1

CHAPTER 1

1.1 INTRODUCTION

Working capital is regarded as the 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 downfall
of what otherwise might be considered as a promising concern. Much has been
rightly made of the long-term planning of capital projects. But the cost to industry
due to inadequate planning in the use of working capital is immeasurable. 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.
Working capital is the leading cause of the portion of the assets of a business
which are used in, or related to current operations, and represented at any one time
by the operating cycle of such items as against receivables, inventories of raw
materials, stores, work-in-process and finished goods, merchandise, notes or bills
receivables and cash. The assets of this type are relatively temporary in nature. In
accounting, working capital is the difference between the inflow and outflow of
funds. In other words, it is the net cash flow. It is defined as the excess of current
assets over current liabilities and provisions.

There are two concepts of working capital, gross concept and net concept.
Gross working capital simply called as working capital, refers to the firm’s
investment in current assets. The net working capital is the difference between
firm’s current assets and current liabilities. Current assets are those assets which
can be converted into cash within an accounting year or operating cycle whichever
is longer and current liabilities are all obligations that a firm will have to incur
within an accounting year or operating cycle.
 2

WORKING CAPITAL MANAGEMENT

The term working capital refers to the amount of capital which is readily
available to an organization. That is, working capital is the difference between
resources in cash or readily convertible into cash (Current Assets) and organizational
commitments for which cash will soon be required (Current Liabilities).
Current Assets are resources, which are in cash or will soon be converted into cash in
“the ordinary course of business.”
Current Liabilities are commitments, which will soon require cash settlement in “the
ordinary course of Business”.

Working capital = current assets –current liabilities

In the department’s statement of financial position, these components
of working capital are reported under the following headings:

CURRENT ASSETS
◘ Liquid Assets (Cash and bank deposits)
◘ Inventory
◘ Debtors and receivables

CURRENT LIABILITIES
◘ Bank overdraft
◘ Creditors and payables

◘ Other Short term Liabilities

Finance is regarded as the lifeblood of every undertaking. Without adequate

finance, no enterprise can accomplish its objectives. So finance is one of the most
important of all the business functions. The success mainly depends on how well the
finance function is performed. Hence, efficient management of every business
enterprise is closely linked with efficient management of its finance.
Financial management also referred to as corporate finance or managerial
finance, is broadly concerned with the acquisition and use of fund by a firm. The main
objectives of financial management are profit maximization and wealth maximization.
 3

The working capital management is one of the most important aspects of financial
management. The achievements of objectives of a business like maximization of
profit and maximization of wealth largely depends upon the effective working capital
management. Finance management problems such as investment, financing and
dividend decision relating to the financial operations of a firm. These three major
decisions in financial management are known as ‘functions of finance’.

Working capital management decision comes under investment of finance, is

concerned with the managements of current assets. It is an important and integral part
of financial management as short-term survival is a pre-requisite to long-term success
of an enterprise.

The developing economies generally face the problem of inefficient utilization

of resources available to term. Capital is the most scarce and highly productive
resources in such economies and proper utilization of the valuable resources promotes
profitability, rate of growth, progress, cuts down cost of production and above all
improves efficiency of the productive systems.

The total capital of the economy comprises of the fixed capital and working
capital. Working capital is the most dynamic element of a company’s total capital and
comprises the bulk of a company’s transaction. Understanding the management of
working capital can help maximize a company’s leverage and potential for revenue
generation. Hence, purposeful harnessing and monitoring of the working capital is of
paramount importance in any development of institutions.
MEANING AND DEFINITION OF WORKING CAPITAL

Finance is the lifeblood of business. The funds ended for the short-term
purpose of raw materials, payments of wages and other day-to-day expenses are
known as working capital, which is, requires for financing short-term or current
assets.
In the words of SHUBIN “WORKING CAPITAL IS THE AMOUNT OF
FUNDS NECESSARY TO COVER THE COST OF OPERATING THE
ENTERPRISE”.
 4

The term current assets refer to those assets which in the ordinary course of
business can be or will be turned into cash within one year or without undergoing a
diminution in value and without disrupting the operations foot eh firm. The major
current assets are cash, marketable securities, accounts receivable and inventory.

Current liabilities are those liabilities, which are intended at their inception to
be paid in the ordinary course of business with in a yea, out of the current assets. The
basic current liabilities are accounts payable, bills payable, bank over draft and
outstanding expenses.

Working capital in simple terms means the amount of funds, which a company
must have to finance its routine business operations. It can be regarded as the portion
of the company’s total capital, which is employed in short term operations like
purchase of materials, payment of directs and indirect expenses, carring out the
production, investment in stores, stocks and receivable etc.,
 5

1.2 COMPANY PROFILE

The First World War that started in 1918 leaving the Indian economy
considerably shattered. It also brought to the surface the numerous contradictions
between Indian and British interests. In the first place, the war affected Indian and
British interests. In the first place, the war affected Indian life through massive
recruitments, heavy taxes and enforced war loans and an very sharp rise in prices. No
less than 3.55 lakhs people were recruited form Punjab alone and the British admitted
that the proportion of soldiers to the adult population had been forced up from 1:150
to 1.44 in single years. The 300 percent increase In defense expenditure meant not
only war loans – at times semi – compulsory – but a sharp increase in taxes. There
was a fall in living standards for the majority of the Indian people. The consumption
of cotton piece goods, for instance, went down from 5,102 million yards in 1913 -14
to 2,899 million yards in 1919 – 1920.

Mr. Mohandas Karamchand Gandhi C.M.K. Gandhi for short who had by
1920 come back to Indian to make a major impact on the national science had, as a
weapon against the British, advocated the boycott of British goods.

His advocacy had become so powerful that the value of imports of foreign
cloth fell from Rs.102 core in 1920 – 21 to Rs.57 core a year later. But because of the
very low wages paid to workers, strikes were on the rise and in just one year, 1921
there were 396 strikes involving over 6 lakes workers involving a loss of 69.94 lake
work days.

