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A PROJECT REPORT ON

Working Capital Management

Project Report Submitted to University of Pune,

In Partial Fulfillment of requirements of the Award of Degree of

BACHELOR IN BUSINESS ADMINISTRATIONPREPARED BY

Shukrullah Arzush

T.Y.BBA

Under guidance of

Prof.VARSHA KHOLE

MARATHWADA MITRA MANDALS COLLEGE OF

COMMERCE

DECCAN GYMKHANA, PUNE-14

2010-2011

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ACKNOWLEDGEMENT

It gives me immense pleasure to present this project report on Working

Capital Management carried out at Golden Star Technical Services PVT.LTD. In

partial fulfillment of under-graduate course B.B.A.

No work can be carried out without the help and guidance of various persons.

I am happy to take this opportunity to express my gratitude to those who have

been helpful to me in completing this project report.

At the outset I would like to thankMr.Ravi Rajapurkar (Chartered

Accountant) for his valuable advices and guidance during my project completion,

also our respected principal SirDr.MD Lawrence and our finance teacher

Prof. Varsha Khole for helping and taking entire efforts concerning various aspects

of this Project.

I also thank to all staff members of BBA department and my other friends for

helping me to complete this project.

I would be failing in my duty if I do not express my deep sense of gratitude to

all above mentioned people without their guidance, it wouldnt have been

Possible for me to complete this project work.

Lastly I would like to thank my parents, friends and well wishers who

Encouraged me to do this research work and all those who contributed directly

Or indirectly in completing this project to which I am obligated to.

Shukrullah Arzush

T.Y BBAMMCC

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DECLARATION

I, the undersigned, hereby declare that the Project Report entitled

WORKING CAPITAL MANAGEMENT written and submitted by me to the

University of Pune, in partial fulfillment of the requirements for the award of the

degree ofBACHELOR OF BUSINESS ADMINISTRATION under the guidance

of respected Prof. Varsha Khole and R.M Rajapurkar sir (Chartered

Accountants),the performance and original work of the project along with the

conclusions drawn therein are based on the material collected by myself.

Place: Pune Shukrullah Arzush

Date: 02-04-2011 B.B.A. Student

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INDEX

Sr.No Particulars Page No

1 Introduction & Objectives of Project 52 Objectives of working Capital 6

3 Company profile and Information 7-10

4 Research Methodology 11--13

5 Meaning of Working Capital 14

6 Concept of Working Capital 15-18

7 Nature of Working Capital 19-20

8 Factors Affecting Working Capital 21-23

9 Types of Working Capital 2410 Need of Working Capital 25

11

Financing Sources of Working Capital:

26-31

12Regulation of bank finance for working capital :

32-40

13 Provision for Contingency margin 41

14 Comparatives Charts 44-48

15 Graphical Representation 44-48

16

17

2008-2009 Working Capital Calculations: 49

Comments 51

Schedules 51

18

2009-2010 working Capital Calculations: 52

Comments 53-54

Schedules 53

19 Conclusions 55

20 Suggestions 56

21 Biblography 57

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INTRODUCTION & OBJECTIVES OF THIS PROJECTThis Project relates to working capital of Golden Star Technical

ServicesPVT.LTD This Project involves study of data for the past three years

those are 2008, 2009 & 2010.

The purpose of taking up this project is to study the effect of current

assets, current liabilities and net working capital on profitability and risk and

overall analysis of working capital management.

During the period of this research, I learnt about the interaction and

composition of various current assets & current liabilities in the total working

capital. I also observed that Inventory and debtors were the largest components

of companys working capital.

To mention the main purpose of this research is academic andeducational and not for any other use.

The next step after the projection is to look for financing. The company can

raise finance from various other sources like bank, government and other securities,

etc. The important factor for a company is to manage its component of working

capital.

In short, the project contains all important aspects about working capital

management of the company. All this study is organized in manufacturing sector, so

it includes a brief review on requirements of working capital.

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OBJECTIVES OF WORKING CAPITAL

MANAGEMENT

1. To minimize the amount of capital employed in financing the current assets. Thiswill also lead to an improvement in the "Return on capital employed".

2. To manage the current assets in such a way that the managerial return on

investment on those assets is not less than the cost of capital acquired to finance

them. This will ensure the maximization of the value of the business unit.

3. To maintain the proper balance between the amount of current assets & current

liabilities in such a way that the firm if always able to meet its financial obligations

whenever due. This will ensure the smooth working of the unit without any production

held up due to scarcity of funds.

4. To meet day-to-day cash transactions demand.

5. To meet maturity obligations to the creditors and other outsiders.

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Company Profile

Mr.V.S. Paralikar, a Business Entrepreneur-Chairman emeritus and the tour deforce of our prestigious company, started his

career in Automobile Engineering, ventured into the Packaging industry viz

corrugated boxes, in 1964. The enterprise was therecipient of the most prestigious award in packaging INDIA STARaward, in 1975

for its brilliant invention in ReinforcedCorrugated Boxes.

In 1976 they were theproud winners ofASIASTARand 1978 proved to

be another successful awardwinning year for them. The

winning of the pinnacle ofawards - THE WORLD

STARproved to be doubly

prestigious, since theenterprise was then the first

Indian company to have

received this award.Mr.V.S. Paralikar holds the

patent for this inventivetechnology in packaging.

