Chapter -1

INTRODUCTION OF THE STUDY

1
1.1 Introduction

Finance is an essential for corporates. Finance describes the management, creation as well study
of money, banking, credit, investment, assets and liabilities that make up the financial system.
Liquidity ratios judge whether the business is likely to run out of cash in the short term, before
calculating any ratio, what would expect from the company being analyzed e.g. a company
selling perishable commodities should have rapid stock turnover. Cash is lifeblood of a
company. If company with good liquidity will usually have a current ratio of more than two.
Finance statements are essential tools for showing the summarized picture of the financial and
economic condition of the firm; financial statements use the blue prints of the financial affairs of
the business enterprise. Financial statements are based on recorded facts and record is made only
of those facts which can express in the term of monetary value. Working capital is the amount of
financing requires sustaining optimal balances of the firm’s working capital assets. Working
capital represents that portion of capital which circulates form one form to another in the
ordinary conduct of business. Working assets are those assets that will turnover or release cash
within a short period of time. They include inventory, accounts, receivable and Liquid assets etc.
Current assets are limited by accounting convention to be converted in to cash within a year, the
current assets financed by current liabilities i.e. sundry creditors, bill payable, outstanding
liabilities etc. Current liabilities are defined as those obligations which are due within one year.

1.2 Importance of the study

The firm needs funds for business growth, market competition as well expansion of business,
fund should be available adequate to keep business continue in operation as well maintaining
customers fundamental. Finance is need to control internal of a company. It should have liquidity
to need uncertainty in future, finance is need for paying wages, workers, rent etc. in a company
as well need to liquidity position of a company whether cash is or not, it is an essential a firm.
This study importance is to know true picture of financial statements whether strengths and

2
weakness in the firm, analyzing the financial statements through ratio analysis as well
computation of working capital, determinants of working capital in the firm, these are the
importance of study.

1.3 Objectives of the study

 To study the liquidity position of a company

 To study the computation of a working capital
 To analyze the determinants of working capital
 To analyze the financial statements through ratio analysis

1.4 Scope of the study

This project has been conducted in the area of some limited topics respected to study the
liquidity position, to study the computation of working capital, to analyze the determinants of
working capital as well to analyze the financial statements through ratio analysis of a Pansoft
data solutions private limited.

1.5 Hypothesis of the study

 Working capital helps to control the flow of funds

 Reducing liquidity lead to increase profitability

3
1.6 Limitation of the study

 Due to lack of experience in research, I faced problems in framing of hypothesis, making

objectives and scope of Pan soft data Solutions Pvt. Ltd.

 An organization’s manager hesitated to provide information to me reason of what would

do after taking information.

 There is a lack of reliable and available data in the limit of scope.

 Since all persons were busy to their work, they did have much time to provide complete
existing information to me.

1.7 Conclusion of the study

I have been understood this study financial statement is indispensable number of reasons.
They serve number of purposes without which the firm would not able to where it is heading.
Various parties are interested to know whether they are getting adequate returns on their
investment as well liquidity position of a company.

4
 Chapter – 2

Profile of the Company

5
Company Name_____Pansoft data Solutions Private limited.

Address

301, Business Avenue 3rd floor

Lane No. 6, North Main Road,

Above Cosmos Bank, Koregaon

Park, Pune – 411001

Tel – (020) 41200613/ (020) 60506699

Phone – 8888678911

Email Id – pankaj@pansofttds.com

Introduction

Pansoft Data Solutions Private Limited is an Unlisted Company incorporated on 12 Jul

2010 with Registrar of Companies, Pune. The registered office of the company is at E 3/8,Shirine
Garden Iti Road, PariharChowk, Aundh, Pune Mh 411007 In. The total paid-up capital is INR
1.0 LAC. Pansoft Data Solutions Private Limited has no reported secured loans.

Pansoft Data Solutions Private Limited has 3 directors’/key management personnel.These

include business & technology consulting, systems integration, application development &
maintenance, IT infrastructures services, analytics, business intelligence, data
warehousing, customer relationship management, supply chain management

6
Pansoft Data Solutions Pvt Ltd.InPune. Computer Training Institute for Oracle Developer with
Address, Contact Number, Photos, Maps. View Pansoft Data Solutions Pvt Ltd, Pune on Justdial.
Pansoft Data Solutions Pvt Ltd in Camp, Pune has been offering professional training to
students. It specializes and is well-known for training students as well as working professionals
in accounting, web designing, programming languages, hardware and networking. It is run and
managed by seasoned professionals who lead a team of educators and trainers having relevant
domain expertise.

Mission

Our Vision is to be the most preferred service provider for our clients contributing to their
business, improving value through better and desired solutions.

Our Mission is to help organizations excel in their business by providing accelerated Oracle
Implementation Services and Support Services enabling them to improve operational efficiency.

Services Offered at Pansoft Data Solutions Pvt Ltd

Pansoft Data Solutions Pvt Ltd in Camp offers short-term courses and certificate courses.
Inclusive of comprehensive learning, the long-term programmes feature subjects such as web
development, financial accountancy, computer application and programming, information
technology, multimedia and web-designing. Some of the short-term courses cover topics like
Windows XP, 7, 8, 10, Vista, MS Office, DTP (Desk Top Publishing), Web Designing,
Multimedia, Tally ERP 9, C, C++ , and Visual Basic. Walk into this centre all through the week
between 10:00 - 20:00. Pay in Cash, Cheques., engineering & manufacturing
solutions, enterprise resource planning, research and development outsourcing,
and testing solutions.

Pansoft data solutions pvt ltd. has three key practice areas that span its business Digital Business,
Digital Operations, and Digital Systems &Technology.

7
Pansoft is a software services organization, providing oracle erp integrated services.

We have a proven track record in end-to-end solution delivery. Our services encompass all the
aspects of an oracleerp software that includes application implementation, development, upkeep,
maintenance and administration.

