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Documenti di Professioni
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Dr.BAIDYANATH DALAI
SUBMITTED TO:
DEPARTMENT OF COMMERCE
Date-
CERTIFICATE
I hereby certify that the work which is being presented in the report
‘WORKING CAPITAL MANAGEMENT AS A FINANCIAL STRATEGY’ entitled of the
requirements for the award of Bachelor degree in Commerce and submitted in
the department of Commerce of BJB Autonomous College, Bhubaneswar is an
authentic record of my own work carried out under the supervision of
Dr.Baidyanath Dalai, Department of Commerce, BJB Autonomous College,
Bhubaneswar.
The matter presented in the report has not been submitted by me for the
award of any other degree of this or any other institute.
Special thanks to Mr. Sudhansu Sekhar Panda for his constant support and
encouragement.
Signature of Student
Place : Bhubaneswar Prasanjit Sahoo
Date : Roll No. 41631081
CONTENTS
Certificate………………………………………………………………………. I
Declaration…………………………………………………………………….. II
Acknowledgement………………………………………………………….. III
Chapter – 1- INTRODUCTION…………………………………………… (1-7)
1.1 Introduction……………………………………………………………… 1
1.2 Objective of the study……………………………………………….. 3
1.3 Scope of the study…………………………………………………….. 4
1.4 Significance of the study…………………………………………….. 5
1.5 Research methodology……………………………………………….. 6
1.6 Limitation of the study………………………………………………… 7
Chapter – 2- LITERATURE REVIEW………………………………… (8-13)
Chapter – 3- CONCEPTUAL FRAMEWORK OF W.C………… (9-31)
3.1 Concept of working capital management…………………….. 10
3.2 Objectives of working capital….…………………………………… 18
3.3 Classification of working capital………………………………….. 19
3.4 Inadequate of working capital & excess of w.c…………….. 22
3.5 Factors affecting working capital needs……………………….. 25
3.6 Sources of working capital…………………………………………… 29
3.7 Importance of working capital……………………………………… 30
Chapter – 4- COMPANY PROFILE…………………………………(31-38)
Chapter – 5- DATA ANALYSIS & INTERPRETATION……..(39-50)
Chapter – 6-CONCLUSION………………………………………….(51-53)
6.1 Findings………………………………………………………………………. 52
6.2 Suggestions…………………………………………………………………. 53
6.3 Conclusion…………………………………………………………………… 53
Bibliography………………………………………………………………………. 54
CHAPTER-1
INTRODUCTION
1.1 INTRODUCTION:
Every business whether big, medium or small, needs finance to carry on
its operations and to achieve its target. Infact, finance is so indispensable
today that its rightly said to be the lifeblood of an enterprise. Without
adequate finance, no enterprise can possibly accomplish its objectives. So
this chapter deals with studying various aspects of working capital
management that is necessary to carry out the day-today operations. The
term working capital refers to that part of firm’s capital which is required for
financing short term or current assets such as cash, marketable securities,
debtors and inventories funds invested in current assets keep revolving fast
and are being constantly converted in to cash and this cash flows out again
in exchange for other current assets. Hence it is known as revolving or
circulating capital. On the whole, Working Capital Management performs a
key function and is of top priority for every finance manager. All managers
must, however, keep in mind that n their pursuit to liquidity, they should not
lose sight of there basic goal of profitability. They should be able to attain a
judicious mix of liquidity and profitability while managing their working
capital.
In our present day economy, finance is defined as the provision of
money at time when it is required. Every business whether big, medium or
small, needs finance to carry on its operations and to achieve its target.
Infact, finance is so indispensable today that its rightly said to be the lifeblood
of an enterprise. Without adequate finance, no enterprise can possibly
accomplish its objectives.
A firm is required to maintain a balance between liquidity and profitability
while conducting its day to day operations. liquidity is a precondition to
ensure that the firm are able to meet its short term obligations and its
continued flow can be guaranteed from a profitable venture. The importance
of cash as an indicator of continuing financial health should not be surprising
in view of its crucial role within the business. This requires that business must
be run both efficiently and profitably. In the process, an asset-liability
mismatch may occur which may increase firm’s profitability in the short run
but at a risk of its insolvency. On the other hand, too much focus on liquidity
will be at the expense of profitability. Thus, the manager of a business entity
is in a dilemma of achieving desired tradeoff between liquidity and
profitability in order to maximize the value of a firm.
