Working Capital Analysiss

A
Summer Training Project Report

On
“WORKING CAPITAL ANALYSIS OF PERFECT APPARTMENT PVT.
LIMITED”
SUBMITTED TO
Dr. A.P.J. Abdul Kalam Technical University, Lucknow

FOR PARTIAL FULFILMENT OF POST GRADUATE IN MANAGEMENT
Faculty Mentor Presented By
Mr.Pankaj kumar Lovely Bansal
(H.R.) 1724970050
M.B.A. (2017-2019)
SHRI RAM COLLEGE OF MANAGEMENT, MUZAFFARNAGAR
LOVELY BANSAL Page 1

ACKNOWLEDGEMENT
First of all I would like to thank my project guide. Mr. PANKAJ KUMAR faculty member of SHRI
Ram College Of Management. Who gave me the choice to choose the project work from the fill
of my choice, the support he gave me throughout my study is worth mentionable.
I am also thankful to my gratitude to my loving parents, and my friends and well-wishers, who
were the source of warm impetus and inspiration, behind the academic sense.
LOVELY BANSAL
1724970050

PREFACE
M.B.A. is a stepping stone to the management carrier and to develop good manager. It is
necessary that the theoretical must be supplemented with exposure to the real environment.
Theoretical knowledge just provide the base and it’s not sufficient to produce a good manager
that’s why practical knowledge is needed.
Therefore the research project is an requirement for the student of M.B.A. This research
project not only helps the student to utilized his skills properly learn field realities but also
provides a chance to the organization to find out talent among the building managers in the
very beginning.
In accordance with the requirement of M.B.A. course I have summer training project on the
topic “ WORKING CAPITAL ANALYSIS OF PERFECT APPARTMENT PRIVATE LIMITED”.
The information regarding the project research was collected through the questionnaire
formed by me which was filled by the customer there.
(LOVELY BANSAL)
Roll No.: 1724970050

DECLARATION
I here by status that this project report submitted in partial fulfillment requirements for M.B.A.
course of “SHRI RAM COLLEGE OF MANAGEMENT” is an original research work carried out by
me under the guide further to my knowledge. This project or any part of it has not been
previously submitted for a degree / diploma of university / institute elsewhere.
NAME : LOVELY BANSAL
ROLL No. : 1724970050

INDEX
S. No. CONTENT’s
1. ACKNOWLEDGEMENT
2. DECLARATION
3. INTRODUCTIONOF THE COMPANY
4. INTRODUCTION OF TOPIC
5. OBJECTIVE OF THE STUDY
6. RESEARCH METHODOLOGY
7. DATA ANALYSIS
8. FINDING
9. SUIGGESTION& RECOMMENDATIONS
10. CONCLUSION
11. QUESTIONNAIRES
12. BIBLIOGRAPHY

INTRODUCTION OF THE COMPANY
Perfect Appartment Pvt. Ltd. Is a Private incorporated on 19 July

1988. It’s classified as non- govt. company and is registrar of companies, shilling. It’s authorized
share capital is Rs.5,00,000 and it’s paid up capital is Rs.3,80,000. It’s involved in Building
installation (These activities are usually performed at the site of construction, although part of
the job may be carried out in special shop. Repair of installation are also included in the
corresponding sub-classes.)
Perfect Appartment Pvt. Ltd. Annual General Meeting (AGM) was last held on 30 September
2008 and as per records from ministry of corporate Affairs (MCA), it’s balance sheet was last
filed on 31 March 2008.
Director of Perfect Appartment Pvt. Ltd. are Mr. Alok Goyal.
Current Status of Perfect Appartment Pvt. Ltd. Is Strike Off.
COMPANY DETAIL’s
Tin No. 09188098883
Company Name Perfect Appartment Pvt. Ltd.
Company Status Strike Off
RoC RoC-Shillong
Company Category Company Limited by Share
Company Sub- Non-govt. Company
Category
Class of Company Private
Date of Incorporation 19 July 1988
Age Of Company 30 Years, 1 Months, 28 Days
Activity Building installation (These activities are usually performed at
the site of construction, although part of the job may be
carried out in a special shop. Repair of installations are also
included in the corresponding sub-classes.)
Number of Members -

Perfect Appartment experienced staff and pre-construction expertise enabled it to reach the
quarter-century milestone. By AlokGoyal.
Perfect Appartment Pvt. Ltd. Staff of loyal, skilled employees helps it build strong relationships
with clients. “Our people are what distinguish us,” says NeileshVerma, presented of the San
Antonio, Texas-based contractor. “It’s our people who have done this kind of work time and
time again, who bring a vast amount of knowledge to what needs to be built (and) who help us
stand out”.
The Company’s building experience extends back to 1991, when it was founded by
Verma’sfatherArun, an industry veteran who had previously worked as present of another
contractor. This year marks the company’s 25th anniversary.
NeileshVerma began working for the company in 2005 after receiving a bachelor’s degree in
economics from the Universityof Texas at Austin. He was employed as a project manager and in
other position at the company while obtaining his executive masters in business administration
from the University of Texas at San Antonio in 2009.
Verma become president of PerfectAppartment Builders in August 2012. His father served as
chairman of the company’s board thereafter until his passing last December. “His involvement
after the transition was in strategy and mentoring,” Verma says. “He made sure we worked
with clients that aligned with our vision; he was our safety net, if we the needed consultation or
advice, he was the person we want to. He was a wealth of knowledge and wec were all
fortunate to have learned under his guidance.”
Perfect Appartmant honored its founder’s legacy in February, when it sponsored a memorial
golf tournament in his name. the event, which took more than seven weeks to plan and was
completely sold out with sponsors and golfers, raised more than $45,000 for the American
Heart Association –San Antonio division. The company directly donated $10,000 making it one
of the leading sponsors of the association’s local campaign.
“My father battled heart disease for most of his life, so our family felt it was the right cause to
donate to, “Verma says. “The AHA has become a long-term partner for us we intend to host this
event on an annual basis moving forward”.
MASTER PLANNERS
Perfect Appartment longevity has contributed to its positive reputation among developers and
owners in the San Antonio market as well as throughout Texas. The company has completed
more than 20,000 multifamily units during it’s history.

Much of Perfect Appartment work is negotiated through repeat business and referrals, as
opposed to being hard-bid. “We take great pride in being one of the most competitively priced
contractors in the market, by being conscientious of obtaining several bids for each scope of
work, being current with commodity pricing and in tune with the labor market,” Verma says.
“The niche experience in this market and tenure of our people make our clients feel
comfortable.”
SPACIOUS AND INVITING

The company applies its pre-construction and other skills to a wide range of multifamily project
types. This includes conventional garden apartment as well as rehabilitation projects, senior
living, HUD-financed affordable housing projects and military/ government housing.
EXPERIENCE APPLIED
The company in January 2015 broke ground on Twin Creeks, a 22-building, 300-units Class A
garden-style apartment complex for owner SWBC in San Antonio’s Alamo Ranch. The project is
anticipated for completion in early summer. The project, located on an 18-acre property, was
designed with it’s surrounding in the Texas hill country in mind. “The heavily- treed site was
treated with great care to save as many tree and incorporate the natural beauty of the
environment around it.”
IN THE NAME OF VALOR

Perfect Appartment is now working on the Valor Club project in San Antonio. The project,
Perfect Appartment ninth Project for owner Home Springs Realty, is a unique 252-units
development located on the Pecan Valley Golf Course in San Antonio. The golf course, which
closed in 2012, was one home to several major PGA Championships. The complex is designed to
accommodate tenants with disabilities – particularly veterans, who will have first priority to
lease unit there.

EXCELLENCE RECOGNIZED
Perfect Appartment work as earned it the recognition of many of its peers in the industry. The
company among the top 50 privately owned companies in San Antonio building contractors by
the San Antonio Business Journal. The company is also noted as a top 100 builder magazine and
Texas Contraction magazine.
CRAFTING BONDS
Perfect craft bonds with its staff in a variety of ways, including offering perks ranging from
finishing and golfing trips to shopping adventures. “Each opportunity uplifts morale around the
organizational walls and keeps employees looking forward to the next event.” Perfect
Appartment adds.