Having established a sizeable offshore development center in India with clients across various
geographies it is our intention to broaden our horizon serving our clients.
Our committed pool of qualified techno-functional consultants and project management
personnel have helped us thus so far overcome every challenge as we strive to reach greater
heights.

Description

ORATC is a subsidiary of Pansoft Data Solutions, started in May 2010, At ORATC we offer
high end training services on different modules. PANSOFT is a software services organization,
providing oracle ERP integrated services. We have a proven track record in end-to-end solution
delivery. Our services encompass all

the aspects of an Oracle ERP software that includes application implementation, development,
upkeep, maintenance and administration.Customer Focus: The Customer is Our True North. Our
customers’ delight powers our success and that we place unwavering focus on customer
satisfaction.Collaboration: Work Together to Achieve a Common Goal. A cornerstone of
Integrity: We Act with Integrity in Every Decision We Make. We never exceeding customer
expectations is our belief. No matter how big or small a project is, it will be delivered with the
highest quality. Every associate knows that the customer is why we are here and compromise on
integrity and we take every decision accordingly. Integrity means doing the right things, always.
Integrity also means that we treat our colleagues and clients with respect and value their
opinions.

Provides information technology, information security, consulting, ITO and BPO services. These
include business & technology consulting, systems integration, application development &
maintenance, IT infrastructure services, analytics, business intelligence, data

8
 warehousing, customer relationship management, supply chain management, engineering &
manufacturing solutions, enterprise resource planning, research and development outsourcing,
and testing solution.

Company details.

PANSOFT DATA SOLUTIONS

Company Name
PRIVATE LIMITED

CIN U72200PN2010PTC136815

Authorized Capital Rs. 1.00 Lac

Company Category Company limited by Shares

Company Subcategory Non-govt company

Email Address adwaniandco@gmail.com

Incorporation Date 12/07/2010

Paid-up Capital Rs. 1.00 Lac

E-3/8,SHIRINE GARDEN ITI

ROAD, PARIHAR CHOWK,
Registered Address
AUNDH, PUNE Pune MH
411007 IN

Company Status Active

Company Class Private

Is Company Listed No

9
Last Board Meeting On 30/09/2016

Last Balance Sheet On 31/03/2016

Number of Members 0

Secondary Address -

ROC where registered ROC-Pune

DIRECOR DETAILS -

End
Name DIN/PANStart Date
Date

AMIT MUKESH SHAH 0199321112/07/2010 -

PANKAJ MEGHRAJ CHANDNANI 0291356312/07/2010 -

MOHAMMED NAZIM MOHAMMED TAIYEB

0291376212/07/2010 10 -
SHAIKH

10
 Chapter -3

REVIEW OF LITERATURE

11
Meaning & significance of liquidity ratios

Liquidity refers to a company’s ability to meet its current financial obligations as they arise and

thereby remain solvent. Liquidity is concerned with the entire conversion cycle of stock in to

sales, debtors in to cash and cash to creditors. If business operations are successfully managed,

stock will be moving quickly through the business, generating revenue which improves the

profitability and working capital thereby maintaining liquidity. If liquidity is stretched,

bankruptcy and liquidation would follow. If creditors lose confidence in the company’s ability to

pay, they will cease to extend credit, thereby putting a further strain on what may already be

serious cash situation. Furthermore, sales may be lost if company’s liquidation position prevents

the extension of credit to its customers, and this can add impetus to downhill slide.

“A large position in cash or in assets that is easily convertible to cash. High liquidity produces
flexibility for a firm or an investor in a low-risk position, but it also tends to decrease
profitability.”

1. Current ratio
The current ratio is a financial ratio that shows the proportion of current assets to current
liabilities. The current ratio is used as an indicator of a company's liquidity. In other words, a
large amount of current assets in relationship to a small amount of current liabilities provides
some assurance that the obligations coming due will be paid. Current ratio is better than a
smaller ratio. If that a current ratio that is less than 1:1 indicates insolvency.

2. Quick ratio
Quick ratio is a measure of a firm's ability to meet its short-term obligations using its most liquid
assets (near cash or quick assets). Quick assets include those current assets that presumably can
be quickly converted to cash at close to their book values. Quick ratio is viewed as a sign of a

12
company's financial strength or weakness; it gives information about a firm’s short term
liquidity. The ratio tells creditors how much of the firm's short term debt can be met by selling
all the company's liquid assets at very short notice.

3. Net working capital,

Net working capital or working capital, is the total aggregate amount of all current assets less all
current liabilities, measuring the short-term liquidity of a business. It's also an indicator of the
ability of the firm's management to utilize assets in an efficient manner.

Meaning & significance of working capital

In an ordinary sense, working capital denotes the amount of funds needed for meeting day-to-day
operations of a concern. This is related to short-term assets and short-term sources of financing.
Hence it deals with both, assets and liabilities—in the sense of managing working capital it is the
excess of current assets over current liabilities.
We will discuss about the various aspects of working capital.

The funds invested in current assets are termed as working capital. It is the fund that is needed to

run the day-to-day operations. It circulates in the business like the blood circulates in a living

body. Generally, working capital refers to the current assets of a company that are changed from

one form to another in the ordinary course of business, i.e. from cash to inventory, inventory to

work in progress (WIP), WIP to finished goods, finished goods to receivables and from
receivables to cash.

13
The importance of working capital

i. It helps measure profitability of an enterprise. In its absence, there would be neither

production nor profit.
ii. Without adequate working capital an entity cannot meet its short-term liabilities in
time
iii. A firm having a healthy working capital position can get loans easily from the market
due to its high reputation or goodwill.
iv. Sufficient working capital helps maintain an uninterrupted flow of production by
supplying raw materials and payment of wages.
v. Sound working capital helps maintain optimum level of investment in current assets.
vi. It enhances liquidity, solvency, credit worthiness and reputation of enterprise.
vii. It provides necessary funds to meet unforeseen contingencies and thus helps the
enterprise run successfully during periods of crisis.

