Chapter - 1

Introduction And Design of the study

CONTENTS

1.1 Introduction
1.2 Objectives of the study
1.3 Research Methodology
1.4 Hypotheses
1.5 Scope of the study
1.6 Limitations of the study

Institute of Management Studies , Kuvempu University 1

 CHAPTER – 1
INTRODUCTION AND DESIGN OF THE STUDY

1.1 INTRODUCTION

Working capital management is a relationship between current assets and

current liabilities. The management to employ the short-term assets and short-
term liabilities of finance to meet its day to day operations. The management of
such assets is described as Working Capital Management or Current Assets
Management.

Today management of working capital is the most challenging task for

top management. Most of the firms are forced to work under the constraints of
shortage of funds. It is not possible to find any firm carrying on day to day
operations without using funds and making investments in fixed assets.

The efficient and effective utilization of working capital of the

organizations will enhance the organization’s reputation in the market, and also
helps in the smooth flow of production in the company.

Working Capital management is an integral part of financial management

because the management of current asset is similar to that of fixed assets in the
sense that in both the causes a firm analysis their effect on its return and risk.

The two main aspects of company’s life are liquidity and profitability.
These cannot gain momentum unless working capital is properly managed. So
the company must balance between liquidity and profitability. Some of the
significant failures of the business concern are due to the inadequacy and mis-
management of working capital.

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 Therefore, management of working capital has become a yardstick to
measure the performance of a business.

1.2. OBJECTIVES OF THE STUDY

1. To know the management of current assets and current liabilities with

respect to Working Capital Management.

2. To know the factor responsible for increase or decrease in the level of

working Capital during the study period.

3. To know the cash and bank balance at the end of the each year of Grasim,

during the study period, To study the existing system of receivables

management, inventory management and cash management.

4. To study the sources and application of working capital.

1.3. METHODOLOGY

The study on working capital management in a case study. The

methodology employed is empirical in nature. Success or failure of the research
depends upon the method that is adopted. Therefore, selection of methodology
is very important.

Sources of information contain both primary and secondary sources.

When the investigator collects the first hand information, it is known as primary
data. On the other hand, if the collections of data is from any published book, or
through in direct way such data is known as secondary data.

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 In this research work investigator has collected both the primary and
secondary data. Primary data includes, personnel interview, personnel
observation etc. The secondary data includes journals, books, magazines, annual
reports etc.

The necessary data is obtained through brouchers of Grasim; personnel

interview of concerned persons of Gracie.

1.4 HYPOTHESIS

A hypothesis is a correct explanation of a phenomenon through

investigation. In this project investigation has made certain hypotheses they are
as follows:

1. Most of the companies consider cash, debtors and inventories are the only
current asset tp determine the optimal level of working capital.
2. Maintenance of working capital management is satisfactory.

1.5. SCOPE OF THE STUDY

The study examines working capital management in the Grasim at the

microlevel. The focus is only on analyzing the position of working capital
management in Grasim. Working capital management includes,

• How much money is to be invested in current assets.

• Nature of financial policy
• Management of cash
• Adopting E.O.Q. technique for inventory management.
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 1.6. LIMITATION OF STUDY

The limitations of the study are

1. The information obtained through personal interview may contain based

opinion.
2. It was not possible to have in-depth study as the company executives
were not revealing factson the aspects that adversely effect the
insert of
the organization.
3. The relationships between long term assets and short term assets are
excluded in this study. This study is confined only to Harihar
polyfibers (Grasim), Kumarpatnam.

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 Chapter -2

WORKING CAPITAL MANAGEMENT

Some Theoretical considerations

CONTENTS

2.1. Meaning and Defination

2.2. Concepts of working
2.3. Determinants of Working Capital
2.4. Need for Working Capital
2.5. Permanent and Variable Working Capital
2.6. Conclusion

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 CHAPTER – 2

WORKING CAPITAL MANAGEMENT

SOME THEORETICAL CONSIDERATIONS

2.1. MEANING AND DEFINATION

A Firm has to employ short-term assets and short sources of financing.