Working capital management is significant in financial management. It
plays a vital role in keeping the wheel of the business running.
Every business requires capital, without it can’t be promoted. Investment
decisions is concerned with investment in current assets and fixed assets.
Working capial plays a key role in a business entyerprise just as the role of heart
in human body. It acts as grease to run the wheels the fixed assets. It’s effective
provisions can ensure the success of businesses while it’s insufficient
management can lead not only the loss but also the ultimate downfall of what
otherwise might be considered as a promising concern. Efficiency of a business
enterprise depends largely on it’s ability to it’s working capital. Working capital
management is one of the important facts of affirms overall financial
management.
For increasing shareholder’s wealth a firm has to analyse the efeect of fixed
assets and current assets on it’s reurn and risk. Working capital management of
current assets, the management of current assets on the basis of following
points;
1. Current assets are for short period while fixed assets are for more than
one year.
2. The large holding of current assets, especially cash, strengthness liquidity
position but also reduce overall profitability, and to maintain an optimal
level of liquidity and profitability, risk return trade off is involved holding
current assets.
3. Only current assets can be adjusted with sales fluctuating in the short run.
Thus the firm has greater degree of flexibility in managing current assets.
The management of current assets help affirm in building a good market
reputation regarding it’s business and economic conditions.
1.2 OBJECTIVES OF THE STUDY:
Working capital is the most widely used and powerful technique of financial
analysis. The main objective of the present study is to know the financial
condition of the company.
To know the overall operational efficiently and performance of Reliance
industries ltd.
To interpret the financial position of the company of each appropriate (or)
not.
To asses the long term financial ability of company.to know whether the
management is constantly concerned about the overall profitability of the
company (or) not.
To provide reliable financial information those add, it’s in estimating the
potential of enterprise.
To disclose to the extent possible other information related to the financial
statement users.
1.3 SCOPE OF THE STUDY:
This project is vital to me in a significant way. It does have some importance
for the company too. These are as follows:-
The findings of this study may have implications for other companies who
are trying to make decisions regarding working capital reform model.
This finding would help to develop an understanding of the advantages and
disadvantages of financial practices and techniques of managing working
capital components.
The study would reveal how essential working capital management
strategies such as policies, practices and techniques is for the reliance
industries in terms of performance.
A general conceptual framework model will provide basic guidelines for
researchers, accountants and professionals, financial managers and policy
makers.
The study would suggest various financial management techniques reliance
industries can use to measure their performance in terms of profitability.
Current ratio to asses the firms liquidity status, Activity ratios, leverage
ratios, cash conversion cycle etc.
The findings may also help assess the effectiveness of working capital
management on firm’s performance.
1.5 RESEARCH METHODOLOGY :
Primary data:
The primary data has been collected from personal interaction with finance
manager and other staff members.
Secondary data:
The major source of data for this project was collected through annual
reports, financial statements of 4 years and some more information collected
from internet and text resources.
SAMPLING DESIGN:
Sampling unit : financial statements.
Sampling size : last four years financial statements.
Smith Keith V. (1973) believes that Research which concerns shorter range or
working capital decision making would appear to have been less productive. The
inability of financial managers to plan and control properly the current assets and
current liabilities of their respective firms has been the probable cause of
business failure in recent years. Current assets collectively represent the single
largest investment for many firms, while current liabilities account for a major
part of total financing in many instances. This paper covers eight distinct
approaches to working capital management. The first three - aggregate
guidelines, constraints set and cost balancing are partial models; two other
approaches - probability models and portfolio theory, emphasize future
uncertainty and intendencies while the remaining three approaches -
mathematical programming, multiple goals and financial simulation have a
wider systematic focus.
