impact of current asset on workng cap

7/30/2019 Impact of Current Asset on Workng Cap

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Impact of Current Assets on Working Capital. AT

OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)

Babasabpatilfreepptmba.com

Contents

Sl. No. Titles Page No.

I Chapter 1

Introduction

Literature Review

Statement of the Problem

Purpose of the Study

Scope of the study

Objectives of the Study

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39

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II Chapter 2

Organization Profile

Organization Chart

Data Collection Method

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52

III Chapter 3

Results & discussion with Charts & graphs

Findings

Suggestions

Conclusions

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79

IV Chapter 4

Appendix

Bibliography

Joining Report

Weekly Reports

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Introduction: -

The project is assigned to me Impact of Current Assets on Working Capital. At

Oilgear Towler Polyhydron Private Limited (OTPL). The various information regarding

classification, determinants, components, sources, arrangement operating cycle have been

also discussed and aspects relating to the perspective of Oilgear Towler Polyhydron

Private Limited (OTPL).

Ratio Analysis has been carried out using Financial Information for last three

accounting years i.e. from 2003 to 2005; Ratios like Current Ratio, Working Capital

Turnover Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio have also been

analyzed. A Statement of Changes in Working Capital has also been analyzed and

attached Turnover & Performance of the Company for last three years has also been

analyzed.



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MEANING & DEFINITION OF WORKING CAPITAL: -

Working capital in simple terms is the amount of funds, which a company, must

have to finance its day-to-day operation, it can be regarded as part/portion of capital,

which is, employed in short operation.

Every organization invests their funds in two terms of capital namely,

1. Fixed Capital.

2. Working Capital

The amount invested in the assets like Plant and Machinery, Building, Furniture

etc, blocked on permanent basis and is called Fixed Capital Organization not only

requires Fixed Capital, but also need of fund to meet day to day operations for short term

purpose, such funds is called Working Capital.

A Study of Working Capital is of major part of the external and internal analysis

because of its close relationship with the current day to day operation of business.

Working Capital consists broadly for that position/the assets of a business that are used at

related current operations and is represented by raw materials, stores, work in process and

finished goods merchandise, note/bill receivable.



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Definition of Working Capital: -

Genestenberg: -

Working Capital means Current Assets of a company that are changed in the

ordinary course of business, from one to another, for ex, from cash to inventories,

inventories to receivable, receivable to cash.

Gathman & Dug wall: -

Working Capital as excess of current assets over current liabilities.

Westen & Brigham: -

Working capital refers to a term investment in short term assets cash, short term

securities accounts receivables and inventories.

J. Smith: -

The Sum of the current assets is the working capital of the business.

WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.



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Working capital cycle: -

Introduction

The working capital cycle can be defined as:

The period of time, which elapses between the point at which, cash begins to be

expended on the production of a product and the collection of cash from a customer

The diagram below illustrates the working capital cycle for a manufacturing firm



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The upper portion of the diagram above shows in a simplified form the chain of

events in a manufacturing firm. Each of the boxes in the upper part of the diagram can be

seen as a tank through which funds flow. These tanks, which are concerned with day-to-

day activities, have funds constantly flowing into and out of them.

The chain starts with the firm buying raw materials on credit.

In due course this stock will be used in production, work will be carried out on the

stock, and it will become part of the firms work in progress (WIP)

Work will continue on the WIP until it eventually emerges as the finished product

As production progresses, labor costs and overheads will need to be met

Of course at some stage trade creditors will need to be paid

When the finished goods are sold on credit, debtors are increased

They will eventually pay, so that cash will be injected into the firm

Each of the areas stocks (raw materials, work in progress and finished goods), trade

debtors, cash (positive or negative) and trade creditors can be viewed as tanks into and

from which funds flow.

Working capital is clearly not the only aspect of a business that affects the amount

of cash:



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The business will have to make payments to government for taxation

Fixed assets will be purchased and sold

Lessors of fixed assets will be paid their rent

Shareholders (existing or new) may provide new funds in the form of cash

Some shares may be redeemed for cash

Dividends may be paid

Long-term loan creditors (existing or new) may provide loan finance, loans

will need to be repaid from time to time, and

Interest obligations will have to be met by the business.

Unlike movements in the working capital items, most of these non-working

capital cash transactions are not everyday events. Some of them are annual events (e.g.

tax payments, lease payments, dividends, interest and, possibly, fixed asset purchases and

sales). Others (e.g. new equity and loan finance and redemption of old equity and loan

finance) would typically be rarer events.



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COMPONENTS OF WORKING CAPITAL

There are two components of Working Capital

A. Current Assets

B. Current Liabilities

A. Current Assets

An asset is termed as current assets when it is acquired either for the purpose of

selling or disposing of after taking some required benefit through the process of

manufacturing of which constantly changes in form and contributes to transactions take

place with the operation of the business although such assets does continue for long in the

same form.

Components of Current Assets are as follows:

Cash & Bank Balance

Stock of Raw Material at cost- work in process and Finished Goods.

Advanced Recoverable in Cash or kind or kind or for value to be received.

Security deposits with electricity board-telephone department balances with

customers.



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Deposits under the company scheme.

Prepaid Expenses.

Miscellaneous Stores implements goods in transit.

Advanced payment of income takes credit certificates.

Excise duty and sales tax recoverable.

Outstanding debts for a period exceeding six months.

CO-RELATION BETWEEN CURRENT ASSETS AND WORKING CAPITAL

The working capital is in simple terms is the amount of funds which company

must have to finance its day-to-day operations. The interaction between current assets

and current liability is main theme of theory of working capital. In general terms working

capital means difference between current assets and current liabilities.

