Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Introduction of Finance:
Finance is one of the major elements. Which activities the overall growth of the
economy, Finance is regard as the lifeblood of a business enterprise This is because in the
modem money-oriented economy finance is one the basic foundations of all kinds of
economic activities. It is the master key which provides the access to all the sources for
being employed in manufacturing and merchandising activities. It has rightly been said that
business needs money to take more money. How ever it is also prove that so money will get
more money. Only when it is properly managed.
Hence efficient management of every business enterprises is closely linked with
efficient management of finance.
Meaning of Finance:
Finance is the main business activity, which are concerned with the acquisition and
conservation of capital funds in meeting financial needs and overall objectives of a business
enterprise.
Financial system calls for the effective performance of financial institution,
financial Instruments and financial market.
Financial Management:
The Management makes use of various financial techniques device etc. for
administrating the financial assets of the firm the most effective way. Financial
management therefore means the entire games of management efforts divided to the
management of finance, with its sources and services of the enterprise.
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
WORKING CAPITAL
Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital
Every business needs funds for two purposes for its establishment and to carry out its
day- to-day operations. Long terms funds are required to create production facilities
through purchase of fixed assets such as p&m, land, building, furniture, etc. Investments in
these assets represent that part of firm’s capital which is blocked on permanent or fixed
basis and is called fixed capital. Funds are also needed for short-term purposes for the
purchase of raw material, payment of wages and other day – to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to
that part of the firm’s capital which is required for financing short- term or current assets
such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current
assts keep revolving fast and are being constantly converted in to cash and this cash flows
out again in exchange for other current assets. Hence, it is also known as revolving or
circulating capital or short term capital.
Working capital is commonly defined in accounting and financial analysis as net
current assets consisting of inventories, including goods, net receivables, marketable
securities, Bank balances and cash in hand.
DEFINITION OF WORKING CAPTIAL:
According to MY Khan and P.K Jain “Working capital refers to manage the firm
current assets and current liabilities in such a way that a satisfactory level of working
capital is maintained.
According to the Shubin “working capital is an amount of fun is necessary to cover
the cost of operating the enterprise”.
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Working capital management is concerned with the problems is that arise in
attempting to manage the current assets and the current liabilities and their inter relationship
they arise between them.
Current assets refer to those assets which to ordinary course of business can be or
will be turned into cash within one year without undergoing a diminution in value and
without disrupting the operations of the firm.
The major current assets are cash marketable securities accounts receivable and
their inception to be paid in the ordinary course of business within a year out of Current
Assets or earnings of the concern. The basic Current Liabilities are Bill payables, Bank
Overdrafts and Outstanding expenses.
The goal of working capital managements is to manage the firms Current Assets.
And Current Liabilities in such a way that a satisfactory level of working capital is
maintained.
Thus the current assets should be large enough to cover its current Liabilities in
order to ensure a reasonable margin of safety. Each of the current assts must be efficiently
in order to maintain the liquidity of the short term be managed efficiently in order to
maintain the liquidity of the short term sources of financing must be continuously managed
to ensure that they are obtained and used in a best possible way.
Therefore interaction between current assets and current liabilities in the main
theme of working capital Management.
The current assets should be large enough to cover is current liabilities in order to
ensure a reasonable margin of safety. The interaction between current assets and current
liabilities in therefore the main theme of the threat of working capital management.
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital:-
Balance sheet concept
Operating cycle or Circular flow Concept.
On the basis of balance sheet Working capital may be classified in two ways:ON THE BASIS OF CONCEPT.ON THE BASIS OF TIME.
WORKING CAPITAL
ON THE BASIS OF CONCEPT ON THE BASIS OF TIME
& &
Gross working capital also referred to as working capital means the firm’s investment in current assets.i.e
Net working capital refers to the difference between current assets and current liabilities. i.e.
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GROSS WORKING CAPITALGROSS WORKING CAPITAL
NET WORKING CAPITALNET WORKING CAPITAL
PERMANENT WORKING CAPITALPERMANENT WORKING CAPITAL
TEMPRORY WORKING CAPITAL
TEMPRORY WORKING CAPITAL
CURRENT ASSETS CURRENT LIABILITIES
TOTAL OF CURRENT ASSETS
Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
CURRENT ASSETS:
Current assets are those assets which in the ordinary course of business can be converted into cash or held in the business for the short time only.
Constituents of Current Assets:-
STOCK OF RAW MATERIAL
WORK IN PROGRESS
FINISHED GOODS
TRADE DEBOTRS
PREPAYMENTS
CASH BALANCES
CURRENT LIABILITIES:
Current Liabilities refers to short term debts of the business. It is money owned by a business which will need to be repaid within the next 12 months.
Constituents of Current Liabilities:-
TRADE CREDITORS
SHORT TERM LOANS
BANK OVERDRAFTS
DIVIDEND DUE FOR PAYMENT TAX DUE TO PAY WITHIN THE NEXT 12 MONTHS.
On the basis of time concept
Working capital can be classified as gross working capital and net working capital. On
the basis of time, working capital may be classified as:
a. Permanent or fixed working capital.
b. Temporary or variable working capital
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Permanent or Fixed Working Capital
Permanent or fixed working capital is minimum amount which is required to ensure
effective utilization of fixed facilities and for maintaining the circulation of current assets.
Every firm has to maintain a minimum level of raw material, work- in-process, finished
goods and cash balance. This minimum level of current assts is called permanent or fixed
working capital as this part of working is permanently blocked in current assets. As the
business grow the requirements of working capital also increases due to increase in current
assets.
Temporary or Variable Working Capital
Temporary or variable working capital is the amount of working capital which is required
to meet the seasonal demands and some special exigencies. Variable working capital can
further be classified as seasonal working capital and special working capital. The capital
required to meet the seasonal need of the enterprise is called seasonal working capital.
Special working capital is that part of working capital which is required to meet special
exigencies such as launching of extensive marketing for conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that is
required for short periods and cannot be permanently employed gainfully in the business.
In Fig. 1, permanent working capital is stable of fixed over time while the temporary or
variable working capital fluctuates. In fig.2, permanent working capital is also increasing
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
with the passage of time due to expansion of business but even then it does not fluctuate as
variable working capital which sometimes increases and sometimes decreases.
Operating cycle or Circular Flow Concept
The circular flow concept of working capital is based upon this operating or working
capital cycle or a firm. The cycle starts with the purchase of raw materials and other
resources and ends with the realization of cash from the sale of finished goods. It involves
purchase of raw material and stores its conversion into stock of finished goods through
work-in-progress with progressive increasment of labor and service costs, conversion of
finished stock into sales debtors and receivables and ultimately realization of cash and this
cycle continues again form cash to purchase of raw material and so on. The time duration
required to complete one cycle determines the requirements of working capital longer the
period of cycle, larger is the requirements of working capital.
