WORKING CAPITAL MANAGEMENT More businesses fail for lack of cash than for want of profit Cash is the

lifeline of a company, no matter how large or small the organization is. If this lifeline deteriorates so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital Management. Working capital management involves the relationship between a firm's current assets and its current liabilities. Current Assets are resources, which are in cash or will soon be converted into cash in "the ordinary course of business". Current Liabilities are commitments which will soon require cash settlement in "the ordinary course of business".

The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing shortterm debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash to pay current liabilities as they fall due. This implies a clearly designed risk policy to determine the required liquidity level. Why Firms Hold Cash The finance profession recognises the three primary reasons offered by economist John Maynard Keynes to explain why firms hold cash. The three reasons are for the purpose of speculation, for the purpose of precaution, and for the purpose of making transactions. All three of these reasons stem from the need for companies to possess liquidity

CONCEPTS OF WORKING CAPITAL: There are two concepts of working capital: (I) Gross Working Capital.

(ii) Net Working Capital.

In the broad sense, the term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Current assets are those assets, which in the ordinary course of business can be converted into cash within a short period of normally one accounting year. In a narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities.

Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intend to be paid in the ordinary course of business within a short period or normally one accounting year out of the current assets or the income of the business. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. These two concepts of working capital are not exclusive, rather both have their own merits. Gross concept is very suitable to the company form of organization where there is divorce between ownership, management and control. The net concept of working capital may be suitable only for proprietary form of organizations such as soletrader or partnership firms. However, it may be made clear that as per the general practice net working capital is referred to simply as working capital.

Working Capital = Current Assets - Current Liabilities

TYPES OF WORKING CAPITAL: Working Capital may be classified in two ways:

(a) On the basis of concept. (b) On the basis of time. (a) On the basis of concept, working capital 1. Gross working capital. 2. Net working capital. (b) On the basis of time, working capital can be further classified into 1. Permanent or fixed working capital. 2. Temporary or variable working capital. Permanent working capital: Permanent or fixed working capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum Level of current assets, which is continuously required by the enterprise to carry out its normal business operations. For example, every firm has to maintain a minimum level of raw materials, work-in-process, finished goods and cash balance. This minimum level of current assets is called fixed working capital. Temporary working capital: Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. This portion of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes. Working Capital Cycle: Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands, the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits

and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash Inventory (stocks and work-in-progress) and Receivables arising from credit terms extended to customers and as reflected in day sales outstanding (DSO - DSO provides a rough guide to the number of days that a company takes to collect payment after making a sale). The main sources of cash are Payables arising from trade terms adopted in supply chain management (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions. TIME ......... and MONEY. When it comes to managing working capital TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales.

If you ... Collect receivables (debtors) faster Collect receivables (debtors) slower

Then ... You release cash from the cycle Your receivables soak up cash

Get better credit (in terms of duration You increase your cash resources or amount) from suppliers Shift inventory (stocks) faster Move inventory (stocks) slower You free up cash You consume more cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing down a plug hole, they remove liquidity from the business.

IMPORTANCE OF WORKING CAPITAL: Working capital is the lifeblood and nerve centre of business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows: 1. Solvency of the business: Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

2.

Goodwill: sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill.

3.

Easy loans: A concern hacking adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favorable terms.

4.

Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs.

5.

Regular payment of salaries: wages and other day-to-day commitments company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which raises the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits.

6.

Regular supply of raw materials: Sufficient working capital ensures regular supply of raw materials and continuous production.

7.

Ability to face Crisis: Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital.

8.

Quick and Regular return on Investments: Every Investor wants a quick and regular return on investments. Sufficient of working capital enables a concern to pay quick and regular dividends to its investors, as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates a favourable market to raise additional funds in the future.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excessive working capital nor inadequate nor shortage of working capital. Both excessive as well as short working capital positions are bad for any business.

1.

Excessive working capital means idle funds which earn no profits for the business and

hence the business cannot earn a proper rate of return on its investments.

2.

When there is redundant working capital, it may lead to unnecessary purchasing and

accumulation of inventories causing more chances of theft, waste and losses. 3. Excessive working capital implies excessive debtors and defective credit Policy which may cause higher incidence of bad debts. 4. It may result into overall inefficiency in the organisation. 5. When there is an excessive working capital relation with the banks and other financial institutions may not be maintained. 6. Due to low rate of return on investments the value of shares may also fall.