The current assets are main source of working capital. It refers to those assets,

which can be converted into cash within a year. The current assets are inventories, cash

and bank balance, sundry debtors, loans and advances etc

Current asset management is one the most important aspect of the overall

financial management. The efficient management of working capital can determine its

profitability skill of every financial manager lies in the efficient management requires

maintaining proper relationship between current asset and current liability. Therefore,

planning and control of current asset is he most important function of finance manager.



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A study of working of working capital is major part of external and internal

analysis. Because, of its close relationship with current day-to-day operations of business.

Working capital consists broadly the assets of business that are used at current operations

which was represented by raw materials, stores, WIP, and finished goods, merchandise,

bills receivable. Etc.

Characteristics of Current Assets

While managing the working capital bear in mind of two characteristics of

Current assets.

1. Short life span.

2. Swift transformation into other assets forms.

Current assets a life span, cash balance may be held idle for a week or two

accounts receivable may have life span of 32 to 60 days and inventories may be need for

2 to 60 days. It s depends upon time require in the activities of procurement of,

production, sales and collection, and the degree of synchronization among them.

Each Current Assets swiftly transform into other asset cash is used for requiring

raw materials: raw material are transform in to finished goods, finished goods are

generally sold on credit are convertible into account receivable and finally accounts

receivable on realization, generate cash.



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The short life span of working capital component and they swift transformation

from one from to another has certain implication.

CURRENT ASSETS CYCLE

1. Decisions relating to working capital management are repetitive and frequent.

2. The difference between profit and present value is insignificant.


Finished Goods

A\C Receivable WIP

Raw Materials

SuppliersCash

Wages / Factory

overhead


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3. The close interaction among working capital components implies that efficient

management one component cannot undertake without simultaneous consideration of

other components.

Working capital means assets of the company that are changed in the ordinary

capital of business term to another. For ex, from another as for as from cash to

inventories, inventories to debtors and again debtors in to cash where it is collected.

Working capital refers to a term investment in short term assets cash; short-term

securities account receivable and inventories. Current asset management that affects a

firm liquidity is at another important finance function. In addition to the management of

long-term assets, Current assets should be managed efficiently for safe guarding the firm

against the dangerous of liquidity and insolvency. Investment in Current Assets affects

the firm profitability, liquidity and risk.

Current Liabilities:

Components of Current Liabilities are as follows:

Non-Refundable non-interest bearing advances against subscription to shares.

Sundry Creditors for the goods and expenses.

Income tax deducted at sources from contractors.

Expenses Payable.



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Amount due to promoter of company.

Unclaimed Dividend.

Security Deposits.

Dealers Deposits.

Liabilities for bills discounted.

IMPORTANCE OF WORKING CAPITAL: -

Working Capital is most important in every organization whether it is a small or

big concern. Therefore it is said that, working capital is the blood and center at a

business.

1. Adequately Working Capital creates certainty, security and confidence in the

minds of the person in the might as well in the minds of creditors and workers.

2. It creates a good credit standing for the firm because credit standing depends upon

the ability to pay promptly. A company with adequate working capital is always

able to meet C.L. in time.

3. It ensure solvency and stability of the enterprise it also ensures continuity in

production and sales.

4. It enables the company to take advantage of cash discount allowed by the

suppliers of raw materials or merchandise.

5. It enables the prestige of the company and the morale of its workers because a

company with adequately working capital is always able to pay wages and

salaries promptly and regularly.



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6. It enables the company to procure loans terms banks on easy and competitive

terms.

7. In terms of boon it enables the company to meet increasing demand of its product.

8. In the time of depression, it enables the company to overcome the crises

successfully.

9. It enables the company to hold up inventory and wait for better marketing

opportunities so as to secure higher prices.

10. It enable the company on its business successfully and achieve progress and

prosperity,

METHODS OF ESTIMATING WORKING CAPITAL: -

Conventional Method: -

According to the conventional method, cash inflows and outflows are matched

with each other. Greater emphasis is laid on liquidity and greater importance is attached

to current ratio, liquidity ratio, etc., which pertain to the liquidity of a business.

Operating cycle method:

In order to understand what gives rise to differences in the amount of timing of

cash flows, we should first know the length of time which is required to convert cash into

resources, resources into final product, the final product into receivables and receivables

back into cash.



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CLASSIFICATION OF WORKING CAPITAL



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conservative. It the firm is aggressive then it will finance a part of its permanent current

assets with short-term funds. On the other hand, a conservative firm will finance its

permanent assets and also a part of temporary current assets with long-term financing.

(b) Gross Working Capital

This refers to the firms investment in current assets. Current Assets are the assets

which can be converted into cash within a short period say, an accounting year. Current

assets include cash, debtors, and bill receivable, short-term securities. etc.

A. On the basis of Time

a. Permanent Working Capital

Permanent Working Capital is permanently locked up in the circulation of current

assets. It covers the minimum amount requested for maintaining the circulation of current

assets.

i. Initial Working Capital

At its inception and during the formative period of its operations a company must

have enough cash fund to meet its obligations. The need for initial working capital is for

every company to consolidate its position.

ii. Regular Working Capital



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It refers to the minimum amount of liquid capital required to keep up the

circulation of the capital from the cash inventories to account receivable and from

account receivables to back again cash. It consists of adequate cash balance on hand and

at bank, adequate stock of raw materials and finished goods and amount of receivables.

b. Variable Working Capital

It refers to the past of the Working Capital that changes with the volume of

business; it may be divided into two classes.

i. Seasonal Working Capital

There is many line of business where the volumes of operations are different and

hence the amount of working capital varies with seasons. The capital required to meet

the seasonal needs of the enterprise knows as Seasonal Working Capital.

ii. Special Working Capital

The capital required to meet any special operations such as experiments with new

products or new techniques of production and making interior advertising campaign etc,

is also know as Special Working Capital.