Kaveri V. S. (1985) has based his writing on the RBI‟s studies on finances of
large public limited companies. This review of working capital finance refers to
two points of time i.e., the accounting years ending in 1979 and 1983 and is based
on the data as given in the Reserve Bank of India on studies of these companies
for the respective dates. He observes that the Indian industry has by and large
failed to change its pattern of working capital financing in keeping with the
norms suggested by the Chore Committee. While the position of working
capital management showed some investment between 1975-79 and 1979-83,
industries have not succeeded in widening the base of long-term funds to the
desired extent. The author concludes with the observation that despite giving
sufficient time to the industries to readjust the capital structure so as to shift from
the first method to the second method, progress achieved towards this end fell
short of what was desired under the second method of working capital finance.
Rao K.V. and Rao Chinta (1991) observe the strong and weak points of
conventional techniques of working capital analysis. The result has been
obviously mixed while some of the conventional techniques which could
comprehend the working capital behaviour well; others failed in doing the job
properly. The authors have attempted to evaluate the efficiency of working
capital management with the help of conventional techniques i.e., ratio analysis.
The article concludes prodding future scholars to search for a comprehensive and
decisive yardstick in evaluating the working capital efficiency.
Hamlin Alan P. and Heath field David F. (1991) opine that working capital is
necessary input to the production process and yet is ignored in most economic
models of production. The implications of modelling the time dimension of
production, and hence, the working capital requirements of firms are explored,
with the particular stress placed on the competitive advantage gained by firms
that retained flexibility in the time structure of their production. In this article
they have attempted to explore only this most basic role of time in the
production process and so focus is on the implications of explicitly recognizing
the need for working capital.
Fazzari Steven M. and Petersen Bruce C. (1993) throws light on new tests for
finance constraints on investment by emphasising the often neglected role of
working capital as both a use and a source of funds. The authors believe that
working capital is also a source of liquidity that should be used to smooth fixed
investment relative to cash-flow shocks if firms face finance constraints. They
have found that working capital investment is “excessively sensitive” to cash-
flow fluctuations. Besides, when working capital investment is included in a fixed-
investment regression as a use or source of funds, it has a negative
coefficient. They conclude that controlling for the smoothing role of working
capital results in a much larger estimate of the long-run impact of finance
constraints than reported in other studies.
Hossain Saiyed Zabid and Akon Md. Habibur Rahman (1997) emphasise the
basic objective of working capital management i.e., to arrange the needed
working capital funds at the right time, at right cost and from right source with a
view to achieving a trade-off between liquidity and profitability. The analysis
reveals that BTMC had followed an aggressive working capital financing policy
taking the risk of liquidity. There was uninterrupted increasing trend in negative
net working capital throughout the period of the study which suggested that
BTMC had exploited the entire short-term sources available to it without
considering the actual needs.
Garg Pawan Kumar (1999) focuses on the study of working capital trend and
liquidity analysis in the selected public sector enterprises of Haryana. The study
suggests forecasting of working capital requirement confined mainly to various
components of working capital. After considering the facts the author realized
the need for proper assessment and forecasting of working capital in the public
sector undertaking. For this purpose, he has suggested the analysis of production
schedule, sales trend, labour cost etc., should be taken into consideration. He
further suggested the need for better management of components of working
capital.
Jain P. K. and Yadav Surendra S. (2001) study the corporate practices related
to management of working capital in India, Singapore and Thailand. In this paper
the authors have tried to understand the working capital management and
current assets and current liabilities, and their inter-relationship. Further the
authors have shown an aggregative analysis of current assets and current
liabilities in terms of major liquidity ratios. It also states working capital
position in terms of these ratios pertaining to various industries. From the paper
one can infer that the available data in respect of the sample companies from the
three countries confirm the wide inter-industry variations in liquidity ratios.
Towards the end, the authors suggest that serious consideration needs to be
given by the respective governments as well as industry groups in these three
countries in order to take corrective measures to take care of and rectify the areas
of concern.
CHAPTER-3
CONCEPTUAL
FRAMEWORK OF
WORKING CAPITAL
MANAGEMENT
INTRODUCTION :-
Any person cannot ignore the necessity of funds in a business unit either a
retail shop or a large manufacturing unit. Money is the only common factor in all
units. Thus money management is must that is commonly known as financial
management. Proper management of invested funds in a business results in
effective financial management. Each and every business unit needs funds.