With a technical vision andzeal to excel, the enterprise

crusaded in diversificationin another foray and this

time it was the successful

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launching of the highly

technical and innovative

product range in the area of

energy conservationsystems and the range of

Heat Pipes.

The activities started undera proprietary concern in the

name of Golden StarTechnical Services in 1993.

The growing size of thecompany resulted in

floating of a Private

Limited company viz M/s

Golden Star Technical

Services Pvt Ltd. in 1995,thereby introducing twohighly educated and

experienced Directors. Oneof whom has an experience

of 20 years in Plastic

Industry and another

Doctorate inChemical Engineering with

rich experience to hiscredit.

The sound business acumenof Mr.V.S.Paralikar led the

company to go professionalthereby appointing trained

Engineers and staff members.

The Company has a state of

the art manufacturing facilityat their Pune MIDC factory

and an efficient Sales Officein Thane City, near Mumbai.

The Company is involved in

the development of Heat

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Pipes for Plastic & Die

Casting Industries. Our

products range from Tubular

Heat Pipes, Angular HeatPipes, Cooling Sachets, Heat

Pipes with baffle, Stepped

Heat Pipes, Finned HeatPipes available in standard aswell as customized sizes.

Most of the leading Plastic

Processors, Mould Makers in

India use our Heat Pipes for

achieving better results. Weexport Heat Pipes to

Germany, UAE, Sri Lanka

etc. Another range ofproducts on our list are HeatRecovery Systems. The

HRS is instrumental inrecovering heat from exhaust

of Boilers, Ovens, Furnacesetc. resulting in the

conservation of energy to thetune of 65% thus enhancing

the prevention of energylosses to a great extent.

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RESEARCH METHODOLOGY

DATA COLLECTION

Collection of data is an important activity. Utmost care must be taken while collecting data because it

constitutes the foundation on which the super structure of analysis is based.

Data can be collected with the help of primary sources or secondary sources,

Primary data is original data collected by the researcher. Information from primary

sources is very usefully and important because

It includes the definition of terms and important components.

It includes a copy of schedule and description of procedure used for collecting

data.

Secondary data may contain mistakes due to error in figures copied

from primary sources.

Information from secondary source is also very useful and important due to the

following reasons

Secondary source is much quicker to obtain data.

Primary may not be available.

Data collection is an important process but it is expensive and a time

consuming process.

Sources and methods of Data Collection

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Two types of data were collected to achieve the above mentioned objectives.

Primary Data

Primary data is obtained by a study specifically designed to fulfill data needs

of the problem at hand. Such data is original in nature.

Sources of primary data:

1. Direct personal interviews:

In this case information is collected from the management on a one

to one basis. The interviewer asks questions pertaining to surveys and collects the

desired information. The information collected by this method is first hand in nature.

2. Indirect oral interviews :

This method consists of collecting data from indirect sources. This

method is used when the information collected is more complex in nature.

This method is useful when direct source of information is required as direct sources

are unavailable or not useful.

Secondary Data

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Are those data which are not fresh and first hand in nature, the secondary data is

already accessed by the other people.

Sources of secondary data

1. Published sources:

There are a number of registered organizations which collect the

Statistical data relating to business, trade, labor, prices, production, etc.

2. Unpublished sources:

Not all types of statistical data are always published.

In respect of this project the data is collected by primary sources as well as

secondary sources.

3. Annual Reports:

From the annual report of the company I could find out enough necessary

information to do this research, in fact the main source of collecting data for

analysis and findings are annual reports of the company which contains all

data about a company in a period of one year.

4. Web sites and Reference materials:

The website of the company and other sites which have enough necessary data

useful for my research is referred and also other reference books from themain source of knowledge library are referred for this research.

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MEANING OF WORKING CAPITAL

Working capital is that part of the capital which is required for daily

working of the business. Proper amount of working capital is necessary for

every business as it indicates the financial position of the concern and protects

it from becoming bankrupt.

WORKING CAPITAL = CURRENT ASSETSCURRENT LIABILITIES

Current Assets: Current Assets mean those assets that a company

has as its disposal that can be converted into cash within one

operating cycle.

Current Liabilities: Current Liabilities are those claims of

outsiders, which are expected to mature for payment within an

accounting year.

Definitions of working capital:

Working capital stands forthat capital of company which is required for the

financial or current needs of the company.

Working capital refers to a firms investment in short-term assets. It refers

to all aspects of current assets and current liabilities.

The theoretical definition of Working Capital is:

Excess of current assetsover current liabilities.

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NCEPTS OF WORKING CAPITAL

There are two concepts of working capital i.e. gross concept and net concept

1) The Gross Concept:The gross working capital is usually referred to as working capital that representsbills receivables ,etc. current assets are those assets which are normally converted

into cash within one year .thus ,the total capital invested in various current assets of

the company is known as working capital, irrespective of the fact whether such

capital is long-term or short-term.

2) The net concept:The term Net Working Capital represents the difference between current assets

and current liabilities. Current liabilities of the company are those claims of

outsiders which are expected to mature for payment within one year and include

creditors, bills payable, bank overdraft and expenses outstanding. The net working

capital can be positive or negative .when current assets exceed current liabilities, the

net working capital becomes positive. When current liabilities exceed current assets

the net working capital becomes negative.

