final project of reliance infra(2)

8/9/2019 Final Project of Reliance Infra(2)

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A Project on‘Working Capital Management of Reliance Infra’

Submitted to University of Mumbai in partial fulfillment of the requirement

for the award of the Degree of MASTERS IN MANAGEMENT STUIES !MMS"

S#$mitte% &'Geetal Thakare

B-! "#inan$e%

Bat$h &'(&-()

Un%er t(e G#i%ance of *rof+ Mayur Malviya

,.D/s S0MS

,.D/s Sterling 0nstitute of Management Studies

1ffiliated to the University of Mumbai

*lot ,o+ !23!214 Se$tor (!4 ,erul"5%4 ,avi Mumbai )'''6

Tel7 '&&-&'&&8&4 #a97 '&&-&&&&!'

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CERTIFICATE by the INSTITUTE

This is to certify that ___________________________________ (Name) a student

of ______ (discipline) _______ from ____________________________________

(Institute/University) has done/is doing his/her semester project at

__________________ from __________to __________under my guidance.

The project or! entitled "_______________________________________#

em$odies the original or! done $y___________________during his/her a$ove

full semester project training period.

%ate&

Name of the 'aculty uide uthori*e

+ignatory

___________________________

,lace -our ollege Name ith +tamp %irector


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EC)ARATI*N

0 hereby de$lare that the pro:e$t work entitled ;Working Capital Management of

Reliance Infra+ is a re$ord of an original work done by me under the guidan$e of *rof+

Mayur Malviya4 #a$ulty Member4 ,.D/s Sterling 0nstitute of Management Studies4 and

this pro:e$t has not performed the basis for the award of any Degree or Diploma and

similar pro:e$t if any+

Geetal Thakare

B-! "#inan$e%

Bat$h &'(&-&'()

0


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Ackno,le%gement

The su$$ess and final out$ome of this pro:e$t required lots of guidan$e and assistan$e

from many people and 0 am e9tremely fortunate to have got this all along the $ompletion

of my pro:e$t+

0 owe my profound gratitude to our Dire$tor Mr+


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needs to operate+ 1 se$ond purpose of working $apital is addressing seasonal or $y$li$al

finan$ing needs+

orking $apital is the flow of ready funds ne$essary for the working of the enterprise+ 0t

$onsists of funds invested in $urrent asset of that asset4 whi$h in the ordinary $ourse of

business4 $an be turned into $ash within a brief period without undergoing redu$tion in

value and without disruption of organiation +0t also throws light on 5vils of inadequate

working $apital4 5vils of e9$essive working $apital4 .ole of $ash and bank in working $apital

management+

#urther the pro:e$t reveals about re$eivables management4 inventory management and

analysis of ratio+

1part from this the pro:e$t highlights the analysis of one $ompany - .elian$e 0nfra

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C9APTER 3

RESEARC9 MET9**)*G;

hapter dis$ussed the ob:e$tives of this study and in this pro:e$t 0 will dis$uss about the

resear$h methodology whi$h is followed to $arry out this pro:e$t i+e+ the universe4 lo$ale

of our study4 Sample sele$tion4 Data olle$tion4 data analysis and field e9perien$e+ 1s

in organiation like .elian$e 0nfra 4 working $apital $onstitute a ma:or portion of its

resour$es4 a thorough study of its working $apital management has been done broadly

$overing7 .e$eivables Management4 ash Management4 and 0nventory Management

*$jecti


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RE)E:ANCE *> T9E PR*?ECT

The working $apital management is $ru$ial for some industries as the $apital

required3blo$ked is different in ea$h $ase+ hen a $ompany has too little working

$apital4 it $an fa$e finan$ial diffi$ulties and may even be for$ed toward bankrupt$y+ This

is true of very small $ompany and billion-dollar organiation+ 1 $ompany with this

problem may pay $reditors late or even skip payments+ 0t may borrow money in an

attempt to remain afloat+ 0f late payments have affe$ted the $ompany/s $redit rating4 it

may have diffi$ulty obtaining a loan at an affordable interest rate+

0n some types of businesses4 it isn/t as mu$h of a problem to have a lower amount of

working $apital+ ompany that are operated on as $ash basis4 have fast inventory

turnovers4 and $an generate $ash qui$kly don/t ne$essarily need as mu$h working

$apital+ #or e9ample4 a gro$ery store might meet these requirements and do well with

less working $apital+

.elian$e 0nfra being a working $apital intensive $ompany requires knowing the effe$t of

its $urrent methods+ The $ompany made a team to study the working $apital

management and to $ondu$t a finan$ial analysis+ 1nd in the pro$ess we also determine

$redit worthiness of the $ompany as well as study its position with respe$t to its

$ompetitors+

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C9APTER 7

)ITERATURE RE:IEW

1 Study of orking apital Management of

ement 0ndustries in 0ndia

0nternational .efereed Hournal

(asst+ *rof+ 1$harekar Sa$hin >ilas >i:aya4 &prof+ Shingare >ishal Sundar .ama(

C+H+Somaiya ollege of S$ien$e F ommer$e4 >idyavihar "5% Mumbai I)'' '&

Bhimrao T+ *radhan4 ollege Shahpur

ement industry4 whi$h has been signed out from investigation in the present study4 is

indeed the

Ba$k bone of e$onomi$ growth in any $ountry+ 1 thi$k relationship has been found

between the

level of e$onomi$ growth and the quantum of $ement $onsumption in developed as well

developing $ountries+ ement industry4 through its forward linkages provides the

ma9imum stimulus to growth in other industry also+ @ne employee in $ement

manufa$turing a$tivity supports eight to ten persons in related a$tivities+ 0n 0ndia4 sin$e

independen$e4 great emphasis has been laid on the development of $ement industry+ 0t

is one of the key basi$ industries in 0ndia+ 0t plays dominant role in the national

e$onomy+ ement industry ranks se$ond after the 0ron and steel industry+ ement is

indispensable in building and $onstru$tion works+ The produ$tion and $onsumption of