INTRODUCTION OF THE TOPIC
(WORKING CAPITAL ANALYSIS)
“Working Capital Analysis is used to determine the liquidity and sufficiency of current assets in
comparison to current liabilities. This information is needed to determine whether an
organization needed additional longer- term funding for its operations, or whether it should
plan to shift excess cash into longer-term investment vehicles.”
Working Capital Analysis is one way of evaluating the credit worthiness of a business. By
evaluating changes in a firm’s current assets or liabilities an analysis can determine changes to
the business working capital. This figure helps lenders determine how much financing will be
required to see a business through its normal cycle of operation.
Definition:-
According to Guthmann & Doughal – “ Excess of current assets over current liabilities.
OBJECTIVE OF WORKING CAPITAL ANALYSIS

1. The management wants maximum productivity and profits in the employment of
capital. This is possible by striving to maintain a correct ratio between working capital
and fixed capital.
2. The management has another objective and that is to maintain a smooth and rapid
flow of funds in order to enhance the efficiency of working capital or profitability of the
firm.
3. If cash receipts and cash outlay synchronize, there is no need to maintain a cash
reserve. In business; it would be a miracle to have perfect coincidence and co-ordination
between receipts and payments. Hence, firms must have sufficient cash reserve to meet
all normal as well as abnormal cash needs.
NATURE OF WORKING CAPITAL

The nature of working capital is as discussed below:
i. It is used for purchase of raw materials, payment of wages and expenses.

ii. It changes form constantly to keep the wheels of business moving.

iii. Working capital enhances liquidity, solvency, creditworthiness and reputation of the
enterprise.
iv. It generates the elements of cost namely: Materials, wages and expenses.
v. It enables the enterprise to avail the cash discount facilities offered by its suppliers.
vi. It helps improve the morale of business executives and their efficiency reaches at the
highest climax.
vii. It facilitates expansion program of the enterprise and helps in maintaining
operational efficiency of fixed assets.
SCOPE OF WORKING CAPITAL

A. Cover all expenditure
B. Keep business going
C. Generate operating profit
CONCEPT OF WORKING CAPITAL

1. GROSS WORKING CAPITAL: It is the sum of all current assets appear in balance sheet.
Current Assets are those assets which can be easily converted into cash.
Gross working capital = Stock + Debtors + Receivables + Cash.
2. NET WORKING CAPITAL: It is the difference between current assets & current liabilities.
Current liabilities are short term liabilities.
Net Working Capital = Stock + Debtors + Receivables + Cash – Creditors – Payables.
TYPES OF WORKING CAPITAL:

If gross concept of working capital is used, there will always be positive working capital
as it represents only current assets. On the other hand, if net concept of working capital
is used, there may be positive, negative or zero (nil) working capital.

(i) POSITIVE WORKING CAPITAL:
Positive working capital refers to excess of current assets over current liabilities. It
indicates the extent of long-term sources of funds such as equity share, preference
share, retained earnings, long-term loans and debentures etc. used to finance the
current assets of a business concern.
(ii) NEGATIVE WORKING CAPITAL:

If current liabilities of a firm exceed current assets it is called negative working capital.
In other words, working capital is said to be negative when the current assets fall short
of the current liabilities. The excess of current liabilities over current assets is supposed
to have been used in procuring fixed assets of the firm.
So, it indicates the extent of short-term sources of fund used to finance the fixed assets
of the firm. A negative working capital means a negative liquidity and is disastrous for
the firm.
(iii) ZERO WORKING CAPITAL:

If the current assets are equal to current liabilities, it is called zero or nil working capital.
IMPORTANCE OF WORKING CAPITAL:

It is said that working capital is the lifeblood of a business. Every business needs funds
in order to run its day-to-day activities.
The importance of working capital can be better understood by the
following:
i. It helps measure profitability of an enterprise. In its absence, there would be
neither production nor profit.
ii. Without adequate working capital an entity cannot meet its short-term
liabilities in time.
iii. A firm having a healthy working capital position can get loans easily from the
market due to its high reputation or goodwill.
iv. Sufficient working capital helps maintain an uninterrupted flow of production
by supplying raw materials and payment of wages.
v. Sound working capital helps maintain optimum level of investment in current
assets.
vi. It enhances liquidity, solvency, credit worthiness and reputation of enterprise.
vii. It provides necessary funds to meet unforeseen contingencies and thus helps
the enterprise run successfully during periods of crisis.

COMPONENTS OR COPMPOSITION OF WORKING CAPITAL:
There are two components of working capital viz., current assets and current liabilities.
1. CURRENT ASSETS:
Current assets generally mean those assets which, in the normal and ordinary course of
business, will be or are likely to be converted into cash within a year.
EXAMPLE OF CURRENT ASSETS:
1. Inventories like raw materials, work-in-progress, stores and spare parts, finished goods
2. Sundry Debtors (net of provision)
3. Short-term investment or marketable securities
4. Short-term loans and advances
5. Bills receivable or accounts receivable
6. Pre-paid expenses
7. Accrued Income
8. Cash in hand and bank balances.
2. CURRENT LIABILITIES:
Current liabilities means those liabilities repayable within the same period, i.e., a year.
In other words, current liabilities are those which are to be repaid in the ordinary course
of the business within a year.
EXAMPLES OF THE CURRENT LIABILITIES:
1. Sundry creditors
2. Bills payable
3. Outstanding expenses
4. Short-term loans, advances and deposits
5. Provision for tax
6. Proposed dividend
7. Bank overdraft.
DIFFERENT SOURCE OF WORKING CAPITAL:

A firm can use two types of sources to finance its working capital, namely:
(i) Long-term source, and
(ii) Short-term source.

(i) LONG-TERM SOURCE:
Every business organization is required to maintain a minimum balance of cash and

other current assets at all the times—irrespective of the ups and downs in the level of
activity. The portion of working capital which is continuously maintained by the
business at all times to carry on its minimum level of activities is called permanent
working capital.
This type of working capital should be arranged from long-term sources of fund.
The following are the long-term sources of financing permanent working capital:
(a) Issue of Equity shares
(b) Issue of Preference shares
(c) Retained earnings (ploughed-back profits)
(d) Issue of Debentures and other long-term bonds
(e) Long-term loans taken from financial institutions etc.
(ii) SHORT-TERM SOURCE:

The short-term financing of working capital is generally used to support the temporary
working capital which is usually needed to meet the seasonal increase or sudden spurt in
demand.
Various short-term sources of financing of temporary working
capital are:
(a) Bank credit (e.g., cash credit, letter of credit, bills finance, working capital demand
loan, overdraft facility etc.)
(b) Public deposits
(c) Trade credit
(d) Outstanding expenses
(e) Provision for depreciation
(f) Provision for taxation
(g) Advances from customers
(h) Loans from directors
(i) Security money received from employees
(j) Receipts from factoring.
DETERMINANTS OF WORKING CAPITAL:

A firm should always maintain a requisite amount of working capital for smooth and
efficient functioning of its operations. The total working capital requirement is
determined by a wide variety of factors. These factors affect different enterprises
differently. They also vary from time to time.

In general, the following factors are to be considered in determining the
working capital requirement of a firm:
1. NATURE OF BUSINESS:
The working capital requirements of a firm are widely influenced by the nature of
business. Public utilities like bus service, railways, water supply etc. have the lowest
requirements for working capital—partly because of the cash nature of their business
and partly because of their rendering service rather than manufacturing product and
there is no need of maintaining any inventory or book debt except capital assets.
On the contrary, trading concerns are required to maintain more working capital
because they have to carry stock-in-trade, receivables and liquid cash. Manufacturing
concerns also require large amount of working capital because of the time lag involved
in the conversion of raw materials into finished products and, finally, into cash.
2. SIZE OF BUSINESS:
The amount of working capital requirement also depends upon the size of the business.
The size can be measured in terms of the scale of operations. A large firm with a high
scale of operation will require to maintain a large amount of working capital than a firm
with a small scale of operation.
3. PRODUCTION CYCLE:
Production cycle is the time involved in manufacturing or processing a product. It starts
when raw materials are put in the production process and ends with the completion of
manufacturing of the product. Longer the production cycle, higher is the need of
working capital.
This is because funds remain blocked in work-in-progress for long periods of time. For
example, the working capital needs of a ship-building industry will be much longer than
those of a bakery.
4. BUSINESS CYCLE:
The working capital requirements are also determined by the nature of the business
cycle. During the boom period, the need for working capital will increase to meet the
requirements of increased production and sales. On the other hand, in a slack period,
the reduced volume of operation will require relatively lower amount of working capital.