The term workingcapital refers to the gross working capital and it represents

which in the ordinary course of business can be converted into cash within a short

period of normally one accounting year.

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Current Assets are:

a) Cash and Bank balanceb) Short-term loans and advancesc) Bills receivablesd) Sundry debtorse) Inventories such as :(i) Raw materials,(ii) Work-in progress(iii) Finished Goodsf) Prepaid expensesg)

Accrued expenses

h) Money receivable within 12 months.Current liabilities are:

a) Bills payableb) Sundry creditorsc) Accounts payabled) Short-term borrowingse) Dividends payablef) Statutory liabilitiesg) Accrued or Outstanding Expensesh) Bank Overdrafti) Provident Fund Dues

j) Any Other Payment Due within 12 months.Net working Capital = Current Assets- Current Liabilities

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1) CURRENT ASSETSA current asset is the asset which can be converted into cash within an accounting

year or an operating cycle. Current assets include the following:

o Inventory:

The various forms in which a manufacturing concern may carry inventory are:

Raw materials

These represent inputs purchased and store to be converted into

finished products in future by making certain manufacturing process on

the same.

Work in progress

These represent semi-manufactured products, which require

further processing before they can be treated as finished products.

Finished goods

These represent the finished products read for sale in the

market.

o Debtors

Receivables or debtors are one of the most important parts of Current assets,

which are created when the company sells the finished goods to the customers but

does not receive the cash for the same immediately.

o Cash and Bank balances

These assets represent cash in hand and at banks, which are used for meeting

operational requirements. This kind of current assets is purely liquid but not

productive.

o Prepaid Expenses

Prepaid expenses are those expenses, which have been paid for the goods and

services whose benefits are still to be received.

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o Loans and Advances

Loans and Advances represent loans and advances given by a firm to other

firms for a short period of time.

oInvestments

These assets comprise of short-term surplus funds invested in government

securities, shares and short-term bonds.

2) CURRENT LIABILITIES:Current liabilities represent that part of obligations, which the firm has to clear to

the outside parties in a short period, generally within a year. These liabilities

comprise the following:

o Creditors

Creditors are the liabilities that stem out of purchase of raw materials on credit

terms usually for a period of one or two months.

o Bank Overdrafts

Bank overdrafts include withdrawals in excess of credit balance standing in

the firms current accounts with banks.

o Short Term Loans

Short-term borrowings by the firm, from the banks and others, form part of

current liabilities as short-term loans.

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Nature of Working Capital

1. Cash Cycle:

The nature of working capital is described with the help of nature of operation cycle

of the firm. The process of cash or operation cycle starts when a firm uses cash to

purchase raw materials and pay for other manufacturing costs to produce goods.

These goods are carried as inventory for some time till they are sold. When goods

are sold, either cash is received or accounts receivable are created. Accounts

receivables are collected from debtors. This brings cash into a firm. Thus, a cash

cycle is complete and new process of dcash cycle starts over again. These processes

are described as circulating nature of current assets.

2. Degree of Efficiency:

The speed of circulation of working capital or the turnover of current assets is an

indicator of the degree of efficiency of the management. The faster the turnover, the

higher the degree of efficiency.

3. Goal of Working Capital:

The goal of working capital management is to manage the firms current assets and

current liabilities in such a way that satisfactory level of working capital is

maintained. That is so because of the firm cannot maintain a satisfactory level of

working capital, it is likely to become insolvent and may even be forced intobankruptcy.

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5. Interaction between Current Assets and Liabilities:The current assets are large enough to cover its current liabilities in order to ensure

a reasonable margin of safety. Each of the current assets must be managed efficiencyin order to maintain the liquidity of the firm while not keeping too high a level of

any one of them. Each of the short-term sources of financing must be continuously

managed to ensure that they are obtained and used in the best possible way. The

interaction between

Current assets and current liabilities are the main them of working capital

management.

Factors affecting working capital

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The need for working capital required for running day-to-day business activities

cannot be over-emphasized. But the amount of working capital depends upon a

variety of factor which operates together. The working capital requirements in a

certain business may be negligible while in certain others; it may be larger than even

the amount of fixed capital.

1) Nature of Business:The nature of a business concern has got a bearing on its working capital

requirements. In certain types of enterprises like public utilities and railways current

capital requirement when compared to fixed capital the requirement of working

capital is small while in manufacthring concerns, a large amount of working capital

is needed.

2) Manufacturing Cycle:The quantum of working capital needed is influenced by the length of the

manufacturing cycle. Manufacturing process always involves a time-gap between

the time when raw materials are fed into the production line and finished production

is finally turned out by it. The length of the period of manufacturing in turn dependson the nature of the product as well as production technology used by concern.

3) Economic of Scales :The need for working capital funds are significantly determined by the economies of

the scale of operation of a business enterprise. In very small companies a large

amount of working capital s needed due to high overhead charges, high buying and

selling costs and less efficient technical equipments.

4) Business Fluctuations :

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The need for working capital increases during periods of inflation and depression

and declines during other periods of trade cycle. During the boom period, the

manufacturing would like to produce more of finished products for sale in a buoyant

market. That necessitates them in maintaining huge stocks of raw materials which in

turn demands a large amount of working capital.5) Rapidly of Turnover :There is a high degree of inverse co-relation between the quantum of working capital

and the velocity with which the sales are affected. When a company has to carry on a

large slow moving stock, it needs a large working capital as against another whose

turnover is rapid.

