chinna final

8/7/2019 Chinna Final

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A STUDY ON WORKING CAPITAL MANAGEMENT

AT VELACHERY BRANCH,

CHENNAI.

SUMMER PROJECT REPORT

Submitted by

CHINNACHAMY.D

(Reg No: 30709631008)

Under the guidance of

Mrs.G.SRIVIDYA, B.E., M.B.A

Faculty Member, Department Of Management Studies

in partial fulfillment for the award of the degree

of

MASTER OF BUSINESS ADMINISTRATION

in

DEPARTMENT OF MANAGEMENT STUDIES

JERUSALEM COLLEGE OF ENGINEERING

NAARAYANAPURAM, PALLIKARANAI,

CHENNAI-600100

ANNA UNIVERSITY

CHENNAI-25

JULY-2010


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NE EL L NITE TION LIMITE

(A Mini Ratna Govt of India Enterprise)

P.O NEYVELI -607801, Cuddalore District, Tamil Nadu

CE TIFICATE

This is certify that the summer project report entitled A ST ON T AINING

AND DE ELOPMENT IN NE ELI LIGNITE CORPORATION , NE ELI is a

bonafide work done by A.KRISHNA KUMAR(Roll No-30709631017) in partial fulfillment

of the requirement for the award of the degree of MASTER OF BUSINESS

ADMINISTRATION through Department ofManagement Studies, Jerusalem College Of

Engineering , Narayanapuram, Pallikaranai, Chennai-600100.

The project work done under my guidance during the period between 28-06-2010 to

08-08-2010 for a period of six week.

DATE : EXTERNAL GUIDE

PLACE


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DECLARATION

I, D.CHINNACHAMY, a bonafide student of Department ofManagement studies of

JERUSALEM COLLEGE OF ENGINEERING, Chennai-100, declare that the project

titled A STUDY ON WORKING CAPITAL MANAGEMENT AT INDIAN

OVERSEAS BANK, VELACHERY BRANCH, CHENNAI submitted for the partial

fulfillment forthe award ofMBA degree from Anna university is my original work, and itis

not submitted to any other university.

Dat Si natu


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ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me

during the project.

My deep sense of gratitude to the management of Jerusalem College of Engineering

for giving me an opportunity to undergo M.B.A degree course thereby to undertake this

project work

I express my thanks to the Principal Dr.G.SAMBANDAN, B.E., M.T ch.,

Ph.D(IIT-D), for extending his support.

I wish to express my deep sense of obligation to our most revered Head of the

department, Dr.V.DHAMODHARAN, M.B.A., Ph.D, for enlightening and helping me on

the major aspects ofthe project.

My deepest thanks to Lecturer, Mrs.G.SRIVIDYA, B.E., M.B.A., the project

coordinator of the project for guiding and adding valuable insights for the project of mine

with attention and care. I also wish to thank my project guide Mrs.G.SRIVIDYA, B.E.,

M.B.A., He has taken pain to go through the project and guide me as and when needed.

I convey my heartiest thanks to Mr.RAJARAM, INDIAN OVERSEAS BANK,

VELACHERY BRANCH, CHENNAI, who kindly granted permission to do this project

reportin his esteemed organization.

I also extend my heartfelt thanks to my family and well wishers, who helped me

directly orindirectly to successfully complete this project.


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ABSTRACT

This project entitled WORKING CAPITAL MANAGENENT at

INDIAN OVERSEAS BANK, VELACHERY BRANCH, CHENNAI is intended to

determine whetherthe business working capital.

The rapid growth of multinational corporations has hastened the need for the

development of powerful models to reflectthe new complexities imposed by the international

interface. Working capital management is complex in the uninational setting where the firm

must weigh the trade-offs between the liquidity and profitability of its current assets in the

face of uncertainty. Significant additional dimensionality is added to the problem when

foreign exchange rates, foreign tax methodologies, new sources of funds from foreign money

markets, and new multi-faceted social, economic, and political factors are superimposed on

the framework. This paper develops a simulation modelto assistthe multinational firm in the

management of working capital for all ofits subsidiaries considering their needs, world-wide

short-term opportunities, and global sources of short-term funds.

The simulation methodology is used in conjunction with a linear

programming model which determines the optimal sources and uses of short-term funds for

each subsidiary given the values that have been generated for each exogenous variable in the

system. The overall model capitalizes on the strengths of both simulation and the linear

programming optimization model and thus, yields a flexible but robust approach to this

difficult problem setting


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TABLE OF CONTENTS

CHAPTERTITLE

PAGE

NO

I

1.INTRODUCTION

1.1.INTRODUCTION TO INDUSTRY

1.2.INTRODUCTION TO

ORGANIZATION1.3.INTRODUCTION TO THE STUDY

II REVIEW OF LITERATURE

III RESEARCH METHODOLOGY

IVDATA ANALYSIS AND

INTERPRETATION

V SUGGESTIONS AND

RECOMMEDATIONS

VI CONCLUSION

ANNEXURES &BIBILOGRAPHY


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LIST OF TABLES

TABLE

NO.NAME OF THETABLES

PAGE

NO.

4.1STATEMENT OF WORKING CAPITAL

4.2CURRENT RATIO

4.3

ACID-TEST OR QUICK RATIO

4.4DEBTORS TURNOVER RATIO

4.5CREDITORS TURNOVER RATIO

4.6CREDITORS PAYMENT PERIOD


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CHSPTER-I

1.INTRODUCTION

1.1. INDUSTRY PROFILE

ABOUTBANKING INDUSTRY

In any country banks are the major contributors fortheir economic development.

They function as the chiefinstitution for granting ofloans and advances in orderto keep the

wheels ofthe progress moving, since they occupy a key role in the financial sector, they need

to be regulated and controlled by a proper authority that is why, every country will have a

Central bank of its own which act as the bankers bank. The Reserve Bank of India acts a

centralized body monitoring any discrepancies and shortcoming in the system. The word

bankis derived from a Greek word Bankus which means table, where money was placed in

ancient days.

The Indian banking can be broadly categorized into nationalized (government

owned), private banks and specialized banking institutions. Since the nationalization of banks

in 1969, the public sector banks orthe nationalized banks have acquired a place of rominence

and has since then seen tremendous progress.

The need to become highly customer focused has forced the slow-moving public

sector banks to adopt a fasttrack approach. The unleashing of products and services through

the net has galvanized players at all levels of the banking and financial institutions market

grid to look anew attheir existing portfolio offering. Conservative banking practices allowed

Indian banks to be insulated partially from the Asian currency crisis.

Indian banks are now quoting at higher valuation when compared to banks in

other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems


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linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are

nimble footed in approach and armed with efficient branch networks focus primarily on the

high revenue niche retail segments.

The Indian banking has finally worked up to the competitive dynamics of the

new Indian market and is addressing the relevant issues to take on the multifarious

challenges of globalization. Banks that employ IT solutions are perceived to be futuristic

and proactive players capable of meeting the multifarious requirements of the large

customers base. Private Banks have been fast on the uptake and are reorienting their

strategies using the internet as a medium The Internet has emerged as the new and

challenging frontier of marketing with the conventional physical world tenets being just as

applicable like in any other marketing medium.

The Indian banking has come from a long way from being a sleepy business

institution to a highly proactive and dynamic entity. This transformation has been largely

brought about by the large dose ofliberalization and economic reforms that allowed banks to

explore new business opportunities rather than generating revenues from conventional

streams (i.e. Borrowing and lending).

The banking system in India is highly fragmented with 30 banking units

contributing to almost 50% of deposits and 60% of advances. Indian nationalized banks

(banks owned by the government) continue to be the major lenders in the economy due to

their sheer size and penetrative networks which assures them high deposit mobilization.

