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A TYBMS PROJECT REPORT ON

SUBMITTED TO PROF. KAMAL ROHRA OF


BMS
DEPARTMENT

Compiled by:

Danish Choudhari (40) (TL)


Jaffer Choudhari (41)
Mayuri Joshi (08)
Khatija Daudi (06)

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Acknowledgment

We are greatly honoured and privileged to


thank and acknowledge those people who
have contributed directly or indirectly in
making this project successfully.
Firstly with gratitude, we would thank Our
Principal Sir, Prof. A.E. Lakdawala for giving
us the opportunity for making this project
and extracting good knowledge from this
project. We also thank Our Joint-Principal,
Prof. Kamala A.; Vice-Principal Prof. Mallika
and Our BMS Co-ordinator, Prof. Arshi in this
context. With immense gratitude, we would
like to thank Our Subject Co-ordinator, Prof.
Kamal Rohra, for guiding us throughout the
project.
We would also thank all the sources from
whom we have collected the data and lastly
our group members who have been
supportive and co-operative throughout
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Sr. Contents Pg.
No. No
1. Introduction 4
2. Working capital/Operating 6
cycle
3. Working capital 7
management
4. Factors affecting working 8
capital requirements
5. Working capital concepts 12
6. Characteristics of working 14
capital
7. Kinds of working capital 16
8. Adequate working capital 17
9. Concept of zero working 21
capital
10. Working capital policy 22
11. Sources of working 25
3
capital financing
12. Estimation of working 27
capital
13. Crystal Solutions Pvt. Ltd. 29
14. Analysis of the financial 31
statements of the firm
15. Conclusion 35
16. Bibliography 36

Introduction

In a perfect world, there would be no necessity for current assets and liabilities
because there would be no uncertainty, no transaction costs, information search costs,
scheduling costs, or production and technology constraints. The unit cost of production
would not vary with the quantity produced. Borrowing and lending rates shall be same.
Capital, labour, and product market shall be perfectly competitive and would reflect all
available information, thus in such an environment, there would be no advantage for
investing in short term assets.
However, the world we live is not perfect. It is characterized by considerable
amount of uncertainty regarding the demand, market price, quality and availability of own
products and those of suppliers. There are transaction costs for purchasing or selling
goods or securities. Each organization is faced with its own limits on the production
capacity and technologies. There are fixed as well as variable costs associated with
production goods.

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These real world circumstances introduce problem’s which require the necessity of
maintaining working capital. For example, an organization may be faced with an
uncertainty regarding availability of sufficient quantity of crucial imputes in future at
reasonable price. This may necessitate the holding of inventory. Similarly, an organization
may be faced with an uncertainty regarding the level of its future cash flows and
insufficient amount of cash may incur substantial costs. This may necessitate the holding
of reserve of short term marketable securities, again a short term capital asset. In corporate
financial management, the term Working capital management” (net) represents the
excess of current assets over current liabilities.
Working capital is the heart of the business. If it is weak, business cannot function
properly. Cash is the lifeline of company. If this lifeline deteriorates, so does the
company’s ability to fund operations, reinvest to meet capital requirements and payment.
Understanding Company’s cash flow health is essential to making investment decision. A
good way to judge a company’s cash flow prospects is to look at its working capital
management. The company must have adequate working capital as much as needed by the
company. It should neither be excessive or nor inadequate. Excessive working capital
causes idle funds lying with the firm without earning any profit; whereas inadequate
working capital shows the company doesn’t have sufficient funds for financing its daily
needs. The goal of working capital management is to ensure that a firm is able to
continue its operation and that is has sufficient ability to satisfy both maturing short
term debt and upcoming operational expenses. The primary objective of working
capital management is to ensure that sufficient cash is available to:

• Meet day to day cash flow needs.


• Pay wages and salaries when they fall due
• Pay creditors to ensure continued supplies of goods and services.
• Pay government taxation and provider of capital – dividends and
• Ensure the long term survival of the business entity.

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The prime objective of the company is to obtain maximum profit throughout the
business. The amount of profit largely depends upon the magnitude of sales. However, the
sales do not get converted into cash immediately. There is always a time gap between
sale of goods and receipt of cash. The time gap between the sales and their actual
realization in cash is technically termed as operating cycle. Additional capital is
required to have uninterrupted business operations, and the amount will be locked up in
the current assets. Regular availability of adequate working capital is inevitable for
sustained business operations.

Working Capital/Operating Cycle

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Operating Cycle

If the company has a certain amount of cash, it will be required for purchasing the
raw material though some raw material may be available on credit basis. Then the
company has to spend some amount for labour and factory overheads to convert the raw
material in work in progress, and ultimately finished goods. These finished goods when
sold on credit basis get converted in the form of sundry debtors. Sundry debtors are
converted in cash only after the expiry of credit period. Thus, there is a cycle in which
originally available cash is converted in the form of cash again but only after following
the stages of raw material, work in progress and sundry debtors. Thus, there is a time gap
for the original cash to get converted in form of cash again. Working capital needs of
company arise to cover the requirement of funds during this time gap, and the quantum of
working capital needs varies as per the length of this time gap.
Thus, some amount of funds is blocked in raw materials, work in progress, finished
goods, sundry debtors and day to day cash requirements. However, some part of these
current assets may be financed by the current liabilities also. Example, some raw material
may be available on credit basis, all the expenses need not be paid immediately, workers
are also to be paid periodically etc. But still the amounts required to be invested in these
current assets is always higher than the funds available from current liabilities. This is the
precise reason why the needs for working capital arise.
WORKING CAPITAL MANAGEMENT

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From the financial management point of view, the nature of fixed assets and current
assets differ from each other in the following respects.