Components of Working Capital

1. Current Assets
Current assets are those assets which are convertible into cash within a period of one year and
are those which are required to meet the day to day operations of the business. The working
capital management, to be more precise the management of current assets. The current assets are
cash or near cash resources.

14
These include

(a) Cash and bank balances

(b) Temporary investments,

(c) Short-term advances,

(d) Prepaid expenses,

(e) Receivables,

(f) Inventory of raw materials, stores and spares,

(g) Inventory of work-in-progress

(h) Inventory of finished goods.

2. Current Liabilities
Current liabilities are those claims of outsiders which are expected to mature for payment within
an accounting year.

These include:

(a) Creditors for goods purchased,

(b) Outstanding expenses,

(c) Short-term borrowings,

(d) Advances received against sales,

(e) Taxes and dividends payable, and

(f) Other liabilities maturing within a year.

15
Various types of working capital

1. Gross working capital

Total or gross working capital is that working capital which is used for all the current assets.
Total value of current assets will equal to gross working capital. In simple words, it is total cash
and cash equivalent on hand. But remember, we do not account of current liabilities in gross
working capital.

2. Net Working Capital

Net working capital is the excess of current assets over current liabilities.
Net Working Capital = Total Current Assets – Total Current Liabilities
This amount shows that if we deduct total current liabilities from total current assets,
then balance amount can be used for repayment of long term debts at any time. It also measure
of both a company's efficiency and its short-term financial health.

3. Permanent Working Capital

Permanent working capital is that amount of capital which must be in cash or current assets for
continuing the activities of business. It also shows the minimum amount of all current assets that
is required at all times to ensure a minimum level of uninterrupted business operations.

4. Temporary Working Capital

Temporary working capital (TWC) is the temporary fluctuation of net working capital over and
above the permanent working capital. It is the additional working capital requirement arising out
of seasonal demand of the product or any special event which otherwise are not predictable. In
other words, it is the difference between net working capital and the permanent working capital.

16
5. Negative Working Capital

Negative working capital is when a company's current liabilities exceed its current assets. This
means that the liabilities that need to be paid within one year exceed the current assets that are
monetizable over the same period.

6. Reserve working capital

It is the working capital cushion which needs to be maintained over and above regular working
capital for contingencies which may arise due to unexpected situations.

7. Fluctuating working capital

Fluctuating working capital represents the additional working capital required to finance the
additional inventory or other current assets due to seasonal nature of the industry. It can also
mean extra funds needed to meet contingencies during inflationary situations, recession or a
strike to take advantages of bulk discount.

Sources of working capital

 Short term sources

 Bank loan –short term

 Public deposit

 Creditors & bill payable

 Provisions for expenses, taxation, depreciation etc

 Long term sources

 Issue of shares

17
  Issue of debentures

 Long term sources of finance, term loan

 Retained profits i.e. General reserve, etc.

Determinants of working capital

1. Nature of business
It is an important factor for determining the amount of working capital needed by various

companies. The trading or manufacturing concerns will require more amount of working capital
along-with their fixed investment of stock, raw materials and finished products.

Public utilities and railway companies with huge fixed investment usually have the lowest needs

for current assets, partly because of cash, nature of their business and partly due to their selling a

service instead of a commodity. Similarly, basic and key industries or those engaged in the

manufacture of producer’s goods usually have less proportion of working capital to fixed capital
than industries producing consumer goods.

2. Length of manufacturing cycle

The average length of the period of manufacture, i.e., the time which elapses between the

commencement and end of the manufacturing process is an important factor in determining the

amount of the working capital. If it takes less time to make the finished product, the working

capital required will be less. To give an example, a baker requires one night time to bake his

daily quota of bread. His working capital is, therefore, much less than that of a shipbuilding

concern which takes three to five years to build a ship. Between these two cases may fall other

business concerns with varying periods of manufacture requiring different amounts of working
capital.

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3. Seasonal Variation
There are some industries which either produce goods or make sales only seasonally. For

example, the sugar industry produces practically all the sugar between December and April and

the woollen textile industry makes its sales generally during winter.In both these cases the needs

of working capital will be very large, during few months {i.e., season). The working capital
requirements will gradually decrease as and when the sales are made.

4. Turnover of circulating capital

The speed with which the circulating capital completes its round I.e., conversion of cash into

inventory of raw material Into Inventory of finished goods. Inventory of finished goods into

book debts or accounts receivables and book debt into cash account, plays an Important and
decisive role in judging the adequacy of working capital.

5. Growth and expansion of business

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

6. Business cycle fluctuations

Requirements of working capital of a company vary with the business variation. At a time when

the price level comes up and boom condition prevail, the psychology of the management is to

pile up a big stock of raw material and other goods likely to be used in the business operations as

there is an expectation to take advantage of lower prices. The expansion of business units caused
by the inflationary conditions creates demand for more and more capital.

19
7. Terms of purchase and sales:
A business unit, making purchases on credit basis and selling its finished products on cash basis,

will require lower amount of working capital, on the contrary, a concern having no

creditfacilities and at the same time forced togrant credit to its customers may find itself in a
tight position.

8. Dividend policy
A desire to maintain an established dividend policy may affect working capital, often changes in

working capital bring about an adjustment of dividend policy. The relationship between dividend

policy and working capital is well established and very few companies declare a dividend

without giving due consideration to its effects on cash and their needs for cash. A shortage of

working capital often acts as a powerful reason for reducing or skipping a cash dividend. On the
other hand, a strong position may justify continuing dividend payment.

9. Operating Efficiency
The operating efficiency of a firm also affects the firm's need of working capital. The operating
efficiency of the firm results in optimum utilization of assets. The optimum utilization of assets
in turn results in more fund release for working capital.

10. Changes in Price Level

Change in price level also affect the working capital requirements. Generally, the rise in price

will require the firm to maintain large amount of working capital as more funds will be required
to maintain the sale level of current assets.

