1.

CONCEPT:

Working capital means the funds which are required to meet the daily transactions of the business .In other words it refers to that part of the firms capital which is required for financing current assets such as cash, marketable securities, debtors and inventories. Thus working capital is very significant facet of financial management. Every business concern should have adequate working capital to run its operations smoothly. It should have neither excess working capital nor inadequate working capital because both of these have adverse effects on firms profitability and liquidity positions. Therefore, business concerns should maintain adequate working capital. The basic objective of working capital is to manage the firms current assets and current liabilities in such a way that that a satisfactory level of working capital is maintained. Working capital policies have a great effect on a firms liquidity and profitability. Therefore, the working capital should be managed in such a way which will ensure higher profitability and proper liquidity to the business concern. The significance of working capital management is to ensure that the organization maintains a good fit with the changing environment and strives to build the capability to cope with challenges.

CONCEPTS OF WORKING CAPITAL There are two concepts of working capital: Balance sheet concept or traditional concept. Operating cycle concept. BALANCE SHEET CONCEPT OR TRADITIONAL CONCEPT It shows the position of the firm at a certain point of time. It is calculated on the basis of balance sheet prepared at a specific date. In this method there are two types of working capital. Gross working capital Net working capital
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GROSS WORKING CAPITAL It refers to a firms investment in current assets. The sum of the current assets is the working capital of the business. The sum of the current is quantitative aspect of working capital which emphasizes more on quantity than on its quality, but it fails to reveal the true picture of the financial position of the business because every increase in current liabilities will decrease the gross working capital.

NET WORKING CAPITAL It is difference between the current assets and current liabilities or the excess of total current assets over total current liabilities. It can also be defined as that part of a firms current asset which is financed with long term funds. It may be either negative or positive. When the current assets exceed the current liabilities, the working capital is positive and vice-versa.

OPERATING CYCLE CONCEPT The duration or time required to complete the sequence of events right from the purchase of raw materials for cash to the realization of sales in cash is called operating cycle or working capital cycle. The operating cycle consists of three phases: In phase 1, cash gets converted into inventory. This would include purchase of raw materials, conversion of raw materials into workin-progress, finished goods and terminate in the transfer of goods to stock at the end of the manufacturing process. In the case of trading organization, this phase would be shorter as there would be no manufacturing activity and cash will be converted into inventory directly. The phase will, of course, be totally absent in case of service organizations. In phase 2 of the cycle, the inventory is converted into receivables as credit sales are made to customers. Firms which do
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not sell on credit will obviously not have phase 2 of the operating cycle. The last phase, phase 3, represents the stage when receivables are collected. This phase completes the operating cycle. Thus, the firm has moved from cash to inventory, to receivables and to cash again.

1.2 NEED OF THE STUDY :

Any organization should always assess itself its performance for its survival and growth, more so in the present scenario of globalization and liberalized economy. From a company's point of view, excess working capital means operating inefficiencies. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will
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show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations. Poor working capital management can lead to over-capitalization and overtrading. Characteristics of over-capitalization are: excessive stocks debtors cash Low return on investment with long term funds tied up in non-earning short term assets.

Overtrading leads to escalating debtors and creditors, and if unchecked, ultimately to cash starvation. Planning for working capital management is an essential function of management in any business. The inflow of funds cannot be synchronized completely, if these were possible, then it would not necessary to maintain more than a minimum of cash or near cash resources. Broadly, the objective of this study is mainly To analysis the structure of organization for management of working capital. To see adequacy or inadequacy of working capital in the organization and how the situation has been dealt with. To suggest the suitable policy measurement for effective management of working capital.

1.3 PERIOD OF THE STUDY: The study relates to the five (5) years period 2005 to 2010. Due to turn around in the steel industry, the company started making profit from 2006. Thus the period of selection for study is justified due to gradual upward boom in the core sector (steel) and subsequent progressive turn around of the company from sick company to profit making company giving due impact of the business environment in the present scenario.
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1.4SCOPE OF THE STUDY: The scope of study covers in detail of the working capital in MECON LIMITED is being managed and the scope of improving the same, if possible. An attempt has also been made to compare the management of working capital in manufacturing industries vis-vis in consultancy organization. Ratio analysis technique has been employed in analysis of working capital management by using the secondary data as available in the annual reports of the Company.

1.5 LIMITATIONS OF THE STUDY: The published financial statements of MECON LIMITED, is the major source of data and hence conclusions are limited to the extent of information available in the published financial statement. Some of the major limitations are listed. Limitations of the Balance Sheet: Cognizance has to be taken of the common limitations of financial statements. Firstly, the financial statements give expressions of exactness and completeness with regard to value shown in them. The real value of assets can be found only if the assets are realized. The inflationary impact of the values is not brought out in these statements. They reflect transactions that involve the values of the many dates and the value of money has gone down considerably during the past few years. The influence of these changes in Rupee value on the relationship of items and trends from period to period has not been isolated for want of reliable methods. This affects the comparability of data. The business of MECON has changed over a period of time due to glut in the steel industry and has to diversify to other fields like defence sector and oil sector. The other limitations being the co-operation from the respondents due to time pressure, authority problem, attitudinal problem.

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1.6REVIEW OF THE LITERATURE: Working capital : Working capital may be regarded as the life blood of business. Working capital is of major importance to internal and external analysis because of its close relationship with the current day-today operations of a business. Every business needs funds for two purposes. * Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc * Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. . It is other wise known as revolving or circulating capital It is nothing but the difference between current assets and current liabilities. i.e. Working Capital = Current Asset Current Liability. Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to put a down payment down on a piece of commercial real estate. Working capital is essential for any business to succeed. It is becoming increasingly important to have access to more working capital when we need it. Importance of Adequate Working Capital A business firm must maintain an adequate level of working capital in order to run its business smoothly. It is worthy to note that both excessive and inadequate working capital positions are harmful. Working capital is just like the heart of business. If it becomes weak, the business can hardly prosper and survive. No business can run successfully without an adequate amount of working capital. Danger of inadequate working capital When working capital is inadequate, a firm faces the following problems. Fixed Assets cannot efficiently and effectively be utilized on account of lack of sufficient working capital. Low liquidity position may lead to liquidation of firm. When a firm is
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unable to meets its debts at maturity, there is an unsound position. Credit worthiness of the firm may be damaged because of lack of liquidity. Thus it will lose its reputation. There by, a firm may not be able to get credit facilities. It may not be able to take advantages of cash discount.

Concept of working capital 1) Gross Working Capital = Total of Current Asset 2) Net Working Capital = Excess of Current Asset over Current Liability Current Assets Cash in hand / at bank Bills Receivable Sundry Debtors Short term loans Investors/ stock Temporary investment Prepaid expenses Accrued incomes Current Liabilities Bills Payable Sundry Creditors Outstanding expenses Accrued expenses Bank Over draft

One of the most important areas of finance to monitor is your company's working capital, which is the difference between current assets and current liabilities. As a small business owner, you must constantly be alert to changes in working capital and their implications; otherwise, you may miss some warning signs
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that can lead to business failure. The most important component of working capital is cash, far the most important asset of any business, particularly a small business. Without it, the business will fail. So it is of paramount importance for you as the business owner to control all cash transactions.