Receivable conversion period Raw material storage (RCP) conversion period (RMSCP)
Cash received form Debtors and paid to suppliers Of raw materials
Sales of finished Raw materials Goods introduced into process
Finished Goods Produced
Finished goods conversion Work in process Period (FGCP) Conversion period (WIPCP)
Chart Showing Operating Cycle
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
The Need of Working Capital:
Working capital is needed for the following purposes:
1. For the purpose of raw material, components and spares.
2. To pay wages and salaries
3. To incur day-to-day expenses and overload costs such as office expenses.
4. To meet the selling costs as packing, advertising, etc.
5. To provide credit facilities to the customer.
6. To maintain the inventories of the raw material, work-in-progress, stores and spares
and finished stock.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
1. NATURE OF BUSINESS:
The requirements of working is very limited in public utility undertakings such as
electricity, water supply and railways because they offer cash sale only and supply services
not products, and no funds are tied up in inventories and receivables. On the other hand the
trading and financial firms requires less investment in fixed assets but have to invest large
amt. of working capital along with fixed investments.
2. SIZE OF THE BUSINESS:
Greater the size of the business, greater is the requirement of working capital.
3. PRODUCTION POLICY:
If the policy is to keep production steady by accumulating inventories it will require higher
working capital.
4. LENTH OF PRDUCTION CYCLE:
The longer the manufacturing time the raw material and other supplies have to be carried
for a longer in the process with progressive increment of labor and service costs before the
final product is obtained. So working capital is directly proportional to the length of the
manufacturing process.
5. SEASONALS VARIATIONS:
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Generally, during the busy season, a firm requires larger working capital than in slack
season.
6. WORKING CAPITAL CYCLE:
The speed with which the working cycle completes one cycle determines the requirements
of working capital. Longer the cycle larger is the requirement of working capital.
7. RATE OF STOCK TURNOVER:
There is an inverse co-relationship between the question of working capital and the velocity
or speed with which the sales are affected. A firm having a high rate of stock turnover wuill
needs lower amt. of working capital as compared to a firm having a low rate of turnover.
8. CREDIT POLICY:
A concern that purchases its requirements on credit and sales its product / services on cash
requires lesser amt. of working capital and vice-versa.
9. BUSINESS CYCLE:
In period of boom, when the business is prosperous, there is need for larger amt. of working
capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the
contrary in time of depression, the business contracts, sales decline, difficulties are faced in
collection from debtor and the firm may have a large amt. of working capital.
10. RATE OF GROWTH OF BUSINESS:
In faster growing concern, we shall require large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY:
Some firms have more earning capacity than other due to quality of their products,
monopoly conditions, etc. Such firms may generate cash profits from operations and
contribute to their working capital. The dividend policy also affects the requirement of
working capital. A firm maintaining a steady high rate of cash dividend irrespective of its
profits needs working capital than the firm that retains larger part of its profits and does not
pay so high rate of cash dividend.
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
12. PRICE LEVEL CHANGES:
Changes in the price level also affect the working capital requirements. Generally rise in
prices leads to increase in working capital.
Others FACTORS: These are:
ü Operating efficiency.
ü Management ability.
ü Irregularities of supply.
ü Import policy.
ü Asset structure.
ü Importance of labor.
ü Banking facilities, etc.
SOURCE OF WORKING CAPITAL
The company can choose to finance its current assets by Long term sources Short term sources A combination of them.
Long term sources of permanent working capital include equity and preference
shares, retained earning, debentures and other long term debts from public deposits and
financial institution. The long term working capital needs should meet through long term
means of financing. Financing through long term means provides stability, reduces risk or
payment. And increases liquidity of the business concern. Various types of long term
sources of working capital are summarized as follow
1. Issue of shares
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
It is the primary and most important sources of regular or permanent working capital .
issuing equity shares as it does not create and burden on the income of the concern. Nor the
concern is obliged to refund capital should preferably raise permanent working capital.
2. Retained earnings
Retain earning accumulated profits are a permanent sources of regular working capital. It is
regular and cheapest. It creates not charge on future profits of the enterprises.
3. Issue of debentures
It crates a fixed charge on future earnings of the company. company is obliged to pay
interest . management should make wise choice in procuring funds by issue of debentures.
4. Long term debt
Company can raise fund from accepting public deposits, debts from financial institutution
like banks, corporations etc. the cost is higher than the other financial tools.
Other sources sale of idle fixed assets , securities received from employees and customers
are examples of other sources of finance.
5. Short term sources of temporary working capital
Temporary working capital is required to meet the day to day business expenditures. The
variable working capital would finance from short term sources of funds. And only the
period needed . it has the benefits of ,low cost and establishes closer relationships with
banker.
Some sources of temporary working capital are given below;
1. Commercial bank
A commercial bank constitutes a significant sources for short term or temporary working
capital . this will be in the form of short term loans, cash credit, and overdraft and though
discounting the bills of exchanges.
2. Public deposits
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
most of the companies in recent years depends on this sources to meet their short term
working capital requirements ranging fro six month to three years.
3.Various credits
trade credit, business credit papers and customer credit are other sources of short term
working capital. Credit from suppliers, advances from customers, bills of exchanges,
promissnotes, etc helps to raise temporary working capital
4. Reserves and other funds
various funds of the company like depreciation fund. Provision for tax and other provisions
kept with the company can be used as temporary working capital.
The company should meet its working capital needs through both long term and short term
funds. It will be appropriate to meet at least 2/3 of the permanent working capital
equipments form long term sources, whereas the variables working capital should be
financed from short term sources. The working capital financing mix should be designed in
such a way that the overall cost of working capital is the lowest, and the funds are available
on time and for the period they are really required.
SOURCES OF ADDITIONAL WORKING CAPITAL
Sources of additional working capital include the following
Existing cash reserves
Profits(when you secure it as cash)
payables(credit from suppliers)
new equity or loans from shareholder
bank overdrafts line of credit
long term loans
ADEQUATE WORKING CAPITAL
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
As I stated about keeping adequate working capital is the mantas towards the success of
financial management. The term adequate working capital refuters to the amount of
working capital to be kept with the organization to met its daily operations. Large
investment in fixed assets not sufficient to run a business successfully. Adequate
working capital is equally important. Without working capita fixed assets are like a gun,
which cannot shoot, as there are no cartridges.
It is said that “inadequate working capital is a disastrous: where as redundant working
capital is a criminal waste.” It is clear that the company can’t invest all its funds in
current assets to increase working capital. At the same time it requires to keep sufficient
funds with it. So a proper leverage between both ends is needed to assure proper
running of the business. It needs to keep adequate working capital with it. Neither less
nor more than needed.
ADAVANTAGES OF ADEQUATE WORKING CAPITAL
Adequate working capital provides certain benefits to the company they are:
1. Increase in debt capacity and goodwill;
Adequate working capital represents the financial soundness of the company. If one
company is financially sound it would be able to pay its creditors timely and properly. It
will increase companies goodwill. It crests confidence among investors and creditors.
Thus a firm with adequate working capital can raise requisite funds from market ,
borrow short term credit form banks, and purchases inventories of raw material etc., for
the smooth operations of its business.
2. Increase in production inefficiency
With adequate working capital the firm can smoothly carryout research and
development actives and thus adds to it production efficiency.
3. Exploitation of favorable opportunities:
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
In the presence of adequate working capital , a company can avail the benefits of
favorable opportunities. Adequate working capital will help the company to have bulk
purchases, seasonal storage of raw material etc., which would reduce the cost of
production, thus adds to its profit.
4. Meeting contingencies adverse changes:
A company can easily face certain business and economic crises a company having
adequate working capital can successfully meet contingencies such as business
oscillations, financial crisis arising from heavy losses etc.,
5. Available cash discount:
Maintenance of adequate working capital enables a company to avail the advantage of
cash discount by making cash payment for to the suppliers of raw materials and
merchandise. Obviously it will reduce the cost of production and increase the profit of
the company.