6)

Terms of Purchase and Sale :As a result of extension of liberal credit by certain companies a large amount of

working capital gets locked up in sundry debtors and the bills receivables. When the

credit terms extended by a company to its customers are for longer periods than what

is extended to it by its suppliers, a larger working capital is needed and vice-versa.

7) Current Assets :If a company follows a conservative assets policy, it will operate with a high level of

current assets relative to its sales volume. It has to carry large stocks of raw

materials, inventories and finished goods, offer liberal terms of credit to customers

and carry a large a amount of cash to meet its current expenditure, all of which in

turn demand a large working capital.

8) Market Conditions :

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In a buyer market i.e. the market with fierce competition the companies

are forced to sell on credit, with liberal credit and collection policies. This

increases the level of investment in working capital due to increased

debtors balances and its administration costs. But if the sellers market

prevails, the quick disposal of stocks, high percentage of cash sales, strict

credit and collection policies etc. reduces the need for working capital.

9) Conditions of supply

The inventory of raw materials, spares, and stores depend on the

conditions of supply. If the supply is prompt and adequate, the firm can

manage with small inventory. However, if the supply were unpredictable

and scant then the firm, to ensure continuity of production, would have to

acquire stocks as and when they are available and carry larger inventory

on an average.

Types of working capital

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1. Gross working capital

Total or gross working capital is that working capital which is used for all the

current assets. Total value of current assets will equal to gross working capital. In

simple words, it is total cash and cash equivalent on hand. But remember, we do not

account of current liabilities in gross working capital.

2. Net Working Capital

Net working capital is the excess of current assets over current liabilities.

Net Working Capital = Total Current AssetsTotal Current Liabilities

This amount shows that if we deduct total current liabilities from total current assets,

then balance amount can be used for repayment of long term debts at any time. It

also measure of both a company's efficiency and its short-term financial health.

3. Permanent Working Capital

Permanent working capital is that amount of capital which must be in cash

or current assets for continuing the activities of

business. It also shows the minimum amount of all current assets that is

required at all times to ensure a minimum level of uninterrupted business

operations.

4. Temporary Working CapitalSometime, it may possible that we have to pay fixed liabilities, at that time we need

working capital which is more than permanent working capital, then this excess

amount will be temporary working capital. In normal working of business, we dont

need such capital.

Need of working capital

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1. There is a positive correlation between the sale of the product of the firmand the current assets. An increase in the sale of the product requires a

corresponding increase in current assets. It is therefore indispensible to

manage the current assets properly and efficiently.

2. More than half of the total capital of the firm is generally invested in currentassets. It means less than half of the capital is blocked in fixed assets . we pay

due attention to the management fixed assets through the capital budgeting

process. Management of working capital too, attracts the attention of the

management.

3. In emergency fixed assets can be acquired on lease but there is noalternative for currents assets. Investment in current assets, i.e., inventory or

receivables can in no way avoided without sustaining loss.

4. Working capital needs are more often financed through outside sources so itis necessary to utilize them in the best way possible.

5. The management of working capital is more important for small unitsbecause they scarcely rely on long term capital market and have an easy

access to short term financial sources i.e. trade credit, short term bank loan

etc.

FINANCING SOURCES OF WORKING CAPITAL

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1) Trade credit

2) Bank Finance

3) Letter of credit

4) Commercial Papers.5) Public Deposits.

1)Trade creditTrade credit refers to the credit that a customer gets from suppliers of goods in

the normal course of business. The buying firms do not have to pay cash

immediately for the purchase made. This deferral of payments is a short term

financing called trade credit. It is major source of financing for firm.Particularly small firms are heavily depend on trade credit as a source of

finance since they find it difficult to raised funds from banks or other sources in

the capital market. Trade credit is mostly an informal arrangement, and it

granted on an open account basis. A supplier sends goods to the buyers accept,

and thus, in effect, agrees to pay the amount due as per sales terms in the

invoice. Trade credit may take the form of bills payable. Credit terms refer to

the condition under which the supplier sells on credit to the buyer, and the

buyer required to repay the credit. Trade credit is the spontaneous source of the

financing. As the volume of the firms purchase increase trade credit also

expand. It appears to be cost free since it does not involve explicit interest

charges, but in practice, it involves implicit cost. The cost of credit may be

transferred to the buyer via the increased price of goods supplied by him.

2) Bank finance for working capital

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Banks are main institutional source of working capital finance in India. After

trade credit, bank credit is the most important source of financing working

capital in India. A banks considers a firms sales and production plane and

desirable levels of current assets in determining its working capital

requirements. The amount approved by bankfor the firms working capital iscalled credit limit. Credit limit is the maximum funds which a firm can obtain

from the banking system. In practice banks do not lend 100% credit limit; they

deduct margin money.

Forms of bank finance:-

a- Term Loan

b- Overdraft

c- Cash credit

d- Purchase or discounting of bills

A- Term LoanIn this case, the entire amount of assistance is disbursed at one time

only, either in cash or the companys account. The loan may be paid

repaid in installments will charged on outstanding balance.

B- Overdraft

In this case, the company is allowed to withdraw in excess of the balance

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standing in its Bank account. However, a fixed limit is stipulated by the Bank

beyond which the company will not able to overdraw the account. Legally,

overdraft is a demand assistance given by the bank i.e. bank can ask repayment

at any point of time.

