A Reporton

of

Sultanate of Oman

Submitted by

R.Sasikumar

Course code : 406Register No: 32118

Enrollment No: 08008PF103

Under the Guidance ofProf. N. Aravindakshan

Submitted in partial fulfillment of the requirement

for the award of the degree of

ofM.G.UNIVERSITY

KOTTAYAM – KERALA

March – 2010

EXECUTIVE SUMMARY

This project is based on the study of working capital management in Arabian Industries LLC, An

insight view of the project will encompass – what it is all about, what it aims to achieve, what is

its purpose and scope, the various methods used for collecting data and their sources, including

literature survey done, further specifying the limitations of our study and in the last, drawing

inferences from the learning so far.

“Arabian Industries LLC” an Oman’s prestigious Engineering and Manufacturing Company; is a

well established engineering company. It is an Omani company which always maintained the

highest international standards of excellence through quality, technology and innovation. It has

the ability to provide the best in engineering and back up services for the petroleum and allied

industries. The company has ISO 9001-2000 certification and has executed projects in various

Middle East countries. It captured the various facets of the Oman economy in sectors ranging

from maintenance, manufacturing, fabrication and infrastructure, etc.

Working capital is the life-blood of all types of enterprises, manufacturing and trading both. It is

constantly required to buy raw materials for payment of wages and other day-to-day expenses.

Without adequate working capital, manufacturing operations will be crippled. It is a base on

which all the activities of business enterprise depend. The working capital management refers to

the management of working capital, or precisely to the management of current assets. A firm’s

working capital consists of its investments in current assets, which includes short-term assets—

cash and bank balance, inventories, receivable and marketable securities.

This project tries to evaluate how the management of working capital is done in Arabian

Industries LLC, through inventory ratios, working capital ratios, trends, computation of cash,

inventory and working capital, and short term financing. Working capital is primarily concerned

with inventories management, Receivable management, cash management & Payable

management.

The objective of the company now is to increase the scale of its business by increasing its profits

and the turnover and also by venturing into new line of business. It is now targeting to be the

World Class Industrial Enterprise from the present status. It is striving to have a huge global base.

AILLC/ADM/00101-2010 31ST March 2010

CERTIFICATE

This is to certify that Mr.Sasikumar.R. Register No.-32118 a IV th semester MBA student

of M.G.University - Kerala, has visited our Organization and conducted a study about it’s

Working Capital Management and he has successfully completed his Project works,

during the period from January to February 2010..

We wish all the best in his future endeavors.

Thanks with Regards,

Yours faithfully,

MaheshNair,

Finance Manager

Arabian Industries LLC.

CERTIFICATE

This is to certify, that Mr. Sasikumar.R is a bonafide student of Polyglot Institute,

Sultanate of Oman, and is presently pursuing a Post Graduate Degree in Master of

Business Administration in Finance and marketing.

Under our guidance, he has submitted his project report titled “Working Capital

Management” of Arabian Industries LLC, in partial fulfillment of the requirement for the

summer internship project during the Post Graduate Degree in Master of Business

Administration studies.

This report has not been previously submitted as part of another degree or diploma of

another Business School or University.

Centre Co-Ordinator:

.

Place: Muscat, Sultanate of Oman

Date: 31st March 2010

Prof. N. Aravindakshan

Dept. of Management

Polyglot Institute, Muscat,

Sultanate of Oman

Dr.K.Vijaya kumar

Polyglot Institute

DECLARATION

I, Sasikumar.R., the undersigned, an MBA student of M.G.University, Kerala do

hereby declare that this report titled “Working Capital Management” of

ArabianIndustries LLC, under the guidance of Prof. N.Aravindakshan, Professor of

Finance and Accounting, Department of University Studies, Polyglot Institute, Sultanate

of Oman, submitted in partial fulfillment of the requirement for the

summer internship project during the Post Graduate Degree in Master of

Business Administration studies.

This is my original work and has not been previously submitted as a

part of another degree or diploma of another Business school or

University. The findings and conclusions of this report are based on my

personal study and experience, during the tenure of my summer

internship.

Place: Muscat, Sultanate of Oman.

Date: 31st March 2010.

Counter signed:

Prof. N.Aravindakshan,

Dept. of University Studies,

Polyglot Institute,

Muscat, Sultanate of Oman.

ACKNOWLEDGEMENT

I take this opportunity to thank various people, who all have helped me to complete successfully

my internship programme with a project at Arabian Industries LLC. I would like to express my

gratitude towards thanking the following people:

Prof. N.Aravindakshan: (Former Co-Ordinator, Institute of Management in Kerala, University

of Kerala, Kollam Centre:)

Prof. N Aravindakshan, guided me with his valuable suggestion. He was a source of

inspiration for me to complete the study and make this report on time and was instrumental in

shaping this report.

Dr.K Vijaya Kumar.(Centre Co-ordinator)

I am highly indebted to the centre co-ordinator Dr.. K.Vijaya Kumar, Department of

Management Studies for inspiring me and for his valuable guidance and assistance provided.

