Meaning of Working Capital

“WORKING CAPITAL MANAGEMENT” 2016
IntroductION
 MEANING OF WORKING CAPITAL
Working Capital (abbreviated WC) is a financial metric which represents

operating liquidity available to a business, organization or other entity,
including governmental entity. Along with fixed assets such as plant and
equipment, working capital is considered a part of operating capital. Net
working capital is calculated as current assets minus current liabilities. It is a
derivation of working capital that is commonly used in valuation techniques
such as DCFs (Discounted cash flows). If current assets are less than current
liabilities, an entity has a working capital deficiency, also called a working
capital deficit. A company can be endowed with assets and profitability but
short of liquidity if its assets cannot readily be converted into cash. Positive
working capital is required to ensure that a firm is able to continue its
operations and that it has sufficient funds to satisfy both maturing short-term
debt and upcoming operational expenses. The management of working capital
involves managing inventories, accounts receivable and payable, and cash.
Every business whether big, medium or small, needs finance to carry on its
operations and to achieve its target. In-fact, 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-to-day 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 in their pursuit to
liquidity, they should not lose sight of their basic goal of profitability. They
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should be able to attain a judicious mix of liquidity and profitability while

managing their working capital.
Current assets and current liabilities include three accounts which are of
special importance. These accounts represent the areas of the business where
managers have the most direct impact:
• Accounts receivable (current asset)
• inventory (current assets), and
• accounts payable (current liability)
The current portion of debt (payable within 12 months) is critical, because it

represents a short-term claim to current assets and is often secured by long
term assets. Common types of short-term debt are bank loans and lines of
credit. An increase in working capital indicates that the business has either
increased current assets (that it has increased its receivables or other current
assets) or has decreased current liabilities, for example has paid off some
short-term creditors.
COMPANY PROFILE
 COMPANY’S NAME: RSB TRASMISSIONS (I) LTD.

 ESTD IN: 1975 (AS INTERNATIONAL AUTO LTD.)
 HEADED BY : Mr. R.K. Behera (Chairman)
 VISION: “TO BE AMONGST MOST ADMIRED ORGANISATION WITH
SIGNIFICANT GLOBALPRESCENCE”.
 MISSION:-“To be a leader by providing customer delight through world class

quality in progressive, innovate & challenging environment”.
 We strive to exceed the customer expectation in service, quality & cost.
 We endeavour to provide an enriching rewarding & environment friendly
work experience for our employees in an achievement based high
performance structure.
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History of the company
• In 1975, Mr. R. K. Behera, a young mechanical engineer from NIT,

Jamshedpur, hailing from a humble service oriented middle class family,
shunned the security of a job and plunged into the hurly burly of high-risk and
high-reward business arena and founded International Auto in Jamshedpur
with 15 people and 500 square feet of workspace.
• Inspired and motivated by the benevolent ideals of the legendry JRD and
obsessed with an incorrigible and irrepressible passion to create a world class
industrial edifice, R. K. Behera along with his brother S. K. Behera set about
meticulously crafting the present-day RSB enterprise brick by brick.
• Toughened by the early trials and tribulations and propelled by nothing-

is-impossible spirit of the Behera brothers, RSB has now blossomed into a
pulsating and throbbing global engineering
Institution in automotive components and systems and construction equipment

aggregates.
• RSB now boasts of manufacturing facilities in six different locations in

India and one in the USA with 85,000 square meters of workspace. Latest
technologies and human resources are working together around the world
passionately to create an enduring institution.
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• Founder and Chairman Mr. R. K. Behera, Co-Founder and Managing

Director Mr. S. K. Behera and Joint Managing Director Mr. Sailendra Behera
now spearhead RSB.
• All RSB manufacturing units are ISO / TS16949, ISO: 14001 and OHSAS:
18001 certified.
• S. K. Behera, who has been co-piloting last four decades in his

entrepreneurial journey, started in a humble way in 1975 with a meagre
monetary help of Rs. 15,000/- from his father and RSB now has grown into
multi-product/multi-location global engineering enterprise with 13 state-of-
the-art manufacturing plants spread over 7 locations in India namely
Jamshedpur (Jharkhand), Pune (Maharashtra), Dharwad (Karnataka), Chennai
(Tamil Nadu), Pantnagar (Uttarakhand), Cuttack (Orissa) and Lucknow (Uttar
Pradesh); and one each in Homer (USA), Silao (Mexico) and partnered venture
at Brazil, with cumulative employment base of more than 4,000 persons.
Scope
Study of working capital is discussed under:
 Management of cash and marketable securities
 Management of accounts receivable
 Management of inventory
 Management of current liabilities
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Objectives
The main objective of working capital management is to maintain a trade of

between risk and return for the purchase of raw material component and
spares.
Management team
 Mr.R. K. Behera
Chairman
Mr.R.K.Behera (RKB) is the founder and chairman of RSB Group.

Mr.RKB is a graduate in Mechanical engineering and has undergone
specialized training in several areas of industrial management.Mr.RKB is a
member of several professional and trade organization such as
confederation of indian industry, value engineers association of india, Indo
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German Chamber of Commerce, Maharatta Chamber of Commerce. He has

over 30 years of experience in Auto Industry
 Mr.S.K. Behera
Vice Chairman & Managing Director
Mr.S.K. Behera (SKB) is a graduate in Commerce and has undergone

specialized training in production management system. Mr.SKB is an
Executive Committee Member and Regional Chairman (East) of ACMA. He is
in the governing council of Indo-Danish Tool Room, Jamshedpur. Mr.SKB is a
committee member of Red Cross Society of India and is also associated with
CII. He has over 28 years of experience in Auto component industry.
 Mr.Sailendra K. Behera
Joint Managing Director
Mr.Sailendra Behera is a Bachelor of Mechanical Engineering and has

undergone advance training in cutting Technology (Israel), Total Production
Management (Japan), QS 9000 training in TUV(USA), and Gear Technology
in Italy and turkey.
 Mr.M.Sankaranarayanan
President: Auto Components & Systems.
Prior to joining RSB Group, Mr.Sankaranarayanan was

associated with Ashok Leyland Ltd. And BAJAJ Tempo Ltd. Associated wily
the group since 2002 and heading the business vertical. He has 30 years of
rich experience in mechanical engineering and has successfully worked in
areas of Operations, Quality, Costing, and Product Development. He holds a
Bachelors degree in Mechanical engineering.
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 Mr. Mathura Singh

Senior Vice President: Finance
Prior to joining RSB Group, Mr. Singh was associated with seraikela glass,
Binary Fusion Pvt Ltd. Associated with the group since 1994 and heading
Finance.He has 18 years of rich experience in Finance Management. He has
sucessful worked in areas of Finance & Accounts, MIS, Payroll, taxation. He
is a qualified ICWA.
 Mr. G. Krishnasami
Vice President: Group Quality.
Prior to joining RSB Group, Mr. Krishnasami was associated

with TVS Brake lining and Ceniwin Export. Associated with the group since
2006 and heading the Group Quality and TQM Implementation Program. He
has successfully worked in areas of Quality Management Systems, TQM. He
is a Science Graduate (Chemistry) from Chennai University.
 Mr.Debasish Basu
Vice President: Strategic Sourcing & Supply Chain
Management.
Prior to joining RSB Group, Mr Basu was associated with

GKW India Ltd., GEC Alsthom India Ltd., GEC Alsthom India Ltd. And New Ale
berry Work. Associated with the group since 1997 and heading the business
vertical. He is a Mechanical Engineer with 17 years of
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Rich experience. He has successfully worked in areas of Operations, Quality,

Costing, and Product Development. He holds a BE-Mechanical Engineering
from REC-Durgapur and Diploma in Export Management.
 Mr. Bijay Lenka

Associate Vice President: Group Corporate Finance.
Prior to joining RSB in the year 2004, he was associated with

Automotive wiring Systems Limited and Unique Aluminum Industries Pvt
Limited. He currently looks after the corporate Finance portfolio including
M&Aand Private Equity Deals of the Group as a whole. He worked in areas
of Mergers and Acquisitions, Private Equity, Finance & Accounts, Adults,
Funds management, MIS, Taxation, Excise Customs, Forex Management
during his career. Mr.Lenka is a B.Com (Hones), a Chartered Accountant and
a Company Secretary by qualification having an overall working exposure of
around 16 years in various fields of Finance.
RSB GROUP
RSB comprises of four different companies,
 RSB Transmissions (I) Ltd.,
 RSB Transmissions North America Inc. (Formerly known as
 Miller Brothers Manufacturing),
 I-Design Engineering Solutions Ltd. and
 I-vitas Technologies Pvt. Ltd. (Currently known as RSB Industries.)
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1. RSB Transmission (I) Ltd.
It was launched in 2000 as the Group Holding Company to bring all the
Group Companies under a common parent and in the wake of
g
l
o
b
a
l
i
z
ation, to create a unified structure for global expansion and
diversification and value accretion.
RSB Transmissions (I) Ltd
2. RSB Transmissions North America Inc. (Formerly known as Miller Brothers