The management of such assets is described as working capital management. It
is the most important part of overall financial management.

Working capital management consists of effective and efficient

management of current assets and discharging current obligations. The problem
involved in the management of working capital differs from those in fixed
assets. Fixed assets are acquired to be retained in business over a period of time
and yield a return over the life of assets. In contrast to this, short-term assets
loose their identity fairly and quickly. Working capital management is defined
as the problem that arises in managing the current assets and current liabilities
and interrelationship exist between them.

The current assets refer to those assets which are in the ordinary course of
business can be converted into cash within a short period without undergoing a
dilution in value and without disrupting of the firm.

Current liabilities are those variables, which are intended and to be paid
in ordinary course of the business i.e., within a short period.

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2.2. CONCEPT OF WORKING CAPITAL
The working capital can be classified into two concepts:

1. Gross working capital

2. Net working capital

Gross Working Capital

It refers to the firm’s investment in current assets. As we already said

current asset are the assets that can be converted into cash with in an accounting
year and includes cash, short-term securities, debtors, bills receivables and
stocks.

Net Working Capital

It refers to the difference between current assets and current liabilities.

Current liabilities are those claims which are expected and included for payment
within an accounting year and includes creditors, bills payable and outstanding
expenses. The net working capital may be positive or negative. Positive net
working capital will arise when current asset is more than current current
liability and vice-versa for negative.

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SIGNIFICANCE OF CONCEPT OF WORKING CAPITAL
The gross working capital focuses on two aspects of current asset management.

a) How to optimize the investment in current asset?

b) How should current assets be financed?

Current assets should avoid two danger points excessive and inadequate
investment in current assets. An excessive current asset should be avoid because
it impairs the firm’s profitability. An idle investment earns nothing. On the
other hand inadequate amount of working capital can threaten solvency of the
firm because of its ability to meet its current obligations.

Another aspect of the gross working capital points to the need of

arranging funds to finance current assets. Whenever a need of working capital
fund arises, financing arrangement should be made quickly. Similarly, if
suddenly, some surplus fund arises they should not be allowed to remain idle,
but should be invested in short-term securities.

Net working capital is a qualitative concept. It indicates the liquidity

position of the firm and suggest the extent to which working capital needs may
be financed by permanent source of funds. A negative working capital proves
too harmful for the company’s reputation. Excessive liquidity is also bad.

Net working capital concept also covers the question of judicious mix of
long term and short term funds for finance in current assets. For every firm,
there is minimum amount of net working capital, which is permanent.
Management must therefore, decide the extent to which current assets should be
financed with quity capital and for borrowed capital.

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2.3. DETERMINANTS OF WORKING CAPITAL

To determine the Working capital there is no exact formulae as such. A

large number of factors, each having a different importance, influence working
capital’s need of the firm. The following are the descriptive factors which
generally influence the working capital requirement of the firm.

1. Sales and Demand Condition:

Sales depend on demand conditions. Most firms experience seasonal and
cyclical fluctuations in the demand for their product and service. When there is
upward swing in the economy; sales will increase; correspondingly, the firm’s
investment in the inventories, debtors will also increase. Under boom condition,
additional investment in fixed assets may be made by some firms to increase
their productivity.

2. Firm’s Credit Policy:

Credit control includes such factors as the volume of credit sales, the
terms of credit sales, the collection policy, etc. With a sound credit control
policy, it is possible for a firm to improve its cash inflow.

3. Size of Business:

The size of business has also an important impact on its working capital
needs. Size may be major interms of scale of operations. A firm with larger
scale of operation will need more working capital then a small firm.

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2.4. NEED FOR WORKING CAPITAL

The need for working capital to run day to day business activities cannot
be over emphasized. The firm has to invest enough funds in current asset for
generating sales. Sales do not convert into cash instantaneously. There is an
operating cycle involved in the conversion of sales into cash.

