Description
The project is assigned to me “Impact of Current Assets on Working Capital”. At Oilgear Towler Polyhydron Private Limited (OTPL). The various information regarding classification, determinants, components, sources, arrangement operating cycle have been also discussed and aspects relating to the perspective of Oilgear Towler Polyhydron Private Limited (OTPL).
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
Contents
'l. "o. Titles Page "o.
I C(apter )
? Introduction
? Literature Review
? Statement of the Problem
? Purpose of the Study
? Scope of the study
? Objectives of the Study
3
37
3
3
3
!"
II C(apter *
? Or#ani$ation Profile
? Or#ani$ation %hart
? &ata %ollection 'ethod
!(
)"
)*
III C(apter +
? Results + discussion with %harts + #raphs
? ,indin#s
? Su##estions
? %onclusions
)3
77
7-
7
I# C(apter ,
? .ppendi/
? 0iblio#raphy
? 1oinin# Report
? 2ee3ly Reports
-"
-"
-(
-*
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
Intro-uction. /
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$ed6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
$EA"I"G 0 !E1I"ITIO" O1 WOR2I"G CAPITAL. /
2or3in# capital in simple terms is the amount of funds9 which a company9 must
have to finance its day;to;day operation9 it can be re#arded as partuent6
*6 4he difference between profit and present value is insi#nificant6
,inished Doods
.F% Receivable 2IP
Raw 'aterials
Suppliers
%ash
2a#es < ,actory
overhead
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
36 4he close interaction amon# wor3in# capital components implies that efficient
mana#ement one component cannot underta3e without simultaneous consideration of
other components6
2or3in# capital means assets of the company that are chan#ed in the ordinary
capital of business term to another6 ,or e/9 from another as for as from cash to
inventories9 inventories to debtors and a#ain debtors in to cash where it is collected6
2or3in# capital refers to a term investment in short term assets cash: short;term
securities account receivable and inventories6 %urrent asset mana#ement that affects a
firm li>uidity 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 Lia3ilities.
%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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
? .mount due to promoter of company6
? Bnclaimed &ividend6
? Security &eposits6
? &ealers &eposits6
? Liabilities for bills discounted6
I$PORTA"CE O1 WOR2I"G CAPITAL. /
2or3in# %apital is most important in every or#ani$ation whether it is a small or
bi# concern6 4herefore it is said that9 wor3in# capital is the blood and center at a
business6
(6 .de>uately 2or3in# %apital creates certainty9 security and confidence in the
minds of the person in the mi#ht as well in the minds of creditors and wor3ers6
*6 It creates a #ood credit standin# for the firm because credit standin# depends upon
the ability to pay promptly6 . company with ade>uate wor3in# capital is always
able to meet %6L6 in time6
36 It ensure solvency and stability of the enterprise it also ensures continuity in
production and sales6
!6 It enables the company to ta3e advanta#e of cash discount allowed by the
suppliers of raw materials or merchandise6
)6 It enables the presti#e of the company and the morale of its wor3ers because a
company with ade>uately wor3in# capital is always able to pay wa#es and
salaries promptly and re#ularly6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
E6 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
$ETO!' O1 E'TI$ATI"G WOR2I"G CAPITAL. /
? 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-.
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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
CLA''I1ICATIO" O1 WOR2I"G CAPITAL
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
A. On t(e 3asics of Concept
%a& "et Working Capital.