DISADVANTAGES OF INADEQUATE WORKING CAPITAL 1) A concern, which has inadequate working capital, cannot pay its short-term liabilities in time. credit facilities. 2) The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business. 3) It becomes impossible to utilise efficiently the fixed assets due to non-availability of liquid funds. 4) The rate of return on investments also fall with the shortage of working capital. Thus it will loose its reputation and shall not be able to get good

CAPITAL MANAGEMENT APPROACHES TO WORKING The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities. Though Working capital management takes place on two levels, component level and analysis level, the approach to WCM depends upon

1. Natures or Character of Business 2. Size of Business/Scale of Operations 3. Production Policy 4. Manufacturing Process 5. Working Capital Cycle 6. Rate of Stock turnover 7. Credit Policy 8. Rate of Growth of Business 9. Earning Capacity and Dividend Policy 10. Price Level Changes MANAGEMENT OF CASH Cash Management is one of the key areas of working capital management. Cash, the most liquid asset is of vital importance to the daily operation of business firms. Crucial for the solvency of the business it is referred to as the life blood of business. Firm needs cash to meet the needs of daily transactions, to take advantage of unexpected investment opportunities. While cash serves these functions, it is an idle resource with an opportunity cost. The liquidity provided by the holding cash is at the expense of profits that could accrue from alternative investment opportunities. Hence, the firm should plan and control cash carefully.

OBJECTIVES: *1 *2 Bringing the companys cash resources within control as quickly and efficiently as Achieving the optimum conservation and utilization of the funds. Accomplishing the first goal requires, establishing accurate, timely forecasting and reporting system, improving cash collections and disbursements and decreasing the cost of moving funds among affiliates. The second objective is achieved by minimizing the required level of cash balances, making money available when and where it is needed and increasing the risk-adjusted return on those funds that can be invested. Cash management deals with the following: 1. Cash inflows and outflows 2. Cash flows within the firm 3. Cash balances held by the firm at a point of time Cash Management needs strategies to deal with following various facets of cash: CASH PLANNING It is a technique to plan and control the use of cash. A projected cash flow statement may be prepared, based on the present business operations and anticipated future activities. The cash inflows from various sources may be anticipated and cash outflows will determine the possible uses of cash. CASH FORECASTS & BUDGETING A cash budget is the most important device for the control of receipts and payment of cash. A cash budget is an estimate of cash receipts and disbursements during a future period of time. It is a forecast of expected cash intake and outlay. Normally a cash budget consists of 1. Cash collections 2. Cash payments 3. Cash balances possible.

OPTIMUM CASH BALANCE A firm has to maintain a minimum amount of cash for settling the dues in time. By preparing Cash Budget we determine the optimum cash balance. If a firm maintains less cash balance then its liquidity position will be weak. If a higher cash balance is maintained then an opportunity to earn is lost.

INVESTMENT OF SURPLUS FUNDS There are, sometimes, surplus funds with the companies, which are required after sometime. These funds can be employed in liquid and risk free securities to earn some income. There are number of avenues where these funds can be invested.

*3 *4 *5 *6 *7

Unit 1964 Scheme Ready forwards Investment in Marketable Securities Bald Financing Negotiable Certificate of Deposit

Rational Behind the study: In these days working capital is most important in every company. This study helps the management of the organization in taking decision regarding working capital and financial decisions. This study is useful to the HBL power systems Ltd, A study Towards their a major working capital management. of working capital management is

importance to internal & external analysis.

OBJECT OF THE STUDY Primary objective: To know the Working capital management of the HBL power systems Ltd.

Secondary objective: To identify the efficiency of cash management in the HBL power systems Ltd., To compare the performance of the previous year balance sheet. To analyze the operating cycle of HBL power systems Ltd. To analyze the different ratios in HBL organization. To evaluate the effectiveness of inventory management in the HBL Ltd.

SCOPE OF THE STUDY The study is mainly conducted to know the working capital management of

the firm. The working capital management is concerned with the firm current assets and liabilities. It is important and integral part of financial management as short term survival to long term success. To analyze the ratio analysis of HBL power systems Ltd. To compare the balance sheet of HBL power systems Ltd. To compare the statement of changes in working capital of HBL power systems Ltd.