5. CREDIT TERMS OF PURCHASE AND SALES:
The period of credit given by the suppliers and the period of credit granted to the
customers will affect the working capital needs of a firm. If a firm allows a very short
credit period, cash will be realized very soon from debtors. So the need for the working
capital will be less.
On the other hand, a liberal credit policy will result in higher amount of book debts.
Higher book debts will mean more working capital requirement. If the firm has to
purchase raw materials in cash or gets credit for shorter period, it has to arrange for
relatively higher amount of working capital.
6. SEASONAL VARIATIONS:
There are industries like cold drinks, ice-cream and woolen where the goods are either
produced or sold seasonally. So, in such industries, working capital requirements during
production or sale seasons will be large and these will start decreasing when the season
starts coming-to end.
However, much depends on the policy of management with regard to production or sale
of goods. For example, the management of a woolen industry wants to carry on
production evenly throughout the year rather than concentrating on its production only
in the busy season. In that case the working capital requirements will be low.
7. OPERATING EFFICIENCY:
If the operating efficiency of a firm is very high, the resources will be properly utilized.
As a result, it improves the profitability of the firm which ultimately, helps in releasing
the pressure of working capital. On other hand, inefficiency compels the firm to
maintain relatively a high level of working capital.
8. PRICE LEVEL CHANGES:

If prices of input rise, the firm requires additional working capital to maintain the same
level of production.
9. GROWTH AND EXPANSION OF THE BUSINESS:

Every concern wants to grow over a period of time and with the increase in its size, so
the working capital requirements are bound to increase. A growing firm would require
greater working capital than a static one.
10. PROFITABILITY AND RETENTION MONEY:

The net profit earned by the firm goes to increase the working capital to the extent it has
been earned in cash. The cash profit can be found by adjusting non-cash items such as
depreciation, outstanding expenses and losses or intangible assets written-off in the net
profit.

But what portion of this profit will be reinvested as working capital will depend upon the
retention policy of a firm which is, again influenced by corporate tax structure and
dividend policy. So, if the amount of retained profit is not immediately invested outside
the business, it would increase the amount of working capital.
11. RELATIONSHIP OF MATERIAL COST TO TOTAL COST:

In manufacturing concerns, where raw material costs bear a large proportion to the total
cost of production, a greater amount of working capital will have to be maintained. For
example, in industries like textile and electronics, large sums are required to maintain
the inventory of such raw materials.
12. TURNOVER OF CURRENT ASSETS:

The speed with which the current assets revolve around also affects working capital
requirements of a firm. In few cases like vegetables or fruit shops, stocks get sold very
quickly and, for this reason, a little or no working capital is required in carrying over the
stock.
On the other hand, there are some businesses, like jewellery, having very slow turnover
of the stocks—leading to the need for a larger amount of working capital.

COMPONENTS OF WORKING CAPITAL
CURRENT ASSETS CURRENT LIABILITIES
A. Raw Material A. Short Term Creditors
B. Working-in-progress B. Bank Overdraft
C. Finish goods C. Short Term Borrowings
D. Stock D. Proposed Dividend
E. Inventory E. Short Term Loans &
F. Prepaid/ Advances Advanced
G. Cash
H. Sundry Debtors
I. Short term Deposit
J. Bank balance
DETERMINANTS OF WORKING CAPITAL

FORMULA
The formula to calculate working capital is rather straightforward.
Working Capital= Current Assets – Current Liabilities
MANAGEMENT OF WORKING CAPITAL

The goal of managing working capital is to allow continuous operations amid reducing
operating cycle. It allow increasing “free cash flow” (FCF) and therefore increasing “economic
value added” (EVA).
1. CASH MANAGEMENT: The key point to determine the cash balance necessary
for allowing uninterrupted financing of operations and reducing the holding cost of
cash.
2. RECEIVABLE MANAGEMENT: The goal is to set up a credit policy attractable to

buyers, which allows collecting time to be reduced.
3. INVENTORY MANAGEMENT: The focus is to identify order quantity, stock

level, & safety stock, which allows uninterrupted operations & minimizes capital
invested in inventory, holding cost, & ordering cost.
4. SHORT-TERM FINANCING MANAGEMENT: The idea is to identify

appropriate source to found seasonal or unexpected needed in working capital.
SOURCES OF WORKING CAPITAL FINANCING

As was mentioned above, working capital is needed for uninterrupted business operations. This
constant need is usually financed by long term needs that can be founded by short-term
financing source.
1. SHORT-TERM LOAN: If a business needs additional temporary working capital, a

short-term loan (maturity is less than 12 months) is a useful source of financing.
2. LINE OF CREDIT: If there is uncertainty when additional needs arise, a line of credit
can help meet additional requirement.
3. FACTORING: This source of financing is rather expensive but can be used when
other sources are unavailable.

4. TRADE RECEIVABLES: If a business has a good reputation, it can ask trade
creditors to extend collection term, i.e., from 30 days to 40 days, but an increase in
trade receivable is not a good sign for other creditors.
5. EQUITY FINANCING: Retained earning a widely used source of financing, but in
some rare instances owners can provide additional funds.
PERFECT APPARTMENT PVT. LTD. Infosystem has of the following sources available for the
fulfillment of its working capital requirements its working capital requirements in order to
carry on its operation smoothly.
 BANKS:
THESE INCLUDES OF THE FOLLOWING BANKS-
1. STATE Bank of India.

2. Canara Bank.
3. HDFC Bank Ltd.
4. ICICI Bank Ltd.
5. Societe Generale.
6. Standard Chartered Bank.
7. State Bank of Patiala.
 COMMERCIAL PAPERS:
Commercial papers have become an important tool for financing working capital
requirements of a company. Commercial paper is an unsecured promissory note issued by
the company to raise short-term funds. The buyers of the commercial papers includes
banks, insurance companies, units trusts, and companies with surplus funds to invest for a
short period with minimum risk.
SOURCES OF DATA FOR RATIO ANALYSIS:

Values used in calculating financial ratios are taken from the balance sheet, income
statement, statement of cash flows or (sometimes) the statement of retained earnings.
These comprise the firm’s “accounting statement” or financial statement. The
statements data based on the accounting method and accounting standards used by the
organization.
LIQUIDITY RATIOS (SHORT-TERM SOLVENCY):

Liquidity ratios measures the short-term solvency, i.e., the firm’s ability to pay its current dues.
They comprise of Current Ratio and Liquidity Ratio.
“Current Ratio is a relationship of Current Assets or Current Liability and is computed to assess
the Short-term financial position of the enterprises. It means Current Ratio is an inductor of the
enterprise’s ability to meets its short-term obligation.”
“Current Assets” are the assets that are either in the form of cash and cash equivalents or can
be converted into cash or cash equivalents in a short time
“Current liabilities” are liabilities repayable in the short time.
Computation: The ratio is calculated as:
CURRENT RATIO= Current Assets/ Current Liabilities
OBJECTIVE AND SIGNIFICANCE:

The objective of calculating Current Ratio is to assess the ability of enterprise to meet its
short-term liabilities promptly. It is used to asses the short-term solvency of enterprise.
It shows the number of times the current assets are in excess of current liabilities. As a
norm, current assets should be twice the current liabilities, i.e., ratio should be 2:1.
CHARACTERISTICS OF WORKING CAPITAL:
 NEEDS THAT ARE SHORT TERM:: Working capital is being utilized in

acquiring current assets which will be converted to cash for a short period only.
 CIRCULAR MOVEMENT: Working capital is being converted to cash
constantly which will just be turned as a working capital all over again.
 PERMANENCY: Although it is just a kind of short term capital, working capital
is needed by a business forever and always.
 FULCTUATION: Working still fluctuates every now and then even it is
something permanent.

 LIQUIDITY: It is very liquid for it can be converted as cash any time without
losing anything.
 LESS RISKY: Investments in current assets such as working capital comes
with less risk for it is just for short term.
 NO NEED FOR SPECIAL ACCOUNTING SYSTEM: Since working
capital is a short term asset that will last for a year only, there will be no need for
adoption of a special accounting system.
SOURCES OF WORKING CAPITAL:

 Operational funds
 Sales of assets that are non-current
 Long term investments’ sales
 Physical fixed assets’ sales
 Intangible fixed assets’ sales
 Financing for longer term
 Borrowings that are long term
 Issuance of preference and equity shares
WORKING CAPITAL CYCLE:

Working Capital Cycle or popularly known as operating cycle, is the length of time between the
outflow and inflow of cash during the business operation. It is the time taken by the firm, for the
payment of materials, wages and other expenses, entering into stock and realizing cash from the
sale of the finished good.
In short, the working capital cycle is the average time required to invest cash in assets and
reconverting it into cash by selling the assets produced.
The working capital cycle may vary from enterprise to enterprise depending on various factors,
such as nature and size of business, production policies, manufacturing process, fluctuations in
trade cycle, credit policy, terms and conditions for purchase and sales, etc.
Working Capital Cycle = Days Sales of inventory + Days of Sales Outstanding – Days of payables
Outstanding
VENTURE CAPITAL
Definition: Venture Capital can be defined as the financing for startup companies and small
enterprises, that involves a considerable amount of risk but are supposed to have long-term
growth potential, i.e. the project can earn a high rate of return.
A budding company, which is not yet ready to raise funds from the financial market through
public offering may seek venture capital. It implies a financial statement that aims at supporting
new and expanding firms, during their primary stages.
A Venture Capitalist, invest in the equity or debt of the firm promoted by new professionally or
technically qualified but an unproven entrepreneur, whose business idea is relatively unique, but
does not possess financial backing.