7. Solvency and efficiency fixed assets:
It helps to maintain the solvency of the company. So that payments could be made in
time as and when they fall due. Like wise, adequate working capital also increases the
efficiency for fixed assets insofar as their proper maintenance depends upon the
availability of funds.
8. Attractive dividend to shareholders:
It enables the company to offer attractive dividend to the shareholders so that sense of
security and confidence will increase among them . it also increases the market values
of its shares.
DANGERS OF INADEQUATE WORKING CAPITAL
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Having inadequate working capital les to so many of dangers as it doesn’t fulfill its
purpose. Some are given below:
1. Loss of goodwill and creditworthiness:
As the firm fails to on or its current liabilities it loses it goodwill and creditworthiness
among its creditors. Consequently, the firm finds it difficult to procure the requisite
funds for its business operations on easy terms, which ultimately results in reduced
profitability as well as production interruption.
2. Firm can’t make use of favorable opportunities:
The firm fails to undertake the profitable projects, which not only prevent the fir from
availing the benefits of favorable opportunities but also stagnate its growth.
3. Adverse effects of credit opportunities:
The firm also fails to avail the attractive credit opportunities but also stagnate its growth
4. Operational inefficiencies:
In leads the company to operating inefficiencies, as day to day commitments cannot be
met.
5. Effects on financial capacity:
Inadequacy of working capital also weakness the shock absorbing capacity of the firm
because it cannot meet the contingencies arising form business oscillations, financial
losses, due to shortage of working capital.
6. Non achievement of profit target:
The firm cannot implement operational plans due to unavailability of fund. Which will
lead to non achievement of profit margin.
7. Low rate of return on capital:
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Excessive or redundant working capital implies the presence of idle funds that earn no
profit to the firm. So it cannot earn a proper rate of return on its total investments,
whereas profits are distributed on its total investment, whereas profits are distributed on
the whole of its capital.
8. Decline in capital and efficiency:
Since the rate of return on capital is low the company tempts to make some adjustment
to inflate profit to increase the dividend. Some times these unearned dividend paid out
of the company’s capital to keep up the show of prosperity by window dressing of
accounts. Certain provision, such as provision for deprecation , repairs and renewals are
into made. This leads to decline in operating efficiency of the firm.
9. Loss of goodwill and confidence:
Lower rate of return leads to lower dividend available to share holder. This leads to
down fall in market value of the company’s share and markets the shareholder lose their
confident in company.
It is evident form the foregoing discussion that a company must have adequate working
capital pursuant to its requirements. It should neither be excessive not inadequate. Both
situation are dangerous. While inadequate working capital adversely affects the
business operations and profitability . excessive working capital remains idle and earns
no profits for the company. So company must assure its working capital is adequate for
its operations.
Management of Working Capital
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Management of working capital is concerned with the problem that arises in attempting to
manage the current assets, current liabilities. The basic goal of working capital management
is to manage the current assets and current liabilities of a firm in such a way that a
satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive
as both the situations are bad for any firm. There should be no shortage of funds and also no
working capital should be ideal. Working Capital Management Polices of a firm has a great
on its probability, liquidity and structural health of the organization. So working capital
management is three dimensional in nature as
1. It concerned with the formulation of policies with regard to profitability, liquidity and
risk.
2. It is concerned with the decision about the composition and level of current assets.
3. It is concerned with the decision about the composition and level of current liabilities.
Sources of Working Capital
Among the various available for financing working capital needs, a finance manager has to
select the best suitable source depending on the working capital needs of the company.
Permanent of fixed sources:
1. Issue of shares
2. Issue of debenture
3. Public deposits
4. Ploughing back of profits
5. Loans from financial institutions
Financing of temporary, variable, or short term working capital
The main source of short term working capital is as follows:
1. Indigenous bankers
2. Trade credit
3. Installment credit
4. Advances
5. Accounts receivables credit or factoring
6. Accrued expenses
7. Deferred incomes
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
8. Commercial paper
9. Commercial banks
Working capital Management can be classified into:
1. Cash Management
2. Receivables Management
3. Inventory Management
Chart showing Classification of Working Capital Management
Management of cash:
Introduction:
Cash is one of the current assets of a business; it is needed at all times to keep the business
going. A business concern should always keep sufficient cash for meeting its obligations.
Any shortage of cash will hamper the operations of a concern and any excess of it will be
unproductive. Cash is the most unproductive of all the assets. While fixed assets like
machinery, plant, etc and current assets such as inventory will help the business in
increasing its earning capacity, cash in hand will not ad anything to the concern. It is in this
context that cash management has assumed much importance.
Motives for holding cash:
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Working Capital Management
Cash ManagementReceivables Management
Inventory Management
Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
1. Transaction motive: the transaction needs of cash can be anticipated because the
expected payments in near future can be estimated. The receipts in future may also be
anticipated but the things do not happen as desired. If more cash is needed for payments
than receipts, it may be raised through bank overdraft. On the other hand if there are more
cash receipts than payments, it may be spent on marketable securities. The maturity of
securities may be adjusted to the payments in future such as interest payment, dividend
payment, etc
2. Precautionary motive: a firm should keep some cash for contingencies which would
arise or it should be in position to raise finances at a short period. The cash maintained for
contingency needs is not productive or it remains ideal. However such cash may be
invested in short period or low risk marketable securities which may provide cash as and
when necessary.
3. Speculative motive: the speculative motive relates to holding of cash for investing in
profitable opportunities as and when they arise. Such opportunities do not come in a regular
manner. These opportunities cannot be scientifically predicted but only conjectures can be
made about their occurrence.
Cash management needs strategies to deal with various faces of cash. Following are some
of its facets:
1. Cash planning: cash planning is a technique to plan and control the use of cash. A
projected cash follow 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.
2. Cash forecasts and budgeting: a cash budget is the most important device for the
control of receipts and payments of cash. A cash budget is an estimate of cash receipts and
disbursements during a future period of time. It is an analysis of flow of cash in a business
over a future, short or long period of time.
The short term forecasts can be made with the help of cash flow projections. The
finance manager will make estimates of likely receipts in the near future and the expected
disbursements in that period. The long term cash forecasts are also essential for proper cash
planning. These estimates may be for three, four, five or more years. Long term forecasts
indicate company’s future financial needs for working capital. Capital projects, etc
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Managing cash flows:
After estimating the cash flows, efforts should be made to adhere to the estimates of
receipts and payments of cash. Cash management will be successful only if cash collections
are accelerated and cash disbursements, as far as possible are delayed. The following
methods of cash management will help:
Methods of accelerating cash inflow
1. Prompt payment by customers
2. Quick conversion of payment into cash
3. Decentralized collections
4. Lock box system.
Methods of slowing cash outflows
1. Paying on last date
2. Payment through drafts
3. Adjusting payroll funds
4. Centralization of payments
5. Interbank transfer
These methods help the company to have a proper cash management and able to
meet day to day expenses.
Receivables management:
Receivables represents amount owed to the firm as a result of sale of goods or services in
the ordinary course of business. These are claims of the firm against its customers and form
part of its current assets. The receivables are carried for the customers. The period of credit
and extent of receivables depends upon the credit policy followed by the firm. The purpose
of maintaining or investing in receivables is to meet competition and to increase the sales
and profits.