LIMITATIONS 1. It is only a study of interim reports. 2. It is based on monetary information but not on non-monetary information . 3. It does not consider change in price level. 4. Changes in accounting procedures management. by firm may often make working capital

INTRODUCTION TO WORKING CAPITAL MANAGEMENT Working capital may be regarded as the most important factor of a business, its effective provision and utilization can do much to ensure the success of a business. While the efficient management may not only lead to loss of projects but also to the ultimate shown fall of what other wise would be considered as promising concern. A study on working capital is of major importance, because of its close relationship with current day-today operations of a business. The term working capital stands for that form of capital which is required for the financially of working or current need of the company it is usually invested in raw material work in progress, finished goods, accounts receivable and salable securities. Management of working capital usually involves planning and controlling current assets, namely cash and marketable securities, assets receivable and inventories and also administration of current liabilities. Working capital or current assets management its one of the most important aspect of the over all financial management. Its is concerned with the problem that arises in attempting to mange the current assets. The current liabilities and the inter relationships that exist between them. Current assets are the assets which can be converted into cash with in an Accounting year and includes cash short term securities, debtors, bill receivable and inventories current liabilities are those claims of out side which are expected to mature for payment with in an Accounting year and includes creditors bill payable and outstanding expenses.

The goal of working capital management is to mange the firms current assets and current liabilities in such a way enough to cover its current liabilities in order to ensure that they are obtained and used in the best possible way.

Meaning of Working Capital Capital required for a Business can classified under two main categories. 1. Fixed Capital 2. Working Capital Working capital is the amount of funds necessary to cover the cost of operating of enterprises. Every business needs funds for two purpose for its establishment and to carry out its day-to-day operations. Long-term funds are required to create production facilities through purchases of fixed assets such as plant, machinery, land building, furniture etc. Investment in these assets represented that part of firms capital, which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purpose for the purchase of raw material, payment of wages and other day-to-day expenses. These funds are known as working capital funds thus, invested current assets keep revolving fast and are being constantly converted into cash and this cash flows out again in exchange for other current assets. Hence it is also known as revolving or circulating capital as short-term capital. Circulating capital means current assets of a company that are changed in the ordinary course of business from to another for example: From cash to inventories to receivables, and receivables to cash.

CONSTITUTENTS OF CURRENT ASSETS 1. Cash in hand and bank balance 2. Bills Receivable 3. Sundry debtors( less provision for doubtful debts) 4. Short term loans and advances 5. Inventories of stock as: a. Raw Material b. Work in Progress c. Stores and spaces d. Finished goods. 6. Temporary investments of surplus funds 7. Prepaid expenses 8. Accrued incomes

Net liabilities.

Working Capital is the excess of Current assets over current Current assets-Current Liabilities, Net Working

Net Working Capital =

capital may be +ve or ve. When the Current assets exceed the Current liabilities the Working capital is +ve and the ve Working capital results when the Current Liabilities are more than the Current Assets , Current Liabilities are those liabilities which are intended to the paid in the ordinary course of business with in a short period of normally one accounting year out of the Current Assets or the income of the business. CONSTITUTENTS OF CURRENT LIABILITIES 1. Bills Payable 2. Sundry creditors or Accounts/payable 3. Accrued or O/S Expenses 4. Short terms loans, Advances and deposits 5. BOD 6. Dividend payable 7. Provision for taxation, if it does not amount to appropriation of profits.

CLASSIFICATION OF WORKING CAPITAL: Working capital may be classified into two ways: i. ii. On the basis of concepts. On the basis of time.

The basis of concepts, Working Capital is classified as gross Working Capital and net Working Capital. On the basis of time: 1. Permanent or fixed Working Capital 2. Temporary or variable Working Capital Permanent or fixed Working Capital: It is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of Current Assets there is always a minimum level of Current Assets, which continuously required by the enterprise to carry out its normal business operation. As the business grants the requirement of permanent we also increases due to increase in Current Assets from cash to inventories from inventories to receivables and from receivables to cash and so on.

Temporary or Variable Working Capital: It is the amount of Working Capital, which is required to meet the seasonal demands, and some special emergencies, variable Working capital can further be classified seasonal Working Capital and special Working Capital. The capital required to meet the seasonal needs of the enterprise is called seasonal Working Capital special Working Capital is that part of Working Capital which is required to meet the special exigencies such as launching of extensive marketing campaigns for conduction research etc.,

IMPORTANCE OF ADEQUATE WORKING CAPITAL: WC is the life blood, just as circulation of blood is essential in the human for maintaining life, WC is very essential to maintain to smooth running of a business no business can run successfully wit out an adequate of maintaining adequate amount of WC are as follows: WC . The main advantages of

1. Solving of the business: Adequate WC helps in maintaining solvency of the

business by providing uninterrupted flow of production.