$ement4 to a large e9tent4 indi$ates a $ountry/s progress+ The development of transport4

infrastru$ture4 irrigation and power pro:e$ts et$+ depends to a very large e9tent on the

availability of the $ement+

The per $apita $onsumption level of $ement is regarded as one of the indi$ators of

development and standard of living in a nation+ Ceeping in mind the above importan$e

of the $ement industry in the e$onomi$ development4 it is required to do an in- depth

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study of the problems fa$ed by the industry espe$ially in the area of working $apital

management+ The study aims to analyse the working $apital issues like liquidity and

profitability aspe$ts of the working $apital management+ 0t also analyse the various

sour$es of working $apital finan$e

Strategies for improving working capital management $' orot(' R#le@ irector

an% Glo$al 9ea% of )i#i%it' an% In


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The new li$!idit# paradigm% Foc!s on working capital% The arti$le fo$uses on the

efforts of $orporate treasurers to improve working $apital management in line with the

emergen$e of the new liquidity paradigm brought about by the re$ent e$onomi$ $risis+ 0t

outlines some of the $ommon misper$eptions about working $apital optimiation

initiatives+ 0t presents the findings of an in-depth analysis of working $apital-intensive

industries $ondu$ted by itiJs #inan$ial Strategy Group+ 0t dis$usses the $omponents of

working $apital su$h as pro$ure to pay and order to $ash+

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C9APTER 8

INTR*UCTI*N *> W*RBING CAPITA)

orking $apital is the employment of $urrent assets and $urrent liabilities in su$h a way

as to in$rease short-term liquidity+ orking $apital management is a signifi$ant fa$t of

finan$ial management due to the fa$t that it plays a $ru$ial role in keeping the wheels

of business enterprise running+ orking $apital management is $on$erned with the

short-term finan$ial de$isions4 whi$h have been $omparatively negle$ted in the

literature of finan$e+ Shortage of funds for working $apital has $aused many

businesses to fail+ Aa$k of effi$ient and effe$tive utiliation of working $apital leads to

low rate of returns on $apital employed or even $ompels to sustain loses+ The need for

skilled working $apital has be$ome greater in re$ent years+

1 firm usually invests a part of its permanent $apital in fi9ed assets and keeps a part of

it for working $apital4 for e9ample meeting day-to-day requirements+ The requirement of

working $apital varies from firm to firm4 depending on the nature of business4

produ$tion poli$y4 market $onditions4 seasonality of operation4 $ondition of supply et$+

orking $apital to a $ompany is like a blood of human body+ 0t is the most vital

ingredient of business+ orking $apital if $arried out effe$tively and effi$iently and

$onsistently4 will assure the health of an organiation+

5very organiation has to arrange for adequate funds for meeting day-to-day

e9penditure4 apart from investment from fi9ed assets+ orking $apital is the flow of

ready funds ne$essary for the working of the enterprise+ 0t $onsists of funds invested in

$urrent asset of that asset4 whi$h in the ordinary $ourse of business4 $an be turned into

$ash within a brief period without undergoing redu$tion in value and without disruption

of organiation+ urrent liabilities are those indented to be paid in ordinary $ourse of

business within a short period of time+

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Working capital =er


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E>INITI*N *> W*RBING CAPITA)

0n $ase of gross working $apital4 it is the $on$ept that fo$us attention of two aspe$ts of

$urrent asset management7

(+ @ptimum investment in $urrent asset+

&+ #inan$ing of $urrent assets+

#ollowing definitions of working $apital pla$e emphasis on gross working $apital+

2. Accor%ing to Mea%@ Mallot >iel%. FWorking capital means current assets+.

3. Accor%ing to &onne


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C9APTER 4

C)ASSI>ICATI*N *> W*RBING CAPITA)

orking $apital may be $lassified on the fallowing basis7

2. *n t(e $a=i= of concept

0+ Gross working $apital "represented by the total $urrent asset%+

00+ ,et working $apital "e9$ess of $urrent asset over $urrent liabilities%+

3. *n t(e $a=i= of perio%icit' of re#irement=

>ie% or permanent ,orking capital 0t represents that part of $apital permanently lo$kedup in the $urrent asset to $arry out the business smoothly+ This investment in $urrent asset

in$rease as the sie of business e9pands+ 59amples of su$h investment are those required

to maintain the minimum sto$k of raw material4 work in progress4 finished produ$ts4 loose

tools and equipments+ This arrangement requires minimum $ash balan$e to be kept in

reserve for payment of wages salaries and all other $urrent e9penditure throughout the

year+

T(e permanent fie% ,orking capital ma' again $e =#$%i


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:aria$le ,orking capital >ariable working $apital $hanges with the in$rease or de$rease

in the volume of business+

It ma' $e =#$%i


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C9APTER /

AEJUAC; *> W*RBING CAPITA)

orking $apital or investment in $urrent asset is a must for meeting the day-to-day

e9penditure on salaries4 wages rent4 advertising et$ and for maintaining the fi9ed asset+

Aarge-s$ale $apital in fi9ed asset is often determined by relatively small amount of $urrent

asset+ The heart of industry4 working $apital4 if weak the business $annot prosper and

survive4 although there may be a large investment of fi9ed assets+ 0nadequate as well as

superfluous working $apital is dangerous for the health of the industry+N

0nadequate working $apital is disastrous4 whereas superfluous working $apital is a $riminal

wasteN+ Both situations are unwarranted in a sound business organiation+ 1dequa$y of

working $apital is the lifeblood and $ontrolling nerve $enter of a business+

Some of t(e #=e= of a%e#ate ,orking capital are

2" CAS9 ISC*UNT By adequate working $apital the business $an avail the advantage of