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 E"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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
conservative6 It the firm is a##ressive then it will finance a part of its permanent current
assets with short;term funds6 On the other hand9 a conservative firm will finance its
permanent assets and also a part of temporary current assets with lon#;term financin#6
%3& Gross Working Capital
4his refers to the firm@s investment in current assets6 %urrent .ssets are the assets
which can be converted into cash within a short period say9 an accountin# year6 %urrent
assets include cash9 debtors9 and bill receivable9 short;term securities6 etc6
A. On t(e 3asis of Time
a. Permanent Working Capital
Permanent 2or3in# %apital is permanently loc3ed up in the circulation of current
assets6 It covers the minimum amount re>uested for maintainin# the circulation of current
assets6
i. Initial Working Capital
.t its inception and durin# the formative period of its operations a company must
have enou#h cash fund to meet its obli#ations6 4he need for initial wor3in# capital is for
every company to consolidate its position6
ii. Regular Working Capital
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
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
3. #aria3le 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
5. Ot(er !eterminants of Working Capital
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
In order to mana#e the 2or3in# %apital optimally: on has to #ive due
consideration to the factors that influence the amount of 2or3in# %apital to be
maintained6
'O9RCE' O1 WOR2I"G CAPITAL. /
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
). Long Term 'ources of Working Capital. /
4he followin# are the some important of the lon#
term sources of wor3in# capital6
A. Issue of '(ares. Issuin# shares can finance a part of lon#;term wor3in# capital6
06 Issue of !e3enture. Lon# 4erm 2or3in# %apital can be collected by the way of
issuin# the debentures6
%6 Retaine- Profits. .ccumulated lar#e profit can also consider as a source of financin#
the lon#;term capital6
&6 Term Loans. / 4he mid and term loan above three year are also important source of
financin# the lon# term wor3in# capital needs6
=6 Reseruired to meet the firm@s transactions and precautionary needs6 4he firm
needs cash to ma3e payments for ac>uisition of resources and services9 for the normal
consist of the business6 It 3eeps addition funds to meet any emer#ency situation6
%ash 'ana#ement involves three thin#s6
? 'ana#in# cash flow in and out of the firm6
? 'ana#in# cash flow within the firm6
? ,inancin# deficit or investin# surplus cash6 .nd thus controllin# of cash balance at
the point of time6
5& Inuirements 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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
.nother factors which have a bearin# on the >uantum of wor3in# capital is the
production cycle6 4he term “Production or manufacturin# cycle5 refer to the time
involved in the manufacture of #oods6 It covers the time;span between the procurement
of finished #oods6 ,unds have to be necessarily tied up durin# the process of
manufacture9 necessitatin# enhanced wor3in# capital6 In other words9 there is some time
#ap before raw material becomes finished #oods6 4o sustain such activities the need for
wor3in# capital is obvious6 4he lon#er the time span 7i6e6 Production %ycle89 the lar#er
will be the tied up fund and9 therefore9 the lar#er is the wor3in# capital needed and vice;
versa6
+. 5usiness C;cle
4he wor3in# capital re>uirements are also determined by the nature of business
cycle6 0usiness fluctuations lead to cyclical and seasonal chan#es9 which9 in turn9 cause a
shift in the wor3in# capital position9 particularly for temporary wor3in# capital
re>uirement6 4he variations in business condition may be in two directions9
(6 Bpward Phase? ; 2hen boom conditions prevail9
*6 &ownswin# Phase? ; 2hen economic activity is mar3ed by a decline6
&urin# the upswin# of business activity9 the need for wor3in# capital is li3ely to
#row to cover the la# between increased sales and receipt of cash as well as to finance
purchase of additional material to cater to the e/pansion of the level of activity6
,. Pro-uction Polic;
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
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 it@s
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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
mana#erial discretion in wor3in# out a suitable credit policy relevant to each customer
based on the merits of each case6 ,or instance9 liberal credit facilities can be e/tended on
the basis of credit ratin#6 4his will avoid the problem of havin# e/cess wor3in# capital6
@. Gro4t(s an- E=pansion
.s a company #rows9 it is lo#ical to e/pect that a lar#er amount of wor3in#