2. Goodwill: Sufficient WC enables a business concern to make prompt payment

and hence in creating and maintaining goodwill.

3. Easy loans: A concern having a WC, high solvency and good credit standing
can arrange the loans from banks and other on easy and favorable term.

4. Cash discount: Adequate WC also enables a concern to avail cash discounts on

the purchase and hence it reduced cost.

5. Regular supply of raw material: Sufficient WC ensures regular supply of raw

material and continuous production.

6. Regular

payments

of

salaries,

wages

and

other

day-to-day

commitments: Company which has ample WC can make regular payments of salaries, wages and after day-to-day commitments which raises the morale of its employees, increases their efficiency, reduces wastage and cost and enhances production and profit.

7. Exploitation of favorable market condition: Only concern with adequate WC

an exploit favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding it inventories for higher prices.

8. Ability to face crisis: A WC enables a concern to face business crisis in

emergencies such as depression because during such periods, generally, there is much prices use on WC.

9. Quick and regular return on investment: Every investor wants a quick and
regular return on his investments sufficiency of WC enables a concern to pay quick and regular dividends to its investors as then may no be much pressure to

plough back projects. This gains the confidence of its investors and creates a favorable market to raise additional funds in the future.

10. High morale: Adequacy pf WC creates an environment of society confidence,

and high morale and creates efficiency in a business. EXCESS OR INADEQUATE WORKING CAPITAL: Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate or shortage of working capital. Both excess as well as short working capital position a bad for any business. However, out of the two, it is the inadequate of working capital, which is more dangerous from the point of view of the firm. DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL: 1. Excess working capital means ideal funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments. 2. When there is a redundant working capital it may lead to unnecessary purchasing and accumulation of inventories causing more change of theft, waste and losses. 3. Excessive working capital impulse excessive debtors and defectives credit policy, which causes high incidence of bad debts. 4. It may result into overall inefficiency in the organization. 5. Due to low of return on investment, the values of shares may fall. 6. The redundant working capital gives raise to speculative transaction.

DISADVANTAGES OR DANGEROUS OF INADEQUATE WORKING CAPITAL: 1. A concern which has inadequate working capital cannot pay it short-term liabilities in time. Thus, it will lose its reputation and shall not be able to get good credit facilities. 2. It cannot buy its requirements in bulk and cannot avail of discounts etc., 3. It becomes difficult for the firms to exploit due to lack of working capital. 4. The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increased cost and reduces the profit of business.

5. It becomes impossible to utilize efficiently the fixed assets due to non availability of liquid funds. 6. The rate of return of investments also falls with the short of working capital. Factors Determining Working Capital 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Requirements

Nature or character of Business Size of Business/ sale of Operations Production policy Manufacturing process/Length of the Production cycle Seasonal Variations Working Capital Cycle Stock Turnover ratio Credit policy Business Cycle Rate of Growth of Business Earning Capacity and Dividend Policy Price Level Changes Other Factors

OPERATING The

CYCLE

profit earned by the firm depends upon magnitude if the scales among However sales do not convert into cash instantly there is There is, therefore a

things successful scales program is in other words necessary for earning profits by one business enterprises. invariably time lag between sale of goods and receipt of cash.

working capital in the form of current assets to deal with the problem arising out of the lack of immediate realization of cash against goods sold. Therefore sufficient capital is necessary to sustain sales activity. cycle and cash cycle. Technically there is referred to as the operating It is defined as a continuing flow from cash suppliers, to

Inventory, to accounts receivables and back into cash. It consists of 3 phases: 1. Conversion of cash into Inventory. 2. Conversion of Inventory into Receivables 3. Conversion of Receivables into cash.

PARTICULARS Raw material stock Work in progress Finished goods Debtors Creditors Raw material consumption Purchases Cost of production(exclude dep) Cost of goods sold Sales

2009 9516.01 5058.17 3424.09 28263.56 10484.08 82030.37 78482.99 88427.43 108193.25 140126.76

2008 8563.51 7483.06 1200.08 27300.56 8503.87 68598.83 72237.38 68861.62 91950.86 113397.35

2007 4977.19 2372.01 272.48 17420.42 7493.91 32178.82 33285.06 35625.44 45580.45 58828.83

2006 3758.22 2358.01 651.69 13834.34 5378.81 22485.39 22846.52 24597.43 31245.41 42095.37

2005 3314.81 1585.97 352.12 11435.94 4545.37 17276.08 18529.81 19136.82 25822.38 33143.55