$ash dis$ount by paying $ash for the purpose of raw material and mer$handise+ 0f proper

$ash balan$e is maintained4 this will redu$e the $ost of produ$tion+

3" SENSE *> SECURIT; AN C*N>IENCE 1dequate working $apital $reate a sense

of se$urity4 $onfiden$e and loyalty throughout the business and also among its

$onsumers4 $reditors and business asso$iates +The proprietor4 offi$ial or manager of a

$on$ern are $arefree4 if they have proper $apital arrangements be$ause they need not

worry for the payment of business e9penditure or $reditors+

7" S*):ENC; AN C*NTINU*US PR*UCTI*N7 0n order to maintain the solven$y of

business4 it is essential that suffi$ient amount of funds are available to make all the

payments in time as and when they are due+ 0n the absen$e of working $apital4

produ$tion will suffer in the era of $utthroat $ompetition and business $an never flourish

in the absen$e of adequate working $apital+

8" S*UN G**WI)) AN INCREASE E&T CAPACIT; *romptness of payment in

business $reates goodwill and in$reases the debt $apa$ity of the firm+ 0f the investors and

borrowers are $onfident that they will get their due interest and payment of prin$iple in time4

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a firm $an raise funds from market4 pur$hase goods on $redit and borrow short term loans

from bank et$+

4" EAS; )*ANS >R*M T9E &ANB 1n adequate working $apital helps the $ompany to

borrow unse$ured loans from the bank4 be$ause the e9$ess provides a good se$urity to the

unse$ured loans+ 0f the business has a good $redit standing and trade reputation4 bank

favors in granting seasonal loans+

/" ISTRI&UTI*N *> I:IEN Short of working $apital4 a $ompany $annot distribute

dividend to its shareholders in spite of suffi$ient profits+ To make up for the defi$ien$y of

working $apital4 profits are to be retained in business+ @n the other hand ample dividend

$an be de$lared and distributed to the market value of share and in$rease by suffi$ient

working $apital+

0" E-P)*ITATI*N *> G** *PP*RTUNITIES7 Good opportunity $an be e9ploited

through adequa$y of $apital in a $on$ern+ #or e9ample I 1 $ompany may make off seasons

pur$hase4 resulting in substantial saving or it $an fet$h big supply orders resulting in good

profits+

6" MEETING UNSEEN C*NTINGENC; 1s sto$k piling of finished goods be$omes

ne$essary4 depression shoots up the working demand of $apital+ 0f a $ompany maintain

adequate working $apital4 unseen $ontingen$ies su$h as finan$ial $risis due to heavy loses4

business os$illation et$ $an easily be over$ome+

1" INCREASE IN E>>ICIENC; *> >I-E ASSETS *roper maintenan$es/ and adequate

working $apital in$rease the effi$ien$y of fi9ed asset of business+ 0t has been rightly said ,”

the fate of large s$ale investment in fi9ed $apital is often determined by a relatively small

amount of $urrent asset+N

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25" 9IG9 M*RA)E The provision of adequate working $apital improves the morale of the

e9e$utive as they get an environment of se$urity4 $ertainty and $onfiden$e4 whi$h is a great

psy$hologi$al fa$tor in improving the overall effi$ien$y of business and of the person who is

at the helm of affair in the $ompany+ C9APTER 0

E:I)S *> INAEJUATE W*RBING CAPITA)

Some of the evils of not having adequate working $apital in a business firm or a

$ompany are as follows7

(% )*SS *> CREIT W*RT9INESS AN G**WI)) 1 firm losses its $redit

worthiness and goodwill if it fails to honors its $urrent liability+ 0t finds it diffi$ult to pro$ure

the required funds for its business operation on easy terms+ This leads to redu$edprofitability and produ$tion interruption+

3" N* &ENE>IT >R*M >A:*RA&)E *PP*RTUNIT; ith inadequate working

$apital a firm fails to undertake profitable pro:e$ts+ 0t prevents the firm from availing the

benefit of available opportunity and stagnate its growth+

7" >AI)URE T* A:AI) CREIT *PP*RTUNIT; Due to inadequate working $apital a

firm fail to avail attra$tive $redit opportunities+

)% *PERATING INE>>ICIENCIES 0nadequate working $apital leads to operating

ineffi$ien$ies4 as day-to-day $ommitment $annot be met+

% )*W RATE *> RETURN *N >I-E ASSET 0nadequate working $apital leads to a

lowering down of rate of returns of fi9ed asset4 as it $annot be effi$iently utilied or

maintained due to inadequa$y of working $apital+

6% INCREASE IN &USINESS RISBS 0nadequate working $apital in$reases the

business risk of the firm+ Unable to dis$harge its $urrent liability it is liable to be de$lared as

insolvent+ Thus inadequate working $apital posses a serious threat to the working and

survival of the firm+

% CANN*T AC9IE:E PR*>IT TARGET Due to inadequate working $apital the firm

$annot a$hieve its profit target4 as it $annot put into operation4 its operating plans due to

shortage of working $apital+

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8% )*W M*RA)E *> &USINESS E-ECUTI:ES 0nadequate working $apital

adversely lowers the morale of the firm/s e9e$utive4 as they do not have an environment of

$ertainty safety and $onfiden$e4 whi$h is ne$essary psy$hologi$al fa$tor in improving the

overall effi$ien$y of a business firm+

C9APTER 6

W*RBING CAPITA) MANAGEMENT

orking $apital is the money used to make goods and attra$t sales+ The less working