C- Cash credit

In practice, the operations in cash credit facility are similar to those

of those of overdraft facility except the fact that the company need not

have a formal current account. Here also a fixed limit is stipulated beyond

which the company is not able to withdraw the amount.

D- Bills purchased / discounted

This form of assistance is comparatively of recent origin. This facility enables

the company to get the immediate payment against the credit bills / invoice

raised by the company. The banks hold the bills as a security till the payment is

made by the customer. The entire amount of bill is not paid to the company.

The company gets only the present worth of amount of bill from of discount

charges. On maturity, bank collects the full amount of bill from the customer

3)Letter of creditIn this case the exporter and the importer are unknown to each other. Under

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these circumstances, exporter is worried about getting the payment from the

importer and importer is worried as to whether he will get goods or not. In this

case, the importer applies to his bank in his country to open a letter of credit in

favor of the exporter whereby the importers bank undertakes to pay the exporter

or accept the bills or draft drawn by the exporter on the exporter fulfilling theterms and conditions specified in the letter of credit.

Banks have certain norms in granting working capital finance to

companies. These norms have been greatly influenced by the recommendation

of various committees appointed by the Reserve Bank of India from time to

time. The norms of working capital finance followed by bank since mid-70

were mainly based on the recommendations of the Tondan committee. The

Chore committee made further recommendations to strengthen the procedure

and norms for working capital finance by banks.

4) Commercial Papers

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Commercial paper was introduced to enable corporate borrowers, with good

credit standings to diversify their sources of short term borrowings and to provide an

additional instrument to investors.

Only the most credit worthy companies can issue commercial papers in India. High

rated corporate bodies, primary dealers, satellite dealers and financial institutions areauthorized to issue such commercial papers.

Initially minimum size of issue of the commercial paper was 1 crore but today it has

been reduced to 5 lacs. Commercial paper can be issued in denominations of 5 lacs

or multiples there off.

In the global money market, commercial paper is an unsecured promissory

note with a fixed maturity of 1 to 270 days

Thus Commercial Paper is a debt instrument for short-term borrowing that

enables highly-rated corporate borrowers to diversify their sources of short-term

borrowings and provides an additional financial instrument to investors with a freely

negotiable interest rate. The maturity period ranges from three months to less than

1year. Since it is a short-term debt, the issuing company is required to meet dealers

fees, rating agency fees and any other relevant charges. Commercial paper is short-

term unsecured promissory note issued by corporation with high credit ratings.

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5)Public DepositsMany firms, large and small, have solicited unsecured deposits from the

public in recent years, mainly to finance their working capital requirements.

Public deposits maybe accepted by companies from their members, directors and

maximum of 3 years. Public deposits are accepted to meet the short-term

requirements of the company.

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Business cycle shows the complete process while of trading performing the

business.

Fig.

Business Cycle

This phase completes the operating cycle.

Regulation of Bank Finance

Cash

Rawmaterial

Work inprogress

Finishedgoods

Sundry

debtors

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A. Tandon CommitteeIn 1974, a study group under the chairmanship of Mr. P. L. Tandon was

constituted for framing guidelines for commercial banks for follow-up & supervision

of bank credit for ensuring proper end-use of funds. The group submitted its report

in August 1975, which came to be popularly known as Tandon Committees Report.

Its main recommendations related to norms for inventory and receivables, the

approach to lending, style of credit, follow ups & information system.

It was a landmark in the history of bank lending in India. With acceptance of

major recommendations by Reserve Bank of India, a new era of lending began in

India.

Tandon committees recommendations

Breaking away from traditional methods of security oriented lending; the committee

enjoyed upon the banks to move towards need based lending. The committee pointed

out that the best security of bank loan is a well functioning business enterprise, not

the collateral.

Major recommendations of the committee were as follows:

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1. Assessment of need based credit of the borrower on a rational basis on the basis of

their business plans.

2. Bank credit would only be supplementary to the borrowers resources and not

replace them, i.e. banks would not finance one hundred percent of borrowers

working capital requirement.

3. Bank should ensure proper end use of bank credit by keeping a closer watch on

the borrowers business, and impose financial discipline on them.

4. Working capital finance would be available to the borrowers on the basis of

industry wise norms (prescribe first by the Tandon Committee and then by Reserve

Bank of India) for holding different current assets, viz.

Raw materials including stores and others items used in manufacturing

process.

Stock in Process.

Finished goods.

Accounts receivables.

5. Credit would be made available to the borrowers in different components like

cash credit; bills purchased and discounted working capital, term loan, etc.,

depending upon nature of holding of various current assets.

6. In order to facilitate a close watch under operation of borrowers, bank would

require them to submit at regular intervals, data regarding their business and

financial operations, for both the past and the future periods.

The Norms

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Tandon committee had initially suggested norms for holding various current assets

for fifteen different industries. Many of these norms were revised and the least

extended to cover almost all major industries of the country.

The norms for holding different current assets were expressed as follows:

(a) Raw materials as so many months consumption. They include stores and

other items used in the process of manufacture.

(b) Stock-in-process, as so many months cost of production.