The Reserve Bank of India acts as a centralized body monitoring any discrepancies and

shortcoming in the system. Itis the foremost monitoring body in the Indian financial sector.

The nationalized banks (i.e. government-owned banks) continue to dominate the Indian

banking arena. Industry estimates indicate that out of 274 commercial banks operating in

India, 223 banks are in the public sector and 51 are in the private sector. The private sector

bank grid also includes 24 foreign banks that have started their operations here. Under the


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ambit of the nationalized banks come the specialized banking institutions. These co-

operatives, rural banks focus on areas of agriculture, rural development etc.,

Nature ofindustry

Banks safeguard money and valuables and provide loans, credit, and payment

services, such as checking accounts, money orders, and cashiered checks. Banks also may

offerinvestment and insurance products, which they were once prohibited from selling. As a

variety of models for cooperation and integration among finance industries have emerged,

some ofthe traditional distinctions between banks, insurance companies, and securities firms

have diminished. In spite ofthese changes, banks continue to maintain and perform their

primary roleaccepting deposits and lending funds from these deposits.

There are several types of banks, which differ in the number of services they

provide and the clientele they serve. Although some ofthe differences between these types of

banks have lessened as they begin to expand the range of products and services they offer,

there are still key distinguishing traits. Commercial bank, which dominate this industry, offer

a full range of services for individuals, businesses, and governments. These banks come in a

wide range of sizes, from large global banks to regional and community banks. Global banks

are involved in international lending and foreign currency trading, in addition to the more

typical banking services. Regional banks have numerous branches and automated teller

machine (ATM) locations throughout a multi-state area that provide banking services to

individuals. Banks have become more oriented toward marketing and sales. As a result,

employees need to know about all types of products and services offered by banks.

Community banks are based locally and offer more personal attention, which many

individuals and small businesses prefer. In recent years, online bankswhich provide all

services entirely over the Internethave entered the market, with some success. However,

many traditional banks have also expanded to offer online banking, and some formerly

Internet-only banks are opting to open branches.


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Savings banks and savings and loan associations, sometimes called thrift

institutions, are the second largest group of depository institutions. They were first

established as community-based institutions to finance mortgages for people to buy homesand still cater mostly to the savings and lending needs of individuals.Credit unions are

another kind of depository institution. Most credit unions are formed by people with a

common bond, such as those who work for the same company or belong to the same labor

union or church. Members pooltheir savings and, when they need money, they may borrow

from the credit union, often at a lower interest rate than that demanded by other financial

institutions.

Federal Reserve banks are Government agencies that perform many financial

services forthe Government. Their chief responsibilities are to regulate the banking industry

and to help implement our Nations monetary policy so our economy can run more

efficiently by controlling the Nations money supplythe total quantity of money in the

country, including cash and bank deposits. For example, during slower periods of economic

activity, the Federal Reserve may purchase government securities from commercial banks,

giving them more money to lend, thus expanding the economy. Federal Reserve banks also

perform a variety of services for other banks. For example, they may make emergency loans

to banks that are short of cash, and clear checks that are drawn and paid out by different

banks.

Interest on loans is the principal source of revenue for most banks, making their

various lending departments critical to their success. The commercial lending department

loans money to companies to start or expand a business or to purchase inventory and capital

equipment. The consumer lending department handles student loans, credit cards, and loans

for home improvements, debt consolidation, and automobile purchases. Finally, the mortgage

lending departmentloans money to individuals and businesses to purchase real estate.

The money to lend comes primarily from deposits in checking and savings

accounts, certificates of deposit, money market accounts, and other deposit accounts that

consumers and businesses set up with the bank. These deposits often earn interest for the


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owner, and accounts that offer checking provides an easy method for making payments safely

without using cash. Deposits in many banks are insured by the Federal Deposit Insurance

Corporation, which ensures that depositors will gettheir money back, up to a stated limit, if abank should fail.

Technology is having a major impact on the banking industry. For example,

many routine bank services that once required a teller, such as making a withdrawal or

deposit, are now available through atms that allow people to access their accounts 24 hours a

day. Also, direct deposit allows companies and governments to electronically transfer

payments into various accounts. Further, debit cards, which may also used as ATM cards,

instantaneously deduct money from an account when the card is swiped across a machine at a

stores cash register. Electronic banking by phone or computer allows customers to pay

bills and transfer money from one account to another. Through these channels, bank

customers can also access information such as account balances and statement history. Some

banks have begun offering online account aggregation, which makes available in one place

detailed and up-to date information on a customers accounts held atvarious institutions.

Advancements in technology have also led to improvements in the ways in

which banks process information. Use of check imaging, which allows banks to store

photographed checks on the computer, is one such example that has been implemented by

some banks. Other types of technology have greatly impacted the lending side of banking.

For example, the availability and growing use of credit scoring software allows loans to be

approved in minutes, rather than days, making lending departments more efficient.Other

fundamental changes are occurring in the industry as banks diversify their services to become

more competitive. Many banks now offer their customers financial planning and asset

management services, as well as brokerage and insurance services, often through a subsidiary

or third party. Others are beginning to provide investment banking services that help

companies and governments raise money through the issuance of stocks and bonds, also

usually through a subsidiary. As banks respond to deregulation and as competition in this

sector grows, the nature ofthe banking industry will continue to undergo significant change.


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1.2. Companyprofile

Profile of Indian Overseas Bank

Indian Overseas Bank(IOB) was founded on February 10, 1937 by Shri.M.Ct.M.

Chidambaram Chettyar. IOB had the unique distinction of commencing business on the

inaugural day itselfin three branches simultaneously - at Karaikudi and Chennaiin India and

Rangoon in Burma (presently Myanmar) followed by a branch in Penang.

Indian Overseas Bank was the first Bank to venture into consumer credit. It

introduced the popular Personal Loan scheme. In 1964, the Bank made a beginning in

computerization in the areas ofinter-branch reconciliation and provident fund accounts. IOB

was one ofthe 14 major banks that were nationalized in 1969. On the eve of Nationalization

in 1969, IOB had 195 branches in India with aggregate deposits of Rs 67.70 crores and

Advances of Rs 44.90 crores. In 1977, IOB opened its branch in Seoul and the Bank opened a

Foreign Currency Banking Unitin the free trade zone in Colombo in 1979.

As of March 2003, IOB had 1427 branches in India and 6 branches overseas.

Besides the Bank has a network of over 240 atms and 243 Extension Counters. IOB has

specialized branches to cater to the exclusive needs of Commercial & Industrial credit,

Industrial finance, Small Scale industries, hi-tech agriculture and foreign exchange.

Head office

763, anna salai,Chennai - 600002.


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Company back round

One ofthe few public sector banks that have shown remarkable turnaround in asset

quality, Indian Overseas Bank (IOB) shows very healthy growth prospects. The bank was

established in 1937 with the twin objective of specializing in foreign exchange and overseas

banking. The bank has been performing well until it was hit with the menace of NPA

problems, which have been safely negotiated. The bank operates through a network of 1,457

branches and 165 atms. The bank is not a big player in the retail market and has recently

moved into stepping up the retail lending process. The bank is authorized to collect

Government revenue, which helps it garner fee income.

Business

IOB has been showing impressive in its business (credit + deposits). The home loan

outstanding amountincreased 60% on yoy basis for 2004. The bank is one ofthe few banks

meeting the priority as well as the agriculturallending target.