capital is re>uired6 It is9 of course9 difficult to determine precisely the relationship
between the #rowth in the volume of business of a company and the increase in its
wor3in# capital6 4he composition of wor3in# capital in a #rowin# company also shifts
with economic circumstance and corporate practices6 Other thin#s9 bein# e>ual9 #rowth
industries re>uire more wor3in# capital than those that are static6
A. Profit Leuality of mana#ement and monopoly power
would by and lar#e determine the profit earned by a firm6 . priori9 it can be #enerali$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. !iuired6 4he effect of risin#
prices is that a hi#her amount of wor3in# capital needed6 Iowever9 in the case of
companies9 which can raise their prices proportionately9 there is no serious problem
re#ardin# wor3in# capital6
)). Operating Efficienc;
4he operatin# efficiency of the mana#ement is also an important determinant of
the level of wor3in# capital6 4he mana#ement can contribute to a sound wor3in# capital
position throu#h operatin# efficiency6 .lthou#h the mana#ement cannot control the rise
in prices9 it can ensure the efficient utili$ation of resources by eliminatin# waste9
improvin# co;ordination9 and a fuller utili$ation of e/istin# resources and so on6
=fficiency of operations accelerates the pace of cash cycle and improves the wor3in#
capital turnover6 It releases the pressure on wor3in# capital by improvin# profitability and
improvin# the internal #eneration of funds6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
Tec(niFues of Working Capital $anagement. /
2or3in# %apital mana#ement involves decidin# upon the amount and
composition of current asset and how to finance the asset6 4his decision involves trade off
between ris3 and profitability6
2or3in# %apital 0alances are measured from the financial dates of the company@s
balance sheet6 . study of the causes for chan#es of wor3in# capital that ta3e place in the
balance from time to time is necessary6 4hese chan#es can be measured in rupee amount
and also in percenta#e by comparin# current assets9 current liabilities and wor3in# capital
over the #iven period6
4he importance tools of 2or3in# %apital are9
). Ratio Anal;sis of Working Capital. /
(6 Ratio analysis of wor3in# capital6
*6 4urnover of wor3in# capital Ratio6
36 %urrent Ratio6
!6 %urrent &ebt tan#ible net worth6
)6 Inventory 4urnover Ratio6
E6 &ebtor 4urnover Ratio6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
*. 1un-s 1lo4 Anal;sis of Working Capital. /
It is an effective mana#ement tool to study how funds have been produced for a
business and how they have been employed6 4his techni>ue helps to analy$e chan#e in
wor3in# capital components between two data6 4he comparison of current asset and
current liability at the be#innin# and at the end of specific period show chan#es in such
type of current assets and resources from which 2or3in# %apital has been obtained funds
flow statement contributes materially to the financial aspects6
+. Working Capital 5u-get. /
4he wor3in# capital bud#et is an important phase of overall financin# bud#etin#6
4his bud#etin# should be distin#uished from a cash bud#et that is desi#ned to measure all
the financial repayment of loans9 term loan and similar item6 On the other hand wor3in#
capital repayment and assure that they are duly provided for6 4he objective of that bud#et
is to secure an effective utility of investment6
,. Tren- Anal;sis. /
. trend analysis indicates the chan#e9 which has been ta3in# place from time to
time of an individual item of current assets6 .ssets and utility and net wor3in# capital on
the basis of some standards year and its effect on wor3in# capital portion6 It enables
creative the upward and down ward trend of current assets and current liabilities6 4hese
are usa#e measured from review of comprehensive balance sheet of a concern at the end
of account year and result is drawn on the basis of trend shown by them6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
Literature Re6ft 7("*E S>6m68
0uildin# and the site of the re#istered office; !-3" S>6ft 7!)" S>6m68
Land at site of plant (; **"" S>6ft6 7*"! S>6m68
0uildin# at site of plant (; (E** S>6ft 7)( S>6m68
Land site of the wor3s *)-9("" S>6ft 7*37- S>6m68
0uildin# Site of the wor3s *)9""" S>6 ft 7*3** S>6m686
,.*& $ACI"ERYH A"!LI"GH EI9IP$E"T A"! TE'T RIG'
,.+& O11ICE A"! EI9IP$E"T
Communication. /
Iead Office? ;
Phone lines E Gos6
,a/ lines ( Go
=;mail ( Go
=lectronic =/chan#e ("O3" %apacities6
Laths 3 Go s Paintin# =>uipment * Sets
Iori$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
4ID 2eldin# Set ( Go s Deneratin# Stands 3 Go s
,lame %uttin# =>uipments ( Set Over head %ranes 3 Go s
.rc 2eldin# Set * Go s
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
2or3s? ;
Phone lines E Gos6
,a/ line ( Go6