Manufacturing Co.)
It enters the 21st century in a facility of 98,000 square feet with more than 150
dedicated employees and projected sales of over $25 million.
3. I-Design Engineering Solutions Limited.
It was established in the year 2002 to provide in house R&D support.
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4. Invites Technologies Pvt. Ltd.
It is a ISO 9001-200. The company offers a range of comprehensive IT services

and business
The Group Companies function with the philosophy of providing quality

products and efficient services.
Each of the Group companies is equipped with state-of-the-art technology and

latest IT infrastructure that enables smooth functioning. The Group's core
capabilities range from design to manufacturing of aggregates and systems
related to commercial vehicles, passenger cars, construction equipments and
farm and off-highway equipments.
The Group is also in the trailer manufacturing business. The Group has chalked
out an ambitious plan keeping the future in mind. IL&FS has partnered to
facilitate expansion and growth plans of the Group.
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Rsb cients
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Product
 Propeller Shaft
 Axles
 Transmission Components
 Aluminium Castings
 Ferrous Casting
 Running Gear System
 Construction Equipment Aggregates
 Forgings
Propeller Shaft
RSB is a vertically integrated Propeller Shaft Solution provider, enjoying the

largest market shares in India. To enhance its in-house technical capabilities
and overall productivity, RSB has developed a technical collaboration with
Eugene Klein GmbH, Germany for acquiring technical know-how in designing,
processing and testing.
The Propeller Shaft manufacturing program covers more than 65 unique part
designations. RSB is focused on catering to the present & futuristic commercial
vehicle power transmission requirements and meeting the stringent quality
norms. The six manufacturing plants set up at 4 locations are functioning to
assist Auto OEM’s for Propeller Shaft solutions targeted towards regular
production as well as after market requirements.
Axles
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Axles are one of the most significant products offered by RSB. It has a
staggering capacity to manufacture 2, 00,000 Axles/year. There are plans to
enhance the capacity by 30% to cater to the export market. Well-equipped
manufacturing lines have been dedicated to develop a variety of Axle.
Transmission Components
RSB's Gear Transmission units provide in-depth product support to prospective

OEM clients based on its vast industry experience and expertise. It
manufactures an extensive range of fully finished gears at two of its plants that
are strategically located to cater to diversified industry sectors inclusive of
Commercial Vehicles, Passenger Cars, Tractors, Pump OEM's. RSB is renowned
for its customer services such as, fast turn around and individual attention to
complex orders.
Aluminum Castings
RSB offers precision machined Aluminum castings to domestic as well as export

markets. RSB has been assisting any intricate casting ranging from 0.5 Kg
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aluminum component to 8.0 Kg aluminum component. RSB has been

successfully managing the complete supply chain program for a reputed US
based OEM and supplies around half a million components annually. The scope
includes local warehousing in US and daily online supplies. The existing export
supply agreement has been renewed for the next program that reaffirms the
faith of the customers.
Ferrous Castings
RSB manufactures Ferrous Castings as per customer design & specifications at

its manufacturing plants located at Jamshedpur & Pune. It offers and supplies a
wide range of products to leading OEM’s like Cummins. RSB completely
manages the supply-chain from Castings procurement stage to the supplies and
also conducts periodical supplier audits.
An in-house Quality Control has been ensuring high quality standards. The vast
experience of the professionals and the expertise of RSB has been the key to
manufacturing cost-
effective and reliable
Automobile Parts.
Running Gear System
RSB manufactures Running Gear Systems like Axle, Fifth Wheel Coupling, King
Pin and Landing Leg, which are designed, developed, tested and validated by its
in house R&D division I-Design. Our Fifth Wheel coupling design is at par with
latest European models. RSB offers organized after sales service network across
major cities in India.
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Construction Equipment Aggregates
RSB is a forerunner in the Construction Equipment Aggregates industry in India.

It has set up three modern manufacturing facilities at Jamshedpur, Dharwad
and Chennai.RSB has reached significant milestones in the exports market over
past few years. The services and the efforts are being reflected by the faith of
our international customers. Today, RSB is serving as a single source to many
overseas customers and manages their supply chain.
Forging
RSB manufactures forging components with state-of-the art technology and

equipment to cater to the most stringent quality standards of forged
components for domestic and export customers. This facility will be the
backbone of the group’s forging requirements, and will also cater to OEM
customers of the country.
(forging)
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SWOT ANALYSIS
Strengths
• Cost competitiveness in terms of labor and raw material.
• Established manufacturing base
• Qualified and skilled man power
• Manufacturing capabilities with international quality standards
• High operational efficiency
Weaknesses
• Low investment in research and development
• Limited knowledge of product liability and offshore warranty
Handling
• Limited domestic market for various components inhibiting
Capacity creations
• Comparatively poor infrastructure for supply chain and exports
• Lack of experience in system integration
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Opportunities
• May serve as sourcing hub for global automobile majors
• Significant export opportunities may be realized through
Diversification of export basket.
• The growing need to outsource
• Leverage on product engineering expertise to improve the
Worthiness and exports of auto component
• Acquisition in foreign markets
Threats
• The presence of a large counterfeit components market poses
significant threat
• Pressure on price from OEMs continues
• Imports pose price based competition in the replacement
Market
• Further marginalization of smaller players likely
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RESEARCH METHODOLOGY
Research methodology has multiple dimensions. Research Methodology is a

way to systematically solve the research problems scientifically.
Primary Data:
The information is collected through the primary sources like:
 Talking with the employees of the department.

 Getting information by observations e.g. in manufacturing processes.
 Discussion with the head of the department.
Secondary Data:
The data is collected through the secondary sources like:
 Annual Reports of the company.

 Office manuals of the department.
 Magazines, Reports in the company.
 Policy documents of various departments.
Objectives:
1. To identify the financial strengths & weakness of the company
2. through the net profit ratio & other profitability ratio,
Understand the profitability of the company
3. Evaluating company’s performances relating to financial Statement
Analysis.
4. To know the liquidity position of the company with the help of current
Ratio.
5. To find out the utility of financial ratio in credit analysis & determining
the financial capacity of the firm.
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Introduction of the Topic
WHAT IS WORKING CAPITAL?
Working capital refers to the investment by the company in short terms assets
such as cash, marketable securities. Net current assets or net working capital
refers to the current assets less current liabilities. It measures how much in
liquid assets a company has available to build its business. The fundamental
principles of working capital management are reducing the capital employed
and improving efficiency in the areas of receivables, inventories, and payables.
The concept of working capital is, perhaps, one of the most misunderstood
issues in the literature of finance. The reason is that it is subject to multiple
connotations. Some define it as excess of current assets over current liabilities.
These net concepts are based
on „gone concern‟ approach. A „going concern‟ approach takes a total view of

the business and considers gross current assets as the gross working capital
requirement of a business, and management of working capital as
management of current assets and current liabilities to ensure dynamic
stability between generation of current assets and their funding operations.
Gross working capital:-
It refers to the firm’s investment in current assets. The sum of total current
assets is called gross working capital. Current assets are the assets, which can
be converted into cash within a one accounting year or operating cycle, &
include cash short-term securities, debtors, receivable, & stock.
Net working capital:-
It is the difference between the current assets & current liabilities. Current
liabilities are those claim of outside which are expected to mature for payment
within one accounting year. Net working capital is positive & negatives both. If
a current asset is more than current liabilities, it will call positive net working
capital & Current liabilities is more than current assets, it will call negative
working capital.
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GOAL OF WORKING CAPITAL MANAGEMENT:
The Goal of Capital Management is to manage the firm’s current assets &
liabilities, so that the satisfactory level of working capital is maintained. If the
firm cannot maintain the satisfactory level of working capital, it is likely to
become insolvent & may be forced into bankruptcy. To maintain them margin
of safety current asset should be large enough to cover its current liabilities.
Main theme of the theory of working capital management is interaction

between the current assets & current liabilities and satisfies both maturing
short-term debt and upcoming operational expenses.
Scope of working capital:
 Maintain the adequate level of working capital, always to meet the rising
turnover, this way peak needs can be taken care of.
 Sufficient liquidity to meet short-term obligation & when they arise also
to avail market opportunities like purchase of raw material at low prices
or at attractive discount.
 Proper interdepartmental co-ordination to minimize working capital
investment. I.e. co-ordination between the marketing department &
production department.
 Selection of appropriate sources of working capital viz trades credit, bank
finance, or other short-term finance as well as long term finance.
 It becomes easy to avail finance for the working capital if the firm banker
relationship are good and built on strong good faith.
 For the purposes of optimizing working capital, the most important
factors are:
o Accounts receivables management

o Inventory management
o Liquidity and Cash management
o Accounts payable management
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IMPORTANCE OF WORKING CAPITAL:
 Working capital may be regarded as the lifeblood of the business.
Without sufficient working capital no business organization can run
smoothly or successfully.
 In the business the Working capital is comparable to the blood of the

human body. Therefore the study of working capital is of major
importance to the internal and external analysis because of its close
relationship with the current day to day operations of a business. The
inadequacy or mismanagement of working capital is the leading cause of
business failures.
 To meet the current requirements a business needs working capital to

purchase services, raw materials etc. It is also pointed out that working
capital is nothing but one segment of the capital structure of a business.
• In short, the cash and credit in the business, is comparable to the blood
in the human body like finance’s life and strength i.e. profit of solvency to the
business enterprise.
• Financial management is called upon to maintain always the right cash

balance so that flow of fund is maintained at a desirable speed not allowing
slow down. Thus enterprise can have a balance between liquidity and
profitability. Therefore the management of working capital is essential in each
and every activity.
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TYPE OF WORKING CAPITAL
WORKING CAPITAL
ON THE BASIS ON THE BASIS

