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A study on Working Capital Management

LOVELY PROFESSIONAL UNIVERSITY


DEPARTMENT OF MANAGEMENT

Report on Summer Training


A Study On
Working Capital Management
Of State Bank of Patiala
Submitted to Lovely Professional University

In partial fulfillment of the


Requirements for the award of Degree of
Master of Business Administration
Submitted by:
Amandeep Kaur
University Roll No. 11204324(B35)

DEPARTMENT OF MANAGEMENT
LOVELY PROFESSIONAL UNIVERSITY
JALANDHAR NEW DELHI GT ROAD
PHAGWARA
PUNJAB

DECLARATION
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A study on Working Capital Management

I declare that the project titled A study on working capital management in State Bank of
Patiala is an original project done by me under the guidance of Mr. Virender Singh, Chief
Manager, Sunam Main Branch, State Bank of Patiala.
I further declare that this project is the result of my own efforts and this report has
not been submitted to any other University.

Sign: Amandeep Kaur

A study on Working Capital Management

ACKNOWLEDGEMENT
I take this opportunity to express my gratitude to Mr.Virender Singh, Chief Manager, Sunam
Main Branch, State Bank of Patiala, for providing me an opportunity to do the project under
his guidance despite his busy schedule. I also thankful to my training coordinator for guiding
me to do my work successfully.
Their support and suggestions were immense in enabling the successful completion of this
project.

THANK YOU

Amandeep Kaur

A study on Working Capital Management


CERTIFICATE

A study on Working Capital Management


TABLE OF CONTENTS

S.No.
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CONTENT
Executive Summary
Bank Profile
Introduction to working capital management
Objectives of the study
Literature Review
Research Methodology
Data Analysis and Interpretation
Findings
Recommendations
Conclusion
References
Annexure

Page No.
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72-73
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A study on Working Capital Management


1.Executive Summary
As a part of curriculum, every student studying MBA has to undertake a project
on a particular subject assigned to him/her. Accordingly I have been assigned the project
work on the study of working capital management in State Bank of Patiala .
This project work has been undertaken to know the procedures involved in the working
capital management in State Bank of Patiala. An attempt is made to study the factors
contributing towards working capital and the sources on which the company is depending for
the funds. The research study was also conducted to derive working capital ratios, to know
the performance and efficiency of working capital management and to know the kind o policy
adopted in this part of the management. For analyzing the factors and conditions influencing
working capital tables and graphs were drawn based on the study.
1.1 Statement of the Problem
A strong banking sector is important for flourishing economy. The failures of the banking
sector may have an adverse impact on other sectors. The skill for working capital is some
what unique and novel, through the goals are to make an efficient use of funds for
minimizing the risk of loss to attain projct objective. It involves deciding upon the amount
and composition of current assets and how to finance these assets. Working capital
management is not a simple one. It enables an enterprise to start and conduct its operations.
Working capital requirements is estimate under optimistic assumptions, but what the
expectations come true, the firm may be confronted with a difficult situation.
The optimum working capital investment to be determined by decision on the level of
capacity utilization. We have human and natural resources in abundance but our capital
resources are limited and arresting the pace of development, strong of funds for working
capital has caused many business to fail and in many cases has restarted their growth.
Working capital which is concerned with short term financial decision, have been relatively
neglected in the literature of finance. From the banker point of view, it is working capital gap.
This is actually needed by borrower for working capital. It is the successful play with finance
traders that generally decides the fortune of any business enterprise.
The findings of the study are Working capital of the company is decreasing and showing
negative working capital per year. It shows bad liquidity position.Negative working capital
indicates that company has unable for payments of short terms liabilities. Working capital
decreased because of increment in the current liabilities is more than increase in the current
assets. As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of
the company for last five years it is less than 1. This depicts that companys liquidity position
is not sound. Its current liabilities are more than its current assets. Income of the bank
increases from the last five year. Net profit decreases due to increase in selling and
administrative expenses and interest expense. Receivables other than deferred and exports are
the major part of assets. From the last five years data depicts that a source of funds are less
than uses of funds i.e. inflows are less than outflows. As we know If a company can generate
more sales with fewer assets it has a higher turnover ratio which tells it is a good company
because it is using its assets efficiently. A lower turnover ratio tells that the company is not
using its assets optimal. In 2010-13 this ratio is same and less than 2009.
.
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1.2 Source of Data