Venture Capitalist Company (VCC) is quite interested in entrepreneurial businesses with high
growth prospects managed by an experienced team who have the potential to turn the business
plans into reality.
METHOD OF VENTURE CAPITAL FINANCING:

Equity Financing: A firm needs funds for a longer period to survive and grow, but as
venture capital firm is a new company the firm is not able to give timely returns to its
investors, for which equity financing proves beneficial. The investor’s contribution is not
more than 49% of the total stake, and so the ultimate power remains with the
entrepreneur.
 CONDITIONAL LOANS: Conditional loans are the one that does not carry interest
and are repayable to the lender in the form of royalty after the venture capital
undertaking is able to make revenue. The royalty rate may vary from 2% to 15%, on the
basis of factors such as gestation period, external risk and cash flow patterns.
 INCOME NOTES: A form of hybrid financing, that combines the characteristics of the
traditional loan and conditional loan, on which the venture capital firm pays both
royalty and interest, but at low rates.
 PARTICIPATING DEBENTURES: The interest on participating debentures is payable
at three various rates, as per the phase of operation:
o Start-up phase — Nil
o Initial operations phase — Low rate of interest
o After a particular level of operations – High rate of interest
 CONVERTIBLE LOANS: The loans which are convertible into equity when interest
on the loan is not paid within the stipulated period.
Venture Capital provides long term funding to unquoted companies to grow and succeed.
Raising venture capital is a bit different from borrowing money from lenders because lenders
have the right to interest on the loan and capital repayment. On the other hand, venture capital
investment provides equity stake to the investor, and the return on investment relies on the
growth and profitability.
RETURN ON CAPITAL EMPLOYED

Definition: The Return on Capital Employed Ratio measures the profits generated from each
capital employed. Unlike return on equity that measures only the company’s common equity, the
return on capital employed is a comprehensive approach that measures the overall financial
performance of the company, by taking both the equity and the liabilities into consideration.
The return on capital employed is best suited when comparing the performance of the companies
in the capital- intensive industries. The company’s return should be more than the rate at which
the funds are borrowed from the investors.

The formula to calculate this ratio is:
Return on Capital Employed = Net Operating Profit/ Capital Employed
Where, Net Operating Profit is equivalent to earnings before interest and taxes (EBIT) and
Capital Employed = Total Assets – Current Liabilities or shareholder’s equity – long-term
liabilities.
A Higher value of return on capital employed ratio shows more revenue is generated with the
capital employed and hence better returns are given to the investors.
Example: Suppose a firm has a net operating profit of Rs 25,000 and has reported Rs 1,50,000
and Rs 50,000 as total assets and current liabilities respectively. Then the Return on Capital
Employed will be:
Return on Capital Employed = 25,000/ 1,00,000 = 0.25 or 25%

[ Capital employed = 1,50,000 – 50,000 = 1,00,000]
PREFERANCE CAPITAL
Definition: The Preference Capital is that portion of capital which is raised through the issue of
the preference shares. This is the hybrid form of financing that has certain characteristics of
equity and certain attributes of debentures.
ADVENTAGES OF PREFERENCE CAPITAL

 There is no legal obligation on the firm to pay a dividend to the preference shareholders.
 The redemption of preference shares is not distressful for a firm since the shares are redeemed
out of the profits and through the issue of fresh shares (preference shares and equity shares).
 The preference capital is considered as a component of net worth and hence the
creditworthiness of the firm increases.
 Preference shareholders do not enjoy the voting rights, and thus, there is no dilution of control.
DISADVANTAGES OF PREFERENCE CAPITAL

 It is very expensive as compared to the debt-capital because unlike debt interest, preference
dividend is not tax deductible.
 Although, there is no legal obligation to pay the preference dividends, when the payment is
made it is done along with the arrears.
 The preference shareholder can claim prior to the equity shareholders, in case the dividends are
being paid or at the time of winding up of the firm.
 If the company does not pay or skips the preference dividend for some time, then the
preference shareholders could acquire the voting rights.

The preference capital is similar to the equity in the sense: the preference dividend is paid out of
the distributable profits, it is not obligatory on the part of the firm to pay the preference dividend,
these dividends are not tax-deductible.
The portion of the preference capital resembles the debentures: the rate of dividend is fixed,
preference shareholders are given priority over the equity shareholders in case of dividend
payment and at the time of winding up of the firm, the preference shareholders do not have the
right to vote and the preference capital is repayable.
EQUITY CAPITAL:
Definition: The Equity Capital refers to that portion of the organization’s capital, which is
raised in exchange for the share of ownership in the company. These shares are called the equity
shares.
The equity shareholders are the owners of the company who have significant control over its
management. They enjoy the rewards and bear the risk of ownership. However, their liability is
limited to the amount of their capital contributions. The Equity Capital is also called as the share
capital or equity financing.
ADVANTAGES OF EQUITY CAPITAL:

It has several advantages:
 The firm has no obligation to redeem the equity shares since these have no maturity date.
 The equity capital act as a cushion for the lenders, as with more and more equity base, the
company can easily raise additional funds on favorable terms. Thus, it increases the
creditworthiness of the company.
 The firm is not bound to pay dividends, in case there is a cash deficit. The firm can skip the
equity dividends without any legal consequences.
DISADVANTAGES OF EQUITY CAPITAL:

There are several disadvantages of raising the finances through the issue of equity shares which
are listed below:
 With the more issue of equity shares, the ownership gets diluted along with the control over the
management of the company.
 The cost of equity capital is high since the equity shareholders expect a higher rate of return as
compared to other investors.
 The cost of issuing equity shares is usually costlier than the issue of other types of securities.
Such as underwriting commission, brokerage cost, etc. are high for the equity shares.
 The cost of equity is relatively more, since the dividends are paid out of profit after tax, but the
interest payments are tax-deductible.

LEVERAGED BUYOUT :
Definition: Leveraged Buyout or LBO is the transaction wherein the acquisition of another
company or a single asset is financed through the combination of equity and the significant
amount of debt or borrowed funds.
In other words, Leveraged buyout is the acquisition of another company by using the debt as the
major or primary source of financing. Usually, the ratio used in LBO is 90% debt and 10%
equity. Since the cost of debt is cheaper than the cost of equity, so the returns on equity increases
with the increased debts. Therefore, the debt act as a lever that facilitates the increased returns on
investments.
Often the assets of the companies being acquired are used as collaterals for the loans along with
acquiring company’s own asset to secure and repay the debt. The purpose of Leveraged buyout is
to enable the companies to perform big acquisitions without having a larger capital base.
In a leveraged buyout, the bonds are not the investment grade, a rating given to the bonds which
are relatively less risky, such as corporate or municipal bonds and therefore, are often called as
junk bonds. The bonds, which are riskier and whose returns are speculative in nature, but
however, offers a higher yield than the safer bonds.
TERM LOAN:
Definition: The Term Loan is the primary source of long-term debt raised by the companies to
finance the acquisition of fixed assets and working capital margin. It is also called as a term
finance which means the money raised through the term loans is generally repayable in regular
payments i.e. fixed number of installments over a period of time.
ADVANTAGES OF TERM LOAN

 Interest on debt is tax-deductible, whereas the equity or preference dividends are paid out of
profit after tax.
 There is no dilution of control of the management, since, in the debt financing, the lenders have
no right to vote.
 The lenders are not entitled to the profits of the firm as they are only paid the principal and the
interest amount.
 An issue cost of debt is less expensive as compared to the preference and equity capital.
 The maturity of the debt instrument can be altered with respect to the funds requirements in
the firm.
 Generally, it is easier for the management of the firm to communicate the proprietary details to
the private lenders than to a public capital market.