History

y 1937: Shri.M.Ct.M. Chidambaram Chettyar establishes the Indian Overseas Bank(IOB) to encourage overseas banking and foreign exchange operations. IOB started up

simultaneously at three branches, one each in Karaikudi, Madras (Chennai) and

Rangoon (Yangon). It then quickly opened a branch in Penang and another in

Singapore. The bank served the Nattukottai Chettiars, who were a mercantile class

that atthe time had spread from Chettinad in Tamil Nadu state to Ceylon (Sri Lanka),Burma (Myanmar), Malaya, Singapore, Java, Sumatra, and Saigon. As a result, from

the beginning IOB specialized in foreign exchange and overseas banking (see below).


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y 1960s: The banking sectorin India was consolidating by the merger of weak privatesector banks with the stronger ones; IOB absorbed five banks, including Kulitali Bank

(est. 1933).

y 1969: The Government of India nationalized IOB. At one point, probably beforenationalization, IOB had twenty of its eighty branches located overseas. After

nationalization it, like all the nationalized banks, turned inward, emphasizing the

opening of branches in rural India.

y 1988-89: IOB acquired Bank of Tamil Nadu in a rescue.

y 2000: IOB engaged in an initial public offering (IPO) that brought the government'sshare in the bank's equity down to 75%.

International expansion

y 1937-38: As mentioned above, IOB was international from its inception with branchesin Rangoon, Penang, and Singapore.

y 1941: IOB opened a branch in Malaya that presumably closed almost immediatelybecause ofthe war.

y 1946: IOB opened a branch in Ceylon.y 1947: IOB opened a branch in Bangkok and re-opened others.

y 1948: United Commercial Bank (see below) opened a branch in Malaya.y 1949: IOB opened a branch in Bangkok.


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y 1963: The Burmese government nationalized IOBs branch in Rangoon.

y 1973: IOB, Indian Bank and United Commercial Bank established United Asian Banky Berhad in Malaysia. (Indian Bank had been operating in Malaysia since 1941 and

United Commercial Bank Limited had been operating there since 1948.) The banks

set up United Asian to comply with the Banking Law in Malaysia, which prohibited

foreign government banks from operating in the country. Also, IOB and six Indian

private banks established Bharat Overseas Bank as a Chennai-based private bank to

take over IOB's Bangkok branch.

y 1977: IOB opened a branch in Seoul.y 1979: IOB opened a Foreign Currency Banking Unitin Colombo, Sri Lanka.

y 1992: Bank of Commerce (BOC), a Malaysian bank, acquired United Asian Bank(UAB).

y 1999: Bank of Commerce (BOC) merged with Bank Bumiputras Malaysia to formy Bumiputra-Commerce Bank (BCB) Berhad.

y 2005: BCB integrates with CIMB which the company is own by the Datuk Seri NazirRazak who is the youngest son of Malaysia's second (former) Prime Minister Tun

Abdul Razak from 1970 - 1976 and youngest brother oftoday's (2005) deputy prime

minister Dato Seri Najib Tun Razak.

y 2007: IOB takes over Bharat Overseas Bank.


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Objective of IOB

The Policy and Operations Evaluation Department (IOB) meets the need for

independent evaluation of policy and operations in all policy fields falling under the

Homogenous Budget for International Cooperation (HGIS). Its evaluations enable the

ministers to accountto parliament for policy and the allocation of resources. In addition, the

evaluations aim to derive lessons forthe future. Efforts are accordingly made to incorporate

the findings of evaluations into the Ministry of Foreign Affairs' knowledge cycle. Evaluation

reports are used to provide targeted feedback, with a view to improving both policy and

implementation. They enable policymakers to devise measures that are more effective and

focused. The IOB also advises on the planning and implementation of non-central evaluations

of policy departments and embassies.

Approachandmethodology

IOB has a staff of experienced evaluators and its own budget. When carrying

out evaluations, it calls on the assistance of external experts with specialized knowledge of

the topic underinvestigation. To monitorits own quality, it sets up a reference group for each

evaluation, which includes not only external experts but also interested parties from within

the Ministry.

Programme

IOB has a rolling multi-year program me which is updated every two years.

This program me is devised using an internal selection process based on an assessment ofthe

political, social, policy-related and financialimplications of all possible themes, as well as ona number of broad consultations within the various parts ofthe Ministry. Once adopted, the

program me is submitted to parliament by the Minister of Foreign Affairs and the Minister

for Development Cooperation.


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An organizationindevelopment

Since IOB's establishment in 1977, major shifts have taken place in its

approach, areas of focus and responsibilities. In its early years, its activities tookthe form of

separate project evaluations for the Minister for Development Cooperation. Around 1985,

evaluations became more comprehensive, taking in sectors, themes and countries. Moreover,

IOB's reports were submitted to parliament, thus becoming public. 1996 saw a review of

foreign policy and a reorganization of the Ministry of Foreign Affairs. As a result, IOBs

mandate was extended to the Dutch government's entire foreign policy, in which

development cooperation occupies an important place. In recent years, it has also sought to

extend its partnerships with similar departments in other countries, forinstance through joint

evaluations. Finally, IOB also aims to expand its methodological repertoire. A recent

example is the application of statistical methods ofimpact evaluation.

IOB's history shows considerable changes in the approach and methodology

of its evaluations. However, its strict independence has remained constant. This, combined

with its thorough approach and professional evaluations, ultimately forms the rationale for

IOB's existence.

IOBprofitup

Indian Overseas Bank's net profit for the third quarter ended December 31,

2002 has increased to Rs. 116.95 crores from Rs. 45.57 crores. The net profit for the nine

months ended December 31, 2002 was higher at Rs. 277.88 crores against Rs. 167.23 crores.

This profit has been arrived at after providing VRS related expenditure. The global operating

profit for the third quarter was Rs. 236.70 crores against Rs. 131.21 crores. For the ninemonths ended December 31, 2002, the operating profit was Rs. 596.47 crores against Rs.

322.70 crores. As at December 31, 2002 global deposits grew by over Rs. 12,590 crores over

the March 1999 level. Global net advances expanded from Rs. 10,117 crores in 1999 to Rs.


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16,960 crores in December 2002. The bank's total business as of December 31, 2002 was Rs.

51,463.66 crores.

1.3.Introduction ofthe study

Introduction of working capital

The net working capital of business is its current assets less its current

liabilities.

Current Assets include:

Stock of Raw Material

Workin Progress

Finished goods

Trade debtors

Prepayments

Cash balances

CurrentLiabilities include:

Trade creditors

Accruals


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Taxation payable

Dividends payable

Shortterm Loans

Every business needs adequate liquid resources in orderto maintain day to day cash flows. It

needs enough cash to by wages and salaries as they fall due and to pay creditors. If it is to

keep its workforce and ensure its supplies. Maintaining adequate working capital; is not just

importantin the shortterm.

Sufficientliquidity must be maintained in orderto ensure the survival of business

in the long term as well. Even a profitable business may failifit does not have adequate cash

flows to meet its liabilities as they fall a due. Therefore when business make investment

decisions they must not only consider the financial outlay involved with acquiring the new

machine or the new building etc, but must also take account ofthe additional current assets

that are usually involved with any expansion of activity . Increase production tends to

engender a need to hold additional stocks of raw material & workin progress. Increased sales

usually mean thatthe level of debtor willincrease. A generalincrease in the firms scales of

operation tends to imply a need for greaterlevel of cash.

Working capitalmanagement

In a perfect world, there would be no necessity for current assets and liabilities

because there would be no uncertainty, no transaction costs, information search costs,

scheduling costs, or production and technology constraints. The unit cost of production would

not vary with the quantity produced. Borrowing and lending rates shall be same. Capital,

labour, and product market shall be perfectly competitive and would reflect all available


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information, thus in such an environment, there would be no advantage forinvesting in short

term assets.

