“Impact of Current Assets on Working Capital”. AT
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Contents
)l. "o. Titles Page "o.
I C*apter +
? Introduction
? Literature Review
? Statement of the Problem
? Purpose of the Study
? Scope of the study
? Objectives of the Study
3
37
3
3
3
!"
II C*apter ,
? Or#ani$ation Profile
? Or#ani$ation %hart
? &ata %ollection 'ethod
!(
)"
)*
III C*apter -
? Results + discussion with %harts + #raphs
? ,indin#s
? Su##estions
? %onclusions
)3
77
7-
7
I# C*apter .
? .ppendi/
? 0iblio#raphy
? 1oinin# Report
? 2ee3ly Reports
-"
-"
-(
-*
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“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
Intro/uction0 1
4he project is assi#ned to me “Impact of %urrent .ssets on 2or3in# %apital56 .t
Oil#ear 4owler Polyhydron Private Limited 7O4PL86 4he various information re#ardin#
classification9 determinants9 components9 sources9 arran#ement operatin# cycle have been
also discussed and aspects relatin# to the perspective of Oil#ear 4owler Polyhydron
Private Limited 7O4PL86
Ratio .nalysis has been carried out usin# ,inancial Information for last three
accountin# years i6e6 from *""3 to *""): Ratios li3e %urrent Ratio9 2or3in# %apital
4urnover Ratio9 Inventory 4urnover Ratio9 &ebtors 4urnover Ratio have also been
analy$ed6 . Statement of %han#es in 2or3in# %apital has also been analy$ed and
attached 4urnover + Performance of the %ompany for last three years has also been
analy$ed6
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“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
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“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
$EA"I"G 2 !E3I"ITIO" O3 WOR4I"G CAPITAL0 1
2or3in# capital in simple terms is the amount of funds9 which a company9 must
have to finance its day;to;day operation9 it can be re#arded as partuidity is at another important finance function6 In addition to the mana#ement of
lon#;term assets9 %urrent assets should be mana#ed efficiently for safe #uardin# the firm
a#ainst the dan#erous of li>uidity and insolvency6 Investment in %urrent .ssets affects
the firm profitability9 li>uidity and ris36
Current Lia(ilities0
%omponents of %urrent Liabilities are as follows?
? Gon;Refundable non;interest bearin# advances a#ainst subscription to shares6
? Sundry %reditors for the #oods and e/penses6
? Income ta/ deducted at sources from contractors6
? =/penses Payable6
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“Impact of Current Assets on Working Capital”. AT
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? .mount due to promoter of company6
? Cnclaimed &ividend6
? Security &eposits6
? &ealers &eposits6
? Liabilities for bills discounted6
I$PORTA"CE O3 WOR4I"G CAPITAL0 1
2or3in# %apital is most important in every or#ani$ation whether it is a small or
bi# concern6 4herefore it is said that9 wor3in# capital is the blood and center at a
business6
(6 .de>uately 2or3in# %apital creates certainty9 security and confidence in the
minds of the person in the mi#ht as well in the minds of creditors and wor3ers6
*6 It creates a #ood credit standin# for the firm because credit standin# depends upon
the ability to pay promptly6 . company with ade>uate wor3in# capital is always
able to meet %6L6 in time6
36 It ensure solvency and stability of the enterprise it also ensures continuity in
production and sales6
!6 It enables the company to ta3e advanta#e of cash discount allowed by the
suppliers of raw materials or merchandise6
)6 It enables the presti#e of the company and the morale of its wor3ers because a
company with ade>uately wor3in# capital is always able to pay wa#es and
salaries promptly and re#ularly6
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“Impact of Current Assets on Working Capital”. AT
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@6 It enables the company to procure loans terms ban3s on easy and competitive
terms6
76 In terms of boon it enables the company to meet increasin# demand of its product6
-6 In the time of depression9 it enables the company to overcome the crises
successfully6
6 It enables the company to hold up inventory and wait for better mar3etin#
opportunities so as to secure hi#her prices6
("6 It enable the company on its business successfully and achieve pro#ress and
prosperity9
$ETO!) O3 E)TI$ATI"G WOR4I"G CAPITAL0 1
? Conuidity and #reater importance is attached
to current ratio9 li>uidity ratio9 etc69 which pertain to the li>uidity of a business6
? Operating c;cle met*o/0
In order to understand what #ives rise to differences in the amount of timin# of
cash flows9 we should first 3now the len#th of time which is re>uired to convert cash into
resources9 resources into final product9 the final product into receivables and receivables
bac3 into cash6
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“Impact of Current Assets on Working Capital”. AT
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CLA))I3ICATIO" O3 WOR4I"G CAPITAL
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“Impact of Current Assets on Working Capital”. AT
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A. On t*e (asics of Concept
%a& "et Working Capital0
4his is the difference between current assets and current liabilities6 %urrent
Liabilities are those that are e/pected to mature within an accountin# year and include
creditors9 bills payable and outstandin# e/penses6
Investment is current assets represent a very si#nificant portion of the total
investment in assets6 In case of public limited companies in India9 current assets
constitute around @"H of the total capital employed6 4herefore the finance mana#er
should attention to wor3in# capital mana#ement6
2or3in# %apital 'ana#ement is no doubt si#nificant for all firms9 but its
si#nificance is enhanced in cases of small firms6 . small firm has more investment in
current assets than fi/ed assets and therefore current assets should be efficiently
mana#ed6
4he wor3in# capital needs increase as the firm #rows6 .s sales #row9 the firm
needs to invest more in debtors and inventories6 4he finance mana#er should be aware of
such needs and finance them >uic3ly6
%urrent .ssets can be finance throu#h lon#;term and short;term sources6 4he
ratio of lon#;term to short;term source will depend on whether the firm is a##ressive of
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“Impact of Current Assets on Working Capital”. AT
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conservative6 It the firm is a##ressive then it will finance a part of its permanent current
