-requisite for the successful carrier in dynamic business environment. The present study is concerned in Abhinandan Engineers, Belgaum. Technically analysis of working capital in which the present project report is an important part of financial managing current assets is more difficult than management of fixed assets and the finance management needs to strike a balance both profitability and liquidity. If liquidity more there will be adverse effect of profitability is given more weight age is to greater risk. A business enterprise with adequate working capital is always a position to evil advantage of any favorable opportunities. The present study related to the working capital management Abhinandan Engineers, Belgaum. Sources control and effective utilization of the working capital by the company. An endeavor has been made to study and analyze the assisting pattern and utilization of financial resources and analyze the five year of working capital management, receivable management. The project primarily deals with the study of financing and utilization of available resources and measuring the perform of the company.

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WORKING CAPITAL MANAGEMENT
Working
Capital is needed for the smooth conduct of day-to day business activities. It is needed to finance the current assets of the firm. The working capital should neither be in excess nor should it be inadequate. Excessive investment in current assets would have a negative impact on the firm’s profitability because of idle investment On the other hand, inadequate working capital would lead to inability to meet the current obligations which would hamper the firm’s creditability and thereby its reputation. Usually the current assets are maintained at twice the level of current liabilities i.e .the current ratio is 2:1 But the quality of current assets is important. The current assets should be easily marketable. i.e. they should be liquid. If the Liquidity is also harmful. It may be due to mismanagement of current assets.

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CLASSIFICATION OF WORKING CAPITAL
WORKING CAPITAL

On the basis of concepts

On the basis of time

Net working Capital

Gross working capital

Permanent working capital

Variable Working capital

Seasonal working Capital

Special working capital

Initial working capital

Regular working capital 13

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A. 1.

On the basics of Concept Net Working capital This is the difference between current assets and current liabilities. Current liabilities are

those that are expected to mature within an accounting year and include creditors, bills payable and outstanding expenses.

Investment in current assets represents a very significant portion of the total investment in assets. In case of public limited companies in India, current assets constitute around 60% of the total capital employed. Therefore the finance manager should attention to working capital management.
Working Capital Management is no doubt significant for all firms, but its significance is enhanced in cases of small firms. A small firm has more investment in current assets than fixed assets and therefore current assets should be efficiently managed. The working capital needs increase as the firm grows. As sales grow, the firm needs to invest more in debtors and inventories. The finance manager should be aware of such needs and finance them quickly. Current Assets can be financed through long –term and short-term sources. The ratio of long – term to short-term source will depend on whether the firm is aggressive or conservative. If the firm is aggressive then it will finance a part of its permanent current assets with short-term funds. On the other hand , a conservative firm will finance its permanent assets and also a part of temporary current assets with long- term financing.

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2.

Gross Working Capital

This refers to the firm’s investment in current assets. Current assets are the assets which can be converted into cash within a short period say, an accounting year. Current assets include cash, debtors, bills receivable ,short term securities etc.

B) On the Basis of Time
1) Permanent Working Capital

Permanent Working Capital is permanently locked up in the circulation of current assets. It covers the minimum amount requested for maintaining the circulation of 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 It 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 of adequate cash balance on hand and at bank, adequate stock of raw materials and finished goods and amount of receivables.

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1) Variable Working Capital It refers to the past of the Working Capital which changes with the volume of business, it may be divided into two classes. 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. Determinants of Working Capital In order to manage the Working Capital optimally, one has to give due consideration to the factors that influence the amount of Working Capital to be maintained.

The determinants of Working Capital are stated below with reference to the operations of Abhinandan Engineers, Belgaum :
1) Nature of business

2) Capacity Utilization
3) Credit Policy 4) Demand, Sales and Conditions

5) Availability of Credit
6) Price Level 7) Degree of Competition 8) Conditions of Supply

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COMPONENTS OF WORKING CAPITAL
There are two components of Working Capital viz. Current Assets Current liabilities. 1) Current Assets An asset is termed as current assets when it is acquired either for the purpose of selling or disposing of after taking some required benefit through the process of manufacturing or which constantly changes in form and contributes to transactions take place with the operation of the business although such assets does continue for long in the same form. Components of Current Assets are as follows 0 1 2 Cash and bank balance Stock of raw materials at cost- work in process and finished goods. Advanced recoverable in cash or kind or kind or for value to be received.

3
0 1 2 3 4 5

Security

deposits

with

electricity

board-

telephone

department balances with customers.
Deposits under the company scheme. Prepaid expenses Miscellaneous stores_ implements _ goods in transit Advanced payment of income tax credit certificates Excise duty and sales tax recoverable Outstanding debts for a period exceeding six months 17

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6 Balance with central excise authorities.