Operating cycle of manufacturing company involves four pages:

a) Conversion of cash into raw materials.

b) Conversion of raw material into finished goods.
c) Conversion of finished goods into accounts receivable.
d) Conversion of debtors and bills receivables into cash.

The operating cycle of a manufacturing business can be shown as given

in the following chart.

( ******************** draw a chart here***************) page no 10 in

old project report

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2.5. PERMANENT AND VARIABLE WORKING CAPITAL

The operating cycle is a continuous process and therefore the need for the
current asset is felt constantly. But the magnitude of current assets needed is not
always the same, it increases and decreases overtime. However there is always a
minimum level of current assets which is continuously required by the firm to
carry on its business operations.

This minimum level of current asset is referred to as permanent or fixed

working capital. Depending upon the changes in production and sales, the need
for working capital, over and above permanent working capital, will fluctuate.

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The above graph will show the clearly the kind of working capital requirements.

2.6 CONCLUSION

The management should maintain a sound working capital position. It

should have adequate working capital to run its business. Both excessive and
inadequate are dangerous from the firm’s point of view.

Therefore management should maintain right amount of working capital

on a continuous basis. Only then a proper functioning of business operations
will be ensured.

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 obligation on due date.
Lenders such as commercial banks insist that the firm should maintain a
minimum level of networking capital position.

Institute of Management Studies , Kuvempu University 13

 Chapter – 4

Inventory Management

CONTENTS

3.1. Introduction
3.2. Objectives of Inventory Control
3.3. Need to Hold Inventories
3.4. Techniques of Inventory Control

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 Chapter – 4
INVENTORY MANAGEMENT

4.1.INTRODUCTION

Inventory control is a system which ensures the provision of required

quantity of inventories of the required quality at the required time with the
minimum amount of capital. Efficient inventory control keeps cost down and
helps production run smoothly.

Inventory control will lead to;

(i) Maximization of production

(ii) Reduction in cost of production and better distribution

(iii) Maximization of profit.

4.2.OBJECTIVES OF INVENTORY CONTROL

The basic objective of good material control is to be able to place and

order at the right time, to the right place, for the right quantity and the right
price and quality. Other objectives are:

1. Provide a supply of required materials and parts for efficient and un-

interrupted production.

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 2. Maintain investment in inventories at the lowest level consistent with
operating requirements.

3. Store materials with a minimum of handling time and cost and protect
them form loss by fire, theft and the damage through handling.

4. Derive maximum economy in the cost of purchasing and inventory

holding.

5. Keep inactive, surplus and obsolete item to a minimum by systematic

reporting of production changes which affect material requirements.

4.3. NEED TO HOLD INVENTORIES

Maintaining inventories involves tying up of the company’s fund and

incurring of storage and handling cost. Then also company is holding
inventories due to two general motives. They are:

1. Transactionary motive
2. Precautionary motive

Transactionary motive

Transactionary motive emphasizes on the need to maintain inventories to

facilitate smooth production and sales operation.

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 (1) Precautionary motive

Precautionary motive necessitates holding of inventories to guard against

the risk of unpredictable changes in demand and supply forces and other factors.

INVENTORY TURNOVER RATIO

Inventory turn over ratio is calculated as follows.

I.T.R = Sales
Avg.Inventory

Where,
Avg.Inventory = Opening stock of + Closing stock of
Finished goods finished goods
2

Days of inventory holding = 365

I.T.R.