B. Other Determinants of Working Capital



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In order to manage the Working Capital optimally; on has to give due

consideration to the factors that influence the amount of Working Capital to be

maintained.

SOURCES OF WORKING CAPITAL: -



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SHORT TERM SOURCES OF WORKING CAPITAL: -

Duration for this generally do not exceeds one year. Its sources are

INTERNAL SHORT TERM SOURCES

1. Depreciation Funds: Depreciation Funds created out of the profit is good source for

short-term source of financing working capital.

2. Provision for Taxation: Provision made for the companies, can use taxation as a

source of working capital during the intermediate period.

3. Accrued Expenses: The company executives postpone the payment of certain

expenditures due the date of finalization of account. These accrued expenses are useful as

working capital

EXTERNAL SHORT TERM SOURCES.

1. Trade Credit: Trade Credits extended by one business unit to the other on the

purchase sale of goods and equipments are very important.



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2. Bank Credit: - Commercial banks are providing a greater part of working capital in

the form of over drafts cash credit and short-term loans.

3. Credit Papers: - Bills Payable, promissory notes etc are usefully for working capital

requirements.

4. Customer Credit: Amount may also be obtained from customer and these amounts

can be used for purchasing raw materials, paying expenses etc.

5. Financial Corporation: The financial corporation likes IDBI, IFCI, ICICI, etc,

advances loans for various types of assistance.

6. Government Assistance: State and Central Government, of the country provide

short-term finance industries on easy terms.

7. Loan from Directors: - One enterprise can also obtain loan from its directors,

officers, M.D. etc



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EFFICIENT UTILIZATION OF WORKING CAPITAL MANAGEMENT

Well working capital management refers to the administration of all aspects of the

current assets and liabilities. It is necessary to get maximum benefit.

There is a direct relation between sale and working capital needs. As sale grows

the firm needs capital to invest in inventories and book debts.

A) Cash Management: -

Cash is required to meet the firms transactions and precautionary needs. The firm

needs cash to make payments for acquisition of resources and services, for the normal

consist of the business. It keeps addition funds to meet any emergency situation.

Cash Management involves three things.

Managing cash flow in and out of the firm.

Managing cash flow within the firm.

Financing deficit or investing surplus cash. And thus controlling of cash balance at

the point of time.

B) Inventory Management: -



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Inventories play very significant role in working capital. It is single most sizable

investment in working material, indigenous raw material, spares, stock, tools, the

maintenance, and goods in progress, stock of packing materials, stationary etc. To

manage inventories efficiently and effectively answer should be sought from the

following questions.

How much should be ordered?

When should be ordered?

The aim of inventory management thus should be to avoid excessive and

inadequate levels of inventories and to maintain sufficient inventories for the smooth

production and sales operation.

C) Management of Receivables: -

Business firm generally sell goods on credit to facilitate sales. When goods are

sold on credit finished goods are converted into receivable. Receivable when realized

generate cash for forecasting standard ratio of accounts receivables based on analysis of

part data of two years. Recessions analysis and making may be appeared.

D) Operating Cycle: -

Operating Cycle refers to length of time required to complete the series of events

as stated below in case of manufacturing enterprise, which is cyclical in nature.

For a manufacturing firm, cash is spent on acquiring raw materials, which are

transformed in to work in progress. The work in progress is then converted in to finished



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goods. Finished goods take the form sales, which may be credit or cash. Credit sales

convert in to sundry debtors, bills receivables, which after some time, gets converted in to

cash. This cycle repeats.

OPERATING CYCLE OF MANUFACTURING COMPANY

Cash

Debtors / BR Raw Materials

Sales of goods Work in Progress

Finished Goods

IMPORTANCE OF OPERATING CYCLE

Operating cycle concept is a new concept in working capital management, which

has been gaining more and more importance in recent years. This concept emphasizes the

importance of time factors in the conversion of raw materials into final product and then

in to sales resulting in cash collection, right from the acquisition of raw materials,

normally operating cycle passes through the following stages.

1. Acquisition of raw materials.

2. Work in Progress.



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Another factors which have a bearing on the quantum of working capital is the

production cycle. The term Production or manufacturing cycle refer to the time

involved in the manufacture of goods. It covers the time-span between the procurement

of finished goods. Funds have to be necessarily tied up during the process of

manufacture, necessitating enhanced working capital. In other words, there is some time

gap before raw material becomes finished goods. To sustain such activities the need for

working capital is obvious. The longer the time span (i.e. Production Cycle), the larger

will be the tied up fund and, therefore, the larger is the working capital needed and vice-

versa.

3. Business Cycle

The working capital requirements are also determined by the nature of business

cycle. Business fluctuations lead to cyclical and seasonal changes, which, in turn, cause a

shift in the working capital position, particularly for temporary working capital

requirement. The variations in business condition may be in two directions,

1. Upward Phase: - When boom conditions prevail,

2. Downswing Phase: - When economic activity is marked by a decline.

During the upswing of business activity, the need for working capital is likely to

grow to cover the lag between increased sales and receipt of cash as well as to finance

purchase of additional material to cater to the expansion of the level of activity.

4. Production Policy



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managerial discretion in working out a suitable credit policy relevant to each customer

based on the merits of each case. For instance, liberal credit facilities can be extended on

the basis of credit rating. This will avoid the problem of having excess working capital.