DISADVANTAGES OF TERM LOAN
 The firm is legally obliged to pay the fixed interest and principal amount to the lenders, the
failure of which could lead to its bankruptcy.
 The debt financing, especially the term loans, raises the financial leverage of the firm, which in
turn raises the cost of equity to the firm.
 If the inflation rate touches the extremely low levels, then the real cost of debt will be more
than expected.
Now the question may arise, that how the term loan is different from the bank’s short-term loan?
Well, the bank’s short-term loans are employed to finance the short-term working capital
requirements, and it recovers its full cost in less than a year. The banks or financial institutions
give rupee loans as well as a foreign currency term loan.
The rupee term loan is generally given directly to the organizations for setting up new projects or
buying new capital assets. Whereas, the currency loan is given to meet the expenses incurred in
importing the machinery or equipment or paying the fees against the foreign technical know-
how. The term loan is typically a secured borrowing, as the assets against which the loan is
raised is called the prime security while the other assets may serve as a collateral security.
FIXED ASSETS TURNOVER RATIO :

Definition: The Fixed Assets Turnover Ratio shows, how efficiently the fixed assets are used
to generate sales. Simply, this ratio shows the efficiency of a firm in generating profits relative to
the investments in the fixed assets.
The fixed assets turnover ratio is suitable for the heavy industries where huge capital is
employed in the investments such as manufacturing. Thus, the ratio should be compared with the
companies within the specific industries.
Also, the companies should keep in mind; that accelerated depreciation can inflate the value of
the ratio, due to the reduced value of the denominator. To overcome this problem, the company
should reinvest in other investments to compensate the older assets.
The formula to compute this ratio is:
Fixed Assets Turnover Ratio = Net Sales/ Gross Fixed Assets – Accumulated Depreciation
Higher the ratio, the better is the utilization of fixed assets. This means a firm is able to generate
sales with the limited amount of fixed assets without raising any additional capital.
Example: Suppose a firm has a gross fixed assets worth Rs 10,00,000 with the accumulated
depreciation of Rs 2,00,000. The sales for the year is Rs 12,00,000. Then the Fixed Assets
Turnover Ratio will be:

Fixed Assets Turnover Ratio = 12,00,000/ (10,00,000 – 2,00,000) = 1.5 times
CURRENT RATIO
Definition: The Current Ratio is the part of the liquidity ratio that helps to determine the firm’s
ability to pay off its short-term obligations with its Current Assets. Simply, a firm uses the
current assets, such as cash, cash equivalents, marketable securities, bills receivables, etc. to
meet its short-term debt.
Generally, the current assets more than twice the current liabilities are considered favorable, as it
shows the firm’s readiness to meet its obligations when they arise. Current liabilities are
generally the obligations that are expected to become due within 12 months, and these are in the
form of loans and advances, creditors, bills payable, etc.
An ideal way to judge the performance of the company is to compare its current ratio with the
other companies within the same industry. This ratio helps the firm to determine its efficiency to
pay for the current debt as well as helps in the planning of future payments on the basis of the
trend followed by the current ratios calculated in the past 5 to 7 years.
The formula for calculating the current ratio:
Current Ratio = Current Asset/ Current Liabilities
The Higher value of current ratio shows the readiness of a firm to pay for its current obligations
when they arise. Thus, higher the ratio higher is the liquidity of the firm.
Example: Suppose a firm has its current assets and current liabilities worth Rs 15,00,000 and Rs
5,00,000 respectively. Then the current Ratio of the firm will be:
Current Ratio = 15,00,000/5,00,000 = 3:1
BREAKING DOWN 'WORKING CAPITAL MANAGEMENT

(WCM)':
Working capital management commonly involves monitoring cash flow, assets, and
liabilities through the ratio analysis of key elements of operating expenses, including the
working capital ratio, collection ratio, and the inventory turnover ratio. Efficient working
capital management helps maintain the smooth operation of the operating cycle (the
minimum amount of time required to convert net current assets and liabilities into cash)
and can also help to improve the company's earnings and profitability. Management of
working capital includes inventory management and management of accounts
receivables and accounts payables. The main objectives of working capital
management include maintaining the working capital operating cycle and ensuring its

ordered operation, minimizing the cost of capital spent on the working capital, and
maximizing the return on current asset investments.
ELEMENTS OF WORKING CAPITAL MANAGEMENT:

The working capital ratio, calculated as current assets divided by current liabilities, is
considered a key indicator of a company's fundamental financial health since it indicates
the company's ability to successfully meet all of its short-term financial obligations.
Although numbers vary by industry, a working capital ratio below 1.0 is generally
indicative of a company having trouble meeting its short-term obligations. Working
capital ratios of 1.2 to 2.0 are considered desirable, but a ratio higher than 2.0 may
indicate a company is not effectively using its assets to increase revenues.
The collection ratio, also known as the average collection period ratio, is a principal
measure of how efficiently a company manages its accounts receivables. The collection
ratio is calculated as the product of the number of days in an accounting
period multiplied by the average amount of outstanding accounts receivables divided by
the total amount of net credit sales during the accounting period. The collection ratio
calculation provides the average number of days it takes a company to receive
payment. The lower a company's collection ratio, the more efficient its cash flow.
The final element of working capital management is inventory management. To operate

with maximum efficiency and maintain a comfortably high level of working capital, a
company must carefully balance sufficient inventory on hand to meet customers' needs
while avoiding unnecessary inventory that ties up working capital for a long period
before it is converted into cash. Companies typically measure how efficiently that
balance is maintained by monitoring the inventory turnover ratio. The inventory turnover
ratio, calculated as revenues divided by inventory cost, reveals how rapidly a company's
inventory is being sold and replenished. A relatively low ratio compared to industry
peers indicates inventory levels are excessively high, while a relatively high ratio
indicates the efficiency of inventory ordering can be improved.

RESEARCH
METHODOLOGY

Research methodology is a way to systematically solve the research problem. It may be
understood as a science of studying how research is done scientifically. So, the research
methodology not only talks about the research methods but also considers the logic behind the
method used in the context of the research study.
 RESEARCH DESIGN:
Descriptive research is used in this study because it will ensure the minimization or bias and
maximization of reliability of data collected. The researcher had to use fact and information
already available through financial statements of earlier year and analysis these to make critical
evaluation of the available material. Hence by making the type of the research conducted to be
both Descriptive and Analytical in nature.
From the study, the type of data to be collected and the procedure to be used for this purpose
were decided.
 DATA COLLECTION:
The required data for the study are basically secondary in nature and the data are collected
from the audited reports of the company.
 PRIMARY DATA:
Primary data are those data, which is originally collected afresh. In this project, Questionnaires
Method & Interview Method has been used for gathering required information.
 SOURCE OF DATA:
The sources of data are from the annual reports of the company from the year 2013-2017.
 METHODS OF DATA ANALYSIS:

The data collected were edited, classified and tabulated for analysis. The analytical tools
used in this study.
 ANALYTICAL TOOLS APPLIED:

The study employs the following analytical tools:
 Comparative statement.
 Common Size Statement.
 Trend Percentage.
 Ratio Analysis.

WORKING CAPITAL ANALYSIS
FINANCIAL ANALYSIS:
Financial analysis is the process of identifying the financial strengths and weakness of the
firm and establishing relationship between the items of the balance sheet and profit & loss
a/c.
Financial ratio analysis is the calculation and comparison of ratio, which are derived from
the information in a company’s financial statements. The level and historical trends of these
ratios can be used to make inference about a company’s financial condition, its operations
and attractiveness as an investment. The information in the statements is used by -
 Trade creditors, to identify the firm’s ability to meet their claims i.e. liquidity position of
the company.
 Investors, to know about the present and future profitability of the company and its
financial structure.
 Management, in every aspect of the financial analysis. It is the responsibility of the
management to maintain sound financial condition in the company.

RATIOS ARE USEFUL FOR SEVERAL PARTIES SUCH AS:
1) Investors, both present as well as potential investors.
2) Financial analyst.
3) Mutual funds.
4) Stock broker and stock exchanger authorities.
5) Government.
6) Tax department.
7) Competitors.
8) Research analysts and students.
9) Company’s management.
10) Creditors and Suppliers.
11) Lending Institutions-COMPANYs and Financial Institutions.
12) Financial Manager.
13) Other Interested parties like credit rating agencies etc.
NATURE AND FUNCTIONS WORKING CAPITAL ANALYSIS:

The money market is a market for short-term financial assets that are clos
substitutes for money. It facilitates the exchange of money for new financial claims
in a primary market as well as financial claims already issued in the secondary
market. It provides a mechanism for meeting the liquidity needs of the lenders and

the short-term requirements of borrowers with minimum transaction cost and
delay. There is strictly no demarcated distinction between the short-term money
market
QUICK RATIOS OR ACID TEST RATIOS:

The acid test ratio is a stringent and meticulous test of a firm’s ability to pay its short-
term obligations ‘as and when they are due. Quick assets and current liabilities can be
associated with the help of Quick Ratio.
The ideal Quick Ratio is 1: 1 and is considered to be appropriate. High Acid Test Ratio
is an accurate indication that the firm has relatively better financial position and
adequacy to meet its current obligation in time.
Quick Ratio = Liquid Asset (Current Assets – Stock & Prepaid

Expenses) / Current Liabilities
ADVANTAGES OF QUICK RATIOS:

 It tells us the liquidity position of a firm
 It is used to remove the errors of current ratio
 It is used as supplementary to the current ratio.