Dimensions of Receivables Management:
1. Forming of credit policy
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
2. Executing the credit policy
3. Formulating and executing collection policy
1. Forming of credit policy: for efficient management of receivables, a concern must
adopt a credit policy. A credit policy is related to decisions such as credit standards,
length of credit period, cash discount and discount period etc.
2. Executing credit policy: after formulating the credit policy, its proper execution is
very important. The evaluation of credit applications and finding out the credit
worthiness of customers should be undertaken that is by collecting credit
information, credit analysis, credit analysis, credit decision, financing investments
in receivables and factoring.
3. Formulating and executing collection policy: the collection of amounts due to the
customers is very important. The concern should devise procedures to be followed
when accounts become due after the expiry of credit period. The collection policy
may be termed as strict and lenient. The collection policy should also devise the
steps to be followed in collecting overdue amounts. The objective is to collect the
dues and not to annoy the customer. The steps should be like sending reminder for
payments, personal request through telephone, personal visits to the customers,
taking help of collecting agencies and taking legal action.
Inventory Management
Every enterprise needs inventory for smooth running of its activities. It serves as a
link between production and distribution processes. There is generally, a time lag between
the recognition of a need and its fulfillment. The greater the time lag, the higher the
requirements for inventory. The unforeseen fluctuations in demand and supply of goods
also necessitate the need for inventory. It also provides a cushion for future price
fluctuations.
The investment in inventories constitutes the most significant part of current assets or
working capital in most of the undertakings. Thus it is very essential to have proper control
and management of inventories. The purpose of inventory management is to ensure
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
availability of materials in sufficient quantity as and when required and also to minimize
investment in inventories.
Objectives of Inventory Management
1. To ensure continuous supply of materials, spares and finished goods so that
production should not suffer at any time and the customers demand should also be
met.
2. To avoid both over stocking and under stocking of inventory
3. To maintain investments in inventories at the optimum level as required by the
operational and sales activities
4. To keep material cost under control so that they contribute in reducing cost of
production and overall costs
5. To eliminate duplication in ordering or replenishing stocks. This is possible with the
help of centralizing purchases.
Tools and Techniques of Inventory Management:
Effective inventory management requires an effective control system, for inventories. A
proper inventory control not only helps in solving the acute problem of liquidity but
also increases profits and causes substantial reduction in the working capital of the
concern. The following are the important tools and techniques of inventory
management and control:
1. Determination of stock levels.
2. Determination of safety stocks
3. Selecting a proper system of ordering for inventory
4. Determination of economic order quantity
5. ABC analysis
6. VED analysis
7. Inventory turnover ratio
8. Aging schedule of inventories
9. Preparation of inventory reports
10. Lead time
11. Perpetual inventory system
12. Just In time control system
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Conclusions
As working capital management is very important in each and every business. It helps to
understand different concepts involved in it and various tools and techniques to analyze the
liquidity positions of each firm. It gives a basic idea of working capital cycle as cash is
converted to raw materials, raw materials to work in progress, working in progress to
finished goods, finished goods into sales, sales to debtors and again debtors to cash. It also
helps to analyze whether the investments should be of short term or long term investments
also.
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Research Design
Every business needs adequate liquid resources in order to maintain day-to-day cash flow.
It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is
to keep its workforce and ensure its supplies.
Maintaining adequate working capital is not just important in the short-term. Sufficient
liquidity must be maintained in order to ensure the survival of the business in the long-term
as well.
Even a profitable business may fail if it does not have adequate cash flow to meet its
liabilities as they fall due. Therefore, when businesses make investment decisions they must
not only consider the financial outlay involved with acquiring the new machine or the new
building, etc, but must also take account of the additional current assets that are usually
involved with any expansion of activity.
Title of the study
“Effectiveness of Working Capital Management with special reference to MACOLAM
Engineering Private Limited”
Statement of Problem
The efficient management of Working Capital is one of the important factors for the
success of any organization. Management of Working Capital is one of the important areas
with regards to management of cost. Increase in working capital of the business increases
the profits. A systematic forecasting of working capital needs and proper management of
each of the components of working capital will be extremely beneficial for any company in
realizing the organization goals. Therefore there is a need to study the management of
working capital in an industry.
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Scope of the Study
This study tries to cover all aspects of working capital management in MECOLAM. It
studies the important areas to establish a better control over all the components of working
capital in an industry.
This study also tries to identify optimum working capital requirements for MECOLAM and
various sources available for financing working capital in general.
Objective of the study
1. To understand working capital management.
2. To analyze the various items involved in working capital management.
3. To understand the trends exhibited by working capital over the period under the
study.
4. To evaluate the working capital position of the company using the tool of ratio
analysis
5. To suggest the ways and means to improve the management of working capital at
MECOLAM
Methodology of the study
The methodology that has been adopted while collecting the information and
interpretation in a meaningful way has been to collect information both from primary
and secondary sources:
Tools of data collection
Data had been collected from two sources one from report published by MECOLAM and
information has been collected from the executives &library of MECOLAM.
The data was processed according to the requirement of the study. They are presented in the
form of tables and graphs, where necessary percentages are drawn to generalize the finding,
interpretations is done through ratios based upon the analysis inferences are drawn and
conclusion made.
.
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Research design:
The quality of the project work depends on the methodology adopted for the
study. Methodology in turn depends on the nature of the project work. The use of proper
methodology is an essential part of any research. In order to conduct the study scientifically
suitable methods and measures are to be followed.
Methodology is nothing but a plan or a strategy of the investigation process that
sets out to obtain solution to the study.
RESEARCH TYPE
Descriptive research;
Descriptive research is study of existing facts to come to a conclusion. This
research is carried out to analyze the past performance of the Mecolam Eng pvt Ltd.
A research is a method of and procedure for acquiring information needed to solve
the problem. A research design is the basis plan that helps in the data collection or analysis;
it specifies the type of information to be collected sources and data collection procedure.
Data sources: The data sources can be classified in to two categories:
Primary data
Secondary data
PRIMARY DATA: The data directly collected by the researcher with respect to the
problem under study, is known as Primary data. Primary data is also the first hand data
collected by the researcher for the immediate purpose of the study.
Sources of primary data: Having discussion with different department managers and
officers of the company to get general information about the company and its activities.
SECONDARY DATA:
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Secondary data are statistics that already exist. They have been gathered not for
immediate use. This may be described as “those data that have been compiled by some
agency other than the users”.
Sources of secondary data:
Annual report
Company manuals
Text books
News papers
Internal sources
Limitations of the study
1. The secondary data collected was only for 5 years.
2. Analysis of data is made of the assumption that information so obtained is correct.
Operational definitions and concepts
Working capital:
The term Working Capital refers to the short-term funds required for financing the duration
of the operating cycle in a business,
Gross working capital:
Gross Working Capital is the firm’s investment in current assets.
Net working capital:
Net Working Capital is the difference between current assets and current liabilities.
Current Assets:
Current Assets are those assets which are easily converted into cash within a normal
accounting period or within the operating cycle.
Current liability:
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Current Liabilities are those liabilities which are easily converted into cash for the specific
normal accounting period or within operating cycle for the disposal of current asset or for
the reconstruction of current liability.
