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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
Sundry Debtors 558,107 53
Bank Balance 71,625 7
Deposits (assets) 115,045 11
Other Current Assets 27,676 3
Total Current Assets 1,057,296 100
1%
25%
53%
7%
11%3%
Current Assets of 2009
Cash Balance
Inventories
Sundry Debtors
Bank Balance
Deposits (assets)
Other Current 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
Sundry Debtors 497,305 46
Bank Balance 266,696 24
Deposits (assets) 15,045 1
Other Current Assets 22,169 2
Total Current Assets 1,094,681 100
1%
26%
46%
24%
1%
2%
Current Assets of 2010
Cash Balance
Inventories
Sundry Debtors
Bank Balance
Deposits (assets)
Other Current 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.