Mrs. Sindhu Divakaran

Mrs.Sindhu Divakaran, Faculty of Management Studies, Polyglot Institute, has also guided me

with her valuable suggestions and advice for making this report a good success.

Mr.P.O. Jabir - Operation Manager-Polyglot Institute, Sultanate of Oma,

I take this opportunity to express my sincere and whole hearted thanks to Mr.P.O.Jabir, Operation

Manager, and all the staff members of Polyglot Institute, Sultanate of Oman., for their

tremendous help and support during the period of my project study.

Mr. Mahesh Nair

I express my sincere gratitude to Mr.Mahesh Nair-Manager Finance-Arabian Industries LLC, for

the valuable advice and guidance extended to me for the completion and shaping of the

dissertation.

Mr.Abdulkhadar Padiyath,

I wish to extend my sincere thanks to Mr.Abdulkhader Padiyath (Manager Finance -(Assistant),

for His help and support in shaping this report.

I also extend my sincere gratitude to all employees of Arabian Industries LLC, for their kind co-

operation and support for the completion of this report.

TABLE OF CONTENTS

1. Executive Summary

2. Certificate from organization

3. Certificate from Guide

4. Declaration

5. Acknowledgement

6. List of Tables and Chart

Chapter No: Page No.

1. Introduction 1

1.1 Background of the study 2

1.2 Statement of Problem 3

1.3 Need and Importance of the study 3

1.4 Objectives of the study 4

1.5 Hypothesis 5

1.6 Methodology 5

1.7 Limitations of the study 8

1.8 Chapterization- 8

2 Manufacturing Industry in Oman-A Profile 9

2.1 Introduction 10

2.2 Present Scenario 10

2.3 Foreign Investment 12

2.4 Oman Economy – A Review 13

2.5 Major Diversification 14

2.6 Manufacturing industry in Oman 15

2.7 Infrastructure Industry for Crude Oil 15

2.8 Aim of Mfg. Industry inOman 16

2.9 The Scope of Oil and Gas Industry 17

3 A profile of Arabian Industries LLC 18

3.1 Introduction 19

3.2 Industry Profile 20

3.3 Subsidiary and Joint Venture 21

3.4 Mission and Vision 24

3.5 Objectives and Goals 28

3.6 Product and Project Profiles 31

3.7 Financial Highlights 35

3.8 Literature Review 44

4 A Theoretical Perspective of Working Capital Management 50

4.1 Introduction 51

4.2 Need of Working Capital 56

4.3 Concept of Working Capital 56

4.4 Classification of Working Capital 59

4.5 Determinants of Working Capital 61

5 Research Methodology 65

5.1 Introduction 66

5.2 Scope of the Study. 67

5.3 Type of Data Collection 67

5.4 Objective of the Study 68

5.5 Scope and Limitation of the Study 69

6 Working Capital Level and Analysis 71

6.1 Working Capital Level 72

6.2 Working Capital Trend Analysis 73

6.3 Current Asset Analysis 76

6.4 Current liability Analysis 79

6.5 Changes of Working Capital 80

6.6 Operating Cycle 83

6.7 Working Capital Leverage 90

7 Analysis of Financial Statements 92

7.1 Introduction 93

7.2 Role of Ratio Analysis 93

7.3 Limitations of Ratio Analysis 94

7.4 Classification of WC Ratio 94

7.5 Efficiency Ratio 95

7.6 Liquidity Ratio 102

8 Working Capital Management-Finance and Estimation 109

8.1 Introduction 110

8.2 Receivables Management 110

8.3 Inventory Management 120

8.4 Cash Management 118

8.5 Working Capital – Finance and Estimation 124

8.6 Source of Working Capital 125

8.7 Estimation of working capital 128

9 Summary of Findings, Conclusion and Suggestions 130

9.1 Findings 131

9.2 Conclusions 132

9.3 Suggestions 133

BIBLIOGRAPHY

ABBREVIATION

LIST OF TABLES, AND FIGURES .

Sl. No. Description/name of the Table Table No. Page No.

1 Business Unit wise Performance-FBU 3-1 36

2 Business Unit wise Performance-MBU-TSU 3-2 36

3 Business Unit wise Performance-PDU 3-3 37

4 Business Unit wise Performance-EMU 3-4 37

5 Division Wise Performance 3-5 38

6 Financial Performance 3-6 38

7 Financial Summary 3-7 39

8 Cash Flow Analysis 3-8 41

9 Five Year Planned Turnover 3-9 41

10 Business Plan 3-10 43

11 Capital Expenditure 3-11 43

12 Size of Working Capital 6-1 72

13 Working Capital - Variance 6-2 74

14 Working Capital-size 6-3 74

15 Analysis of Current Asset and Liabilities 6-4 76

16 Current Asset - Size 6-5 76

17 Composition of Current Asset 6-6 77

18 Current Liabilities 6-7 79

19 Changes in Working Capital 6-8 82

20 Operating Cycle 6-9 89

21 Working Capital leverage 6-10 91

22 Working Capital Turnover Ratio 7-1 95

23 Inventory turnover 7-2 98

24 Debtors Turnover 7-3 100

25 Current Asset Turnover 7-4 101

26 Current Ratio 7-5 104

27 Quick Ratio 7-6 106

28 Absolute Liquid Ratio 7-7 108

29 Size of Receivable 8-1 111

30 Average Collection Period 8-2 112

31 Size of Inventory 8-3 115

32 Components of Inventory 8-4 115

33 Inventory turnover Ratio 8-5 117

34 Inventory Holding Period 8-6 117

35 Size and Index of Cash 8-7 121

36 Operating Cycle 8-8 123

37 Cash Conversion Cycle 8-9 127

38 Estimation of Working Capital 8-10 128

LIST OF GRAPHS

Sl. No. Description-Name of Charts Chart No Page No.