The reconstitution did not work as effectively as was expected and new
thoughts arose as to why the three banks should not be amalgamated, not only to
control recurring crises but to have a uniform management.

The main functions of the proposed amalgamate bank to be called the state
bank included. Same functions as performed by the presidency bank with relaxation
of some restriction.

Management of note issue. Management of public debt in India. Effecting

remittance for the secretary of state through the London office.
 6

Acceptance of payment and making disbursements on behalf of the

government at all place where the bank had a branch

The matter was taken up by the government in September 1919 in the Indian
legislative council. The amalgamated bank was to be known as the imperial bank.
The amalgamation came into effect in January 1921. It performed only two important
central bank functions viz., bank the regulation of note issue and management of
foreign exchange.

“Banks and financial institutions have a greater responsibility of being

conscious of the obligation they have of not jeopardizing the larger public interest.
What Mahatma Gandhi said, that business hold public money interests more true of
the financial sector than others”.

1.2.1 VISION

To become the bank of first choice in chosen areas by building beneficial and
lasting relationship with customer through a process of continues improvement

1.2.2 MISSION

1. To be customer centric organization known for its differentiated

customer services.

2. To offer comprehensive range of product to meet all financial needs of

customer.

3. To be a top creator of shareholder wealth through focus on profitable

growth.

4. To be a young organization leveraging on technology and experienced

workforce.

5. To be the most trusted brand, admired by all stakeholders.

6. To be a leader in area of financial inclusion.

 7

1.2.3 Classification of Branches;

As many as 65 branches were classified under Group ‘A’, ‘B’ and ‘c’. In order
to develop business with foreign banks, It was decided that the bank should bear the
expenses of bankers from abroad incurred in traveling conveyance and entertainment
during their stay in Indian. It was a wise decision that was to pay in the long run.

Retirements A g e ;

On 3 November 1960 the bank reduced the age of retirement from 60 to 58

years but the matter was referred to the industrials tribune and was held under
abeyance. The tenure of the bank was to expire on 1 April 1961 but he was given an
extension of five more years with the approval of the RBI. In order to continue its
expansion programmed in north Indian, the bank also decided to extend the services
of Mr. S.D.Dua,st.

Foreign exchange business soars:

Services for Mr. R.J.S. Angus had been loaned to the bank for four years by
west Minster bank ltd. Initially up to 1960 and then again for two more years. He
relinquistely his post on 17 April 1962. He did a great job in organizing the foreign
exchange department of the bank on a sound footing and training the required
personnel.

Co department;

1.) The central office under the setup was divided into the following departments.

2.) General Manager’s office.

3.) Deputy General Manager office.

4.) Advance departments.

5.) Chief advance departments (including investment).

6.) Inspection departments.

7.) Development &information departments.

8.) Staff departments.

Bank revises pay;

 8

The staff salaries issue had long been pending with the National Industrial
Tribunal which finally made its Award know. Two hundred officers and sub-officers
of the bank drawing a salary of less than Rs 500/- were given the option to option out
of the Awards recommendation but only one officer choose that option.

Merger of Smaller Bank;

Even though the Bank had grown to an appreciable degree, it was felt that
takeover of small banks to enlarge the scope of business was a good option.
Therefore, the Bank took a policy decision in December 1962 to small regional bank
to enlarge its network of operations. However confidentiality had to be maintained in
this regard.

Employee Housing Society;

The employee of the bank formed a co-operative Housing society know as

UBI Employees co-operative Housing Society Ltd with 96 members. The same was
registered under the co-operative society Act,

Stock Exchange Division;

The stock Exchange division of the government of India had asked Bombay
Stock Exchange to get the following suggestion implemented by joint stock
companies including banks.

a) Registration fees for shares lodged for transfer from one name to another

b) Splitting or consolidation fees for sub-division or consolidation in

denomination of market unit of trading

The data of commencement of closer of transfer books should not fall on a data
immediately Currencies succeeding a holiday

Dealing in Foreign;

We got a general license from RBI in 1956 to deal in all foreign currencies. It
was not without difficulty that we obtained it. Knew the deputy controller of foreign
exchange and approaches him in 1955 itself, within a year of my joining.
 9

1.2.4 Deposit Schemes;

(i) Deposit Reinvestment Certificate
(ii) Fixed Deposit Receipt
(iii) Monthly Income Scheme
(iv) Union Monthly Plus
(v) Flexi Deposit Scheme-Savings
(vi) Flexi Deposit Scheme-Current
(vii) Union Tax Saver
(viii) Capital Gains Account Schemes
(ix) Union Super Salary Account.
Loan Product;
(i) Union Home
(ii) Union Miles
(iii) Union Education
(iv) Union Mortgage
(v) Union Reverse Mortgage.
Alternative Delivery Channels;
(i) Internet Banking
(ii) SMS Banking
(iii) Call Center
Other Initiatives;
(i) Life Insurance
(ii) Non Life Insurance
(iii) Union Health ( Medical Policies)
(iv) Union Home Plus
(v) Mutual Fund
(vi) Union Bill Pay
(vii) Stamp Vending
(viii) Union Wealth
 10

1.2.5 Blue print for a stronger future;

a) Branding campaign
Our branding campaign and new logo has appended to the youth.
Union Bank is now visible across the country.
b) Technology rollout;
Our technology rollout has helped our forge ahead with 100% CBS,
LAS, DATA CENTRE.
c) Marketing orientation;
Initiatives on sales campaigns, customer calling, coaching, and CRM’S
have created a new staff attitude.
d) Centralization;
Shift to focus from operations to sales and services activities due to
centralization of many branch activities in bank office centre.
d) Creation of verticals
Organization structure for segmented focus through business verticals
like wholesale banking, MSME, Retail, Transaction banking etc…
f) New Branches/Alternate Channels;
Standardization branch format with privilege lounges/lobby banking
g) Recruitment;
Over 3000 staff recruited in last 19 months including direct recruitment
at campuses and lateral hires.
h) Initiatives for new products;
New initiatives including syndication, Government business, CMS.
Insurance for mutual fund.
i) Tat
Establishment of ‘Tat’ in our vocabulary. Reduction in Tat of credit
sanctioning, account opening pension and salary settlements, cheque book
issuance.
1.2.6 Bank’s Importance milestone:
1. Bank founded in Bombay on 11th November, 1919.
2. Bank’s Registered Office inaugurated by Mahatma Gandhi,
Father of the nation.
3. Came under the management of Central bank of India.
4. Freed from the tutelage of Central Bank of India.
 11