$apital is used to attra$t sale4 the higher is it likely to be the return of investment+ orking

$apital management is about the $ommer$ial and finan$ial aspe$t of inventory4 $redit4

marketing4 royalty and investment poli$y+ The higher the profit margin4 lower is it likely to be

the level of working $apital tied up in $reating and selling titles+ The faster that we $reateand sell the books the higher is it likely to be the return on investment+

No, let #= look at =ome of t(e %efinition= of ,orking capital management

PR*> B : SMIT9 ;orking $apital management is $on$erned with problems that arise in

attempting to manage the $urrent asset4 the $urrent liability and the interrelation that e9ist

between themN+

WEST*N AN &RIG9AM Forking $apital management refer to all aspe$t of

administration of both $urrent asset and $urrent liabilityN+

?AMES C :AN 9*RNE ;urrent asset4 by definition are asset normally $onverted into

$ash within one year+ orking $apital management is $on$erned with the administration of

these asset-namely $ash and marketable se$uritiesN+

No, let #= look at =ome of t(e main an% important o$jecti


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)+ The $ompany should always be in a position to meet its $urrent obligation4 whi$h should

be properly supported by $urrent assets available with the firm+ Maintaining e9$ess fund in

working $apital means lo$king of funds without any returns+

+ To lo$ate appropriate sour$e of short term finan$ing+

C9APTER 1

IMP*RTANCE *> W*RBING CAPITA) MANAGEMENT

1$$ording to 9#=$an% an% 9ocker'@ Nthe prime ob:e$t of management is to make a profit4

either or not this is a$$omplished4 depend on the manner in whi$h working $apital is

a$$omplishedN+ The primary ob:e$t of working $apital is management is to manage the

firm/s $urrent asset and $urrent liability in su$h a manner that a satisfa$tory level of working$apital is maintained+ The firm may be$ome insolvent if it $annot maintain a satisfa$tory

level of working $apital+ orking $apital assist in in$reasing the profitability of the $on$ern+

The working $apital position de$ide the various poli$ies in the business with re$eipt to

general operation vi importan$e of working $apital+

Po=iti


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C(apter 25

>ACT*RS ETERMINING W*RBING CAPITA) REJUIREMENTS

,ow let us look at the various fa$tors determining the working $apital requirement in a

business firm7

!A" Nat#re of $#=ine==e= The amount of working $apital is related to the nature of

business+ 0t $on$erns4 where the $ost of raw material used in manufa$ture of a produ$t is

very large in produ$tion to its total $ost of manufa$ture4 the requirement of working $apital

will be very large+ #or instan$e a $otton or sugar mills require a large amount of working

$apital+ @n the other hand firms requiring large amount of investment in fi9ed asset require

less working $apital+ *ubli$ utility $on$ern like 0ndian .ailways4 require a lesser amount of

working $apital as $ompared to trading or manufa$turing $on$ern4 partly be$ause of $ash

nature of their business and partly be$ause4 they are selling servi$e instead of a $ommodity

and there is no need of maintaining inventories+

!&" SiKe of $#=ine== #nit The general prin$iple in this regard is that the bigger the sie of

business4 the larger will be the amount of working $apital required4 be$ause the larger

business unit are required to maintain big inventories for the flow of the business and to

spend more in $arrying out the business operation smoothly+

!C" Sea=onal


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of working $apital+ Terms and $onditions of pur$hase and sale are generally governed by

prevailing trade pra$ti$e and by $hanging e$onomi$ $onditions+

!I" Con


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rightfully used+ 5ven if the net profit is earned in $ash4 whole of it is not available for

working $apital purpose+ The $ontribution towards working $apital is effe$ted by the way in

whi$h profit are appropriated and affe$ted by ta9 a$tion4 dividend4 depre$iation and reserve

poli$y+

!M" Price le


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C9APTER 22

W*RBING CAPITA) >INANCING

The main sour$e of working $apital finan$ing4 namely4 trade $redit4 bank $redit4 .B0

framework3regulation of bank $redit3finan$e3advan$es4 fa$toring and $ommer$ial papers will

be dis$ussed in this $hapter+

2. TRAE CREIT7 Trade $redit refers to the $redit e9tended by the suppliers of goods and

servi$e in normal $ourse of transa$tion3business3sale of the firm+ 1$$ording to trade

pra$ti$e4 $ash is not paid immediately for pur$hase but after an agreed period of time+

There is however4 no formal3spe$ifi$ negotiation of trade $redit 0t is an informal

arrangement between buyer and seller+ There is no legal instrument of a$knowledgement

of debt4 whi$h is granted on an open a$$ount basis+

!a" A:ANTAGES - Trade $redit as a sour$e of short-term working $apital finan$e has

$ertain advantages+ 0t is easily available+ Moreover it is fle9ible and spontaneous sour$e of

finan$e+ The availability and magnitude of trade $redits is related to the sie of operation of

a firm in relation to sales3pur$hase+ 0f the $redit pur$hase of goods de$line4 availability of

$redit will also de$line+ Trade $redit is also an informal4 spoteganous sour$e of finan$e+ ,ot

requiring negotiation and formal agreement4 trade $redit is free from the restri$tion

asso$iated with formal3negotiated sour$e of finan$e3$redit+

3 .C*ST Trade $redit does not involve any e9pli$it interest $harged+


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C9APTER 23

MET9*S *> ESTIMATING W*RBING CAPITA) REJUIREMENT

No, let #= look at =ome of t(e ,a'= #=e% $' a $#=ine== firm in e=timating t(e

,orking capital re#irement

*perating c'cle met(o%7 @perating $y$le is a period that a business enterprise takes in

$onverting $ash ba$k into $ash+

It (a= t(e fallo,ing fo#r =tage=.