2) Current Liabilities Components of Current Liabilities are as follows Non- refundable non-interest bearing advances against subscription to shares. • • • • • • • • • • Sundry creditors for the goods and expenses Income –tax deducted at sources from contractors Expenses payable Amount due to promoter of company Unclaimed dividend Security deposits Dealers deposits Liabilities for bills discounted Bank overdraft acceptance Dividend warrants but not un- cashed.

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SOURCES OF WORKING CAPITAL
SOURCES OF WORKING CAPITAL

SHORT TERM SOURCES LONG TERM SOURCES 1 .ISSUE OF SHARES 2. ISSUE OF DEBENTURES 3. RETAINED PROFIT 4. RESERVES AND SURPLUS 5. LONG TERM LOANS

INTERNAL EXTERNAL 1 DEPRECITION FUNDS 2 PROVISION FOR TAXATION 3 ACCURED EXPENSES

SHORT TERM SOURCES

1. TRADE CREDITS 2. BANK CREDIT 3. CREDIT PAPER 4. CUSTOMER CREDIT 19

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5. PUBLIC DEPOSITS 6. FINANCIAL CO-OPERATION 7. GOVERNMENTASSISTANCE 8. LOAN FROM DIRECTORS

ARRANGEMENT OF WORKING CAPITAL
The trade credit and cash creditors are two primary sources of working capital in India. Bank loan and trade creditors together account for finance about 75% of the working capital credit requirements of industry. The bankers after granting of the loans and applications on the line suggested by Reserve Bank of India determine the maximum line of credit permissible for the period based on the margin requirement of the security offered. After getting the overall credit limit sanctioned by the banker the company actually draws the funds needed from time to time using all or any of the following forms of credit 0 Loan Arrangement The entire amount of loan is credited by the bank to the parties account. Interest is payable on the entire amount or when loan is repaid in installments on the actual balance of outstanding. 1 Overdraft Arrangement The party is permitted to over draft on his current account with his banker up to a specified amount and during a specified period. Interest is charged on the amount actually utilized and repayments are permitted. 2 Cash Credit Arrangement The borrower is allowed to withdraw funds from the bank up to the sanctioned credit once rather he can draw periodically to the extent of his requirements and repay by depositing surplus funds in his cash credit amount. 3 Term loan for working capital Under this arrangement borrower can obtain a loan for appeared three to five years and the said amount in nearly or half yearly installments. 20

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4 Bills purchased or Bills discounted Bills are purchased by bankers and advance bills are discounted whether bills are purchased as discounted the amount need available under this arrangement is covered by cash and over draft element. In obtaining commercial bank credit the various modes of security are such as

0

Hypothecation

Under hypothecation money is borrowed by owner of gods on the security of movable property (normal inventories) without parting with the possession of movable property. The right of the hypothecation depends upon the term of the contract between parties.

1

Pledge

Under this arrangement the borrower is required to transfer the physical possession of the property offered as security to the bank to obtain credit.

2

Lien

It is the right of retaining goods belonging to the another until the debts due to him are paid.

3 money advanced.

Mortgage

It is the transfer of interest in specific immovable property for securing the payment of

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OPERATING CYCLE OF WORKING CAPITAL
It is essential that the operating cycle should be kept up continuously. Others the fixed assets will remain idle and to the cost without bringing any reserve .so long with fixed capital ready and adequate working capital is necessary to get the understating successful on a sound pedestal CASH

Receipts fromDebto rs

Purchase Raw material

Creation of Account Receivables (Debtors)

Creation of Accounts

Manufacturing Operation Sales of finished Goods/ 1.Wages &Salaries 2.Fuel supply

Warehousing of finished /Goods/Merchandise

Payment to creditors 22

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Office selling Distribution &Other Expenses

THE NEED FOR THE WORKING CAPITAL

The need for the working capital cannot be once emphasized. Every business need some amount of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. Therefore Working capital required for

 To meet the cost of inventories including total of raw materials purchased parts, operating supplies, work in progress, finished goods.

 To pay wages, salaries, for indirect labour, clerical staff, managerial and supervision staff.



To meet overhead costs, including those of maintenance services activities, fuel, power charges, taxes and general expense administration.

 To bear the expansion(with regard to promotion of sales) e.g. expenses on packing advertisement, salesmanship, sales servicing , after requires ,credit facilities, delivery services etc.

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IMPORTANCE OF WORKING CAPITAL MANAGEMENT

0

Adequate working capital
workers.

creates certainty, security and confidence in the

minds of the persons in the management as well as in the minds of creditors and 1 It creates a good credit standing for the firm because credit standing depends upon the ability to pay promptly. A Company with adequate working capital is always able to meet current liabilities. 2 3 4 It ensures solvency and stability of the enterprises It also ensures continuity in production and sales. It enable the company to take advantage of cash discount offered by the suppliers of raw materials or merchandise. It enhances the prestige of the company and moral of its workers because a company with adequate working capital is always able to pay wages and salaries promptly and regularly. 5 6 7 8 9 It enables the company to procure loans from banks on easy and competitive terms. In times of boom, it enables the company to meet increasing demands for its products. In times of depression the company to overcome the crisis successfully. It enables the company to hold carry on its business successfully and active continued progress and prospective. It enables the company to carry on its business successfully and active continued progress and prosperity.