6. Growths and Expansion

As a company grows, it is logical to expect that a larger amount of working

capital is required. It is, of course, difficult to determine precisely the relationship

between the growth in the volume of business of a company and the increase in its

working capital. The composition of working capital in a growing company also shifts

with economic circumstance and corporate practices. Other things, being equal, growth

industries require more working capital than those that are static.

7. Profit Level

The level of profit earned differs from enterprise to enterprise. In general, the

nature of the product, hold on the market, quality of management and monopoly power

would by and large determine the profit earned by a firm. A priori, it can be generalized

that a firm dealing in a high quality product, having a good marketing arrangement and

enjoying monopoly power in the market, is likely to earn high profit and vice-versa.

Higher profit margin would improve the prospects of generating more internal funds

thereby contributing to the working capital pool.

8. Dividend Policy



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Techniques of Working Capital Management: -

Working Capital management involves deciding upon the amount and

composition of current asset and how to finance the asset. This decision involves trade

off between risk and profitability.

Working Capital Balances are measured from the financial dates of the

companys balance sheet. A study of the causes for changes of working capital that take

place in the balance from time to time is necessary. These changes can be measured in

rupee amount and also in percentage by comparing current assets, current liabilities and

working capital over the given period.

The importance tools of Working Capital are,

1. Ratio Analysis of Working Capital: -

1. Ratio analysis of working capital.

2. Turnover of working capital Ratio.

3. Current Ratio.

4. Current Debt tangible net worth.

5. Inventory Turnover Ratio.

6. Debtor Turnover Ratio.



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2. Funds Flow Analysis of Working Capital: -

It is an effective management tool to study how funds have been produced for a

business and how they have been employed. This technique helps to analyze change in

working capital components between two data. The comparison of current asset and

current liability at the beginning and at the end of specific period show changes in such

type of current assets and resources from which Working Capital has been obtained funds

flow statement contributes materially to the financial aspects.

3. Working Capital Budget: -

The working capital budget is an important phase of overall financing budgeting.

This budgeting should be distinguished from a cash budget that is designed to measure all

the financial repayment of loans, term loan and similar item. On the other hand working

capital repayment and assure that they are duly provided for. The objective of that budget

is to secure an effective utility of investment.

4. Trend Analysis: -

A trend analysis indicates the change, which has been taking place from time to

time of an individual item of current assets. Assets and utility and net working capital on

the basis of some standards year and its effect on working capital portion. It enables

creative the upward and down ward trend of current assets and current liabilities. These

are usage measured from review of comprehensive balance sheet of a concern at the end

of account year and result is drawn on the basis of trend shown by them.



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1. Finance Department.

2. Design Department.

3. Production Department.

Objective of the Study: -

The following are the some importance objective of the study of working capital

management.

1. To analyze the working capital of the organization.

2. To analyze the effect of current assets on working capital.

3. To study financial performance of organization with the help of ratios.

4. To study the working capital and recommend the suitable working capital of the

year to the organization.



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marketed very reasonable price, the company manufacturing Redial Piston Pumps, Relief

Valves, and Directional Control Valves. And SPICA MOUCLD CYLINDERS

PRIVATE LIMIED, established in Jan 06 for manufacture of Mould Cylinders to be

exported to Italy. This company is yet to commence its production.

OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED: -

From its inspection has been manufacturing OIL HYDRAULIC SYSTEMS &

HYDRAULIC ACTUATORS & has later added PISTION type accumulators to its range

of products.

1. COLLABORATION

The company entered into a joint venture collaboration agreement with the

OILGEAR COMPANY, OILGEAR TOWLER INTERNATIONAL DIVISION, USA in

Dec 1993.

THE OILGEAR COMPANY is a world famous for its Electro-Hydraulic and

Hydraulics products such as sophisticated pumps, valves and systems and especially

known in the technology of world for its contribution to the technology of Metal

Extrusion and Metal forming systems. The company also has its subsidiaries in Australia,

Canada, France, Germany, Great Britain, Italy, Japan, and Korea & Spain.

Participated in following Business Areas

Market Oilgear products in the Indian market. Include products like piston, pumps,

solenoid valves, prefil valves and cartridge valves.



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Market Hydraulic and Electro hydraulic and subsystems for presses and machines.

Install, commission, and service, Hydraulic and Electro hydraulic systems

manufacturing by the Oilgear Company in Asian and South East Asian countries.

Assemble, service, repairs and test Oilgear products.

Design, manufacturing, sell, Install, repair, and service Hydraulic and Electro

hydraulic systems and subsystems, cylinders and other equipment in Asian and South

East Asian countries.

2. THE CONSTITUTION OF THE COMPANY: -

Name

OILGEAR TOWLER POLYHYDRON PRIVATE

LIMITED (OTPL)

Constitution A private limited company registered under

companies act 1956

Location

Registered Office

Plot No 4, R.S. No- 608/2, BEMCIEL

UDYAMBAG BELGAUM, 590008

KARNATAKA STATE, INDIA.

Phone: - 0831-2441157; Fax: - 0831-2441610

Works Plot No 34 & 37B

Village Kuttalwadi



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4.1) LAND AND BUILDING

Land and the site of the registered office 11054 Sq.ft (1026 Sq.m.)

Building and the site of the registered office- 4830 Sq.ft (450 Sq.m.)

Land at site of plant 1- 2200 Sq.ft. (204 Sq.m.)

Building at site of plant 1- 1622 Sq.ft (51 Sq.m.)