• The raw material and stores inventory stage+

• The semi finished goods or work in progress stage

• The finished goods inventory stage+• The a$$ounts re$eivable and book debt stage+

5a$h of he above stage is e9pressed in terms of days of relevant a$tivity+ 5a$h requires

a level of investment to support it+ The sum of these stage wise investments will be total

amount of working $apital of the firm+ The fallowing formulae $an be used to e9press the

framework of the operating $y$le+

T !S C" W > &

here

T Stands for the total period of operating $y$le in number of days

R Stands for the number of days of raw material and stores

onsumption requirement held in raw material and store

0nventory

C The number of days of pur$hase in trade $reditors

W The number of days of $ost of produ$tion held in +0+*

> The number of days of $ost of sales held in finished goods

& The number of days of sale in book debt

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C9APTER 27

RECEI:A&)ES MANAGEMENT

The re$eivables represent an important $omponent of $urrent asset of a firm+ Thepurpose of this $hapter is to analye the importan$e of effi$ient management of

re$eivables4 within the framework of a firm/s ob:e$tive of value ma9imiing+ The first se$tion

of this $hapter dis$usses the ob:e$tive of re$eivables management+ This is followed by an

indebt analysis of three $ru$ial aspe$t of management of re$eivables+

Before understanding the ob:e$tives of re$eivables management let us first understand

the two $on$epts4 whi$h forms an important part in re$eivables management4 namely

debtors and $reditors+

e$tor= Debtors "1$$ounts .e$eivable% are $ustomers who have not yet made payment

for goods or servi$es4 whi$h the firm has provided+ The ob:e$tive of debtor management is

to minimie the time-lapse between $ompletion of sales and re$eipt of payment+

T(e co=t= of (a


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may wish to en$ourage suppliers to a$$ept this option+


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8.efa#lt co=t #inally the firm may not be able to re$over the overdue be$ause the

inability of the $ustomers to pay+ Su$h that are treated as bad debts and have to be written

off4 as they $annot be realied is $alled default $ost+

&enefit=

The benefits are in$reased sales and anti$ipated profits be$ause of a more

liberal poli$y+ hen firms e9tend trade $redits4 that is4 invest in re$eivablesK they intend to

in$rease the sales+ The impa$t of liberal trade $redit poli$y is likely two take two forms+ #irst

it is oriented to sales e9pansion+ 0n other words a firm may grant trade $redit to in$rease

sale to e9isting $ustomers+ Se$ondly the firm gives trade $redit to prote$t its $urrent sales

against $ompetitions+

Cre%it policie=

The $redit poli$y of the firm provides a framework to determine "a% whether or not

to e9tend $redit to a $ostumer "b% how mu$h $redit to e9tend+

T(e cre%it polic' %eci=ion of a firm (a= t,o $roa% %imen=ion=

(+redit standards

&+redit analysis

0


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C9APTER 28

W*RBING CAPITA) RATI*

orking $apital ratios indi$ate the ability of a business $on$ern in meeting its $urrent

obligation as well as its effi$ien$y in managing the $urrent asset in the generation of sales+

These ratios are applied to evaluate the effi$ien$y with whi$h the firm manages and make

use of its $urrent assets+ The fallowing three $ategories of ratio are used for effi$ient

management of working $apital "a% effi$ien$y ratios "b% Aiquidity ratios "$% Stru$tural health

ratios+

Efficienc' ratio This ratio is $omputed by dividing the working $apital by sale+ This ratio

helps to measure the effi$ien$y of utiliation of networking $apital+ 0t signifies for an amount

of sale a relative amount of working $apital is needed+ 0f any in$rease in sale is

$ontemplated4 working $apital should be adequate and thus this ratio is useful for

maintaining adequate level of working $apital+

In


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rate indi$ates redu$ed lo$k up of funds in $urrent assets+ 1n analysis of this ratio over a

period of time refle$ts working $apital management of a firm+

)i#i%it' ratio This ratio indi$ate the e9tend of soundness of the $urrent finan$ial position

of an undertaking and the degree of safety provided to the $reditors+ The higher the $urrentratio4 the larger amount of rupee available4 per rupee for $urrent liability4 the more the firms

ability to meet $urrent obligation and the greater safety of funds of short term $reditors+ The

liquidity ratio formulae is

LI.&I/IT0 )TI* , C&'(T )SS'T1 L*)(S1 )/+)(C'S C&'(T LI)"ILIT0

urrent assets are those assets4 whi$h $an be $onverted into $ash within an a$$ounting

year+ urrent liability and provisions are those liability that are payable within a year+ 1

$urrent ratio of &7 ( indi$ates a highly solvent position+ Banks $onsider a $urrent ratio of (7

27 ( as minimum a$$eptable level for providing working $apital finan$e+ The $onstituents of

the $urrent asset are as important as $urrent asset themselves for evaluation of $ompanies

solven$y position+

J#ick ratio This ratio is a more refined tool to measure the liquidity of an organiation+

0t is a better test of finan$ial strength than the $urrent ratio4 be$ause it e9$ludes very slow

moving inventories and the item of $urrent asset4 whi$h $annot be $onverted into $ash

easily+ This ratio shows the e9tend of $ushion of prote$tion provided from the qui$k assetsto the $urrent $reditors+ 1 qui$k ratio of (7 ( is usually $onsidered satisfa$torily through it is

again a rule of the thumb only+

Str#ct#ral (ealt( ratio This ratio e9plains the relationship between $urrent asset and total

investment in $urrent asset+ 1 business enterprise should use its $urrent asset effe$tively

and e$onomi$ally be$ause it is out of the management of these assets that profits a$$rue+