assets with short;term funds6 On the other hand9 a conservative firm will finance its
permanent assets and also a part of temporary current assets with lon#;term financin#6
%(& Gross Working Capital
4his refers to the firmAs investment in current assets6 %urrent .ssets are the assets
which can be converted into cash within a short period say9 an accountin# year6 %urrent
assets include cash9 debtors9 and bill receivable9 short;term securities6 etc6
A. On t*e (asis of Time
a. Permanent Working Capital
Permanent 2or3in# %apital is permanently loc3ed up in the circulation of current
assets6 It covers the minimum amount re>uested for maintainin# the circulation of current
assets6
i. Initial Working Capital
.t its inception and durin# the formative period of its operations a company must
have enou#h cash fund to meet its obli#ations6 4he need for initial wor3in# capital is for
every company to consolidate its position6
ii. Regular Working Capital
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It refers to the minimum amount of li>uid capital re>uired to 3eep up the
circulation of the capital from the cash inventories to account receivable and from
account receivables to bac3 a#ain cash6 It consists of ade>uate cash balance on hand and
at ban39 ade>uate stoc3 of raw materials and finished #oods and amount of receivables6
(. #aria(le Working Capital
It refers to the past of the 2or3in# %apital that chan#es with the volume of
business: it may be divided into two classes6
i. )easonal Working Capital
4here is many line of business where the volumes of operations are different and
hence the amount of wor3in# capital varies with seasons6 4he capital re>uired to meet
the seasonal needs of the enterprise 3nows as Seasonal 2or3in# %apital6
ii. )pecial Working Capital
4he capital re>uired to meet any special operations such as e/periments with new
products or new techni>ues of production and ma3in# interior advertisin# campai#n etc9
is also 3now as Special 2or3in# %apital6
'. Ot*er !eterminants of Working Capital
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“Impact of Current Assets on Working Capital”. AT
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In order to mana#e the 2or3in# %apital optimally: on has to #ive due
consideration to the factors that influence the amount of 2or3in# %apital to be
maintained6
)O9RCE) O3 WOR4I"G CAPITAL0 1
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“Impact of Current Assets on Working Capital”. AT
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+. Long Term )ources of Working Capital0 1
4he followin# are the some important of the lon#
term sources of wor3in# capital6
A. Issue of )*ares0 Issuin# shares can finance a part of lon#;term wor3in# capital6
06 Issue of !e(enture0 Lon# 4erm 2or3in# %apital can be collected by the way of
issuin# the debentures6
%6 Retaine/ Profits0 .ccumulated lar#e profit can also consider as a source of financin#
the lon#;term capital6
&6 Term Loans0 1 4he mid and term loan above three year are also important source of
financin# the lon# term wor3in# capital needs6
=6 Reseruestions6
? Iow much should be orderedJ
? 2hen should be orderedJ
4he aim of inventory mana#ement thus should be to avoid e/cessive and
inade>uate levels of inventories and to maintain sufficient inventories for the smooth
production and sales operation6
C& $anagement of Receiuired to complete the series of events
as stated below in case of manufacturin# enterprise9 which is cyclical in nature6
,or a manufacturin# firm9 cash is spent on ac>uirin# raw materials9 which are
transformed in to wor3 in pro#ress6 4he wor3 in pro#ress is then converted in to finished
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#oods6 ,inished #oods ta3e the form sales9 which may be credit or cash6 %redit sales
convert in to sundry debtors9 bills receivables9 which after some time9 #ets converted in to
cash6 4his cycle repeats6
OPERATI"G CYCLE O3 $A"93ACT9RI"G CO$PA"Y
%ash
&ebtors < 0R Raw 'aterials
Sales of #oods 2or3 in Pro#ress
,inished Eoods
I$PORTA"CE O3 OPERATI"G CYCLE
Operatin# cycle concept is a new concept in wor3in# capital mana#ement9 which
has been #ainin# more and more importance in recent years6 4his concept emphasi$es the
importance of time factors in the conversion of raw materials into final product and then
in to sales resultin# in cash collection9 ri#ht from the ac>uisition of raw materials9
normally operatin# cycle passes throu#h the followin# sta#es6
(6 .c>uisition of raw materials6
*6 2or3 in Pro#ress6
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36 Stoc3 of finished #oods6
!6 Sale and reali$ation of sales proceeds6
Operatin# cycle concept plays an important role in determinin# the wor3in#
capital re>uirement of firm6 &uration of manufacturin# process ri#ht from the ac>uisition
of raw materials till they are sole out after bein# converted into final products and the
cash is reali$ed determines the amount of wor3in# capital re>uired6 Lon#er the operatin#
cycle #reater will be the amount of wor3in# capital re>uired and shortest operatin# cycle
re>uires limited amount of wor3in# capital6 4herefore9 an efficient mana#ement should
try to reduce the time elapsed in these consecutive sta#es in operatin# cycle6
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!ETER$I"A"T) O3 WOR4I"G CAPITAL0 1
. firm should plan its operations in such a way that it should have neither too
much not too of little wor3in# capital6 4he wor3in# capital re>uirement is determined by
a wide variety of factors6 4hese factors9 however9 affect different enterprise differently6
4hey also vary from time to time6 In #eneral9 the followin# factors are involved in a
proper assessment of the >uantum of wor3in# capital re>uired6
4he followin# are the some important determinants of wor3in# capital
+. General "ature of 'usiness
4he wor3in# capital re>uirements of an enterprise are basically related to the
conduct of business6 =nterprise falls in to some broad cate#ories dependin# on the nature
of their business6 ,or instance9 public utilities have certain features which have a bearin#
on their wor3in# capital needs6 4he two relevant features are9
(6 4he cash nature of business9 that is9 cash sale6
*6 Sale of services rather than commodities6
In a view of these features9 they do not maintain bi# inventories and have9
financial enterprise6 4he nature of their business is such that they have to maintain a
sufficient amount of cash9 inventories9 and boo3 debts6
,. Pro/uction C;cle
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“Impact of Current Assets on Working Capital”. AT