Howeverthe world we live is not perfect. It is characterized by considerable amount

of uncertainty regarding the demand, market price, quality and availability of own products

and those of suppliers. There are transaction costs for purchasing or selling goods or

securities. Information is costly to obtain and is not equally distributed. There are spreads

between the borrowings and lending rates for investments and financings of equal risks.

Similarly each organization is faced with its own limits on the production capacity and

technology it can employ there are fixed as well as variable costs associated with production

goods. In other words, the markets in which real firm operated are not perfectly competitive.

These real world circumstances introduce problems which require the necessity of

maintaining working capital. For example,, an organization may be faced with an uncertainty

regarding availability of sufficient quantity of crucial imputes in future at reasonable price.

This may necessitate the holding ofinventory., current assts. Similarly an organization my be

faced with an uncertainty regarding the level ofits future cash flows and insufficient amount

of cash may incur substantial costs. This may necessitate the holding of reserve of shortterm

marketable securities, again a shortterm capital asset. In corporate financial management, the

term Working capital management (net) represents the excess of current assets over current

liabilities.

Need for working capital

The prime objective of the company is to obtain maximum profit thought the

business. The amount of profit largely depends upon the magnitude of sales. However the

sale does not convert into cash instantaneously. There is always a time gap between sale of

goods and receipt of cash. The time gap between the sales and their actual realization in cash

is technically termed as operating cycle. Additional capital required to have uninterrupted

business operations, and the amount will be locked up in the current assets. Regular


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availability of adequate working capital is inevitable for sustained biasness oprations. If the

proper fund is not provided for the purpose, the business operations will be effected. And

hence this part of finance to be managed well.

Working capitalcycle.

Each component of working capital (namely inventory, receivables and payables) has

two dimensions time and money. When the comes to managing working capital time is

money. If you can get money to move fester around the cycle ( collect monies due from

debtors more quickly) or reduce the amount of money tied up ( ie., reduce inventory level

RECEIVABLE

SALES

OVERHEADS

Etc.

PAYABLES

INVENTORY

CASH

Equity & loan


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relative to sales). The business will generate more cash or it will need to borrow less money

to fund working capital. As a consequences, you could reduce the cost of bankinterest or you

will have additional freee4 money available to support addition sales growth or investment.Similarly, if you can negotiate improved terms with suppliers e.g. Get longer credit or an

increased creditlimit, you festively create freed finance to help fund future sales.

A perusal of operational cycle reveals thatthe cash invested in operations are recycled

backin to cash. Howeverittakes time to reconvertthe cash. Cash flows in cycle into around

and out of a business it the businesss lifeblood and every managers primary task to help

keep it flowing and to use the cash flow to generate profits. The shorter the period of

operating cycle. The larger will be the turnover ofthe funds invested in various purposes.

Determinants of working capital

Working capital requirements of a concern depends on a number of factors, each of which

should be considered carefully for determining the proper amount of working capital. It may

be however be added thatthese factors affect differently to the different units and these keeps

varying from time to time. In general, the determinants of working capital which re common

to all organizations can be summarized as under:

Nature of business

Need for working capital is highly depends on what type of business, the firm in.

There are trading firms, which needs to invest a lotin stocks, ills receivables, liquid cash etc.

Public utilities like railways, electricity, ete., need much less inventories and cash.

Manufacturing concerns stands in between these two extends. Working capital requirementfor manufacturing concerns depends on various factor like the products, technologies,

marketing policies.


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Productionpolicies

Production policies of the organization effects working capital requirements very

highly. Seasonal industries, which produces only in specific season requires more working

capital . Some industries which produces round the year but sale mainly done in some special

seasons are also need to keep more working capital.

Size of business

Size of business is another factorto determines the need for working capital

Length of operating cycle.Operating cycle of the firm also influence the working capital .

Longer the orating cycle, the higher will be the working capital requirement of the

organization.

Creditpolicy

Companies; follows liberal credit policy needs to keep more working capital

with them. Efficiency of debt collecting machinery is also relevant in this matter. Credit

availability form suppliers also effects the companys working capital requirements. Acompany doesnt enjoy a liberal credit from its suppliers will have to keep more working

capital

Business fluctuation

Cyclical changes in the economy also influancthe level of working capital. During

boom period, the tendency of management is to pile up inventories of raw materials and

finished goods to availthe advantage of rising proves. This creates demand for more capital.

Similarly. During depression when the prices and demand for manufactured goods.

Constantly reduce, the industrial and trading activities show a downward termed. Hence the

demand for working capitalis low.


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Currentassetpolicies.

The quantum of working capital of a company is significantly determined by its

current assets. Policies. A company with conservative assets policy may operate with

relatively high level of working capital than its sales volume. A company pursuing an

aggressive amount assets policy operates with a relatively lowerlevel of working capital.

Fluctuations of supplyand seasonal variations

Some companies need to keep large amount of working capital due to their irregular

sales and intermittent supply. Similarly companies using bulky materials also maintain large

reserves of raw material inventories. This increase the need of working capital . Some

companies manufacture and sell goods only during certain seasons. Working capital

requirements of such industries will be higher during certain season of such industries period.

Other factors

Effective co ordination between production and distribution can reduce the need for working

capital . Transportation and communication means. If developed helps to reduce the working

capital requirement/.

working capitalconcepts

There are two thoughts that re currently accepted about working capital. They are as follows,

Gross working capital concept Net working capital concept


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Gross working capitalconcept

This thought says thattotal investmentin current assets is the working capital ofthe

company. This concepts does not consider current liabilities at all. Reasons given for the

concept. When we consider fixed capital as the amount invested in fixed assets. Then the

amount invested in current assets should be considered as working capital.Current asset

whatever my be the sources of acquisition, are used in activities related to day to day

operations and their forms keep on changing. Therefore they should be considered as working

capital.

Net working capital

It is narrow concept of working capital and according to this, current assets minus

currentliabilities forms working capital. The excess of current assets over currentliabilities is

called as working capital. This concept lays emphasis on qualitative aspect. Which indicates

the liquidity position of the concern enterprise. The reasons for the net working capital

method are:

The materialthing in the long fun is the surplus of current assets over currentliability

Financial health can easily be judged by with this concept particularly from the view point of

creditors and investors.Excess of current assets over currentliabilities represents the amount

which is notliable to be returned and which can be relied upon to meet any contingency.

Inter company comparison of financial position may be correctly done particularly when both

the companies have the same amount of current assets.If the current assets are higher than

currentliability itis considered the financial position ofthe company is sound. If both current

assets and liabilities are equal , the company has resorted to shortterm funds for financing the

working capital and long term sources of funds have been used to finance the acquisition of

fixed assets. It doesnt not indicate the financial soundness for the company. If the current


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assets are lesser than current liabilities there is negative working capital which indicates

financial crisis.

Net working capital concept is more reasonable than the gross working capital

concepts. The balance seet of the company includes group of liabilities such as bank

overdraft, creditors, bills payables, outstanding expenses etc. If it is not deduct from current

assets , the concern may consider itself quite secured: while the reality is may be that the

concern has very little working capital or has no working capital . There fore itis reasonable

to define working capital as the excess of current assets over currentliabilities.

Characteristics of Working Capital

The features of working capital distinguishing it from the fixed capital

Are as follows:

Shortterm Needs

Working capitalis used to acquire current assets which get converted Into cash in ashort period. In this respectit differs from fixed capital which represents funds locked in long

term assets. The duration ofthe working capital depends on the length of production process,

the time that elapses in the sale and the waiting period ofthe cash receipt.

Circular movement

Working capitalis constantly converted into cash which again turns

Into working capital. This process of conversion goes on continuously. The cash is used to

purchase current assets and when the goods are produced and sold out; those current assets

are transformed into cash. Thus it moves in a circular away. That is why working capital is

also described as circulating capital.