ORGANISATION PROFILE: MECON LIMITED

2.1 Brief on MECON LIMITED

MECON LIMITED formally it was known as METTALURGICAL & ENGINEERING CONSULTANTS (INDIA) LIMITED is a Government of India Public Sector undertaking under Ministry of Steel. MECON LTD, established in 1959 as Hindustan Steel Limited (HSL), Is Indias frontline engineering, consultancy and contracting
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organization offering full range of services required for setting up of projects from Concept to Commissioning, including turnkey execution. HSL was transformed into Mecon Limited in 1973. MECON LTD is a multi disciplinary disciplinary designing, planning, engineering, consultancy and contracting organization an established engineering & contracting, ISO 9001 company employs with qualified & experienced engineers, scientists, technical & supporting staff, possesses offices. Companys corporate office at Ranchi is modern and equipped with a large computer network and laboratories for testing and making models.

MECON has collaboration agreements with leading firms form the USA, Germany, France, Italy, Russia, etc in various fields. The organization is quite familiar in working with collaborators who provide process known how and basic engineering. MECON is a multi disciplinary firm with 1030 experienced and dedicated engineers, scientists and technologists, having a wide network of offices spread all over the country. Experienced in handling consultancy assignments and EPC projects. MECON LTD. Has played a significant role in the development of the Indian industry. MECON Ltd is an ISO 9001 : 2000 certified company and is registered with International financial institutions like the World Bank, Asian Development Bank, African Development Bank and has technological tie ups with worlds leading organizations MECON played a pivotal role in the development and expansion of the Iron and Steel Industry of the country. Mecon has subsequently diversified far beyond ferrous metallurgy and consolidated its position in:

Non ferrous metallurgy Defence Space Environment Power Petrochemical

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 Oil/gas pipelines Infrastructure Other sectors

2.2 VISION AND MISSION OF MECON LIMITED:

VISION To provide appropriate state of the art technology as also quality services at competitive prices to customers. To implement and maintain total quality management (TQM) in all spheres. To optimize gross margin by operation through identified strategic business units(SBU) To get more business from foreign markets To foster and sustain a competent and highly responsive workforce Quantification of quality objectives under business related, customer related performance related and improvement related issues. MISSION

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Developing into an internationally recognized centre of excellence for providing quality services in technical consultancy, design and engineering, design and supply of plant, equipment and systems, Project implementation from concept to commissioning for industrial development and up gradation ventures, development of infrastructure and other service sectors.

2.3 QUALITY POLICY

MECON has the distinction of being the first engineering consultancy organization in the country to get ISO- 9001 certification. Recently the organization has ventured into providing services in ISO- 9000 Quality Management System and ISO-14000 Environment management to its clients.

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2.4 AREAS OF ACTIVITIES

Mecon provides its services in the following areas:

METALS:
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Iron Making Steel Making Rolling Mills Non ferrous By products and Mining Raw Materials & Mining Refectories Research & Development Beach Sand Mining

POWERS:
Thermal and Hydel Power Plant Transmission and Distribution Non-Conventional Energy Sources Energy Management and Audit RLA and RMO Studies

OIL AND GAS:

Oil and Gas pipelines Petro chemicals Refineries CNG stations and city Gas Distributions POL Depots
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and

 LPG Bulk Storage, Bottling And Transportation Off-Shore Platforms and Marine Pipelines Retail Outlets

INFRASTRUCTURES:
Civil and Structural Engineering Architecture and Town Planning Road, Bridges, Highways and Fly overs Defence Related Projects Environmental Planning Hydro Engineering Information Technology

BUSINESS
The CORE FOCUS OF Mecon is providing engineering consultancy and project management services to its client, which are basically industrial. Mecon has carved out a niche for providing its engineering services for large scale projects globally. It is serving a large number of clients in the public and the private sector.
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In view of the cyclic demand in the Steel Sector over the past few years. Mecon has made forays into a number of diversified sectors of the economy especially Oil and Gas, Power and Infrastructure. Business procurement in the area of Engineering Consultancy services has shown an upward trend. The company has thus laid more emphasis on its operations in this area.

RANGE OF SERVICES:
Planning, Analysis and Feasibility Reports

Market Survey Site Selection Basic and Project Engineering Construction Management EIA/EMP reports Environmental Management System ISO : 14000 ISO 9001:2000 Quality System Implementation

2.5 SWOT

STRENGTH Experience in setting up of projects in green / brown fields from concept to commissioning on single point responsibility basis.
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 Consultancy, design and detailed engineering capabilities. Multidisciplinary highly experienced and capable pool of engineers/technologists in various specialized technical disciplines. Vast database and reference materials. Capability in equipment & system design and supply & execution. Market recognition in core competence area of metals. WEAKNESSES Will take time to consolidate strength in new strategic businesses. OPPORTUNITIES Major investments in iron & steel sectors. Investments in diversified sectors Tie-ups with other vendors/contractors for synergizing mutual strength Greater concern in the country for environment and ecology. THREATS Mushrooming of small consultancy firms. Trend of setting up in house consultancy outfits Stringent financial pre qualification criteria Stress for consortium bidding along with foreign partner in lead Highly fluctuating business scenario in the metals sector

2.6 BUSINESS DIVERSIFICATION

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In view of the cyclic demand/investments in the Steel sector over the past several years, the company has made forays into a number of diversified sectors of the economy especially oil & gas, power and infrastructure. This has been achieved by formation of distinct Strategic Business Units in the company. The company has gained substantial experience and recognition in some of these sectors and would like to build a strong portfolio of services to meet the growing demand of clients. This would also help the company in adjusting to the sectorial market fluctuations by aligning itself towards the sectors having higher opportunities in future. During the year 2008-09, consultancy business procured from the diversified sectors (other than metal) has been significant. In Engineering and Consultancy, the companys order booking is 21.97% (previous year 17.53%) in the diversified sectors and 78.03% (previous year 82.47%) in metal sector. In case of supply/turnkey projects, it is 12.16% (previous year 1.83%) in the diversified sectors and 87.84% (previous year 98.17%) in metals sector. 1.) BUSINESS PROCURED (CONSULTANCY): FOLLOWING FIGURES ARE IN RS. CRORES: Fig.-2 ,Source-PDF file of annual report of MECON 2009-2010. 2.) BUSINESS PROCURED (SUPPLY): FOLLOWING FIGURES ARE IN RS. CRORES Fig.-3, Source-PDF file of annual report of MECON 2009-2010 NOTE: 2009-10 FIGURES ARE ESTIMATED/PROJECTED SECTOR WISE BUSINESS PROCURED (CONSULTANCY) The above bar graph shows that the supply is not in the same ratio of production. 3.)