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.nother factors which have a bearin# on the >uantum of wor3in# capital is the
production cycle6 4he term “Production or manufacturin# cycle5 refer to the time
involved in the manufacture of #oods6 It covers the time;span between the procurement
of finished #oods6 ,unds have to be necessarily tied up durin# the process of
manufacture9 necessitatin# enhanced wor3in# capital6 In other words9 there is some time
#ap before raw material becomes finished #oods6 4o sustain such activities the need for
wor3in# capital is obvious6 4he lon#er the time span 7i6e6 Production %ycle89 the lar#er
will be the tied up fund and9 therefore9 the lar#er is the wor3in# capital needed and vice;
versa6
-. 'usiness C;cle
4he wor3in# capital re>uirements are also determined by the nature of business
cycle6 0usiness fluctuations lead to cyclical and seasonal chan#es9 which9 in turn9 cause a
shift in the wor3in# capital position9 particularly for temporary wor3in# capital
re>uirement6 4he variations in business condition may be in two directions9
(6 Cpward Phase? ; 2hen boom conditions prevail9
*6 &ownswin# Phase? ; 2hen economic activity is mar3ed by a decline6
&urin# the upswin# of business activity9 the need for wor3in# capital is li3ely to
#row to cover the la# between increased sales and receipt of cash as well as to finance
purchase of additional material to cater to the e/pansion of the level of activity6
.. Pro/uction Polic;
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4he >uantum of wor3in# capital is also determined by production policy6 In case
of certain lines of business9 the demand for products is seasonal9 that is9 they are
purchased durin# certain months of the year6 4here are two options to open to such
enterprise? either they confine production only to period when #oods are purchased or
they follow a steady production policy throu#hout the year and product #oods at a level
to meet the pea3 demand6 In former case9 there are wor3in# force and physical facilities
without ade>uate production and sale6
?. Cre/it Polic;
4he credit policy relatin# to sales and purchases9 also affects the wor3in# capital6
4he credit policy influences the re>uirements of wor3in# capital in two ways9
(6 4hrou#h the credit terms #ranted by the firm to its customersuirements of a business are9 thus9
affected by the terms purchase and sale9 and role #iven to credit by company in itAs
dealin# with creditors and debtors6
*6 %redit terms fi/ed by an enterprise are affected by the prevailin# trade practices
as well as chan#in# economic conditions6 If9 for e/ample9 competition were 3een9 there
would pressure to #rant #enerous credit terms6 Gevertheless9 there is wide scope for
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mana#erial discretion in wor3in# out a suitable credit policy relevant to each customer
based on the merits of each case6 ,or instance9 liberal credit facilities can be e/tended on
the basis of credit ratin#6 4his will avoid the problem of havin# e/cess wor3in# capital6
@. Gro5t*s an/ E=pansion
.s a company #rows9 it is lo#ical to e/pect that a lar#er amount of wor3in#
capital is re>uired6 It is9 of course9 difficult to determine precisely the relationship
between the #rowth in the volume of business of a company and the increase in its
wor3in# capital6 4he composition of wor3in# capital in a #rowin# company also shifts
with economic circumstance and corporate practices6 Other thin#s9 bein# e>ual9 #rowth
industries re>uire more wor3in# capital than those that are static6
A. Profit Leuality of mana#ement and monopoly power
would by and lar#e determine the profit earned by a firm6 . priori9 it can be #enerali$ed
that a firm dealin# in a hi#h >uality product9 havin# a #ood mar3etin# arran#ement and
enjoyin# monopoly power in the mar3et9 is li3ely to earn hi#h profit and vice;versa6
Ii#her profit mar#in would improve the prospects of #eneratin# more internal funds
thereby contributin# to the wor3in# capital pool6
C. !iuipment * Sets
Iori$ontal 0ore 3 Go s =lectro Static %leaner ( Go s
%G% 'achine %enter ( Go s %leanin# 'achine * Go s
%G% Lertical 'achine %enter ( Go s Pallet 4ruc3s * Go s
&rillin# 'achine 3 Go s .ir %ompressors 3 Go s
'illin# 'achine ( Go s Pr#au#e %alibrator ( Go s
Surface 'achine * Go s Iardness 4ester ( Go s
Ionin# 'achine ( Go s Pumps 4est Stands 3 Go s
Iac3 Saws * Go s Lalve 4est Stands ( Go s
4IE 2eldin# Set ( Go s Eeneratin# Stands 3 Go s
,lame %uttin# =>uipments ( Set Over head %ranes 3 Go s
.rc 2eldin# Set * Go s
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2or3s? ;
Phone lines @ Gos6
,a/ line ( Go6
=;mail ( Go
=lectronic =/chan#e ("O3" %apacities6
...& !ATA PROCE))I"G
%omputer ;;;; *! Gos6 3or
&esi#n .ccountancy
Inventory Plannin#
Sales Purchase
.dministration6
?& )TA330 1
)ales A Engineers J . )upport
Purc*ase , Officers J - )upport
Planning + Engineer
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!esign D Engineers J + )upport
Accounts an/ A/ministrations @ Officers J - )upports
$anufacturing - Engineers J .E )upports
)eruic3 ratio was (6@* and there has been
decreased in the year compared to *""3;"! and *""!;")6
4he hi#h ratio indicates that all debtors may not be >uic3 and cash may be
immediately needed to pay operatin# e/penses6 It should be noted that inventories are not
absolutely non;li>uid to a measurable e/tent inventories are available to meet current
obli#ations6 So the company can suffer from shorta#e of funds6 On the other hand9 a
company with low ratio in the year *""3;"! and *"!;")9 indicates that >uic3 ratio may
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“Impact of Current Assets on Working Capital”. AT
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really be prosperin# and payin# its current obli#ation in time if it has been turnin# over
its inventories efficiently6
-. Total Assets Turnouality of #oods
and over investment in sales in the *""3;*""!6
.. 3i=e/ Assets Turnouality of debtors6 Since9 a short
collection period implies that prompt payment by debtors6 In collection period havin#
some increase and decrease6 So9 we can find out that there is no uniformity in the debtorAs
collection period of the year6
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C. Gross Profit $argin Ratio0 1
Eross Profit 'ar#in Ratio is the result of relationship between price9 sales9
volume and cost6 . chan#e in #ross profit mar#in can be due to chan#es in any of these
factors6 It represents the limit of beyond which fall in sales price are outside and tolerance
limit6
Eross Profit 'ar#in Ratio Q Eross Profit
Get Sales
Particulars ,EE,1,EE- ,EE-1,EE. ,EE.1,EE?