=;mail ( Go
=lectronic =/chan#e ("O3" %apacities6
,.,& !ATA PROCE''I"G
%omputer ;;;; *! Gos6 1or
&esi#n .ccountancy
Inventory Plannin#
Sales Purchase
.dministration6
?& 'TA11. /
'ales A Engineers J , 'upport
Purc(ase * Officers J + 'upport
Planning ) Engineer
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
!esign D Engineers J ) 'upport
Accounts an- A-ministrations @ Officers J + 'upports
$anufacturing + Engineers J ,E 'upports
'eruite well by
O4PL6 4he finance department is carryin# out its responsibilities efficiently6 4he entire
departments are collectively wor3in# hard for the pro#ress of O4PL6
4he followin# are the su##estions6
1. In a comparative 0alance Sheet &ebtors are increased from year to year 7(9!79(9"""
to !9779"9""86 =ven thou#h debtors are increased which is favorable enou#h for the
company6 0ut should ta3e care while dealin# a#ainst the loss due to doubtful and bad
debt6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
2. 4he company net sale is very low in the year *""*;*""3 Rs )9739739"""9 as compared
to *""3;*""! Rs6 ("9-E9E"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 *6EE 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 It@s effective
provision can do much to ensure the success of a business9 while it@s 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.
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
(6 Iere9 I conclude that %han#es in the financial year is showin# increase in the wor3in#
capital9 because company maintains its wor3in# capital properly in the year *""3 to
*"")6
*6 .ccordin# to my calculation %urrent .ssets main part of9 the wor3in# capital of the
business6 .ccordin# to all Ratios9 It shows that company maintains its ratio is very
well6 So9 In t*e )ear 2004-2005 company showin# better position in the wor3in#
capital6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
5I5LOGRAPY
• ,inancial 'ana#ement by boo3s used from which I have ta3en help for the theory
part of the study?
? $.#. 2(an 0 P.2. 6ain
? I.$. Pan-e;
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
• I have also used the trial balance of Oil#ear 4owler Polyhydron Private Limited
7O4PL86 4hose are from the year *""3;*"")6 2hich provide by the official at
0el#aum 2or3s6
• I have meet with the different people at the .dministrative &epartment at Oil#ear
4owler Polyhydron Private Limited 7O4PL86 .s also too3 their views and information
for my Study6
• I have also too3 the help form the company site www6oil#ear6co6in
doc_402533214.doc
The project is assigned to me “Impact of Current Assets on Working Capital”. At Oilgear Towler Polyhydron Private Limited (OTPL). The various information regarding classification, determinants, components, sources, arrangement operating cycle have been also discussed and aspects relating to the perspective of Oilgear Towler Polyhydron Private Limited (OTPL).
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
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
-"
-"
-(
-*
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
Intro-uction. /
4he project is assi#ned to me “Impact of %urrent .ssets on 2or3in# %apital56 .t
Oil#ear 4owler Polyhydron Private Limited 7O4PL86 4he various information re#ardin#
classification9 determinants9 components9 sources9 arran#ement operatin# cycle have been
also discussed and aspects relatin# to the perspective of Oil#ear 4owler Polyhydron
Private Limited 7O4PL86
Ratio .nalysis has been carried out usin# ,inancial Information for last three
accountin# years i6e6 from *""3 to *""): Ratios li3e %urrent Ratio9 2or3in# %apital
4urnover Ratio9 Inventory 4urnover Ratio9 &ebtors 4urnover Ratio have also been
analy$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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
$EA"I"G 0 !E1I"ITIO" O1 WOR2I"G CAPITAL. /
2or3in# capital in simple terms is the amount of funds9 which a company9 must
have to finance its day;to;day operation9 it can be re#arded as partuent6
*6 4he difference between profit and present value is insi#nificant6
,inished Doods
.F% Receivable 2IP
Raw 'aterials
Suppliers
%ash
2a#es < ,actory
overhead
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
36 4he close interaction amon# wor3in# capital components implies that efficient
mana#ement one component cannot underta3e without simultaneous consideration of
other components6
2or3in# capital means assets of the company that are chan#ed in the ordinary
capital of business term to another6 ,or e/9 from another as for as from cash to
inventories9 inventories to debtors and a#ain debtors in to cash where it is collected6
2or3in# capital refers to a term investment in short term assets cash: short;term
securities account receivable and inventories6 %urrent asset mana#ement that affects a
firm li>uidity 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 Lia3ilities.
