Working capital management is concerned with the decisions which are related with the current assets and the current liabilities. It means, it concerned with day-to-day management activities. The key factor, which is used to differentiate long term financial management and short- term financial management, is the timing of cash. Long- term financial decisions by buying capital equipment or issuing debentures, involve cash which flows over an extended period of time. But a short time financial decision mainly involves the cash flow within a year, or with in the operating cycle of the firm. 2.2 CONCEPTS OF WORKING CAPITAL
The two concepts of working capital are
1. Gross working capital
It refers to the investment made by the company in current assets. Current assets are the assets which can be converted into cash with an accounting year or operating cycle. It also includes cash, short-term securities, debtors, bills receivable and stock.
2. Net working capital
The difference between current assets and current is called the net working capital. Current liabilities are the one which is claimed from the outsiders and are expected to be returned within an accounting year. It includes creditors, bills payable, and out siding expenses.
Net working capital may be positive or negative. A net working capital becomes positive only when the current assets exceed current liabilities. A negative net working capital occurs when current liabilities exceed current assets.
2.3 TWO DANGEROUS POINTS OF CURRENT ASSETS
2.3.1 Danger of inadequate working capital
1. Inadequate working capital will lead to a condition, in which one cannot pay its short-term liabilities in time. So there arises a situation where there is a loss of reputation and tight credit terms.
2. The organization's requirements cannot be fulfilled in bulk; hence it cannot take
the advantage of cash discounts.
3. Difficulties will arise in meeting the day-to-day expenses. This will lead to
inefficiency and increase in costs with the minimum profits.
4. Lack of working capital will lead to less favorable marketing conditions and less
profitable projects.
5. Due to scarcity of working capital, fixed assets are not properly utilized. Thus
this results in the fall of investments return.
2.3.2 Danger of Excessive Working Capital
1. Excessive working capital will lead to low investments in fixed assets. Hence there will be no profits for the business and there can be no proper rote of return on its investments.
2. The low rate of return on investment will lead to the fall in the value of shares.
3. Excessive working capital will lead to unnecessary purchasing and excessive
amount of inventories. As a result, there are chances of theft and loses.
4. Excessive debtors and defective credit policy are the indication of excessive
working capital. There may be delay in collection and increased incidence of bad debts.
5. Excessive working capital will make the management complacent. This will lead
to overall inefficiency in the organization.
2.4 NEED FOR WORKING CAPITAL MANAGEMENT
Beyond the limit, both the current assets i.e., inadequate working capital and excessive working capital are dangerous. Beyond the limitations of both the level, the common goal of the organization cannot be achieved.
Working capital Management provides effective and efficient decision to allocate
the current assets.
2.5 TYPES OF WORKING CAPITAL
The two types of working capital are,
1. Permanent working capital.
2. Temporary working capital.
2.5.1 Permanent Working Capital
As the operating cycle is a continuous process, the need for current assets is felt constantly. The Magnitude of the current assets need not to be the same. It may increase or decrease over the time.
However, there is a minimum level of current assets which are continuously required by the firm to continue its business operations. This minimum level of the current assets is known as permanent or fixed working capital. However the permanent working capital line needs not to be horizontal.
2.5.2 Temporary working capital
On the other hand, when there is a slack period in the market, the investment made
on the inventories and account receivable will be low.
The change of the extra working capital used to support the production and sales, is
known as fluctuating or variable or temporary working capitals.
When the company has a peak period of sales, it will have large amount of inventories, when compared to their normal sales. This makes the costumers to invest money for credit sales.
2.6 RATIO ANALYSIS
Ratio analysis, simply defined, refers to the analysis and interpretation of financial statements through ratios. Now a day it is used by all the business and industrial concerns in their financial analysis.
2.7 RATIO
The term ratio simply means one number expressed in terms of another. It describes
in mathematical terms the quantitative relationship that exists between two numbers.
2.8 TYPES OF RATIOS
1. CURRENT RATIO
It is relationship between firm's current assets and current liability.