The uses of funds of a concern can be divided into two parts namely long-term
funds and short-term funds. The long–term investment may be termed as „fixed
investment.‟ A major part of the long-term funds is invested in the fixed assets.
These fixed assets are retained in the business to earn profits during the life of
the fixed assets. To run the business operations short–term assets are also
required.
Working capital is work as Blood in business. So, any business firm cannot work
without working capital. Inadequate working capital means shortage of inputs,
whereas excess of it leads to extra cost. So the quantum of working capital in
every business firm should be neither more nor less than what is actually
required. The management has to see that funds invested as working capital in
their organization earn return at least as much as they would have earned return
if it invested anywhere else. At the time of increasing capital costs and scare
funds, the area of working capital management assumes added importance as it
deeply influences a firm's liquidity and profitability. A notable feature of
utilization of funds is that they are of recurring nature. Therefore, efficient
working capital management requires a proper balance between generation and
utilization of these funds without which either shortage of funds will cause
obstruction in the smoother functioning of the organization or excess funds will
prevent the firm from conducting its business efficiently. So the main objective of
working capital management is to arrange the needed funds on the right time
from the right source and for the right period, so that a trade of between liquidity
and profitability may be achieved.
A firm invests a part of its permanent capital in fixed assets and keeps a part
of it for working capital i.e. for meeting the day to day requirements. We will
hardly find a firm which does not require any amount of working capital for its
operations the requirement of working capital varies from firm to firm depending
upon the nature of business, production policy, market conditions Seasonality of
operations, condition of supply etc. Working capital is the most vital ingredient
of a business. Working capital management if carried out effectively, efficiently
and consistently will assure the health of an organization.
Definition:-
According to Genestenberg,
‘’ Circulating capital means current assets of a company that are changed
in the ordinary course of business from one form to another, as for example, from
cash to inventories, inventories to receivables, receivables into cash.’’
3.1 CONCEPT OF W.C.M :-
They have their own points of importance. “If the objectives is to measure
the size and extent to which current assets are being used, „Gross concept‟ is
useful; whereas in evaluating the liquidity position of an undertaking „Net
concept‟ becomes pertinent and preferable. There are two concepts of working
capital quantitative and qualitative. Some people also define the two concepts as
gross concept and net concept. According to quantitative concept, the amount of
working capital refers to „Total of current assets‟. What we call current assets?
Smith1 called, „Circulating capital‟. Current assets are considered to be gross
working capital in this concept.
It is rightly observed that “Current assets have a short life span. These types
of assets are engaged in current operation of a business and normally used for
short term operations of the firm during an accounting period i.e. within twelve
months. The two important characteristics of such assets are, (1) short life span,
and (2) swift transformation into other form of assets. Cash balance may be held
idle for a week or two, account receivable may have a life span of 30 to 60 days,
and inventories may be held for 30 to 100 days.”
Fitzgerald defined current assets as, “cash and other assets which are
expected to be converted in to cash in the ordinary course of business within one
year or within such longer period as constitutes the normal operating cycle of a
business.”
The firm creates a Current Liability towards Creditors‟‟‟ (sellers) from whom
it has purchased raw materials on credit. This liability is also known as accounts
payable and shown in the balance sheet till the payment has been made to the
Creditors‟‟.
The claims or obligations which are normally expected to mature for
payment within an accounting cycle are known as current liabilities. These can be
defined as “those liabilities where liquidation is reasonably expected to require
the use of existing resources properly classifiable as current assets, or the
creation of other current assets, or the creation of other current liabilities.”
The value represent by these assets circulates among several items. Cash is
used to buy raw-materials, to pay wages and to meet other manufacturing
expenses. Finished goods are produced. These are held as inventories. When
these are sold, accounts receivables are created. The collections of accounts
receivable brings cash into the firm. The cycle stats again. This is show in.
Current liabilities are the debt of the firms that have to be paid during the
current accounting period or within a year. These include:
Creditors for goods purchased.
Outstanding expense i.e. expenses due but not paid.
Short-term borrowing.
Advances received against sales.
Taxes and dividends payable.