PARTICULARS Raw material Conversion period Raw material Consumption during the year average consumption per day Raw material Closing stock value Raw material conversion in days Work in progress conversion period Total cost of production excluding dep cost of production per day WIP value WIP conversion period in no days Finished goods conversion period Total cost of goods sold cost of goods sold per day Finished goods value Finished goods conversion in days Debtors conversion period in no days Sales value Sales value per day Debtors value Debtors conversion period in no days Payments differed period Total purchase value Purchase value per day Creditors value at closing Creditors payment differed period Gross working capital operating cycle days (RMCP+WIPCP+FGCP+DCP) Net working capital operating cycle days

2009

2008

2007

2006

2005

82030.37 224.74 9516.01 42.34

68598.83 187.94 8563.51 45.56

32178.82 88.16 4977.19 56.46

22485.39 61.01 3758.22 61.01

17276.08 47.33 3314.81 70.03

88427.43 242.27 5058.17 20.88

68861.62 188.66 7483.06 39.66

35625.44 97.61 2372.01 24.31

24597.43 67.39 2358.01 34.99

19136.82 52.43 1585.97 30.25

108193.25 296.42 3424.09 11.55

91950.86 251.92 1200.08 4.76

45580.45 124.88 282.48 2.26

31245.41 85.61 651.69 7.61

25822.38 70.75 352.12 4.98

140126.76 383.91 28263.56 73.62

113397.35 310.68 27300.56 87.87

58828.83 161.17 17420.42 108.08

42095.37 115.33 13834.34 119.95

33143.55 90.81 11435.94 125.94

78482.99 215.02 10484.08 48.76

72237.38 167.91 8503.87 42.97

33285.06 91.19 7493.91 82.18

22846.52 62.61 5378.81 85.93

18529.81 50.77 4545.37 89.53

148.39

177.87

191.01

223.56

231.02

99.63

134.91

108.93

137.63

141.67

(Gross operating cycle-PDP Operating Cycle in no months 3.32 4.5 3.63 4.59 4.72

PERMANENET AND VARIABLE WORKING CAPITAL:

The magnitude of working capital required is not always the same and increases and decreases over time. However there is always a minimum level of current assets, which is continuously required by the firm to carry on this business operation this minimum level of current is referred to as permanent for fixed working capital. It is permanent in the same way as the firm fixed assets are. Depending up on the changes in production and sales the need for working capital, over and above permanent working capital will fluctuate . For example extra inventory of finished goods will have to be maintained to support peak period of sale and investment. In receivables any also increase during such periods. needed to support the changing production and sales variable or temporary working capital. The extra working capital

activity is called fluctuation or

Both kind of working capital-permanent ad temporary are necessary to facilitate production and sales through operating cycle, but temporary working capital is created by the firm to meet liquidity requirements that will last only temporarily. Permanent working capital is stable over time while temporary working capital is fluctuating. However a permanent working capital the time need not be horizontal of the firm. Requirements for permanent capital are increasing over period for a growing firm, the difference between permanent and temporary working capital depicted below.

DRAW BACK OF EXCESSIVE WORKING CAPITAL: 1. It result in unnecessary accumulation of inventories thus Echinacea of inventory mishandling, waste, theft and losses increases

2. It is indication of defective credit policy and slack collection period consequently higher incidence of bad debts results, which adversely effects profits. 3. Excessive working capital makes management complacent which degenerates in, to managerial inefficiency.

INADEQUATE WORKING CAPITAL: 1. Stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds. 2. It become difficult to implement operating plans achieve the firm profit target. 3. Operating inefficiency creep in which it becomes difficult even to meet day-to-day commitments. 4. Fixed assets are not efficiently utilized for the lack of working capital funds. Thus firms profitability would Detroit. 5. Paucity of working capital funds renders the firm unable to avail attractive credit opportunities.