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 Table – 4.1.: Inventory turn over ratio and days of inventory holding

Year Net Sales Average Inventory Days of

(Rs.in Inventory Turnover inventory
Crore) ratio Holding
2002-2003 4606 146.61 31.41 11
2003-2004 5213 114.82 45.40 8
2004-2005 6229 162.09 38.42 9.50

Days of Inventory Holding

12
No.of Days

10
8
6 series1
4
2
0
2002- 2003- 2004-
2003 2004 2005
Year

Inventory turnover ratio is very low in the year 2002-2003 and days of
inventory holding period is high in the year 2002-2003 and low in the year
2003-2004

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4.4. TECHNIQUES OF INVENTORY CONTROL

The techniques used for inventory control in HPF are:

ABC Analysis

Just-in-time(JIT)

1. ABC Analysis

Also known as ‘Always better control’ or ‘Proportional Parts Value

Analysis’ method, the technique is based on the principle of selective control.
The maxim is “put your efforts where the results are maximized”. In large
manufacturing companies where stocks of direct materials and component part
consist of many thousands of different items, the task of maintaining a stock
control on every individual item is obviously difficult, if not impossible. For
some time, attempts have been made to reduce this cost, while still maintaining
a high degree of control. Many large companies have introduced a system of
analyzing stocks by value categories, so as to ensure that adequate attention can
be paid to important stock items. Stocks are analyzed by categories, and
according to their values. All items in stock are listed in order of descending
value, showing quantity held and the corresponding value of the materials.
From these figures, an analysis can be made in three categories, viz.high
medium and low values. In the USA, this classification is usually referred to as
the ABC technique, where the A category consists of items of considerable
value, B category of medium value and C category of low value. Results of
surveys have shown a situation such as the following:

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Category Percent of total value Percent of total quantity
A 70 10
B 25 35
C 5 55

It can be seen that 10 percent of the items held in stock accout for 70
percent of the total value. Obviously these items need to be controlled carefully
and very strict levels of stock should be maintained. Items of medium value
represent 35 percent of total quantity, but account for 25 percent of the value.
These items should be subject to the usual material control routine, but levels of
stock set need not be quite so rigidly adhered as those in ‘A’ category. Finally,
low value items in category ‘C’ represent the largest quantity in use but account
for only 5 percent of the total value. These items may be considered as ‘free
issue’, no records being maintained. However, their stocks are kept under some
observation so as to ensure the reordering of fresh supplies when necessary.

2. Just In-Time(JIT)

In inventory management, the technique that is most discussed these days

is of JIT. Since stocks of raw materials and finished goods, though necessary,
do not give direct income, they should be non existent or minimum. This
Japanese philosophy takes a more dynamic view of how to optimize production.
Inventory is viewed as a form of waste, a cause of delays and a signal of
production inefficiencies. The JIT approach aims at reducing and eventually,
eliminating set-up times. With the lot size of one, the work can flow smoothly
to the next stage, without the need to move it into inventory and to schedule the
next machine to accept this item. JIT production has led to large savings to the
organizations.

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 Much lower investment is required to hold inventory. When inventory
levels are reduced from three months to one month of sales, financial costs are
slashed by two-thirds. Then large spaces are there to store raw materials and
work-in-process. Above all, there has been the savings from JIT operations. It
has been viewed broadly as a procedure for helping companies to manage and
reduce their total processing times. It has been applied throughout the
organization in manufacturing and service.

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 Chapter – 5

Accounting Ratios and Analysis

CONTENTS

5.1. Introduction
5.2. Liquidity Ratio
5.3. Activity Ratio
5.4. Profitability Ratio
5.5. Leverage Ratio

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 CHAPTER – 5
ACCOUNTING RATIOS

5.1 INTRODUCTION

Ratio analysis is a powerful tool of financial analysis. A ratio is defined

as “the indicated quotient of two mathematical expressions” and the
“relationship between two or more things”. In financial analysis, a ratio is used
as a benchmark for evaluating the financial position and performance of firm.

In other words, ratio analysis is a method of determining and interpreting

different items in financial statements. A ratio is a statistical yardstick.