Fig.-4, Source-PDF file annual report of MECON 2008-2009 From the above pie-chart it is clear that the major business procured part is in the field of metals i.e 78%,and the power(8%),
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oil & gas(11%) and infrastructure(3%) only forms a minor part of the business of MECON

2.7 OFFICES IN INDIA:

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HEAD OFFICE Ranchi Vivekananda path, Doranda Ranchi-834002 Jharkhand

OVERSEAS OFFICES Logos, Nigeria Metallurgical & Engineering Consultancy (Nigeria) Limited B-13, LSDPC Flats 24, Odeku Street P.O.-73001 Adela

Victoria Island, Logos , Nigeria OTHER OFFICES Adipur(Gujarat) Bhilai (Chhattisgarh) Borako (Jharkhand) Chennai (Tamil Nadir) Delhi(Delhi) Durgapur ( Westbengal) Jamnagar ( Gujrat) Karwar ( Karnataka) Mecheri (TamilNadu) Mundra Navi Mumbai (Maharashtra) Rourkela (Orissa) Secunderabad (Andhra Pradesh ) Tuticorin (Kerala) Vishakhapatnam (AP) Bangalore(Karnataka) Bhubaneshwar (Orissa) Chavara (Kerala) Cochin (Kerala) Duburi (Orissa) Jaipur (Rajasthan) Kanpur ( UP) Kolkata(West Bengal) Mangalore( Karnataka) Nagapattnam(Tamil Nadu) Neyveli (TamilNadu) Sambalpur(Orissa) Trivandrum (Kerala) Vazhakkala (Kerala)

2.8 ISO CERTIFICATION:

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MECON is the first consultancy organization in the country to be accredited with ISO Certification. MECON was certified in the year 1994. MECON Ltd. Has received the ISO 9001: 2000 certification from RWTUV of Germany. ISO stands for International Organization for Standardization which is the worlds largest developer and publisher of International Standards. 9001 refers to the series of certification standards, whereas 2000 refers to the year in which the standards for certification were revised by the ISO. The certificate is valid for 3 years from the date of certification. The present certificate of MECON is valid upto jan 2009. The certification necessitates the creation of Quality Management System (QMS) to maintain the proper quality standards as per the requirement of ISO. Certain clauses which relate to the ISO Standards are explained in brief below: Quality management System Management Responsibility Resource Management Production Realization Measurement Analysis and Improvement

3.1COMPETITORS AND CLIENTS OF MECON

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This chapter discusses the conditions for perfect competition. It also investigates the significance of competitive equilibrium in a perfectly competitive market. It explains the meaning of excess demand and supply. To understand the complete effect of a shift in demand or supply, it is necessary to consider both sides of the market. Generally, the effect of any change in demand or supply depends on the elasticitys with respect to price of both demand and supply. The time horizon is a key factor affecting the elasticitys of demand and supply. Prices are more volatile and quantity adjustment takes relatively longer in industries where production involves substantial sunk costs. Finally, it is important to distinguish a receipt or payment from incidence. A payment or receipt can be shifted from one to the other side of the market. Incidence is fundamental and depends only on the elasticitys of demand and supply. MECON LIMITED is the first engineering consultancy organization in the country to be accredited with ISO 9001. The company not only provides consultancy services in the field of basic engineering, detailed engineering, project management etc., but has also developed considerable expertise in the design and supply of equipment for the ferrous, non-ferrous, oil and gas, petrochemical and other general industries. Plan outlay (IEBR) is for renovation and expansion of office space/guest house at various locations.

ITS MAJOR COMPETITORS ARE THOSE WHICH ARE UNDER THE MINISTRY OF STEEL AS FOLLOWING: MSTC: The Company, a trading concern of Government of India, undertakes disposal of ferrous scrap and other secondary arising generated in integrated steel plants disposal of scrap, surplus stores, etc. from other public sector enterprises and Government Departments. After decanalisation, the Company has no canalized item and arranges imports of scrap as well as other items as per the needs of actual users in competition with the private sector.
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Outlay, to be met from IEBR, is for setting up a Joint Venture for Logistics.
1)

FERRO SCRAP NIGAM: Earlier a Joint Sector Company between MSTC Ltd. and M/s Harsco Corporation Inc.USA, FSNL is now a 100% subsidiary of MSTC Ltd. with the acquiring of 40% equity shares held by M/s Harsco by MSTC. The Company undertakes recovery and processing of scrap from steel plants Durgapur, Rourkela, Burnpur, Bhilai, Bokaro, Visakhapatnam and Dolvi. For processing the slag and reclaiming iron and steel from dumps the company has to depend on various types of equipment and modern technology. Plan outlay is for AMR schemes and is to be met from IEBR of the company. SPONGE IRON INDIA: The Sponge Iron Plant was set up with UNDP/UNIDO assistance to establish the techno economic feasibility of producing Sponge Iron from Lump Iron Ore and 100% non cooking coal. The Unit, which went into regular operation in November, 1980, has been designed both for production and for R&D. No outlay has been proposed for 2009-10 as Govt. of India has approved merger of SIIL with NMDC Ltd. and the Date of Merger has been fixed as 30.6.2008. The merger process is likely to be completed by March, 2009 HINDUSTAN STEELWORK CONSTRUCTION LIMITED: Incorporated in 1964, this Company has the expertise for undertaking complete construction of modern steel plants as also projects in the infrastructure sector involving high degree of co-ordination and modern sophisticated techniques. Plan budgetary support has been provided for procurement and capital repair of construction equipments and machinery

2)

3)

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5)

BHARAT REFRACTORIES LIMITED: It has four units Bhandaridah Refractories Plant, Ranchi Road Refractories Plant, Bhilai Refractories Plant and IFICO Refractories Plant under its control. The company manufactures various kinds of refractories for steel plants. Govt. of India on 24.4.2008 approved the merger of BRL with SAIL. The merger is deemed to have taken effect from1.4.2008 for all legal and accounting purposes and the merger process is to be completed by March, 2009. Outlay has provided been for AMR Schemes and is to be met from IEBR of the company. NMDC LIMITED (formerly National Mineral Development Corporation): NMDC is the single largest producer of iron ore and diamonds in the country. The company is also entering into the field of producing high value products like Ferric Oxide, Iron Powder, etc. Plan outlay has been made for schemes/projects like Bailadila Deposit-11B, Windmill in Karnataka, 3 million tones Steel Plant in Chattisgarh, AMR/Township, Expansion of SIIL, R&D schemes, etc. Total outlay will be met from IEBR of the company. KUNDREMUKH IRON ORE COMPANY LIMITED: : KIOCL was set up to manufacture iron ore concentrates for export to Iran. Consequent upon Irans inability to lift ironore concentrates as per agreement, a Pellet Plant to utilize 3 million tones of concentrates was approved in May, 1981. The Project, implemented at a cost of Rs. 116.65 crores, commenced commercial production in April, 1987. However, as per the directions of Honorable Supreme Court, the company had to stop mining at Kudremukh w.e.f. 31.12.2005. Plan outlay is mainly for AMR schemes (including P filters). Other schemes included in the outlay are Ductile Iron Spun Pipe Plant, infrastructure for receipt of iron ore by rail at Mangalore, R&D/feasibility studies, Eco-Town development at Kudremukh, Coal Injection System. Outlay is being met from IEBR of the company.
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6)