%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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
? .mount due to promoter of company6
? Bnclaimed &ividend6
? Security &eposits6
? &ealers &eposits6
? Liabilities for bills discounted6
I$PORTA"CE O1 WOR2I"G CAPITAL. /
2or3in# %apital is most important in every or#ani$ation whether it is a small or
bi# concern6 4herefore it is said that9 wor3in# capital is the blood and center at a
business6
(6 .de>uately 2or3in# %apital creates certainty9 security and confidence in the
minds of the person in the mi#ht as well in the minds of creditors and wor3ers6
*6 It creates a #ood credit standin# for the firm because credit standin# depends upon
the ability to pay promptly6 . company with ade>uate wor3in# capital is always
able to meet %6L6 in time6
36 It ensure solvency and stability of the enterprise it also ensures continuity in
production and sales6
!6 It enables the company to ta3e advanta#e of cash discount allowed by the
suppliers of raw materials or merchandise6
)6 It enables the presti#e of the company and the morale of its wor3ers because a
company with ade>uately wor3in# capital is always able to pay wa#es and
salaries promptly and re#ularly6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
E6 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
$ETO!' O1 E'TI$ATI"G WOR2I"G CAPITAL. /
? 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-.
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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
CLA''I1ICATIO" O1 WOR2I"G CAPITAL
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
A. On t(e 3asics of Concept
%a& "et Working Capital.
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 E"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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
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
%3& Gross Working Capital
4his refers to the firm@s 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 3asis 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
“Impact of Current Assets on Working Capital”. AT
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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
3. #aria3le 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
5. Ot(er !eterminants of Working Capital
“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' O1 WOR2I"G CAPITAL. /
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
). Long Term 'ources of Working Capital. /
4he followin# are the some important of the lon#
term sources of wor3in# capital6
A. Issue of '(ares. Issuin# shares can finance a part of lon#;term wor3in# capital6
06 Issue of !e3enture. Lon# 4erm 2or3in# %apital can be collected by the way of
issuin# the debentures6
%6 Retaine- Profits. .ccumulated lar#e profit can also consider as a source of financin#
the lon#;term capital6
&6 Term Loans. / 4he mid and term loan above three year are also important source of
financin# the lon# term wor3in# capital needs6
=6 Reseruired to meet the firm@s transactions and precautionary needs6 4he firm
needs cash to ma3e payments for ac>uisition of resources and services9 for the normal
consist of the business6 It 3eeps addition funds to meet any emer#ency situation6
%ash 'ana#ement involves three thin#s6
? 'ana#in# cash flow in and out of the firm6
? 'ana#in# cash flow within the firm6
? ,inancin# deficit or investin# surplus cash6 .nd thus controllin# of cash balance at
the point of time6
5& Inuirements 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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
.nother factors which have a bearin# on the >uantum of wor3in# capital is the
production cycle6 4he term “Production or manufacturin# cycle5 refer to the time
involved in the manufacture of #oods6 It covers the time;span between the procurement
of finished #oods6 ,unds have to be necessarily tied up durin# the process of
manufacture9 necessitatin# enhanced wor3in# capital6 In other words9 there is some time
#ap before raw material becomes finished #oods6 4o sustain such activities the need for
wor3in# capital is obvious6 4he lon#er the time span 7i6e6 Production %ycle89 the lar#er