OF CONCEPT OF TIME
GROSS NET WORKING PERMANENT VARIABLE

WORKING CAPITAL WORKING WORKING
CAPITAL CAPITAL CAPITAL
REGULAR RESERVE
WORKING WORKING SPECIAL
SEASONAL
CAPITAL CAPITAL WORKING
WORKING
CAPITAL
CAPITAL
Working Capital can be classified in two ways:
1. On the basis of Concepts.

2. On the basis of Time.
1. ON THE BASIS OF CONCEPT:
There are 2 concepts:
 Gross Working Capital.

 Net Working Capital.
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Gross Working Capital
 In point of view of an Accountant the Gross Working Capital is the total

Current assets where Current assets are the assets that can be converted
into cash within an accounting year & include cash, debtors etc.
 In “Economics Concept” assets are employed to derive a return.
Net Working Capital
Net Working Capital= Current Assets – Current Liabilities
 In point of view of an Accountant Net Working Capital is the difference

between Current Assets and Current Liabilities and it indicates the liquidity
position of a firm & suggests the extent to which working capital needs may
be financed by permanent sources of funds.
It can be positive or negative. When current assets exceed current liabilities, it

is known as ‘positive net working capital’ and if the current liabilities are more
than current assets, it is known as, a working capital deficiency.
Implications of Net Working Capital:
Net working capital is necessary because the cash outflows and inflows do not
coincide. In general the cash outflows resulting from payments of current
liability are relatively predictable. The cash inflows are however difficult to
predict. More predictable the cash inflows are, the less NWC will be required.
But where the cash inflows are uncertain, it will be necessary to maintain
adequate current assets to cover current liabilities.
For evaluating NWC position, an important consideration is tradeoff between

probability and risk. The term profitability is measured by profits after
expenses. The term risk is defined as the profitability that a firm will become
technically insolvent so that it will not be able to meet its obligations when they
become due for payment. The risk of becoming technically insolvent is
measured by NWC. If the firm wants to increase profitability, the risk will
definitely increase.
If firm wants to reduce the risk, the profitability will decrease.
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2. ON THE BASIS OF TIME
• Permanent or Fixed working capital.
• Temporary or Variable working capital.
Permanent or Fixed working capital
 There is always a minimum level of current assets which is continuously

required by a firm to carry on its business operations.
 Thus, the minimum level of investment in current assets that is required too
continues the business without interruption is referred as permanent
working capital.
Temporary or Variable working capital
 This is the amount of investment required to take care of fluctuations in

business activity or needed to meet fluctuations in demand consequent
upon changes in production & sales as a result of seasonal changes.
Distinction between permanent and variable working capital
 Permanent is stable over time where as variable is fluctuating according to

seasonal demands.
 Investment in permanent portion can be predicted with some profitability

where as investment in variable cannot be predicted easily.
 While permanent is minimum investment in various current assets, variable
is expected to take care for peak in business activity.
 While permanent component reflects the need for a certain irreducible level
of current assets on a continuous and uninterrupted basis, the temporary
portion is needed to meet seasonal & other temporary requirements.
 Also permanent capital requirements should be financed from Long Term
sources whereas Short Term funds should be used to finance temporary
working capital needs of a firm.
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REQUIREMENTS OF FUNDS
Every company requires funds for investing in two types of capital i.e. fixed
capital, which requires long-term funds, and working capital, which requires
short-term funds.
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Capital Sources of additional working include the following:
 Profits (when you secure it as cash!)

 Payables (credit from suppliers)
 Bank overdrafts or lines of credit
 Short Term loans
If a company have insufficient working capital and try to increase sales, it can
easily over-stretch the financial resources of the business. This is called
overtrading. Early warning signs include:
 Pressure on existing cash

 Exceptional cash generating activities e.g. offering high discounts for
early cash payment.
 Seeking greater overdrafts or lines of credit
 Part-paying suppliers or other creditors
 Paying bills in cash to secure additional supplies
 Management pre-occupation with surviving rather than managing
 Frequent short-term emergency requests to the bank (to help pay wages,
pending receipt of a cheque.
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SHORT TERM
LONG TERM SOURCES
SOURCES
 Issue of Shares  Factoring
 Loans from other financial  Invoice Discounting
institutions.
 Debentures  Overdraft Facilities
 Trade Credit
Different approaches in determination of Working Capital
1) Industry norm approach

2) Economic modeling approach
3) Strategic choice approach
1) Industry norm approach
 This approach is based on the premise that every company is guide by

the industry practice.
 Like if majority of firm has been granting 3 months credit to a customer
then others will have to also follow the majority due to fear of losing
customer.
2) Economic modeling approach
 To estimate optimum inventory is decided with the help of EOQ MODEL.
3) Strategic choice approach
 This approach recognizes the variation in business practice and

advocates use of strategy in taking working capital decisions.
 The purpose behind this approach is to prepare the unit to face
challenges of competition & take a strategic position in the market place.
 The emphasis is on strategic behavior of business unit. Thus the firm is
independent in choosing its own course of action which is not guide by
the rules of industry.
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Operating or Cash Cycle
The working capital cycle refers to the length of time between the firms paying
the cash for materials, etc., entering into production process/stock & the inflow
of cash from debtors (sales), suppose a company has certain amount of cash it
will need raw materials. Some raw materials will be available on credit but,
cash will be paid out for the other part immediately. Then it has to pay lab our
costs & incurs factory overheads. These three combined together will constitute
work in progress.
After the production cycle is complete, work in progress will get converted into
sundry debtors. Sundry debtors will be realized in cash after the expiry of the
credit period. This cash can be again used for financing raw material, work in
progress etc. thus there is complete cycle from cash to cash wherein cash gets
converted into raw material, work in progress, finished goods and finally into
cash again. Short term funds are required to meet the requirements of funds
during this time period. This time period is dependent upon the length of time
within which the original cash gets converted into cash again. The cycle is also
known as operating cycle or cash cycle.
Working capital cycle can be determined by adding the number of days

required for each stage in the cycle. For example, company holds raw material
on average for 60 days, it gets credit from the
Supplier for 15 days and finished goods are held for 30 days & 30 days credit is
extended to debtors. The total days are 120, i.e., 60 15 + 15 + 15 + 30 + 30 days
is the total of working capital.
Thus the working capital cycle helps in the forecast, control & management of
working capital. It indicates the total time lag & the relative significance of its
constituent parts. The duration may vary depending upon the business policies.
In light of the facts discusses above we can broadly classify the operating cycle
of a firm into three phases:-
1. Acquisition of resources.
2. Manufacture of the product and
3. Sales of the product (cash / credit).
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First and second phase of the operating cycle result in cash outflows, and be
predicted with reliability once the production targets and cost of inputs are
known. However, the third phase results in cash inflows which are not certain
because sales and collection which give rise to cash inflows are difficult to
forecast accurately.
Operating cycle consists of the following:
 Conversion of cash into raw-materials;