1 business will end up in losses if there is any la$una in managing assets to the advantage

of business+ 0nvestment in fi9ed assets being inelasti$ in nature there is no elbowroom tomake an amendment in this sphere and its impa$t on profitability remains minimal+ This

stru$tural ratio $an be indi$ated as

S.9.R NET ASSETS L CURRENT ASSET

0


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1n analysis of $urrent assets $omposition enable one to e9amine in whi$h $omponents the

working $apital funds are lo$ked up+ Aarge tie up of funds in inventories effe$t profitability of

the business adversely owing to $arry over $ost +in addition losses are likely to o$$ur by the

way of depre$iation4 de$ay4 obsoles$e4 evaporation and so on+ .e$eivable $onstitute

another $omponent of $urrent assets 0f the ma:or portion of $urrent assets are made of

$ash alone the profitability will be de$reased be$ause $ash is a non earning asset+ 0f the

portion of $ash balan$e is e9$essive then it $an be said that management is not effi$ient to

employ surplus $ash+

e$tor t#rno


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CREIT TURN*:ER PERI* CREIT*RS 7/4 L PURC9ASES.

03


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Some of t(e ='mptom= of poor ,orking capital management are

(+ 59$essive $arriage of inventory over the normal levels required for business will result in

more balan$e in trade $reditors a$$ount+ More $reditors balan$e will $ause strain on the

management in management of $ash+

&+ orking $apital problem will arise when there is a show down in $olle$tion of debtors+

2+ Sometimes $apital goods will be pur$hased from the funds available for working $apital+

This will result in the working $apital and its impa$t on the operation of the $ompany+

)+ Unplanned produ$tion s$hedule will $ause e9$essive sto$k of finished goods or failure in

meeting dispat$h s$hedule+ More funds kept in the form of $ash will not generate any profit

for the business+

+ 0neffi$ien$y in using potential trade $redit require more funds for finan$ing working

$apital+

6+ @vertrading will $ause shorta ge of working $apital and its ultimate effe$t is on the

operation of the $ompany+

+ Dependen$e in short term sour$e of finan$e for finan$ing permanent working $apital$auses less profitability and will in$rease strain on management in managing working

$apital+

8+0neffi$ien$y in $ash management will $ause embelement of $ash

04


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C(apter 24

IN:ENT*R; MANAGEMENT

0nventories symbolie the se$ond largest asset $ategories for manufa$turing $ompanies4

ne9t only to plant and equipments+ The proportion of inventories to total asset varies

between fifteen to thirty per$ent+ 0nventories are sto$ks of the produ$t a $ompany is

manufa$turing for sale and $omponent that make up the produ$t+ There are three types of

inventories7 raw materials4 work in progress and finished goods+ .aw materials are

materials and $omponents that are inputs in making the final produ$t+ The work in progress4

also $alled sto$k in progress4 refer to goods in intermediate stage of produ$tion+ #inished

goods $onsist of the final produ$ts that are ready for sale+ hile manufa$turing firms

generally hold all three types of inventories4 distribution firms hold mostly finished goods+ 1s inventory management has important finan$ial impli$ation4 the finan$ial manager has

the responsibility to ensure that the inventory properly monitored and $ontrolled+

T(e t(ree general moti


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to meet delivery $ommitments+ The aim of inventory management thus should be to avoid

e9$essive and inadequate level of inventories and to maintain suffi$ient inventories for

smooth produ$tion and sales operation+ 5fforts should be made to pla$e an order at the

right time and with the right sour$e to a$quire the right quantity at he right pla$e and quality+

An effecti


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EC*N*MIC *RER JUANTIT;

There are two basi$ questions that should be $onsidered in inventory management namely

"a% hat should be the sie of orderO "b% 1t what level should the order be pla$edO

T(i= incl#%e= t(ree t'pe= of co=t

(+ *r%ering co=t7 0t relates to pur$hased items that in$lude e9pense on fallowing7

requisitioning4 preparation of pur$hase order4 e9pediting4 transport and re$eiving and

pla$ing in storage+

3. Carr'ing co=t7 0t in$ludes e9penses on interest on $apital lo$ked up in inventory4

storage4 and insuran$e4 obsoles$e and ta9es+ arrying $ost generally are &P of the value

of inventory held+

7. Storage co=t 0t arises when inventories are short of requirement for meeting the need

of produ$tion or demand of $ustomers+ 0nventory shortage may result in high $ost4 less

effi$ient and une$onomi$ produ$tion s$hedules4 $ustomer dissatisfa$tion and loss of sale+

Thus when a firm order in large quantities4 in a bid to redu$e the total ordering $ost4 the

average inventory4 other things being equal4 tends to be high thereby in$reasing the

$arrying $osts+ 0n view of su$h relationship4 minimiation of overall inventory management

would require a $onsideration of trade off among these $osts+

#or determining Economic *r%er J#antit' formula the fallowing symbols are used7

U 1nnual usage3demand

E Euantity ordered

# ost per order

*er$ent $arrying $ost

* *ri$e per unit

T Total $ost of ordering and $arrying

T.C U > J P C

The total $ost of ordering and $arrying $ost is minimied when

7


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J O 3 >U L PC

STRATEGIES IN W*RBING CAPITA) MANAGEMENT

1t present more finan$e option are available to the finan$e manager to see the operation of

his firm go smoothly+ Depending on the risks of business strategies is evolved to manage

the working $apital+

Con=er


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defaults+ 0t is a $ardinal prin$iple of $orporate finan$e that long term sour$e and short-term

assets should finan$e long term asset by a mi9 of long and short-term sour$e+

5ffi$ient working $apital management te$hniques are those that $ompressed operating

$y$le+ The length of operating $y$le is equal to the sum of the length of the inventory periodand the re$eivable period+ Just in time inventory management te$hniques redu$e $arrying