Land site of the works 258,100 Sq.ft (23978 Sq.m.)

Building Site of the works 25,000 Sq. ft (2322 Sq.m.).

4.2) MACHINERY, HANDLING, EQUIPMENT AND TEST RIGS

4.3) OFFICE AND EQUIPMENT

Communication: -

Head Office: -

Phone lines 6 Nos.

Fax lines 1 No

E-mail 1 No

Electronic Exchange 10*30 Capacities.


Laths 3 No s Painting Equipment 2 Sets

Horizontal Bore 3 No s Electro Static Cleaner 1 No s

CNC Machine Center 1 No s Cleaning Machine 2 No s

CNC Vertical Machine Center 1 No s Pallet Trucks 2 No s

Drilling Machine 3 No s Air Compressors 3 No s

Milling Machine 1 No s Prgauge Calibrator 1 No s

Surface Machine 2 No s Hardness Tester 1 No s

Honing Machine 1 No s Pumps Test Stands 3 No s

Hack Saws 2 No s Valve Test Stands 1 No s

TIG Welding Set 1 No s Generating Stands 3 No s

Flame Cutting Equipments 1 Set Over head Cranes 3 No s

Arc Welding Set 2 No s

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Works: -

Phone lines 6 Nos.

Fax line 1 No.

E-mail 1 No

Electronic Exchange 10*30 Capacities.

4.4) DATA PROCESSING

Computer ---- 24 Nos. For

Design Accountancy

Inventory Planning

Sales Purchase

Administration.

5) STAFF: -

Sales 7 Engineers + 4 Support

Purchase 2 Officers + 3 Support



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Methodology adopted and data collection: -

The nature of the study was collection analysis and interpretation of working

capital management in OTPL The information about this was gathered through

following sources.

Primary Data : -

Primary Data are those, which are collected fresh and for the first time, and thus it

happens to be original in character.

The primary sources of data are collected from the financial executives through

personal discussion in the light of the set objectives. Along with this, informal discussion

with other, member of the finance.

Secondary Data: -

Secondary Data are those have already been collected by someone else and while

already been passed through statistical process.

Annual Report of the Company.

Annual Accounts of the Company.

Ledger Profit and Loss Account.



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STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2003

OTPL


Particulars 2002 2003 Increase Decrease

A) Current Assets

1. Inventories.

2. S. Debtors

3. Cash & Bank Balance

4. Other C. Assets.

5. Loans & Advances.

TOTAL

B) Current Liabilities

1. Current Liabilities

2. Provision

TOTAL

Working Capital

(A-B)

Net Increase in

Working Capital

GRAND TOTAL

1,43,29,584

1,47,19,225

96,70,212

5,04,462

23,58,269

4,15,81,752

88,76,844

56,67,201

1,45,44,045

2,70,37,707

23,11,839

2,93,49,456

1,82,87,763

1,62,67,703

99,24,482

6,83,065

18,000,63

4,69,69,076

1,27,30,292

47,89,238

1,76,19,530

2,93,49,456

2,93,49,456

39,58,179

15,48,478

2,54,270

1,78,603

---------

--------

8,77,963

68,17,493

68,17,493

---------

---------

---------

---------

5,52,206

39,53,448

------------

45,05,654

23,11,839

68,17,493

54


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INTERPRETATION

As we can see in the above year 2002-03, there is an increase in the working

capital by Rs. 23,11,839. This is because:

1. As we can see that there is a great increase in Current Assets as the company is

looking to invest more in the inventory of raw material in this year, because of the

shortage of raw material in the market, so overall there is increase in the current

assets. But in current assets loans and advance are decreased.

2. As we can see there is decrease of Rs.39,53,448 in the liabilities of the company,

which is good for the company. But Rs. 8,77,963 increases provisions.

3. So from all the above calculation we can see that there is good increase in the

working capital. So we can say that company is more likely to increase there

inventory because they thinking it for the long term perspective.



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STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004

OTPL PVT LTD (Rs. In Thousand)


A) Current Assets

1. Inventories

2. S. Debtors

3. Cash & Bank Bal.

4. Other C. Assets

5. Loans & Advances

TOTAL



2. Provision

TOTAL

Working Capital

(A-B)

Net Increase in Working

Capital

GRAND TOTAL

18,288

16,298

9,924

6,83

1,806

46,969

12,830

4,789

17,619

29,350

16,543,

45,893

34,600

32,122

12,492

9,45

1,939

82,098

28,541

7,664

36,205

45,893

45,893

16,312

15,854

2,568

2,62

1,33

----------

----------

35,129

35,129

-------

-------

-------

-------

-------

15,711

2,875

18,586

16,543

35,129



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INTERPRETATION

In the above table it is seen that, there is an increased in the working capital by

Rs.16, 543 in the year 2003-04, this is because: -

1. As we can see in the above table that in the Current assets are increased, because of

increase in inventories, debtors, cash and bank balance, loans and advance and also

increase in other current assets.

2. As we can see there is overall decrease in current liabilities. Because of current

liabilities are decreased by Rs.15,711 and also provision are also decreased by Rs.

2,875.

3. So as the liabilities have decreased this year and there is increase in current assets, so

there is increase in working capital.

STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004



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OTPL PVT LTD (Rs. In Thousand)


A) Current Assets

1. Inventories

2. S. Debtors

3. Cash & Bank Bal

4. Other C. Assets

5. Advance to Suppliers

6. Loans & Advances

TOTAL



2. Advance from customer

3. Provision

TOTAL

Working Capital (A-B)

Net Increase in Working Capital

GRAND TOTAL

34,600

32,122

12,492

9,45

-------

1,930

82,098

28,541

---------

7,664

36,205

45,896

6,874

52,767

28,042

47,790

10,084

6,056

1,215

1,771

94,958

26,531

9,082

6,778

42,191

52,767

52,767

--------

15,668

--------

5,111

1,215

--------

21,994

2,210

------

8,86

3,096

25,090

25,090

6,558

-------

2,408

-------

-------

1,59

9,125

--------

9,082

-------

9,082

18,207

6,883

25,090

INTERPRETATION



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Ratio Analysis is a widely used tool of financial analysis. It defined as the

systematic use of to interpret the financial statement so that the strength and weakness

of a firm well as its historical performance and current financial condition can be

determined. This relationship can be expressed

1. Percentage says net profits are 25 percent of sales.

2. Proportion of numbers (the relationship between net profit and sales is 1:4), these

alternative methods of expressing items which are related to each other are, for the

purpose of financial analysis, referred to as ration analysis.

Types of Ratios

Ratio can be classified into following categories,

1. Current Ratios.

2. Net Working Capital Ratios.

3. Total Assets Turnover Ratios.

4. Inventory Turnover Ratios.

5. Fixed Assets Turnover Ratios.

6. Creditors Turnover Ratios.

7. Creditors Collection Period.

8. Debtors Turnover Ratios.

9. Debtors Collection Period.

10. Gross Profit Margin Ratios.

MERITS AND DEMERITS OF THE RATIO: -



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Current Ratio

2

2.2

2.4

2.6

2.8

2002-2003 2003-2004 2004-2005

Years

Rat

ios

Current Ratio

Interpretation: -

As a conventional rule, a current ratio of 2:1 or more considered satisfactory. The

OTPL Company, has current ratio is 2.66:1; therefore, it may be interpretated to be

satisfactory company. The current ratio represents a margin of safety for creditors. The

higher the current ratio, the greater the margin of safety, so, there has been increased in

the ratio during 2002-2003, when compared with 2003-2004 and 2004-2005. So, larger

the amount of current assets in relation to current liabilities, the more the firms ability to

meet its current obligation. Firm with less than 2:1, current ratio may be doing well,

while firm with 2:1 or even higher current ratio may be struggling to meet their

obligations. This is so because, if Rs.2 is your Current Assets and Rs.1 is Your Current

Liabilities. Thus Current Ratio shown is 2:1, which is an Ideal Ratio.

2. Quick Ratio

It establishes a relationship between quick or liquid, assets and current liabilities.

An asset is liquid if it can be converted in to cash immediately or reasonably soon

without a loss of value. Cash is most liquid assets. Other assets, which are considered to



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be relatively liquid and included in the quick assets, are debtors, and bills receivable and

marketable securities. Inventories are considered to be less liquid, inventories normally

requires some time for realizing in to cash; their value also has a tendency to fluctuate.

Formula

Quick Ratio = Current Assets Inventories

Current Liabilities


Particulars 2002-2003 2003-2004 2004-2005

Current Assets 4,69,69,000 8,20,98,000 9,49,58,000

(-) Inventory 1,82,88,000 3,46,00,000 2,80,42,000

Total 2,86,81,000 4,74,98,000 6,69,16,000

(/) Current Liabilities 1,76,19,000 3,62,05,000 4,21,91,000

Quick Ratio 1.62 1.31 1.58

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Quick Ratio

0

0.5

11.5

2

2002-2003 2003-2004 2004-2005

Years

Ratios

Quick Ratio

Interpretation: -

Generally a quick ratio is 1:1 is considered to represent a satisfactory current

financial condition. In the year 2002-03 quick ratio was 1.62 and there has been

decreased in the year compared to 2003-04 and 2004-05.

The high ratio indicates that all debtors may not be quick and cash may be

immediately needed to pay operating expenses. It should be noted that inventories are not

absolutely non-liquid to a measurable extent inventories are available to meet current

obligations. So the company can suffer from shortage of funds. On the other hand, a

company with low ratio in the year 2003-04 and 204-05, indicates that quick ratio may

really be prospering and paying its current obligation in time if it has been turning over

its inventories efficiently.

3. Total Assets Turnover Ratio: -



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The Total assets turnover ratio in addition to, or instead the net current assets,

This ratio shows the firms ability in generating sale from all the financial resource

committed to total assets

Formula,

Total Assets Turnover Ratio = Net Sales

Total Assets

Particulars 2002-2003 2003-2004 2004-2005Net Sales 5,73,73,000 10,86,60,000 10,70,00,000

Total Assets 2,69,95,000 2,57,87,000 2,52,21,000

Total Assets Turnover Ratio 2.12 4.21 4.24

Total Assets Turnover Ratio

0

1

2

3

4

5

2002-2003 2003-2004 2004-2005

Years

Ratios

Total Assets

Turnover Ratio

Interpretation: -



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There has been increased in the year 2004-05, when compared to 2002-2003 and

2003-2004. And high ratio indicates that in the year 2004-05, that ratio shows the firms

ability in generating sales from all financial resources.

4. Inventory Turnover Ratio: -

It indicate the efficiently of the firm in producing the selling its product. The ratio

indicates how fast inventory is sold. A high ratio is good from viewpoint of liquidity and

vice versa. A low ratio would signify that inventory does not sell and stay on the shelf or

in warehouse for a long time.