5. Received license to deal in all foreign currencies.

6. Bank 100th branch opened in Kerala.
7. Three private sector banks – perumbavoor bank ltd.., catholic
union bank ltd., nadir mercantile bank ltd. were taken over.
8. Bank nationalized along with 13 other leading banks and Shri
F.K.F. Nairiman became its first Custodian.
9. Bank assigned 8 lead districts, four in U.P and two each in kerala
and M.P for assintong rural development.
10. Belgaum bank ltd., a private sector bank, was taken over by our
bank, adding as many as 40 branches.
11. Bank Diamond Jubilee year celebrations inaugurated by RBI
Governor.
12. Bank received from the president of the India, the Government’s
National Award for outstanding export performance during 1979-
1980.
13. Bank’s major IT initiative Core Banking Solution providing
anytime anywhere banking along with Tele-banking launched.
14. Bank launched technology product to enable online payment of
the fees by Exporters and Importers to Directs General of Foreign
Trade.
15. Bank opens its Representative Office in Sydney, Australia.

1.2.7 Customer Services Interaction:

As you all know, we have embarked upon a new phase of Nav Nirman, named
;the nexstep’, to help us achieve our vision of becoming the Number 1 Retail Bank in
Customer Services Excellence. As part of this programme, we shall undertaken
various initiatives to improve our technology and processes to consistently deliver
excellent customer experiences. I am pleased to inform you that we have successfully
launched 3 remodeled branches in Mumbai for the pilot phase and are simultaneously
working towards improving our call centre, alternate channels and customer
grievances redressed systems.

However, while it is important that we undertaken these technological and

process changes, we cannot be successful without the support of our most valuable
 12

asset- our people. To provide this human touch, there are a few initiatives that each
one of us can take individually to enhance our customer experience.
i)Presenting the best face of our bank Customer;
Each one of us is the face of Union Bank for our customer. While upgrade
technology and processes will help improve customer convenience, what will win us
customer loyalty is the quality of interaction with them.
Hence, the responsibility lies with each one of us to present the best face of
Union Bank to the customer. We have to endear to the customer. We must appear
presentable while interacting with them. We should be cheerful and amicable while
speaking to customer and always have a smile on our face. A welcoming face will put
our customer at ease, and make their experience a positive one.
ii)Being there for customer when they need us;
Another important initiative to guarantee excellent customer experiences is to
ensure that each one of us is available for the customer when he /she request our
services. When a customer walks into a branch at its opening time, we should be
ready at our counters to serve the customer. We should be the ones waiting for the
customer, instead of the other way round. Hence, we must be punctual to prevent a
customer from being disappointed.
The daily corporate prayer is another initiatives, which was mentioned in the
New Year’s communication sent to your from our corporate office. It is a simple, non-
religious, inspirational song which we must embrace in order to find the strength
within ourselves to serve the customer better.
The real happiness and satisfaction that one gets in wholeheartedly serving the
customer, no matter how small the task, is invaluable. As part of Nav Nirman-the
nexstep, we aim to make this corporate prayer an integral part of the Union Bank
cultural. Each of us must be present when the prayer is being recited, 15 minutes
before the start of business or office hours every day.
These initiatives need very little effort from each one of us, but they will go
long way in improving customer experiences. In conclusion, I reiterate that a change
in the way we interact with customer is as important a part of Nav Nirman- the
nexstep as the technology and process changes. These practices should be
incorporated into the of every move forward to achieve our vision.
 13

When Neil Armstrong stepped on the moon, he said, ”That’s one small steps
for a man, one giant leap for mankind”. Similarly, these simple initiatives are small
steps for each one of us. However, for Union Bank, they shall be a giant leap forward.
1.2.8 A Successful Transformation Journey;
Our transformation journey for a better tomorrow started some four years
back. It has been an exciting experience coupled with joys of our collective
achievements. Between 2007 and now, our total business has been more than doubled
while our return ratiois have improved significantly.
Truly, in the preceding three years, Unionites have created a belief for
themselves that ‘we can’ outperform. While we have moved towards our next
initiatives on customer sernices and human resources, I have great pleasure in sharing
the performance of our Bank in the preceding three years.
 14

1.3 OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVE:

 To study on working capital management in Union Bank of India at Ranipet.

SECONDARY OBJECTIVE:

 To identify the method of financing of working capital in Union Bank

Of India by separating the sources of cash from the long term or short
term.

 To assess whether the investment of Union Bank of India in current

assets is sufficient, compared to the position of current liabilities.

 To understand the components in working capital of the bank.

 To diagnose how the components of current assets are managed by the

Union Bank of India.

 To determine the utilization of the working capital.

 15

1.4 NEED FOR THE STUDY:

 Total sales, whether for cash or credit, increase funds and net profit but only
cash sales increase the cash balance.

 Total purchase, whether for cash or on credit decrease the funds and the
profits? But cash purchase alone reduce cash change in creditors due to credit
purchase has to be adjusted in the funds from operations.

 All expenses incurred, paid for or not, decrease funds. Change in outstanding
and prepaid expenses has to be adjusted in the funds from operations.

 All incomes earned increase funds, whether cash is received or not.

 Incomes received in cash alone can increase cash balance.