Inventory:
Inventory includes stock of raw materials, spares and store, work in progress and finished
goods.
Receivable:
Receivable is a component of the current asset representing the claims of a firm against
customers as a result of credit sales also called debtors.
Liquidity:
It is the ability of a company to realize value in money. There are two dimensions of
liquidity; they are; the time necessary to convert the assets into money and the degree of
certainty associated with the conversion ratio or price realized for the asset.
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COMPANY OVERVIEW
Mecolam Engineering Pvt Ltd is a Bangalore based AS9100B (including ISO 9001-2000)
certified company with DGQA & DGAQA registration. It has grown since 1982 into a well
established company with capabilities in diversified technologies. Currently Mecolam is
satisfying the needs of institutional customers in Defence & Non-defence areas. For
defence segment Mecolam can source all ttheir requirements. For non-defence segment it
provides solutions in Fiberglass, rubber moulded and fabricated component out of
insulating material.
Mecolam has state of the art facilities with dedicated employees and professionals striving
to produce good quality products and services to our customers on time every time.
QUALITY ASSURANCE
To ensure the quality of products, the company follows a standard quality control system
and maintains strict vigil throughout the production process. The company has promptly
inspected of the quality of raw materials used at our manufacturing unit. Further the
finished products are again scrutinized by our quality control inspection to prevent any sub
standard product to reach the hands of the customer. In addition to it the company takes
pride to acquire with the fact that the companies have not received any complaints from the
customers.
TEAM
The company thrives on the mutual efforts of highly committed team of engineers
technicians, quality, supervisors etc. they are matchless experts of their own fields who
within the sincere efforts have modeled our company into and overdriving entity of the
market. They have acquired sound knowledge and understanding of the industry and render
their services accordingly.
CUSTOMERBASE: Due to the fact that quality is tradition at company and to show the
tradition, the company having professional companionship of the country’s renowned
companies like that of BHEL, TATA, BIRLA etc.and many more.
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PRODUCTS RANGE
The Company manufacturing and offering wide range of material handling conveyors
& subsystem manufacturing from high quality material, the range is known for its high
operational efficiency and long lasting functional services. The company products can be
classified in two types they are.
Defense Products
Fiberglass Products
The range has wide application area that includes fertilizers, food processing, automobiles,
flow mills, Defense Products. Distillates and many more fields. Beside designing &
manufacturing the company has also offering services relating to installations
commissioning as per client requirements.
Hence described earlier the following products are in the usual manufacturing range:
Defense Products
o Composites o Sheet metal components o Machined components o Electronic parts o Rubber molded parts o Pressed components o Injection molded parts o Rubber to metal molded parts o Aircraft wheel chocks o Aircraft sound proofing panels and bags o Hydraulic jacks o Pistons o Cockpit ladders o Fluid replenishing o Dynamometers o RADOMEs for MIG 29 Aircraft o Aircraft engine air intake blanking covers o Washers o Blanks o Tab washers o Clip retaining o Gaskets o Mechanism plates o Latches etc.
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Fiberglass Products
Compared with other engineering materials, fiberglass is light but tough on weight to weight basis. Production of complex profiles is possible. Bulk production of any fiberglass products can be taken up. Mecolam has facilities for Resin Transfer Moulding Technology (RTM).
o RADOMEs o Bonnets o Bumpers o Grilles o Fenders o Snack trays o Wind deflectors o Body panels o Doors o Seats o Linings o Bath tub o Machine guards and covers o Medical equipment covers
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Data Analysis
Introduction:
The term Financial Analysis and Interpretation refers to the process the process of
determining financial strengths and weaknesses of the firm by establishing a strategic
relationship between the components of financial statements and other operating data.
The purpose of financial analysis is to diagnose the information contained in financial
statements so as to judge the profitability and soundness of a firm. Financial analysis means
simplifications of financial data by methodical classification of data given in the financial
statements. Interpretation means explaining the meaning of and significance of data so
simplified. The analysis and interpretation of financial statements is used to determine the
financial position and results of operations as well.
Following are the common devices used to analyze the data. They are Ratio Analysis and
Trend Analysis
Ratio analysis:
The ratio analysis is one of the most powerful tools of financial analysis. It is the process of
establishing and interpreting various ratios (quantitative relationship between figures and
groups of figures). It is with the help of ratios that the financial statements can be analyzed
more clearly and decisions made from such analysis.
Significance or Importance of ratio analysis:
1. It helps in evaluating the firm’s performance: With the help of ratio analysis
conclusion can be drawn regarding several aspects such as financial health,
profitability and operational efficiency of the undertaking. Ratio points out the
operating efficiency of the firm i.e. whether the management has utilized the firm’s
assets correctly, to increase the investor’s wealth. It ensures a fair return to its
owners and secures optimum utilization of firms assets
2. It helps in inter-firm comparison: Ratio analysis helps in inter-firm comparison by
providing necessary data. An inter firm comparison indicates relative position. It
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provides the relevant data for the comparison of the performance of different
departments. If comparison shows a variance, the possible reasons of variations may
be identified and if results are negative, the action may be initiated immediately to
bring them in line.
3. It simplifies financial statement: The information given in the basic financial
statements serves no useful purpose unless it s interrupted and analyzed in some
comparable terms. The ratio analysis is one of the tools in the hands of those who
want to know something more from the financial statements in the simplified
manner
4. It helps in determining the financial position of the concern: Ratio analysis
facilitates the management to know whether the firm’s financial position is
improving or deteriorating or is constant over the years by setting a trend with the
help of ratios The analysis with the help of ratio analysis can know the direction of
the trend of strategic ratio may help the management in the task of planning,
forecasting and controlling.
5. It is helpful in budgeting and forecasting: Accounting ratios provide a reliable data,
which can be compared, studied and analyzed. These ratios provide sound footing
for future prospectus. The ratios can also serve as a basis for preparing budgeting
future line of action.
6. Liquidity position: With help of ratio analysis conclusions can be drawn regarding
the Liquidity position of a firm. The liquidity position of a firm would be
satisfactory if it is able to meet its current obligation when they become due. The
ability to met short term liabilities is reflected in the liquidity ratio of a firm.
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Limitations of Ratio Analysis
The ratio analysis is one of the most powerful tools of financial management. Though ratios
are simplest calculate and easy to understand they suffer from some serious limitations:
1. Limited use of a single ratio: a single ratio usually does not convey much of a sense,
to make a better interpretation a number of ratios have to be calculated which is
likely to confuse the analyst than help him in making any meaningful conclusion.
2. Lack of adequate standards: there are no well accepted standards or rules of thumb
for all ratios which can be accepted as norms. It renders interpretation of the ratios
difficult.
3. Inherent limitations of accounting: like financial statements, ratios also suffer from
the inherent weakness of accounting records such as their historical nature ratios of
the past are not necessarily true indicators of the firms.
4. Change of accounting procedure: Change in accounting procedure by a firm often
makes ratio analysis misleading.
5. Window dressing: financial statements can easily be window dressed to present a
better picture of its financial and profitability position to outsiders. Hence one has to
be very careful in making a decision from ratios calculated from such financial
statements.
6. Uncomparable: not only industries differ in their nature but also the firms of the
similar business widely differ in their size and accounting procedures etc. It makes
comparison of ratios difficult and misleading. Moreover, comparisons are made
difficult due to differences in definitions of various financial terms used in the ratio
analysis.