• The fixed assets are required to be retained in the business over a period of time
and they yield the returns over their life, whereas the current assets lose their
identity over a short period of time, say one year.
• In case of current assets, it is always necessary to strike a proper balance between
the liquidity and profitability principles which is not the case with the fixed assets.

For example, if the size of current assets is large, it is always beneficial from the
liquidity point of view as it ensures the smooth and fluent business operations. Sufficient
raw material is always available to cater to the production needs, sufficient finished goods
are available to cater to any kind of demand of customers, liberal credit period can be
offered to the customers to improve the sales, and sufficient cash is available to pay off
the creditors and so on.
However, if the investment in current assets is more than what is ideally required, it
affects the profitability as it may not be able to yield sufficient rate of return on
investment. On the other hand, if the size of current assets is too small, it always involves
the risk of frequent stock out, inability of the company to pay its dues in time etc. As such,
the investment in current assets should be optimum. Hence, it is necessary to manage the
individual components of current assets (viz. stock, receivables and cash) in a proper way.
Thus, working capital management refers to proper administration of all aspects of current
assets and current liabilities.

Working capital management is concerned with the problems arising out of the
attempts to manage current assets, current liabilities and inter relationship between them.
The intention is not to maximize the investment in working capital nor is it to minimize
the same. The intention is to have optimum investment in working capital. In other words,
it can be said that the aim of working capital management is to have minimum investment
in working capital without affecting the regular and smooth flow of operations. The level
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of current assets to be maintained should be sufficient enough to cover its current
liabilities with a reasonable margin of safety.
Moreover, the various sources available for financing working capital should be
properly managed to ensure that they are obtained and utilized in the best possible
manner.

FACTORS AFFECTING WORKING CAPITAL


REQUIREMENTS

The amount of working capital required depends upon a number of factors which can be
stated as below:

1. Nature of business: Some businesses are such, due to their very nature, that their
requirement of fixed capital is more than working capital. These businesses sell
services and not the commodities and that too on cash basis. As such, no funds are
blocked in piling inventories and also no funds are blocked in receivables. Example,
public utility services like railways, electricity boards, infrastructure oriented
projects, etc. Their requirement of working capital is less. On the other hand, there
are some business like trading activity, where the requirement of fixed capital is less
but more money is blocked in inventories and debtors. Their requirement of the
working capital is obviously more.

2. Length of Production Cycle: In some business like machine tool industry, the time
gap between the acquisitions of raw material till the end of final production of
finished product itself is quite high. As such more amounts may be blocked either in
raw materials, or work in progress or finished goods or even in debtors. Naturally,
their needs of working capital are higher. On the other hand, if the production cycle is
shorter, the requirements of working capital are also less.

3. Size and Growth of Business: In very small companies the working capital
requirements are quite high due to high overheads, higher buying and selling costs
etc. As such, the medium sized companies positively have an edge over the small
companies. But if the business starts growing after a certain limit, the working capital
requirements may be adversely affected by the increasing size.

4. Business / Trade cycles: If the company is operating in the period of boom, the
working capital requirements may be more as the company may like to buy more raw
material, may increase the production and sales to take the benefits of favorable

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markets, due to the increased sales, there may be more and more amount of funds
blocked in stock and debtors etc. Similarly, in case of depression also, the working
capital requirements may be high as the sales in terms of value and quantity may be
reducing, there may be unnecessary piling up of stocks without getting sold, the
receivables may not be recovered in time, etc. As such, in both these two extreme
situations of business/ trade cycles, the working capital requirement may be high.

5. Terms of Purchase and Sales: Sometimes due to competition or custom, it may be


necessary for the company to extend more and more credit to the customers, as a
result of which more and more amounts is locked up in debtors or bills receivables
which increase working capital requirements. On the other hand, in case of
purchases, if credit is offered by the suppliers of goods and services, a part of
working capital requirement may be financed by them, but if it is necessary to
purchase these goods or services on cash basis, the working capital requirement will
be higher.

6. Profitability: The profitability of the business may vary in each and every individual
case, which in its turn may depend upon numerous factors, but high profitability will
positively reduce the strain on working capital requirements of the company, because
the profits to the extent that they are earned in cash may be used to meet the working
capital requirements of the company. However, profitability has to be considered
from one more angles so that it can be considered as one of the ways in which strain
on working capital requirements of the company may be relieved. And these angles
are:
• Taxation policy how much is required to be paid by the company towards its
tax liability? As the amount of cash profits only after payment of taxes will be
available to the company for meeting its requirements of working capital.