 Accrued incomes and incomes received in advance have to be adjusted in the

funds from operations
 16

1.5 SCOPE OF THE STUDY

 This study deals with the analysis for the performance of working capital in
UNION BANK OF INDIA
 The study is based on the published financial statements of the bank for the
past 5 years.
 They are also useful in identifying areas where, more focus is required.
 The scope of the study is limited to the working capital of the bank, by
establishing ratios, percentage and average on the basis of financial
statements.
 It helps to take short term financial decision.
 It indicates the cash requirement needed for plant and equipment expansion
programmer.
 It reveals the liquidity position of the firm by highlighting the various sources
of cash and its uses.
 17

1.6 LIMITATION
 The study is limited for a period of four month.

 Importance of giving excellent customer services.

 Importance of keeping minimum cash balance on every Friday

 Poor technology initiating undertaken by the bank to promote financial

inclusion.

 Poor technology initiating undertaken by the bank to promoting village

knowledge centre.
 18

1.7 REVIEW OF LITERATURE

WORKING CAPITAL
Net working capital commonly defined as the difference between
current assets and current liabilities. Efficient working capital management requires
that firms should operate with some amount of NWC, the exact amount varying from
industry to industry and depending among other things, on the nature of industry.
Working capital is the excess of current assets over current liabilities. It is
requires for running the day-to-day affairs of the unit. According to SHABIN,
“working capital is the amount of funds necessary to cover the cost of operating the
enterprises”.

According to GENSTENBERG, ‘Working capital means of a company that

are changed in the ordinary course of business from one to another’. For e.g- from
cash to inventories, inventories to receivables, receivable to cash.

Working capital (abbreviated WC) is a financial metric which

represents operating liquidity available to a business, organization, or other
entity, including governmental entity. Along with fixed assets such as plant
and equipment, working capital is considered a part of operating capital. Net
working capital is calculated as current assets minus current liabilities. It is a
derivation of working capital that is commonly used in valuation techniques
such as DCFs (Discounted cash flows). If current assets are less than current
liabilities, an entity has a working capital deficiency, also called a working
capital deficit.

Working Capital = Current Assets

Net Working Capital = Current Assets − Current Liabilities
Net Operating Working Capital = Current Assets − Non Interest-
bearing Current Liabilities
Equity Working Capital = Current Assets − Current Liabilities −
Long-term Debt
 19

A company can be endowed with assets and profitability but short

of liquidity if its assets cannot readily be converted into cash. Positive working
capital is required to ensure that a firm is able to continue its operations and
that it has sufficient funds to satisfy both maturing short-term debt and
upcoming operational expenses. The management of working capital involves
managing inventories, accounts receivable and payable, and cash.

NEED FOR WORKING CAPITAL

Every business needs some amount of working capital. The need for working
capital arises due to time gap between production and realization cash from sales.

There are time gap in purchase of and production of and production and sales
and sales and realization of cash. Then working capital is needed for the following
purpose.

For the purchase of raw materials, components and spares,

 To pay wages and salaries,

 To incur day-to-day expenses and overhead costs such as fuel power and
officer expenses,
 To meet the selling costs such as packing, advertising,
 To provide credit facilities to the customers.

Determinants of working capital

The total working capital requirements of a firm is determined by a variety of
factors. It should be, however noted that these factors affect different enterprises
differently. They also vary from time to time. In general, the following factors are
involved in a proper assessment of the quantum of working capital requirements.

General nature of business

The working capital requirements of an enterprise are basically related
to the conduct of the business. Some business need more working capital and vice
versa. For example, the percentage of current asset to total assets was found to be
lowest in hotels , restaurants and eating houses (10 – 20%), but in the case of
 20

construction and trading groups, it is to be expected a high working capital (80 –

90%).

Production cycle
Another factor which has a bearing on the quantum of working capital
is the production cycle. The term “PRODUCTION CYCLE” refers to the time
involved I the manufacture of goods. It covers the time span between the
procurement of raw materials and the completion of production process. Funds or
working capital is required in these stages.

Business cycle
The working capital requirements are also determined by the nature of
the business cycle. Business fluctuations lead to cyclical and seasonal changes which
in turn, cause a shift in the working capital position, particularly temporary working
capital requirements.

Production policy
The quantum of working capital is also determined by production policy. In
the case of certain lines of business, the demand for products is seasonal, i.e., it will
be purchased during certain months of the year. So there is a problem of storing the
goods. This creates the need of more working capital.

Credit policy
The level of working capital is also determined by credit policy which
relates to sales and purchases. The credit policy influences the requirement of
working capital in two ways.
a) Through credit terms granted by the firm to its customers.
b) Credit terms available to the firm from its customers.
These two will affect the working capital need.
Growth and expansion
As a company grows, it is logical to expect that a larger amount of
working capital will be required. It is, of course, difficult to determine precisely the
 21

relationship between the growth in the volume of business of a company and the
increase in its working capital.
Classification of working capital
Like any other concern UBI too has a classification for working
capital. UBI has classified its working capital requirements into permanent working
capital and variable working capital.

Permanent working capital

Permanent or fixed working capital is the minimum amount which is
required to ensure effective utilization of fixed facilities and for maintaining the
circulation of current assets. There is always a minimum level of current assets which
is continuously required by the enterprise to carry out its normal business operations.
For example, every firm has to maintain level of raw materials, work in process,
finished goods and cash balance. This minimum level of current assets is called
permanent or fixed working capital as this part of capital is permanently blocked in
current assets. As the business grows, the requirements of permanent working capital
also increase due to the increase in current assets. The permanent working capital can
further be classified, regular working capital and reserve working capital.

Variable working capital

Temporary or variable working capital is the amount of working
capital which is required to meet the seasonal demands and some special exigencies,
variable working capital can be further classified as seasonable working capital and
special working capital. Most of the enterprises have to provide additional working
capital to meet the seasonal needs of the enterprise, called seasonal working capital.
Special working capital is that part of working capital which is required to meet
special exigencies such as launching of extensive, marketing campaigns, for
conducting research etc.

Danger of excessive working capital

The dangers of excessive working capital are as follows.

 22

1. It results in unnecessary accumulation of inventories. Thus the chances of

inventory mishandling, waste, theft and losses increase.