will be the tied up fund and9 therefore9 the lar#er is the wor3in# capital needed and vice;
versa6
+. 5usiness C;cle
4he wor3in# capital re>uirements are also determined by the nature of business
cycle6 0usiness fluctuations lead to cyclical and seasonal chan#es9 which9 in turn9 cause a
shift in the wor3in# capital position9 particularly for temporary wor3in# capital
re>uirement6 4he variations in business condition may be in two directions9
(6 Bpward Phase? ; 2hen boom conditions prevail9
*6 &ownswin# Phase? ; 2hen economic activity is mar3ed by a decline6
&urin# the upswin# of business activity9 the need for wor3in# capital is li3ely to
#row to cover the la# between increased sales and receipt of cash as well as to finance
purchase of additional material to cater to the e/pansion of the level of activity6
,. Pro-uction Polic;
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
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 it@s
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
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
mana#erial discretion in wor3in# out a suitable credit policy relevant to each customer
based on the merits of each case6 ,or instance9 liberal credit facilities can be e/tended on
the basis of credit ratin#6 4his will avoid the problem of havin# e/cess wor3in# capital6
@. Gro4t(s an- E=pansion
.s a company #rows9 it is lo#ical to e/pect that a lar#er amount of wor3in#
capital is re>uired6 It is9 of course9 difficult to determine precisely the relationship
between the #rowth in the volume of business of a company and the increase in its
wor3in# capital6 4he composition of wor3in# capital in a #rowin# company also shifts
with economic circumstance and corporate practices6 Other thin#s9 bein# e>ual9 #rowth
industries re>uire more wor3in# capital than those that are static6
A. Profit Leuality of mana#ement and monopoly power
would by and lar#e determine the profit earned by a firm6 . priori9 it can be #enerali$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. !iuired6 4he effect of risin#
prices is that a hi#her amount of wor3in# capital needed6 Iowever9 in the case of
companies9 which can raise their prices proportionately9 there is no serious problem
re#ardin# wor3in# capital6
)). Operating Efficienc;
4he operatin# efficiency of the mana#ement is also an important determinant of
the level of wor3in# capital6 4he mana#ement can contribute to a sound wor3in# capital
position throu#h operatin# efficiency6 .lthou#h the mana#ement cannot control the rise
in prices9 it can ensure the efficient utili$ation of resources by eliminatin# waste9
improvin# co;ordination9 and a fuller utili$ation of e/istin# resources and so on6
=fficiency of operations accelerates the pace of cash cycle and improves the wor3in#
capital turnover6 It releases the pressure on wor3in# capital by improvin# profitability and
improvin# the internal #eneration of funds6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
Tec(niFues of Working Capital $anagement. /
2or3in# %apital mana#ement involves decidin# upon the amount and
composition of current asset and how to finance the asset6 4his decision involves trade off
between ris3 and profitability6
2or3in# %apital 0alances are measured from the financial dates of the company@s
balance sheet6 . study of the causes for chan#es of wor3in# capital that ta3e place in the
balance from time to time is necessary6 4hese chan#es can be measured in rupee amount
and also in percenta#e by comparin# current assets9 current liabilities and wor3in# capital
over the #iven period6
4he importance tools of 2or3in# %apital are9
). Ratio Anal;sis of Working Capital. /
(6 Ratio analysis of wor3in# capital6
*6 4urnover of wor3in# capital Ratio6
36 %urrent Ratio6
!6 %urrent &ebt tan#ible net worth6
)6 Inventory 4urnover Ratio6
E6 &ebtor 4urnover Ratio6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
*. 1un-s 1lo4 Anal;sis of Working Capital. /
It is an effective mana#ement tool to study how funds have been produced for a
business and how they have been employed6 4his techni>ue helps to analy$e chan#e in
wor3in# capital components between two data6 4he comparison of current asset and