$ost by slashing the time that goods are parked as inventories+ To shorten the re$eivables

period without ne$essary redu$ing the $redit period4 $orporate $an offer trade dis$ount for

prompt payment+


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ANA);SIS 2

R. IN>RA

CURRENT SCENARI*

.0nfra4 the infrastru$ture development arm of the 1nil 1mbani-led .elian$e Group

reported a 66+2P growth in its net sales on $onsolidated basis to Q6(42'&+ million in

E2#?‟(&4 driven by higher sales from its engineering and $onstru$tion "5*% business

and ele$tri$al segment+ The 5* business $lo$ked revenue of Q&!4)'+! million4 up

(+(P on ?o? basis4 as it largely undertakes $onstru$tion of in-house pro:e$ts and is

benefiting from a large number of pro:e$ts that are under $onstru$tion+ @n $ontrary4

operating profit margin "@*M% depre$iated by &&'bps to (2+'P on ?o? basis4 due to

(!2+6P rise in material $ost F sub $ontra$t $harges4 whi$h in turn $apped the operating

profit growth of the $ompany to )&+P ?o? at Q!+ million+ @wed to ('!+P rise in

interest $harges and (2P rise in ta9ation $harges4 the *1T before share of profit from

asso$iate and minority interest reported a de$line of 8P in E2#? ‟(& on ?o? basis at

Q24(86+ million as against Q24)68+8 million in E2#?‟((++ 1s a result4 the ,*M

depre$iated by )('bps ?o? to 6+P+ .0nfra‟s 5* business reported in$ome of

Q&!4)'+! million in E2#?‟(&4 up (+(P ?o? driven by better e9e$ution in .*ower

pro:e$ts+ 1s on De$ember &'((4 5* segment had an order book position of Q&(4'

million+ The order book $omprises of 6 power pro:e$ts of over !4!'' M4 one

transmission pro:e$t of (4'' kms along with 6 road pro:e$ts totaling ' kms+ #urther4

revenue from the ele$tri$ity and infrastru$ture business grew by &'+2P and !+8P

respe$tively on ?o? basis+ The $ompany has also added (!'4''' $ustomers in its

power distribution $ir$les in Mumbai and Delhi in &'((+ The units sold in Mumbai and

Delhi stood at (4!! million "-((+&P ?o?% and 2428 million "R8+)P ?o?% respe$tively+Besides4 the $ompany is developing (( road pro:e$ts out of whi$h its pro:e$ts are

already operational4 while five additional would begin generating revenue in ne9t three

months+ Meanwhile4 the total assets under B@T basis reported a growth of !6P ?o? at

Q8' million and with the indu$tion of Mumbai metro into B@T portfolio will add value for

the $ompany+

0


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C*MPARITI:E ANA);SIS

0n order to determine the performan$e of relian$e infrastru$ture on the front of working

$apital management4 we have a$$umulated data for the last five years and tried to

analye the going of relian$e infra on various fronts of working $apital+ 0n this way4 we‟ll

be able to better understand the nature of $hange "if any% in the working $apital situation

of the organisation+

So first we‟ll look at various working $apital ratios for the past five years and e9amine

the findings+

W*RBING CAPITA) RATI*

The differen$e between $urrent assets and $urrent liabilities e9$luding short term bank

borrowing is $alled net working $apital ",%+ ,et orking apital is sometimes used

as a measure of a firm‟s liquidity+

,et working $apital measures the firm/s potential reservoir of funds+

;EARS 3551 3525 3522 3523 3527

NETW*RBING

RATI*5.83 5.3/ 5.51 5.2/ 5.25


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2009 2010 2011 2012 2013

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

Column3

InterpretationD

1s it is shown in the graph4 the following observations $an be made7

(+ 1 $ompany having a higher , ratio has a greater ability to meet its $urrent

obligations+ #rom a $onservative position of &''! where the ratio was as high as '+)&4it

has now settled at '+(' whi$h is slightly on the lower side 1s this ratio represents a

firm/s potential reservoir of funds4 a de$lining trend should be taken seriously and

appropriate remedial measures need to be taken so as to avert a more troubled

situation+

2


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CURRENT RATI*

urrent ratio is $al$ulated by dividing $urrent assets by $urrent liabilities7

urrent assets in$lude $ash and those assets that $an be $onverted into $ash within a

year4 su$h as marketable se$urities4 debtors4 inventories4 loans and advan$es+ 1ll the

obligations maturing within a year are in$luded in $urrent liabilities+

urrent liabilities in$lude $reditors4 bills payable4 a$$rued e9penses4 short term bank

loan4 in$ome ta9 liability and long-term debt maturing in the $urrent year+

Significance

• 0t indi$ates the availability of $urrent assets in rupees for every one rupee of

$urrent liability+ 1 ratio of greater than one means that the firm has more $urrent

assets than $urrent $laims against them+ 0n 0ndia4 the $onventional rule is to have

a ratio of (+22"internationally it is &%+

• The $urrent ratio represents the margin of safety for the $reditors+ The higher the

$urrent ratio4 the greater the margin of safetyK the larger the amount of $urrent

assets in relation to $urrent liabilities4 the more the firm/s ability to meet its$urrent obligations+

;EARS 3551 3525 3522 3523 3527

CURRENT 3.11 3.32 5.14 2.81 2.51

3


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RATI*

2009 2010 2011 2012 2013

0

0.5

1

1.5

2

2.5

3

Column3

InterpretationD

#or the year &''!4 .elian$e 0nfra had a $urrent ratio of &+!! whi$h got offset during the

subsequent years rea$hing as low as '+! in &'((+The situation got better in &'(& with

a ratio of (+)! but again it has be$ome $riti$al with a ratio of (+'! at the end of #? (2 +1