Inventory Turnover Ratio = Net Sales

Inventory

Interpretation: -


Particulars 2002-2003 2003-2004 2004-2005Net Sales 5,73,73,000 10,86,60,000 10,70,00,000

Inventory 1,82,88,000 3,46,00,000 2,80,42,000

Inventory Turnover Ratio 3.13 3.14 3.81

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There has been increased in the ratio in the year 2004 2005, when compared

with 2002-2003 and 2003-2004. In the year 2004-2005, indicates high ratio, it means,

Inventory turnover ratio implies good inventory management and very high ratio calls for

a careful analysis. It may indicate under investment in inventory. While a Low ratio

indicate in the year 2002-2003, that, it may be result in use of inferior quality of goods

and over investment in sales in the 2003-2004.

4. Fixed Assets Turnover Ratio: -

Fixed Assets Turnover Ratio measures Sales per rupees investment in Fixed

Assets. It measures the efficiency of fixed assets employed in the organization. High

degree of ratio indicates high efficiency of assets utilization vice-versa.

Fixed Assets Turnover Ratio = Net Sales

Fixed Assets


Particulars 2002-2003 2003-2004 2004-2005

Net Sales 5,73,73,000 10,86,60,000 10,70,00,000

Fixed Assets 3,69,41,000 3,72,38,000 3,83,06,000

Fixed Assets Turnover Ratio 1.55 2.91 2.79

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Fixed Assets Turnover Ratio

0

1

2

3

4

2002-2003 2003-2004 2004-2005

Years

Ratios

Fixed Assets

Turnover Ratio

Interpretation: -

There has been increased in the ratio during 2002-2003 and 2004-2005, when

compared with 2003-2004. A low ratio in the year 2002-2003 indicates in efficiency use

of assets, and the next two years (2003-2004 and 2004-2005) shows high ratio, which

means that increasing efficiency of fixed assets employed in the organization. One of the

cautions to be kept in the mind is when fixed assets are old and substantially depreciated

the ratio tenders to be high, because, the denominator of the ratio will be low.

5. Creditors Turnover Ratio: -

It is the ratio between the Sales and Creditors or Net Credit Purchase and average

amount of creditors. It is an important tool of analysis as a firm can maintain minimum

amount of Current Assets, as credit from suppliers is easily available.



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Creditor Turnover Ratio = Net Sales

Creditors

Creditors Turnover Ratio

3

3.5

4

4.5

5

2002-2003 2003-2004 2004-2005

Years

Ratios


Interpretation: -

In the year 2002-2003, there was been increased when compared to 203-2004 and

2004-2005. In the year 2002-2003 indicate high ratio means the sales of the year very

low as compared to 2003-2004 and 2004-2005 and also creditors are low as compared to

2003-2004 and 2004-2005.

6. Creditors Collection Period: -


Particulars 2002-2003 2003-2004 2004-2005

Net Sales 5,73,73,000 10,86,60,000 10,70,00,000

Creditors 1,28,30,000 2,85,41,000 2,63,31,000

Creditors Turnover Ratio 4.47 3.80 4.06

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This ratio is the difference between Days and Creditors turnover ratios.

Formula,

Creditors Collection Period = Days


Creditors Collection Period

0

50

100

150

2002-2003 2003-2004 2004-2005

Years

Ratios

Creditors Collection

Period

Interpretation: -


Particulars 2002-2003 2003-2004 2004-2005

Days 365 365 365

Creditors Turnover Ratio 4.47 3.80 4.06

Creditors Collection Period 81.65 96.05 89.90

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In the year 2002-2003, there was increase when compared to 2003-2004 and

2004-2005. The high ratio of 2002-2003 indicates that the sales of the year is very low as

compared to 2003-2004 and 2004-2005, and also creditors are low as compared to as

compared to 2003-2004 and 2004-2005. While low ratio in the year 2003-2004 indicates

that creditors are high as compared to other year.

7. Debtors Turnover Ratio: -

It indicate the how many times debtors turnover each year. Generally, the higher

the ratio of debtors turnover, the more efficient is the management of credit. The ratio

measured how will reveal the days of debts to be colleted.

Debtors Turnover Ratio= Net Sales

Debtors

Particulars 2002-2003 2003-2004 2004-2005

Net Sales 5,73,73,000 10,86,60,000 10,70,00,000

Debtors 1,62,68,000 3,21,22,000 4,77,90,000

Debtors Turnover Ratio 3.52 3.38 2.23



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Debtors Turnover Ratio

0

1

2

3

4

2002-2003 2003-2004 2004-2005

Years

Rat

ios

Debtors Turnover

Ratio

Interpretations: -

There has been increased debtor in the year 2002-2003 as compared to 2003-204

and 2004-2005, high ratio indicates of shorter time gap between credit sales and cash

collation. A low ratio shows that debts are not being colleted rapidly. So, the standard

norms this high ratio reveals that company has quite efficient management of debtors. In

the year 2000 & 2003 are showing equal turnover ratio.

8. Debtors Payment Period: -

The debtors payment period is mainly related to how many days debtors have

taken to complete a period and how much is debtors turnover ratio.

Debtors Payment Period = Days

Debtors Turnover Ratio

Particulars 2002-2003 2003-2004 2004-2005



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Days 365 365 365

Debtors Turnover Ratio 3.52 3.38 2.23

Debtors Collection Period 103.69 107.98 163.67

Debtors Collection Period

0

50

100

150

200

2002-

2003

2003-

2004

2004-

2005

Years

Ratios

Debtors Collection

Period

Interpretation: -

The shorter the collection period is better quality of debtors. Since, a short

collection period implies that prompt payment by debtors. In collection period having

some increase and decrease. So, we can find out that there is no uniformity in the debtors

collection period of the year.