Ratios are the relative figures reflecting the relationship between

variables. They enable analyst to draw conclusions regarding financial
operations of the firm. Ratios are helpful as a guide in determining the trade of
the business and analyzing the factors that may have contributed whether to
increase or to decrease in its sales or that of gross profit.

In this chapter the comparison has been made on the basis of historical
data with at of the present performance of the company and thereby inferences
are drawn as to know whether ratios are improved or deteriorated. But main
drawback of this method is that it may some times lead to comparison of poor
ratios of the past with that of poor ratios of present, which may give misleading
figure.

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 The ratios may be grouped into various classes according to the financial
function.
1. Liquidity ratio
2. Activity ratio
3. Profitability ratio
4. Leverage ratio

5.2 (1) Liquidity ratio:

Liquidity ratio refers to the ability of the organization to generate cash

internally from business operation or to raise cash externally from the public
including the financial institutions so that it can meet its entire cash requirement
and discharge all current obligations.

The failure of the company to meet its obligations due to lack of

sufficient liquidity will result in poor credit worthiness, loss of creditors
confidence or even legal tangles resulting in the closure of the company.

The most common ratio which indicate the extent of liquidity or lack of it are;

(i) Current ratio

(ii) Quick ratio

(i) Current ratio

The current ratio is calculated by using the following formula.

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 Current ratio = current assets
Current liabilities

TABLE – 5.1.: Current Ratio

Year Current assets Current liabilities Ratios

2002-2003 1495.61 752.49 1.99
2003-2004 1496.01 752.1 1.99
2004-2005 1853.93 827.89 2.23

2.25
2.2
2.15
2.1
Ratio

2.05 series1
2
1.95
1.9
1.85
2002-2003 2003-2004 2004-2005
Year

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 From the above data it is clear that in 2004-2005 the company is more
liquid(2.23) as compared to other years i.e., in 2002-03, 2003-04 during which
period ratios are 1.99 and 1.99 respectively.

(ii) Quick Ratio:

Quick ratios are used as a complementary ratio to the current ratio. The ratio is
concerned with the establishment of relationship between the liquid assets and
liquid liabilities. The liquid assets are those, which can be immediately or at a
short notice can be converted into cash without loss of or diminution in value.

The components of quick assets are

1. Sundry debtors
2. Cash and bank balances
3. Loans and advances.

The components of current liabilities are

1. Sundry creditors
2. Trade advances and deposits
3. Interest accrued but not given
4. Unclaimed dividends

Quick ratio = Quick assets

Quick liabilities

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Table – 5.2: Quick Ratio:

Year Quick ratio Ratios

2002- 955.66/752.49 1.75
2003 1036.55/752.01 1.37
2003- 1174.24/827.89 1.42
2004
2004-
2005

1.5
Ratio

1 series1

0.5

0
2002-2003 2003-2004 2004-2005
Year

In the year 2002-2003, Quick ratio is high (1.75), low in the year
2003-2004(1.37 )
Comparison of Current assets with Quick assets is shown in graph

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 2000

1500

Current assets
1000
quick assets

500

0
2002-2003 2003-2004 2004-2005

(iii) Net working capital to capital employed Ratio (NWCCER)

This ratio is used to measure for a proportion of working capital in total

NWCCER = Net working capital

Capital employed

Net working capital = Current asset – Current liability

Capital employed = Net Worth + Debt
Net Worth = Paid up capital + reserves & surplus – intangible assets.
Debt = long term debt.

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Table – 5.3: NWCCER

(Rs.in Crores)
Year Net Working Capital employed NWCCE Ratio
Capital
2002-2003 743.12 5678.88 0.13
2003-2004 743.91 6308.56 0.11
2004-2005 1026.04 6936.19 0.14

0.16
0.14
0.12
0.1
Ratio

0.08 Series1
0.06
0.04
0.02
0
2002-2003 2003-2004 2004-2005
Year

Net working capital to capital employed ratio is highest in the year 2004-
2005 and the lowest in the year 2003-2004. Net working capital is highest in
the year 2004-2005 and the lowest in the year 2002-2003. Capital employed is
highest in the year 2004-2005 and lowest in the year 2002-2003.