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Working Capital Management is concerned with the following aspects: 0 1 2 3 Debtors Management Creditors Management Inventory Management Cash Management

All these aspects will be analyzed in relation to the functioning of Ashok Iron Works Ltd in the report as below. Debtors Management Now-a- days debtors management has assumed a lot of importance If the debtors are efficiently managed, the blocked capital will be reduced and thereby the associated costs. Due to the increase in competition, one cannot do away with credit sales. Credit provision can increase sales. It is particularly appealing to those customers who cannot borrow from other sources or find it inconvenient to do so. A firm’s investment in accounts receivable depends on how much it sells on credit and how long it takes to collect receivables. The firm should be very good at assessing the credit worthiness of its customers and effective collection methods. Debt collection is no doubt challenging but a firm, which executes it efficiently, will reduce costs to a great extent.

Debtors Management mainly concerns itself with three major aspects: 0 1 Credit Policy Credit Analysis 25

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2 Collection Policy

INVENTORY MANAGEMENNT
The inventory is broadly classified into the following: 1) Raw material inventory. 2) Consumables inventory consisting of tools, statonery,fuel etc. 3) 4) Work in Progress inventory. Finished goods inventory.

Usually the finished goods inventory is maintained at zero level. The parts are manufactured to fulfil the current demand. Raw materials (basic) are usually in stock for 4 to 15 days. Raw materials (others) or consumables are kept for 15 days to 1 month. The duration depends the availability, prices, demand and other market factors. Say, if the price of a certain raw material is expected to increase or it is likely to be in short supply in the future, then the quantity purchased will be more than usual and it will be stocked. On the other hand if the raw material is freely available, then it will be purchased as and when required.

ABC analysis is carried out to determine the relative importance of the types of raw materials and the stocking duration is determined based on he rating assigned to the particular raw material.The materials with rating ‘A’will be the most controlled because they constitute a major portion of the investment.

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Economic Order Quantity ( E.O.Q) & Re-Order Level ( R.O.L) Now, two Important questions need to be answered-‘when to purchase?’ and ‘how much to purchase?’The first question can be answered by fixing the Re-order level (ROL). This is the level after reaching which the order for the material should be placed. Calculation of this level and its practical implementation will ensure the smooth flow of production activity without bottlenecks. This is calculated as:

ROL=average daily consumption *Lead time+ safety stock The second question can be answered by finding out the Economic Order Quantity ( EOQ). Now, EOQ is the trade-off between the carrying costs and the ordering costs. It is that quantity at which the ordering costs and carrying costs are minimum. This is calculated by using the formula:

E.O.Q.=

√2AO
C

Here, A= Annual consumption O= Ordering cost per order C= Carrying cost per unit

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Safety stock is maintained to avoid unnecessary stoppage in production. Minimum and Maximum stock level is also calculated on average yearly basis. But all these calculations made may be altered depending on the activity of market forces.

Cash Management Cash is the basic input of any business. It is necessary for the smooth flow of the business operations. The cash balance with any business firm should neither be in excess nor in shortage. Inadequate cash will disrupt the business operations and excess cash will result in higher opportunity costs because it is idle. Cash Management is an important function of the finance manager. Sufficient cash balance has to be maintained to run the firm efficiently. But at the same time, the finance manager has to bear in mind that cash balance is an idle resource which has an opportunity cost. The liquidity provided by the cash holding is by sacrificing the profits of a foregone alternative investment opportunity. Hence the finance manager should: • • • establish reliable forecasting and reporting systems, improve cash collections and disbursements & achieve optimal conservation and utilization of funds.

There are three possible motives for holding cash. They are. 0 1 Transaction Motive: Cash is required to carry out the numerous transactions involved in day-to-day business

activities. The firm needs cash to make payments for wages and salaries, for purchases, other operating expenses, taxes, dividends, etc. There would have been no need to hold cash if the receipts and payments were perfectly synchronized. 2 3 Precautionary Motive: 28

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Cash is also needed to effectively confront uncertainties in the future. There may be some uncertainty about the timing of cash inflows from sale of gods and services, assets etc. Similarly, there may be uncertainty about cash outflows resulting from purchases and other obligations. Stronger the ability of the firm to borrow at short notice less the need for precautionary balance. The precautionary balance may be kept in cash and marketable securities.