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• Dividend policy how much of the profits earned by the company are
distributed by way of dividend? As the amount of cash profits to the extent not
distributed by way of dividend only will be available to the company for
meeting its requirements of working capital.

7. Operating Efficiency: If the business is carried on more efficiently, it can operate in


profits which may be reduces by eliminating waste and improved co-ordination etc.

8. Production Policy: Working capital requirements also fluctuate according to the


production policy. Some products have a seasonal demand but in order to eliminate
the fluctuations in working capital, the manufacturer plans the production in a steady
flow throughout the year. This policy evens out the fluctuations in working capital.

9. Seasonal Fluctuations: A firm producing products on seasonal demands requires


more working capital during peak seasons while the demand for working capital goes
down during slack season.
10. Dividend policy: A company has to pay dividends in cash as per Company Act,
1956. With liberal policy for payment of dividends, more working capital will be

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required, while the needs for more working capital will be reduced if policy is
conservative.

11. Credit policy: The working capital requirements of a firm depend on the credit
policy to its debtors. A liberal credit policy will result in huge funds blocked with
debtors which will enhance the need for working capital. The situation will be further
deteriorated, if the collection procedure is slow. If a liberal credit policy is followed
without inquiring into the creditworthiness of customers, there can be a problem of
recovery in future which will further push up the working capital requirements.
The need for working capital is also affected by the credit policy followed by
the firm’s creditors. If the creditors are ready to supply materials and goods on liberal
credit, working capital requirements are substantially reduced. On the other hand, if
purchases are mainly in cash, working capital needs, goes up. While planning the
working capital, due attention should be given towards credit policies followed by the
firm and its creditors.

12. Market Conditions: Due to competition in the market, the demands for working
capital fluctuate. A business firm has to give liberal credit to customers. It has to
maintain a large inventory of finished goods to serve the customers promptly. In this
situation, larger amount of working capital is required. On the other hand, when a
firm is in seller’s market it can manage with a smaller amount of working capital
because sales can be made on cash basis and there is no need to maintain large
inventory of finished goods because customers can be served easily

Working capital concepts

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There are two thoughts that are currently accepted about working capital. They are Gross
working capital concept and Net working capital concept.

• Gross working capital concept

This thought says that total investment in current assets is the working capital of the
company. This concept does not consider current liabilities at all. The reasons given for
the concept are:

• When we consider fixed capital as the amount invested in fixed assets. Then the
amount invested in current assets should be considered as working capital.
• Current asset whatever may be the sources of acquisition, are used in activities
related to day to day operations and their forms keep on changing. Therefore they
should be considered as working capital.

• Net working capital

It is narrow concept of working capital and according to this, current assets minus current
liabilities forms working capital. The excess of current assets over current liabilities is
called as working capital. This concept lays emphasis on qualitative aspect which

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indicates the liquidity position of the concern/enterprise. The reasons for the net working
capital method are:

• The material thing in the long fun is the surplus of current assets over current
liability
• Financial health can easily be judged by with this concept particularly from the
view point of creditors and investors.
• Excess of current assets over current liabilities represents’ the amount which is not
liable to be returned and which can be relied upon to meet any contingency.
• Inter-firm comparison of financial position may be correctly done particularly when
both the companies have the same amount of current assets.

If the current assets are higher than current liability it is considered the financial
position of the company is sound. If both current assets and liabilities are equal, the
company has resorted to short term funds for financing the working capital and long term
sources of funds have been used to finance the acquisition of fixed assets. It doesn’t
indicate the financial soundness for the company. If the current assets are lesser than
current liabilities there is negative working capital which indicates financial crisis.

Net working capital concept is more reasonable than the gross working capital
concepts. The balance sheet of the company includes group of liabilities such as bank
overdraft, creditors, bills payables, outstanding expenses etc. if it is not deduct from
current assets , the concern may consider itself quite secured: while the reality is may be
that the concern has very little working capital or has no working capital . Therefore, it is
reasonable to define working capital as the excess of current assets over current liabilities.

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Characteristics of Working Capital

• Short term Needs: Working capital is used to acquire current assets which get
converted into cash in a short period. In this respect it differs from fixed capital
which represents funds locked in long term assets. The duration of the working
capital depends on the length of production process, the time that elapses in the sale
and the waiting period of the cash receipt.

• Circular Movement: Working capital is constantly converted into cash which


again turns into working capital. This process of conversion goes on continuously.
The cash is used to purchase current assets and when the goods are produced and
sold out; those current assets are transformed into cash. Thus, it moves in a circular
away. That is why working capital is also described as circulating capital.

• An Element of Permanency: Though working capital is a short term capital, it is


required always and forever. As stated before, working capital is necessary to
continue the productive activity of the enterprise. Hence, so long as production
continues, the enterprise will constantly remain in need of working capital. The
working capital that is required permanently is called permanent or regular
working capital.

• An Element of Fluctuation: Though the requirement of working capital is felt


permanently, its requirement fluctuates more widely than that of fixed capital. The
requirement of working capital varies directly with the level of production. It
varies with the variation of the purchase and sale policy; price level and the level of
demand also. The portion of working capital that changes with production, sales,
price etc. is called variable working capital.