current liability at the be#innin# and at the end of specific period show chan#es in such
type of current assets and resources from which 2or3in# %apital has been obtained funds
flow statement contributes materially to the financial aspects6
+. Working Capital 5u-get. /
4he wor3in# capital bud#et is an important phase of overall financin# bud#etin#6
4his bud#etin# should be distin#uished from a cash bud#et that is desi#ned to measure all
the financial repayment of loans9 term loan and similar item6 On the other hand wor3in#
capital repayment and assure that they are duly provided for6 4he objective of that bud#et
is to secure an effective utility of investment6
,. Tren- Anal;sis. /
. trend analysis indicates the chan#e9 which has been ta3in# place from time to
time of an individual item of current assets6 .ssets and utility and net wor3in# capital on
the basis of some standards year and its effect on wor3in# capital portion6 It enables
creative the upward and down ward trend of current assets and current liabilities6 4hese
are usa#e measured from review of comprehensive balance sheet of a concern at the end
of account year and result is drawn on the basis of trend shown by them6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
Literature Re6ft 7("*E S>6m68
0uildin# and the site of the re#istered office; !-3" S>6ft 7!)" S>6m68
Land at site of plant (; **"" S>6ft6 7*"! S>6m68
0uildin# at site of plant (; (E** S>6ft 7)( S>6m68
Land site of the wor3s *)-9("" S>6ft 7*37- S>6m68
0uildin# Site of the wor3s *)9""" S>6 ft 7*3** S>6m686
,.*& $ACI"ERYH A"!LI"GH EI9IP$E"T A"! TE'T RIG'
,.+& O11ICE A"! EI9IP$E"T
Communication. /
Iead Office? ;
Phone lines E Gos6
,a/ lines ( Go
=;mail ( Go
=lectronic =/chan#e ("O3" %apacities6
Laths 3 Go s Paintin# =>uipment * Sets
Iori$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
4ID 2eldin# Set ( Go s Deneratin# Stands 3 Go s
,lame %uttin# =>uipments ( Set Over head %ranes 3 Go s
.rc 2eldin# Set * Go s
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
2or3s? ;
Phone lines E Gos6
,a/ line ( Go6
=;mail ( Go
=lectronic =/chan#e ("O3" %apacities6
,.,& !ATA PROCE''I"G
%omputer ;;;; *! Gos6 1or
&esi#n .ccountancy
Inventory Plannin#
Sales Purchase
.dministration6
?& 'TA11. /
'ales A Engineers J , 'upport
Purc(ase * Officers J + 'upport
Planning ) Engineer
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
!esign D Engineers J ) 'upport
Accounts an- A-ministrations @ Officers J + 'upports
$anufacturing + Engineers J ,E 'upports
'eruite well by
O4PL6 4he finance department is carryin# out its responsibilities efficiently6 4he entire
departments are collectively wor3in# hard for the pro#ress of O4PL6
4he followin# are the su##estions6
1. In a comparative 0alance Sheet &ebtors are increased from year to year 7(9!79(9"""
to !9779"9""86 =ven thou#h debtors are increased which is favorable enou#h for the
company6 0ut should ta3e care while dealin# a#ainst the loss due to doubtful and bad
debt6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
2. 4he company net sale is very low in the year *""*;*""3 Rs )9739739"""9 as compared
to *""3;*""! Rs6 ("9-E9E"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 *6EE 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 It@s effective
provision can do much to ensure the success of a business9 while it@s 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.
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
(6 Iere9 I conclude that %han#es in the financial year is showin# increase in the wor3in#
capital9 because company maintains its wor3in# capital properly in the year *""3 to
*"")6
*6 .ccordin# to my calculation %urrent .ssets main part of9 the wor3in# capital of the
business6 .ccordin# to all Ratios9 It shows that company maintains its ratio is very
well6 So9 In t*e )ear 2004-2005 company showin# better position in the wor3in#
capital6
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
5I5LOGRAPY
• ,inancial 'ana#ement by boo3s used from which I have ta3en help for the theory
part of the study?
? $.#. 2(an 0 P.2. 6ain
? I.$. Pan-e;
“Impact of Current Assets on Working Capital”. AT
OILGEAR TOWLER POLYY!RO" PRI#ATE LI$ITE! %OTPL&
• 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
doc_402533214.doc