20
11. Credit Period
Credit period allowed to customers is also one of the major factors which influence the

requirement of working capital. Longer credit period requires more investment in debtors and

hence more working capital is needed. But, the firm which allows less credit period to
customers’ needs less working capital.

12. Storage Time or Processing Period

Time needed for keeping the stock in store is called storage period. The amount of working

capital is influenced by the storage period. If storage period is high, a firm should keep more

quantity of goods in store and hence requires more working capital. Similarly, if the processing
time is more, then more stock of goods must be held in store as work-in-progress.

11. Other Factors

In addition to the above mentioned considerations there are also a number of other factors which
affect the requirements of working capital. Some of them are given below.

(i) Degree of co-ordination between production and distribution policies.

(ii) Specialization in the field of distribution.

(iii) Developments of means of transportation and communications.

(iv) The hazards and contingencies inherent in the type of business.

21
Meaning of Financial Statement Analysis
Financial Statement Analysis is an analysis which highlights important relationships in the
financial statements. Financial Statement analysis embraces the methods used in assessing and
interpreting the results of past performance and current financial position as they relate to
particular factors of interest in investment decisions. It is an important means of assessing past
performance and in forecasting and planning future performance. Financial analysis of a
company should include an examination of the financial statements of the company, including
notes to the financial statements, and the auditor's report. The auditor's report will state whether
the financial statements have been audited in accordance with generally accepted auditing
standards. The report also indicates whether the statements fairly present the company's
financial position, results of operations, and changes in financial position in accordance with
generally accepted accounting principles. Notes to the financial statements are often more
meaningful than the data found within the body of the statements. The notes explain the
accounting policies of the company and usually provide detailed explanations of how those
policies were applied along with supporting details. Analysts often compare the financial
statements of one company with other companies in the same industry and with the industry in
which the company operates as well as with prior year statements of the company being
analyzed.

Comparative financial statements provide analysts with significant information about trends and
relationships over two or more years. Comparative statements are more significant for
evaluating a company than are single-year statements. Financial statement ratis are additional
tools for analyzing financial statements. Financial ratios establish relationships between various
items appearing on financial statements.

Importance of financial statements

1. Financial Conditions

A company’s financial conditions are of a major concern to investors and creditors. As capital
providers, investors and creditors rely on a company’s financial conditions for both the safety
and profitability of their investments. More specifically, investors and creditors need to know

22
where their money went and where it is now. The financial statement of balance sheet addresses
such issues by providing detailed information about a company’s asset investments. The balance
sheet also lists a company’s outstanding debt and equity components, and so debt and equity
investors can better understand their relative positions in a company’s capital mix.

2. Operating Results

Financial conditions shown in the balance sheet are snapshots of a company’s assets, liabilities
and equity at the end of a financial reporting period; they don’t reveal what happened during the
period from operations that may have caused changes to financial conditions. Therefore,
operating results during the period also concerns investors. The financial statement of income
statement reports operating results such as sales, expenses and profits or losses. Using the
income statement, investors can both evaluate a company’s past income performance and assess
the uncertainty of future cash flows.

3. Cash Flows
A company’s profits reported in the income statement are accounting income and most likely
contain certain non-cash elements, providing no direct information on a company’s cash
exchange during the period. Moreover, a company also incurs cash inflows and outflows during
a period from other non-operating activities, namely investing and financing. To investors, cash
from all sources, not just accounting income from operations, is what pays back their
investments. The importance of the cash flow statement is that it shows the exchange of cash
between a company and the outside world during a period, and so investors can know if the
company has enough cash to pay for expenses and asset purchases.

4. Shareholders’ Equity

The statement of shareholders’ equity is especially important to equity investors because it

shows the changes in various equity components, including retained earnings, during a period.
The amount of shareholders’ equity is a company’s total assets minus its total liabilities,
representing the company’s net worth. A steady growth in a company’s shareholders’ equity by

23
way of increasing retained earnings, as opposed to expanding shareholder base, means the
accumulation of investment returns for current equity shareholders.

Balance sheet

A Balance Sheet is a statement of the financial position of a business which states the assets,
liabilities, and owners' equity at a particular point in time. In other words, the balance sheet
illustrates your business's net worth.

The balance sheet is the most important of the three main financial statements used to illustrate
the financial health of a business. The others are:

 The Income Statement, which shows net income for a specific period of time, such as a
month, quarter, or year. Net income equals revenue minus expenses for the period.

 The Cash Flow Statement, which shows the movements of cash and cash equivalents in
and out of the business. Chronic negative cash flow is symptomatic of troubled
businesses.


Tools& techniques of financial analysis

1. Comparative Statements
Comparative statements deal with the comparison of different items of the Profit and Loss
Account and Balance Sheets of two or more periods. Separate comparative statements are
prepared for Profit and Loss Account as Comparative Income Statement and for Balance
Sheets.As a rule, any financial statement can be presented in the form of comparative statement
such as comparative balance sheet, comparative profit and loss account, comparative cost of
production statement, comparative statement of working capital and the like.

24
2. Comparative Income Statement
Three important information are obtained from the Comparative Income Statement. They are
Gross Profit, Operating Profit and Net Profit. The changes or the improvement in the profitability
of the business concern is found out over a period of time. If the changes or improvement is not
satisfactory, the management can find out the reasons for it and some corrective action can be
taken.

3. Comparative Balance Sheet

The financial condition of the business concern can be finding out by preparing comparative
balance sheet. The various items of Balance sheet for two different periods are used. The assets
are classified as current assets and fixed assets for comparison. Likewise, the liabilities are
classified as current liabilities, long term liabilities and shareholders’ net worth. The term
shareholders’ net worth includes Equity Share Capital, Preference Share Capital, Reserves and
Surplus and the like.

4. Common Size Statements

A vertical presentation of financial information is followed for preparing common-size
statements. Besides, the rupee value of financial statement contents is not taken into
consideration. But, only percentage is considered for preparing common size statement.