• Special Accounting System not needed: Since fixed capital is invested in long
term assets, it becomes necessary to adopt various systems of estimating
depreciation. On the other hand working capital is invested in short term assets
which last for one year only. Hence it is not necessary to adopt special accounting
system for them.

• Liquidity: Working capital is more liquid than fixed capital. If need arises, working
capital can be converted into cash within a short period and without much loss. A
company in need of cash can get it through the conversion of its working capital by
insisting on quick recovery of its bills receivable and by expediting sales of its

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product. It is due to this trait of working capital that the companies with a larger
amount of working capital feel more secure.

• Less Risky: Funds invested in fixed assets get locked up for a long period of time
and cannot be recovered easily. There is also a danger of fixed assets like
machinery getting obsolete due to technological innovations. Hence, investment in
fixed capital is comparatively more risky. As against this, investment in current
assets is less risky as it is a short term investment. Working capital involves more of
physical risk only, and that too is limited. Working capital involves financial or
economic risk to a much less extent because the variations of product prices are less
severe generally. Moreover, working capital gets converted into cash again and
again; therefore, it is free from the risk arising out of technological changes.

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Kinds of working capital

Working capital can be put in two categories:


1. Fixed or permanent working capital and
2. Fluctuating or temporary working capital

• Fixed or permanent working capital: The volume of investment in current assets can
change over a period of time. But always there is minimum level of current assets that
must be kept in order to carry on the business. This is the irreducible minimum amount
needed for maintaining the operating cycle. It is the investment in current assets which
is permanently locked up in the business, and therefore known as permanent working
capital.

• Variable/temporary working capital: It is the volume of working capital which is


needed over and above the fixed working capital in order to meet the unforced market
changes and contingencies. In other words, any amount over and about the permanent
level of working capital is variable or fluctuating working capital. This type of working
capital is generally financed from short term sources of finance such as bank credit
because this amount is not permanently required and is usually paid back during off
season or after the contingency.

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Adequate working capital

Keeping adequate working capital is the mantra towards the success of financial
management. The term adequate working capital refers to the amount of working capital
to be kept with the organization to meet its daily operations. Large investment in fixed
assets is not sufficient to run a business successfully. Adequate working capital is equally
important. Without working capital fixed assets are like a gun, which cannot shoot, as
there are no cartridges.

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


working capital is a criminal waste.” It is clear that the company can’t invest all its funds
in current assets to increase working capital and at the same time it requires to keep
sufficient funds with it. So a proper leverage between both ends is needed to assure proper
running of the business. The company is required to keep adequate working capital with
it; neither less nor more than needed.

Advantages of Adequate Working Capital

• Increase in debt capacity and goodwill: Adequate working capital represents the
financial soundness of the company. If one company is financially sound it would
be able to pay its creditors timely and properly. It will increase company’s
goodwill. It crests confidence among investors and creditors. Thus, a firm with
adequate working capital can raise requisite funds from market, borrow short term
credit form banks, and purchase inventories, etc. for the smooth operations of its
business.

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• Increase in production efficiency: With adequate working capital the firm can
smoothly carryout research and development activities and thus, add to its
production efficiency.

• Exploitation of favorable opportunities: In the presence of adequate working


capital, a company can avail the benefits of favorable opportunities. Adequate
working capital will help the company to have bulk purchases which would reduce
the cost of production, thus adds to its profit.

• Meeting contingencies adverse changes: A company can easily face certain


business and economic crises. A company having adequate working capital can
successfully meet contingencies such as business oscillations, financial crisis
arising from heavy losses, etc.

• Avail cash discount: Maintenance of adequate working capital enables a company


to avail the advantage of cash discount by making cash payment for to the suppliers
of raw materials and merchandise. Obviously it will reduce the cost of production
and increase the profit of the company.

• Solvency and efficiency for fixed assets: It helps to maintain the solvency of the
company. So that payments could be made in time as and when they fall due.
Likewise, adequate working capital also increases the efficiency for fixed assets as
their proper maintenance depends upon the availability of funds.

• Attractive dividend to shareholders: It enables the company to offer attractive


dividend to the shareholders so that sense of security and confidence will increase
among them. It also increases the market values of its shares.

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 Dangers of Inadequate Working Capital
Inadequate working capital means that the owner of the business has no money to run the
business on a day to day basis and will therefore force the owner of the business to go in
for an overdraft. Having inadequate working capital leads to so many of dangers as it
doesn’t fulfill its purpose. Some are given below:

• Loss of goodwill and creditworthiness: As the firm fails to have adequate


working capital, it loses it goodwill and creditworthiness among its creditors.
Consequently, the firm finds it difficult to procure the requisite funds for its
business operations on easy terms, which ultimately results in reduced profitability
as well as production interruption.

• Firm can’t make use of favorable opportunities: The firm fails to undertake the
profitable projects, which not only prevent the firm from availing the benefits of
favorable opportunities but also affect its growth.

• Adverse effects of credit opportunities: The firm also fails to avail the attractive
credit opportunities but also stagnate its growth

• Operational inefficiencies: It leads the company to operating inefficiencies, as day


to day commitments cannot be met.