 Conversion of raw-material into work-in-progress;
 Conversion of work-in-progress into finished stock;
 Conversion of finished stock into accounts receivable through sales; and
 Conversion of accounts receivable into cash.
In the form of an equation, the operating cycle process can be expressed as

follows:
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The time elapsed between cash outlay and cash realization by the sale of
finished goods is the length of an operating cycle. It consisting of:-
 Procurement of raw material, components, stores and spares for the

manufacture of the product
 Conversion of raw material in to finished goods
 Storage of credit to customers, and
 Collection of cash form customer.
BALANCED WORKING CAPITAL POSITION
The firm should maintain a sound working capital position. It should have
adequate working capital to run its business operations. Both excessive as well
as inadequate working capital positions are dangerous from the firm’s point of
view. Excessive working capital not only impairs the firm’s profitability but also
result in production interruptions and inefficiencies.
Operating cycle for manufacturing firm:
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The firm is therefore, required to invest in current assets for smooth and
uninterrupted functioning:
Here, the length of GOC is the sum of ICP and RCP. ICP is the total time needed
for producing and selling the products. Hence it is the sum total of RMCP,
WIPCP and FGCP. On the other hand, RCP is the total time required to collect
the outstanding amount from customer usually, firm acquires resources on
credit basis. PDP is the result of
Such an incidence and it represents the length of time the firm is able to defer
payments on various resources purchased.
The difference between GOC and PDP is known as Net Operating Cycle and if
Depreciation is excluded from the expenses in computation of operating cycle,
the NOC also represents the cash collection from sale and cash payments for
resources acquired by the firm and during such time interval between cash
collection from sale and cash payments for resources acquired by the firm and
during such time interval over which additional funds called working capital
should be obtained in order to carry out the firms operations. In short, the
working capital position is directly proportional to the Net Operating Cycle.
The dangers of excessive working capital are as follows:
 It results in unnecessary accumulation of inventories. Thus, chances of

inventory mishandling, waste, theft and losses increase.
 It is an indication of defective credit policy, slack collections period.

Consequently, higher incidence of bad debts resulting to which adversely
affects profits.
31
 Excessive working capital makes management complacent which

degenerates into managerial inefficiency.
 Tendencies of accumulating inventories tend to make speculative profits
grow.
 This may tend to make dividend policy liberal and difficult to cope with in
future when the firm is unable to make speculative profits.
Inadequate working capital is also bad and has the following dangers:
 It stagnates growth. It becomes difficult for the firm to undertake profitable

projects for non- availability of working capital funds.
 It becomes difficult to implement operating plans and achieve the firms
profit target.
 Operating inefficiencies creep in when it becomes difficult even to meet day
commitments.
 Fixed assets are not efficiently utilized for the lack of working capital funds.
Thus, the firm s profitability would deteriorate.
 Paucity of working capital funds render the firm unable to avail attractive
credit opportunities etc.
 The firm loses its reputation when it is not in a position to honor its short-
term obligations.
As a result, the firm faces tight credit terms. An enlightened management

should, therefore, maintain the right amount of working capital on a
continuous basis. Only then a proper functioning of business operations will be
ensured. Sound financial and statistical techniques, supported by judgment,
should be used to predict the quantum of working capital needed at different
time periods.
A firm s net working capital position is not only important as an index of

liquidity but it is also used as a measure of the firm’s risk. Risk in this regard
means chances of the firm being unable to meet its obligations on due date.
The lender considers a positive net working as a measure of safety. All other
things being equal, the more the net working capital a firm has, the less likely
that it will default in meeting its current financial obligations. Lenders such as
commercial banks insist that the firm should maintain a minimum net working
capital position.
32
CONSTITUENTS OF WORKING CAPITAL:-
 CURRENT ASSETS:
 Inventory
 Sundry Debtors
 Cash and Bank Balances
 Loans and advances
 CURRENT LIABILITIES:
 Sundry creditors
 Short term loans and Provisions
Current Assets:-
Current Assets are assets in the balance sheet which is expected to be realized
usually within one year, or one business cycle – whichever is longer. Current
Assets are also called the GORSS WORKING CAPITAL.
Typical current assets include:
 Cash and Bank balances

 Accounts Receivable
 Inventory
 Short – term – investment,
 Security Deposits, and
 Prepaid accounts which will be used within a year.
Characteristics of Current Assets:
 Short Life Span
Cash balances may be held idle for a week or two, thus a/c may have a life span
of 30-60 days etc.
 Swift Transformation into other Asset forms
Each CA is swiftly transformed into other asset forms like cash is used for
acquiring raw materials , raw materials are transformed into finished goods
and these sold on credit are convertible into A/R & finally into cash.
33
Current Liability:-
In accounting, current liabilities are often understood as all liabilities of the

business that are to be settled in cash within the fiscal year or the operating
cycle of a given firm, whichever period is longer. A more complete definition is
that current liabilities are obligations that will be settled by current assets or by
the creation of new current liabilities.
For example, accounts payable for goods, services or supplies that were
purchased for use in the operation of the business and payable within a normal
period of time would be current liabilities.
Current Assets are controlled by using a scientific tool called the “Ratio
Analysis”. In order to control over the Current Assets, a company calculates the
Current Ratio.
Current Ratio:-
Current ratio is calculated by dividing current assets by current liabilities:
Current assets include cash and those assets that can be converted into cash
within a year, such as marketable securities, debtors, inventories, loans and
advances. All the obligations maturing within a year are included in current
liabilities.
Current liabilities include creditors, bills payable, accrued expenses, short term
bank loan, income tax liability and long-term debt maturing in the current year.
CURRENT RATIO = CURRENT ASSETS ÷ CURRENT LIABILITIES.
This ratio varies from industry to industry. In ideal situation the Current Ratio
should be 2:1. But for the company like RSB Transmission (I) the ratio should be
1.33. In order to improve the Current Ratio one has to keep proper control over
both current assets and current liabilities.
34
CASH MANAGEMENT:-
Cash is one of the important aspects of Current Asset. Cash Management

involves control and analysis of cash flow during a particular period of time.
Holding excessive cash by a company indicates that the company is not

investing its idle cash in the available profitable project. It adds the implicit of
Capital. We must note that Cash is an asset for the company only when it is
used effectively. Idle cash is the liability.
However, the requirement of Cash varies from business to business. A firm may
hold cash at times of lower inflow with an object to finance it ongoing project.
A Cash Reserve is essential to tide over the deficit or future contingencies.
In other words firm that have volatile cash flow are more likely to keep more
cash balance then a non-volatile firm. The most important factor that
determines the amount of cash that a company can hold is the “Conversion
Cycle”.
Conversion Cycle is the length of time that a company takes to convert its
resource i.e input to cash flow. It begins from purchasing of raw-material,
converting the Raw-material into Work-in-process, converting the work-in-
process to Finished Goods, selling out the finished goods and ends with
collection of money from the Customer.
The Conversion Cycle Diagram:
35
Motives for holding Cash:

1. To meet the day-to-day requirement of the business.
2. To meet the future contingencies.

3. for speculative business opportunities.
Cash Flow:
Cash Flow refers to the flow of cash into and out of a business over a period of
time. The outflow of cash is measured by the money we pay every month to
salaries, suppliers, and creditors. The inflows are the cash we receive from
customers, lenders, and investors.
The Cash Flow is of two types:-
1. Positive Cash Flow
2. Negative Cash Flow
1. Positive Cash Flow:

If the cash coming into the business is more than the cash going out of the
business, the company has a positive cash flow. A positive cash flow is very
good and the only concern here is managing the excess cash prudently.
2. Negative Cash Flow:

If the cash going out of the business is more than the cash coming into the
business, the company has a negative cash flow.
A negative cash flow can be caused by a number of problems that result in a
shortage of cash, such as too much or obsolete inventory, or poor collections on
accounts receivable. If the company doesn't have money in the bank or can't
borrow additional cash at this point, it may be in serious trouble.
Cash Flow Statement:-

A cash flow statement is prepared to periodically to know the inflow as well as
out flow of cash and whether the company is having a positive cash balance at
the end. It is also drawn to know how much cash is generated by a company
from:
1. Operation Activities.
2. Investment Activities
3. Financing Activities
36
1. Operating Cash Flow (Internal)

Operating cash flow, often referred to as working capital, is the cash flow
generated from internal operations. It is the cash generated from sales of the
product or services of a business. Because it is generated internally, it is under
control of a company.
2. Investing Cash Flow (Internal)

Investing cash flow is generated internally from non-operating activities. This
component would include investments in plant and equipment or other fixed
assets, non-recurring gains or losses, or other sources and uses of cash outside
of normal operations.
3. Financing Cash Flow (External)

Financing cash flow is the cash to and from external sources, such as lenders,
investors and shareholders. A new loan, the repayment of a loan, the issuance
of stock and the payment of dividend are some of the activities that would be
included in this section of the cash flow statement.
Good cash management means:
• Knowing when, where, and how cash needs will occur,

• Knowing what the best sources are for meeting additional cash needs;
and,
• Being prepared to meet these needs when they occur, by keeping good
relationships with bankers and other creditors.
The starting point for avoiding a cash crisis is to develop a cash flow projection.
Smart business owners know how to develop both short-term (weekly,
monthly) cash flow projections to help them manage
Daily cash, and long-term (annually) cash flow projections to help them develop
the necessary capital strategy to meet their business needs. They also prepare
and use historical cash flow statements to gain an understanding about where
all the money went.
37
RSB TRNASMISSIONS (I) LIMITED