$ompany with a falling $urrent ratio needs to take stri$t a$tions otherwise in longer run4

the firm $an found themselves in a diffi$ult situation to $lear their $urrent liabilities

4


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+ ACI RATI* TEST !)i#i%LJ#ick Ratio"

This ratio establishes the relationship between qui$k or liquid assets and $urrent

liabilities+

1n asset is liquid if it $an be $onverted into $ash immediately without a loss of value+

e+g+ ash4 Debtors4 Bills re$eivable and marketable se$urities+ 0nventories are

$onsidered to be less liquid as it requires time for realiing into $ash4 their value also

has tenden$y to flu$tuate+

Significance

Generally a qui$k ratio of (7( is $onsidered to represent a satisfa$tory $urrent finan$ial

$ondition+ This test is more signifi$ant as $ompare to $urrent ratio to fulfill the firm ‟s

obligations

;EARS 3551 3525 3522 3523 3527

ACIRATI*

3.66 3.23 5.61 2.88 2.5/

5


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2009 2010 2011 2012 2013

0

0.5

1

1.5

2

2.5

3

Column3

InterpretationD

.elian$e 0nfra has a qui$k ratio of (+'6 at the end of #?(2 whi$h is $onsistent with the

$urrent ratio for the same year+ Generally a qui$k ratio of (7( is $onsidered to represent

a satisfa$tory $urrent finan$ial situation4 but it does not imply a sound finan$ial position+

0t should be kept in mind that all debtors may not be liquid4 and $ash may be

immediately needed to pay operating e9penses+ Thus a $ompany with a high value of

qui$k ratio $an suffer from shortage of funds if it has slow paying4 doubtful and long

duration outstanding debtors+ @n other hand4 a $ompany with a low value of qui$k ratio

may really be operating with prosperity and paying its obligations in time if it has been

turning over its inventories effi$iently

6


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CAS9 RATI*

0t shows the relationship between absolute liquid or super qui$k $urrent assets and

liabilities+ 1bsolute liquid assets in$lude $ash4 bank balan$es4 and marketable

se$urities+ Sin$e $ash is the most liquid asset4 a finan$ial analyst may e9amine $ash

ratio and its equivalent to $urrent liabilities+ Trade investments or marketable se$urities

are equivalent of $ashK therefore4 they may be in$luded in the $omputation of $ash ratio+

;EARS 3551 3525 3522 3523 3527

CAS9RATI*

8 4 4 7 /4

27


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2009 2010 2011 2012 2013

0%

10%

20%

30%

40%

50%

60%

70%

Column3

InterpretationD

(% The situation of &''! is never re$ommended to have that mu$h $ash sitting idle with

the $ompany+ 0n the subsequent years the $ompany has put the $ash up to use by

investing it in different pro:e$ts thus maintaining a $ash ratio of )-P+

&% There is nothing to be worried about the la$k of $ash if the $ompany has reserve

borrowing power+ 0n 0ndia4 firms have $redit limits san$tioned from banks4 and $an easily

draw $ash+

IN:ENT*R; TURN*:ER RATI*

0nventory turnover is $al$ulated by dividing the $ost of goods sold by the average

inventory+ This ratio indi$ates the effi$ien$y of the firm in produ$ing and selling its

21


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produ$t4 by indi$ating the number of times the inventory has been $onverted into sales

during the period+

;EARS 3551 3525 3522 3523 3527

IN:ENT*R ;TURN*:ER

RATI*

2/.88 21./1 38.08 36.35 77.88

2009 2010 2011 2012 2013

0

5

10

15

20

25

30

35

Column3

InterpretationD

2


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54/57

,et $redit sales $onsist of gross $redit sales minus sales return+

hen the information about $redit sales4 opening and $losing balan$es of trade debtors

is not available then the ratio $an be $al$ulated by dividing total sales by $losing

balan$es of trade debtors+

Debtors Turnover indi$ates the number of times debtors turnover ea$h year+ Generally4

the higher the value of debtors turnover4 the more effi$ient the management of the

$ompany+

;EARS 3551 3525 3522 3523 3527

E&T*R’STURN*:ER

RATI*25.58 4.47 0.5/ 8./2 3.46

2


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2009 2010 2011 2012 2013

0

2

4

6

8

10

12

Series 3

InterpretationD

(% 1s stated earlier4 the higher the value of debtors turnover4 the more effi$ient the

management of the $ompany+ But as it is evident from the graph that the ratio is dipping

with ea$h su$$essive year4 it serves as a sign of $aution for the management to look

after+

22


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C*NC)USI*NS

0n $on$lusion4 good management of working $apital is part of good finan$ial management+

5ffe$tive use of working $apital will add to the operational effi$ien$y of a departmentK

optimal use will help to generate ma9imum returns+

.atio analysis dis$ussed in the beginning4 $an be used to identify working $apital areas4

whi$h require $loser management+ >arious te$hniques and strategies4 dis$ussed above are

available for managing spe$ifi$ working $apital items+ Debtors4 $reditors4 $ash and in some

$ases inventories are the areas most likely to be relevant to a firm

23


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&I&)*GRAP9;

www+bseindia+$om

www+e$onomi$times+$om

www+finan$emaster+$om

www+money$ontrol+$om

www+gu:aratambu:a+$om

www+relian$einfra+$om

>inancial Management H I.M Pan%e'

RP R#=tagi’= Q >inancial Management

Tren%= in ,orking capital management it= impactB Pa%ac(i!355/"

Impact of ,orking capital management policie= on profita$ilit' of a firmS

:i=(nanai!3550"

An anal'=i= of ,orking capital management: Gane=(an!3550"

Effect= of ,orking capital management on SME profita$ilit'P? Gareia

Ter

final project of reliance infra(2)

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