The study is based on collection of primary as well as secondary data.
For primary data collection I interacted with the officers and employees of the bank.
Secondary data are those, which have already been passed through statistical process process,
previous bank records, and files.
1.3 Bank Profile
State Bank of Patiala is an associate bank of State Bank of India. State Bank of Patiala (SBP),
originally named Patiala State Bank, and currently an associate bank of the State Bank of
India, was founded on 17 November 1917. SBP was founded by Maharaja Bhupinder Singh,
Maharaja of the princely state of Patiala of Undivided India, and the functions of the Bank
included the normal functions of commercial banks, as also some functions similar to
functions of a central bank for the princely state of Patiala.
After Indias independence, the Bank was made a wholly owned subsidiary of the
Government of Punjab. On 1 April 1960, SBP was accorded the status of an Associate bank
of the State Bank Group. Presently, the State Bank of Patiala has a network of 1035 service
outlets, including 1010 branches, in all major cities of India, but most of the branches are
located in the Indian states of Punjab, Haryana, Himachal Pradesh, Rajasthan, Madhya
Pradesh, Jammu & Kashmir, Delhi and Gujarat.

1.4 Introduction(Working capital management)


Decisions relating to working capital (Current assets-Current liabilities) and
short term financing are known as working capital management. It involves the relationship
between a firms 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 operation and that it has sufficient cash flow to satisfy both maturing short term
debt and upcoming operational expenses.
Working capital is the fund invested in current assets and is needed for meeting
day to day expenses. Working capital is the fund invested in current assets. It occupies an
important place in a firms Balance Sheet. Working capital financing is a specialized area and
is designed to meet the working requirements of a business. The main sources of working
capital financing are trade credit, bank credit, factoring and commercial paper.

A study on Working Capital Management


1.4.1 Management of working capital
Guided by the above criteria, management will use a combination of policies and techniques
for the management of working capital. The 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.
a) Cash management. Identify the cash balance which allows for the business to meet day to
day expenses, but reduces cash holding costs.
b)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 Process (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
c) 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.
d) 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".
1.4.2 WORKING CAPITAL FINANCING BY BANKS
A commercial bank is a business organization which deals in money i.e. lending
and borrowing of money. They perform all types of functions like accepting deposits,
advancing loans, credit creation and agency functions. Besides these usual functions, one of
the most important functions of banks is to finance working capital requirement of firms.
Working capital advances forms major part of advance portfolio of banks. In determining
working capital requirements of a firm, the bank takes into account its sales and production
plans and desirable level of current assets. The amount approved by the bank for the firms
working capital requirement is called credit limit. Thus, it is maximum fund which a firm can
obtain from the bank. In the case of firms with seasonal businesses, the bank may approve
separate limits for peak season and non-peak season. These advances were usually given
against the security of the current assets of the borrowing firm.
1.5 NEED FOR THE STUDY
The study has been conducted for gaining practical knowledge about Working
Capital Management & activities of State Bank of Patiala.
The study is undertaken as a part of the MBA curriculum from 01 June 2013 to in the form of summer
training for the fulfillment of the requirement of MBA degree
1.6 SCOPE OF THE STUDY
The scope of the study is identified after and during the study is conducted. The main scope
of the study was to put into practical the theoretical aspect of the study into real lifework
experience. The study of working capital is based on tools like Ratio Analysis, Statement of changes in
working capital. Further the study is based on last 5 years Annual Reports of State Bank of
Patiala.
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1.7 LIMITATIONS OF THE STUDY