(c) Finished goods and accounts receivable as so many months cost of sales and

sales respectively. These figures represent only the average levels. Individualitems of finished goods and receivables could be for different periods which

could exceed the indicated norms so long as the overall average level of

finished goods and receivables does not exceed the amounts as determined in

terms of the norm.

(d) Stock of spares was not included in the norms. In financial terms, these were

considered to be a small part of total operating expenditure. Banks were

expected to assess the requirement of spares on case-by-case basis. However,

they should keep a watchful eye if spares exceed 5% of total inventories.

The norms were based on average level of holding of a particular current

asset, not on the individual items of a group. For example, if receivables holding

norms of an industry was two months and an unit had satisfied this norm, calculated

by dividing annual sales with average receivables, then the unit would not be asked

to delete some of the accounts receivable, which were being held for more than two

months.The Tandon committee while laying down the norms for holding various

current assets made it very clear that it was against any rigidity and straight

jacketing. On one hand, the committee said that norms were to be regarded as the

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outer limits for holding different current assets, but these were not to be considered

to be entitlements to hold current assets upto this level. If a borrower had managed

with less in the past, he should continue to do so. On the other hand, the committee

held that allowance must be made for some flexibility under circumstances justifying

a need for re-examination. The committee itself visualized that there might bedeviations of norms in the following circumstances.

(a) Bunched receipt of raw materials including imports.

(b) Interruption of production due to power cuts, strikes or other unavoidable

circumstances.

(c) Transport delays or bottlenecks.

(d) Accumulation of finished goods due to non-availability of shipping space for

exports or other disruption in sales.

(e) Building up of stocks of finished goods, such as machinery, due to failure on

the part of the purchaser for whom these were specifically designed and

manufactured.

(f) Need to cover full or substantial requirement of raw materials for specific

export contract of short duration.

While allowing the above exceptions, the committee observed that the deviations

should be for known and specific circumstances and situation, and allowed only for

a limited period to tide over the temporary difficulty of a borrowing unit. Returns tonorms would be automatic when conditions return to normal.

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Methods of Lending

The lending framework proposed by Tandon Committee dominated commercial

bank lending in India for more than 20 years and its continues to do so despite

withdrawal of mandatory provision of Reserve Bank of India in 1997.

As indicated before, the essence of Tandon Committees recommendations was to

finance only portion of borrowers working capital needs not the whole of it. It was

thought that gradually, the borrower should depend less on banks to fund its working

capital needs. From this point of view the committee three graduated methods of

lending, which came to be known as maximum permissible bank finance system or

in short MPBF system.

For the purpose of calculating MPBF of a borrowing unit, all the three methods

adopted equation:

Working Capital Gap = Gross Current AssetsAccounts Payable

. as a basis which is translated arithmetically as follows:

Gross Current Assets Rs.

Less: Current Liabilities

other than bank borrowings Rs. .

Working Capital Gap Rs. .

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First method of lending

The contribution by the borrowing unit is fixed at a minimum of 25% working

capital gap from long-term funds. In order to reduce the reliance of the borrowers on

bank borrowings by bringing in more internal cash generation for the purpose, it

would be necessary to raise the share of the contribution from 25% of the working

capital gap to a higher level. The remaining 75% of the working capital gap would

be financed by the bank. This method of lending gives a current ratio of only 1:1.

This is obviously on the low side.

Second method of lending

In order to ensure that the borrowers do enhance their contributions to

working capital and to improve their current ratio, it is necessary to place them under

the second method of lending recommended by the Tandon committee which would

give a minimum current ratio of 1.33:1. The borrower will have to provide a

minimum of 25% of total current assets from long-term funds. However, total

liabilities inclusive of bank finance would never exceed 75% of gross current assets.

As many of the borrowers may not be immediately in a position to work under the

second method of lending, the excess borrowing should be segregated and treated as

a working capital term loan which should be made repayable in installments. To

induce the borrowers to repay this loan, it should be charged a higher rate of interest.

For the present, the group recommends that the additional interest may be fixed at

2% per annum over the rate applicable on the relative cash credit limits. This

procedure should be made compulsory for all borrowers (except sick units) havingaggregate working capital limits of rs.10 lakhs and over

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Third method of lending

Under the third method, permissible bank finance would be calculated in the

same manner as the second method but only after deducting four current assets from

the gross current assets.

The borrowers contribution from long-term funds will be to the extent of the entire

core current assets, as defined, and a minimum of 25% of the balance current assets,

thus strengthening the current ratio further. This method will provide the largest

multiplier of bank finance.

Core portion current assets were presumed to be that permanent level which

would generally vary with the level of the operation of the business. For example, in

case of stocks of materials the core line goes horizontally below the ordering level so

that when stocks are ordered materials are consumed down the ordering level during

the lead time and touch the core level, but are not allowed going down further. This

core level provides a safety cushion against any sudden shortage of materials in the

market or lengthening of delivery time. This core level is considered to be equivalent

to fixed assets and hence, was recommended to be financed from long-term sources.

B. CHORE COMMITTEE

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Reserve Bank of India constituted a working group in April 1979 under the

chairmanship of Mr. K.B. Chore. Review of the cash credit system for suggesting

modifications if any, and also suggesting credit facilities to promote greater credit

discipline and to relate the credit limits to production were the terms of references of

this committee. The important recommendations of the committee are as follows:

The committee recommended that dependence of the bank finance should be

reduced. This means that the borrowers should contribute more funds to

finance their working capital requirements and thus reduce the dependence on

the bank credit. In view of this, the committee recommended that the firms

should be placed in the second method of lending as suggested by the Tandon

Committee. A borrower, who is not able to satisfy the requirement

immediately, should be granted loan in the form of working capital term loan.