4 5

Speculative Motive: This motive relates to the holding of cash for investing in profit making opportunities arising

from fluctuations in commodity prices, security prices, interest rates and foreign exchange rates. A cash-rich firm is better prepared to exploit such bargains. By and large business firms do not engage in speculations. 6 Four Facts of Cash Management In order to manage cash effectively, the firm should evolve strategies regarding the following four facets of cash management

 Cash Planning: Cash inflow and outflows should be planned to project cash surplus or deficit for each period of the planning period. Cash planning is a technique to plan and control the use of cash. A projected cash statement is prepared from forecast of expected cash inflows and outflows for a given period . The forecasts may be based on the present operations or the anticipated future operations.

Cash Planning may be done on daily, weekly or monthly basis. The period and frequency of cash planning generally depends upon the size of the firm and the philosophy of the management. Large firms prepare daily and weekly forecasts. Medium-size firms usually prepare weekly and monthly forecasts .Small firms may not prepare may not prepare formal cash forecasts

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.  Managing Cash Collection and Disbursements: The projected cash flows should match the actual cash flows and the finance manager should ensure that there is no significant deviation. To achieve this, cash management efficiency will have to be improved through proper control on cash collection and disbursement. Generally it is recommended that the collections should be accelerated and the payments should be delayed. But to manage cash efficiently we need to understand the concept of float. The cash balance shown by a firm in its books is called the book or ledger balance and the balance shown in its bank account is called the available or collected balance. The difference between the available and the ledger balance is called float. There are two kinds of float-disbursement float and collection float. Say a company has issued a cheque worth Rs 1 lakh. It will reduce the company’s available balance only when the cheque is presented for encashment. This creates a disbursement float of Rs .1 lakh. Similarly we have the collection float. When a company receives acheque of say ,Rs 2 lakhs then it will increase its book balance by the above amount .However, the company’s bank will increase the available balance only when the cheque is presented to the customer’s bank.



Optimal Cash Balance: It is one of the primary responsibilities of the finance manager to

maintain a sound liquidity position so that the production operation is carried on smoothly and also the dues are settled in time. If a firm maintains a small cash balance, it has to sell its marketable securities more frequently and this will result in increasing transaction costs. On the other hand if the firm maintains a large cash balance then it will lead to higher opportunity costs. Therefore the cash balance should neither be too small nor too large. We find that there is a trade-off between transaction costs and opportunity costs. Hence the balance maintained should result in minimum

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possible transaction costs and opportunity costs. This case is similar to the calculation of E.O.Q.We have the Baumol’s model to find optimal cash balance under certainty . The

Formula is: C = 2FT/K Where, C = Optimal Cash Balance T = per transaction cost F = total funds requirement during the year K = opportunity cost The Baumol Model does not provide a solution in cases of uncertainty. To overcome these disadvantages we have The Miller-Orr model. It assumes that the net cash flows are normally distributed with a zero value of mean and a standard deviation. In this case the firm should fix the upper control limit, the lower control limit and the return point. The return point is the normal level of cash balance which is a healthy level. If the firm’s cash flows fluctuate and touch the upper Control limit, then it buys sufficient marketable securities to reach the return point If the cash balance touches the lower control limit then sufficient marketable securities are sold formula for determining the distance (Z) between the upper and lower control limit is: Z = (3/4* Transaction cost * Cash Flow Variance/ Interest Rate)1/3 to reach the return point. The firm sets the lower limit at a point which is its minimum cash requirement. The

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 Investing Surplus Funds: The surplus funds with a company can be invested for short periods before they are required. The surplus can be invested in marketable securities which can be sold easily later when funds are required. The various options available for investments are as follows: Term Deposits with Scheduled Banks: Banks accept term deposits for periods ranging from 15 days to 5 years. The interest may vary from 6% to 11% per anum. The interest rate rises sharply as the period of deposits increase from 30 days to 1 year. 0 Mutual Fund Schemes: There are a variety of schemes offered by mutual funds like equity

schemes, balanced schemes and debt schemes. The most popular scheme is the debt scheme for investing short-term surpluses because the investments are for a short period and is highly and therefore less risky.

1

Treasury Bills: Treasury bills are the short-term obligations of the government. They have

maturity periods of 91 days, 182 days and 364 days. They do not carry an explicit interest rate (coupon rate) but are instead sold at discount and redeemed at par. 2 3 Inter- Corporate Deposits: An inter-corporate deposit is a deposit made by one company with another for a period of up to six months. The inter-corporate deposits represent unsecured borrowings; hence the lending company must satisfy itself about the credit-worthiness of the borrowing firm. There are also certain conditions prescribed under section 370 of the Company’s Act 1956 which should be adhered to by the lending company. 4 Bill Discounting: A bank may purchase a premature bill from the drawer at a discount and it will release the worth of the bill less discount to the drawer. Similarly a company can purchase a bill like a bank at a discount and thereby invest its idle funds. But a company should ensure that the bill and should try to go for bils that are backed by letters of credit for security.