Current assets
Current ratio =_______________________________
Current liability
2. QUICK RATIO
It is relationship between liquid assets and current liabilities.
Liquid assets
Quick ratio =_________________________
Current liabilities
3. CASH RATIO
It is relationship between cash and current liabilities.
Cash
Cash ratio = _______________________
Current liabilities
4. DEBTOR'S TURNOVER RATIO
It indicates the number time debtors turned over each year. Generally the higher value of debtor's turnover shows high efficiency to manage the credit management.
Total sales
Debtors turnover ratio =______________________________
Debtors
5. DEBT COLLECTION PERIOD
It indicates the speed with which debts are collected.
Days/months in a year
Debt collection period =_______________________________
Debtor's turnover ratio
6. CREDITORS TURNOVER RATIO
The ratio shows on an average the number of times creditors turned over
during the year.
Credit purchase
Creditors turnover ratio = ________________________
Average creditors
7. DEBT PAYMENT PERIOD
Creditor's turnover ratio indicates the number of days taken by the firm, to
pay the debtors to creditors.
Days/months in a year
Debt payment period =_______________________________
Creditor's turnover ratio
8. INVENTORY TURNOVER RATIO
It indicates the inventories turning into receivables through sales.
Sales
Inventory turnover ratio =__________________________
Inventory
9. INVENTORY HOLDING PERIOD
It indicates duration of holding inventories in stores.
Days/months in a year
Inventory holding ratio =______________________________
Inventory turnover ratio
10. WORKING CAPITAL TURNOVER RATIO
This ratio explains the relationship between sales and working capital.
Net sales
Working capital turnover ratio =______________________________
Net working capital
CASH TURNOVER RATIO
It is the relationship between sales and cash.
Cash turnover ratio = Sales
___________________
Cash balance
2.9 ARTICLES
To make one's project effective, it is better to go through the projects done by others earlier. This gives a complete idea about one's project. It also helps to correct the mistakes done in the earlier projects. Summing up, it improves one's project.
So with this idea, let us see some of the projects done by others earlier.
Mr. J. Maria peter Ignatius., MBA., of Bharathidasan University did a project
with the title "Working Capital Management in Bharath Heavy Electricals Limited, Tiruchirrappalli". He did this project in the month of June 2004, using the data from 1998 to 2003.
The objectives of his study were
î€To analyse the requirement of funds for the routine activities of business.
î€To study on the source of fund generated and their methods of utilization.
î€To know the amount of funds allotted in the current assets and to forecast the
working capital trend.
î€To study cash receivables position of the organization.
His findings were
î€In all the years the value of the quick ratio is higher than the ideal value; it indicates
firm's ability to pay the immediate obligations
î€Cash ratio clearly indicates firm's debt borrowing power from financial institutions
and other sources.
î€The firm's debt collection period have more than 150 days. Firm increased the debt
collection period year by year. It shows firm's liberal debt collection policy.
î€Working capital turnover ratio was decreased in year by year. It clearly shows firm
reduced to use net working capital for sales
Mr. G. Dhanabal., MBA., of Bharathidasaan University did a project with the title
"Working Capital Management in Trichy Steel Rolling Mills Limited, Tirchirappalli".
He did the project in the month of June 2004, using the data from 1998 to 2003.
His objectives were
î€To study the financial position of the firm
î€To estimate the future of working capital requirement of the unit
î€To bring out the level of inventory and to analyse the receivables, payables and
cash management of the company
His findings were
î€Firm ability have been was increasing every year in order to meet the short term
liabilities.
î€More sales has been done on credit basis
î€Bank balance is sufficient to tackle unexpected problem.
î€Current ratio satisfactory level is 2:1. It is significantly achieved by the company.
Miss. Mohanapriya, M.B.A, in her research on "Working capital management of
Tanjore co-operative milk supply society Ltd." Which is the partial fulfillment of the requirements for the award of her degree submitted to Bharathidasan University, in the year November - 2003. Outlined the following objectives and findings.
Her Objectives were:
î€Know the project of Co-operative milk supply society.