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AnElement of Permanency

Though working capital is a short term capital, it is required always and forever. As stated

before, working capital is necessary to continue the productive activity of the enterprise.

Hence so long as production continues, the enterprise will constantly remain in need of

working capital. The working capital that is required permanently is called permanent or

regular working capital.

AnElement of Fluctuation

Working capital loans Though the requirement of working capital is felt

permanently, its requirement fluctuates more widely than that of fixed capital. The

requirement of working capitalvaries directly with the level of production. Itvaries with the

variation of the purchase and sale policy; price level and the level of demand also. The

portion of working capital that changes with Production, sale, price etc. Is called variable

working capital.

Liquidity

Working capital is more liquid than fixed capital. If need arises,Working capital

can be converted into cash within a short period and without much loss. A company in need

of cash can getitthrough the conversion ofits working capital by insisting on quick recovery

ofits bills receivable and by expediting sales of its product. Itis due to this trait of working

capitalthatthe companies with a larger amount of working capital feel more secure.


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Less risky

Funds invested in fixed assets get locked up for a long period of time and can not

be recovered easily. There is also a danger of fixed assets like machinery getting obsolete due

to technologicalinnovations. Hence investmentin fixed capitalis comparatively more risky.

As againstthis, Investmentin current assets is less risky as itis a shortterm investment.

Working capitalinvolves more of physical risk only, and thattoo is limited. Working capital

involves financial or economic risk to a much less extent because the variations of product

prices are less severe generally. Moreover, Working capital gets converted into cash again

and again; therefore, itis free from the risk arising out oftechnological changes.

Special Accounting Systemnotneeded

Working capitalloans Since fixed capitalis invested in long term assets, it becomes

necessary to adoptvarious systems of estimating depreciation. On the other hand working

capitalis invested in shortterm assets which last for one year only. Hence itis not necessary

to adopt special accounting system forthem.

Kinds of working capital

Working capital can be putin two categories:

Fixed or permanent working capital and

Fluctuating ortemporary working capital


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Fixed or permanent working capital

The volume of investment in current assets an change over a period of time. But

always there is minimum level of current assets that must be kept in orderto carry on the

business. This is the irreducible minimum amount needed for maintaining the operating

cycle. Itis the investmentin current assets. Which is permanently locked up in the business,

and therefore known as permanent working capital.

Variable/temporary working capital

It is the volume of working capital. Which is needed over and above the fixed

working capital in order to meet the unforced market changes and contingencies. In other

words any amount over and about the permanent level of working capital is variable or

fluctuating working capital . This type of working capitalis generally financed from shortter

souse of finance such as bank credit because this amount is not permanently required and is

usually paid back during off season or afterthe contingency.

Sources of working capital

The company can choose to finance its current assets by Long term sources,

Shortterm sources, a combination ofthem.

Long term sources of working capital

Long term sources of permanent working capitalinclude equity and preference

shares, retained earnings, debentures and other long term debts from public deposits and

financial institution. The long term working capital needs should meet through long term

means of financing. Financing through long term means provides stability, reduces risk or

payment. And increases liquidity ofthe business concern. Various types oflong term sources

of working capital are summarized as follows


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Issue of shares

It is the primary and most important sources of regular or permanent working

capital . Issuing equity shares as it does not create and burden on the income ofthe concern.

Nor the concern is obliged to refund capital should preferably raise permanent working

capital.

Retained earnings

Retain earning accumulated profits are a permanent sources of regular working

capital. Itis regular and cheapest. It creates not charge on future profits ofthe enterprises.

Issue ofdebentures

It crates a fixed charge on future earnings ofthe company. Company is obliged to

pay interest . Management should make wise choice in procuring funds by issue of

debentures.

Long termdebt

Company can raise fund from accepting public deposits, debts from financial

institution like banks, corporations etc. The costis higherthan the other financialtools.

Other sources sale ofidle fixed assets , securities received from employees and customers are

examples of other sources of finance.


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Shortterm sources oftemporary working capital

Temporary working capital is required to meet the day to day business

expenditures. The variable working capital would finance from shortterm sources of funds.

And only the period needed . It has the benefits of ,low cost and establishes closer

relationships with banker. Some sources oftemporary working capital are given below;

Commercial bank

A commercial bank constitutes a significant sources for shortterm or temporary

working capital . This will be in the form of shortterm loans, cash credit, and overdraft and

though discounting the bills of exchanges.

Publicdeposits

Most of the companies in recent years depends on this sources to meet their

shortterm working capital requirements ranging fro six month to three years.

Various credits

Trade credit, business credit papers and customer credit are other sources of

short term working capital. Credit from suppliers, advances from customers, bills of

exchanges, promissnotes, etc helps to raise temporary working capital

Reserves and other funds

Various funds of the company like depreciation fund. Provision for tax and

other provisions kept with the company can be used as temporary working capital. The

company should meetits working capital needs through both long term and shortterm funds.


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It will be appropriate to meet atleast 2/3 of the permanent working capital equipments form

long term sources, whereas the variables working capital should be financed from shortterm

sources. The working capital financing mix should be designed in such a way thatthe overallcost of working capital is the lowest, and the funds are available on time and for the period

they are really required.

Sources ofadditional working capital

Sources of additional working capitalinclude the following

Existing cash reserves Profits(when you secure it as cash) payables(credit from suppliers) new equity orloans from shareholder bank overdrafts line of credit long term loans

If you have insufficient working capital and try to increase sales, you can

easily over stretch the financial resources of the business. This is called overtrading. Early

warning signs include

pressure on existing cash exceptional cash generating activities. offering high discounts for clear cash payment bank overdraft exceeds authorized limit seeking greater overdrafts orlines of credit part paying suppliers orthere creditor. Management pre occupation with surviving ratherthan managing.


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Adequate working capital

As I stated bout keeping adequate working capital is the mantas towards the

success of financial management. The term adequate working capital refuters to the amount

of working capital to be kept with the organization to met its daily operations. Large

investment in fixed assets not sufficient to run a business successfully. Adequate working

capitalis equally important. Without working capita fixed assets are like a gun, which cannot

shoot, as there are no cartridges.

It is said that inadequate working capital is a disastrous: where as redundant

working capitalis a criminal waste. Itis clearthatthe company cantinvest allits funds in

current assets to increase working capital . At the same time it requires to keep sufficient

funds with it. So a proper leverage between both ends is needed to assure proper running of

the business . It needs to keep adequate working capital with it. Neitherless nor more than

needed.

Advantages ofadequate working capital

Adequate working capital provides certain benefits to the company they are:

Increase indebtcapacityand goodwill

Adequate working capital represents the financial soundness of the company. If

one company is financially sound it would be able to pay its creditors timely and properly. It

willincrease companies goodwill. It crests confidence among investors and creditors. Thus a

firm with adequate working capital can raise requisite funds from market , borrow shortterm

credit form banks, and purchases inventories of raw material etc., for the smooth operations

ofits busines


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Increase inproductioninefficiency

With adequate working capital the firm can smoothly carryout research and

development actives and thus adds to it production efficiency.

Exploitation of favorable opportunities

In the presence of adequate working capital , a company can availthe benefits of

favorable opportunities. Adequate working capital will help the company to have bulk

purchases, seasonal storage of raw material etc., which would reduce the cost of production,

thus adds to its profit.

Meeting contingencies adverse changes

A company can easily face certain business and economic crises a company having

adequate working capital can successfully meet contingencies such as business oscillations,

financial crisis arising from heavy losses etc.,

Available cashdiscount

Maintenance of adequate working capital enables a company to availthe advantage

of cash discount by making cash payment for to the suppliers of raw materials and

merchandise. Obviously it will reduce the cost of production and increase the profit of the

company.