The study duration is short.
The analysis is limited to just five years of data study (from year 2009 to year 2013)
for financial analysis.
Limited interaction with the concerned heads due to their busy schedule.
1.8 Sampling Design
Sampling unit: Financial Statements
Sampling Size: Last 5 year Financial Statements
Tools Used: MS-Excel has been used for calculations.
2 INDUSTRY PROFILE
Indian banking is the lifeline of the nation and its people. Banking has helped in developing
the vital sectors of the economy and usher in a new dawn of progress on the Indian horizon.
The sector has translated the hopes and aspirations of millions of people into reality. In the
Indian Banking System, Cooperative banks exist side by side with commercial banks and
play a supplementary role in providing need-based finance, especially for agricultural and
agriculture-based operations including farming, cattle, milk, hatchery, personal finance etc.
along with some small industries and self-employment driven activities.
Commercial banks have a comparative advantage as providers of capital because of their
special knowledge of customers and ability to closely monitor uses of funds on an ongoing
basis. The major participants of the Indian financial system are the commercial banks, the
Financial Institutions (FIs), encompassing Term-Lending Institutions, Investment Institutions,
Specialized Financial Institutions and the State-Level Development Bank, Non-Bank
Financial Companies (NBFCs) and other market intermediaries such as the stock brokers and
money-lenders. The commercial banks and certain variants of NBFCs are among the oldest of
the market participants. The Financial Institutions, on the other hand, are relatively new
entities in the financial market place
Generally, co-operative banks are governed by the respective co-operative acts of state
governments. But, since banks began to be regulated by the RBI after 1st March 1966, these
banks are also regulated by the RBI after amendment to the Banking Regulation Act 1949.
The Reserve Bank is responsible for licensing of banks and branches, and it also regulates
credit limits to state co-operative banks on behalf of primary co-operative banks for financing
SSI units. Banking in India originated in the first decade of 18th century with The General
Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both
these banks are now defunct.
After this, the Indian government established three presidency banks in India. The first of
three was the Bank of Bengal, which obtains charter in 1809, the other two presidency bank,
viz., the Bank of Bombay and the Bank of Madras, were established in 1840 and 1843,
respectively. The three presidency banks were subsequently amalgamated intothe Imperial
Bank of India (IBI) under the Imperial Bank of India Act, 1920 which is now known as the
State Bank of India.

A study on Working Capital Management

In 1850s- Foreign banks like Credit Lyonnais started their Calcutta operations .
In 1865- The first fully Indian owned bank was the Allahabad Bank, was established.
By the 1900s- The market expanded with the establishment of banks such as
Punjab National Bank,
In 1895 in Lahore and Bank of India, In 1906, In Mumbai both of which were
founded under private ownership. The Reserve Bank of India formally took on the
responsibility of regulating the Indian banking sector from 1935.
After Indias independence in 1947, the Reserve Bank was nationalized and given broader
powers.
As the banking institutions expand and become increasingly complex under the impact of
deregulation, innovation and technological upgradation, it is crucial to maintain balance
between efficiency and stability. During the last 30 years since Nationalization tremendous
changes have taken place in the financial markets as Well as in the banking industry due to
financial sector reforms. The banks have shed their traditional functions and have been
innovating, improving and coming out with new types of services to cater emerging needs of
their customers. Banks have been given greater freedom to frame their own policies.
The banking sector is broadly divided into two segments:
1. Commercial Banks
2. Co-operative Banks
Commercial Banks
The commercial banking structure in India consists of:
Scheduled Commercial Banks
Unscheduled Banks
Scheduled Commercial Banks constitute those banks which have been included in the second
Scheduled of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks
in this schedule which satisfy the criteria laid down vide section 42 (60) of the Act. Some cooperative banks are scheduled commercial banks albeit not all co-operative banks are. Being
a part of the second schedule confers some benefits to the bank in terms of access to
accommodation by RBI during the time of liquidity constraints. At the same time, however,
this status also subjects the bank to certain conditions and obligation towards the reserve
regulations of RBI. This sub sector can broadly be classified into:
Public sector
Private sector
Foreign banks
Public sector banks have either the Government of India or Reserve Bank of India as the
majority shareholder. This segment comprises of:
State Bank of India (SBI) and its subsidiaries;
Other nationalized banks
Co-operative banks
There are two main categories of the co-operative banks.
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(a) Short Term Lending Oriented Co-operative Banks
Within this category there are three sub category of banks viz. state co-operative banks,
District co-operative banks and Primary Agricultural co-operative societies.
(b) Long Term Lending Oriented Co-operative Banks
Within the second category there are land development banks at three levels- state level,
district level and village level.
2.1 Functioning of a Bank
Functioning of a Bank is among the more complicated of corporate operations. Since
Banking involves dealing directly with money, government in most countries regulates this
sector rather stringently. In India, the regulation traditionally has been very strict and in the
opinion of certain quarters, responsible for the present condition of banks, where NPAs are
of a very high order. The process of financial reforms, which started in 1991, has cleared
the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and
regulations that a bank has to work with makes its operations even more complicated,
sometimes bordering on illogical. This section, which is also intended for banking
professional, attempts to give an overview of the functions in as simple manner as possible.
As per the banking Regulation Act of 1949 and viewed solely from the point of view of the
customers, Banks essentially perform the following functions:
1. Accepting Deposits from public/others (Deposits)
2. Lending money to public (Loans)
3. Transferring money from one place to another (Remittances)
4. Acting as trustees
5. Keeping valuables in safe custody
6. Government Business
3 COMPANY PROFILE- SBoP