STATEMENT OF SCHEDULE CHANGES IN WORKING CAPITAL OF HBL POWER SYSTEMS LTD.,

AS ON 31 MARCH 2007-08 AND 2008-09 (Rs. in lakhs) DECREASE 7730.64 0 0 0 0 3055.59 0 3055.59

PARTICULARS Current Assets Inventory Sundry debtors Cash & Bank balance Loans & Advances Total Current Liabilities Bills payable Creditors Other Liabilities Total Net WC (CA-CL)

2007-08 17246.55 27300.56 4792.96 4209.27 53549.44 4930.21 8503.87 2611.71 16045.78 37503.66

2008-09 9516.01 28263.56 8170.28 4245.71 50195.56 1874.61 10484.08 5403.54 17762.23 32433.33

INCREASE

963.01 3377.32 36.44

0 1980.21 2791.83 4772.04 4930.71

STATEMENT OF SCHEDULE CHANGES IN WORKING CAPITAL OF HBL POWER SYSTEMS LTD., AS ON 31 MARCH 2005-06 AND 2006-07 (Rs. in lakhs) DECREASE 0 0 0 0 0 0 0 298.95 298.95 0

PARTICULARS Current Assets Inventory Sundry debtors Cash&Bank balance Loans & Advances Total Current Liabilities Bills payable Creditors Other Liabilities Total Net WC (CA-CL)

2005-06

2006-07

INCREASE

6767.92 13834.34 2471.74 1902.98 24976.98 318.91 5378.8 1526.42 7224.13 17752.85

7531.68 17420.42 2515.39 2948.79 30416.28 1499.65 7493.91 1227.47 10221.03 20195.25

763.76 3586.08 43.65 1045.81 5493.3 1180.74 2115.11 3295.85 2442.4

STATEMENT OF SCHEDULE CHANGES IN

WORKING CAPITAL OF HBL POWER SYSTEMS LTD., AS ON 31 MARCH 2003-04 AND 2004-05 (Rs. in lakhs) DECREASE

PARTICULARS Current Assets Inventory Sundry debtors Cash&Bank balance Loans & Advances Total Current Liabilities Bills payable Creditors Other Liabilities Total Net WC (CA-CL)

2003-04

2004-05

INCREASE

3347.14 6529.1 1248.82 878.34 12003.4 641.15 2943.87 670.16 4255.18 7748.22

5359.4 11435.95 1416.18 1089.46 19300.99 740.55 4545.37 874.91 6160.83 13140.16

2012.26 4906.85 167.36 211.12 7297.59 99.4 1601.5 204.75 1905.65 5391.94 0 0 0 0

RESEARCH METHODOLOGY The secondary data was collected from the finance department of the company

pertaining to five financial years 2003-2004 to 2008-2009. Other details of the research data were collected from annual reports, profile of the company and through the references from different books dealing with working capital for the above financial years. The data from these reports have been analyzed by using various tools and its various components Annual report published, by company discloses true and fair statement because these are guided by auditors as per rules and regulations stated under the law. a) DATA COLLECTION: The Secondary data is to be collected from the finance department of the company pertaining to the last five years. Certified accounts by internal audit copy. b) PERIOD OF STUDY: Period of study form 01-03-2010 to 30-04-2010. c) LIMITATION: This report is restricted to secondary data. Support from the management side may be limited due to their pre-occupied works. and techniques (accounting and statistical ) with a view to evaluating of working capital

RATIO

ANALYSIS

Ratio Analysis is widely used tool for financial analysis. It is the systematic use of ratio to interpret the financial statement so that the strength and weakness of a firm as well as its historical performances and current financial position can be determined. The term ratio refers to the numerical relationship between two items of variables. This relationship expressed as percentage fractions, proportion of numbers These alternative methods of expressing item, which are related to, each other are for purpose of financial analysis. Ratio Analysis is a technique of analysis and interpretation of financial statement. It is the process of establishing and interpreting various ratios for helping in making certain decision. The suppliers of goods on credit, banks, financial institutions, investors, share loans and making holders and management make use of ratio analysis as a tool in evaluation the financial positions and performance of a firm for granting credit providing investments in the firms. A single ratio in itself does not convey much of sense. Evaluation may be done by comparing present rations and past ratios as this indicates the remained constant over a period of time. I have studied the following Ratios in analyzing the working capital management. direction of changes and whether the firms performance and financial positions has improved, deteriorated or

CURRENT RATIO: Current Assets -----------------------------Current Liabilities (Rs.in Lakhs) CURRENT LIABILITIES 6160.83 7224.13 10221.03 16045.78

Current Ratio

YEAR 2004-2005 2005-2006 2006-2007 2007-2008

CURRENT ASSETS 19300.99 24976.98 30416.28 53549.44

CA/CL 3.13 3.46 2.98 3.34

2008-2009

50195.56

17762.23

2.83

C r e t Rt ur n aio
300 00

200 50

200 00

Amount

100 50

Microsoft Office Excel Worksheet

C R E TA S T U RN SES

C R E TL B IT S U R N IA IL IE

100 00

50 00

0 2 0 -2 0 04 05 2 0 -2 0 05 06 2 0 -2 0 06 07 2 0 -2 0 07 08 2 0 -2 0 08 09

F a c l Y as in n ia e r

Interpretation: Current ratio HBL Power in 2007-08 3.39 but in 2008-09 the current ratio is 3.84. Here increasing the current ratio due to increase in current assets.