Solvencyand efficiency fixedassets.

It helps to maintain the solvency ofthe company. So that payments could be made in

time as and when they fall due. Like wise, adequate working capital also increases the


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efficiency for fixed assets insofar as their proper maintenance depends upon the availability

of funds.

Attractive dividendto shareholders

It enables the company to offer attractive dividend to the shareholders so that sense

of security and confidence willincrease among them . It also increases the marketvalues of

its shares.

Dangers ofinadequate working capital

Having inadequate working capitalles to so many of dangers as it doesnt fulfillits

purpose. Some are given below:

Loss of goodwillandcreditworthiness

As the firm fails to on or its current liabilities it loses it goodwill and

creditworthiness among its creditors. Consequently, the firm finds it difficult to procure therequisite funds for its business operations on easy terms, which ultimately results in reduced

profitability as well as production interruption.

Firmcantmake use of favorable opportunities

The firm fails to undertake the profitable projects, which not only prevent the fir

from availing the benefits of favorable opportunities but also stagnate its growth.


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Adverse effects ofcredit opportunities

The firm also fails to avail the attractive credit opportunities but also stagnate its

growth

Operationalinefficiencies

In leads the company to operating inefficiencies, as day to day commitments cannot

be met.

Effects on financialcapacity

Inadequacy of working capital also weakness the shock absorbing capacity ofthe

firm because it cannot meet the contingencies arising form business oscillations, financial

losses, due to shortage of working capital.

Nonachievement ofprofittarget

The firm cannotimplement operational plans due to unavailability of fund. Which

willlead to non achievement of profit margin.

The concept ofzero working capital\

In todays world ofintense global competition , working capital management is

receiving increasing attention form managers striving for peak efficiency the goal of many

leading companies today, is zero working capital. Proponent of the zero working capital

concept claims that a movementtoward this goal not only generates cash but also speeds up

production and helps business make more timely deliveries and operate more efficiently. The

concept has its own definition of working capital : inventories+ receivables- payables. The


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rational here is (i) thatinventories and receivables are the keys to making sales , but (II) that

inventories can be financed by suppliers through account payables.

Companies use about 20% of working capital for each sales. So , on average,

working capital is turned over five times per year. Reducing working capital and thus

increasing turnover has two major financial benefits. First every money freed up by reducing

inventories or receivables, by increasing payables, results in a one time contribution to cash

flow. Second, a movement toward zero working capital permanently raises a companys

earnings.

The most important factor in moving toward zero working capital is increased

speed. If the production process is fast enough, companies can produce items as they are

ordered rather than having to forecast demand and build up large inventories that are

managed by bureaucracies. The best companies delivery requirements. This system is known

as demand flow or demand based management. And it builds on the just in time method of

inventory control.

Clearly it is not possible for most firm to achieve zero working capital and

infinitely efficient production. Still, a focus on minimizing receivables and inventories while

maximizing payables will help a firm lower its investment in working capital and achieve

financial and production economies.

Estimation of working capitalmanagement

As discussed above a number of factors are responsible for determining the amount

of working capital required by affirm . Let us know discuss the various methods/ technique

used in assessment of firms working capital requirements. These methods are.


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Estimation ofcomponents of working capitalmethod

This method is based on the basic definition of working capitalizes, excess of

current assets overthe currentliabilities . In other worked the amount of different constituent

of the working capital such as debtors, cash inventories , creditors etc are estimated

separately and the total amount of working capital requirementis worked out accordingly.

Percent sales method

This is the most simple and widely used method in combination with other scientific

methods. According to this methods a ratio is determined for estimating the future working

capital requirement . This is the generally based on the past experience of management as the

ratio varies from industry to industry. For example if the past experience shows that the

amount of working capital has been 20% of sales and projected amount of sales forthe next

yearis Rs 10 lakes, the required amount of working capital shall be Rs Two lakh.

As seen from above the above method is merely an estimation based on past

experience. Their fore a lot depends on the efficiency of decision maker, which may not becorrect in all circumstances. Moreover the basic assumptions regarding linear relationship

between sales and the working capital may not hold well in all the cases. Therefore this

method is not dependable ands not universally acceptable. At best, this method gives a rough

idea aboutthe working capital.

Operating cycle approach

The need of working capital arises mainly because of them gap between the

production of goods and their actual realization after sales. This gap is technically referred as

the operating cycle orthe cash cycle ofthe business. Ifit were possible to complete the

entire job instantaneously, there would be no need for current asset (working capital). But


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since itis not possible, every business organization is forced to have current asset and hence

operating cycle. It may be divided into four stage.

Raw materials and stores storage space. Workin process stage. Finished goods inventory stage. Debtors collection stage,

Duration of operating cycle

The duration ofthe operating cycle is equalto sum ofthe duration of these stages

less the credit period allowed by the suppliers ofthe firm. In symbol

OC=R+W+F+D-C

Where

OC= Duration ofthe Operating Cycle

R= Raw materials and storage space periods

W= workin process periods.

F= finished goods storage periods

D= debtor collection period

C= Creditors collection period.

The component of the operating cycles has already been calculated in ratio

Analysis which is as follow.

Average stock of raw material

R = --------------------------------------------------------

Average raw material consumption per day


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Average stock of storesS = -------------------------------------------------

Average stores consumption per day

Average workin process inventory

W = -----------------------------------------------

Average cost of production per day

Average book debts

D = -------------------------------------

Average credit sales per day

` Average trade credit

C = --------------------------------------------------

Average trade credit purchase per day


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1.3.1.Objectives ofthe study

Estimation of working capital requirement Study the operating and cash cycleEvaluation of Liquidity position & working capital utilizationAnalysis of relationship between working capital and profitabilityAnalysis & sources of working capital Analyzing the level of current assets with relation to currentliabilities.

1.3.2.Need ofthe study

The prime objective of the company is to obtain maximum profit thought thebusiness.

Regular availability of adequate working capital is inevitable for sustained businessoperations

To analyses organize profittransaction. To improve the organize financial activities.

1.3.3.Scope ofthe study

The scope of the study is identified after and during the study is conducted. The

study of working capital is based of tools trend analysis , ratio analysis ,working capital

leverage , operating cycle etc.


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1.3.4.Limitation ofthe study

There may be limitations to this study because the study duration is very short

and its not possible to observe every aspects of working capital management practices. the

data is mostly secondary in nature.


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CHAPTER II

2.1.Review ofliterature

The corporate finance literature has traditionally focused on the study oflong-

term financial decisions. However, short-term assets and liabilities are important components

oftotal assets and needs to be carefully analyzed. Management ofthese short-term assets and

liabilities warrants a careful investigation since the working capital management plays an

important role for the firms profitability and risk as well as its value (Smith 1980). The

optimal level of working capital is determined to a large extent by the methods adopted for

the management of current assets and liabilities.

A research study on working capital management of paper industries in India

was conducted by R. Sivarama and Prasad (2001). Their Sample consisted of 21 selected

paper mills, including 9 large, 5 medium and 7 small scales for the period from 1983-84 to

1992-93. They reported thatthe chief executives properly recognized the role of efficient use

of working capital in liquidity and profitability, but in practice they could not achieve it.

Again they reported a clear reveal of a suboptimum utilization of working capital in paperindustry.

A study on working capital management of horticulture industry in himachal

Pradesh by Joginder Singh Dulta (2001) observed the size of current assets and current

liabilities with all variations, registered a slight increase, but due to inefficient use of the

various components of working capital of Himachal Pradesh Horticulture Produce Marketing

and Processing Corporation Ltd, the current liabilities increased proportionately at a faster

rate than current assets and net working capital position was worsened continuously.