8. Gross Profit Margin Ratio: -

Gross Profit Margin Ratio is the result of relationship between price, sales,

volume and cost. A change in gross profit margin can be due to changes in any of these

factors. It represents the limit of beyond which fall in sales price are outside and tolerance

limit.

Gross Profit Margin Ratio = Gross Profit



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Net Sales

Particulars 2002-2003 2003-2004 2004-2005

Gross Profit 7,26,000 1,42,88,000 1,86,54,000

Net Sales 5,73,73,000 10,86,60,000 10,70,00,000

Gross Profit Margin Ratio 1.26 13.14 17.43

Gross Profit Margin Ratio

0

5

10

15

20

2002-2003 2003-2004 2004-2005

Years

Ratios

Gross Profit Margin

Ratio

Interpretation: -

There has been increased in the year 2004-2005 as compared to 2002-2003 and

2003-2004. The high ratio indicates that the company should earn a sufficient profit on

each rupee of sales. While low ratio indicate that in the year 2002-2003 that the company

will be meeting the operations expenses and no returns will be available to the owners.

And also high ratio indicate that a good management indicate that cost of production of



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the firm is relatively low, it may also indicate higher the sales price without a

corresponding increase in the cost of the goods.

CONSOLIDATED STATEMENT OF THE RATIOS FOR THREE YEARS

0

50

100

150

200250

300

Ratios

2002-

2003

2003-

2004

2004-

2005

Years

Consolidated Statement of RatiosGross Profit

Margin Ratio

Debtors

Collection

PeriodDebtorsTurnover Ratio

Creditors

Collection

PeriodCreditors

Turnover Ratio

Fixed Assets

FINDING AND SUGGESTIONS

Findings: -


Sl. No Particulars 2002-2003 2003-2004 2004-2005

1. Current Ratio 2.66 2.26 2.25

2. Quick Ratio 1.62 1.31 1.58

3. Total Assets Turnover Ratio 2.12 4.21 4.24

4. Inventory Turnover Ratio 3.13 3.14 3.81

5. Fixed Assets Turnover Ratio 1.55 2.91 2.79

6. Creditors Turnover Ratio 4.47 3.80 4.06

7. Creditors Collection Period 81.65 96.05 89.90

8. Debtors Turnover Ratio 3.52 3.38 2.23

9. Debtors Collection Period 103.69 107.98 163.67

10. Gross Profit Margin Ratio 1.265 13.14 17.43

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1. Current Ratio of OTPL Company shows the solvency of the firm ability to repay its

liabilities. As ratio is decline to 2.66. It shows that company is in solvency state.

Current assets are should always be twice of current liabilities.

2. In a comparative statement of Balance Sheet, debtors were 1,47,19,000 in the year

2002-2003, and it has increased to 3,21,22,000 and 4,77,90,000 in the last two years.

Because increased in credit sales.

3. Total assets turnover ratio shows the ability to convert all its assets incurring fixed

assets to sales. As per the ratio calculated in the year 2002-2003 it was 2.12, which

was low ratio means firm is able to convert its total assets quickly into funds as per

the company ratio the firm is able to convert it assets because the ratio are higher

between 4.24 to 2.12, which was low ratio.

4. Inventory Turnover Ratio is increased from 3.13 to 3.81 in the year 2002-2003 and

2004-2005 respectively. It shows company has maintained good inventory policy.

5. Gross profit margin ratio shows that increasing year to year. It shows that company

should earn a sufficient profit on each rupee of cash.

Suggestions: -



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The working capital including all its related aspects is managed quite well by

OTPL. The finance department is carrying out its responsibilities efficiently. The entire

departments are collectively working hard for the progress of OTPL.

The following are the suggestions.

1. In a comparative Balance Sheet Debtors are increased from year to year (1,47,19,000

to 4,77,90,00). Even though debtors are increased which is favorable enough for the

company. But should take care while dealing against the loss due to doubtful and bad

debt.

2. The company net sale is very low in the year 2002-2003 Rs 5,73,73,000, as compared

to 2003-2004 Rs. 10,86,60,000. So, the company should manage its current assets,

which effects on production and ultimately on sales.

3. The Current Ratio of the company is decreased from 2.66 to 2.55 in the last three-

year (2003 to 2005). So, the current ratio should be maintained by the company in

such a way that the ratio does not follow below 2:1.

4. Company should give minimum payment time to get prompt payment by debtors.



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Conclusion

Working capital may be regarded as lifeblood of a business. Its effective

provision can do much to ensure the success of a business, while its inefficient

management can lead not only to loss of profits but also to the ultimate down fall of what

otherwise might be considered as a promising concern. A study of working capital is of

major importance to internal and external analysis because of its close relationship with

the current day to day operations of a business.

1. Here, I conclude that Changes in the financial year is showing increase in the working

capital, because company maintains its working capital properly in the year 2003 to

2005.

2. According to my calculation Current Assets main part of, the working capital of the

business. According to all Ratios, It shows that company maintains its ratio is very

well. So, In the year 2004-2005 company showing better position in the working

capital.



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BIBLOGRAPHY

Financial Management by books used from which I have taken help for the theory

part of the study:

M.V. Khan & P.K. Jain

I.M. Pandey

I have also used the trial balance of Oilgear Towler Polyhydron Private Limited

(OTPL). Those are from the year 2003-2005. Which provide by the official at

Belgaum Works.

I have meet with the different people at the Administrative Department at Oilgear

Towler Polyhydron Private Limited (OTPL). As also took their views and

information for my Study.

I have also took the help form the company site www.oilgear.co.in



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impact of current asset on workng cap

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