7)

8)

MANGANESE ORE( INDIA) : MOIL is jointly owned by Government of India and the Governments of Madhya Pradesh and Maharashtra. It is the largest indigenous producer of manganese ore in the country. To improve profitability, the company has diversified into manufacture of value added products like Electrolytic Manganese Dioxide and Ferromanganese. Major portion of the outlay has been allocated for investment in joint venture for Ferro Manganese/Silico Manganese Plant. Other schemes included in the outlay are sinking of new vertical shaft at Gudgeon Mine, AMR schemes, township and R&D/feasibility studies. Plan outlay is being met from IEBR of the company. BIRD GROUP: Bird Group of Companies, taken over by the Government of India in October, 1980, is mainly engaged in mining activities and activities related to sinking of deep tube wells and mineral exploration. Provision has been made for afforestation & lease matters, Mineral & Ore based industries and AMR schemes. Except for Rs.1.00 crore Plan budgetary supports, outlay will be met from IEBR of the company. CLIENTS

9)

1)

STEEL AUTHORITY OF INDIA(SAIL) : The major project of MECON LIMITED zis SAIL. As It has five major steel plants located at Bokaro, Bhilai, Rourkela, Durgapur and Salem and Alloy Steels Plant at Durgapur. With effect from 16.2.2006, Indian Iron & Steel Company (IISCO), which has an integrated steel plant at Burnpur and was a subsidiary of SAIL, has been merged with SAIL and renamed as IISCO Steel Plant. Maharashtra Electros melt Ltd., which is engaged in the production of Ferro Alloys, is the only subsidiary of SAIL. The plan outlay of SAIL Plants/Units and its subsidiaries is being met from the IEBR of SAIL.
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2)

BOKARO STEEL PLANT: Outlay covers expenditure on expansion of Bokaro Plant, Re-building of COB No.1& 2, Installation of TB in Turbo Blower Station, Up gradation of BF 2 and other ongoing and new schemes. BHILAI STEEL PLANT: Major portion (Rs.1100 crore) of the total outlay is for modernization and expansion of the Plant. The balance outlay is for schemes like Rebuilding of Coke Oven Battery (COB) No.5 & 6, Installation of Slab Caster, Main Step Down Station 5, 700 TPD Oxygen Plant and other ongoing and new schemes. ROURKELA STEEL PLANT(RSP): Major scheme included in the outlay is expansion of RSP (Rs.1400 crore).Other schemes are Re-building of COB No.4, 700 TPD Oxygen, Plant, Simultaneous blowing of BOF Converters of SMS-II, etc. DURGAPUR STEEL PLANT: Out of total outlay of Rs.650crore, Rs.500 crore is earmarked for expansion of the Plant. Other schemes covered under the outlay include Bloom Caster with associated facilities, Coal Dust Injection in BF- 3 & 4 and expenditure relating to Steel Processing Unit at Srinagar. IISCO STEEL PLANT(ISP): Major portion of the outlay is earmarked for Expansion of ISP (Rs.3100 crore).Provision has also been made for Re-building of BFNo.2, Re-building of COB-10, etc. ALLOY STEEL PLANT: Outlay is for several completed and ongoing schemes costing less than Rs.20 crore. SALEM STEEL PLANT(SSP): Expansion of SSP (Rs.1002crore) accounts for major portion of the total outlay ofRs.1020 crore.

3)

4)

5)

6)

7)

8)

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9)

VISVESARIYA IRON LIMITED: Outlay covers small value miscellaneous schemes and installation of single strand Bloom Caster in SMS.

National Aluminum Company Limited IOCL /HPCL/BPCL/IPCL GAIL ISRO Nevelli Lignite Corporation Limited Central Coalfields Limited, SECL, WCL Jindal Steel Limited Jharkhand State Electricity Board. Uttaranchal State Electricity Board Oil & Natural Gas Commission Neelachal Ispat Nigam Limited Indraprastha Gas Limited Hindustan Zinc Ltd. Hindustan Copper Limited Essar Steel Limited Bhusan Steel Limited Ordinance Factory Board New Note Press & Mint, GOI, Ministry of Finance KIOSCL Govt. of W.B.- PHD & Forestry Deptt.

4.1 IMPORTANT THINGS ABOUT WORKING CAPITAL:

Working Capital can be negative. At that time, we add one word deficiency" in the back of working capital. It means if Current Liabilities are more than current assets, it is known as working capital deficiency or inverse working capital or negative working capital.

1.

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2.

3. 4.

Working capital can be easily adjusted, if Accounts manager knows different techniques of managing working capital. He can try to get short term loan or he can increase working capital by proper management of inventory and outstanding incomes and debtors. Working capital can also change by Changing in Cash Conversion period. Cash conversion period is a period in which company changes current assets into cash or bank. Working capital can also positive by increasing growth rate of company. If company does not invest more money and increase profit, the same amount will increase in the cash position of company and with cash company can increase their working capital position.

4.2 IMPORTANCE OF WORKING CAPITAL:

Some time, if creditors demand their money from company, at this time company's high working capital saves company from this situation. You know that selling of current assets is easy in small period of time but Company can not sell their fixed assets with in small period of time. So, if Company has sufficient working capital, Company can easily pay off the creditors and create his reputation in market. But if a company has zero working capital and then company can not pay creditors in emergency time and either company becomes bankrupt or takes loan at higher rate of Interest. In both condition, it is very dangerous and always Company's Account Manager tries to keep some amount of working capital for creating goodwill in market. Positive working capital enables also to pay day to day expenses like wages, salaries, overheads and other operating expenses. Because sufficient working capital can not only pay maturity liabilities but also outstanding liabilities without any more delay.

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One of advantages of positive working capital is that Company can do every risky work without any tension of self security. The adequate reserve of working capital ensures a steady flow of raw materials to the production process. The adequate reserve of working capital indicates the good solvency position of the concern and helps it to get loan from the market at favorable terms. The adequate stock of working capital makes it possible for a concern to purchase the trading goods in cash and cash purchase always carries the benefit of getting cash discount. A strong working capital base is probably the only remedy to overcome the odd situations like dull market conditions, scarcity of raw materials and other components in case of any emergency, sudden market fluctuations, etc. A business concern can exploit the market opportunities with the help of adequate working capital. The regular flow of adequate working capital makes possible efficient use of fixed assets, reduces wastage, ensures quick replying of current assets, and establish a well- tuned working environment. A quick rotation of working capital cycle and an efficient management of working capital reduce cost and increases production and sales. The combined effect of all these favorably add to the profitability of the concern.