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(iv) Current asset to sales ratio:

Current asset turnover ratio is the ratio between current assets ad sales.

Current asset to Sales ratio = Sales

Current Assets

Table – 5.4: Current asset to sales ratio

Year Sales Current Asset Ratio

2002-2003 5412.28 1495.61 2.92
2003-2004 6129.95 1496.01 2.83
2004-2005 7201.06 1853.93 3.88

4.5
4
3.5
3
Ratio

2.5
series1
2
1.5
1
0.5
0
2002-2003 2003-2004 2004-2005
Year

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 The ratio of current assets to the sales is highest in the year 2004-2005 and the
lowest in the year 2003-2004. the company is holding relatively large amount of
current assets to sales.

5.3(2) Activity ratio:

The activity ratio reflects the firm efficiency in utilization of its assets. It is
the rate at which the different short term assets are converted into cash and how
promptly the liabilities can discharge.

The important activity turnover ratio’s are:

(i) Net Working Capital Turnover Ratio:

Net Working capital turnover ratio is the ratio between working capital and
turnover.

Net Working capital is the excess of current assets over current liabilities.
Turnover means net sales, i.e., total sales less sales returns.

Net Working Capital Turnover Ratio: = Sales

Net Working Capital

Table – 5.5: Working Capital turnover ratio.

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 (Rs.in Crores)

Year Net sales/Working capital Ratio (in times)

2002-2003 5412.28/743.12 7.28 times
2003-2004 6129.95/743.91 8.24 times
2004-2005 7201.06/1026.04 7.01 times

8.5

8
Ratio in times

7.5
Series1
7

6.5

6
2002-2003 2003-2004 2004-2005
Year

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 In the year 2003-20004(i.e., 8.24), there is high working capital turnover
ratio which indicates the favorable turnover of inventories and receivables and
in the year 2004-05 shows low working capital turnover ratio.

(ii) Fixed assets turnover ratio:

The fixed assets turnover ratio is the ratio between fixed assets and turnover.
Fixed assets, here, means net fixed assets, i.e., fixed assets less depreciation.

Turnover means net sales, i.e., total assets less returns.

Fixed turnover ratio = Net sales
Fixed Assets

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Table – 5.6: Fixed Assets turnover ratio

Year Sales/fixed asset Ratio (in times)

2002-2003 5412.28/3156.01 1.71
2003-2004 6129.95/3116.61 1.97
2004-2005 7201.06/3048.87 2.36

2.5

2
Ratio in times

1.5
Series1
1

0.5

0
2002-2003 2003-2004 2004-2005
Year

Though, there are no standard norms for thus ratio, a very high ratio I,e.,
1.67 times indicates that the company is over trading on its fixed assets. In the

Institute of Management Studies , Kuvempu University 34

year 2001-2002, there is less fixed asset turnover ratio which indicates
excessive investment in fixed assets.

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(iii) Current Assets Turnover Ratio.

Current assets Sales turnover ratio is the ratio between current assets and
turnover or sales (i.e., net sales)

Current assets turnover Ratio = Net Sales

Current Assets

Table – 5.7: Current Assets turnover ratio

(Rs.in Crores)
Year Net Sales Current Assets CATR
2002-2003 5412.28 1495.61 3.62
2003-2004 6129.95 1469.01 4.10
2004-2005 7201.06 1853.95 3.88

4.2
4

3.8
Ratio

Series1
3.6

3.4
3.2
2002-2003 2003-2004 2004-2005
Year

Current asset turnover ratio shows a variation in movement. It is highest

in the year 2003-2004 and lowest in the year 2002-2003, in the year 2004-2005

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the sales is also very high compare to other year. In the year 2002-2003 sales is
low.