Cash Flow Statement
Particular As at 31st March 2016 As at 31st March 2015

(amount in Rs.) (amount in Rs.)
A. Cash flow from Operating Activity
NET PROFIT BEFORE TAX 266,512,974 208,376,444
ADJUSTMENTS FOR:
Depreciation & Amortisation Expenses 372,911,699 378,970,484
Unrealised Foregin Exchange(Gain/Loss) 6,936,061 13,478,481
Loss/Profit on sale of Fixed Assets (94,116) 219,342
Liabilities no longer required written back - -
ITEMS CONSIDERED SEPARATELY:
Interest expenses 478,680,407 426,636,176
Investment income - (150)
Interest income (12,947,457) (36,784,721)
OPERATING PROFIT BEFORE WORKING CAPITAL
1,111,999,568 990,896,056
CHANGES IN WORKING CAPITAL

Net changes in working capital (179,423,987) 163,800,717
CASH GENERATED FROM OPERATIONS
932,575,581 1,154,696,772
Taxes paid (including TDS & prior period taxes) (81,321,407) (36,632,059)
NET CASH FROM OPERATING ACTIVITIES
851,254,174 1,118,064,713
B. Cash flow from Investing Activities

Purchase of Fixed Assets (142,102,536) (157,564,854)
Purchase of Investments (1,290,515) (345,703,313)
Share application money - -
Interest received 12,947,457 36,784,721
Dividend received from Investment(net) - 150
NET CASH FROM INVESTING ACTIVITES
(130,445,594) (466,483,296)
C. Cash flow Financing Activities

Net Proceeds from borrowing(Term Loan) (250,743,244) (121,128,528)
Net Proceeds from borrowing(Working Capital) 40,144,096 (115,778,875)
Net Proceeds from borrowing(Unsecured) 12,166,440 8,689,965
Interest paid (478,680,407) (426,636,176)
Preference Dividend Paid(Including dividend tax) (59,785) (59,785)
NET CASH FROM FINANCING ACTIVITIES
(677,172,900) (654,913,400)
NET INCREASE IN CASH AND CASH EQUIVALENT 43,635,680 (3,331,983)

(A+B+C)
CASH AND CASH EQUIVALENT AT THE 127,565,055 130,897,038
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BEGINNING
CASH AND CASH EQUIVALENT AT THE END 171,200,735 127,565,055
CASH BUDGET:
Cash budget is an estimation of the cash inflows and outflows for a business for
a specific period of time. Cash budgets are often used to assess whether the
entity has sufficient cash to fulfill regular operations and/or whether too much
cash is being left in unproductive capacities. A cash budget is extremely
important, especially for small businesses, because it allows a company to
determine how much credit it can extend to customers before it begins to have
liquidity problems.
The receipt section of Cash Flow shows the receipts from all sources such as:
 Cash collected from Customer
 Sale proceed of Plant & Machinery
 Advances received from Customer
 Scrap sales
Whereas in the payment section we record the anticipated payment to:
 Salaries to employee
 Payment to Supplier of Raw-material
 Payment of Interest.
 Payment of Statutory dues etc.
Cash Management Services in India:

Management of cash flow is an important function for every business
organization. Bank pays a vital role in cash management of a
Company. A bank’s main activity is collection and payment of cheques. The

introductions of electronic banking services make the management of Cash
faster and easier too.
The Reserve Bank of India (RBI) has placed an emphasis on upgrading
technological infrastructure. Electronic banking, cheque imaging, enterprise
resource planning (ERP), real time gross settlements (RTGS) are just few of the
new initiatives. The payment or clearing mechanism in bank can is shown.
39
Banking
Payment
Mechanism
Paper based Electronic

System System
Local Clearing
RTGS NEFT
System
Outstation
EFT
Clearing System
A. Paper based payment system
In India payments are mainly paper based and cheques are the widely accepted
mode of fund transfer. The clearing of these cheques are done through the
clearing house. At present we have clearing house in 990 locations. SBI is said
to be pioneer in the clearing cheques.
Local Clearing:
Local Clearing handles only those cheques that are drawn on branches within
the jurisdiction of the local Clearing House. Generally, the distance between the
Clearing House and the participating branches is defined, taking into account
the local transportation and communication facilities as the cheques have to
physically move to and from the Clearing House. For example, for a cheque to
be processed in Local Clearing in Mumbai, both the presenting and drawee
branches should be within the jurisdiction of the Clearing House in Mumbai.
Generally a local cheque should be clear within 48 hours from the time of
deposit. Under local clearing system, cheques are processed at the Clearing
Houses by using Magnetic Ink Character Recognition (MICR) technology.
Outstation Clearing:
A cheque that is not drawn on the same location where it is deposited becomes
an outstation cheque. In such case the banker of the drawer of the cheque send
the cheque to the drawee’s bank for collection. The collection of such cheques
will take 20 days. Sometimes the CMS banker gives credit of such cheques
40
depending upon the credit worthiness of the depositor. In such cased the CMS
banker discount the cheque and gives credit to the depositor immediately.
B. Electronic System of Clearing:

It provides the means to electronically transfer cheque images and completely
replaces the traditional physical routines of moving paper cheques between
local banks.
The main features are:
 Faster cheque clearing.
 Faster cheques deposit which means increase on your return of fund.
 Improve control and reconciliation (clearing cheques on the same day).
Following are some the Electronic System of clearing cheques:
Real Time Gross Settlement
RTGS system is a funds transfer mechanism where transfer of money takes
place from one bank to another on a 'real time' and on 'gross' basis. This is the
fastest possible money transfer system through the banking channel.
Settlement in 'real time' means payment transaction is not subjected to any
waiting period. The transactions are settled as soon as they are processed.
'Gross settlement' means the transaction is settled on one to one basis without
bunching with any other transaction. Considering that money transfer takes
place in the books of the Reserve Bank of India, the payment is taken as final
and irrevocable.
The RTGS system is primarily for large value transactions. The minimum
amount to be remitted through RTGS is Rs.1 lakh. There is no upper ceiling for
RTGS transactions
Under normal circumstances the beneficiary branches are expected to receive
the funds in real time as soon as funds are transferred by the remitting bank.
The beneficiary bank has to credit the beneficiary's account within two hours of
receiving the funds transfer message.
Electronic Fund Transfer System (EFT) or National Electronics Funds Transfer

System (NEFT)
EFT and NEFT are electronic fund transfer modes that operate on a deferred net
settlement (DNS) basis which settles transactions in batches. In DNS, the
settlement takes place at a particular point of time. All transactions are held up
till that time. For example, NEFT settlement takes place 6 times a day during
the week days (9.00 am, 11.00 am, 12.00 noon. 13.00 hours, 15.00 hours and
17.00 hours) and 3 times during Saturdays (9.00 am, 11.00 am and 12.00
noon). Any transaction initiated after a designated settlement time would have
41
to wait till the next designated settlement time. Contrary to this, in RTGS,
transactions are processed continuously throughout the RTGS business hours.
No minimum or maximum stipulation has been fixed for EFT and NEFT
transactions.
With a view to rationalize the service charges levied by banks for offering
various electronic products, a broad framework has been mandated as under:
a) Inward transactions – Free, no charge to be levied
b) Outward transactions –
Rs. 1 lakh to Rs. 5 lakh - not exceeding Rs. 25 per transaction.
Rs. 5 lakh and above – not exceeding Rs. 50 per transaction.
The remitting customer has to furnish the following information to a bank for
affecting a RTGS remittance:
1. Amount to be remitted
2. His account number which is to be debited
3. Name of the beneficiary bank
4. Name of the beneficiary customer
5. Account number of the beneficiary customer
6. Sender to receiver information, if any
7. The IFSC Number of the receiving branch
DEBTORS MANAGEMENT
Receivables Management in helps you in maintain tight control over Accounts

Receivables by providing the capabilities to help in tracking invoices, process
receipts, and analyze customer activity, so as to manage sales made on
accounts more effectively and yet maintain lower overhead costs.
Benefits:
1. Helps to improve customer satisfaction.