The total assets or total liabilities or sales are taken as 100 and the balance items are compared to
the total assets, total liabilities or sales in terms of percentage. Thus, a common size statement
shows the relation of each component to the whole. Separate common size statement is prepared
for profit and loss account as Common Size Income Statement and for balance sheet as Common
Size Balance Sheet.

25
5. Trend Analysis

The ratios of different items for various periods are find out and then compared under this
analysis. The analysis of the ratios over a period of years gives an idea of whether the business
concern is trending upward or downward. This analysis is otherwise called as Pyramid Method.

6. Statement of Changes in Working Capital

The extent of increase or decrease of working capital is identified by preparing the statement of
changes in working capital. The amount of net working capital is calculated by subtracting the
sum of current liabilities from the sum of current assets. It does not detail the reasons for changes
in working capital.

7. Fund Flow Analysis

Fund flow analysis deals with detailed sources and application of funds of the business concern
for a specific period. It indicates where funds come from and how they are used during the
period under review. It highlights the changes in the financial structure of the company.

8. Cash Flow Analysis

Cash flow analysis is based on the movement of cash and bank balances. In other words, the
movement of cash instead of movement of working capital would be considered in the cash flow
analysis. There are two types of cash flows. They are actual cash flows and notional cash flows.

26
 9. Ratio Analysis
Ratio analysis is an attempt of developing meaningful relationship between individual items (or
group of items) in the balance sheet or profit and loss account. Ratio analysis is not only useful
to internal parties of business concern but also useful to external parties. Ratio analysis
highlights the liquidity, solvency, profitability and capital gearing.

Computation of working capital

Working capital is the measure of cash and liquid assets available to fund a company's day-to-
day operations. Having this information can help you manage your business and make good
investment decisions. By calculating working capital, you can determine if, and for how long, a
business will be able to meet its current obligations. A company with little or no working capital
is probably not one with a bright future. Calculating working capital is also useful for assessing
whether a business is making efficient use of its resources. The formula to calculate working
capital is:

Working capital = current assets - current liabilities

Calculate current assets

Current assets are assets that a company will convert to cash within one year. These assets
include cash and other short-term accounts. For example, accounts receivable, prepaid expenses
and inventory would all be current assets.

 You can usually find this information on a company's balance sheet, which should include a
subtotal of current assets.

 If the balance sheet does not include a subtotal of current assets, read through the balance sheet
line by line. Add up all accounts which meet the definition of a current asset to come up with a
subtotal. For example, you would include the figures listed for "accounts receivable,"
"inventory," and "cash and equivalents."

27
 Calculate current liabilities

Current liabilities are those that are due within one year. They include accounts payable, accrued
liabilities and short-term notes payable.

 The balance sheet should include a subtotal of current liabilities. If it does not, use the balance
sheet information to find this total by adding up the listed liabilities. For example, this would
include "payables and provisions," "taxation payable," and "short term loans."

Calculate working capital.

This calculation is just basic subtraction. Subtract the current liability total from the current asset
total.

 For example, imagine a company had current assets of $50,000 and current liabilities of $24,000.
This company would have working capital of $26,000. The company would be able to pay all its
current liabilities out of current assets and would also have cash left over to serve other purposes.
The company could use the cash for financing operations or long-term debt payment. It could
also distribute the money to shareholders.

 If current liabilities are greater than current assets, the result is a working capital deficit. A deficit
could signal that the company is at risk of becoming insolvent (meaning unable to pay their debts
when they become due).There is many reasons why a company may become insolvent. Such a
company may need other sources of long-term financing. This may signal the company is in
trouble, and may not be a good investment.

 For example, consider a company with current assets of $100,000 and current liabilities of
$120,000. This means they will only be able to pay $100,000 of that debt, and will still owe
$20,000 (their working capital deficit). In other words, the company will be unable to meet its
current obligations and must sell $20,000 worth of long-term assets or find other sources of
financing.

 If the company is in danger of being insolvent, they may opt to restructure the debt so that they
can continue operating while paying off their debt.

28
 Calculate the current ratio

 A ratio is a way of comparing two values, relative to one another.Calculating a ratio is usually a
matter of simple division.

 To calculate the current ratio, divide current assets by current liabilities. Current ratio = current
assets ÷ current liabilities.

 Using the example from Part 1, the company's current ratio is 50,000 ÷ 24,000 = 2.08. This
means that the company's current assets are 2.08 times greater than the company's current
liabilities.

Understand what the ratio means.

The current ratio is a way of evaluating a company's ability to meet its current financial
obligations. Put simply, it indicates how capable a company is of paying its bills.[9] It is often
better to use the current ratio when comparing different companies or industries.

 The ideal current ratio is around 2.0. A falling ratio or a ratio below 2.0 could mean a greater risk
of insolvency. On the other hand, a ratio in excess of 2.0 might mean that management is too
conservative and reluctant to take advantage of the company’s opportunities.

 Using the example above, a current assets ratio of 2.08 is probably healthy. You could interpret
this to mean that current assets could fund current liabilities for a little over two years. This is
assuming, of course, that liabilities stay at the current level.

 The acceptable current ratio will differ between industries. Some industries are capital intensive
and may need to borrow to finance operations. Manufacturing companies, for example, are likely
to have high current ratios.

29
 Manage your working capital.

Business managers must track all parts of working capital to maintain the right level. This
includes inventory, accounts receivable and accounts payable. Managers must assess the
profitability and risks that come with too little or too much working capital.

 For example, a company with too little working capital risks not being able to pay its current
liabilities. Holding too much working capital though can also be a problem. A company with lots
of working capital may be able to invest in long-term productivity improvements. For example,
surplus working capital could be invested in new production facilities or retail stores. These
types of investments can increase future revenues.

 If the working capital ratio is too high or low, consider the tips below for some ideas on how to
improve the ratio.