The main reason for decrease in the current asset turnover ratio is when
the current assets increase; the sale does not increase to the proportion of the
current assets.

5.4(3) Profitability ratio:

Profitability ratios are ratios which measures the profitability of a

concern. In other words, they are the ratios which reveal the total effect of the
business transactions on the profit position of an enterprise and indicate how far
the enterprise has been successful in its aim.

The principle profitability ratios are:

(i) Net Profit ratio

Net profit ratio is the ratio of net profit to sales. Net profit means final
balances of operating and non=operating incomes after meeting all expenses,
i.e., both operating and non-operating.

Sales mean total sales, but net sales, i.e., total sales minus sales returns.

Net Profit ratio = Net Profit 100

Sales

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Table – 5.8: Net Profit turnover ratio

Year Net Profit Sales Net Profit Ratio

2002-2003 367.26 5412.28 6.79
2003-2004 779.26 6129.95 12.71
2004-2005 885.71 7201.06 12.29

14
12
10
Ratio

8
series1
6
4
2
0
2002- 2003- 2004-
2003 2004 2005
Year

As in the year 2003-2004 the Net Profit ratio is 12.71, it indicates that the
profitability of the concern is good.

5.5 (4) Leverage ratios

Leverage ratios are ratios which measure the relative interests of the owners
and the creditors in the enterprise.

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The principal leverage ratio are:
(i) Debt-Equity Ratio
The equity ratio is the ratio which expresses the relationship between debt
and equity.
Debt-Equity Ratio = Debt
Equity

Table – 5.9: Debt-equity ratio

Year Debt/Equity Ratio

2002-2003 2040.12/91.67 22.25
2003-2004 2036.89/91.67 22.21
2004-2005 1974.81/91.67 21.54

22.4
22.2
22
21.8
Ratio

21.6 Series1
21.4
21.2
21
2002- 2003- 2004-
2003 2004 2005
Year

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 Chart showing the Debt-Equity

2500
2000
Rs in Crores

1500 Series1
1000 Series2
500
0
2002- 2003- 2004-
2003 2004 2005
Year

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 Chapter – 6
Cash Management

CONTENTS

6.1. Introduction
6.2. Need for Holding the Cash
6.3. Cash Planning
6.4. Cash Forecast and Budgeting
6.5. Cash Management and Ratios

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 CHAPTER – 6

CASH MANAGEMENT

6.1. INTRODUCTION

Cash management is regarded as the heart of the current asset. Cash is the
basic input needed to keeps business running on a continuous basis and it is also
ultimate output expected to be realized by selling the product or service
manufactured by the firm.

Cash is the money, which a firm can disburse immediately without any
restriction. The term cash includes coins, currency and cheques held by the
firm, and balance in its Bank accounts.

Cash management is concerned with the management of:

(i) Cash flows into the firm and out of the firm.

(ii) Cash flows within the firm, and

(iii) Cash balances held by the firm at a point of time by financing deficit or
investing surplus cash.

The management can be represented in the form of cycles. Sales

generated cash which has to be disbursed out. The surplus cash has to be
invested.

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6.2. NRRF GOT HOLDING THE CASH

The company’s needs to hold cash may be attributed to three motives.

(i) Transactionary motive

(ii) Precautionary motive

(iii) Speculative motive

(i) Transactionary motive:

A transactionary motive requires a firm to hold cash to conduct its

business in the ordinary course i.e., mainly for payment of salaries and wages
and to purchase the raw materials.

(ii) Precautionary motive:

The precautionary motive is the need to hold cash to meet contingencies

in the future. The precautionary motive depends upon the cash predictability. If
cash inflows are predicted accurately, less cash will be maintained for
emergency.

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(iii) Speculative motive:

The speculative motive relates to the holding of cash for investing in

profit making opportunities as and when they arise. The company may speculate
on material price. If the sudden material prices may come down for short
duration or if it is going to be increased in the near future, at that time the
company has to maintain sufficient cash to purchase the raw material.