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P. Saravanan (2001) had undertaken a research on working capital

management in non-banking finance companies. Data from 1987-88 to 1996-97 for 10 non-

banking finance companies had been analyzed. He observed that, medium and large size non-banking companies have efficiently made use of bank creditto finance their working capital

requirements.

Dr. D. Mukhopadhyay conducted a research study to examine working capital

management practices and the problems faced by the firms in working capital management

process particularly in heavy engineering industries. A sick engineering firm named "M/S

Heavy Engineering Company Limited had been selected and data from 1993-94 to 2002-03

had been analyzed. He reported that, the company has under its possession huge real estate

including land and the firm holds legacy of culture and heritage of more than two hundred

years of existence in industrial map of the country and as a consequence, it has built up

"Goodwill" to a remarkable extent. Thus the company may make revaluation of real estate

including land and other assets and make valuation of goodwill and disposal of idle assets

and selling off certain percentage of company goodwill can enable the company infuse fresh

blood in the form of working capitalto run the show.

Jain, Yadav, Surendra (2007), made a study on Working capital management

practices of public sector enterprises in India. The study was based on an analysis of 13 year

period data from 1991 to 2003 of 137 public sector enterprises and stated that, a business

organization has to be conscious that inadequate working capital can disrupt its operations

leading illiquidity. At the same time excessive working capital is also not desirable since it

adversely affects profitability.

Sushma Vishnani and Bhupesh Kr. Shah (2007) had taken an Empirical

Study on impact of Working Capital Management Policies on Corporate Performance by

examining coefficient of correlation and regression analysis between profitability ratios and

some key working capital policy indicator ratios of 23 Indian Consumer Electronics

companies during the period 199495 to 200405. They concluded that, no established


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relationship between liquidity and profitability exists forthe industry as a whole. The various

companies of the industry depicted different type of relationship between liquidity and

profitability, although majority of them revealed positive association between liquidity andprofitability. But working capital management policies and practices have profound impact

on a companys profit performance.

Recently (2008), a study on liquidity management of TISCO Ltd. had been taken

by Sudipta Ghosh. Data from 1996 to 2000-01 had been analyzed. He indicated that,

although the degree of association between liquidity and profitability of the company was

positive, the degree ofinfluence ofliquidity on its profitability was low and insignificant.

A research study was undertaken by Dr. Santanu Kumar Ghosh and Santi Gopal Majito

examine the efficiency of working capital management practices of 20 large cement

companies during 1992-93 to 2001-02. They had analyzed data following an alternative ratio

model developed by Prof. Hrishikesh Bhattacharya (1997). Here, I also followed same

technique to analyze and interpret data.


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CHAPTER III

3.RESEARCH METHODOLOGY

3.1.introductionabout research:

For the research to be effective and to get to derived and accurate result for the

research problem, the researcher has to list down various strategies to be followed and put

forth the research design.

The research methodology deals with various aspects of research, ittalks aboutthe

types of research to be used. The researcher plans how data can be collected either by

primary or secondary medium. He also plans for the data collection tools. The researcher

plans whattype of questionnaire to be followed and what ranking scales to be used.

The researcher decides about the sample frame (size), research boundary and the

various statisticaltools to be used in data analysis and interpretation

3.1.1. Definition of Research:

A Research, which includes findings, analysis, integration and conclusions relating

to a particular subject or matter, which will be used to take final decisions, is called as

Research.

Research is simply the process of finding solutions to a problem after thorough

study and analysis ofthe situational factors.


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3.2. Research focus:

The project study mainly focuses on the working capital requirements of Indian

Overseas Bank.

3.3. Researchdesign:

Research Design is purely and simply the framework (or) plan for a study that

guides the collection and analysis of data. The function of researcher is to ensure that the

required data is collected accurately and economically. Analytical research technique was

adopted in the project. Generally analytical studies are designed to analysis something and it

collects data for a definite purpose. In a research problem, the formidable task is that of

framing the Research Design. Research Design is defined as the arrangement of conditions

for the collection and analysis of data in a manner that aims to combine relevance to the

research purpose with economy in procedure.

To determine an appropriate method for a research problem, two points must be

taken into consideration. First the nature of the problem and second the extent or level ofexisting information.

3.3.1. A good researchdesignhas the following characteristics namely:

Problem definition Specific methods of data collections and analysis Time required for research project Estimate of expenses to be incurred.


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3.3.2. Exploratory research:

Research design followed in this study is exploratory study. Exploratory Research

is a preliminary study of an unfamiliar problem, about which the researcher has little or no

knowledge. Itis ill structured and much less focused on predetermined objectives.

3.4. Datacollectionmethod:

There are two types of collecting data (i.e.) Primary data and secondary data. This

research study includes collection of secondary data.

3.4.1. Primarydata:

As part of strengthening the study, personal contacts are made with the officials

and staff members of the finance department in the form of discussions and collection of

reports.

3.4.2. Secondarydata:

The data are collected from the annual reports, mainly balance sheet, income and

expenditure and other brochures ofthe company. The data forthe analysis are collected and

gathered from the printed reports like annual reports, official files, records and other available

related materials ofthe companies chosen forthis study


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4.5. Methods ofquantityanalysis:

Calculation of net working capital requirements. Ratio analysis Operating cycle & cash cycle Cash flow analysis Determining the Financing mix Statisticaltools like graphical presentation

4.5.1. Ratio Analysis:

Ratios are mathematical aids for appraisal and comparison of financial statements.

They are used to supplement Rupees amount inspection, to examine inter-item relationships

and to compare a specific company's performance againstits industry standard.

Ratio analysis is a process of comparison of one figure against another, which

make a ratio, and the appraisal ofthe ratios to make proper analysis aboutthe strengths and

weaknesses ofthe companys operations.

Ratio analysis is extremely helpfulin providing valuable insightinto a companys

financial picture.

4.5.1.1. Uses of Ratios:

The use of ratios reduces the influence of rupees size on analysis since these

comparisons are expressed as a percentage, fraction, decimal or rates of turnover. Only the

combinations that could be made ofthe items appearing in both schedules limitthe number of

ratios that can be developed from the balance sheet and income statement. The type of


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operation represented by the account and the nature of the risk has an important bearing on

what ratios are to be computed and studied.

Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital

utilization.

Ratio Formulae Result Interpretation

Stock

Turnover

(in days)

Average Stock *

365/

Cost of Goods

Sold

= x days On an average, your stockturnover

Is in x days.

Obsolete stock, slow moving lines will

extend

Overall stockturnover days.

Receivables

Ratio

(in days)

Debtors * 365/

sales

= X days Ittakes your average x days to collect

receivables due to you. Effective debtor

management will minimize the days

Payables

Ratio

(in days)

Creditors * 365/

Cost of Sales (or

Purchases)

= X days On an average, you pay your suppliers

every x days. If you negotiate better credit

terms this willincrease. If you pay earlier,

say, to get a discountthis will decline.

Current ratio Total current

assets/

total current

liabilities

= X times Current Assets are assets that you can

readily turn in to cash or will do so within

12 months in the course of business.

Current Liabilities are amount you are due

to pay within the coming 12 months.


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Quick ratio (Total current

assets -

inventory)/total current

liabilities

= X times Similarto the Current Ratio buttakes

account ofthe factthatit may take time to

convertinventory into cash

Cash flow analysis

Cash flow analysis is the study of the cycle of your business' cash inflows and

outflows, with the purpose of maintaining an adequate cash flow for your business, and to

provide the basis for cash flow management. Cash flow analysis involves examining the

components of your business that affect cash flow, such as accounts receivable, inventory,

accounts payable, and credit terms. By performing a cash flow analysis on these separate

components, you'll be able to more easily identify cash flow problems and find ways to

improve your cash flow.