2. It is an indication of defective credit policy and slack in collection period.

Consequently, higher incidents of bad debts results, which adversely affects
profit.

3. Excessive working capital makes management complacent which degenerate

into managerial inefficiency.

4. Tendencies of accumulating inventories to make speculative profit growth.

This may tend to make dividend policy liberal and difficult to cope within
future when the firm is unable to make speculate profit.

Danger of inadequate working capital

Inadequate working capital is also bad and has the following danger.
1. It has stagnates growth. It becomes difficult for the firm to undertake
profitable projects for non-availability of the working capital funds.
2. It becomes difficult to implement operating plans and achieve the firms
profit target.
3. Operating the inefficiency creep in when it becomes difficult even to meet
day-to-day commitment.
4. Fixed assets are not efficiently utilized for the lack of working capital
funds. Thus the rate of return on investment slumps.
The firm losses its reputation when it is not in a position to honor its short term
obligations. As a result, the term faces tight credit terms.

Calculation

Current assets and current liabilities include three accounts which are
of special importance. These accounts represent the areas of the business
where managers have the most direct impact:

ACCOUNTS RECEIVABLE (CURRENT ASSET)

 23

INVENTORY (CURRENT ASSETS), AND

ACCOUNTS PAYABLE (CURRENT LIABILITY)

• The current portion of debt (payable within 12 months) is critical,

because it represents a short-term claim to current assets and is
often secured by long term assets. Common types of short-term
debt are bank loans and lines of credit.

• An increase in working capital indicates that the business has

either increased current assets (that is has increased its
receivables, or other current assets) or has decreased current
liabilities, for example has paid off some short-term creditors.

• Implications on M&A: The common commercial definition of

working capital for the purpose of a working capital adjustment
in an M&A transaction (i.e. for a working capital adjustment
mechanism in a sale and purchase agreement) is equal to:

Current Assets – Current Liabilities excluding deferred tax assets/liabilities,

excess cash, surplus assets and/or deposit balances.

Cash balance items often attract a one-for-one purchase price adjustment.

Working capital management

• Decisions relating to working capital and short term financing are
referred to as working capital management. These involve managing
the relationship between a firm's short-term assets and its short-term
liabilities. The goal of working capital management is to ensure that
the firm is able to continue its operations and that it has sufficient cash
flow to satisfy both maturing short-term debt and upcoming operational
expenses.

Decision criteria
• By definition, working capital management entails short term decisions
- generally, relating to the next one year period - which is "reversible".
These decisions are therefore not taken on the same basis as Capital
 24

Investment Decisions (NPV or related, as above) rather they will be

based on cash flows and / or profitability.

• One measure of cash flow is provided by the cash conversion cycle -

the net number of days from the outlay of cash for raw material to
receiving payment from the customer. As a management tool, this
metric makes explicit the inter-relatedness of decisions relating to
inventories, accounts receivable and payable, and cash. Because this
number effectively corresponds to the time that the firm's cash is tied
up in operations and unavailable for other activities, management
generally aims at a low net count.
• In this context, the most useful measure of profitability is Return on
capital (ROC). The result is shown as a percentage, determined by
dividing relevant income for the 12 months by capital
employed; Return on equity (ROE) shows this result for the firm's
shareholders. Firm value is enhanced when, and if, the return on
capital, which results from working capital management, exceeds
the cost of capital, which results from capital investment decisions as
above. ROC measures are therefore useful as a management tool, in
that they link short-term policy with long-term decision making.
See Economic value added (EVA).
• Credit policy of the firm: Another factor affecting working capital
management is credit policy of the firm. It includes buying of raw
material and selling of finished goods either in cash or on credit. This
affects the cash conversion cycle.

Management of working capital

Guided by the above criteria, management will use a combination of policies
and techniques for the management of working capital. These policies aim at
managing the current assets (generally cash and cash
equivalents, inventories and debtors) and the short term financing, such that
cash flows and returns are acceptable.
 25

• Cash management. Identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.
• Inventory management. Identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials -
and minimizes reordering costs - and hence increases cash flow.
Besides this, the lead times in production should be lowered to
reduce Work in Progress (WIP) and similarly, the Finished
Goods should be kept on as low level as possible to avoid over
production – see Supply chain management; Just In
Time (JIT); Economic order quantity (EOQ); Economic quantity
• Debtors management. Identify the appropriate credit policy, i.e. credit
terms which will attract customers, such that any impact on cash flows
and the cash conversion cycle will be offset by increased revenue and
hence Return on Capital (or vice versa); see Discounts and
allowances.
• Short term financing. Identify the appropriate source of financing, given
the cash conversion cycle: the inventory is ideally financed by credit
granted by the supplier; however, it may be necessary to utilize a
bank loan (or overdraft), or to "convert debtors to cash" through
"factoring".
 26

1.8 RESEARCH METHODOLOGY

Research can be defined as a systematic and organized effort to investigate a

specific problem encounters in the work setting that needs a solution. It comprises a
series of steps designed and executed with the goal of finding answer to the issues that
are of concern to the manager in the work environment. A research design is the
specification of methods and procedure foe acquiring the information needed to
structure or to solve problems.
Data Collection:

The data are collected from the annual reports cost sheet and other branches of
the mills. The major source of data is secondary.

Primary data:

The primary data is collected from the union bank of India.

Secondary Data:

The study has been made using secondary data, which are obtained from
annual reports and statements of accounts. The study is period for the annual reports
and statements of accounts extended form the year

TOOLS OF WORKING CAPITAL ANALYSIS

A working capital analysis can adopt the following tools for analysis of the
financial statement. These are also termed as methods of working capital analysis.

 Current ratio

The current ratio is calculated by dividing current assets by current liabilities.

Current Asset
Current Ratio = ------------------------
Current Liabilities
 27

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

It is based on the logic that the higher the current ratio the more the firm’s ability to
meet its current obligations.
Even though current ratio is a good measure of firm’s liquidity, it is only a test
of quantity and not quality. Liabilities are not subject to any fall in value; they have to
be paid. But current assets can decline in value.