6.3. CASH PLANNING

Cash flows are inseparable parts of the business operation of a company.

A company needs to invest in inventories, receivables and fixed assets and
make payments for operating expenses in order to maintain growth in sales and
earnings.

Cash planning may be done on daily, weekly or monthly basis. The

period and frequency of cash planning generally depends upon the size of firm.

6.4. CASH FORECAST AND BUDEGETING

Cash budget is the most significant device to plan for and control cash
receipts and payments. A cash budget is a summarized statement of cash
inflows and outflows over a projected time period.

On the other hand, cash forecasts are needed to prepare cash budget, cash
forecasting may be done on short term or long term.

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The short term forecasting is easy. The short term forecasting is done to
determine the following:
(i) To determine operating cash requirement.

(ii) To anticipate short term financing.

(iii) To manage investment of surplus cash.

Table – 6.1: Cash and Bank balance, net sales, current asset and current
Liability of Grasim.

Year Cash and Current asset Current Net Sales

Bank balance Liability
2002-2003 110.11 1495.61 752.49 4609.15
2003-2004 227.48 1496.01 752.1 5213.21
2004-2005 86.70 1853.93 827.89 6229.26

6.5. CASH MANAGEMENT AND RATIOS

The cash management of the firm usually monitors the following ratios.

(i) Cash to current asset ratio

(ii) Cash to current liability ratio
(iii) Cash to sales ratio.

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(i) Cash to current asset ratio

Cash to CCAR = Cash and bank balance 100

Current Asset

Table – 3.2: CCAR

(Rs.in Crores)
Year Cash and Bank Current Asset CCAR
balance
2002-2003 110.11 1495.61 7.36
2003-2004 227.48 1496.01 15.20
2004-2005 86.70 1853.93 4.67

16
14
12
10
Ratio

Series1
8
6
4
2
0
2002- 2003- 2004-
2003 2004 2005
Year

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 Cash to current asset ratio is highest in the year 2003 – 2004 and lowest
in the year 2004 – 2005. The proportionate of cash to current asset directly
indicates the level of cash. Current asset directly indicates the level of cash
maintained by the company. The lower ratio or greater ratio may be the
profitability of the company and it indicates that company as better control over
cash. In the year 2003-2004 the current assets of the company is decreased but
increase in the cash balance.
(ii) Cash to Current liability Ratio:
Cash to Current liability ratio
= Cash & Bank balance
100
Current liability
Table – 6.3: CCLR
(Rs.in Crores)
year Cash & Bank Current CCLR
balance liability
2002-2003 110.11 752.49 14.63
2003-2004 227.48 752.1 30.24
2004-2005 86.70 827.89 10.47

35
30
25
20
ratio

Series1
15
10
5
0
2002- 2003- 2004-
2003 2004 2005
Year

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 Cash to current liability ratio is higher in the year 2003-2004 and lowest
in t he year 2004-2005. in the year 2003-2004 cash and bank balance is more, so
the ratio in that year is high. And in the year 2004-2005 cash and bank balance
is very low and the ratio is also very low in that year.

(iii) Cash to Sales Ratio:

Cash turnover ratio is the ratio between cash and turnover or sales. Cash
for this purpose, means cash in hand, cash at bank and readily realizable
investments or securities.

Turnover refers to total annual sales (i.e., cash sales plus credit sales)
effected during the year. However, sales means net annual sales, i.e., total
annual sales minus returns.

Cash to Sales Ratio = Cash & bank balance

100
Sales

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Table – 6.4: Cash to Sales Ratio

(Rs.in Crores)
Year Cash & Bank Sales CSR
Balance
2002-2003 110.11 4606.20 2.39
2003-2004 227.48 5212.21 4.36
2004-2005 86.70 6229.26 1.39

3
Ratio

Series1
2

0
2002-2003 2003-2004 2004-2005
Year

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