Enhance service levels and increase retention with customized information,
history, and notes that are easily accessible when working with customers.
2. Take control of sales processes.
Manage your sales process more effectively by measuring trends and analyzing
performance with comprehensive customer tracking combined with sales
tracking by person or territory.
42
3. Enhance your productivity.
Help in reducing administrative costs and enhance office productivity with

automated receipt processing and posting and personalized statement cycles
that fit your customers and business.
4. Streamline revenue allocation.
Simplify the task of deferring revenues over multiple periods with automatically
managed calculations and journal entries customized to fit a business needs.
5. Provide access to vital information.
Provide information needed to take more effective business decisions with
comprehensive reporting capabilities and straightforward customer account
and sales performance tracking.
Credit Term:
Credit Standard or negotiated terms (offered by a seller to a buyer) that control

(1) The monthly and total credit amount,
(2) Maximum time allowed for repayment,
(3) Discount for cash or early payment, and
(4) The amount or rate of late payment penalty.
Assessing Credit Risk
There are several factors that go into assessing risk but the most important is
payment history. If we have paid all our accounts on time and as agreed, then
there will probably be considered a low risk. On the other hand, if we've had
numerous late payments or even collection accounts, your risk factor goes up.
Another thing that creditors consider when assessing risk is the amount of
outstanding debt -- too much and you appear to be overextended which makes
you a higher risk.
Other indicators of risk include the Length of credit history. If the credit history
is too short, there is not much of a picture for potential creditors to look at.
43
Bad-debt:-
In financial accounting and finance, bad debt is the portion of receivables that
can no longer be collected, typically from accounts receivable or loans. Bad
debt in accounting is considered an expense.
Because of the matching principle of accounting, revenues and expenses should
be recorded in the period in which they are incurred. When a sale is made on
account, revenue is recorded along with account receivable. Because there is an
inherent risk that clients might default on payment, accounts receivable have
to be recorded at net realizable value. The portion of the account receivable
that is estimated to be not collectible is set aside in a contra-asset account
called Allowance for Doubtful Accounts. At the end of each accounting cycle,
adjusting entries are made to charge as expense the uncollectible receivable.
The actual amount of uncollectible receivable is written off as an expense from
Allowance for Doubtful Accounts to the account called Bad Debt Expense.
Ageing Analysis:-
Knowing 'who owes you' is not as important as knowing 'when it was owed'. It
is sufficient to know how much is owed to you in terms of a monthly period.
Basically, the idea is to reduce the amounts in categories 2, 3 and 4 (see
below), and also to ensure that the percentage of 2, 3 and 4 does not increase
from one month to the next in any one category.
I.e. if category number 3 (currently showing 4.5%) increased to 6% the

following month, you have failed to collect as much revenue in
The 31 - 60 day category as you did last month. This slide is also the first sign of
a longer term problem: if you do not work hard to reduce this important area
you may be looking at legal remedies, or even write off - and that means
spending money to get money.
 Category number 1 is for the most recent full month, and if you allow 30
days credit this should add up to all of your sales for the past month.
 Category number 2 is for all those invoices that are now 31 - 60 days
after the invoice date. These are the most recent 'debtors' if you give 30
days to pay.
 Category number 3 has not paid you after 60 days from the invoice date.
 Category number 4 has not paid you for 3 months since the invoice date
44
Amount in Rs.
Sl. No Day Category Amount in Category %
1 0 - 30 Days 380,000
67.5
2 31 - 60 Days* 147,000
26.0
3 61 - 90 Days 25,000
4.5
4 91 + Days 12,500
2.0
TotalAmountOutstanding 564,500
100%
Note: The 'sum': 380,000 / 564,500 x 100 = 67.5%
* Below, 30 - 60 Day Analysis (from the above details)
45
Invoice Invoice Goods/

Name Tel. No. Amount
No. Date Service
02468
X Co. 00000098 18/10/00 Code 3 16000.00
1357913
01234
ABC Co 11111198 22/09/00 Code 1 40000.00
5678900
04321
22222298 20/10/00 Code 2 23000.00
XYZ Co. 1234567
04321
PQR Co 33333398 15/10/00 Code 1 15000.00
9876543
01234
White Co. 44444498 03/10/00 Code 1 13000.00
6789012
147000.00
Action for Recovering Debt:-
You should raise a debtor list every week. Look at telephone collection for all
the large accounts (large, is what you consider large) and send letters to all
that remain. In my, humble, opinion you should never send two letters without
telephoning the customer to find out why no payment has been received.
Alternatively, a debt recovery service can be consulted to help recover debts

owed to your business. Click the link above for more information.
Anyway, a telephone call is cheaper than a letter, a lot less
bother/administration and gets you real information. It is what you do with
that information that makes telephoning the customer a more powerful tool.
46
CREDITORS MANAGEMENT:-
MANAGING PAYABLES (CREDITORS)

Creditors are a vital part of effective cash management and should be
managed carefully to enhance the cash position.
There is an old adage in business that if you can buy well then you can sell well.
Management of your creditors and suppliers is just as important as the
management of your debtors. It is important to look after your creditors - slow
payment by you may create ill feeling and can signal that your company is
inefficient (or in trouble!).
INVENTORY MANAGEMENT
Inventory is a list for goods and materials, or those goods and materials
themselves, held available in stock by a business. It is also used for a list of the
contents of a household and for a list for testamentary purposes of the
possessions of someone who has died. In accounting inventory is considered an
asset.
The reasons for keeping stock
There are three basic reasons for keeping an inventory:
Time - The time lags present in the supply chain, from supplier to user at every
stage, requires that you maintain certain amount of inventory to use in this
"lead time"
Uncertainty - Inventories are maintained as buffers to meet uncertainties in
demand, supply and movements of goods.
Economies of scale - Ideal condition of "one unit at a time at a place where user
needs it, when he needs it" principle tends to incur lots of costs in terms of
logistics. So bulk buying, movement and storing brings in economies of scale,
thus inventory.
All these stock reasons can apply to any owner or product stage.
Buffer stock is held in individual workstations against the possibility that the
upstream workstation may be a little delayed in long setup or change-over
time. This stock is then used while that change-over is happening. This stock
can be eliminated by tools like SMED.
These classifications apply along the whole Supply chain not just within a
facility or plant.
47
Where these stocks contain the same or similar items it is often the work
practice to hold all these stocks mixed together before or after the sub-process
to which they relate. This 'reduces' costs. Because they are mixed-up together
there is no visual reminder to operators of the adjacent sub-processes or line

management of the stock which is due to a particular cause and should be a
particular individual's responsibility with inevitable consequences. Some plants
have centralized stock holding across sub-processes which makes the situation
even more acute.
The basis of Inventory accounting
Inventory needs to be accounted where it is held across accounting period

boundaries since generally expenses should be matched against the results of
that expense within the same period. When processes were simple and short
then inventories were small but with more complex processes then inventories
became larger and significant valued items on the balance sheet. This need to
value unsold and incomplete goods has driven many new behaviors into
Management practice. Perhaps most significant of these are the complexities

of fixed cost recovery, transfer pricing, and the separation of direct from
indirect costs. This, supposedly, precluded "anticipating income" or "declaring
dividends out of capital". It is one of the intangible benefits of Lean and the TPS
that process times shorten and stock levels decline to the point where the
importance of this activity is hugely reduced and therefore effort, especially
managerial, to achieve it can be minimized.
48
RSB TRANSMISSIONS (I) LIMITED

Profit and Loss Account
Particular For the year For the year
st
ended 31 ended 31st
March 2016 March 2015
Amount in Rs. Amount in Rs.
Revenue from Operations 8,705,947,054 8,219,048,519
Other Income 13,251,511 37,082,905
Total Revenue 8,719,198,565 8,256,131,424
Expenses 57.44% 57.81%

Cost of materials consumed 5,012,668,658 4,824,343,296
Changes in inventories of finished goods (12,282,724) (73,074,647)
Employee benefits expense 749,304,128 782,502,324
Other Expenses 1,851,403,424 1,708,377,347
Finance cost 478,680,407 426,636,176
Depreciation and Amortization 372,911,699 378,970,484
Total Expenses 8,452,685,591 8,047,754,980
Profit for the year before tax 266,512,974 208,376,444

Tax expenses :
Current tax 99,984,000 68,986,000
MAT credit entitlement - (5,994,825)
Defferred tax (3,284,000) 2,217,000
Total Tax 996,736,000 65,258,175
Profit After Tax 169,776,974 143,118,269

Earning per ordinary share (face value
Rs.10 each)
Basis 10.07 9.08
Diluted 6.55 5.91
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RSB TRANSMISSIONS (I) LIMITED