î€Analysis the short term liquidity position of the study unit during the period 96-97
to 2000-01.
î€Analysis and evaluate working capital management.
Her Findings were:
î€The size of current assets has increased during the study period.
î€During the study period the working capital turnover ratio were 210.51;
î€194.60; 45.44 and 11.86 times respectively the higher ratios in the 2 year 1997-98
and 98-99 indicates sufficient amount of working capital and effective utilizations
of working capital.
î€The cash turnover ratio is to be increasing times.
Miss. Abiramisundhari, in her research on "Working capital management of
TSRM Limited Trichy". Which is the partial fulfillment of the requirements for the award of her M.Com degree submitted to Bharathidasan University, in the year November - 2003. Outlined the following objectives and findings.
Her Objectives were:
î€To study the importance of W/c management for a concern.
î€To assess the proportion of the components of W/c of TSRM Ltd, Trichy.
î€To suggest measures to increases the efficiency of W/c management of TSRM
Ltd, Trichy.
Her Findings were:
î€The company has been taken for sufficient care for the maintenance of adequate
accounting period.
î€The proportion of net W/c to total assets showed on increasing trend through
out the five years.
î€The over all performance of receivables management showed a satisfactory
position throughout the past 5 years.
Mr. Kamaraj, M, Phil, in his research on "Working capital management of Dalmia
Cement Limited Trichy". Which is the partial fulfillment of the requirements for the award of her degree submitted to Bharathidasan University, in the year November - 2003. Outlined the following objectives and findings.
His Objectives were:
î€To know the Financial Performance of Dalmia Cement.
î€To examine the practice follow into Management of cash.
î€To know the techniques of Inventory Management in D.C.B.C.
His Findings were:
î€Raw Material Consumption over the study period in terms of quantity and value has
showed an incise trend.
î€Operating ratio is considered to be yardstick of operating efficiently of the concern.
î€The concern has show dormant and fast moving inventories during the 5 years a
study period.
î€Performance of the co should be judged on the basis of return on equity capital. It
is satisfactory positive
CHAPTER -III
3.1 OBJECTIVES
1. Evaluate the working capital of the company during the period of study.
2. Analysis of working capital with various tools.
3. Analysis of various components of working capital.
4. To study the adequacy of working capital and suggest improvement to overcome
deficiency if any.
It is purely and simply the framework or a plans for the study that guides the collection and analysis of data. Research is the scientific way to solve the problem and it's increasingly used to improve market potential. This involves exploring the possible methods, one by one, and arriving at the best solution, considering the resources at the disposal of research. The main scope of the study is to evaluate, analyze and understand the current assets management and to know the influence of the components of working capital on sales.
Net working capital
The difference between current assets and current liabilities is called the net working capital. Current liabilities are the one which is claimed from the outsiders and are expected to be returned within an accounting year. It includes creditors, bills payable, and out siding expenses. Net working capital may be positive or negative. A net working capital becomes positive only when the current assets exceed current liabilities. A negative net working capital occurs when current liabilities exceed current assets.
Concepts of Working Capital :
The two concepts of working capital are
1. Gross working capital
It refers to the investment made by the company in current assets. Current assets are the assets which can be converted into cash with an accounting year or operating cycle. It also includes cash, short-term securities, debtors, bills receivable and stock.
2. Net working capital
The difference between current assets and current is called the net working capital. Current liabilities are the one which is claimed from the outsiders and are expected to be returned within an accounting year. It includes creditors, bills payable, and out siding expenses.
Net working capital may be positive or negative. A net working capital becomes positive only when the current assets exceed current liabilities. A negative net working capital occurs when current liabilities exceed current assets.
2.3 TWO DANGEROUS POINTS OF CURRENT ASSETS
2.3.1 Danger of inadequate working capital
1. Inadequate working capital will lead to a condition, in which one cannot pay its short-term liabilities in time. So there arises a situation where there is a loss of reputation and tight credit terms.
2. The organization's requirements cannot be fulfilled in bulk; hence it cannot take
the advantage of cash discounts.