30
 Chapter – 4

RESEARCH METHODOLOGY

31
INTRODUCTION:

The process used to collect information and data for purpose of making businessdecisions.
Themethodology may include publication research, interviews, surveys and other
researchtechniques,and could include both present and historical informationit is a systematic
theoretical analysis of the methods applied to a field of study.

I have some objectives of study which are to study liquidity position of company, to study the
computation of working capital, to analyze the determinants of working capital, as well analyze
financial statements through ratio analysis. The study has followed case study research based on
survey method. After investigating the implementation methods in literature review, it is realized
that is to know financial position of a company is effective to maintain liquidity and proper
balancing of business.

Types of research design

 Case study research

This project was undertaken by case study research. This project has individual case study
research that is Pansoft Data Solutions Private Limited. This study has limited scope as well
objectives of Pansoft Data Solutions Private Limited.

Sources of data collection method

Following are the sources of data collection

a) Primary data

b) Secondary data

32
Collection of data is very important work and needs to be done carefully and systematically. He
has to decide the objectives clearly before collecting the data. In order to determine dependable
and reliable results, proper data should be collected correct, compiled comprehensively in proper
way. This study has done individual organization.

a) Primary data

We collect primary data during the course of doing experiments in an experimental research but
in case we do research of the descriptive type and perform surveys, whether sample surveys or
census surveys, then we can obtain primary data eitherthrough observation or through direct
communication with respondents in one form or another or through personal interviews.

 Interview

For the research study interview of an organization’sdirectors named Mr.

PankajChandaniMeghraj and AmitMukesh Shah was taken at Pansoft data solutions
private limited. The interview was face to face contact company’sdirectors, I was asked
certain questions regarding objectives of the study and directors given all question’s
answers satisfactory. The company’s directors given questionnaire to fill. In this way
primary data was collected through me. I have interviewed manager of Pansoft Data
Solutions Private limited. I was collected information in this way.The interview was
taken at Pansoft Data Solutions Pvt Ltd. on 26th March 2018 in Koregaun Park in Pune
city.

 Questionnaire

A questionnaire is a research instrument consisting of a series of questions and other

prompts for the purpose gathering information from respondent. The total questions were
ten; a questionnaire was prepared in such way that is able to collect all relevant
information regarding the project. In this questionnaire, the open ended questions arefouras

33
 well close ended questions are six. Which can be answered by respondent? I have got
satisfactory and detailed answers for my entire questions. While some questions were
objective type and some questions are in descriptive type in form of open ended close
ended. It was adopted by Pansoft Data Solutions Privet Limited.

 Observation

At Pansoft Data solution private limited, I was observed organization’s manager is maintained
creditors and debtors in clear way and keeping recordimmediately ofhow much cash comes and
cash goes out of an organization, giving more satisfaction to clients.

b) Secondary Data

Secondary data means data that are already available i.e. they refers to the data which have
already been collected and analyzed by someone else. When the researcher utilizes secondary
data then he has to look into various sources from where he can obtain them.

In my project secondary data was collected from various like published data

1. Books, magazines, newspapers

2. Technical and trade journal

3. Reports and publications of various associations of business and organizations

4. Data records and statistics, historical documents and other sources of published
data information.

The secondary data for this project was collected material through differenttext and
reference books available in the library.

34
  Sampling population

Population sampling is the process of taking a subset of subjects that is representative of the
entire population.

The subject of the study includes one individual that organization is Pansoft Data solution
private limited in Pune city.

 Sample size

The sample size of my project is selected through convenience sampling of one company in Pune
city. The interview was conducted with an individual as it is a case study research. I have
collected information with the help of manager of organization.

Methods of data analysis

In order to collect the primary data the analysis are used charts in order to understand the
research more frequently in percentage, figure as well qualitative.

35
 CHAPTER – 5

DATA ANALYSIS AND INTERPRETATION

36
 1. Is liquidity significant to decide solvency of Company?

Particulars
Ratio

1 Current ratio 1.651

2 Acid test ratio 1.413

3 Net working capital ratio 3.748

1. Current ratio = current assets / Current liabilities

4694420/2842743
= 1.651
2. Acid test ratio = current assets – inventory / current liabilities

4694420-0 / 2842743
= 1.651
3. Net working capital = current assets – current liabilities

Year 2016 1853595 – 1359591

= 494004
Year 2017 4694420 – 2842743
= 1851677
4694004/1851677
= 3.748

37
 4

3.5

2.5

1.5

0.5

0
current assets acid test ratio net working capital
ratio

Table no. 1.1

Interpretation:

I have been founded current assets ratio is 1.651, current liabilities ratio 1.651 as well
networking capital ratio 3.748 all these are shown in chart. It is indicated all ratios are
satisfactory So liquidity is significant to decide solvency of a company because current
asset ratio shows company’s ability to pay short term debt and net working capital ratio
shows whether company has a sufficient amount net funds and financial condition of
business.

38
 2. Which type of working capital is suitable your company?

Particulars
In percentage

1. Permanent working capital 60

2. Gross working capital 40

3. Net working capital 35

70%

60%

50%

40%

30%

20%

10%

0%
permanent working gross working net working capital
capital capital

Table no. 1.2

Interpretation:

Graph is indicating permanent working highest in rank over other working capitalPermanent
working is more suitable for company compared to others permanent working capital is required
for minimum investment in irrespective in any fluctuation of business so it is more suitable for
organization, gross working capital shows total amount of a company’s current assets, and Net
working capital is a more accurate and complete measure of the liquidity health of a business so
it is finally shown permanent working capital is more suitable compared to others .

39
3. Does working capital help to control flow of fund?