QUICK RATIO: Quick assets ----------------------------------Current liabilities (Rs. In Lakhs)0 YEAR QUICK ASSETS CURRENT LIABILITIES QA/CL

Quick ratio

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

13941.59 18208.96 22884.61 36302.79 40679.55

6160.83 7224.13 10221.03 16045.78 17762.23

2.26 2.52 2.24 2.26 2.29

Interpretation: The quick ratio of HBL power systems Ltd has show slight changes the quick ratio And again it increased to 2.45 in

in 2005-06 3.02 but it decreased in 2006-07 as 2.26.

2007-08 and 2.80 in 2008-09. This is due to increase and decrease in quick assets.

QUICK RATIO

WORKING CAPITAL TURNOVER RATIO:

Net Sales Working capital turnover ratio -------------------------------------------Working Capital YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 SALES 33143.55 42095.37 58828.83 113397.34 140126.76 WORKING CAPITAL 13140.16 17752.85 20195.25 37503.66 32433.33 (Rs. in Lakhs) SALES /W.C 2.52 2.37 2.91 3.02 4.32

Interpretation: The working capital turn over ratio of HBL Ltd has shown slight changes are there if we consider the ratios in 2004-05, 2005-06 slight changes that is increase in 2006-07 to compare 2007-08 due to increase in sales and W.C but in 2008-09 it was decreased to 2.28.

WORKING CAPITAL TURNOVER RATIO

INVENTORY TURNOVER RATIO: Net Sales Inventory turnover ration-------------------------------------Avg Inventory YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 SALES 33143.55 42095.37 58828.83 113397.34 140126.76 AVG.INVENTORY 5359.41 6767.92 7531.68 17246.65 9516.01 (Rs. in Lakhs) SALES/AVG. INV 6.18 6.22 7.81 6.58 14.73

Interpretation: The inventory turnover ratio of HBL Ltd in 2008-09 6.22 is greater than of 6.12 in 2007-08 due to sales is increased and inventory is also increased. I INVENTORY TURN OVER RATIO

FIXED ASSET RATIO: Sales Fixed asset turnover ratio------------------------------------------------------

Fixed assets (Rs. in Lakhs) YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 SALES 33143.55 42095.37 58828.83 113397.34 140126.76 FIXED ASSETS 9554.65 12353.88 17634.84 25389.44 28815.19 SALES/F.A 3.47 3.41 3.34 4.47 4.86

Interpretation: The fixed assets turnover ratio in HBL has decreased form 2.76 to 2.73 during the period 2005-06 due to decrease in sales. The ratio then decreased to 2.29 due to increase in fixed assets then the ratio increased to 3.41 during the period 2007-08 and 2008-09 due to increase in sales.

FIXED ASSET RATIO

DEBTORS TURNOVER RATIO: Credit Sales Debtors turnover ratio --------------------------Average Debtors YEAR 2004-05 2005-06 2006-07 2007-08 2008-09 CREDITSALES 33143.55 42095.37 58828.83 113397.34 140126.76 AVG.DEBTORS 11435.95 13834.34 17420.42 27300.56 28263.56 (Rs. In Lakhs) CR.SALES/AVG.DEBTORS 2.91 3.04 3.38 4.15 4.96

Interpretation: Debtor turnover ratio in HBL decreased in 2007-08 compare with 2006-07, but it increased in 2008-09 up to 3.04. Due to sales also. increase in debtors and also increase in credit

DEBTORS

TURNOVER

RATIO

INVENTORY MANAGEMENT Inventories constitute a major part of the working capital, imperative to manage inventories efficiency and effectively. NATURE OF INVENTORIES: The various forms of inventories exist in a company are: 1) Raw Materials 2) Work in-progress 3) Finished goods The raw materials inventory consists of items that are purchased by the firm from others and are converted into finished goods. There are important inputs of the final product Inventories are

approximately 60% of current assets in Public Limited Companies, it is therefore absolutely

The work-in-progress inventory consists items currently being used in the production process. There are normally partially or semi-finished goods. Finished goods inventory represent final on completed products, which are available to sale. NEED TO HOLD INVENTORIES: There are 3 general motives in holding inventories. 1) Transaction Motive: Transaction motive which emphasis to maintain inventories to facilitate smooth production of sales operations. 2) PRECAUTIONALY MOTIVE: Precautionary motive which influences the decision to increase or decrease inventory level to take advantage of price fluctuations. 3) SPECULATIVE MOTIVE: Speculative motive which influences the decision to increase or decrease inventory level to take advantage of price fluctuations.