• Effects on financial capacity: Inadequacy of working capital also weakens the


stock absorbing capacity of the firm because it cannot meet the contingencies
arising from business oscillations, financial losses, due to shortage of working
capital.

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• Non achievement of profit target: The firm cannot implement operational plans
due to unavailability of fund which will lead to non achievement of profit margin.

Dangers of Redundant or Excessive Working Capital

Excessive working capital means the firm has idle funds which earn no profits for the
firm. As the inadequate working capital is dangerous to the firm, redundant working
capital also brings hazardous condition in to the company. Let us discuss the dangers of
redundant working capital to the company.

• Low rate of return on capital: Excessive or redundant working capital implies the
presence of idle funds that earn no profit to the firm. So it cannot earn a proper rate
of return on its total investments because of the excessive costs incurred leading to
blockage of funds and fetching low returns on capital.

• Decline in capital and efficiency: Since the rate of return on capital is low the
company attempts to make some adjustment to inflate profit so as to increase the
dividend. Sometimes, this unearned dividend paid out of the company’s capital is to
keep up the show of prosperity by window dressing of accounts. Certain provision,
such as provision for depreciation, repairs and renewals are to be made. This leads
to decline in operating efficiency of the firm.

• Loss of goodwill and confidence: Lower rate of return leads to lower dividend
available to shareholder. This leads to down fall in market value of the company’s
share and markets the shareholder lose their confident in company.

• Evils of over capitalization: Excessive working capital is often responsible for


giving birth to the situation of overcapitalization in the company with all its evils.
Overcapitalization is not only disastrous to the smooth survival of the company but
also interests of those associated with the company.

• Destruction of turnover ratio: It destructs the control over turnover ratio which is
commonly used in the conduct of an efficient business.

It is evident from the foregoing discussion that a company must have adequate working
capital pursuant to its requirements. It should neither be excessive not inadequate. Both
situations are dangerous. While inadequate working capital adversely affects the business
operations and profitability, excessive working capital remains idle and earns no profits
for the company. So company must assure its working capital is adequate for its
operations.
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THE CONCEPT OF ZERO WORKING CAPITAL
In today’s world of intense global competition, working capital management is
receiving increasing attention from managers striving for peak efficiency the goal of many
leading companies today, is zero working capital. Proponent of the zero working capital
concept claims that a movement toward this goal not only generates cash but also speeds
up production and helps business make more timely deliveries and operate more
efficiently.
The concept has its own definition of working capital:
Inventories + receivables – payables

The rational here is that inventories and receivables are the keys to sales, that
inventories can be financed by suppliers through account payables. Companies use about
20% of working capital for each sale. So, on average, working capital is turned over five
times per year. Reducing working capital and thus increasing turnover has two major
financial benefits. Firstly, every penny is freed up by reducing inventories or receivables,
by increasing payables, resulting in a one-time contribution to cash flow. Secondly, a
movement toward zero working capital permanently raises a company’s earnings.
The most important factor in moving towards zero working capital is increased
speed. If the production process is fast enough, companies can produce items as they are
ordered rather than having to forecast demand and build up large inventories that are
managed by bureaucracies. This system is known as demand flow or demand based
management. And it builds on the just in time method of inventory control.
Clearly it is not possible for most firms to achieve zero working capital and
infinitely efficient production. Still, a focus on minimizing receivables and inventories
while maximizing payables will help a firm lower its investment in working capital and
achieve financial and production economies.

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WORKING CAPITAL POLICY
The basic objective of working capital management should be an optimum
investment. There should not be excessive or shortage of working capital. In order to
decide the optimum investment in working capital, there is a need to consider different
policies of working capital.

1.Ratio of current Assets to Sales

The current assets change as a result of changes in the sales. A firm has to decide
about the proportion of current assets to be maintained in relation to sales. There can be
aggressive, moderate or conservative current assets policies.
If an aggressive current assets policy is followed, a firm will maintain a very low
level of current assets in relation to sales. On the other hand, a conservative policy implies
carrying of a very high level of current assets in relation to sales. A moderate policy is via
media between the two extreme policies mentioned above and results into a moderate
proportion of current assets to sales.

Conservativ
e

Current Moderate
Assets

Aggressive

0
Sales

The result of a conservation current asset policy is that the risk is reduced. The
surplus current assets will ensure that the firm is able to cope up with fluctuation in sales
as well as in production. Besides this, the higher liquidity in this method will help in
eliminating the risk of technical insolvency. However, high profitability will have to be
sacrificed in this method.
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An aggressive current assets policy implies that there is a minimum investment in
current assets in relation to sales. This means the firm is taking greater risk. This method
ensures higher profitability but, it exposes the firm to greater risk of technical insolvency
as well as lack of capacity to cope up unanticipated changes in market.
A moderate current asset policy tries to balance risk and profitability by keeping
moderate level of current assets in relation to sales. The various policies discussed are
shown in the following diagram.

2.Ratio of Current Assets to fixed assets

A firm needs fixed assets and current assets to support a level of output. When output is
increases, current assets are increases but not in proportion to the increase in output. A
ratio of current assets to fixed assets indicates the level of current assets. This ratio is
calculated by dividing current assets by fixing assets. Assuming a constant level of fixed
asset, higher current assets to fixed assets ratio indicates a conservative current assets
policy, while a lower ratio indicates an aggressive current assets policy.