Eross Profit 79*@9""" (9!*9--9""" (9-@9)!9"""
Get Sales )9739739""" ("9-@9@"9""" ("97"9""9"""
Gross Profit $argin Ratio +.,@ +-.+. +A..-
$ross !ro%it &ar'in Ratio
0
5
10
15
20
2002-2003 2003-2004 2004-2005
Years
R
a
t
i
o
s
$ross !ro%it &ar'in
Ratio
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Interpretation0 1
4here has been increased in the year *""!;*"") as compared to *""*;*""3 and
*""3;*""!6 4he hi#h ratio indicates that the company should earn a sufficient profit on
each rupee of sales6 2hile low ratio indicate that in the year *""*;*""3 that the company
will be meetin# the operations e/penses and no returns will be available to the owners6
.nd also hi#h ratio indicate that a #ood mana#ement indicate that cost of production of
the firm is relatively low9 it may also indicate hi#her the sales price without a
correspondin# increase in the cost of the #oods6
CO")OLI!ATE! )TATE$E"T O3 TE RATIO) 3OR TREE YEAR)
)l. "o Particulars ,EE,1,EE- ,EE-1,EE. ,EE.1,EE?
(6 %urrent Ratio *6@@ *6*@ *6*)
*6 Ruic3 Ratio (6@* (63( (6)-
36 4otal .ssets 4urnover Ratio *6(* !6*( !6*!
!6 Inventory 4urnover Ratio 36(3 36(! 36-(
)6 ,i/ed .ssets 4urnover Ratio (6)) *6( *67
@6 %reditors 4urnover Ratio !6!7 36-" !6"@
76 %reditors %ollection Period -(6@) @6") -6"
-6 &ebtors 4urnover Ratio 36)* 363- *6*3
6 &ebtors %ollection Period ("36@ ("76- (@36@7
("6 Eross Profit 'ar#in Ratio (6*@) (36(! (76!3
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0
50
100
150
200
250
300
Ratios
2002-
2003
2003-
2004
2004-
2005
Years
Consolidated Statement of Ratios
$ross !ro%it
&ar'in Ratio
"e#tors
Collection
!erio
"e#tors
Turnover Ratio
Creitors
Collection
!erio
Creitors
Turnover Ratio
Fixe Assets
Turnover Ratio
(nventor)
Turnover Ratio
Total Assets
Turnover Ratio
Quick Ratio
Current Ratio
3I"!I"G A"! )9GGE)TIO")
3in/ings0 1
(6 %urrent Ratio of O4PL %ompany shows the solvency of the firm ability to repay its
liabilities6 .s ratio is decline to *6@@6 It shows that company is in solvency state6
%urrent assets are should always be twice of current liabilities6
*6 In a comparative statement of 0alance Sheet9 debtors were (9!79(9""" in the year
*""*;*""39 and it has increased to 39*(9**9""" and !9779"9""" in the last two years6
0ecause increased in credit sales6
36 4otal assets turnover ratio shows the ability to convert all its assets incurrin# fi/ed
assets to sales6 .s per the ratio calculated in the year *""*;*""3 it was *6(*9 which
was low ratio means firm is able to convert its total assets >uic3ly into funds as per
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the company ratio the firm is able to convert it assets because the ratio are hi#her
between !6*! to *6(*9 which was low ratio6
!6 Inventory 4urnover Ratio is increased from 36(3 to 36-( in the year *""*;*""3 and
*""!;*"") respectively6 It shows company has maintained #ood inventory policy6
)6 Eross profit mar#in ratio shows that increasin# year to year6 It shows that company
should earn a sufficient profit on each rupee of cash6
)uggestions0 1
4he wor3in# capital includin# all its related aspects is mana#ed >uite well by
O4PL6 4he finance department is carryin# out its responsibilities efficiently6 4he entire
departments are collectively wor3in# hard for the pro#ress of O4PL6
4he followin# are the su##estions6
1. In a comparative 0alance Sheet &ebtors are increased from year to year 7(9!79(9"""
to !9779"9""86 =ven thou#h debtors are increased which is favorable enou#h for the
company6 0ut should ta3e care while dealin# a#ainst the loss due to doubtful and bad
debt6
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2. 4he company net sale is very low in the year *""*;*""3 Rs )9739739"""9 as compared
to *""3;*""! Rs6 ("9-@9@"9"""6 So9 the company should mana#e its current assets9
which effects on production and ultimately on sales6
3. 4he %urrent Ratio of the company is decreased from *6@@ to *6)) in the last three;
year 7*""3 to *"")86 So9 the current ratio should be maintained by the company in
such a way that the ratio does not follow below *?(6
!6 %ompany should #ive minimum payment time to #et prompt payment by debtors6
Conclusion
2or3in# capital may be re#arded as lifeblood of a business6 ItAs effective
provision can do much to ensure the success of a business9 while itAs inefficient
mana#ement can lead not only to loss of profits but also to the ultimate down fall of what
otherwise mi#ht be considered as a promisin# concern6 . study of wor3in# capital is of
major importance to internal and e/ternal analysis because of its close relationship with
the current day to day operations of a business.
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(6 Iere9 I conclude that %han#es in the financial year is showin# increase in the wor3in#
capital9 because company maintains its wor3in# capital properly in the year *""3 to
*"")6
*6 .ccordin# to my calculation %urrent .ssets main part of9 the wor3in# capital of the
business6 .ccordin# to all Ratios9 It shows that company maintains its ratio is very
well6 So9 In t*e )ear 2004-2005 company showin# better position in the wor3in#
capital6
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'I'LOGRAPY
• ,inancial 'ana#ement by boo3s used from which I have ta3en help for the theory
part of the study?