Interpretation:

Yes working capital helps to control flow funds of organization. It is shown how much cash is
available over current liabilities. A business may increase the time it takes to pay creditors, but
this is often only a short term solution and can negatively impact on potential discounts or
favorable terms offered by a supplier. We would suggest that a business should first focus on
shortening the time it takes to collect cash from debtors and restructure inventory
turnover. Working capital helping to show how much liquidity is available over current assets as
well net working shown how much amount of sufficient of net fund in organization. Current
assets include cash, marketable securities, investments, accounts receivable, and inventories.
These assets are considered liquid because they can be converted into cash within a year. Hence
working capital is helped to know how much cash are needs to pay creditor how much is going
to me through creditors. So it is important to controlling flow of fund in the organization.

40
 4. Which are the difference sources of working capital?

Particulars In
percentage

1. General reserve 40

2. Issue of shares 10

3. Bank loan short term 35

4. Creditors & bill payable 15

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
general reserve issue of shares bank loan short creditors & bill
term payable

Table no. 1.3

Interpretation:

I have been obtained in my research survey general reserve is covered 40% sources of working
capital it is highest in percentage compared to others then after comes bank loan short term in
also covered 35% of total sources of working capital, then creditors & bill payable it is covered
15% as well last issue of shares it covered 15% of total sources of working capital so it finally
obtained general reserve is mostly covered of total sources of working capital in my investigation

41
 5. Which factors according to you affect the working capital the most?

Sr.no particulars In percentage

1. Nature of business 25
2. Length of manufacturing cycle 30
3. Efficiency of operations 20
4 Change of technology 25

35%

30%

25%

20%

15%

10%

5%

0%
nature of business length of the efficiency of change in
manufacturing operation technology
cycle

Table no. 1.4

Interpretation:

According to my investigation research, length of the manufacturing cycle is affected more that is 30%
compared other factors because length of the manufacturing cycle small or big it is required fist to
working capital then comes nature of business and change in technology both are contributed 25% of
affecting of working capital nature of business is service provider and if technology is made obsolete
they have to change so it affected and last one efficiency of operation is 20% affected of working
capital of organization.

42
 6. Technique adopted for evaluating the financial performance of organization.

Comparative financial statements

Sr. particulars Current Previous year In figure

no. year decrease/
2016
2017 increase

1. Equity 2075097 386947 1688150

2. Current 2842743 1359591 1483152
liabilities
3.
Current assets
4 4694420 1853595 2840825
Profit/ loss
5. 1688150 278109 1410041

3000000

2500000

2000000

1500000

1000000

500000

0
equity current current asstes profit / loss
liabilities

Table no. 1.5

Interpretation:
The study of my survey I have been obtained current assets increased more over others
comparison between current and previous year after it comes equity also increased more
compare to other last profit/loss less increased compared to others between current and previous
year.

43
7. Ratios are calculated for during the liquidity.

Particulars
Ratio

1 Current ratio 1.651

2 Acid test ratio 1.413

3 Net working capital ratio 3.748

1. Current ratio = current assets / Current liabilities

4694420/2842743
= 1.651

2. Acid test ratio = current assets – inventory / current liabilities

4694420-0 / 2842743
= 1.651

3. Net working capital = current assets – current liabilities

Year 2016 1853595 – 1359591
= 494004
Year 2017 4694420 – 2842743
= 1851677
4694004/1851677
= 3.748

44
 4

3.5

2.5

1.5

0.5

0
current assets acid test ratio net working capital
ratio

Table no. 1.6

Interpretation:

I have been founded current assets ratio is 1.651, current liabilities ratio 1.651 as well
networking capital ratio 3.748 all these are shown in chart. It is indicated all ratios are
satisfactory so liquidity is significant to decide solvency of a company because current
asset ratio shows company’s ability to pay short term debt and net working capital ratio
shows whether company has a sufficient amount net funds and financial condition of
business. Three ratios are considered here which calculated are by the organization.

45
8. Enlist the problems/challenges to maintain a proper liquidity.

 No centralized view of liquidity

 Limited analytical capabilities

 Insufficient stress testing

 Overcoming the compliance mindset

Interpretation:

No centralized view of liquidity- An organization and business units limit a firm’s ability to
understand its liquidity position or to understand the impact of illiquid assets and asset classes
across geographies, business units and asset classes.

Limited analytical capabilities- Without sufficient analytic capabilities, firms have extreme
difficulty projecting cash flow for underlying transactions, particularly when those transactions
number in the millions.

Insufficient stress tests - Because too many firms have commonly ignored trading and funding
liquidity considerations in stress testing, they are unprepared for the impacts of market shocks,
making it hard for them to get out of positions easily or to attract new funding.

Overcoming the compliance mindset - If organisation focuses too closely on the compliance
requirements surrounding liquidity risk management, they may overlook the business benefits
that can be gained.

46
9. Financial statements proceed by company.

 Income statements

 Balance sheet

Interpretation:

The income statement

It is important because it shows the profitability of an organization during the time interval
specified in its heading. The period of time that the statement covers is chosen by the company.
If a company was not able to operate profitably the bottom line of the income statement indicates
a net loss a banker/lender/creditor may be hesitant to extend additional credit to the company.

Balance sheet

It's clear that balance sheets are critical documents because they keep business owners like you
informed about your company's financial standing. As Inc. magazine pointed out, many business
owners fail to recognize their companies are in trouble until it's too late. This is because some
business owners aren't examining their balance sheets. Typically, if the ratio of your business's
assets to liabilities is less than 1 to 1, your company is in danger of going bankrupt, and you'll
have to make some strategic moves to improve its financial health. Balance sheets are also
important because these documents let banks know if your business qualifies for additional loans
or credit. Balance sheets help current and potential investors better understand where their
funding will go and what they can expect to receive in the future. Investors appreciate businesses
with high cash assets, as this insinuates a company will grow and prosper.

47
10. Maintaining balance between liquidity & profitability.

Interpretation:

Overhead: Assess your overhead costs and see if there are opportunities to decrease them.
Lowering overhead has a direct impact on profitability. Overhead expenses, including rent,
advertising, indirect labor and professional fees, are indirect expenses that you incur to operate
the business outside of direct material and direct labor.