BALANCE SHEET
As at As at
31stMarch,2016 31stMarch,2016
(Amount in Rs.) (Amount in Rs.)
EQUITY AND LIABILITIES
Shareholder’s funds
Share capital 219,688,170 208,671,920
Reserves and surplus 3,103,430,086 2,744,699,361
3,323,118,256 2,953,341,281
Non-current liabilities
Long-term borrowings 1,505,498,754 1,883,802,446
Deferred tax liabilities 366,091,018 369,339,018
Other long term liabilities 254,945,140 198,752,737
Long term provisions 49,914,319 50,114,443
2,176,449,232 2,502,008,644
Current liabilities
Short-term borrowings 838,179,858 826,035,762
Trade payables 780,358,161 698,356,042
Other current liabilities 910,188,747 1,036,244,171
Short-term provisions 55,229,887 36,575,401
2,583,956,652 2,597,211,376
TOTAL 8,083,524,140 8,052,561,302
ASSETS
Non-current assets
Fixed assets
Tangible assets 3,572,922,226 3,787,591,152
Intangible assets 119,158,439 124,433,440
Capital work-in-progress 122,284,228 123,191,862
Intangible assets under development 2,518,600 12,382,086
3,816,883,494 4,047,598,540
Non-current investments 1,468,773,323 1,467,482,809
Long-term loan and advances 242,584,988 219,501,501
1,741,358,311 1,686,984,310
Current assets
Inventories 1,227,652,356 1,143,156,610
Trade receivables 646,771,922 634,305,051
Cash and cash equivalents 171,200,735 127,565,055
Short-term loan and advances 380,122,828 341,125,898
Other current assets 99,534,495 71,825,837
2,525,282,335 2,317,978,451
TOTAL 8,083,524,140 8,052,561,302
50
RATIO ANALYSIS
A. Financial Ratio
1. Current Ratio :-
Current ratio measures the ability of the enterprise to meet its current
obligation. It shows how liquid a firm is to meet its debts in short runs.
It is computed as:
Current Asset
Current Ratio = -------------------------------
Current Liability
Particulars 2015 2016

2,317,978,451 2,525,282,335
Current Asset (Rs. In
Lacks)
2,583,956,652
Current Liabilities (Rs.in 2,597,211,376
lacks)
0.8924 0.97729
Current Ratio
Interpretation: -
In India the ideal current ratio is 1.25:1.we see here that the RSB’s current ratio
is far above the ideal current ratio. It indicates that the firm is in a liquid
position and has ability to meet its requirements in the short run. A more than
ideal current ratio signifies that the firm has employed less in its long term
assets thus compromising on its profitability. There has been a notable increase
in the current ratio
Over the years signifying that more and longer term sources of funds have been
employed to finance the current assets.
51
1. Quick Ratio :-
It expresses the relationship between quick assets and current liabilities. Quick
assets are defined as the assets that can be easily liquidated. It excludes from
the current assets inventories and prepaid Expenses that are the most liquid
assets.
It is computed as:
Current Asset – (Inventories +Prepaid Expenses)

Quick Ratio = -----------------------------------------------------------------------
Current Liability
Quick Assets = Current Assets – (Inventory + Prepaid Expenses)

Current Assets (2015) = 2,317,978,451
Inventory (2015) = 1,143,156,610
Quick Assets = (Current Assets-Inventory)= 1,174,821,841
Current Assets (2016) = 2,525,282,335

Inventory (2016) = 1,227,652,356
Quick Assets = (Current Assets-Inventory)= 1,297,629,979

1,174,821,841 1,297,629,979
Quick Asset (Rs. In Lacks)
2,597,211,376 2,583,956,652
Current Liabilities (Rs. In
lacks)
0.45 0.502
Quick Ratio
Interpretation: -
In the years we can see a significant difference between the current ratio and
the quick ratio .this signifies that a major part of the
Current assets are in the form of inventory. An ideal quick ratio is 1:1 which
shows that for each unit of short term liability. There is a highly liquid asset and
the company will not face any difficulty to meet any unforeseen situation. It
can be noted here that there has been effort put in by the company to improve
its quick ratio and in the year ended 2011 it has liquid asset sufficient to meet
its short term liabilities.
52
B. Profitability Ratio:-
1. Net Profit Ratio: -
Net Profit (After Tax & Interest)

Net Profit Ratio = -------------------------------------------- X 100
Turnover

Net Profit (PAT) (Rs. in
143,118,269 169,776,974
Lacs)
Turnover (Rs. in Lacs) 8,705,947,054 8,219,048,519
Net Profit/Loss Ratio (%) 0.0164 0.0206
Interpretation: -
In the Year 2016 Turnover of RSB has increased as compare to year 2015 and
also increased Company’s Net Profit. The increase in Net Profit ratio shows the
growth of the Company.
2. Profitability Ratio :-
EBDIT
a. Profitability Ratio = ----------------x 100
Turnover
EBDIT (Rs. in Lacs) 1,013,983,104 1,118,105,080
Profitability Ratio (%) 11.6470 13.6038
53
EBDIT = Earnings before Tax + Depreciation + Interest.
EBT
1. Profitability Ratio = ----------------x 100
Turnover
EBT (Rs. in Lacs) 208,376,444 266,512,947
Profitability Ratio (%) 2.3935 3.24263
EBT = Earnings before Tax

C. Activity Ratio
1. Inventory Turnover Ratio: -

This ratio measures how much time a company takes to convert its cash out
flows during purchase of inventory material to sales of finished goods or cash
inflows.
Cost of Sales
Inventory Turnover Ratio = -----------------------------
Average Inventory
Cost of Sales (Rs. in Lacs) 4,824,343,296 5,012,338,658
Average Inventory (Rs. in Lacs) 1,143,156,610 1,227,652,356
Inventory Turnover Ratio (In Times) 4.2201 4.0831
Interpretation:
It can be observed from the above figure that ITR has decreased in the year
2016 to 4.08 compared to previous year that was 4.22. It is good for company
as it shows the efficiency of stock management.
54
1. Inventory Holding Period: -
Average Inventory
Inventory Holding Period = -----------------------------x 365
Cost of Sales

Cost of Sales(Rs. in Lacs) 4,824,343,296 5,012,668,658
Average Inventory(Rs. in Lacs) 1,143,156,610 1,227,652,356
Inventory Holding Period (In Days) 86.48 89.39
Interpretation: -
Inventory holding period has decreased from 89.39 days to 86.48 days in the
year 2016. It means company has increased the inventory carrying cost and
better utilization of fund and also improves the profitability.
1. Debtors Turnover Ratio:-
This ratio establishes a relationship between net credit sales and average
debtors and bills receivables. The objective of computing this ratio is to
determine the efficiency with which the debtors are managed.
It is computed as:
Net Credit Sales

Debtors Turnover Ratio = ---------------------------
Average Debtors
Net Credit Sales (Rs. In lakhs) 8,219,048,519 8,705,947,054

Average Debtors (Rs. In lakhs) 634,305,051 646,771,922
Debtors Turnover Ratio (In Times) 12.95 13.46
55
Interpretation:-
This ratio indicates the number of times sales is converted to debtors and to
cash. This indicates the efficiency of receivables management in the company.
A higher debtor’s turnover ratio indicates efficient receivables management.
We can see an increase in the debtor’s turnover over the years indicating the
efforts put in by the company to manage its debtors. This can also be achieved
when there are a few suppliers for the product they offer. In the year 2016
there is a dip in the debtors turnover ratio which is due to an decrease in the
sales. To increase the sales companies have to offer a higher credit period thus
reducing the debtor’s turnover ratio.
1. Debtors Collection Period: -
The Average Collection Period measures the average number of days it takes
for the company to collect revenue from its credit sales. This ratio reflects how
easily the company can collect on its customers. It also can be used as a gauge
of how loose or tight the company maintains its credit policies. A particular
thing to watch out for is if the Average Collection Period is rising over time. This
could be an indicator that the company’s customers are in trouble, which could
spell trouble ahead.
This could also indicate the company has loosened its credit policies with
customers, meaning that they may have been extending credit to companies
where they normally would not have. This could temporarily boost sales, but
could also result in an increase in sales revenue that cannot be recovered, as
shown in the Allowance for Doubtful Accounts.
Average Debtors
Debtors collection period = -------------------------- x 365
Net Credit Sales
Net Credit Sales (Rs. In lakhs) 8,219,048,519 8,705,947,054
Average Debtors (Rs. In lakhs) 634,305,051 646,771,922
Debtors collection period (In Days) 28 27
56
Interpretation: -
The credit policy of the Company is 27 days and RSB has maintained its credit
period in the year 2016.Although the collection period has gone up from
previous year but maintained within the credit period. It seems the Company
has improved the fund flow management.
D. Financial Ratios
1. Interest Coverage Ratio: -
This ratio determines how easily a company can pay interest on outstanding
debts. More the interest coverage ratio more beneficiary for the company.
Minimum Interest Coverage Ratio should be 1%.
EBT+ Depreciation + Interest
Interest coverage ratio = ------------------------------------------
Interest

Interest (Rs. in Lacks) 426,636,176 478,680,407
EBDIT (Rs. in Lacs) 1,013,983,104 1,118,105,080
Interest coverage ratio (%) 2.37 2.33
EBDIT = Earnings before Tax + Depreciation + Interest.