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DETERMINANTS OF WORKING CAPITAL A firm should plan its operation in such a way that it should have neither too much nor too little working capital. The working capital requirement is determined by a wide variety of factors. These factors, however, affect different enterprises differently. They also vary from time to time. In general, the following factors are involved in a proper assessment of the quantum of working capital required. The following are some of the important determinants of working capital 1. General nature of business The working capital requirements of an enterprise are basically related to the conduct of business. Enterprise falls in to some broad categories depending on the nature of their business. For instance, public utilities have certain features which have a bearing on their working capital needs. The relevant features are 1) The cash nature of business, that is, cash sale. 2) Sale of services rather than commodities.

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In a view of these features, they do not maintain big inventories and have, therefore, the least requirement of working capital. The nature of their business is such that they have to maintain a sufficient amount of cash, inventories, and book debts. 2. Production cycle Another factor which has a bearing on the quantum of working capital is the production cycle. The term production or manufacturing cycle refers to the time involved in manufacture of goods. It covers the time span between the procurement of raw materials to production of finished goods. Funds have to be necessarily tied up during the process of manufacturing, necessitating enhanced working capital. In other words, there is some time gap before raw materials become finished goods. To sustain such activities the need for working capital is obvious. The longer the span the larger will be the tide up fund and therefore, the larger is the working capital needed and vice versa. 3. Business Cycle The working capital requirements are also determined by the nature of business cycle. Business fluctuations lead to cyclical and seasonal changes, which, in turn cause a shift in the working capital position, particularly for temporary working capital requirement. The variations in business condition may be in two directions, I. II. Upswing phase- when boom conditions prevail Downswing phase- when economic activity is marked by a decline.

During the upswing phase of business activity, the need for working capital is likely to grow to cover the lag between increased sales and receipt of cash as well as to finance purchase of additional materials to cater to the expansion of the level of activity.

4. Production Policy
The quantum of working capital is also determined by production policy. In case of certain lines of business, the demand for production is seasonal, that is they are purchased during certain months of the year. There are two options open to such
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enterprise, either they confine only to period when goods are purchased or they follow a steady production policy throughout the year and produce goods at a level to meet the peak demand. In former case, there are working force and physical facilities without adequate production and sales. 5. Credit policy The credit policy relating to sales and purchases also affect the working capital. The credit policy influences the requirement of working capital in two ways, I. II. Through the credit terms granted by the firm to its customers/buyers of goods. Credit terms available to the firm from its creditors.

The credit terms granted to customers have a bearing in the magnitude of the working capital by determining the level of book debts. The credit sales result in higher book debt (receivables). Higher book debts mean higher working capital. On the other hand, if liberal credit terms are available from the suppliers of goods (trade creditors), the need of working capital will be very less. The working capital requirements of a business are thus affected by the terms of purchase and sales, and role given to credit by company in its dealing with creditors and debtors. 6. Growth and Expansion As a company grows, it is logical to expect that a large amount of working capital is required. It is, of course, difficult to determine precisely the relationship between the grown in the volume of business of a company and the increase in its working capital. The composition of working capital in a growing company also shifts with economic circumstances and corporate practices. Other things being equal, growing industries require more working capital then those that are static. 7. Profit Level The level of profit earned differs from enterprise to enterprise. In general, the nature of product, hold on the market, quality of management and monopoly power
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would by and large determine the profit earned by a firm. It can be generalized that a firm dealing in a high quality product, having a good market presence and enjoying monopoly power in the market, is likely to earn high profit and vice-versa. High profit margin would improve the prospects of generating more internal funds there by contributing to working capital pool. 8. Dividend Policy Another appropriation of profit, which has bearing on working capital, is dividend payment. The payment dividend consumes cash resources and there by affects working capital as funds flow out of firm through dividends. Conversely, if the firm does not pay dividend but retains profits, working capital increases. In theory, a firm should retain profits to preserve cash resources and at the same time, it must pay dividends to satisfy the expectations of share holders. When profits are relatively small, the choice is between retention and payment. The choice must be made after taking in to account all the relevant factors.

9. Depreciation Policy
Depreciation charges do not involve any cash outflows. The affect of depreciation policy on working capital is therefore indirect. In the first place, depreciation affects the tax liability and retention of profits. Depreciation is allowable expenditure in calculating net profits. Higher depreciation also means lower disposable profits and, therefore, smaller dividend payment. Thus cash is preserved. In the second place, the selection of method of depreciation has important financial implication. 10. Price Level Changes Changes in the price levels also affect the requirement of working capital. Rising prices necessitate the use of more funds for maintaining an existing level of activity. For the same level of current assets, higher cash outlays are required. The effect of rising price is that a higher amount of working capital is needed. However, in

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the case of companies, which can raise their prices proportionately, there is no serious problem regarding working capital. 11. Operating efficiency The operating efficiency of the management is also an important determinant of the level of working capital. The management can contribute to a sound working capital position through operating efficiency. Although the management cannot control the rise in prices, it can ensure the efficient utilization of resources and so on. Efficiency of operations accelerates the pace of cash cycle and improves the working capital turnover. It releases the pressure on working capital by improving profitability and improving the internal generation of funds.