 Quick ratio

This ratio establishes the relationship between quick or liquid assets and
current liabilities. An asset is liquid if it can be converted into cash immediately or
reasonably soon without a loss of value.

Current Assets – Inventory

Quick Ratio = -----------------------------------------
Current Liabilities

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

condition. The quick ratio remains as an important index of the firm’s liquidity and is
a more absolute test than the current ratio
 Cash ratio
Since cash is a most liquid asset, the financial analyst may examine this ratio
for his purpose of study. Trade investment or marketable securities are equivalent of
cash and therefore they may be included in the computation in the computation of
cash ratio.

Cash + Marketable securities

Cash Ratio = --------------------------------------
Current Liabilities

 Cash to current asset ratio

Cash to current asset ratio is calculated by dividing cash by current
assets and expressed in percentages. Cash is compared with current assets first to
know the proportion of cash in current assets. A high proportion of cash to total assets
directly affects the profitability of the firm because large amount of cash is kept as
unproductive assets. The lower proportion may lead to higher profitability of the firm.
 28

Even though cash is an unproductive asset it cannot be reduced below a certain limit,
because in all firms there would be certain contingencies to be met. There is no
standard or fixed norm for this ratio.
Cash
Cash to current asset ratio = -----------------------
Current Assets

 Debt ratio
When the firm extends credit to its customers, book debts are created in
the firm’s accounts. Book debts are expected to be converted into cash over a short
period and therefore are included in Current assets. The liquidity position of the firm
depends on the quality of debtors to a great extend.
Debt ratio (or) total debt ratio= Total Debt
Total Tangible Assets

 Debt equity ratio-

This ratio measures the long term or total debt to shareholders equity. This
ratio reflects claims of creditors and shareholders against the assets of the firm.
Debt Equity Ratio is given by:

Long term debt

Debt Equity Ratio =

Shareholders’ equity
 29

CHAPTER -2

TABLE NO.2.1.1
CASH BUDGET
(In lakhs)
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
a.OPENINGCASH
BALANCE 2.85 1.70 2.69 2.95 1.50

b Receipts 16.31 18.06 19.92 20.52 23.93

c Payments 16.09 17.89 19.66 20.25 23.60
d NET CASH FLOW (b-c) 2.22 1.72 2.64 2.67 3.29
e Cumulative Net Cash Flow 2.22 3.94 6.58 9.25 12.55
f (a+e) 5.07 5.64 9.27 12.21 27.57
g Minimum Cash Balance
Requirement 1.00 1.00 1.00 1.00 1.00
SURPLUS RELATION TO
THE MINIMUM
CASHBALANCE
REQUIREMENT(F-G) 4.07 4.64 8.27 11.21 26.57

Interpretation

Opening cash budget in 2.85 in the year of 2005-06 after the receipts and
payment the minimum cash budget requirement is 4.07, Opening cash budget in 1.07
in the year of 2006-07 after the receipts and payment the minimum cash budget
requirement is 4.64, Opening cash budget in 2.69 in the year of 2007-08 after the
receipts and payment the minimum cash budget requirement is 8.27, Opening cash
budget in 2.95 in the year of 2008-09 after the receipts and payment the minimum
cash budget requirement is 11.21, Opening cash budget in 1.50 in the year of 2009-10
after the receipts and payment the minimum cash budget requirement is 26.57.
 30

Chart No.2.2.1
Cash budget

30

25

20

15 cashrequired

10

0
2005-06 2006-07 2007-08 2008-09 2009-10
 31

Table no.2.1.2
Net Working Capital
(In lakhs)

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

CURENT ASSETS 99.51 83.56 89.30 76.09 76.35

CURRENT LIABILITIES 40.47 28.49 40.83 37.90 39.85

NET WORKING CAPITAL 59.03 55.06 48.47 38.19 36.49

FORMULA:

NET WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES.

Interpretation:

It is inferred that in the year of 2005-06 net working capital are 59.03, in the
year of 2006-07 net working capital are 55.06, in the year of 2007-08 net working
capital are 48.47, in the year of 2008-09 net working capital are 38.19, in the year of
2009-10 net working capital are 36.49.
 32

Chart no 2.2.2
Net working Capital
 33

Table no.2.1.3
Current Ratio
(In lakhs)
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
CURRENT ASSETS 99.51 83.56 89.30 76.09 76.35
CURRENT LIABILITIES 40.47 28.49 40.83 37.90 39.85
CURRENT RATIO 2.45 2.93 2.18 2.00 1.9

FORMULA:

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITIES

Interpretation:

It is inferred that in the year of 2005-06 current ratio are 2.45, in the year of
2006-07 current ratio are 2.93, in the year of 2007-08 current ratio are 2.18, in the
year of 2008-09 current ratio are 2.00, in the year of 2009-10 current ratio are 1.9.
 34

Chart no.2.2.3
Current Ratio

100
90
80
70
60
50
40 Current
30 assets
20 Current
10 liabilities
Current r
0
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10

Table no. 2.1.4

 35

Quick Asset ratio

(In lakhs)
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
QUICK ASSETS 24.85 26.58 45.51 36.59 36.16
QUICK
LIABILTIES 40.47 29.00 40.83 37.90 39.85
ACID TEST RATIO 0.61 0.93 1.11 0.96 0.09

FORMULA:

QUICK ASSET RATIO = QUICK ASSETS

QUICK LIABILITIES

Interpretation

It is inferred that in the year of 2005-06 quick assets ratio are 0.61, in the year
of 2006-07 quick assets ratio are 0.93, in the year of 2007-08 quick assets ratio are
1.11, in the year of 2008-09 quick assets ratio are 0.96, in the year of 2009-10 quick
assets ratio are 0.09.