The adequate amount of working capital and its quick rotation increases profit. The rate of dividend of the shareholders also increases as a result of such increase in profit. Sufficient working capital helps in research and development to face the present era of cut throat competition and quick technological advance

4.3 TYPES OF WORKING CAPITAL

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TYPES OF WORKING CAPITAL

ON THE BASIS OF CONCEPT

ON THE BASIS OF TIME

REGULAR WORKING TEMPORARY WORKING CAP CAPITAL GROSS WORKING CAPITALWORKING CAPITAL NET

SEASONAL WORKING CAPITAL WORKING C SPECIFIC

Diagrammatic representation of the concept of working capital

FIXED/PERMANENT WORKING CAPITAL

To carry on business, a certain level of working capital is necessary on a continuous and uninterrupted basis, for all
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practical purpose, the requirement has to be met as with other fixed assets. Permanent working capital represents the minimum level of raw materials, work-in-progress, finished goods, stores, accounts receivables and cash which are in circulation to ensure continuity of production. Permanent working capital is again divided into two parts: regular working capital reserve working capital The portion of fixed working capital which is utilized to carry out the cyclical operation of current assets in the form of conversion of liquid cash into raw materials, raw materials into finished goods, finished goods into debtors and debtors into liquid cash in a continuous manner is known as regular working capital. On the other hand, the portion of fixed working capital, which is preserved for meeting uncertain and emergent working needs (like sudden price hike, abnormal scarcity in times of war, natural calamity, etc) is known as reserve working capital.

VARIABLE/TEMPORARY WORKING CAPITAL

Besides fixed working capital, a business may need additional working capital to meet the growing demands of busy seasons at stated intervals. If the demand for the products of the business goes up at any time it needs additional funds to pay for more materials, labor and other expenses and to meet the requirement of cash balance to be maintained in the changed situation. This additional working capital needed to feed the operating cycle in busy business periods is known as variable or temporary working capital. It is called variable or temporary because the business does not need it always but it is required according to the need of the situation. Generally the importance of variable working capital is more acute in business concern having seasonal market demands. Variable or temporary working capital may be further sub- divided into
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(a) seasonal working capital (b) special working capital. The additional working capital required by a concern to carry out its operating activities in busy seasons of high market demands is known as seasonal working capital. Businesses which mostly have seasonal demands of their products like ice- cream, cold drinks, wool and likely products manufacturing concern may need huge amount of seasonal working capital. In other business concerns too the market may rise to the peak in some particular time period. So in all types of business a portion of working capital may be preserved for meeting seasonal needs. On the other hand, the portion of working capital that is needed by a concern to meet the extraordinary requirements of special situations is known as special working capital. This is called special working capital because it is needed in special situations and not in normal circumstances. Factors determining working capital requirements Nature of business: Working capital requirements of a firm or company are basically influenced by the nature of business. Trading and financial firms have a very small investment in fixed asset but require a large sum of money to be invested in working capital. Some manufacturing and construction firms also have to invest substantially in working capital and a nominal account in fixed assets. The working capital requirements are nominal because they have only cash sales and supply services and not products. Mecon is basically a service providing company so it may only need a nominal amount of working capital for carrying out its functioning.

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Market and demand condition: Sales of product & services are the important factor in determining the working capital needs of a firm. Generally a substantial amount of current assets have to be employed before growth takes place to support enlarge scale of operations. But the sales depend on the demand conditions. Firms may experience seasonal & cyclic fluctuations in the demand for their products & services. These business variations affect the working capital requirements of the firm, especially the temporary working capital requirements. Mecon has experienced ups and downs in the demand of its services, so it adopts different strategies for determining the working capital requirements in the boom period or during the upswing of the demand, the firm generally resorts to substantial borrowing. On the other hand when there is a decline in the level of inventories then debtors will also fall. Most of the firms thus follow a policy of level of production irrespective of the seasonal changes in demand order to utilize its resources to the full extent. This is also called as variable production policy.

Technology & production policy: Non-manufacturing firms, service and financial enterprises do not have a manufacturing cycle or inventory conversion cycle. A firm may adopt a variable production policy, thereby varying its production schedules in accordance with changing demands. The production policy will differ from company to company depending on the circumstances of the individual company.

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Credit policy: The credit policy of the firm affects the working capital by influencing the level of debtors. A liberal credit policy without rating the credit worthiness of customers will be detrimental to the firm and create a problem. A high collection period will create a problem of : slack condition will prompt everyone of tying of large funds in debtors.

Availability of credit from suppliers: The suppliers credit when used to finance the firms inventory reduces the cash conversion cycle. In absence of suppliers the firms generally borrow from the banks. Thus the availability of credit at reasonable costs from the bank is crucial.

Operating efficiency: The efficiency in controlling the operating costs and utilizing fixed and current assets leads to operating efficiency. Thus, the better utilization of resources improves profitability and thus helps in releasing the pressure on working capital.

BANK FINANCE FOR WORKING CAPITAL

Banks are the main institutional sources of working capital finance. A bank considers a firms sales and production plans and the desired levels of current assets in determine its working capital requirements. The approved by the banks for the firms
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working capital is called CREDIT LIMIT. Credit limit is the maximum funds which a company can obtain from the banking system. In case of firms with seasonal businesses, bank may fix separate limits for the peak level credit requirement and normal non-peak level credit requirement.

Maximum Permissible Bank Finance (MPBF)

The tendon committee suggested the following three methods of determining the permissible level of bank borrowings for financing working capital gaps. In the first method, the borrower will contribute 25% of the working capital gap; the remaining 75% can be financed from the bank borrowings. This method will give a current rate of1;1. In the second method, the borrower will contribute 25% of the total current assets. The remaining of the working capital (i.e. the working capital gap less the borrowers contribution) can be bridged from the bank borrowings. This method will give a current ratio of 1.3:1. In the third method, borrower will contribute 100% of the core assets, as defined, and 25% of the balance of the current assets. The remaining of the working capital gaps can be met from the borrowings. This method will further strengthen the current ratio.