7. Price level changes: while making ratio analysis no consideration is made to the
changes in price levels and this makes the interpretation of ratio invalid.
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8. Ratios no substitutes: ratio analysis is merely a tool of financial statements. Hence
ratios become useless if separated from the statements from which they are
computed.
ANALYSIS OF WORKING CAPITAL MANAGEMENT
The chapter contains the analysis of working capital management. Working
capital analysis is quite important for smooth running of the business. Here the working
capital position is analyzed through the ratio analyze the working capital management
the ratio is simple arithmetic expression of the relationship of the indication quotient of
two mathematical expressions. In simple language, ratio can be worked out by dividing
one number by another.
Principles of working capital
Concepts
There are two concepts of working capital first is gross working capital and
second one is net working capital.
Gross working capital
Gross working capital refers to the firm’s investment in current assets. Current
assets are the assets which can be converted into cash within an accounting year and
include cash, short-term securities, debtors, bills receivable and stock.
Net working capital
Net working capital refers to the difference between current assets and current
liabilities are those claims of out sider which are expected to mature for payment within
an accounting year and include creditors, bills payable and outstanding expenses,
networking capital can be positive or negative. A positive working capital will be when
current assets exceed current liability. A negative working capital occurs when current
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liabilities are in excess of current assets.
The gross working capital concept focuses attention on two aspects of current
assets management:
1. How to optimize investment in current assets?
2. How should current asset be financed?
Excessive investment in current asset should be avoided because it impairs the
firm’s profitability as the idle investment earns nothing on the other hand inadequate
amount of working capital can threaten solvency of the firm because of its inability to
meet its current obligation.
The net working capital is a qualitative concept. It indicates the liquidity
position if the firm and suggest the extent to which working capital needs may be
financed by permanent source concept also covers the question of judicious mix of long
term and short term funds for financing current asset. For every firm there is a minimum
amount if nit working capital which is permanent. There fore a portion of the working
capital should be financed with the permanent sources of funds such as equity share
capital, debentures long term debt, preference shares capital and retain earning.
Management must decide the extent to which current asset should be financed with
equity capital and or borrowed capital.
In summary it may be emphasized that both gross and net concepts of working
capital are equally important for the efficient management of working capital. There is
no precise way to determine the exact amount of gross or nit working for any firms. The
data and the problem of each company should be analyzed to determine the amount of
working capital.
Working capital management:
Working capital management of an organization assumes greed significance
in a competitive environment without a well planned working capital system, the
operation of the organization is very difficult, the study of working capital of an
institution is a use full tool for solving so many problems in that area.
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Working capital may be regarded as the life blood of a business. It is the capital
required for meeting the day to day operations of the business. It should be adequate
neither too lower too high. If an organization has too much working capital that what is
actually needed. It represents block up of capital. If it is too low production activities
will be held up. So working capital has greater significance in the life of business.
Generally working capital is the difference between current asset and liabilities.
Analysis of working capital position enables a firm to study, whether an organization
can meet its short term obligations with its current assets or not in short it is the capital
with which the business is worked over.
ROLE OF FINANCIAL MANAGER IN WORKING CAPITAL
MANAGEMENT
1. Working capital management requires must of the finance manger time as it
represent a large position of investment is assets.
2. Working capital management requires much of the finance management time as it
represent larger position of investment in assets.
3. Action should be taken to curtail unnecessary investment in current assets.
4. All precautions should be taken for the effective and efficient management of
working capital.
5. Larger firms have to manage their current assets and current liabilities very
carefully and should see that the work should be done properly in order to achieve
predetermined organization goals.
6. The financial manger should pay special attention to the managements of
current assets on continuing basis.
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DATA ANALYSIS AND STASTICAL TOOLS
1.CURRENT RATIO
Current ratio may be defined as the relationship between the current assets and current
liabilities. This ratio is also known as working capital ratio. Is a measure of general
liquidity and is most widely used to make the analysis so a short term financial analysis
position or liquidity of a firm.
Current ratio = Current assets
Current liabilities
TABLE – 1 CURRENT RATIO
Year Current assets Current liabilities Current ratio
2005 36847984 35698448 1.03
2006 36153263 27942343 1.29
2007 92809547 78548588 1.18
2008 103181804 79813859 1.29
2009 145296787 101441134 1.43
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CHART – 1 CURRENT RATIO
Interpretation:
The above table and graph shows that current ratio for the years 2005-2009
are 1.03, 1.29, 1.18, 1.29 and 1.43 respectively. This shows that there has been a
proportionate increase in the current assets over current liability. By this we can
interpret that the current ratio is moving towards satisfactory position.
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2. LIQUID RATIO/ QUICK RATIO/ ACID TEST RATIO
Quick assets are also known as acid test or liquid ratio is a more rigorous test
of liquidity than the current ratio. The term “liquidity” refers to ability of a firm to
pay its short-term obligation as and when they become due. Quick ratio may be
defined as a relationship between the quick/liquid assets and current or liquid
liability. Investment are prepaid expenses are not liquid assets.
ACID TEST RATIO = LIQUID ASSETS
CURRENT LIABILITIES
TABLE – 2 QUICK RATIOS
Year liquid assets Liquid assets Current liabilities Liquid ratio
2005 105365 35698448 0.0030
2006 328194 27942343 0.0118
2007 766612 78548588 0.0078
2008 2132360 79813859 0.0267
2009 2161488 10144134 0.0213
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CHART -2 QUICK RATIOS
Interpretation:
The above table and graph shows that liquid ratio for the years 2005-2009 are
0.003, 0.011, 0.007, 0.026 and 0.028 respectively. This shows that there has been a
proportionate increase in the liquid assets and liquid liabilities. By this we can interpret
that the liquid ratio is partly moving towards satisfactory position. Generally it is a non
satisfactory position.
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3. INVENTORY TO WORKING CAPITAL RATIO
Inventory to working capital ratio is the ratio is usually expressed as a percentage. This ratio indicates the proportion of the working capital is tied up in the inventories stocks.
Inventory to working capital ratio = Inventory
Working capital
TABLE – 3 INVENTORY TO WORKING CAPITAL RATIO
Year Inventory Working capital Ratio
2005 27631942 1149536 24.04
2006 16588890 8210920 2.02
2007 30200092 14260959 2.12
2008 35030069 23367945 1.50
2009 84476591 43855653 1.93
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CHART – 3 INVENTORY TO WORKING CAPITAL RATIO
Interpretation:
The above table and graph shows the ratio of inventory over working capital
for the year 2005-2009. They are 24.04, 2.02, 2.12, 1.50 and 1.93 respectively. This
shows that the company’s inventory has been increasing year by year except during the
year 2003, where it has come down to 1,65,88,890, but the working capital has been
gradually increased from 2005-2009. By this we can interpret that the inventory to
working capital ratio in a better position.