Chart no.2.2.4
 36

Quick Asset Ratio

Table no.2.1.5
 37

Cash Position Ratio

(In lakhs)
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

BANK BALANCE 86.04 105.07 118.9 117.05 134.1

CURRENT LIABILITIES 40.47 28.49 40.83 37.90 39.85

CASH POSITION 2.12 3.68 2.92 3.08 3.36

FORMULA:

CASH POSITION
RATIO =CASH AND BANK BALANCE+MARKET SECURITIESST
CURRENT LIABILITIES

Interpretation

It is inferred that in the year of 2005-06 cash position ratio are 2.12, in the year
of 2006-07 cash position ratio are 3.68, in the year of 2007-08 cash position ratio are
2.92, in the year of 2008-09 cash position ratio are 3.08, in the year of 2009-10 cash
position ratio are 3.36.

Chart no.2.2.5
 38

Cash position Ratio

140

120

100

80 Bank bal
60 current liabilities
cash postion
40

20

0
2005-06 2006-07 2007-08 2008-09 2009-10

Table no.2.1.6
Debt Ratio (or) Total Debt Ratio
 39

(In lakhs)
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10
TOTAL DEBT 159.8 157.8 155.8 172.62 206.45
TOTAL TANGIBLE 23.13 25.62 35.97 40.97 36.24
ASSEST
DEBT RATIO 6.90 6.16 4.33 4.21 5.69

FORMULA:

DEBT RATIO (or) TOTAL DEBT RATIO= TOTAL DEBT

TOTAL TANGIBLE ASSETS

Interpretation

It is inferred that in the year of 2005-06 debt ratio are 6.90, in the year of
2006-07 debt ratio are 6.16, in the year of 2007-08 debt ratio are 4.33, in the year of
2008-09 debt ratio are 4.21, in the year of 2009-10 debt ratio are 5.69.

Chart no.2.2.6
Debt ratio (or) total debt Ratio
 40

250

200

150
Total debt
Total tangb
100
Debt ratio

50

0
2005-06 2006-07 2007-08 2008-09 2009-10

Table no.2.1.7
Creditor’s Turnover Ratio
(In lakhs)
 41

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

SHORT TERM DEPOSIT 86.0 105.07 118.91 117.05 134.16

AVERAGES
CREDITORS 35.55 31.08 30.11 34.05 32.54
CREDITORS
TURNOVER RATIO 2.42 3.38 3.94 3.43 4.12

FORMULA:

CREDITOR’S TURNOVER RATIO= NET SHORT TERM DOPOSITES

AVERAGE CREDITOR’S

Interpretation

It is inferred that in the year of 2005-06 creditor’s turnover ratio are 2.42, in
the year of 2006-07 turnover ratio are 3.38, in the year of 2007-08 turnover ratio are
3.94, in the year of 2008-09 turnover ratio are 3.43, in the year of 2009-10 turnover
ratio are 4.12.
 42

Chart no.2.2.7
Creditors Turnover ratio

140
120
100 Short term
80 deposit
Average credito
60
40 Creditors
20 Turnover ratio
0
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10

Table no.2.1.8
 43

Fixed assets ratio

(In lakhs)
PARCTICULAR 2005-06 2006-07 2007-08 2008-09 2009-10

FIXED ASSETS 0.614 28.00 26.48 19.82 15.131

LONG TERM 47.95 01.16 12.64 04.51 05.47

FUND

FIXED ASSETS 0.03 23.97 2.09 4.38 2.76

RATIO

FORMULA:

FIXED ASSETS RATIO = FIXED ASSETS

LONG TERM FUNDS

Interpretation

It is inferred that in the year of 2005-06 fixed assets ratio are 0.03, in the year
of 2006-07 fixed assets ratio are 23.97, in the year of 2007-08 fixed assets ratio are
2.09, in the year of 2008-09 fixed assets ratio are 4.38, in the year of 2009-10 fixed
assets ratio are 2.76.

Chart no2.2.8
 44

Fixed assets ratio

50
45
40
35
30
25
20 FIX
15
LON
10 FUN
FIX
5 RAT
0
2005- 2006- 2007- 2008- 2009-
06 07 08 09 10

Table no.2.1.9
 45

Debt equity ratio

(In lakhs)
PARTICULAR 2005-06 2006-07 2007-08 2008-09 2009-10

TOTAL LONG TERM 31.86 17.87 18.90 89.00 05.58

DEBT
TOTAL LONGTERM 47.95 01.16 12.64 04.51 05.47
FUND
DEDT EQUITY 0.66 15.30 14.95 19.69 1.02
RATIO

FORMULA

DEDT EQUITY RATIO = TOTAL LONG - TERM DEBT

TOTAL LONG – TERM FUNDS

Interpretation

It is inferred that in the year of 2005-06 debt equity ratio are 0.66, in the year
of 2006-07 debt equity ratio are 15.30, in the year of 2007-08 debt equity ratio are
14.95, in the year of 2008-09 debt equity ratio are 19.69, in the year of 2009-10 debt
equity ratio are 1.02.
 46

Chart no.2.2.9
Debt equity ratio

90
80
70 TOTALL
60 TERM D
50
TOTAL
40 LONGTE
30 FUND
20 DEDTEQ
RATIO
10
0
2005- 2006- 2007- 2008- 2009-
-
06 07 08 09 10

3.1 FINDINGS
 47

 It is found that debt equity radio end the year 2009-10 is 1.02, when compare

to previous four year debt ratio reduced.

 It is found that cash position ratio end the year 2009-10 is 3.36, when

compare to previous four year cash position ratio increased.

 It is found that net working capital end the year 2009-10 is 36.49, when

compare to previous four year net working capital reduced.

 It is found that current ratio end the year 2009-10 is 1.9, when compare to

previous four year current ratio reduced.

 It is found that cash position ratio end the year 2009-10 is 3.36, when

compare to previous four year cash position ratio increased.

 Union bank is strictly following the guidelines of RBI on Project Financing.

 Interest rates are fixed depending upon the projects which is known as union

bank advance rate.

 The net working capital of the union bank is not satisfactory.

 Debtor turnover ratio is decline indicates it is not satisfactory.

 The financial of union bank is in a very highly stage.