3. Difficulties will arise in meeting the day-to-day expenses. This will lead to
inefficiency and increase in costs with the minimum profits.
4. Lack of working capital will lead to less favorable marketing conditions and less
profitable projects.
5. Due to scarcity of working capital, fixed assets are not properly utilized. Thus
this results in the fall of investments return.
2.3.2 Danger of Excessive Working Capital
1. Excessive working capital will lead to low investments in fixed assets. Hence there will be no profits for the business and there can be no proper rote of return on its investments.
2. The low rate of return on investment will lead to the fall in the value of shares.
3. Excessive working capital will lead to unnecessary purchasing and excessive
amount of inventories. As a result, there are chances of theft and loses.
4. Excessive debtors and defective credit policy are the indication of excessive
working capital. There may be delay in collection and increased incidence of bad debts.
5. Excessive working capital will make the management complacent. This will lead
to overall inefficiency in the organization.
2.4 NEED FOR WORKING CAPITAL MANAGEMENT
Beyond the limit, both the current assets i.e., inadequate working capital and excessive working capital are dangerous. Beyond the limitations of both the level, the common goal of the organization cannot be achieved.
Working capital Management provides effective and efficient decision to allocate
the current assets.
2.5 TYPES OF WORKING CAPITAL
The two types of working capital are,
1. Permanent working capital.
2. Temporary working capital.
2.5.1 Permanent Working Capital
As the operating cycle is a continuous process, the need for current assets is felt constantly. The Magnitude of the current assets need not to be the same. It may increase or decrease over the time.
However, there is a minimum level of current assets which are continuously required by the firm to continue its business operations. This minimum level of the current assets is known as permanent or fixed working capital. However the permanent working capital line needs not to be horizontal.
2.5.2 Temporary working capital
On the other hand, when there is a slack period in the market, the investment made
on the inventories and account receivable will be low.
The change of the extra working capital used to support the production and sales, is
known as fluctuating or variable or temporary working capitals.
When the company has a peak period of sales, it will have large amount of inventories, when compared to their normal sales. This makes the costumers to invest money for credit sales.
2.6 RATIO ANALYSIS
Ratio analysis, simply defined, refers to the analysis and interpretation of financial statements through ratios. Now a day it is used by all the business and industrial concerns in their financial analysis.
2.7 RATIO
The term ratio simply means one number expressed in terms of another. It describes
in mathematical terms the quantitative relationship that exists between two numbers.
2.8 TYPES OF RATIOS
1. CURRENT RATIO
It is relationship between firm's current assets and current liability.
Current assets
Current ratio =_______________________________
Current liability
2. QUICK RATIO
It is relationship between liquid assets and current liabilities.
Liquid assets
Quick ratio =_________________________
Current liabilities
3. CASH RATIO
It is relationship between cash and current liabilities.
Cash
Cash ratio = _______________________
Current liabilities
4. DEBTOR'S TURNOVER RATIO
It indicates the number time debtors turned over each year. Generally the higher value of debtor's turnover shows high efficiency to manage the credit management.
Total sales
Debtors turnover ratio =______________________________
Debtors
5. DEBT COLLECTION PERIOD
It indicates the speed with which debts are collected.
Days/months in a year
Debt collection period =_______________________________
Debtor's turnover ratio
6. CREDITORS TURNOVER RATIO
The ratio shows on an average the number of times creditors turned over
during the year.
Credit purchase
Creditors turnover ratio = ________________________
Average creditors
7. DEBT PAYMENT PERIOD
Creditor's turnover ratio indicates the number of days taken by the firm, to
pay the debtors to creditors.
Days/months in a year
Debt payment period =_______________________________
Creditor's turnover ratio
8. INVENTORY TURNOVER RATIO
It indicates the inventories turning into receivables through sales.
Sales
Inventory turnover ratio =__________________________
Inventory
9. INVENTORY HOLDING PERIOD
It indicates duration of holding inventories in stores.