? $.#. 4*an 2 P.4. 6ain
? I.$. Pan/e;
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• I have also used the trial balance of Oil#ear 4owler Polyhydron Private Limited
7O4PL86 4hose are from the year *""3;*"")6 2hich provide by the official at
0el#aum 2or3s6
• I have meet with the different people at the .dministrative &epartment at Oil#ear
4owler Polyhydron Private Limited 7O4PL86 .s also too3 their views and information
for my Study6
• I have also too3 the help form the company site www6oil#ear6co6in
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doc_775834584.doc
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'a(asa(patilfreepptm(a.com
Contents
)l. "o. Titles Page "o.
I C*apter +
? Introduction
? Literature Review
? Statement of the Problem
? Purpose of the Study
? Scope of the study
? Objectives of the Study
3
37
3
3
3
!"
II C*apter ,
? Or#ani$ation Profile
? Or#ani$ation %hart
? &ata %ollection 'ethod
!(
)"
)*
III C*apter -
? Results + discussion with %harts + #raphs
? ,indin#s
? Su##estions
? %onclusions
)3
77
7-
7
I# C*apter .
? .ppendi/
? 0iblio#raphy
? 1oinin# Report
? 2ee3ly Reports
-"
-"
-(
-*
(
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Intro/uction0 1
4he project is assi#ned to me “Impact of %urrent .ssets on 2or3in# %apital56 .t
Oil#ear 4owler Polyhydron Private Limited 7O4PL86 4he various information re#ardin#
classification9 determinants9 components9 sources9 arran#ement operatin# cycle have been
also discussed and aspects relatin# to the perspective of Oil#ear 4owler Polyhydron
Private Limited 7O4PL86
Ratio .nalysis has been carried out usin# ,inancial Information for last three
accountin# years i6e6 from *""3 to *""): Ratios li3e %urrent Ratio9 2or3in# %apital
4urnover Ratio9 Inventory 4urnover Ratio9 &ebtors 4urnover Ratio have also been
analy$ed6 . Statement of %han#es in 2or3in# %apital has also been analy$ed and
attached 4urnover + Performance of the %ompany for last three years has also been
analy$ed6
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$EA"I"G 2 !E3I"ITIO" O3 WOR4I"G CAPITAL0 1
2or3in# capital in simple terms is the amount of funds9 which a company9 must
have to finance its day;to;day operation9 it can be re#arded as partuidity is at another important finance function6 In addition to the mana#ement of
lon#;term assets9 %urrent assets should be mana#ed efficiently for safe #uardin# the firm
a#ainst the dan#erous of li>uidity and insolvency6 Investment in %urrent .ssets affects
the firm profitability9 li>uidity and ris36
Current Lia(ilities0
%omponents of %urrent Liabilities are as follows?
? Gon;Refundable non;interest bearin# advances a#ainst subscription to shares6
? Sundry %reditors for the #oods and e/penses6
? Income ta/ deducted at sources from contractors6
? =/penses Payable6
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? .mount due to promoter of company6
? Cnclaimed &ividend6
? Security &eposits6
? &ealers &eposits6
? Liabilities for bills discounted6
I$PORTA"CE O3 WOR4I"G CAPITAL0 1
2or3in# %apital is most important in every or#ani$ation whether it is a small or
bi# concern6 4herefore it is said that9 wor3in# capital is the blood and center at a
business6
(6 .de>uately 2or3in# %apital creates certainty9 security and confidence in the
minds of the person in the mi#ht as well in the minds of creditors and wor3ers6
*6 It creates a #ood credit standin# for the firm because credit standin# depends upon
the ability to pay promptly6 . company with ade>uate wor3in# capital is always
able to meet %6L6 in time6
36 It ensure solvency and stability of the enterprise it also ensures continuity in
production and sales6
!6 It enables the company to ta3e advanta#e of cash discount allowed by the
suppliers of raw materials or merchandise6
)6 It enables the presti#e of the company and the morale of its wor3ers because a
company with ade>uately wor3in# capital is always able to pay wa#es and
salaries promptly and re#ularly6
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@6 It enables the company to procure loans terms ban3s on easy and competitive
terms6
76 In terms of boon it enables the company to meet increasin# demand of its product6
-6 In the time of depression9 it enables the company to overcome the crises
successfully6
6 It enables the company to hold up inventory and wait for better mar3etin#
opportunities so as to secure hi#her prices6
("6 It enable the company on its business successfully and achieve pro#ress and
prosperity9
$ETO!) O3 E)TI$ATI"G WOR4I"G CAPITAL0 1
? Conuidity and #reater importance is attached
to current ratio9 li>uidity ratio9 etc69 which pertain to the li>uidity of a business6
? Operating c;cle met*o/0
In order to understand what #ives rise to differences in the amount of timin# of
cash flows9 we should first 3now the len#th of time which is re>uired to convert cash into
resources9 resources into final product9 the final product into receivables and receivables
bac3 into cash6
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CLA))I3ICATIO" O3 WOR4I"G CAPITAL
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A. On t*e (asics of Concept
%a& "et Working Capital0
4his is the difference between current assets and current liabilities6 %urrent
Liabilities are those that are e/pected to mature within an accountin# year and include
creditors9 bills payable and outstandin# e/penses6
Investment is current assets represent a very si#nificant portion of the total
investment in assets6 In case of public limited companies in India9 current assets
constitute around @"H of the total capital employed6 4herefore the finance mana#er
should attention to wor3in# capital mana#ement6
2or3in# %apital 'ana#ement is no doubt si#nificant for all firms9 but its
si#nificance is enhanced in cases of small firms6 . small firm has more investment in
current assets than fi/ed assets and therefore current assets should be efficiently
mana#ed6
4he wor3in# capital needs increase as the firm #rows6 .s sales #row9 the firm
needs to invest more in debtors and inventories6 4he finance mana#er should be aware of
such needs and finance them >uic3ly6
%urrent .ssets can be finance throu#h lon#;term and short;term sources6 4he
ratio of lon#;term to short;term source will depend on whether the firm is a##ressive of
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conservative6 It the firm is a##ressive then it will finance a part of its permanent current