Absolute Liquid Ratio:
The relationship between the absolute liquid assets and current liabilities is established
by this ratios.
Absolute Liquid Assets take into account cash in hand, cash at bank, and marketable
securities or temporary investments. The most favourable and optimum value for this
ratio should be 1: 2. It indicates the adequacy of the 50% worth absolute liquid assets to
pay the 100% worth current liabilities in time. If the ratio is relatively lower than one, it
represents the company’s day-to-day cash management in a poor light. If the ratio is
considerably more than one, the absolute liquid ratio represents enough funds in the
form of cash in order to meet its short-term obligations in time.
Absolute Liquid Ratio = Absolute Liquid Ratio / Current Liabilities

So that were the 3 important Liquidity ratios that one must know in order to find out the
short term solvency position of a company. In our next blog we shall learn
about profitability ratio.

DATA ANALYSIS
AND
INTERPRETATION

Since the working capital ratio measures current assets as a percentage of current liabilities, it
would only make sense that a higher ratio is more favorable. A WCR of 1 indicates the current
assets equal current liabilities. A ratio of 1 is usually considered the middle ground. It’s not
risky, but it is also not very safe. This means that the firm would have to sell all of its current
assets in order to pay off its current liabilities.
A ratio less than 1 is considered risky by creditors and investors because it shows the company
isn’t running efficiently and can’t cover its current debt properly. A ratio less than 1 is always a
bad thing and is often referred to as negative working capital.
On the other hand, a ratio above 1 shows outsiders that the company can pay all of its current
liabilities and still have current assets left over or positive working capital.
Since the working capital ratio has two main moving parts, assets and liabilities, it is important to
think about how they work together. In other words, how does the ratio change if a firm’s current
liabilities increase while the current assets stay the same? Here are the four examples of changes
that affect the ratio:
 Current assets increase = increase in WCR

 Current assets decrease= decrease in WCR
 Current liabilities increase = decrease in WCR
 Current liabilities decrease = increase in WCR
CASH MANAGEMENT
SOURCES OF CASH:
Sources of additional working capital include the following:
 Existing cash reserves.

 Profits.
 Payables.
 New equity or loans from shareholders.
 Bank overdraft or lines of credit.
 Long-term loans.
If you have insufficient working capital and try to increase sales, you 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

 Bank overdraft exceed authorized limit.
 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 ).
CASH MANAGEMENT IN HCL INFOSYSTENS:
The cash management system followed by the HCL Infosystems is mainly lock box system.
Cash Management System involves the following steps:
1. The branch offices of the company at various locations hold the collection of cheques
of the customers.
2. Those cheques are either handed over to the CMS agencies or bank of the particular
location take charge of whole collection.
3. These CMS agencies or bank send those cheques to the clearing house to make them
realized. These cheques can be local or outstation.
4. The CMS agencies or bank send information to the central hub of the company
regarding realization/cheque bounced.
5. The central hub passes on the realized funds to the company as per the agreed
agreement.
6. The CMS agencies or concerned bank provides the necessary MIS to the company as
per requirement.
In cash management the collect float taken for the cheques to be realized into cash is
irrelevant and non-interfering because banks such as Standard Chartered, Perfect
Appartment Pvt. Ltd. These credits are given to immediately and the max. time taken might
be just a day. The cheque send in by two or three customers bouncing. Even otherwise the
time taken for the cheque to be processed is instantaneous. Their Cash Management is quite
efficient.
POSITIVE VS. NEGATIVE WORKING CAPITAL:

 Positive working capital is always a good thing because it means that the business is
about to meet its short-term obligations and bills with its liquid assets. It also means that
the business should be able to finance some degree of growth without having to acquire
and outside loan or raise funds with a new stock issuance.
 Negative working capital, on the other hand, means that the business doesn’t have
enough liquid assets to meet it current or short-term obligations. This is often caused by
inefficient asset management and poor cash flow. If the business does not have enough

cash to pay the bills as they become due, it will have to borrow more money, which will
in turn increase its short-term obligations.
An accounting ratio is made by dividing one account item into another. The aim is to obtain a
Comparison that is easy and beneficial to interpret.
Financial stability ratios are tools for gauging ability to meet long-term obligations with enough
working capital left to operate.
DEBIT RATIO:
total liabilities
Debt ratio =
total assets
Assets are service potential or future economic benefits resulting from past transactions. Assets
are:
 tangible
exist physically:
o land
o buildings
o machinery
o other equipment
o stock or inventory
o patent rights
 intangible
do not exist physically:
o accounts receivable (money owed by customers)
o patent rights
o intellectual property, copyright
o legal claims
In case of liquidation, creditors are paid off before assets are distributed to shareholders so
creditors need a measure of how much cover they have in liquidation. They want to know the
ratio of liabilities (money owed to them) over assets (to be liquidated to repay them). The smaller
the ratio the safer they are.
The debt ratio is more useful to creditors than to shareholders.

The debt ratio shows how much security the assets offer to the creditor.
The debt ratio does not measure the security for shareholders.
Equity ratio or proprietorship ratio

total shareholders' equity
Equity ratio =
trade creditors
Shareholders' equity consists of:
 share capital
amount invested by shareholders
 retained profits or accumulated losses
accumulated profits/losses earned and retained in the business
'Trade creditors' is the sum of monies owed by the business for purchases on credit.
Sometimes used instead of the debt ratio, this equity ratio is said to gauge long-term stability.
It is supposed to meazure the margin of safety for creditors at liquidation.
If preference shareholders' equity is considered a liability then subtract it from the numerator.
To me, the margin of safety depends, not on shareholders' equity, but on saleable assets, since
some of the shareholders' equity may be tied up on poor investments, as was done by AMP in
England, Telstra in Hong Kong, BHP in Vietnam, NAB. (All these were around 1990-2004).
These examples show that 'blue-chip' companies may survive their follies, but shareholders pay
the prices.
therefore, equity is not a reliable guide to stability.
I prefer the unrecognized cents-per-dollar ratio:
total assets - total liabilities - preference shares

centsperdollar ratio =
number of ordinary shares
We can do several things with this. Remind me to tune this
 see the true value per share

 divide this by how much we paid for the shares, to indicate the maximum cents in the
dollar that we might hope for, if the company fails.
One also hopes the total assets are undervalued, since the glittering assets of an
apparently-thriving business suddenly, when in liquidation, become rusty second-
hand assets of no value.
 divide by par-value (+ inflation) to gauge increased value
 divide by buy-back price to see if buy-back offer is low, correct or high.
If it is high, the management is buying their shares with our assets, and we should
sell.
One proviso is that I would subtract from total assets, those assets attributed to recently
purchased overseas companies. Generally, the managements of our Australian companies are too
naive and gullible to survive overseas. They become too wrapped up by a company's figures, and
fail to understand the cultural matrix which enmeshes all dealings with, and the running of,

foreign companies.
Gearing ratio or capitalization ratio

total assets
Gearing ratio =
total (or ordinary) shareholders' equity
The equity ratio is said to indicate the extent that assets are financed by shareholders' equity. A
ratio of 2:1 indicates 0.5 equity, 0.5 debt. Watching the trend reveals management policy for
financing expansion with long-term debt. The next ratio to supplement this, is extra-interest-
paid/extra-return-received (if you can get the figures).
Times interest earned or interest coverage ratio

operating profits before income tax + interest expense
Times interest earned =
interest expense
This indicates the ability to meet periodic interest payments from current profits.
Thus tax and interest are added back into the ability to pay.
Roughly, the profits should be 3 to 4 times the interest, but this reading should be coupled with
other trends.
Asset turnover ratio

net sales revenue
Asset turnover ratio =
average total assets
This indicates the return on each asset dollar; that is, the degree of capital intensity.
From this we see the relationship between return-on-assets ratio and asset-turnover ratio:
operating profit
Return on total assets =
operating profit net sales revenue
= x
net sales revenue average total assets
= profit margin x asset turnover
Thus, to maximize return on assets, maximize both profit margin and asset turnover.
Asset turnover may be increased by lowering profit margin may increase.
A decrease of 0.10 (10%) in the profit margin requires an increase of 0.11 (11%) in the asset
turnover to break even (keep the return equal).
Increasing the profit margin may lead to reduced turnover, sufficient to damage the return.
A common ploy is to lower profit margins on popular items, like bread and milk, to bring in the
customers who then buy other goods at raised profit margins.
These raised profit margins must also cover any expensive advertising of the cheaper goods.
We move on to the return on ordinary shareholders' equity as a function of the return on assets
and the capitalization ratio:
Return on ord = operating

equity profit
average ord
equity
operating
net sales aver total
profit x x
= revenue assets
net sales
aver total assets aver ord equity
revenue
profit x x capitalization
= asset turnover
margin ratio
return on x capitalization
=
assets ratio
We can see here that to maximize the return on ordinary shareholders' equity we must maximize
the profit margin, the asset turnover and the debt finance (capitalization ratio or gearing). It
shows the importance of debt finance, which, however increases interest expense and increases
risk of instability. Does this mean high risk, high return on shareholders' equity? Certainly,
shareholders are advised that an unusually high return on their investment is usually associated
with high risk. In contrast, the higher instability of debt finance may lead to higher turnover, and
then greater profits, which may lead to lower instability.
Cash sufficiency ratios