Days/months in a year
Inventory holding ratio =______________________________
Inventory turnover ratio
10. WORKING CAPITAL TURNOVER RATIO
This ratio explains the relationship between sales and working capital.
Net sales
Working capital turnover ratio =______________________________
Net working capital
CASH TURNOVER RATIO
It is the relationship between sales and cash.
Cash turnover ratio = Sales
___________________
Cash balance
2.9 ARTICLES
To make one's project effective, it is better to go through the projects done by others earlier. This gives a complete idea about one's project. It also helps to correct the mistakes done in the earlier projects. Summing up, it improves one's project.
So with this idea, let us see some of the projects done by others earlier.
Mr. J. Maria peter Ignatius., MBA., of Bharathidasan University did a project
with the title "Working Capital Management in Bharath Heavy Electricals Limited, Tiruchirrappalli". He did this project in the month of June 2004, using the data from 1998 to 2003.
The objectives of his study were
î€To analyse the requirement of funds for the routine activities of business.
To study on the source of fund generated and their methods of utilization. To know the amount of funds allotted in the current assets and to forecast the working capital trend. To study cash receivables position of the organization.
Sampling design :
The present study selected on Government undertaking and private power sector companies As the study follows Cluster Sampling Method, proper attention is made to include a minimum of one company from each cluster in the sample. A selection of 50 employees is made on a simple random basis at the rate of 10 from each company.
Tools of Analysis :
The conceptual framework employed in the empirical analysis of this research study largely rests on the earlier research work in this realm and documented through various studies on earnings and working capital management of power sectors in India from time to time. As employed by most studies by ratio Analysis ( current ratio, cash ratio, quick / acid test ratio, debtors collection period ratio, creditors payment ratio) and trend ratios in NTPC one of the power sector companies in Incredible India , In order to analyze the problem researcher used current years trend positions and current ratio calculation where there is no significant, cash ratio trend there is no much changes occurred quick ratio position is variable where company can avoid future liquidity position , debtors collection period Debtors constitute an important constitute of current assets and therefore the quality of debtors to a great extent determines firm's liquidity .The higher the ratio, the better it is, since it would indicate that debts are being collected promptly, in 2007-08. In the year 2008-2009 the debt is satisfactory to the previous year came down. Creditors collection period turnover is satisfactory. Working capital turnover ratio for the year 2007-2009 was 2.23 times. It is higher when comparing the past four years. The working capital management has to improve by more concentration on collection strategies.
Findings :
In all the years the value of the quick ratio is higher than the ideal value; it indicates firm's ability to pay the immediate obligations. Cash ratio clearly indicates firm's debt borrowing power from financial institutions and other sources. The firm's debt collection period have more than 150 days. Firm increased the debt collection period year by year. It shows firm's liberal debt collection policy. Working capital turnover ratio was decreased in year by year. It clearly shows firm reduced to use net working capital for sales
The company has been taken for sufficient care for the maintenance of adequate accounting period. The proportion of net working capital to total assets showed on increasing trend through out the five years. The over all performance of receivables management showed a satisfactory position throughout the years.
Suggestion & Recommendations :
Apart from present technique of age wise analysis, reason wise analysis to be done periodically and suitable actions to be taken by the organization. While collecting dues from customer collecting focus on customer irrespective of production unit, division and products to be followed. Automatic storage and retrieval system (ASRS) presently implementing in components stores of Power Sector Companies In India, may also be introduce in others stores or units. Periodic review on non moving and slow moving items of inventory must be done by the organization. All suppliers are to be educated on the requirement of various documents so that delay in processing of bills and payment may be reduced/avoided by the organization. Debt collection policy is also very liberal. To avoid bad debts and to increase effective sales. Through the current assets a level is satisfactory. They excess of the fund can be invested in other productive applications.
Conclusion :
The overall working capital management of NTPC is effective and satisfactory. However, effective steps may be taken to reduce sundry creditors and inventory by using latest tools and techniques. the most care has been taken to analyze the working capital position of the NTPC, Apart from that growth and financial soundness of the studying unit have also been made.