Conservative
policy

Average policy

Aggressive policy

Fixed
Assets
Output

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Blueprint for a good working capital management
policy

• General action: It is first necessary to set planning standards for stock days i.e.
Debtor days and creditors days. Having set planning standards KEEP TO THEM.
Impress on staff that these targets are just important operating budgets and standard
cost. Install an understanding amongst the staff that working capital management
produces profits.

• Action on stocks: Keep stock levels as low as possible, consistent with not running
out of stock and not ordering stock in uneconomically small quantities. “Just in
time” stock management is fine, as long as it is “just in time” and never fails to
deliver on time. Consider keeping stock in the supplier’s warehouse and drawing it
as and when and save the warehousing cost.

• Action on debtors /customers: Assess all significant new customers for their
ability to pay. Take references, examine account, and ask around. Try not to take on
new customers who would be poor payers. Reassess all significant customers
periodically. Stop supplying existing customers who are poor payers, you may lose
sales, but you are after QUALITY of business rather than QUANTITY of business.
Consider offering discounts for prompt settlement of invoices, but only if the
discounts are lower than the costs of borrowing the money owed from other
sources.

• Action on creditors: Do not pay invoices too early take advantage of credit offered
by suppliers. Only pay early if the supplier is offering a discount. Even then,
consider this to be an investment. Will you get a better return by using working
capital to settle the invoice and take the discount than by investing the working
capital in some other way? Establish a register of creditors to ensure that creditors
are paid on the correct date not earlier and not later.

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SOURCES OF WORKING CAPITAL FINANCING
The company can choose to finance its current assets by Long term sources or Short term
sources or a combination of both. The company should meet its working capital needs
through both long term and short term funds. It will be appropriate to meet at least 2/3 of
the permanent working capital equipments form long term sources, whereas the variables
working capital should be financed from short term sources. The working capital
financing mix should be designed in such a way that the overall cost of working capital is
the lowest, and the funds are available on time and for the period they are really required.

1. Long term sources: Long term sources of permanent working capital include
equity and preference shares, retained earnings, debentures and other long term debts
from public deposits and financial institution. The long term working capital needs
should meet through long term means of financing. Financing through long term
means provides stability, reduces risk or payment and increases liquidity of the
business concern. Various types of long term sources of working capital are
summarized as follows:

• Issue of shares: It is the primary and most important sources of regular or


permanent working capital. Issuing equity shares is primary source as it does not
create and burden on the income of the concern nor the concern is obliged to refund
capital should preferably raise permanent working capital.

• Retained earnings: Retain earnings, the accumulated profits, are a permanent


sources of regular working capital. It is regular and cheapest. It does not create
charge on future profits of the enterprises.

• Issue of debentures: It creates a fixed charge on future earnings of the company.


The company is obliged to pay interest. Management should make wise choice in
procuring funds by issue of debentures.

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• Long term debt: Company can raise fund from accepting public deposits, debts
from financial institution like banks, corporations, etc. But the limitation is that the
cost is higher than the other financial tools.

• Other sources: Other sources include sale of idle fixed assets, securities received
from employees and customers.

2. Short term sources of temporary working capital: Temporary


working capital is required to meet the day to day business expenditures. The variable
working capital can be financed from short term sources of funds. It has the benefits
of low cost and establishes closer relationships with banker. Some sources of
temporary working capital are:

• Commercial bank: A commercial bank constitutes a significant source for short


term or temporary working capital. This will be in the form of short term loans,
cash credit, and overdraft and though discounting the bills of exchanges.

• Public deposits: Most of the companies, in recent years, depend on this source to
meet their short term working capital requirements ranging from six month to three
years.

• Various credits: Trade credit, business credit papers and customer credit are other
sources of short term working capital. Credit from suppliers, advances from
customers, bills of exchanges, promissory notes, etc helps to raise temporary
working capital.

• Reserves and other funds: Various funds of the company like depreciation fund,
provision for tax and other provisions kept with the company can be used as
temporary working capital.

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ESTIMATION OF WORKING CAPITAL
There are various methods/ technique used in assessment of firm’s working capital
requirements. These methods are:

1. Estimation of components of working capital method: This method is based on the


basic definition of working capital i.e. excess of current assets over the current
liabilities. In other words, the amount of different constituents of the working capital
such as debtors, cash inventories, creditors, etc. are estimated separately and the total
amount of working capital requirement is worked out accordingly.

2. Percent sales method: This is the most simple and widely used method in
combination with other scientific methods. According to this method, a ratio is
determined for estimating the future working capital requirement. This is the generally
based on the past experience of management as the ratio varies from industry to
industry. For example, if the past experience shows that the amount of working capital
has been 20% of sales and projected amount of sales for the next year is Rs 10 lakhs,
the required amount of working capital shall be Rs. 2 lakhs.
As seen from above, this method is merely an estimation based on past
experience. Therefore, a lot depends on the efficiency of decision maker, which may
not be correct in all circumstances. Moreover the basic assumptions regarding linear
relationship between sales and the working capital may not hold well in all the cases.
Therefore this method is not universally acceptable. At best, this method gives a rough
idea about the working capital.