This loan should be repaid in semi annual installments as compared to the

cash credit system would be charged for the same.

The committee recommended that the credit limit for the borrowers should not

be the same during the year. The needs should be split between Peak Level

and NonPeak Level. A borrower should indicate in advance his need for

funds during a quarter. Any difference in the utilization beyond the limit

should be treated as irregularity and appropriate action should be taken. Ad

hoc or temporary credit limits should be discouraged by the bank. Under an

exceptional situation, if such limits are sanctioned, an additional interest of

1% should be charged or such limits.

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According to the committee, existing system of lending through cash credits,

loans and bills should continue. However, the cash credit system should be

replaced by loans and bills wherever possible. There should be a scrutiny of

cash credit accounts at least once in a year. But the bifurcation of cash credits

accounts into demand loan and fluctuating cash credit component should bediscontinued.

The committee recommended that the information system as recommended by the

Tandon Committee should be implemented strictly in case of all borrowers having

capital limits of Rs.50lakhs and over.

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Provision for contingency margin in

working capital

After determining the amount of working capital a provision for contingencies are

made to allowances for likely variation or for unforeseen expenses. It can be said

that provision for contingencies is a sort of caution against uncertainties involved

in estimating and calculating working capital requirement.

For example:

1) Changing government policies

2) Technological changes

3) Market conditions

4) Fluctuation in business cycle

5) Environmental uncertainties

6) Changes in market trends

7) Change in bank norms

8) Seasonal fluctuation

9) Credit policy of R.B.I

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WORKING CAPITAL ANALYSIS

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Format of Working Capital Budgeting

Particulars Amount Amount Increase Decrease

Current Assets xxx xxx xxx xxx

Sundry Debtors xxx xxx xxx xxx

Inventories xxx xxx xxx xxx

Cash and Bank Balance xxx xxx xxx xxx

Receivables xxx xxx xxx xxx

Other Current Assets xxx xxx xxx xxx

Total Current Assets (A)xxx xxx xxx xxx

Total xxx xxx

less(-)

Current Liabilities xxx xxx xxx xxx

Sundry Creditors xxx xxx xxx xxx

Bank over draft xxx xxx xxx xxx

Payables xxx xxx xxx xxx

Other Current liabilities xxx xxx xxx xxx

total Current Liabilities (B) xxx xxx xxx xxxTotal xxx xxx

Net Working Capital (A-B) xxx xxx xxx xxx

Increase/Decrease in Working Capital xxx xxx xxx xxx

Total xxx xxx xxx xxx

COMPARITIVE CHART OF CURRENT ASSETS, CURRENT LIABILITIES, AND WORKING

CAPITALL FOR THE YEARS 2008-2009-2010

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Sr.No Year 2008 2009 2010

1 Current Assets 15,891,140 1,057,296 1,094,681

2 Current Liabilities 360,436 455,091 352,617

3 Working Capital 1,228,712 602,205 742,064

GRAPHICAL REPRESENTATION OF COMPARITIVE CURRENT ASSETS

1 2 3

Current Assets 15,891,140 1,057,296 1,094,681

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

Current Assets

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GRAPHICAL REPRESENTATION OF COMPARITIVE CURRENT LIABILITIES

GRAPHICAL REPRESENTATION OF COMPARITIVE WORKING CAPITAL

1 2 3

Current Liabilities 360,436 455,091 352,617

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

Current Liabilities

1 2 3

Working Capital 1,228,712 602,205 742,064

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Working Capital

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Composition of Current Assets for the year 2008

Particulars 2008 % of Total C.A

Cash Balance 5,786 0

Inventories 210,930 13

Sundry Debtors 714,146 45

Bank Balance 547,546 35

Deposits (assets) 85,045 5

Other Current Assets 25,695 2

Total Current Assets 1,589,148 100

0%

13%

45%

35%

5%

2%

Cuurent Assets of 2008

Cash Balance

Inventories

Sundry Debtors

Bank Balance

Deposits (assets)

Other Current Assets

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COMPOSITIONO OF CURRENT ASSETS FOR THE YEAR 2009

Particulars 2009 % of Total C.A

Cash Balance 15,720 1Inventories 269,123 25






1%

25%

53%

7%

11%3%

Current Assets of 2009

Cash Balance

Inventories

Sundry Debtors

Bank Balance

Deposits (assets)


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COMPOSITION OF CURRENT ASSETS FOR THE YEAR 2010

Particulars 2010 % of Total C.ACash Balance 7,815 1

Inventories 285,651 26






1%

26%

46%

24%

1%

2%

Current Assets of 2010

Cash Balance

Inventories

Sundry Debtors

Bank Balance

Deposits (assets)


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Estimation of Working Capital of Golden Star Technical Services PVT.LTD

Particulars AS AT 31-3-2008 AS AT 31-3-20

CURRENT ASSETS

a) Cash Balance 5,786 15,

b) Inventories 210,930 269,

c) Sundry Debtors 714,146 558,

d) Bank Balance 547,546 71,

e) Deposits (assets) 85,045 115,

f) Other Current Assets 25,695 27,

Total Current Assets (A) 1,589,148 1,057,

less

CURRENT LIABILITIES

a) Sundry Creditors 330,003 387,

d) Duties & Taxes 30,433 67,

Total Current Liabilities (B) 360,436 455,0

Net Working Capital (A-B) 1,228,712 602,

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Graphical representation of current assets, current liabilities, and

working capital for the years 2008,2009 .