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ANALYSIS OF WORKING CAPITAL

Working-Capital-Analysis is not a technique likely to be used frequently. This analysis can prove invaluable in cases where credit risk is unusually high, or the amount of credit requested is very large. Working capital is defined as the excess of current assets over current liabilities. When similar amounts are added to or subtracted from both current assets and current liabilities [such as occurs with the purchase of inventory on open-account terms] the amount of working capital does not change although the activity does change the working capital ratio. The purpose of working-capital-analysis is to identify the factors that cause changes in the actual amount of a firm's working capital, and these factors are always to be found below the "current" line on either side of the balance sheet. Moreover, they can always be listed in one of three basic categories: 1. Changes in net worth. Any net increase in net worth from one reporting period to the next is a source of funds increasing working capital, and any net decrease is an application of funds decreasing working capital. 2. Changes in long-term debt. Any increase in long-term debt from one reporting period to the next is a source of funds
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increasing working capital, and any net decrease is an application of funds decreasing working capital. 3. Changes in non-current assets. Any net decrease in noncurrent assets from one reporting period to the next is a source of funds for increasing working capita. Conversely, any net increase is an application of funds decreasing working capital. 5.1 Changes in Net Worth The major changes affecting working capital usually involve changes in net worth. If working capital increases, the most common source is an increase in net worth- especially an increase resulting from profitable operations. If working capital declines, the most common and most worrisome cause is a decline in net worth resulting from operating losses. On occasion, a credit analyst will also find changes in the amount of a firm's working capital caused by net worth changes that are the result of factors other than operational profits or losses. Working capital may increase, for example, because of refunds on prior years' taxes, profits from the sale of fixed assets, or other profits which do not appear on the income statement (such as profits of a nonrecurring nature or those earned from operations in previous years). Working capital may be reduced by certain additional debits to surplus, such as assessments on prior years' taxes. 5.2 Changes in Long-Term Debt When performing working capital analysis, it is important to guard against the assumption that anything that increases working capital is good. The creation or increase of long-term debt is a source of funds for working capital, but may not be as desirable as equity investments. There are several reasons for this:

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36

1. The payments that will have to be made to reduce the debt must come from future earnings. 2. Some of the firm's assets may be pledged as security for the debt. 3. Even if the loan is unsecured, it represents an additional liability 4. The more debt a company has the smaller the recovery to unsecured creditors is likely to be if the company fails. 5. The existence of the debt reduces the availability of short-term financing to the company - and increases the cost of any financing that can be obtained. 5.3 Changes in Non-Current Assets Working capital is reduced by any increase in non-current assets, particularly in fixed assets. If a credit professional learns that a prospective credit customer is enlarging or modernizing plant facilities, he or she should find out if the undertaking is adequately financed. If there is enough working capital, the out of pocket costs may come out of these funds and there will still be enough left over to pay other current liabilities. Otherwise, the expansion will have to be financed either by obtaining additional equity capital or by negotiating a long-term loan. A reduction in fixed assets, which results in an increase in working capital, is usually the result of depreciation charges made during the year. Occasionally, an analyst may find the working capital has been increased by the sale of fixed assets, but normally this is not a major source of cash. Other important changes to look for include: Large increases in investments in a subsidiary or affiliated concerns, The growth of loans to officers evidenced by an increase in notes receivable from officers, and Increases in such intangible assets as research and development expenses, patents, and goodwill.
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5.4 Analysis of Working Capital Composition Understanding factors that have caused changes in the amount of a firm's working capital from one period to another in no way diminishes the need to know the changes that have occurred in working capital composition. The adequacy of any company's working capital depends on the proportion of current assets to current liabilities-not on the dollar amount of working capital. To discover changes in composition, credit analysts must shift their attention above the Current line of the balance sheet and try to answer such questions as the following:

To what extent has any increase in receivables or inventories been financed by growth of working capital and to what extent by growth of current debt? What has been the form of any important increases in current debt? Accounts payable? Notes payable to the bank? What about current maturity on long-term debt? Has any decrease in receivables and inventories been accompanied by a like decrease in current debts and by a growth of the cash balance? Has any decrease in receivables and inventories been accompanied by continued heavy current debt and by shrinkage in working capital?

The analysis of working capital can be conducted through a number of devices, such as: Ratio analysis. Fund flow analysis. Budgeting. 1. RATIO ANALYSIS

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A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. The following ratios can be calculated for these purposes: 1. Current ratio. 2. Quick ratio 3. Absolute liquid ratio 4. Inventory turnover. 5. Receivables turnover. 6. Payable turnover ratio. 7. Working capital turnover ratio. 8. Working capital leverage 9. Ratio of current liabilities to tangible net worth. 2. FUND FLOW ANALYSIS Fund flow analysis is a technical device designated to the study the source from which additional funds were derived and the use to which these sources were put. The fund flow analysis consists of: Preparing schedule of changes of working capital Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital) business enterprise between beginning and ending of the financial dates. 3. WORKING CAPITAL BUDGET A budget is a financial and / or quantitative expression of business plans and polices to be pursued in the future period time. Working capital budget as a part of the total budgeting process of a business is prepared estimating future long term and short term working capital needs and sources to finance them, and then comparing the budgeted figures with actual performance for calculating the variances, if any, so that corrective actions may be taken in future. He objective working capital budget is to ensure availability of funds as and needed,
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and to ensure effective utilization of these resources. The successful implementation of working capital budget involves the preparing of separate budget for each element of working capital, such as, cash, inventories and receivables.

MECON THE WORKING CAPITAL MANAGEMENT

6.1 ANALYSIS OF WORKING CAPITAL : By Ratio Analysis Technique: As we know working capital is the life blood and the centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management of working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.
Some important ratios have been calculated for the last ten (10) financial years of MECON LIMITED as shown in Table-1 below.

The analysis of working capital can be conducted through a number of devices, such as: 1. Ratio analysis. 2. Fund flow analysis.
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3. Budgeting. Ratio Analysis: Ratio Analysis is the most commonly used technique for working capital analysis which deals practically with each and every aspect of working capital analysis. In this technique, for each aspect of analysis certain rations are computed and then results are drawn on the basis of trends shown by them against those fixed as guide post 1. Current ratio. 2. Quick ratio 3. Absolute liquid ratio 4. Inventory turnover. 5. Receivables turnover. 6. Payable turnover ratio. 7. Working capital turnover ratio. 8. Working capital leverage 9. Ratio of current liabilities to tangible net worth. Fund Flow Analysis: Fund flow analysis is a technical device designated to the study the source from which additional funds were derived and the use to which these sources were put. The fund flow analysis consists of: a. b. Preparing schedule of changes of working capital Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital) business enterprise between beginning and ending of the financial dates. Working Capital Budget: A budget is a financial and / or quantitative expression of business plans and polices to be pursued in the future period time. Working capital budget as a part of the total budgeting
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process of a business is prepared estimating future long term and short term working capital needs and sources to finance them, and then comparing the budgeted figures with actual performance for calculating the variances, if any, so that corrective actions may be taken in future. He objective working capital budget is to ensure availability of funds as and needed, and to ensure effective utilization of these resources. The successful implementation of working capital budget involves the preparing of separate budget for each element of working capital, such as, cash, inventories and receivables etc. ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST OF LIQUIDITY The short term creditors of a company such as suppliers of goods of credit and commercial banks short-term loans are primarily interested to know the ability of a firm to meet its obligations in time. The short term obligations of a firm can be met in time only when it is having sufficient liquid assets. So to with the confidence of investors, creditors, the smooth functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be strong. But a very high degree of liquidity of the firm being tied up in current assets. Therefore, it is important proper balance in regard to the liquidity of the firm. Two types of ratios can be calculated for measuring short-term financial position or shortterm solvency position of the firm. Liquidity ratios. Current assets movements ratios