3. Operating cycle approach: The need of working capital arises mainly because of the
gap between the production of goods and their actual realization after sales. This gap
is technically referred as the “operating cycle” or the “cash cycle” of the business. If it
were possible to complete the entire job instantaneously, there would be no need for
current asset (working capital). But since it is not possible, every business
organization is forced to have current asset and hence operating cycle. It may be
divided into four stages:
1. Raw materials and stores storage
2. Work in process stage.
3. Finished goods inventory stage.
4. debtor’s collection stage,

The duration of the operating cycle is equal to sum of the duration of these stages less
the credit period allowed by the suppliers of the firm. In symbol,

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OC= R+W+F+D-C

Where,
OC= Duration of the Operating Cycle
R= Raw materials and storage space periods
W= work in process periods.
F= finished goods storage periods
D= debtor collection period
C= Creditors collection period.

The component of the operating cycles is calculated as under:

R= Average stock of raw material


---------------------------------------------------------
Average raw material consumption per day

S= Average stock of stores


---------------------------------------------
Average stores consumption per day

W= Average work in process inventory


----------------------------------------------
Average cost of production per day

D= Average book debts


---------------------------------------------------
Average credit sales per day

C= ` Average trade credit


----------------------------------------------------
Average trade credit purchase per day

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CRYSTAL SOLUTIONS PRIVATE LIMITED
Company profile

1. Name Crystal Solutions Private Limited

2. Firm Type Private Ltd Company

3. Industry Type Service Industry

4. Managing Director Mr. Vasant Bhanushali

5. Stake Holders Mr. Vasant Bhanushali and Mr. Kiran Shiveskhar

6. Auditor Jignesh R. Mehta and Associates

7. Corporate Office 716/717, Reena Complex Vidyavihar (W) Mumbai

8. Other branches U.S. Office 244, Fifth Avenue, Suite 2795, 2nd
floor, New York, NY 10001, Singapore

9. Nature of Business Providing online security solutions

10.Slogan “for powerful network solution”

11.Their Customers Tata Communications Ltd


Rediff.com
Times of India
Garware
Crompton & Greaves

12.Web-site www.crystalonnet.com/Solutions.htm

13.E-mail www.care@crystalonnet.com

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About the company

Crystal Solutions Pvt. Ltd., established since 1994 has been a key player in the anti-
virus and security market. Crystal has a composite team structure which includes
commercial as well as technical personnel to facilitate easy accountability and access for
all our clients. Dedicated Customer Support Center enables to streamline support
schedules, avoiding failed commitments. Crystal Solutions Pvt. Ltd is also a Leading
International Recruitment Service Provider. The entire focus being delivery of timely and
quality support to all their direct and indirect customers.
Crystal has always ensured that the companies is with the trend and advances in the
technology and transfer the same to all employees who interface with the customer.
In their endeavor to provide comprehensive solutions to their customers and their channel
partners all over India, Crystal has established tie-ups with many international software
vendors to deliver their solution in India Crystal plans to have strategic tie-up with many
other software vendors and some are almost at materialization.

Services and products

• Anti-Virus Solutions: They have 9+ years of experience in Anti-virus industry and


are in a position to suggest the right solution rather than sell a product. They have
the skills to implement and support McAfee, Symantec and Trend Micro.

• Firewalls and Intrusion Detection: They offer affordable security solution on


corporate firewalls and IDS. They provide Checkpoint, Symantec Firewall,
Stonegate, Netscreen and comprehensive policy setting and configuration.

• Linux Solution: They have acquired excellent technical competence in Linux and
can provide comprehensive solutions on Linux covering:
• Mail server with global address book
• Proxy server, with site control.
• Integrated anti-virus solution.

• Enterprise Back-Up Solutions: They can help you with your Data Availability and
Back-Up Management and provide VERITAS, Computer Associates Arcserver and
Doubletake.

• Messaging Solutions: They have Strong, Cost Effective mailing solutions from
Mdaemon / VPO3 /602 LAN Suite, Integrated Anti-Virus to filter out I-worms at
the mail gateway. They support Exchange, Lotus Notes and any other mail server.

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ANALYSIS OF FINANCIAL
STATEMENTS
I. Assessment of Working Capital for all the 5
years i.e. from 2005-2009

Particulars 2009 2008 2007 2006 2005

Current assets
Inventories 385442 35125 385442 347442 578377
Sundry 407894 252282 361871 261401 289569
Debtors 7.12 0.69 3.14 8.47 6.90
Advances/L 189194 209846 140577 946327 631445
oan/ 4.13 7.56 9.56 .12 .59
Deposits
Cash & (75455 450042 618571 142654 108302
Bank 9.73) .53 .29 5.88 1.39
Balances
Total 5601773 5106455 6028505 5334333 5188540
.52 .78 .99 .47 .88
Less: Current liabilities
Current (35264 (24161 (25807 (25152 (28080
liabilities & 21.06) 15.26) 51.99) 24.52) 29.95)
Provision
Working 2075352 2690340 3447754 2819108 2380510
Capital .46 .52 .00 .95 .93