The need of adequate working capital can hardly be questioned. Just as food
is necessary for a human being but too much of it may be as harmful as too little
of it. In an enterprise, too little working capital means starvation and too much
leads to inflation, which is certain to wreck the foundation of strength.
Inadequate working capital affects the firm's solvency adversely and
excessive working capital affects the firm's profitability adversely. Inadequate
working capital implies shortage of regular funds to carry on the normal business
operation. A business may have inadequate working capital mainly because of
the four reasons i.e. under investment in inventories, under investment in
marketable securities, insufficient or under investment of receivables, shortage
of liquid funds i.e. cash etc.
If a firm plans working capital requirement properly it may have at one time
inadequate working capital and at another time excess working capital.
When working capital is inadequate, the company faces the following problems:
The modernization of equipment and even routine repairs and maintenance
facilities may be difficult to administer.
A Company cannot afford to increase its cash sales and may have to
restrict its activities to credit sales only.
It is not possible for it to utilize production facilities fully for want of
working capital facilities.
A Company may not be able to take advantage of cash discount
The credit worthiness of the company is likely to be
jeopardized because of lack of liquidity.
A Company may not be able to take advantage of profitable business
opportunities.
A Company will not be able to pay its dividends because of the non
availability of funds.
A Company may have to borrow funds at exorbitant rates of interest.
3.4.2 EXCESS WORKING CAPITAL :-
Excess working capital especially in the form of cash and marketable
securities may be unfavourable as inadequacy of working capital because of the
large volumes of funds not being used productively. Idle funds involve a lower
amount of income and often lead to investment to desirable projects or
unnecessary plant facilities and equipment. In fact availability of excess working
capital may lead to carelessness about and therefore to inefficiency of operation.
Credit is extended to undesirable cases and collection efforts get slackened,
in the case of firm having more of the adequate working capital. On the one hand,
people think that the management is conservative and that it does not want to
expand the business and take full advantage of the funds at its disposal, on the
other hand, unnecessary expansion takes place in these firms. It also includes the
management into speculative activities. Sometimes directors exploit the situation
of excess working capital for their personal benefit by giving liberal dividend
which otherwise are not justified.
The situation of excess working capital also brings many disadvantages to
the firm. Beside, the cost of holding it, which may demand on the source of
financing working capital, excess working capital causes inefficiency in the
management. It tempts the management to invest a large portion of funds in slow
moving assets particularly inventories. Filling up of inventories out of proportion
may itself create a situation of cash shortage. Too much working capital is as
dangerous as too little of it.
Excessive working capital creates the following problems:
o A Company may enjoy high liquidity and at the same time, suffer from
low profitability.
o A Company may be tempted to over trade and loss heavily.
o Excessive working capital may be as unfavourable as inadequacy of
working capital if the large volumes of fund are not being used
productively.
o A Company may keep very big inventories and tie its funds
unnecessarily.
o There may be an imbalance between liquidity and profitability.
o High liquidity may induce a company to undertake greater production,
which may not have a matching demand. It may find itself in an
embarrassing position unless its marketing policies are properly
adjusted to boost up the market for its goods.
o A Company may invest heavily in its fixed equipment that may not be
justified by actual sales or production.
3.5 FACTORS AFFECTING THE WORKING CAPITAL NEEDS :-
There is large number of factors upon which the working capital need of a
concern depends such as size a nature of a firm, operations done by the firm,
length of production cycles, stock turnover rate, change in economic
circumstances etc. We can’t rank the above factors as each of them has different
importance and influence. However the following factors are considered
important when the working capital needs are determined.
A firm should plan its operations in such a way that it should have neither
the lack of working capital nor it should have excess of working capital. There is
no set of rules or formula to determine the working capital requirement but there
are so many factors that affect in determining the requirement of working
capital. The factors mainly affect the size and nature of industries and firm.
These factors are also changing from time to time. In general, following factors
are affecting the requirement of working capital.
Numerous factors can influence the size and need of working capital in a
concern. So no set rule or formula can be framed. It is rightly observed that,
“There is no precise way to determine the exact amount of gross or net working
capital for every enterprise. The data and problem of each company should be
analyses to determine the amount of working capital.