There are 6 cash-sufficiency ratios. These ratios meazure the relative ability to meet cash flow
needs from operations. The main needs are:
 debt payment
 acquisitions of assets
 dividend payment
To be useful the ratios should be compared with previous years and across the industry, to assess
changing relative performance. Graphing trends should help identify future strengths and
weaknesses.
Correlating shifts with changes in management policies may show relative significance of
decision-making, such as multiplier effects. [I advocate long-term graphing to illustrate hidden
detail and stimulate poor memories of past changes. Nonetheless, using graphs to predict the
future (extrapolating) is pure hubris. We look back at old predictions and laugh or perhaps,
weep.
Extrapolating assumes there will be no changes in oil prices, tax rates, currency valuations,
national growth rates; that there will be no wars, terrorism, earthquakes, or storms.
Has life ever been that boring?]
Cash flow adequacy

Cash flow adequacy = cash from operations

long-term debt paid + assets acquired + dividends paid
This ratio meazures the relative ability to meet the main cash requirements from operations:
 debt payment
 acquisitions of assets
 dividend payment
Assets acquired is only non-current assets because the inventories (stock) acquisition is already
within the cash flow from operations.
Roughly a ratio of 1 (100%) or more, consistent over years, indicate ability to fulfil the main
cash requirements.
The next 4 ratios give more information on this ability to meet main cash outflows:
 long-term debt repayment ratio
long-term debt repayments

Long-term debt repayment =
cash from operations
 dividend payment ratio
dividends paid
Dividend repayment =
 reinvestment ratio
non-current asset payments

Reinvestment =
 debt coverage ratio
total long-term debt

Debt coverage =
 This gives the number of years to repay the debt, ignoring interest.
Cash flow efficiency ratios
Cash flow to sales ratio

cash from operations * 100%
Cash flow to sales =
net sales revenue

This should approximately equal the profit margin over time. Any difference indicates the
efficiency in turning accrual-based profits into operating cash flows.
Operations index
Operations index =
operating profit after tax
The operations index tries to gauge the efficiency of generating cash from its operations.
Compare over time and across the industry.
Cash flow return on assets

cash from operations + tax paid + interest paid
Cash flow return on assets =
The cash flow return on assets finds the total cahs flow (including that lost to tax and interest)
per dollar asset.
PERFECT APPARTMENT PVT. LTD. FINANCIALS:

CONSOLIDATED FINANCIAL PERFORMANCE.
PARTICULARS 2007 2008

Gross Business Income 11855 11455
Less: Excise Duty 170 87
Net Business Income 11685 11368
Total Expenditure
Cost of Sales (Net) 10801 10589
Staff Cost 227 181
Administration, Selling and Others 253 221
Depreciation 15 12
Opening Profit 389 365
Exchange Fluctuation Gain/Less (Net) 19 (14)
Other Income 31 34
Less: Interest (Net) 10 (1)
Profit Before Tax 429 385
Tax Expanses 113 105
Net Profit After Tax 316 280

WORKING CAPITAL POSITION:
CURRENT ASSETS – TOTAL ASSETS
PARTICULAR 2006 2005 2004 2003 2002

CURRENT 100970 81533 54091 45042 55985
ASSETS
NET BLOCK 7970 5329 4925 4954 5552
TOTAL 122479 99139 87076 71285 75205
ASSETS
CA/TA 82.44 82.44 62.12 63.18 74.43
The current assets percentage on total assets is the highest over the years. This increasing
percentage of current assets to the total assets at first might indicates a preference for liquidity
in place of profitability, but a look into the nature of the business carried on by PERFECT
APPARTMENT PVT.LTD. Infosystem reveal the reason it. How far their preference to current
assets has affected the sales is shown below.
NET CURRENT ASSETS – SALES
PARTICULAR 2006 2005 2004 2003 2002

NET CURRENT 40343 34742 14301 18752 27065
ASSETS
SALES 23136 199886 154295 166604 127003
WORKING 16.12 142.93 -23.736 -30.7 -0.46
CAPITAL %
INCREASE
SALES% 19.14 29.54 -7.38 31.18 8.7
INCREASE
The sales has increased and the profit risen despite the16.12% increase in working capital. But
what is noteworthy here is that the firm has managed to maintain the trend of an increase in
net current assets. Whether the change has worked for the company has to be analysed in the
context of the growth in sales as compared to the previous year. There has been a 19.14% rise
in the sales or revenue generated. This would automatically suggest towards a very efficient
working capital management where the assets of the firm which are short-term in nature have
been utilized optimally in connection to their fixed assets. The firm has gone toward such a
dramatic shift in their working capital position might be become of the tremendous growth
witnessed in the DOMESTIC IT MARKET.

CURRENT ASSETS – FIXED ASSETS
PARTICULAR 2006 2005 2004 2003 2002
NETCA/NET BLOCK 5.062:1 6.519:1 2.903:1 3.785:1 4.875:1
The ratio of the net current assets to the fixed ones is an indicator as to the liquidity position of
the firm. This ratio has declined for the firm compared to the previous year. There could be an
argument as to whether the increased ratio of working capital to net block is an conservative
policy and whether it would be detrimental to the interest of the company. Or, whether it
would have been paper if the company invested more into the capital expenditure in the form
of plant and machinery or invested in any other form that would have got them an internal rate
of return. What has to be kept in mind before coming to a conclusion as to the policy of the
company is the fact that the firm being primarily into assembling, its investment in the fixed
assets segment need not be high. A look into the capacity utilization of the plant would reaffirm
this point. It would be ideal for the firm to continue in the same line and not have excessive
investment in the fixed assets as they can easily add onto this part.
COMPUTER AND MICRO PROCESSIOR BASED SYSTEMS
YEAR INSTALLED CAPICITY ACTUAL PRODUCTION %CAPACITY

UTILIZATION
2006 1150000 581805 50.59
2005 600000 448121 74.69
2004 525000 295192 56.23

CURRENT ASSETS – CURRENT LIABILITY
PARTICULAR 2006 2005 2004 2003 2002
CURRENT ASSETS 100970 81533 54091 45042 55985
CURRENT LIABILITIES 60627 46791 39790 26290 28920
%CURRENTASSETS IN. 23.84 50.7 20.09 -19.54 8.9
%CURRENTLIB. IN. 29.57 17.6 51.35 -9.1 19.45
The 16.12% increase the Net Current Assets despite of the fact that there has been an increase
in the Current Assets by 23.84% and increase in Current Liabilities has been by 29.57% over that
of the previous year has to be attributed to the fact that in 2005 the company showed such a
high increased in CA, that it is still being offset.

OBJECTIVE OF
THE STUDY

PRIMARY OBJECTIVE:
The major objective of the resent study are to know financial strengths and weakness of
PERFECT APPARTMENT PVT. LTD.through WORKING CAPITAL ANALYSIS.
THE MAIN OBJECTIVE OF RESENT STUDY AIMED AS:
 To evaluate the performance of the company by using ratios as a yardstick to measure

the efficiency of the company.
 To understand the liquidity, profitability and positions of the company during the study
period.
 To evaluate and analysis various facts of the financial performance of the company. To
make comparisons between the ratios different periods.

DATA ANALYSIS
AND
INTERPRETATION
The working capital is presented in graph.

W = CA / CL
A. ASSETS LIABILITIES
SHORT
CURRENT TERM
NWC
LONG
LONG
TERM
TERM
B. ASSETS LIABILITIES
SHORT
CURRENT
TERM
NWC
LONG LONG
TERM TERM
C. ASSETS LIABILITIES
CURREN
T SHORT
TERM
NWC
LONG
TERM LONG
TERM
Working capital value levels: A).Positive, B). Zero, C). Negative.

 Legend : Symbols representing the analysis companies show in graph.
EXPLATION OF WORKING CAPITAL FORMULA

Calculating the Working Capital formula is quite easy.
All you need to do is to look at the balance sheet of the company.
And then look at the current assets and current liabilities.
 Current assets are the assets that will offer benefits to the company for the next
one year or less. These assets are just opposites of non-current assets because
these assets benefit the company for a very short period of time. We also call
them short-term assets. Cash, inventories, accounts receivables, marketable
securities, prepaid expenses etc. are the examples of current assets.
 Current liabilities, on the other hand, are liabilities that are short-term liabilities of
the company. That means the company can expect to pay off these short-term
liabilities within a year. These are completely opposite of long-term
liabilities. Accounts payables, notes payables, accrued expenses, a part of the
long-term debt which need to be paid currently etc. are examples of current
liabilities.
When we total the current assets that the company has on their balance sheet and then
deduct the total current liabilities, we will get the WC.
USE OF WORKING CAPITAL FORMULA:

WC depicts so many things about a company.
 If a company has a positive WC (meaning the current assets are more than the
current liabilities of the company), then the company is in a good position in
terms of efficiency, liquidity, and the overall financial health.
 On the other hand, if the company has a negative working capital (meaning the
current assets are less than the current liabilities of the company), the company
is suffering from inefficiency and illiquidity.
It’s also important for a company to see how long the inventories sit with the company. If
the inventories aren’t moving out for long, the capital will remain tied up.