Summary:

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From the above figures, it is observed that from 2005-2007, the working capital was
steadily increasing while 2008-2009, the working capital has significantly decreased. This
can be possible due to decrease in current assets and increase in current liabilities.
The basic objective of working capital management is to make optimum
investments. Hence, the company should improve its working capital requirement to
utilize them effectively and efficiently in investments.
II. Calculations of Ratios from 2005-2009

Name of 2009 2008 2007 2006 2005


the ratio
Current 56017 51064 60285 53343 51885
Ratio =
73.52 55.78 05.99 33.47 40.88
Current
Assets 35264 24161 25807 25152 28080
Current
Liabilities 21.06 15.26 51.99 24.52 29.95
1.59:1 2.11:1 2.34:1 2.12:1 1.85:1
=__ :___

Significance:
The ideal ratio considered is 2:1. Current ratio is also named as Working
Capital Ratio as it represents the working capital being the excess of the current assets
over the current liabilities. This ratio indicates the solvency of their business i.e. ability to
meet the liabilities of the business as and when they fall due. The current assets are the
source from which the current liabilities have to be met. It is also the measure of the
margin of safety that management maintains in order to allow for the inevitable
unevenness in the flow of funds through the current assets and liability accounts.
Though 2:1 ratio is considered desirable, it is not must – it depends upon the
nature of the industry. What is more important is not the size of current ratio but the
distribution and characteristics of current assets and current liabilities and their relation to
the prospective sales volume.

Findings and Suggestions:

33
The current ratio has always been almost 2:1 or more than 2:1. Hence, the company
should either decrease its current liabilities or increase its current assets, so as to maintain
the ideal ratio 2:1. This signifies the liquidity or solvency of the firm.
This also enables them to meet their short term obligations as and when they fall
due.

Name of 2009 2008 2007 2006 2005


the ratio
Stock to 385442 35125 385442 347442 578377
working ------------ ------------ ---------- ----------- ------------
capital ratio =
-- *100 - *100 - *100 - *100 -- *100
Closing stock 2075352 2690340 344775 281910 238051
----------------- .46 .52 4 8.95 0.93
*100
Working
capital
=______________%
18.57 1.30% 11.17 12.32 24.30
% % % %

Significance:
The ratio is an index of the position of over stocking. It shows what part of working
capital is represented by closing stocks. This ratio tells how much of a company's funds
are tied up in inventory. It is preferable to run the business with as little inventory as
possible on hand, while not affecting potential sales opportunities. Keeping track of
inventory levels is crucial to determining the financial health of the business. If this
number is high compared to the average for your industry, it could mean the business is
carrying too much inventory.

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Inventory to working capital ratio is an important indicator of a company’s
operation efficiency. The ideal ratio is that it should not exceed 100%. A low percentage
of inventory to working capital ratio means that a company has high liquidity of current
asset whereas a high value of inventory to working capital ratio means that a company is
carrying too much inventory in stock. It is not favorable for management because
excessive inventories can place a heavy burden on the cash resources of a company. A key
issue for a company to improve its operation efficiency is to identify the optimum
inventory levels and thus minimize the cost tied up in inventories.

Findings and Suggestions:


According to the above figures from 2005-2009, this ratio has always been less than
100%. Hence, this shows that not much of the company’s funds are held up in inventories.
One reason can be that this company is a service firm.

Name of the 2009 2008 2007 2006 2005


ratio

Debtors to 4078947. 2522820 361871 261401 289569


working 12 .69 3.14 8.47 6.90
capital ratio =
------------- ------------ ----------- ------------ ------------
Debtors --- *100 - *100 *100 -- *100 ---*100
----------------- 2075352. 2690340 344775 2819108 238051
*100 46 .52 4 .95 0.93
Working
capital
= ___________%
196.54 93.77 104.9 92.72 121.64
% % 6% % %

Significance:
This ratio is important as it helps to know the debtors’ contribution in the working
capital. Debtors are also included in the current asset. Ideally, the standard of this ratio is
higher the better.

35
Findings and suggestions:
This firm has a very high ratio in the year 2009.

CONCLUSION

Almost as bad is too much working capital or over-capitalization. Poor management


of working capital will result in excessive amounts tied up in current assets. Such a
scenario will lead to a business earning a lower than expected return.
It must be remembered that the shorter an organisation's working capital cycle, the
faster cash, and hence profits, from credit sales will be realized. In order to achieve this,
an organisation must regularly review its working capital, taking action where necessary.
There are many different equity and debt options available to small business
owners, and choosing the appropriate one(s) is essential to ensuring a healthy business. If
the business has a good capital structure and strong working capital management, then a
higher resale value is possible, and it may then prove easier to attract buyers.
Current Assets are essential in sustaining the operations of a business. Working
Capital Management deals with how current assets are managed and financed. The
objective of working capital management is to maximize profitability without
jeopardizing liquidity.

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Websites:

http://www.investor411.org/resources/zero-working-capital.php
http://en.wikipedia.org/wiki/Working_capital
http://ezinearticles.com/?The-Importance-of-Adequate-
Working-Capital&id=1115136
www.crystalonnet.com/Solutions.htm

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