assets with short;term funds6 On the other hand9 a conservative firm will finance its
permanent assets and also a part of temporary current assets with lon#;term financin#6
%(& Gross Working Capital
4his refers to the firmAs investment in current assets6 %urrent .ssets are the assets
which can be converted into cash within a short period say9 an accountin# year6 %urrent
assets include cash9 debtors9 and bill receivable9 short;term securities6 etc6
A. On t*e (asis of Time
a. Permanent Working Capital
Permanent 2or3in# %apital is permanently loc3ed up in the circulation of current
assets6 It covers the minimum amount re>uested for maintainin# the circulation of current
assets6
i. Initial Working Capital
.t its inception and durin# the formative period of its operations a company must
have enou#h cash fund to meet its obli#ations6 4he need for initial wor3in# capital is for
every company to consolidate its position6
ii. Regular Working Capital
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It refers to the minimum amount of li>uid capital re>uired to 3eep up the
circulation of the capital from the cash inventories to account receivable and from
account receivables to bac3 a#ain cash6 It consists of ade>uate cash balance on hand and
at ban39 ade>uate stoc3 of raw materials and finished #oods and amount of receivables6
(. #aria(le Working Capital
It refers to the past of the 2or3in# %apital that chan#es with the volume of
business: it may be divided into two classes6
i. )easonal Working Capital
4here is many line of business where the volumes of operations are different and
hence the amount of wor3in# capital varies with seasons6 4he capital re>uired to meet
the seasonal needs of the enterprise 3nows as Seasonal 2or3in# %apital6
ii. )pecial Working Capital
4he capital re>uired to meet any special operations such as e/periments with new
products or new techni>ues of production and ma3in# interior advertisin# campai#n etc9
is also 3now as Special 2or3in# %apital6
'. Ot*er !eterminants of Working Capital
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In order to mana#e the 2or3in# %apital optimally: on has to #ive due
consideration to the factors that influence the amount of 2or3in# %apital to be
maintained6
)O9RCE) O3 WOR4I"G CAPITAL0 1
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+. Long Term )ources of Working Capital0 1
4he followin# are the some important of the lon#
term sources of wor3in# capital6
A. Issue of )*ares0 Issuin# shares can finance a part of lon#;term wor3in# capital6
06 Issue of !e(enture0 Lon# 4erm 2or3in# %apital can be collected by the way of
issuin# the debentures6
%6 Retaine/ Profits0 .ccumulated lar#e profit can also consider as a source of financin#
the lon#;term capital6
&6 Term Loans0 1 4he mid and term loan above three year are also important source of
financin# the lon# term wor3in# capital needs6
=6 Reseruestions6
? Iow much should be orderedJ
? 2hen should be orderedJ
4he aim of inventory mana#ement thus should be to avoid e/cessive and
inade>uate levels of inventories and to maintain sufficient inventories for the smooth
production and sales operation6
C& $anagement of Receiuired to complete the series of events
as stated below in case of manufacturin# enterprise9 which is cyclical in nature6
,or a manufacturin# firm9 cash is spent on ac>uirin# raw materials9 which are
transformed in to wor3 in pro#ress6 4he wor3 in pro#ress is then converted in to finished
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#oods6 ,inished #oods ta3e the form sales9 which may be credit or cash6 %redit sales
convert in to sundry debtors9 bills receivables9 which after some time9 #ets converted in to
cash6 4his cycle repeats6
OPERATI"G CYCLE O3 $A"93ACT9RI"G CO$PA"Y
%ash
&ebtors < 0R Raw 'aterials
Sales of #oods 2or3 in Pro#ress
,inished Eoods
I$PORTA"CE O3 OPERATI"G CYCLE
Operatin# cycle concept is a new concept in wor3in# capital mana#ement9 which
has been #ainin# more and more importance in recent years6 4his concept emphasi$es the
importance of time factors in the conversion of raw materials into final product and then
in to sales resultin# in cash collection9 ri#ht from the ac>uisition of raw materials9
normally operatin# cycle passes throu#h the followin# sta#es6
(6 .c>uisition of raw materials6
*6 2or3 in Pro#ress6
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36 Stoc3 of finished #oods6
!6 Sale and reali$ation of sales proceeds6
Operatin# cycle concept plays an important role in determinin# the wor3in#
capital re>uirement of firm6 &uration of manufacturin# process ri#ht from the ac>uisition
of raw materials till they are sole out after bein# converted into final products and the
cash is reali$ed determines the amount of wor3in# capital re>uired6 Lon#er the operatin#
cycle #reater will be the amount of wor3in# capital re>uired and shortest operatin# cycle
re>uires limited amount of wor3in# capital6 4herefore9 an efficient mana#ement should
try to reduce the time elapsed in these consecutive sta#es in operatin# cycle6
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!ETER$I"A"T) O3 WOR4I"G CAPITAL0 1
. firm should plan its operations in such a way that it should have neither too
much not too of little wor3in# capital6 4he wor3in# capital re>uirement is determined by
a wide variety of factors6 4hese factors9 however9 affect different enterprise differently6
4hey also vary from time to time6 In #eneral9 the followin# factors are involved in a
proper assessment of the >uantum of wor3in# capital re>uired6
4he followin# are the some important determinants of wor3in# capital
+. General "ature of 'usiness
4he wor3in# capital re>uirements of an enterprise are basically related to the
conduct of business6 =nterprise falls in to some broad cate#ories dependin# on the nature
of their business6 ,or instance9 public utilities have certain features which have a bearin#
on their wor3in# capital needs6 4he two relevant features are9
(6 4he cash nature of business9 that is9 cash sale6
*6 Sale of services rather than commodities6
In a view of these features9 they do not maintain bi# inventories and have9
financial enterprise6 4he nature of their business is such that they have to maintain a
sufficient amount of cash9 inventories9 and boo3 debts6
,. Pro/uction C;cle
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.nother factors which have a bearin# on the >uantum of wor3in# capital is the