A quick and easy way to perform a cash flow analysis is to compare the total

unpaid purchases to the total sales due atthe end of each month. Ifthe total unpaid purchases

are greater than the total sales due, you'll need to spend more cash than you receive in the

next month, indicating a potential cash flow problem.

Operating cycle or Circulating cash format

Working Capital refers to that part of firms capital which is required for

financing short term or current assets such as cash, marketable securities, debtors and

inventories. Funds thus invested in current assets keep revolving fast and being constantly

converted into cash and these cash flows out again in exchange for other current assets.

Hence it is also known as revolving or circulating capital. The circular flow concept of


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working capital is based upon this operating or working capital cycle of a firm. The cycle

starts with the purchase of raw material and other resources. And ends with the realization of

cash from the sales of finished goods. It involves purchase of raw material and stores, itsconversion into stocks of finished goods through workin progress with progressive increment

oflabor and service cost, conversion of finished stocks into sales, debtors and receivables and

ultimately realization of cash and this cycle continuous again from cash to purchase of raw

materials and so on. The speed/time of duration required to complete one cycle determines

the requirements of working capital longer the period of cycle, larger is the requirement of

working capital.


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CHAPTER- IV

4. DATA ANALYSIS AND INTERPRETATION

4.1. Statement of Working capital

PARTICULARS MAR09(InCR.) MAR10(In Cr.)

A) Current Assets;

i) Inventories 3.66 5.20

ii) Sundry Debtors7.48 9.53

iii) Cash & Bank Balanc e1.88 0.86

iv) Fixed Deposit8.41 11.78

v) Loans & Advances26.69 41.95

Total Current Assets (A)49.55 69.32

B) CurrentLiabilities;

Current Liabilities (B)59.33 65.79

Working Capital (A-B)-9.78 3.53

Add: Provision 38.93 39.66

Networking Capital 29.15 43.19


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Note: - Fixed Deposit and loan and advances are assumed as short-term in nature

Interpratation

In 2009 and 2010 its working capital is positive, which intimates improvement

in operating eff

4.2.Current ratio;

The current assets of a firm ,as already stated ,representthose assets which can

be ,in the ordinary course of business, convertes into cash within a short period time oftime,

normally not exceeding one tear and include cash and bank balance marketable securities ,

inventory of raw materials, semi-finished and finished goods , debtors, net of provision for

bad and doubtful debts ,bills receivable and prepaid expanses.

The current liabilities defined as liabilities which are short-term maturity

obligations to be met , as originally contemplated with a year ,consist of trade creditors ,bills

payable ,bank credit , and provision for taxation , dividends payable and outstanding

expanses.

4.2.1.Rationale;

The current ratio of a firm measures its short-term solvency , that is , its

ability to meet short-term obligations as a measure of short-term current financial, liquidity; it

indicates the rupees of current assets (cash balance and its potential source of cash) available

for each rupee of current ratio , the larger is the amount of rupees available per rupee of

current liability, the more is the firms ability to meet current obligations and the greater is

the safety of funds of short-term creditors. Thus , current ratio ,in a way ,is a measure of

margin of safety to the creditors.


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Generally current ratio of 2:1 is considered forthe firm.

Current ratio = currentassets/currentliabilities

Particulars Mar09 Mar10

Current assets 49.55 69.32

Currentliabilities 59.33 65.79

Current ratio 0.83 1.05

Interpretation

Company has less current assets then current claims against them. In 2009-10

company current ratio is 1.05 which is not satisfactory . its short-term solvency is threatened.

4.3. Acid-test/Quickratio

The term quick assets refers to current assets which can be converted immediately

or at a short notice without diminution ofvalue. include in this category of current assets are

(1)cash and bank balance , (2)short-term marketable and (3) debtors / receivables. Thus, the

current assets which are excluded are prepaid expenses and inventory.

Liquid ratio = liquidassets / liquidliabilities


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Liquid assets 44.46 64.12

Liquid liabilities 59.33 65.79Liquid ratio 0.75 0.97

Interpretation

Generally quick ratio of 1:1 represents a satisfactory current financial condition.

But we have seen in table that not evens a single year it has achieves. Similarly year 2008-

2009 the company suffer from the same position. Itis increase by 0.97 in 2009-10.

Companys current financial condition is not satisfactory because liquid assets are less than

liabilities.

4.4. Debtors turnover ratio

It is determined by dividing the net credit sales by average debtors outstandingduring the year. The analysis of the debtors turnover ratio supplements the information

regarding the liquidity of one item of current assets of the firm . the ratio measures how

rapidly receivables are collected.

Debtors turnover ratio = netcredit sales / average debtors


Net credit sales 63.22 56.81

Average debtors 7.97 8.50

Debtors turnover ratio(times) 7.93 6.68


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Note ; its is assumed that 60% sales is on credit and 40% on cash.

Interpretation

We can say yearto yearthe shortertime between credit sells and collection

4.5. Creditors turnover ratio

Creditors turnover ratio = netcreditpurchase / average creditors


Net credit purchase 52.05 46.55

Average creditors 17.18 19.73

Creditors turnover

ratio(times per year)2.92 2.35

Interpretation

If creditors turnover ratio is high companys requirements of working capital will

increase and vice-a-versa.


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4.6. Creditors paymentperiod

Creditors paymentperiod = 360/creditors turnover ratio


Days in years 360 360

Creditors turnover ratio 2.92 2.35

Creditors payment period(in

days) 123 153

Interpretation

Company has to settle its payments within short span to time . in march 09

company makes payment after 153 days which is comparatively higherthan previous years ,it

means forthis year suppliers has given more credit period to the company. Longer payment

period shows the liberal credit terms granted by suppliers. It will reduce requirement of

current by relying on suppliers credit.


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CHAPTER-V

5.1.Finding and recommendation

Working capital financing in Indian Overseas Bankis done as perthe

recommendations proposed by different competent authorities. There is still scope for more

efficient working capital financing in the bank.

Recommendations after Scanning of working capital financing Indian

OverseaBank:

While assessing the project, the profit element should be considered with the riskelement collectively.

Financing of working capital should be avoided to a long loss making firm, eventhough regular customer.

Sometimes the clients business looks promising and realto his words then certainrelaxation should be provided as far as policies are considered.

Sectored analysis should be considered before providing the working capital financeto any firm, trends should be considered.

Statement of financialtransactions should be review at regularintervalto minimizelosses due to irregular payments and defaulters


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The recommendations were essentially based onthree principles:

A proper financial discipline has to be observed by the borrower. He should supply tothe bankerinformation regarding his operational plans wellin advance.

The main function ofthe banker as a lenderis to supplementthe borrowers resourcesto carry an acceptable level of current assets.

The bank should know the end-use of bank credit so thatitis used only forthepurposes for which itis made available.


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CHAPTER- VI

CONCLUSION

Any change in the working capital will have an effect on a business's cash

flows. A positive change in working capitalindicates thatthe business has paid out cash, for

example in purchasing or converting inventory, paying creditors etc. Hence, an increase in

working capital will have a negative effect on the business's cash holding. However, a

negative change in working capital indicates lower funds to pay off short term liabilities(currentliabilities), which may have bad repercussions to the future ofthe company


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ANNEXURES &BIBILOGRAPHY

BOOKS REFERRED

1.I. M. Pandey - Financialmanagement

vikas publishing House pvt. Ltd. - ninth edition 2006

2. M.Y. Khanand P.K. Jain, Financial management-

vikas Publishing house ltd., New Delhi.

3. K.V. Smith- Management of Working Capital-

Mc-Grow- Hill, New york

4. Satish Inamdar- Principles of Financial Management-

Everestpublishing house

Websites:

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