1 2

Current Assets 15,891,140 1,057,296

Current Liabilities 360,436 455,091

Working Capital 1,228,712 602,205

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

2008 2009

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At 31st

March (2008-09)

Comments:

Current Assets:

a) Cash in Hand:

The balance of cash and Cash in Hand as 31st

March 2009 was 15,720 Rs. Which

show an effect of more.

b) Inventories:

Here inventories like Raw Materials, Finished goods, workingin-Progress are

stated more compare to previous year.

c) Sundry Debtors:

According to previous year stated as decrease by figure amount 55,039 Rs.

d) Bank Balances:

As per bank balances of Bank of Maharashtra consolidated networks invested

capital was negative that is 71,625 Rs. Compare with a positive figure 547,346 Rs.

e) Other Current Assets:

At 31st

March 2008-09 came to 25,695 Rs. in 2008 and 27,676 Rs. in 2009 this

change in primarily attributable to other assets.

So, it was stated decreasing a Negative figure compare to previous year positive

figure.

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Current Liabilities:

A) Sundry Creditors:

Like Sundry Creditors stated increase in the value of Current Year that is 2009 with

the figure of 57,243 Rs.

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Estimation of Working Capital of Golden Star Technical Services PVT.LTD

Particulars AS AT 31-3-2009 AS AT 31-3-201

CURRENT ASSETS

a) Cash Balance 15,720 7,8

b) Inventories 269,123 285,6

c) Sundry Debtors 558,107 497,3

d) Bank Balance 71,625 266,6

e) Deposits (assets) 115,045 15,0

f) Other Current Assets 27,676 22,1

Total Current Assets (A) 1,057,296 1,094,6

less

CURRENT LIABILITIES

a) Sundry Creditors 387,246 340,0

d) Duties & Taxes 67,845 12,6

Total Current Liabilities (B)

455,091 352,6

Net Working Capital (A-B) 602,205 742,0

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Graphical representation of current assets, current liabilities, and

working capital for the years 2009 and 2010 .

1 2

Current Assets 1,057,296 1,094,681

Current Liabilities 455,091 352,617

Working Capital 602,205 742,064

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

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At 31st March (2009-10)

Comments:

Current Assets:

a) Inventories:

Because of the increase of inventory the total current assets will be increase

making the working capital of the firm also increased.

6.14143 Rs. Inventories have increased by 6%.

b) Sundry Debtors:

Because of the decrease of sundry debtors net working capital of the firm gets

decreased.

-11 sundry debtors have decreased 11% compare to the previous year,

c) Cash in Hand:

d) Bank Balances:

Companys liquid assets have increased 272 compare to the previous year.

This may be on account of either any sale of assets or merging generated from the

business.

But it is not a prudent policy to keep an idle as it adversely impact the current ratio.

e) Deposits:

The fixed deposit with the Bank of Maharashtra has been matured/ redeemed.

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Current Liabilities:

a) Sundry creditors:

-12.1995 Rs. Sundry creditors have decreased by 12.2%

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CONCLUSIONS:

Working capital management is important aspect of financial management.

The study of working capital management Golden Star Technical Services

PVT.LTD has revealed that the current ration was as per the standard industrial

practice but the liquidity position of the company showed an increasing trend. The

study has been conducted on working capital ratio analysis, working capital

leverage, working capital components which helped the company to manage its

working capital efficiency and affectively. Combined with key industry-specific

components for profitability management and risk management, this scenario group

enables postal organizations to achieve a single view of the customer.

1. Working capital of the company was increasing and showing positive working

capital per year. It shows good liquidity position.

2. Positive working capital indicates that company has the ability of payments of

short terms liabilities.

3. Working capital increased because of increment in the current assets is more than

increase in the current liabilities.

4. Companys current assets were always more than requirement it resulted in

profitability of the company.

5. Current assets are more than current liabilities indicate that company used long

term funds for short term requirement, where long term funds are most costly then

short term funds.

6. Current assets components shows sundry debtors were the major part in

Current assets it shows that the inefficient receivables collection management.

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Suggestions

Suggestions can be used by the firm for the betterment and profitability of the

firm after studying and analyzing of the project report on the study and analysis of

working capital. I would like to suggest:

1. Company should take control on debtors collection period which is

major part of current assets.

2. Company has to take control on cash balance because cash is non-

earning assets and increasing cost of funds.

3. Company should reduce the inventory holding period with use of zero

Inventory concept.

Over all company has good liquidity position and sufficient funds to

repayment of liabilities. Company has accepted conservative financial policy and

thus maintaining more current assets balance. Company is increasing sales volume

per year which supported the growth of the company for sustaining their position in

this competitive world.

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BIBLOGRAPHY

Financial management - M Y Khan and P K Jain

Companys Web site : www.heatPipeline.com

Company annual reports 2OO8, 2009 and 2010.

Documents

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