1. LIQUIDITY RATIOS Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assts. The current assets should either be liquid or near about liquidity. These should be convertible in cash for paying obligations of short-term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. If current assets can pay off the current liabilities then the liquidity position is satisfactory. On the
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other hand, if the current liabilities cannot be met out of the current assets then the liquidity position is bad. To measure the liquidity of a firm, the following ratios can be calculated: CURRENT RATIO QUICK RATIO ABSOLUTE LIQUID RATIO 1.1 CURRENT RATIO Current Ratio, also known as working capital ratio is a measure of general liquidity and its most widely used to make the analysis of short-term financial position or liquidity of a firm. It is defined as the relation between current assets and current liabilities. Thus, CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITES The two components of this ratio are: Current Assets Current Liabilities Current assets include cash, marketable securities, bill receivables, sundry debtors, inventories and work-in-progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. On the hand a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is considered to be satisfactory. 1.2. QUICK RATIO Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash with a short period without loss of value. It measures the firms capacity to pay off current obligations immediately. QUICK RATIO = QUICK ASSET / CURRENT LIABILITES Where Quick Assets are:
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Marketable Securities Cash in hand and Cash at bank.

W0RKING CAPITAL: RATIO ANALYSIS OF MECON LIMITED

TABLE 1 WORKING CAPITAL: RATIO ANALYSIS OF MECON LIMITED PARTICULARS Turnover Inventories Job-in-Progress Sundry Debtors Cash & Bank Other Current Assets Loan & Advances Total Current Assets Less: Current Liabilities Provisions Total Current Liabilities Net Working Capital Total Assets Quick Assets Current Assets to Total Assets Current Assets to Current Liabilities 2005-06 25,379.0 8 81.89 383.65 7895.86 12831.91 511.07 4140.1 25,844.4 8 22,861.3 1 3,885.27 26,746.5 8 -902.10 35,616.3 8 25,378.9 4 72.56% 2006-07 36,561.56 104.01 918.03 7694.49 16,004.24 705.14 5638.92 31,064.83 25,078.82 4,421.92 29,500.74 1,564.09 39,489.55 30,042.79 78.67% 2007-08 46,621.37 83.73 998.43 9,127.85 32,920.07 7,545.16 10,564.07 61,239.31 44,861.38 7,342.67 52,204.05 9,035.26 69,042.79 60,157.15 88.72% 2008-09 55,244.31 123.55 1,577.35 14,270.93 47,485.59 3,115.75 9,963.04 76,536.31 44,519.38 17,661.38 62,180.76 14,355.45 84,544.24 74,835.31 90.53% 2009-10 60,477.53 118.53 919.08 16,314.56 48,694.99 8,683.34 6,334.82 81,065.52 45,669.61 17,481.82 63,151.43 17,914.09 89,098.69 80,027.71 90.98%

96.63%

105.30%

117.31%

123.09% 44

128.37%

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Quick Assets to Current Liabilities Working Capital as a % of Turnover

94.89% -3.55%

101.84% 4.28%

115.23% 19.38%

120.35% 25.99%

126.72% 29.62%

Working Capital Turnover Ratio

-28.13

23.28

5.16

3.85%

3.38

Sundry Debtors and Turnover

TABLE 2 SUNDRY DEBTORS AND DEBTORS
Financial Year Considere d Good Considere d Doubtful Total Debts Turnover % of Total Debts to Turnover

(in lakhs)
% of Doubtful Debts to Total Debts

2005-06 2006-07 2007-08 2008-09 2009-10

7,895.86 7,694.49 9,127.85 14,270.93 16,314.56

556.31 844.53 1,146.68 1,486.07 504.45

8,452.17 8,539.02 10,274.53 15,757.00 16,819.01

25,379.08 36,561.56 46,621.37 55,244.31 60,477.53

33.30% 23.36% 22.04% 28.52% 27.81%

6.58% 9.89% 11.16% 9.43% 3.00%

Sundry Debtors to turnover:

Doubtful Debts to Total Debts:

INTERPRETATION:
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After studying the above table we find that the turnover is increasing every year after a dip in 2004-05. The increase is very encouraging as the job procurement is more and execution of the job is in time and its is the overall result of the work culture and diversification made by the company but the overall position of sundry debtors is not good as it is again rising and is around 150 crores which should be checked and controlled and proper steps should be taken to realize the outstanding dues because the turnover is rising.

Current Ratio
The ratio of current assets to current liabilities is known as current or working capital ratio. It is an index of solvency of the concern or enterprise. It shows the extent of which the current assets may diminish in value carrying any losses in respect of payment to short term creditors. Thus, it is an indication of the ability of an enterprise with regards to meeting its current liabilities. This ratio shows the number of times current assets will pay off current liabilities.

TABLE - 3 CURRENT RATIO FINANCIAL YEAR TOTAL CURRENT ASSETS TOTAL CURRENT LIABILITIES CURRENT RATIO

2005-06 2006-07 2007-08 2008-09 2009-10

25,844.48 31,064.83 61,239.31 76,536.21 81,065.52

26,746.58 29,500.74 52,204.05 62,180.76 63,151.43

0.97 1.05 1.17 1.23 1.28

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INTERPRETATION: A current ratio of 2:1 is considered generally satisfactory for reference level and is better to have in between 1 to 2 for manufacturing organizations. In case of MECON LIMITED, it is more than one with increasing trend which may be due to effective utilization of working capital. After studying the above table we find that the current ratio is increasing every year. The increase is very encouraging with increase in turnover and its is the overall result of the work culture and efficient working capital management

Quick Ratio or Acid Test:

The current ratio doesnt throw a light on the liquidity position of a concern, and therefore, on the solvency position. It is possible that there may exist a good current ratio but the company may not have funds for meeting its immediate obligation leading to a situation of business failure. It is therefore, the quick or the acid test ratio which is used to tell the liquid position of an enterprise. The quick ratio is the ratio of quick assets to current liabilities. The quick assets are like assets and represent all current assets other than inventory.

TABLE - 4 QUICK RATIO

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FINANCIAL YEAR
2005-06 2006-07 2007-08 2008-09 2009-10

TOTAL QUICK ASSETS 25,378.94 30,042.79 60,157 74,835.31 80,027.71

TOTAL CURRENT LIABILITIES

26,746.58 29,500.74 52,204.05 62,180.76 63,151.43

QUICK RATIO

0.95 1.02 1.15 1.2 1.27

INTERPRETATION: A quick ratio of 1:1 is considered a fair indication of the good current financial condition of a business enterprise. Quick ratio for MECON LIMITED has always greater than one which is an indication of better liquidity position.

Current Assets Turnover Ratio

It reflects efficiency in generating Sales by Current Assets. Higher the ratiobetter is the efficiency. The Current Assets Turnover Ratio of MECON LIMITED is shown in Table-7 as under.