Techniques of Working capital management
Working capital management involves deciding upon the amount and Composition of current asset and how these assets are to be financed. This decision involves tradeoff between risk and profitability. Working capital balances are measured from the financial dates of the company’s balance sheet. A study of the causes for changes of working capital that take place in the business from time to time is necessary. These changes can be measured in rupee amount and also in percentage by comparing current assets, current liabilities and working capital over the given period. The important tools of working capital are, 1. Ratio Analysis of working capital
I. II. III. IV. V.

Ratio analysis of working capital Turnover of working capital ratio Current ratio Current debt tangible net worth Inventory turnover ratio
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VI.

Debtor turnover ratio

2. Fund Flow Analysis of Working capital It is an effective management tool to study how funds are generated for a business and how they have been employed. This technique helps to analyze change in working capital components between two data’s. the comparison of current asset and current liability at the beginning and at the end of specific period show changes in such type of current assets and resources from which working capital has been obtained funds flow statement contributing materially to the financial aspects.

3. Working Capital Budget The working capital budget is an important phase of overall finance budgeting. This budgeting should be distinguished from a cash budget that is designed to measure all the financial repayment of loans, term loans and similar items. The objective of this budget is to secure an effective utility of investment. 4. Trend Analysis A trend analysis indicates the change, which has been taking place from time to time of an individual item of current assets. It enables of creation of upward and downward trend of current asset and current liabilities. These are measured from review of comprehensive balance sheet of concern at the end of accounting year and result is drawn on the basis of trend shown by them

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Analysis and Interpretation
STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2010-11

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Particulars A) Current Assets Stock S. Debtors Cash & bank balance Loans & advances TOTAL B) Current Liabilities Current liabilities TOTAL Working Capital (A-B) Net increase in W.C GRAND TOTAL 6,641 6,641 5,022 3140 7966 7966 3,173 3,173 8162 3140 3,468 3,574 434 8810 2294 23 536 11,663 8,506 2,196 31 406 11,335 98 8 130 304 2009-10 (Rs ‘000’) 2010-11 (Rs ‘000’) Increase Decrease

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INTERPRETATION:In the year 2010-11 there is an overall increase in the working capital by Rs 31,40,000 i.e. by 62.52% but not as significant as in the previous financial year. This is because of the following reasons…… 1. In the table we can see that there is increase in the current assets like inventories, increase in the cash and bank balance, sundry debtors and decrease in the loans and advances. 3. As there is decrease in the current liabilities and increase in the current assets it implies that the firm has increased its operations while it has paid off its liabilities reducing the availability of funds through creditors, so there is an increase in the working capital.

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STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN

2009-10

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Particulars 2008-09 (Rs ‘000’) A) Current Assets Stock S. Debtors Cash & bank balance Loans & advances TOTAL B) Current Liabilities Current liabilities TOTAL Working Capital (A-B) Net increase in W.C GRAND TOTAL 8,697 8,697 4296 726 5022 5022 2056 6,641 6,641 5022 726 2056 2056 1330 9136 3211 83 563 12993 8810 2294 23 536 11663 326 917 60 27 2009-10 (Rs ‘000’) Increase Decrease

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INTERPRETATION:In the year 2009-10 there is an overall increase in the working capital by Rs 726,000 i. e by 16.89% but not as significance as in the previous financial year. This is because of the following reasons 1. In the above table we can see that there is decrease in the assets like sundry debtors and decrease in the assets like inventories , cash & bank balance and loan’s & advances. 2. There is overall decrease in the current liabilities by Rs 2,056.

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RATIO ANALYSIS
Ration analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio’s to interpret the financial statements so that the strength and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items or variables. The ratios does not add any information not already inherent in the values of profits or sales but, they reveal the relationship in a more meaningful way so as to enable the management to make better decision.

Types of Ratio’s
Ratios can be classified in to broad categories as follows 1) Liquidity Ratios
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2) Capital Structure /Leverage ratios 3) Profitability Ratios 4) Activity /Efficiency Ratios 5) Integrated Analysis of Ratios 6) Growth Ratios There are many ratios from which analysis can be made in relation to many aspects. The ratios which we are using here to analysis the working capital related components’ are as follows 1) Current Ratio 2) Quick Ratio 3) Cash Ratio 4) Cash Turnover Ratio 5) Working Capital Turnover Ratio 6) Inventory Turnover Ratio 7) Current Assets Turnover Ratio 8) Debt Equity Ratio MERITS AND DEMERITS OF THE RATIO’S Merits of the ratio’s The following are some of the important merits of ratios 1. Ratio analysis reflects the working efficiency of the organization

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2. Since ratio analysis relates the financial health of a concern, insurance and other financial institutions rely on them while deciding about loan application and in taking vital investment decisions 3. It helps in establishing trend it helps in preparing plans for the future 4. It is helpful in forecasting likely events of the future. Demerits of the Ratio’s The following are the some important demerits of the ratio’s 1. There is no single method adapted by all concerns as there is no explicit theoretical structure for the calculation of the ratios 2. For concrete analysis inside information must be know by the analysis since most concerns report to portray of ease picture of the financial attachments. 3. Change in the basis of accounting may pose difficult in analysis of ratios between two intervals.