Interpretation:-
Here we can see that Interest coverage ratio has decreased as compared to
previous year. It shows the company is less earning to pay of its interest.
2. Total Assets Turnover Ratio: -
Turnover
Total Assets Turnover ratio = -----------------
Net Block

Net Block (Rs. in Lacs) 3,663,157,712 3,453,763,787
Total Assets Turnover ratio (In Times) 2.24 2.52
57
Interpretation:-
It is assumed that the total asset turnover ratio should be more than 3 for the
company. Since in both the year total asset turnover ratio is less than 3 that
means some of the assets are kept unused / idle or not properly used or there is
customer demand reduced. But the company is trying to improve its Total Asset
Turnover Ratio.
2. Debt to Equity Ratio: -
This Ratio show how much a company is depended on debt.
Total Debts
Debt to Equity Ratio = ------------------------------------------
Equity (Share Capital + R & S)

Equity (Rs. in Lacs) 2,953,341,281 3,323,118,256
Total Debts (Rs. in Lacs) 2,502,008,644 2,176,449,232
Debt to Equity Ratio (In Times) 0.84 0.65
Interpretation:-
In 2016 some of debts are paid off , so the company ‘s dependency decreased
as compared to previous year
4. Return on Capital Employed:-
PAT + Depreciation
Return on Capital Employed = -------------------------------- x100
Capital Employed
PAT + Depreciation (Rs. in Lacs) 522,088,753 542,688,673
Capital Employed (Rs. in Lacs) 5,455,349,926 5,499,567,488
Return on Capital Employed (%) 9.57 9.86
Capital Employed = Total Assets – Current Liabilities.
58
FINDINGS
RSB Transmissions (I) Ltd. is taking all the efforts to maintain its Working
Capital effectively.
As explained earlier Current Ratio is the indicator of a company’s Short-term

Solvency position of any company. RSB is very concerned about its Current
Ratio.
The Current Ratio for an industry like RSB should be ideally 1.33 times and
should at- least be greater than 1.
The Current Ratio for the financial year 2010-11 is 1.94 which means the
Current Assets of RSB is 1.94 times of Current Liabilities. In other words the
company has Rs.1.94 to pay the liability of Re.1. Earlier in the financial year
2009-10 was 1.55.
For effective management of Fund I found the following system in RSB:
1. Real Time Gross Settlement (RTGS):
RSB has an arrangement with its banker both Bank of India & IDBI for RTGS
facility.
RSB has an arrangement with its banker IDBI Bank Ltd for discounting its
Hundies drawn on Tata Motors Limited.
At the beginning of a financial year RSB like any other company draws an
Annual Cash Budget. The Annual Budget is then converted into monthly for a
better control. The main object of preparing this cash budget is to see whether
the company is having a positive or negative cash flow. In case the negative
Cash Flow the company has to decide whether to go for a short term loan or to
drop some capital requirement.
RSB has been given on an average 30 days credit to its Customers. The
realization of receivables within period will indicate a better position.
In short,
59
 Standard current ratio is 2:1 and for manufacturing industry it is 1.33:1.

RSB’s current ratio is in improving Trend and this is a good sign of
Improvement.
 Inventory turnover ratio is improving from 2009-10 to 2010-11, which

means inventory is used in better way so it is good for the company.
 Debtors collection period is improving from 2009-10 to 2010-11. The

increase in ratio is beneficial for the company because as ratio increases
the number of days of collection for debtors decreases.
 Assets turnover ratio of 2010-11 is improving as compare to 2009-10. It

means the better utilization of Fixed Assets of the company.
 Interest coverage ratio has increased from previous year.
60
APPENDIX
Questionnaire
1) What is the working capital position of RSB?
2) What steps would you take to improve your working capital?
3) How to control internal cash management?
4) How to make cash flow statement?
5) What is the current ratio position?
But I found the following good about the company:
1. The current ratio of the company is in improving trend. This is a good

sign of improvement.
2. The company is also bold in realizing its receivables in time.
However, if company manages its working capital effectively then its current
assets will automatically improve.
In my opinion the company may take the following measures to improve its
working capital.
Measures To improve working capital management
 The essence of effective working capital management is proper cash flow

forecasting. The company should take into account
The impact of unforeseen events, market cycles, loss of a prime customer

and action by competitors.
61
 It should have contingency plans to tide over unexpected events. While

market leaders can manage uncertainty better, even other companies
must have risk management procedure; these must be based on
objective and realistic view of the role of working capital.
 Addressing the issue of working capital on a corporate wide basis has

certain advantages; cash generated at one location can be utilized at
another, for this to happen, information access, efficient banking
channels, good linkages between production and milling, internal
systems to move cash and good treasury practice should be in place.
 An innovative approach, combining operational and financial skills and

an all encompassing view of the company’s operations will help in
identifying and implementing strategies that generate short term cash.
This can be achieved by having the right set of executives who are
responsible for setting targets and performance levels...
 Collaborating with its customers instead of being focused only on own

operation will also yield good result.
Working capital management is an important yard stick to measure a company

operational and financial efficiency. These aspects must form part of the
company’s strategic and operation thinking. Efforts should constantly be made
to improve the working capital, position. This will yield greater efficiencies and
improve customer satisfaction.
RSB strong expertise in the it based engineering solution for products and
process integration has help RSB India has a large auto component industry
noted for its world class capabilities. There is huge demand in domestic
markets due to infrastructure developments and RSB is able to leverage its
knowledge of Indian market. There are favorable government policies and
regulations to boost the auto industry.
62
Bibliography
1) website
 www.google.com
 www.rsbglobal.com
 www.investopedia.com
 www.businessworld.in
2) Annual reports of RSB Transmission (I) Ltd.
3) Books
63

Meaning of Working Capital

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“WORKING CAPITAL MANAGEMENT” 2016

 MEANING OF WORKING CAPITAL

Working Capital (abbreviated WC) is a financial metric which represents

should be able to attain a judicious mix of liquidity and profitability while

• Accounts receivable (current asset)

• inventory (current assets), and

• accounts payable (current liability)

The current portion of debt (payable within 12 months) is critical, because it

 COMPANY’S NAME: RSB TRASMISSIONS (I) LTD.

 MISSION:-“To be a leader by providing customer delight through world class

History of the company

• In 1975, Mr. R. K. Behera, a young mechanical engineer from NIT,

• Toughened by the early trials and tribulations and propelled by nothing-

Institution in automotive components and systems and construction equipment

• RSB now boasts of manufacturing facilities in six different locations in

• Founder and Chairman Mr. R. K. Behera, Co-Founder and Managing

• S. K. Behera, who has been co-piloting last four decades in his

 Management of cash and marketable securities

 Management of accounts receivable

 Management of current liabilities

The main objective of working capital management is to maintain a trade of

Mr.R.K.Behera (RKB) is the founder and chairman of RSB Group.

German Chamber of Commerce, Maharatta Chamber of Commerce. He has

Mr.S.K. Behera (SKB) is a graduate in Commerce and has undergone

Mr.Sailendra Behera is a Bachelor of Mechanical Engineering and has

Prior to joining RSB Group, Mr.Sankaranarayanan was

 Mr. Mathura Singh

Prior to joining RSB Group, Mr. Krishnasami was associated

Prior to joining RSB Group, Mr Basu was associated with

Rich experience. He has successfully worked in areas of Operations, Quality,

 Mr. Bijay Lenka

Prior to joining RSB in the year 2004, he was associated with

RSB comprises of four different companies,

 RSB Transmissions (I) Ltd.,

 RSB Transmissions North America Inc. (Formerly known as

 Miller Brothers Manufacturing),

 I-Design Engineering Solutions Ltd. and

 I-vitas Technologies Pvt. Ltd. (Currently known as RSB Industries.)

1. RSB Transmission (I) Ltd.

RSB Transmissions (I) Ltd

2. RSB Transmissions North America Inc. (Formerly known as Miller Brothers

3. I-Design Engineering Solutions Limited.

It was established in the year 2002 to provide in house R&D support.

4. Invites Technologies Pvt. Ltd.

It is a ISO 9001-200. The company offers a range of comprehensive IT services

The Group Companies function with the philosophy of providing quality

Each of the Group companies is equipped with state-of-the-art technology and

RSB is a vertically integrated Propeller Shaft Solution provider, enjoying the

RSB's Gear Transmission units provide in-depth product support to prospective

RSB offers precision machined Aluminum castings to domestic as well as export

aluminum component to 8.0 Kg aluminum component. RSB has been

RSB manufactures Ferrous Castings as per customer design & specifications at

Running Gear System

Construction Equipment Aggregates

RSB is a forerunner in the Construction Equipment Aggregates industry in India.

RSB manufactures forging components with state-of-the art technology and

• Cost competitiveness in terms of labor and raw material.

• Established manufacturing base

• Qualified and skilled man power

• Manufacturing capabilities with international quality standards

• High operational efficiency

• Low investment in research and development

• Limited knowledge of product liability and offshore warranty