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4. CASH TURN OVER RATIO
CASH TURN OVER RATIO = NET ANNUAL SALES
CASH
TABLE – 4 CASH TURN OVER RATIO
Year Net annual
sales
Cash Cash turn over
ratio
2005 48677738 105365 854.64
2006 178725638 328194 2802.35
2007 148355173 766612 2232.38
2008 252906971 2132360 3786.88
2009 188641488 2161488 1846.64
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CHART – 4 CASH TURN OVER RATIO
Interpretation:
From the above table and graph we can interpret that the cash resources of the
enterprise are not effectively utilized because it is less than the standard or ideal cash
turn over ratio i.e. less than 10%
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5. WORKING CAPITAL TURN OVER RATIO
This is also known as working capital leverage ratio. This ratio indicates whether the working capital has been efficiently utilized or not in making sales. It expresses the calculated as under:
Working capital turn over ratio = Net annual sales
Working capital
TABLE – 5 WORKING CAPITAL TURN OVER RATIO
Year Net annual
sales
Working
capital
Working
capital
turnover ratio
2005 48677738 1149536 42.35
2006 178725638 8210920 21.77
2007 148355173 14260959 10.40
2008 252906971 23367945 10.82
2009 188641488 43855653 4.30
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CHART – 5 WORKING CAPITAL TURN OVER RATIO
Interpretation:
The ratio indicates the efficient or inefficient utilization of the working capital of
the company. Higher the ratio, lower the investment in working capital and the greater
are the profit. Lower the ratio, it would be other way.
From the above table and graph we can interpret that there is an inefficiency of
the management in the utilization of working capital. Since there in a gradual decrease in
the working capital turn over ratio of the company from 2005-2009. I.e. in form 42.35 to
4.30.
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6. INVENTORY TURN OVER RATIO
This ratio establishes the relationship between the cost of goods sold or sales
during a given period and the average amount of stock carried during the
period.
Inventory turn over ratio = Sales
Average stock
TABLE – 6 INVENTORY TURN OVER RATIO
Year Inventory turn over ratio
2005 7.38
2006 8.08
2007 6.34
2008 7.75
2009 3.16
CHART – 6 INVENTORY TURN OVER RATIO
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Interpretation:
From the above table and graph we can analyzes that the inventory that the
inventory turnover ratio is very less compared to that of previous years.
By this we can interpret that the company’s sales from its stock is very less which
indicates a non-satisfactory position.
7. DEBTORS TURN OVER RATIO
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It indicates the number of times average debtors (receivables) are turned over during a year.
It is a ratio between Net Sales and Average debtors. It indicates the efficiency of credit
management. Higher the debtors’ turnover ratio higher will be the efficiency.
Debtors turn over ratio = Total sales
Debtors
TABLE – 7 DEBTORS TURN OVER RATIO
Year Sales Debtors Debtors turn
over ratio
2005 48677738 6033662 8.068
2006 178725638 7829764 22.83
2007 148355173 32934250 4.50
2008 252906971 48077941 5.26
2009 188641488 39315856 4.80
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CHART – 7 DEBTORS TURN OVER RATIO
Interpretation:
From the above table and graph we can interpret that the debts utilized by the
company because the number of times the debt has been collected by the company in
decreasing, i.e. in 2006 it was 22.83 times and goes on decreasing to 4.5, 5.26 where as
in 2009 it was only 4.80 times.
8. DEBTORS TO CURRENT ASSETS RATIO
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Debtors to current assets ratio = Debtors X 100
Current assets
TABLE – 8 DEBTORS TO CURRENT ASSETS RATIO
Year Debtors Current assets Percentage
2005 6033662 36847984 16.37
2006 7829764 36153263 21.66
2007 32934250 92809547 35.49
2008 48077941 103181804 46.60
2009 39315856 145296787 27.06
CHART- 8 DEBTORS TO CURRENT ASSETS
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Interpretation:
From the above table and graph we can interpret that the percentage of
company’s debt. Has been increasing in initial stage has been decreased 46.60 %{ 2008}
to 27.06% {2009}, which indicates the company’s careless debt collection.
9. WORKING CAPITAL TO NET WORTH RATIO
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Working capital to net worth = Working capital X 100
Net worth
TABLE – 9 WORKING CAPITAL TO NET WORTH RATIO
Year Working
capital
Net worth Working
capital turn
over ratio
2005 1149536 14388913 7.99
2006 8210920 15203090 54.01
2007 14260959 20803793 68.55
2008 23367945 26990495 86.58
2009 43855653 39338637 111.48
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CHART – 9 WORKING CAPITAL TO NET WORTH RATIO
Interpretation:
The above table and graph shows the ratio of working capital to net worth for the
year 2005-2009 are 7.99, 54.01, 68.55, 86.58 and 111.48. This shows that there has been
a gradual increase in working capital as well as the net worth of the company. By this we
can interpret that there has been a positive mode towards company’s working capital to
net worth ratio.
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
10. AVERAGE DEBTORS COLLECTION PERIOD
The Debtors / Receivable Turnover ratio when calculated in terms of days is known as Average Collection Period or Debtors Collection Period Ratio.
The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash.
AVERAGE DEBTIRS COLLECTION PERIOD = No. of days in a year
Debtor turn over ratio
TABLE – 10 AVERAGE DEBTORS COLLECTION PERIOD
YEAR No of days in
a year
Debtors
Turnover
ration
Period
2002 365 8.068 45.24
2003 365 22.83 15.99
2004 365 4.50 81.11
2005 365 5.26 69.39
2006 365 4.80 76.04
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
CHART – 10 AVERAGE DEBTORS COLLECTION PERIOD
Interpretation:
From the above table and graph we can interpret that the actual period of credit
allowed by the company is increasing i.e. during 2007 it was 81.11 which shown the
highest period of credit allowed where as during the year 2009 it is 76.04, which shows
the second highest. I.e. there is an inefficient credit collection period by the company.
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
11. CURRENT ASSET TURN OVER RATIO
This gives the relationship between net sales and current assets.
Current asset turn over ratio = sales
Current assets
TABLE – 11 CURRENT ASSET TURN OVER RATIO
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Year SalesCurrent
assets
Ratio
2005 48677738 36847984 1.32
2006 178725638 36153263 4.94
2007 148355173 92809547 1.60
2008 252906971 103181804 2.45
2009 188641488 145296787 1.30
Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
CHART – 11 CURRENT ASSET TURN OVER RATIO
Interpretation:
This ratio indicates the contribution of current asset to sales. There is no standard
current asset turnover ratio. Yet the inference is that a high current asset turn over ratio
is an indication of a better utilization of current asset. On the other hand a low current
asset turn over ratio suggests that the current asset have not been utilized effectively.
12.Cash in current asset Ratio
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Cash in Current asset ration= Total cash
Total current assets
TABLE – 12 CASH IN CURRENT ASSET RATIO
YEAR Total Cash Total Current
Assets
Ratio
2005 105365 36847984 2.86
2006 328194 36153263 9.08
2007 766612 92809547 8.26
2008 2132360 103181804 0.021
2009 2161488 145296787 1.49
CHART – 12 CASH IN CURRENT ASSETS RATIO
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Interpretation:
From the above table and graph we can interpret that the percentage of cash
utilized under current asserts is very less, I.e. 2.86, 9.08, 8.26, 0.21, 1.49 which indicates
inefficient cash utilization.
13. STOCK TO CURRENT ASSETS
This gives the relationship between the stock and current assets.