RATIO ANALYSIS 1. Current Ratios
It measures the relative ability of a company to pay its short term liabilities as and when they become due. The ratio is used to calculate how well a company is prepared to meet a sudden demand of short term payments to its creditors.

Formula: current Ratio = Current Assets / Current liabilities.
Particulars Current Assets 2008-09 1,29,93,261 2009-10 11664649 2010-11 11138095

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Current Liabilities Current Ratios 86,97,007 1.49 6641016 1.75 3173245 3.5

CURRENT ASSETS TO CURRENT LIABILITIES 3.5 3.5 3 VALUES ( in times ) 2.5 2 1.5 1 0.5 0 2009 2010 YEARS 2011 1.75 1.49

Graph 1.1 CURRENT ASSTES TO CURRENT LIABILITIES

INTERPRETATION:The ratio 2:1 means that for every current liability of one rupee the firm is having two rupees of current assets which it can repay the current liabilities as and when the liabilities become due. Compared to previous year 2008-09 increase in the current ratio of the year 2010-11 which implies that the firm is having sufficient funds to meet its liabilities as and when they become due.

2. Quick Ratio

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it is also known as “Acid Test Ratio” and it is used to measure the liquidity of a firm by its availability of cash as more liquid than other current assets like inventory which require some time to realize in to cash and current ratio fails as it also takes in to account assets like inventory which cannot be realized all of sudden. Quick ratio comes out of this defect present in the current ratio. It gives more accurately the liquidity of the organisation.

Formula: Acid Test Ratio = Quick Assets/Current Liabilities
Or

Acid Test Ratio = (Current Assets- Inventories)/Current Liabilities
Quick Assets refers to those assets which can be converted into cash immediately or a shortest span of time without diminution of value such as cash & bank balance, short term marketable securities, debtors/receivables. Particulars Current Assets Current Liabilities 2008-09 38,56,786 86,97,007 2009-10 28,54,407 66,41,016 2010-11 26,32,455 3173245

Quick Ratios

0.44

0.43

0.83

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QUICK ASSETS TO CURRENT LIABILITIES 0.83

0.9 0.8 0.7 VALUES ( in times ) 0.6 0.5 0.4 0.3 0.2 0.1 0 2009 2010 YEARS 0.44 0.43

2011

Graph 1.2 QUICK ASSETS TO CURRENT LIABILITIES

INTERPRETATION:Generally a quick ratio of 1:1 is considered as a satisfactory current financial condition. Here in the graph 1.2 it can be seen that improvement in the year 2010-11 compared to the previous earlier year and also company improve its efficiency of inventory turnover. The ratio 1:1 which implies the efficient utilization of resources and improvement in the operations of the firm.

3. Cash ratio
This ratio analysis the availability of cash to meet the current liabilities. It finds out the capacity of the firm to meet the liabilities as and when they become due.

Formula: Cash Ratio= Cash Balance/Current Liabilities
Particulars Cash Balance 2008-09 83,213 2009-10 23864 2010-11 30,762

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Current Liabilities 86,97,007 66,41,016 3173245

Cash Ratio

0.0095

0.0035

0.0096

CASH RATIO 0.0095 0.0096

0.01 0.009 0.008 VALUES ( in times ) 0.007 0.006 0.005 0.004 0.003 0.002 0.001 0

0.0035

2009

2010 YEARS

2011

Graph 1.3 CASH RATIO

INTERPRETATION:In most of the firm it is seen that the cash balance is always less than the current liabilities. But in this year the cash balance is more compared to the previous year there is no investment in the other ways like investment.

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This ratio represents how many times the cash has been covered in the sales. It shows the no of times of sales made in terms of one unit of cash.

Formula: Cash Turnover Ratio = Sales/Cash
Particulars Sales Cash Balance Cash Turnover Ratio 2008-09 9962455 83,213 119 2009-10 7096159 23864 297 2010-11 4506987 30,762 146

Cash Turnover Ratio 297 300 250 VALUES ( in times ) 200 146 150 100 50 0 2009 2010 YEARS 2011 119

Graph 1.4

Cash Turnover Ratio

INTERPRETATION:-From the above table it can be seen that the cash ratio is in decreasing manner which is not a good for the company for the growth.

5. Working Capital Turnover Ratio (WCTR)
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This ratio shows the no of times the working capital covered in the sales. The high working capital ratio indicates high sales and high working capital coverage in the sales made by the company.