production cycle6 4he term “Production or manufacturin# cycle5 refer to the time
involved in the manufacture of #oods6 It covers the time;span between the procurement
of finished #oods6 ,unds have to be necessarily tied up durin# the process of
manufacture9 necessitatin# enhanced wor3in# capital6 In other words9 there is some time
#ap before raw material becomes finished #oods6 4o sustain such activities the need for
wor3in# capital is obvious6 4he lon#er the time span 7i6e6 Production %ycle89 the lar#er
will be the tied up fund and9 therefore9 the lar#er is the wor3in# capital needed and vice;
versa6
-. 'usiness C;cle
4he wor3in# capital re>uirements are also determined by the nature of business
cycle6 0usiness fluctuations lead to cyclical and seasonal chan#es9 which9 in turn9 cause a
shift in the wor3in# capital position9 particularly for temporary wor3in# capital
re>uirement6 4he variations in business condition may be in two directions9
(6 Cpward Phase? ; 2hen boom conditions prevail9
*6 &ownswin# Phase? ; 2hen economic activity is mar3ed by a decline6
&urin# the upswin# of business activity9 the need for wor3in# capital is li3ely to
#row to cover the la# between increased sales and receipt of cash as well as to finance
purchase of additional material to cater to the e/pansion of the level of activity6
.. Pro/uction Polic;
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4he >uantum of wor3in# capital is also determined by production policy6 In case
of certain lines of business9 the demand for products is seasonal9 that is9 they are
purchased durin# certain months of the year6 4here are two options to open to such
enterprise? either they confine production only to period when #oods are purchased or
they follow a steady production policy throu#hout the year and product #oods at a level
to meet the pea3 demand6 In former case9 there are wor3in# force and physical facilities
without ade>uate production and sale6
?. Cre/it Polic;
4he credit policy relatin# to sales and purchases9 also affects the wor3in# capital6
4he credit policy influences the re>uirements of wor3in# capital in two ways9
(6 4hrou#h the credit terms #ranted by the firm to its customersuirements of a business are9 thus9
affected by the terms purchase and sale9 and role #iven to credit by company in itAs
dealin# with creditors and debtors6
*6 %redit terms fi/ed by an enterprise are affected by the prevailin# trade practices
as well as chan#in# economic conditions6 If9 for e/ample9 competition were 3een9 there
would pressure to #rant #enerous credit terms6 Gevertheless9 there is wide scope for
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mana#erial discretion in wor3in# out a suitable credit policy relevant to each customer
based on the merits of each case6 ,or instance9 liberal credit facilities can be e/tended on
the basis of credit ratin#6 4his will avoid the problem of havin# e/cess wor3in# capital6
@. Gro5t*s an/ E=pansion
.s a company #rows9 it is lo#ical to e/pect that a lar#er amount of wor3in#
capital is re>uired6 It is9 of course9 difficult to determine precisely the relationship
between the #rowth in the volume of business of a company and the increase in its
wor3in# capital6 4he composition of wor3in# capital in a #rowin# company also shifts
with economic circumstance and corporate practices6 Other thin#s9 bein# e>ual9 #rowth
industries re>uire more wor3in# capital than those that are static6
A. Profit Leuality of mana#ement and monopoly power
would by and lar#e determine the profit earned by a firm6 . priori9 it can be #enerali$ed
that a firm dealin# in a hi#h >uality product9 havin# a #ood mar3etin# arran#ement and
enjoyin# monopoly power in the mar3et9 is li3ely to earn hi#h profit and vice;versa6
Ii#her profit mar#in would improve the prospects of #eneratin# more internal funds
thereby contributin# to the wor3in# capital pool6
C. !iuipment * Sets
Iori$ontal 0ore 3 Go s =lectro Static %leaner ( Go s
%G% 'achine %enter ( Go s %leanin# 'achine * Go s
%G% Lertical 'achine %enter ( Go s Pallet 4ruc3s * Go s
&rillin# 'achine 3 Go s .ir %ompressors 3 Go s
'illin# 'achine ( Go s Pr#au#e %alibrator ( Go s
Surface 'achine * Go s Iardness 4ester ( Go s
Ionin# 'achine ( Go s Pumps 4est Stands 3 Go s
Iac3 Saws * Go s Lalve 4est Stands ( Go s
4IE 2eldin# Set ( Go s Eeneratin# Stands 3 Go s
,lame %uttin# =>uipments ( Set Over head %ranes 3 Go s
.rc 2eldin# Set * Go s
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2or3s? ;
Phone lines @ Gos6
,a/ line ( Go6
=;mail ( Go
=lectronic =/chan#e ("O3" %apacities6
...& !ATA PROCE))I"G
%omputer ;;;; *! Gos6 3or
&esi#n .ccountancy
Inventory Plannin#
Sales Purchase
.dministration6
?& )TA330 1
)ales A Engineers J . )upport
Purc*ase , Officers J - )upport
Planning + Engineer
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!esign D Engineers J + )upport
Accounts an/ A/ministrations @ Officers J - )upports
$anufacturing - Engineers J .E )upports
)eruic3 ratio was (6@* and there has been
decreased in the year compared to *""3;"! and *""!;")6
4he hi#h ratio indicates that all debtors may not be >uic3 and cash may be
immediately needed to pay operatin# e/penses6 It should be noted that inventories are not
absolutely non;li>uid to a measurable e/tent inventories are available to meet current
obli#ations6 So the company can suffer from shorta#e of funds6 On the other hand9 a
company with low ratio in the year *""3;"! and *"!;")9 indicates that >uic3 ratio may
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really be prosperin# and payin# its current obli#ation in time if it has been turnin# over
its inventories efficiently6
-. Total Assets Turnouality of #oods
and over investment in sales in the *""3;*""!6
.. 3i=e/ Assets Turnouality of debtors6 Since9 a short
collection period implies that prompt payment by debtors6 In collection period havin#
some increase and decrease6 So9 we can find out that there is no uniformity in the debtorAs
collection period of the year6
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C. Gross Profit $argin Ratio0 1
Eross Profit 'ar#in Ratio is the result of relationship between price9 sales9
volume and cost6 . chan#e in #ross profit mar#in can be due to chan#es in any of these
factors6 It represents the limit of beyond which fall in sales price are outside and tolerance
limit6
Eross Profit 'ar#in Ratio Q Eross Profit
Get Sales
Particulars ,EE,1,EE- ,EE-1,EE. ,EE.1,EE?