1 Performance Review-FBU 3-1 36

2 Performance Review-MBU-TSU 3-2 36

3 Performance Review-PDU 3-3 37

4 Performance Review-EMU 3-4 37

5 Finance Performance- 3-5 39

6 Financial Summary 3-6 40

7 Cash Flow Analysis 3-7 41

8 Permanent Working Capital 4-1 59

2 Temporary Working Capital 4-2 60

9 Working Capital Index 6-1 73

10 Current Asset Index 6-2 77

11 Current Asset Component 6-3 78

12 Current Liability Index 6-4 79

13 Changes in Working Capital 6-5 82

14 Net Operating Cycle 6-6 89

15 Working Capital Leverage 6-7 91

16 Working Capital Turnover Ratio 7-1 96

17 Inventory Turnover Ratio 7-2 97

18 Receivable Turnover Ratio 7-3 100

19 Current Asset Turnover Ratio 7-4 101

20 Current Ratio 7-5 104

21 Quick Ratio 7-6 106

22 Cash and Bank to Current Liabilities 7-7 108

23 Receivable Index 8-1 111

24 Average Collection Period 8-2 112

25 Inventories Index 8-3 115

26 Components of Inventories 8-4 116

28 Inventory Turnover Ratio 8-5 117

29 Inventory Holding Period 8-6 118

30 Cash Index 8-7 121

31 Cash Conversion Cycle 8-8 123

12432 Cash Conversion Cycle 8-9 127

33 Estimation of Working Capital-2010 8-10 129

LIST OF DIAGRAMS

Sl. No Descriptions Page No.

1 Structure of Arabian Industries LLC 19

2 Corporate Objectives 28

3 AI LLC-Holding Company Structure 40

2 Determinants of Working Capital 64

6 Research Methodology 66

7 Research Methodology – Data to Action 70

8 Operating Cycle 84

9 Working Capital Cycle 87

10 Cash Conversion Cycle 122

13. BIBLIOGRAPHY

BOOKS REFERRED

1) Banarjee.A.K., Nair.R.K., Agarwal. V.K. – Organisational Behaviour

(2007) – Pragathi Publishers – Meerut

2) Gupta.R.L – Advanced Accountancy

(2006) – Sultan Chand and Sons

3) Khan M.Y. Jain P.K. – Financial Management

(2008) – Tata Mc Graw Hill Publishers – New Delhi

4) Maheshwari.Dr.S.N. – Management Accounting and Financial Control

(2006) – Sultan Chand and Sons – new Delhi

5) Maheshwari.Dr.S.N - Accounting for Management

(2005) – Sultan Chand and Sons

6) Pandey.I.M – Financial Management

(2008) – Vikas Publishing House – New Delhi

7) Sharma.R.K., Shashi K Gupta - Business Management

(2008) – Kalyani Publishers – Ludhiana.

REPORTS REFERRED

Financial Statement – (Annual Report for 2009)

Company Journals – Arabian Industries LLC.

Main Economic and Social Indicators – 2009 - Ministry of National Economy – Sultanate

of Oman.

ABBREVIATION

AI LLC Arabian Industries LLC

AIM LLC Arabian Industries Manufacturing LLc

AIP LLC Arabian Industries Project LLC

AITS LLC Arabian Industries Technical Support LLC

APO Account Payable Outstanding

ARO Account Receivable Outstanding

BUH Business Unit Head

CCC Cash Conversion Cycle

CFO A US Magazine

CNC Computed Numerically Controlled

COO Chief Operating Officer

CPP Creditors payment Period

DCP Debtors Conversion Period

DSS Decision Support System

EPC Engineering, Procurement and Construction

FGCP Finished Goods Conversion Period

GCC Gulf Co-Operation Council

GOC Gross Operating Cycle

GWC Grows Working Capital

ICP Inventory Conversion Period

IOD Inventory Over Days

LLC Liability Limited Company

MBU Manufacturing Business Unit

MD Managing Director

NWC Networking Capital

PBU Project Business Unit

PDO Petroleum Development Oman

PWC Permanent Working Capital

QAQC Quality Assurance and Quality Control

RCP Receivable Conversion Period

RMCP Raw Material Conversion Period

TOR Turn Over Ratio

TWC Temporary Working Capital

WCC Working Capital Cycle

WCM Working Capital Management

WIPCP Work in Progress Conversion Period