Formula: WCTR= Cost of Goods Sold/Net Working Capital
Particulars Cost of Goods Sold Net Working Capital 2008-09 5538953 4296000 2009-10 4994836 5023633 2010-11 5800188 7966000

Cash Turnover Ratio

1.28

0.99

0.72

Working Capital Turnover Ratio 1.4 1.2 0.99 VALUES ( in times ) 1 0.8 0.6 0.4 0.2 0 2009 2010 YEARS 2011 0.72

1.28

Graph 1.5

Working Capital Turnover Ratio

INTERPRETATION:-

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This ratio shows the no of times the working capital rotated in the cost of goods sold. Higher capital turnover ratio higher will be the requirement of working capital if the firm is selling goods on long term credit and vice versa.

6. Inventory Turnover Ratio (ITR)
This ratio shows the no of times the inventory covered in the cost of goods sold. Higher the ratio higher the sales and turnover of inventory which is a good sign of an organisation.

Formula: Inventory turnover Ratio = Cost of Goods Sold/Average Inventory
Particulars Cost of Goods Sold Avg Inventory Cash Turnover Ratio 2008-09 5538953 3784252 1.46 2009-10 4994836 8657941 0.57 2010-11 5800188 7966000 0.72

Inventory Turnover Ratio 1.6 1.4 VALUES ( in times ) 1.2 1 0.8 0.6 0.4 0.2 0 2009 2010 YEARS 2011 0.57 0.72

1.46

Graph 1.6

Inventory Turnover Ratio
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INTERPRETATION:This ratio the no of times of coverage of inventory in the cost of goods sold. If the inventory turnover is high then the requirment for working capital will be high and vice versa.

7. Current Assets Turnover Ratio (CATR)
This ratio shows the no of times of coverage of current assets in the cost of goods sold. It shows how many times the current assets have been covered in the sale of cost of goods sold. Formula: Current Assets turnover Ratio = Cost of Goods Sold/Average Current Assets

Particulars Cost of Goods Sold Average Current Assets

2008-09 55,38,953 38,56,786

2009-10 49,94,836 28,54,407 1.74

2010-11 58,00,188 26,32,455 2.20

Current Assets Turnover 1.43 Ratio

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Current Assets Turnover Ratio Ratio 2.5

2.2 1.74 1.43

2 VALUES ( in times )

1.5

1

0.5

0 2009 2010 YEARS 2011

Graph 1.7

Current Assets Turnover Ratio

INTERPRETATION:This ratio shows the no of times of coverage of current assets in the cost of goods sold. The higher the ratio the better the operation of the company and vice versa the current assets turnover ratio is on the rise which is good sign of management of assets.

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Conclusion

Working capital may be regarded as lifeblood of a business. It’s effective provision can do much to ensure the success of a business, while it’s inefficient management can lead not only to loss of profits but also to the ultimate down fall of what otherwise might be considered as a promising concern. A study of working capital is of major importance to internal and external analysis because of its close relationship with the current day to day operations of a business.

1. Here, I conclude that Changes in the financial year is showing increase in the working capital, because company maintains its working capital properly in the year 2008-09.

2. According to my calculation Current Assets main part of, the working capital of the business. According to all Ratios, It shows that company maintains its ratio is very well. So, In the year 2010-11 company showing better position in the working capital.

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6. Summary of Findings
 The Current Ratio has come to a satisfactory level and is nearing 2:1  The Quick Ratio is Should be bit greater than the 1:1 ratio but still the company is growing this which is a good sign in managing working capital  The Cash Ratio of the company is increasing as compared to the previous year  The Cash Turnover Ratio of the company is decreasing year by year which is not a good sign  The Working Capital Turnover is satisfactory of the company  The Inventory Turnover Ratio is rise which is good sign  The Current Assets Turnover Ratio has raised compared to the previous year which is good sign of growth of the company  The Company is investing its own equity funds it decreased the debt totally which indicates that the firm is generating more cash by its operation

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7. Suggestions:

Overall long term solvency of

ABHINANDAN ENGINEERS

is good.

The company is using its own fund for investment.  The overall profitability should be increased by reducing the cost of raw material, administrative expenses and by increasing sales.  The company should utilize the available large marketing network and improve the customer relation through the constant customer support and often-sales services.  The company should focus on cost control measure for ensuring competitive pricing of the product.  The company should take full advantages of creditors and obtain maximum credits from them. So that it reduce interest payments and the net profit  It is profitable to concentrate on business diversification.  So as the company has a better goodwill in the market it will help them to a new market.

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ABHINANDAN ENGINEERS  It is good to have a decentralized decision making unit in order to activate the company performance effectively and compete with other companies.

8. BIBLIOGRAPHY
1. Company Manual 2. Financial Management Book by A.D Bhat 3. Financial Management Book by Khan and Jain. 4. Final Accounts of ABHINANDAN ENGINEERS.

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