3.5.1 NATURE OF BUSINESS :-
The working capital needs are basically influenced by the nature of the
business. Trading and financial firms require a working capital in large amount as
they have to carry large stocks of a variety of merchandise to satisfy their
customer’s varied demand. Such firms have low investment in fixed assets. On
the other hand public utilities like electricity, water supply and railways require a
large amount invented in fixed assets. Their working capital needs are nominal
because they offer cash sales only and supply services, not products, and as such
no funds are tied up in inventories and receivables. The manufacturing units also
require sizable working capital along with fixed investments.
Trading and industrial concerns require more funds for working capital.
Concerns engaged in public utility services need less working capital. For
example, if a concern is engaged in electric supply, it will need less current assets,
firstly due to cash nature of the transactions and secondly due to sale of
services. However, it will invest more in fixed assets.
In addition to it, the investment varies concern to concern, depending upon
the size of business, the nature of the product, and the production technique.
The general nature of business is also as important determinant of working
capital. Working capital requirements are depend upon general nature and its
activity to work. In public utility services, the working capital requirement is
relatively slow as the inventories and goods rapidly change into cash. The large
concerns that are engaged in production maintenance, a big part of investment
consists of working capital. They have to maintain cash, inventory at very large
level.
1. The current ratio has shown non fluctuating trend as 1.14, 1.16, 1.38 and 1.23
during 2014-15, 2015-16, 2016-17 and 2017-18.
2. The quick ratio is also in non fluctuating trend throughout the period 2014 –
18 resulting as 0.67, 0.69, 0.75, 0.78.The Company believes in high profitability
and low liquidity position.
3. The stock working capital ratio decreased from 3.21 to 1.39 in the year 2014
– 18.
4. Cost of goods sold shows a non fluctuating pattern in the year 2014-17 and
increased in the year 2017-18.
5. The cash ratio shows a non fluctuating pattern in the year 2015, 2017 and
2018 but decreased in the year 2017.
6. The net working capital available to the company was maximum in the year
2018 shows the high liquidity position of the firm and it was minimum in the year
2016 shows the low liquidity position of the firm.
7. The cash and cash equivalents of the firm decreased in the year 2015 and
2016, which shows the low liquidity position of the firm in these years. The cash
and cash equivalents of the firm increased in the year 2017 and 2018 showing the
high liquidity position of the firm.
8. The opening cash and cash equivalents are minimum in the year 2016 and
maximum in the year 2015. The Closing cash and cash equivalents maximum in
the year 2015 and minimum in the year 2017 shows the firm maintain the
maximum liquidity position in the year 2018.
6.2 SUGGESTIONS :-
Liquidity refers to the ability of the concern to meet its current obligations
as and when these become due. The company should improve its liquidity
position.
The company should make the balance between liquidity and solvency
position of the company.
The company should pay a little attention to short term solvency of the
company.
The cost of goods sold is high in every year so the company should do efforts
to control it.
To purchase raw material at lower cost will reduce the cost of raw material.
The company has to give importance to maintenance and consumption of
raw materials which would otherwise result in the overstocking and leads
to obsolescence.
6.3 CONCLUSION:-
The company’s overall position is at a very good position. The company
achieves sufficient profit in past four years. The long term solvency position of
the company is very good. The company maintains low liquidity to achieve the
high profitability. The company distributes dividends every year to its share
holders. The profit of the company decreased in the last year due to maintaining
the comparatively high liquidity. The net working capital of the company is
maximum in the last year shows the maximum liquidity.
BIBILOGRAPHY
REFERENCE BOOKS:-
Fundamentals of financial management (by Shashi K. Gupta; R.K Sharma;
Neeti Gupta)
Management Accounting (by T.S. Reddy)
Working Capital Management (by Krish Rangarajan)
JOURNAL:-
CAMS journal of Business Studies and Research:0975-7953 July-
September.
ANNUAL REPORTS:-
Reliance industries limited Annual Report from 2014-2018.
WEBSITES:-
www.google.com
www.wikipedia.com
www.investopedia.com
www.moneycontrol.com
www.ril.com