TABLE - 5 CURRENT ASSETS TURNOVER RATIO FINANCIAL YEAR

2005-06 TOTAL CURRENT ASSETS 25,844.48 TURNOVER TURNOVER / CURRENT ASSETS 0.98 48

25,379.08

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2006-07 2007-08 2008-09 2009-10

31,064.83 61,239.31 76,536.21 81,065.52

36,561.56 46,621.37 55,244.31 60,477.53

1.18 0.76 0.72 0.75

INTERPRETATION: The Current Assets Turnover shows a fluctuating trend from FY 2003-04 to FY 2009-10. The ratio was highest in the FY 2006-07 and lowest in the year 2004-05. However, this ratio is far from satisfactory. It needs improvement.

Current Assets to Total Assets

In addition to efficiency & liquidity of working capital, the structure health is also equally important for finding the state of affairs relating to the administration of working capital. One of these ratios is current asset to total assets ratio, which is in increasing trend. This ratio has gone up from 0.68 in 2003-2004 to 0.91 in 2009-2010.
TABLE - 6 CURRENT ASSETS TO TOTAL ASSETS FINANCIAL YEAR 2005-06 2006-07 2007-08 2008-09 TOTAL CURENT ASSETS 25,844.48 31,064.83 61,239.31 76,536.21 CURRENT ASSETS / TOTAL ASSETS 0.73 0.79 0.89 0.91
49

TOTAL ASSETS

35,616.38 39,489.55 69,024.66 84,544.25

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2009-10

81,065.52

89,098.69

0.91

Working Capital
The working capital of MECON LIMITED is the Net of Current Assets and Current Liabilities. The Current Assets represents, The Inventories, Jobs-in-Progress, Sundry Debtors, Cash & Bank Balances, Other Current Assets and Loans & Advances. Current Liabilities represents Current Liabilities and Provisions. The various components of working capital is shown in Table-9 as under.

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TABLE -7 WORKING CAPITAL: BY RATIO ANALYSIS METHOD PARTICULARS Inventories Job-in-progress Sundy Debtors Cash & Bank Other Current Assets Loan & Advances Total Current Assets LESS: Current Liabiliies Provision s Total Current Liabilities Net Working Capital 2005-06 81.89 383.65 7,895.86 12,831.91 511.07 4,140.10 25.844.4 8 22,861.31 3,885.27 26,746.5 8 -902.10 2006-07 104.01 918.03 7,694.49 16,004.24 705.14 5,683.92 31,064.8 3 25,078.82 4,421.92 29,500.7 4 1,564.09 2007-08 83.73 998.43 9,127.85 32,920.07 7,545.16 10,564.07 61,239.3 1 44,861.38 7,342.67 52,204.0 5 9,035.26 2008-09 123.55 1,577.35 14,270.93 47,485.59 3,115.75 9,963.04 76,536.2 1 44,519.38 17,661.38 62,180.7 6 14,355.4 5 (in lakhs) 2009-10 118.73 919.08 16,314.56 48,694.99 8,683.34 6,334.82 81,065.5 2 45,669.61 17,481.82 63,151.4 3 17,914.0 9

WORKING CAPITAL TREND OF MECON LIMITED FROM 2005-2010

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CONCLUSIONS AND RECOMMENDATIONS

The objective of this study was to find out how the working capital in MECON is being managed and the scope of improving the same, if possible. An attempt has also been made to compare the management of working capital in manufacturing industries vis-MARWARI COLLEGE RANCHI | 52

vis in consultancy organization. Ratios analysis technique has been employed in analysis of working capital management by using the secondary data as available in the annual reports of the company. Following are the conclusion and recommendations to improve the Working Capital Management in MECON.

7.1

CONCLUSIONS Till few years back, the working capital in MECON was not treated very seriously. After liberalization started in 1990 and market forces started their dominance over the economy through various means and the whole country came into its grip. MECON too started facing small operation cash crunches and subsequent misbalance in cash inflows and outflows. Many times it had to defer its capital procurement schemes to meet its urgent obligations. The probable reason for not accorded the WCM its due weight age could be due to inherent difficulties of being in service sector and may be due to it natural resistance for change. Moreover, since the company has the ample reserve and the working capital is about one-fourth of the volume of the business.

Some of the point in the working capital management as follows: 1. The basic problem in working capital management is to synchronize the cash receipts and payments. Here in MECON, the payments are almost without delay; however, the receipts are delayed quite for longer period. The company kept the target of lead time between raising the invoices and receipts as more than five months. This seems too high and should be reduced considerably. 2. The component of working capital is having a wide gap. As this observed that since last few years, the volume of working capital is increasing with increase in business.
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However, the ratio of current assets to current liabilities is increasing. This is a good sign for any organization. 3. Cash planning in the organization is not been its due as can be seen from erratic cash flow position. This can only be rectified by a full-fledged cash planning department. One major are of neglect is sources of funds. It is evident that the company is using only banks as source of fund as well as to keep the surplus funds. Company has never tried the other sources of funds paying less interest and also other financial instrument to keep the surplus funds for better return. It observed that MECON is still following the traditional structure for handling its finance and accounts department. This is no longer generating a direction but only kept the organization moving with flow. This requires proper thrust better positions towards achieving the goal of organization.

4.

5.

7.2 RECOMMENDATIONS Considering all the above observations and with the change in Indian industrial scenario, it is felt that the company also must reorient its philosophy for betterment. Those days are gone when the company used to have a lot of jobs on cost plus basis with almost a monopoly market in the iron and steel sector. Nowadays, the company has to compete in the open market with all other private competitors and with the multinationals. Hence, the company must also act like business organization, its every action must be business oriented. Few specific suggestions based on the findings of this study are mentioned below:

Lead time and cash flow monitoring The lead time may be brought down to about 90 days. In addition to this, a continuous monitoring of collection must be looked after by the project coordinators to improve the cash inflows.
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Collection of Sundry Debts To avoid liquidity crisis in near future, the collection of debts must be given immediate attention. Top management can review the position in this regards for better collection of debts.

Realistic Budgeting Budgeting system should be change to obtain a realistic budget for optimum control over financial resources. The provision of revision for budget may be removed to stress the importance on the original budget. The budget preparation time may also be changed to December-January instead of present practice of August-September. By this we can have more realistic estimate of future year.

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Sources of Funds In todays market economy there are many sources of fund, which could be considered for reducing the interest burden on company.

Organization Structure To attend the financial activities as well as planning in the complex situation, there is a need for a full time Director, Finance.

8.3 SCOPE FOR FURTHER RESEARCH The review of the past studies and the experience from this present study made the researcher offer the following areas for further study in this field. Study may be conducted among the Strategic Business Units (SBUs) of MECON LIMITED, and comparison can be made between or among these SBUs. This will bring out the SBUs, needing effective working capital management. A further study may be helpful for identifying the forces that govern this chronic nature of inefficiency present in the company in the matter of working capital management. Econometrics can be applied to remove the influence of extraneous factors on the performance of the company. This will enable accurate measurement of the impact made on the analysis of working capital. It is hoped that the present study will be an inspiration for pursuing research in any of the above areas in the future.

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