Unproductive assets: If you have unproductive assets that the business is just storing, then it's
time to get rid of them. The only reason you should spend money on assets such as buildings,
equipment and vehicles is to generate revenue.

Accounts receivable: Monitor accounts receivables effectively to ensure that you're billing your
clients properly and that you're receiving prompt payments.

Accounts payable: Negotiate longer payment terms with your vendors whenever possible to
keep your money longer.

Owner's draws: Monitor the amount of money that's being taken out of the business for non-
business purposes such as owner's draws. Taking too much money out can put an unnecessary
cash drain on the business.

Profitability: Review the profitability on your services. Assess where prices can be increased
on a regular basis to maintain or increase profitability. As your costs increase and markets
change, prices may need to be adjusted as well.

48
 Chapter- 6

FINDINGS, CONCLUSION & SUGGESTION

49
 CONCLUSIONS:

This research study draws its conclusion base on the findings that, a generalization can be made
that the concept of liquidity, determinants of working capital and computation of working capital
and profitability. This would apply mainly to organization sector that deals with cash in their
day-to-day transactions. There is no specified yard stick in measuring the balance between
liquidity and profitability, but organization aim at managing cash effectively in a way to keep
cash balances at optimal (i.e. not too high and not too low). The yardstick could be set by
individual organization, as they deem it appropriate to meet their aims. The concept of working
capital should be understandable easily, as it is very much connected with our personal lives as
well. In the sense, sufficient money is needed for our cost of living. We would like to collect the
money owed to us, at the same time; we would like to pay whom we owe. If the ready money is
not maintained properly or we fail to do so, the situation is called as bankruptcy or insolvency.
The same applies to a business and the task of financial management in terms of working capital
is to maintain sufficient funds for its day-to-day requirements, while safeguarding the business
against the possibility of insolvency. Thus, the term working capital refers to the excess of the
current assets over the current liabilities’

50
 FINDINGS:

After collecting data are analyzed and general observations have proven that Pansoft Data
Solutions Private Limited has done remarkable job to know financial position as well status
working capital of an organization.

The main findings are as follows:

 I have been founded in Panasoft Data Solutions Private Limited’s manager felt financial
position of a company is good.

 I obtained current assets and current liabilities are satisfactory of Pansoft Data Solutions
Pvt Ltd.

 There founded general reserve most effective sources of working for Pansoft Data
Solution private limited.

 I obtained organization manager is always kept information in secret regarding financial

information of company.

 An organization manager is generally proceeded income statements and balance sheet of

a Pansoft Data Solution pvt Limited.

 There was obtained maintaining between liquidity and profitability in effective in Pansoft Data
Solutions Pvt ltd.

51
 PROVING OF HYPOTHESES

1. Working capital helps to control the flow of funds

 It was observed that an organization manager was agreed to working capital helps
to control the flow of funds.

Thus the hypothesis was proved that working capital is good for controlling flow
of funds.

2. Reducing liquidity lead to increase profitability

 It was observed that organization manager was agreed fifty percentage to

reducing liquidity lead to increase profitability

Thus the hypothesis was proved only fifty percentage that liquidity lead to
increase profitability.

52
 Recommendations:

 As company’s current ratio is increased too much compared to current liabilities it should
be not increase more because unnecessary current assets are not profitable for company.

 The total expenses of current year of the company increased more the two times Compared to
previous year it should not be,may face problems in debts of the company in future.

 Liquid ratio is decreasing it may result in difficulties of meeting current obligation of

company.

 Current ratio of company should be 1:1 if it is less than 1:1 that is not good for company.

53
 Bibliography:

 Rao, A.P,2011.Fundamentalof financial mgt. Everest publishing House, Pune

 Khan, My &Jain, P k .2004. Financial mgt. Tata mc grow-hill publishing co.

ltd, New Delhi.

 Jain, Pk.2006.Financial mgt. everest publishing House,Pune

 Paramasivan, dr. c (2011).Research Methodology For Commerce and

Mnangement. Regal Publications, New Delhi.

 Kothari, c.r.&Garg, Gaurav.(Repring2015). Research Methodology Methods

and Techniques.New Age International (p) limited, Publisher, New Delhi.

 https://www.tradeindia.com/Seller-7253861-Pansoft-Data-Solutions-Pvt-Ltd/

 https://www.indiamart.com/pansoft-data-solutions/

 https://www.naukri.com/pansoft-data-solutions-pvt-dot-ltd-recruiters
 ANNEXTURE

1. Is liquidity significant to decide solvency of a company?

Yes NO

2. Which type of working capital is suitable for your company?

a) Permanent working capital e) Negative working capital

b) Temporary working capital f) Reserve working capital
c) Gross working capital g) Fluctuating working capital
d) Net working capital

3. Does working capital help to control flow of fund? Yes NO

4. Which are the difference sources of working capital?

a) Issue of shares d) General reserve

b) Issue of debentures e) Bank loan short term
c) Public deposit f) Creditors & Bill payable

5. Which factors according to you affect the working capital the most?

a) Nature of business g) Terms of purchases and sales

b) Length of manufacturing cycle h) Efficiency of operations
c) Cyclical changes in the economy i) Change in technology
d) Seasonal factors j) Irregular supply
e) Velocity of turnover
f) Growth and expansion of business Depreciation policy
6. Which are the tools and techniques adopted for evaluating the financial
performance of business enterprise?

a) Comparative financial statements Cash flow analysis

b) Comparative size financial statements Ratio analysis
c) Trend analysis Fun flow analysis

7. Which ratios are calculated for during the liquidity?

a) Current ratio c) Net working capital to sales ratio

b) Acid test ratio

8. Enlist the problems /challenges to maintain a proper liquidity balance.

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9. Which are the financial statements proceed by company?

a) Income statement c) Statement of cash flows

b) Balance sheet d) Statement of changes in equity

10. How do maintain balance between liquidity & profitability?

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