Eross Profit 79*@9""" (9!*9--9""" (9-@9)!9"""
Get Sales )9739739""" ("9-@9@"9""" ("97"9""9"""
Gross Profit $argin Ratio +.,@ +-.+. +A..-
$ross !ro%it &ar'in Ratio
0
5
10
15
20
2002-2003 2003-2004 2004-2005
Years
R
a
t
i
o
s
$ross !ro%it &ar'in
Ratio
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Interpretation0 1
4here has been increased in the year *""!;*"") as compared to *""*;*""3 and
*""3;*""!6 4he hi#h ratio indicates that the company should earn a sufficient profit on
each rupee of sales6 2hile low ratio indicate that in the year *""*;*""3 that the company
will be meetin# the operations e/penses and no returns will be available to the owners6
.nd also hi#h ratio indicate that a #ood mana#ement indicate that cost of production of
the firm is relatively low9 it may also indicate hi#her the sales price without a
correspondin# increase in the cost of the #oods6
CO")OLI!ATE! )TATE$E"T O3 TE RATIO) 3OR TREE YEAR)
)l. "o Particulars ,EE,1,EE- ,EE-1,EE. ,EE.1,EE?
(6 %urrent Ratio *6@@ *6*@ *6*)
*6 Ruic3 Ratio (6@* (63( (6)-
36 4otal .ssets 4urnover Ratio *6(* !6*( !6*!
!6 Inventory 4urnover Ratio 36(3 36(! 36-(
)6 ,i/ed .ssets 4urnover Ratio (6)) *6( *67
@6 %reditors 4urnover Ratio !6!7 36-" !6"@
76 %reditors %ollection Period -(6@) @6") -6"
-6 &ebtors 4urnover Ratio 36)* 363- *6*3
6 &ebtors %ollection Period ("36@ ("76- (@36@7
("6 Eross Profit 'ar#in Ratio (6*@) (36(! (76!3
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0
50
100
150
200
250
300
Ratios
2002-
2003
2003-
2004
2004-
2005
Years
Consolidated Statement of Ratios
$ross !ro%it
&ar'in Ratio
"e#tors
Collection
!erio
"e#tors
Turnover Ratio
Creitors
Collection
!erio
Creitors
Turnover Ratio
Fixe Assets
Turnover Ratio
(nventor)
Turnover Ratio
Total Assets
Turnover Ratio
Quick Ratio
Current Ratio
3I"!I"G A"! )9GGE)TIO")
3in/ings0 1
(6 %urrent Ratio of O4PL %ompany shows the solvency of the firm ability to repay its
liabilities6 .s ratio is decline to *6@@6 It shows that company is in solvency state6
%urrent assets are should always be twice of current liabilities6
*6 In a comparative statement of 0alance Sheet9 debtors were (9!79(9""" in the year
*""*;*""39 and it has increased to 39*(9**9""" and !9779"9""" in the last two years6
0ecause increased in credit sales6
36 4otal assets turnover ratio shows the ability to convert all its assets incurrin# fi/ed
assets to sales6 .s per the ratio calculated in the year *""*;*""3 it was *6(*9 which
was low ratio means firm is able to convert its total assets >uic3ly into funds as per
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the company ratio the firm is able to convert it assets because the ratio are hi#her
between !6*! to *6(*9 which was low ratio6
!6 Inventory 4urnover Ratio is increased from 36(3 to 36-( in the year *""*;*""3 and
*""!;*"") respectively6 It shows company has maintained #ood inventory policy6
)6 Eross profit mar#in ratio shows that increasin# year to year6 It shows that company
should earn a sufficient profit on each rupee of cash6
)uggestions0 1
4he wor3in# capital includin# all its related aspects is mana#ed >uite well by
O4PL6 4he finance department is carryin# out its responsibilities efficiently6 4he entire
departments are collectively wor3in# hard for the pro#ress of O4PL6
4he followin# are the su##estions6
1. In a comparative 0alance Sheet &ebtors are increased from year to year 7(9!79(9"""
to !9779"9""86 =ven thou#h debtors are increased which is favorable enou#h for the
company6 0ut should ta3e care while dealin# a#ainst the loss due to doubtful and bad
debt6
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2. 4he company net sale is very low in the year *""*;*""3 Rs )9739739"""9 as compared
to *""3;*""! Rs6 ("9-@9@"9"""6 So9 the company should mana#e its current assets9
which effects on production and ultimately on sales6
3. 4he %urrent Ratio of the company is decreased from *6@@ to *6)) in the last three;
year 7*""3 to *"")86 So9 the current ratio should be maintained by the company in
such a way that the ratio does not follow below *?(6
!6 %ompany should #ive minimum payment time to #et prompt payment by debtors6
Conclusion
2or3in# capital may be re#arded as lifeblood of a business6 ItAs effective
provision can do much to ensure the success of a business9 while itAs inefficient
mana#ement can lead not only to loss of profits but also to the ultimate down fall of what
otherwise mi#ht be considered as a promisin# concern6 . study of wor3in# capital is of
major importance to internal and e/ternal analysis because of its close relationship with
the current day to day operations of a business.
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(6 Iere9 I conclude that %han#es in the financial year is showin# increase in the wor3in#
capital9 because company maintains its wor3in# capital properly in the year *""3 to
*"")6
*6 .ccordin# to my calculation %urrent .ssets main part of9 the wor3in# capital of the
business6 .ccordin# to all Ratios9 It shows that company maintains its ratio is very
well6 So9 In t*e )ear 2004-2005 company showin# better position in the wor3in#
capital6
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'I'LOGRAPY
• ,inancial 'ana#ement by boo3s used from which I have ta3en help for the theory
part of the study?
? $.#. 4*an 2 P.4. 6ain
? I.$. Pan/e;
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• I have also used the trial balance of Oil#ear 4owler Polyhydron Private Limited
7O4PL86 4hose are from the year *""3;*"")6 2hich provide by the official at
0el#aum 2or3s6
• I have meet with the different people at the .dministrative &epartment at Oil#ear
4owler Polyhydron Private Limited 7O4PL86 .s also too3 their views and information
for my Study6
• I have also too3 the help form the company site www6oil#ear6co6in
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doc_775834584.doc