The rich heritage of State Bank of Patiala dates back to the year 1917, when it was founded
by Late His Highness Bhupinder Singh, Maharaja of erstwhile Patiala state, with one branch
by the name of 'Chowk Fort, Patiala' to begin with. The Bank, then known as the 'Patiala
State Bank' was state owned and setup for the explicit purpose of fostering growth of
agriculture, trade and industry. The constitution, scope and operations of the Bank underwent
a sea change with the formation of the Patiala and east Punjab States Union (PEPSU) in
1948.The Bank was then reorganized and brought under the control of Reserve Bank of India.
It was christened as the Bank of Patiala. Another milestone in history of the Bank was its
becoming a subsidiary of the State Bank of India on 1st April,1960 when it was named as the
State Bank of Patiala and since then it has grown significantly both in size and volume of
business. During these glorious years, the Bank has been playing an important role in
Banking sphere.

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Our Bank has now added a golden chapter to its history by fully networking all its branches
on Core Banking Solutions on 08.08.2005 and become the first fully networked Public Sector
Bank in the country.
An associate bank of State Bank of India, State Bank of Patiala has a network of 847 service
outlets, including 759 branches in all major cities of India. It offers personal banking,
agricultural and rural banking, SME and corporate banking, internet banking, NRI services
etc. It facilitates its clients to pay their taxes through its branches.
State Bank of Patiala supports Malwa Gramin Bank. It also provides car loans, education
loans, two-wheeler loans, consumer durable loans, loans against term deposits, gold
ornaments and personal loans. On 24th January 2003 State Bank of Patiala became the first
fully computerized Public Sector Bank in the country.

3.1 BOARD OF DIRECTORS

Shri Pratip Chaudhuri,


Chairman,
State Bank of India,
Corporate Centre,
MUMBAI.

Shri Achal Kumar Gupta,


Managing Director,
State Bank of Patiala, ,
Head Office,
The Mall,
PATIALA 147001.

Shri Vijay Malhotra,


Under Secretary,
Government of India,
Ministry of Finance,
Department of Financial
Services,
Jeevan Deep Building,
Sansad Marg,
NEW DELHI 110001.

Shri Vijay Chugh,


Chief General Manager,
Department of Payment & Settlement
Systems,
Reserve Bank of India,
14th Floor,
Central Office Building,
Shaheed Bhagat Singh Marg,
MUMBAI 400005.

Shri Rajeev N. Mehra,


Chief General Manager
(Associates & Subsidiaries),
State Bank of India,
Corporate Centre,
MUMBAI 400021.

Shri Purna Chandra Jena,


General Manager,
(Associates & Subsidiaries),
State Bank of India,
Corporate Centre,
MUMBAI 400021.
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Shri Verjinder Kumar Gupta,


261, Dalima Vihar,
RAJPURA 140401

Shri Arun Kumar Agarwal,


B-142, Shivalik,
Malviya Nagar,
New Delhi 110017.