Balance Sheet of Perfect Appartment Pvt. Ltd.
As at 31st March, 2016
Liabilities Amount Assets Amount
Share Capital 15,00,000 19,90,000 Cash in Hand 20,000
(+) N/P 6,20,000
(-) Drawing 1,30,000
Sundry Creditors 2,40,000 B/R 1,00,000
B/P 60,000 Investment (Short Term) 80,000
Bank Overdraft 1,80,000 Sundry Debtors 3,20,000
Closing Stock 4,00,000
Furniture 1,50,000
Plant & Machinery 8,00,000
Land & Building 6,00,000
TOTAL 24,70,000 TOTAL 24,70,000
Compute the Following ratios:
1. Working Capital
SOLUTION:
1. Computation of Working Capital:

Working Capital = Current Assets – Current Liabilities
= (Stock+ Debtors+ B/P+ Cash)- (Creditors+ B/P+ Bank Overdraft)
= Rs.(4,00,000+3,20,000+1,00,000+20,000)-(2,40,000+60,000+1,80,000)
= Rs. 8,40,000-4,80,000
= Rs. 3,60,000

FINDING

1. The ideal current ratio is 2:1 which the firm obtains only in the FY 2015-2016 it shows
the positive impact.
2. The ideal liquid ratio is 1:1 which is also obtained by the firm in FY 2015-2016 it indicates
that PERFECT APPARTMENT PRIVATE LIMITED, without selling its inventory, has enough
short-term assets to cover its immediate liabilities.
3. The net profit ratio shows fluctuating tend, it shows that more or less the company is
successful to maintained efficiency in sale value and operating expenses.
4. The return on investment ratio is increased from 15% to 16% in FY 2015 because both
the EBIT and total assets increased.
5. The company is maintaining the proper record of inventory. Management is successful
to manage the cost involved in inventory, because of increasing ratio of inventory.
6. The fixed assets turnover ratio of the firm is in increasing trend from the FY 2015-2016,
means that the company is efficiently utilizing the fixed assets.
7. The proprietary ratio of the firm shows increasing trend, means that the long term
solvency of the firm is increased.
8. PERFECT APPARTMENT PRIVATE LIMITED borrowed loans in such a way that the cost of
this debt financing do not outweigh the return that the company generates on the debt
through investment and business activities and become too much for the company to
handle.
9. PERFECT APPARTMENT PRIVATE LIMITED is far better in covering its fixed cost with the
interest coverage ratio.
10. The sales, profit before tax, profit after tax shows the increasing trend during the period
under review. It depicts that the company is working with more efficiency.
11. The company has not made any preferential allotment of share and also company has
not issue any debentures.

SUGGESTIONS
AND
CONCLUSION

SUGGESTIONS:
1. The CURRENT RATIO of PERFECT APPARTMENT PRIVATE LIMITED was less than the
standard in FY 2005-2006 and 2013 i.e., 1.8,1.5 respectively. A low current ratio
indicates that co will not be able to meet its short term debts.
2. PERFECT APPARTMENT PRIVATE LIMITED should look into its credit policies in order to
ensure the timely collection of imparted credit that is not earning interest for the firm.
3. There is decreasing trend in interest coverage ratio which is due to heavy investment
which further effect on the return on investment ratio. So PERFECT APPARTMENT
PRIVATE LIMITED should keep up its investment to sufficient level.
4. The PERFECT APPATMENT PRIVATE LIMITED should formulate the strategy to use the
fixed assets more effectively to generate more revenues.
5. Operating expenses should be especially considered to be reduced.
6. Inventory is the biggest item of balance sheet that must have demanded a large amount
of maintaining cost. So there is need for efficiency Inventory Management.
7. There should be efficient utilization of share holder fund to increase return on
investment and return on equity to maintain its goodwill in investors mind.

CONCLUSION:
The company’s overall position. Through the losses were there in the FY 2003-2004, they
were able to come out of it successfully and regain into profitable scenario. Particularly the
last three year’s position is well due to raise in the profit level from the FY 2003 to FY 2006.
It is better for the firm to diversify the fund to different sectors in the present market
scenario. On a whole PERFECT APPARTMENT PRIVATE LINITED has once again demonstrated
its potential to ride through the difficult times.
Higher demand for marine paints can be expected in the next decade, once investments in
ports and port development have started to reach fruition. As India is hopeful of competing
with other established shipbuilding nations, the multinationals are likely to find plentiful
opportunity in India, given the compliance requirements imposed by effects of international
legislation on marine paints.
Also other segments are showing promising opportunities to grow. With these many
opportunities at hand along with the potential player who would be able to make use of the
situation well, T would rather start looking at a career in PERFECT APPARTMENT PVT. LTD.
So from this we can conclude that there is a better opportunities for investors to invest in
this company.

LIMITATION
OF THE
STUDY

THE MAIN LIMITATIONS OF THE PROJECTS UNDERTAKEN ARE AS
UNDER:-
The main limitation of the project undertaken are as under:-
 TIME: The time of around two months was too short as wide subject like Financial
analysis.
 CONFIDENTAL INFORMATION: The executives were hesitant to reveal complete
information since it was confidential.
 BUSY SCHEDULE OF CONCERNED EXECUTIVES: The concerned executives were
not having very busy schedule because of which they were reluctant to give
appointment.

BIBLIOGRAPHY

 Financial Management: M Y KHAN AND P K JAIN Fifth Edition
 FINANCIAL MANAGEMENTC – I.M.PANDEY
 Financial Management (BMS):MR. KALE.
 Kansai Nerolac Paint’s magazines, brochures etc.
 Annual Reports of the Kansai Nerolac Paint’s Ltd
 87th Annual report 2003-2004
 88th annual report 2004-2005
 89th annual report 2005-2006

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Summer Training Project Report

Dr. A.P.J. Abdul Kalam Technical University, Lucknow

SHRI RAM COLLEGE OF MANAGEMENT, MUZAFFARNAGAR

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Roll No.: 1724970050

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NAME : LOVELY BANSAL

ROLL No. : 1724970050

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3. INTRODUCTIONOF THE COMPANY

5. OBJECTIVE OF THE STUDY

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Perfect Appartment Pvt. Ltd. Is a Private incorporated on 19 July

Director of Perfect Appartment Pvt. Ltd. are Mr. Alok Goyal.

Current Status of Perfect Appartment Pvt. Ltd. Is Strike Off.

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SPACIOUS AND INVITING

IN THE NAME OF VALOR

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OBJECTIVE OF WORKING CAPITAL ANALYSIS

NATURE OF WORKING CAPITAL

i. It is used for purchase of raw materials, payment of wages and expenses.

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vii. It facilitates expansion program of the enterprise and helps in maintaining

operational efficiency of fixed assets.

SCOPE OF WORKING CAPITAL

CONCEPT OF WORKING CAPITAL

TYPES OF WORKING CAPITAL:

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(ii) NEGATIVE WORKING CAPITAL:

(iii) ZERO WORKING CAPITAL:

IMPORTANCE OF WORKING CAPITAL:

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DIFFERENT SOURCE OF WORKING CAPITAL:

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Every business organization is required to maintain a minimum balance of cash and

(ii) SHORT-TERM SOURCE:

DETERMINANTS OF WORKING CAPITAL:

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8. PRICE LEVEL CHANGES:

9. GROWTH AND EXPANSION OF THE BUSINESS:

10. PROFITABILITY AND RETENTION MONEY:

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11. RELATIONSHIP OF MATERIAL COST TO TOTAL COST:

12. TURNOVER OF CURRENT ASSETS:

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DETERMINANTS OF WORKING CAPITAL

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Working Capital= Current Assets – Current Liabilities

MANAGEMENT OF WORKING CAPITAL

2. RECEIVABLE MANAGEMENT: The goal is to set up a credit policy attractable to

3. INVENTORY MANAGEMENT: The focus is to identify order quantity, stock

4. SHORT-TERM FINANCING MANAGEMENT: The idea is to identify

SOURCES OF WORKING CAPITAL FINANCING

1. SHORT-TERM LOAN: If a business needs additional temporary working capital, a

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1. STATE Bank of India.

SOURCES OF DATA FOR RATIO ANALYSIS:

LIQUIDITY RATIOS (SHORT-TERM SOLVENCY):