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Stock to current Assets ratio = Stock X 100
Current assets
TABLE – 13 STOCK TO CURRENT ASSETS
YEAR Stock Current
Assets
Average
2005 276631942 36847984 74.99%
2006 16588890 36153263 45.88%
2007 30200092 92809547 32.54%
2008 35030069 103181804 33.95%
2009 84476591 145296787 58.14%
CHART – 13 STOCK TO CURRENT ASSETS
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Interpretation:
We can interpret that the percentage of stock utilized by the company in more in
2009 i.e. 58.14 compared to that of previous two years. It indicates that the company’s
stock utilization is more which generally indicates an unhealthy business.
CHANGES IN WORKING CAPITAL OF 2008-09
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
PARTICULARS 2008 2009 INCREASE DECREASE
Current assets
Inventories 35030069 84476591 49446522
Sundry debtors 42643178 35988533 6654645
Cash and bankBalance
2132360 2161488 29128
Other currentAssets
1643023 5835756 4192733
Loans and advances 21733174 16834419 4898755
{A} TOTALCURRENT ASSETS
103181804 145296787
Current liabilities 79813859 101441134 21627275
{B}TOTALCURRENTLIABILITIES
79813859 101441134
NET WORKINGCAPITAL {A-B}
23367945 43855653
INCREASE INWORKING CAPITAL
20487708 20487708
43855653 43855653 53668383 53668383
FINDINGS
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Working capital management is an essential part of financial management. Here
we studied various ratios relating to measurement of the working capital such as current
ratio, quick ratio, debtor’s turnover etc from 2005-2006 to 2008-2009.The major
findings are given below
Table 1 and chart 1 show about the current ratio, where there is proportionately
increase in the current assets over current liabilities.
Table 2 and chart 2 shows Liquid ratio what is partly increasing i.e. in liquid assets over
liquid liabilities. There is fluctuating position.
Table 3 and chart 3 shows Inventory over working capital for the year 2005-2009. They
are 24.04, 2.02, 2.12, 1.50 and 1.93 respectively. This shows that the company’s
inventory has been increasing year by year except during the year 2003, where it has
come down to 1,65,88,890.
Table 4 and chart 4 shows cash turn over ratio, which is the ratio is less than 10%.
Table 5 and chart 5 shows there is a gradual decrease in working capital turn over ratio
of the company from 2002-2006 i.e. from 42.35 to 4.30.
Table 6 and chart 6 shows Inventory turn over ratio. It is clearly stated that only during
2006 company’s inventory turn over ratio is said to be effectively utilized which is
shown 8.08, where as during the year 2009 it is 3.16.
Table 7 and chart 7 shows debts has been ineffectively utilized by the company because
the number of times the debt has been collected by the company is decreasing, that is
2006 it was 22.83 times where as in 2009 it was only 4.80.
Table 8 and chart 8 shows debts collection has been fluctuating year by year.
Table 9 and chart 9 shows working capital to net worth ratio, which is gradually
increasing i.e. working capital as well as net worth of company.
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Table 10 and chart 10 shows actual period of credit allowed by the company, which was
increased during the year 2007, that is 81.11 which shows the highest and in 2009 it is
76.04 the second highest.
Table 11 and chart 11 shows, current asset turn over ratio in 2006 is high i.e. 4.94 and
gradually decreases.
Table 12 and chart 12 shows, the percentage of cash utilized under current assets is very
less.
Table 13 and chart 13 shows, the stock utilization is comparatively more from previous
years.
SUGGESTION:
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
The study conducted is to analyze the working capital needs of “MECOLAM
ENGINEERING PVT LTD” Ltd from 2005 to 2008.The findings of the study are quit
interesting. The study is done in the fields of Current ratio, Quick ratio, Debtors
turnover, Inventory turnover, Working capital turnover etc.
Avoid unnecessary liability to make current ratio of 2:1 with equal or more but
not less than the ideal ratio. Company should increase in working capital ratio
year by year.
Company can try to improve their inventory management by calculating the
stock quantity serial of each major type if material at frequent internal and
placing the orders accordingly so that the unnecessary blockage of funds in
inventory can be avoided.
Average collection period of the organization should be given more attention a
strict credit policy should be adopted.
The firm should take steps to recover the debts.
Company should keep minimum balance of cash and if more cash is kept it will
be idle.
Proper control should be exercised at all levels of its operation, through which
the cost can be reduced considerably.
The marketing department has to think of undertaking promotional activities to
increase the turn over which will help to reduce the increased investment in
finished stock, which is a component of inventory.
Sweep out the idle time both in the operation of men and machine.
CONCLUSIONS
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
The project study includes the over all view of the working capital management
operations. The study reveals the current asset financing at the Mecolam engineering pvt
limited. Hence for analyzing the data, accounting ratios have been used. It discloses the
relevant information’s about different area of working capital management.
This study report includes the working capital cycle and analysis which reveals the
raw material inventory period, work in progress period and finished goods storage
period.
Mecolam Engineering Private Ltd PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
Particulars Schedule As at31-03-09
As at31-03-08
INCOMESales and Related IncomeLess: Excise Duty
Other Income
EXPENDITURECost of MaterialsExcise DutyOther ExpendituresInterestDepreciation
PROFIT/(LOSS) BEFORE TAXLess: Provision for TaxationCurrent taxIncome tax relating to earlier years(Net)Deferred TaxFringe Benefit Tax
PROFIT/(LOSS) AFTER TAXAdd: Balance brought forward from previous year
BALANCE CARRIED TO BALANCE SHEET
12
13
14
188,641,488 21,707,765166,933,72079,455167,013,185
82,035,649408,28766,420,407271,6171,192,756
150,326,716
16,684,4695,950,000326,367(317,994)391,693
10,334,40316,202,306
26,536,709
26,537,409
252,863,88434,784,926
218,078,958195.748218,274,706
122,442,627(175,001)85,527,794561,208,955
209,004,431
9,270,2753,650,000_(679,026)--
6,299,3019,903,005
16,202,306
31ST MARCH 2009
Mecolam Engineering Private Ltd
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
BALANCE SHEET AS AT 31ST MARCH, 2009
Particulars Schedule As at31-03-09
As at31-03-08
I. SOURCES OF FUNDSShares Holder’s Funds-Capital-Reserves & Surplus
Loan Funds -Secured Loan
Deferred Tax Liability(Net)
IIAPPLICATION OF FUNDSFIXED ASSETSGross BlockLess: DepreciationNet BlockA: Current Assets, Loans & advances:InventoriesSundry DebtorsCash & Bank BalancesOther Current AssetsLoans & Advances
B:Less: Current Liabilities & ProvisionsLiabilitiesProvisions
Net Current Assets (A-B)
Accounting Polices & Notes to Accounts
12
3
4
56789
1011
15
9,000,07026,537,4092,898,160902,998
39,338,637
15,896,1617,722,973
7,873,188
84,476,59135,988,5332,161,4885,835,75616,834,419145,296,787
101,441,13412,390,204113,831,338
31,465,449
39,338,637
9,000,07016,203,006566,4271,220,992
26,990,495
16,231,853 7,026,501
9,205,352
35,030,06942,643,1782,132,3601,643,02321,733,174103,181,804
79,813,8595,582,80285,396,661
17,785,143
26,990,495
BIBLIOGRAPHY:
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Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd
1) FINANCIAL MANAGEMENT : Prasanna Chandra
2) FINANCIAL MANAGEMENT : I.M. PANDEY
3) MANAGEMENT ACCOUNTING : S.N.Maheswari
WWW.MECOLAM.COM
WWW.GOOGLE.COM
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