INVENTORY MANAGEMENT TECHNIQUES: The company should aim at an optimum level of inventory on the basis of trade-off between cost and benefit to maximize companys wealth. inventories make the firm flexible. The following are some of the important control techniques: 1. SETTING INVENTORY LEVELS: This involves fixing a define maximum and minimum reorder levels. These levels should not be allowed to the static. They must be revised to such circumstances. 2. ABC ANALYSIS: All items in the inventory are not equally important. Emphasis of control should very depending upon the importance use and value of item. quantity. INVENTORY BREAK DOWN BASED ON ABC ANALYSIS For that purpose the inventories are categorized into 3 classes. A,B and C based on their usage value are Efficiently controlled

CLASS A B C

QUANITY 5%-10% 15%-20% 70%-75%

VALUE OF ITEM 70%-80% 15%-20% 5%-10%

3. TWI BIN SYSTEM: Under this system of control, two bins are maintained for each item of inventory. The first bin contains stock, which is sufficient for usage which occurs between receipts of an order and placing of next order. The second bin contains a reserve stock, which will be sufficient for consumption from the date of order to delivery date and reserve stock. As soon as the first bin is empty, a requisition for supply is placed and second bin is used in the mean time.

4. ECONIMIC ORDER QUANTITY (EOQ): There are 3 major cash involved with inventories. The are carrying costs, ordering costs and stock out cost. a) CARRYING COST: inventory.. Some These cost all increased for maintaining or carrying i.e Tax, depreciation, of the carrying costs are storage cost.

insurance, insurance of inventory etc., they may be 30% of investment in inventor. b) ORDERING COST: These costs are also known as acquisition or setup costs. They are related to processing and generating an order and connected paperwork. They consist of salaries, to purchasing staff, telex, telegrams. c) STOCK OUT COSTS: They are invisible get important, these costs are incurred by the company . It there is a stock-out-resulting in loss of production. They may be loss of profit on lost production, loss of goodwill, impact on future stock. The question how much to order, relates to the problem of determining levels of inventories. Bulk buying reduces the frequency of ordering and hence ordering cash. But may result in large inventory, leading to an increase in carrying cost. The determination of EOQ is to balance ordering cost and carrying cost. Formula

EOQ = 2 AO/C Where A = C = Annual Consumption Carrying cost per unit

O = Ordering cost per unit

OBJECTIVES OF INVENTORY MANAGEMENT: a. To maintain inventory for efficient and smooth production and sales

operations. b. To minimize firms investment in inventories and to maximize profitability. c. To utilize available storage space and prevent stock from exceeding space availability. d. To check against loss of materials through carelessness and pilferage. e. To provide a perpetual inventory value and a consistent and reliable basis for preparing financial statements.

FINDINGS It was found that, current ratio of HBL increased from 2005 to 2006, due to

decrease in current assets and current liabilities. Then in decreased to next year and again it increased to fluctuations in current assets. It was found that, debtors turnover ratio in HBL has increased from 2005 to 2006, this is due to the increase in sales and decrease in debtors. The ratio decreased from 2006 to 2007, this is due to increase in average debtors, again it increased in 2008. It was found that, the inventory turnover ratio in HBL has increased from 2005-06 due to the increasing sales. The ratio then increased to 6.12 during the period 200708, due to the increase in sales. It further increased in 2009. It was found that, the working capital turnover ratio in HBL has shown increasing trend during the period 2005-2008. It has increased from 2.27 to 2.41. This is due to increase in net working capital. It was decreased in 2009 to 2.28.

It was found that, the fixed asset turnover ratio in HBL, has decreasing from 2.76 to 2.29 during the period 2005 to 2007, due to decrease in sales. The ratio then increased to 3.41 during the period 2007-08, due to increase in sales. It was constant in 2009 also.

It was found that, fixed assets in 2005 are 6346.23 and it increased to 7422.87 in year 2006. This is due to the increase in net block. Current assets increased in 2006 against 2005. This is due to increase in all current assets.