 In the year net working capital as been decrease year on basic.

 The current cash position has been increased when compare to previous year

due to changes in deposits and borrowable account.

 Credit turnover ratio shows financially standard in both short term deposit.

 More volity shows in union bank due to lack of long term funds.

 The all ratio are showing vest improvement.

 48

 This ratio indicates there is lower amount required in the fixed assets ratio.

The higher amount is in the year 2005-06 at 0.03 it will clearly determine the

bank.

 This ratio indicates there is lower amount required in the debt equity ratio.

The higher amount is in the year 2005-06 at 0.66. It will clearly determine the

bank.
 49

3.2 SUGGESTION

 The bank failed to manage the receivable in the normal level because of poor

performance of the collection procedure and inefficient performance related

with managing the receivables.

 In 2005-06 the net profit is increased compare to the other four year. So the

concern should maintain the same position to improve the net profit.

 The cash and bank balance indicate high liquidity position of a bank, The

union bank of India maintain cash including bank balance is at a optimum

level and it is enough to meet day to day requirement.

 Bank should check only financial, technical and commercial feasibility of the

project and it should not consider sensitivity analysis and social cost benefit

analysis of the project. Hence the bank should consider this in the point of

view of risk and economy growth.

 50

3.3 CONCLUSION

In this an attempt is being made to provide an overall view about Union

bank of India on the various departments and on the analysis of the working capital

management. The balance sheet and the profit and loss account of bank from 2006-10

analyzed. The bank is enjoying a sound liquidity position, utilizes funds in the

appropriate manner and is enjoying. There are so many problems in the deposit

interest rates should be increase or decrease, competitors with high levels interests

given to deposits. Therefore, steps must be taken to improve efficiency in utilization

of all deposits.
 51

BIBLIOGRAPHY

 I.M Pandey (2002) Financial Management. Published by Vikas

Publishing House Pvt. Ltd., New Delhi.

 Dr. S.N. Maheswari (2000) Principles of Management Accounting.

Published by Sultan Chand & Sons, New Delhi.

 Khan & Jain (2001) Theory and problems of Financial Management.

Published by Tata McGraw-Hill Publishing Company Ltd., New Delhi.

 Prasanna Chandra (1999) Fundamentals of Financial Management.

Published by Tata McGraw-Hill Publishing Company Ltd., New Delhi.
 52

TABLE SHOWING STATEMENT OF IN WORKING CAPITAL FOR

THE YEAR 2005-2006
Changes in working
2005 2006 capital
PARTICULARS
Rs. Rs. Increase Decrease
Rs. Rs.
a. Current Assets

Deposits 3950640 4018625 67985

Sundry debtors 122467 165467 43000

Cash & Bank 1501847 1497207 - 6640

balances
Loans & Advances 377608 377895 287 -

Total C.A 5952562 6059194

b. Current Liabilities

Liabilities 115758 133219 17461

Provisions 857 14936 - 14079
Total C.L 116615 148155
Net Working capital 5835947 5911039

(a-b)
Net increase in 73092 73092
working capital
Total 5909039 5911039 111272 111272
 53

TABLE SHOWING STATEMENT OF CHANGES IN WORKING

CAPITAL FOR THE YEAR 2008-2009

Changes in working
2006s 2007 capital

Rs. Rs. Increase Decrease

Particulars Rs. Rs.
a. Current Assets

Deposits 694321 688217 6104

Sundry debtors 3363458 3747384 383926

Cash & Bank balances 295244 301875 6621

Loans & Advances 737381 257851

479530
Total C.A 5090404 4995327
b. Current Liabilities

Liabilities 1945367 1815814 129553

Provisions 19012 857 18155
Total C.L 1964379 116615
Net Working capital 423748 687019

(a-b)
Net decrease in 29211 29211
working capital
Total 423748 716230 567466 61094
 54

TABLE SHOWING STATEMENT OF CHANGES IN WORKING

CAPITAL FOR THE YEAR 2007-2008

Changes in working
2007 2008 capital

Rs. Rs. Increase Decrease

Particulars Rs. Rs.
a. Current Assets

Deposit 726292 1006316 280024

Sundry debtors 131274 158243 26969

Cash & Bank balances 269108 268537 571

Loans & Advances 194320 206000 11680

Total C.A 1320994 1639096

b. Current Liabilities s

Liabilities 300466 379275 78809

Provisions 8842 19012 10170
Total C.L 309308 438929
Net Working capital 514923 576157

(a-b)
Net increase in working 40642 40642
capital
Total 555565 576157 318673 130192
 55

TABLE SHOWING STATEMENT OF CHANGES IN WORKING

CAPITAL FOR THE YEAR 2006-2007

Changes in working
2008 2009 capital

Rs. Rs. Increase Decrease

Particulars Rs. Rs.
a. Current Assets

Deposits 991175 792972 198203

Sundry debtors 3652395 4542399 890004

Cash & Bank balances 170140 172057 1917

Loans & Advances 332424 377608 45184

Total C.A 5146134 5885036

b. Current Liabilities

Liabilities 530420 531981 1561

Provisions 3223 8224 5001
Total C.L 533643 540205
Net Working capital 781635 716502

(a-b)
Net increase in working 10401 10401
capital
Total 792036 716502 938666 213605
 56

TABLE SHOWING STATEMENT OF CHANGES IN WORKING

CAPITAL FOR THE YEAR 2005-2006

Changes in working
2009 2010 capital

Rs. Rs. Increase Decrease

Particulars Rs. Rs.
a. Current Assets

Deposits 792972 944278 151306

Sundry debtors 3596559 3652395 55836

Cash & Bank balances 285276 288465 3189

Loans & Advances 377608 432320 54712

Total C.A 5052415 5317458

b. Current Liabilities

Liabilities 531981 735107 203126

Provisions 3300 903 2397
Total C.L 535281 736010
Net Working capital 8343267 8347290

(a-b)
Net increase in working 4023 4023
capital
Total 8347290 8347290 267440 207149
57
58