Shri Jagdish Sharma,


Workmen Director,
State Bank of Patiala,
Shastri Bhawan Branch,
NEW DELHI

3.2 LOGO

Togetherness is the theme of this corporate logo of SBI where the world of banking services
meet the ever changing customers needs and establishes a link that is like a circle, it indicates
complete services towards customers. The logo also denotes a bank that it has prepared to do
anything to go to any lengths, for customers.
The blue pointer represent the philosophy of the bank that is always looking for
the growth and newer, more challenging, more promising direction. The keyhole indicates safety
and security
3.3 VISION and MISSION
Vision:
To evolve and position the bank as a world class, progressive, cost-effective and customer
friendly institution providing comprehensive financial and related services.
Integrating frontiers of technology and serving various segments of society especially weaker
section.
Mission:
To provide excellent professional services and improve its position as a leader in financial
and related services.
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Build and maintain a team of motivated workforce with high work ethos.
3.4 SWOT ANALYSIS
STRENGTH

Wide number of networks.


Large number of customers.
Fast adaptability to technology.
Excellent training.

OPPORTUNITY

WEAKNESS
High gross NPA.
Slow down decision making due to
large hierarchy.

THREAT

Increasing adoption of E transactions.


Home to Home banking services.
Diversification towards other fields.

Large number of market players.


Competitive edge.
Changing culture.

3.5 Products and Services


Personal Banking

SBI Term Deposits SBI Loan For Pensioners

SBI Recurring Deposits Loan Against Mortgage Of Property

SBI Housing Loan Against Shares & Debenture

SBI Car Loan Rent Plus Scheme

SBI Educational Loan Medi-Plus Scheme

Other services

Agriculture/Rural Banking

NRI Services

ATM Services

Demat Services

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Corporate Banking

Internet Banking

Safe Deposit Locker

Financing working capital


Financing working capital is another service provided by the bank.
1. Financing Commission Agents (Arhtias)
Objective:To cater to the financial needs of commission agents/ arhtias for on-lending to the farmers.
Eligibility:Commission Agents/Arhtias (in rural/ Semi-urban areas functioning in markets/ mandies)
dealing in crops, vegetables,fruits etc. enjoying good reputation in the market and having
sufficient experience in the line of their business.
Interest:Concessional Rate of Interest.
Loan limit :Eight times of the net brokerage (after taxes) of the previous year. However, the Drawing
Power
will be subject to 60% of the Book Debts which are not older than 6 months.
Security:(i ) Primary: Assignment of Book Debts which are not older than 6 months and pertaining to
the
current crop.
(ii) Collateral: 100% of the loan amount.
Margin:- 40%
Repayment period :To be liquidated twice in a year or within one month of harvesting of the crop (Rabi/Kharif)
2. Scheme SBP EASY LOAN SCHEME : Easy loan scheme for Small Enterprises and
Retail Trade.
Purpose:
Loan is for business requirement and is against mortgage of self- owned property of applicant
or belonging to the close relatives.
Eligibility:

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Loan can be availed by only those units which have a proven profitable track record and are
well established. The proposals for setting up new MSE units will not be considered under
this scheme.
Loan Amount:
Min. Rs. 5.00 lacs, Max Rs. 1.00 crores (subject to 50% of the realizable value of the
property value.)
Processing fee:
Cash credit:- 2% of limit sanctioned, maximum Rs. 50000/Term Loan: - 1% of the limit sanctioned, max. Rs. 50000/Type of Security
Primary: Hypothecation of stock & receivables and/or fixed assets to be
acquired with bank finance.
Collateral: Equitable mortgage of non-encumbered, non-agriculture residential/other
property.
Repayment Period
TL: Maximum 60 months.
CC: Maximum 60 months with auto-reduction of limit on quarterly basis.
Rate of Interest Base rate plus 5.00% i.e. 15.50% per annum.
(Base rate as on 17.08.2011 is 10.50%)
Documents required
ITR for last 3 financial years duly acknowledged by IT Department.
TDS certificate- form 16 in case of Salaried Persons.
Address & ID proof such as copy of Passport/Voter Card/Pan Card/Electricity bill/
Telephone Bill etc.
Statement of Bank account at least for the last six months.
Balance sheet/ Copy of Sale Tax Number/VAT/ Firms return etc.
FAQs
1.) Can this scheme be extended for purchase of land/property development and building of
residential/commercial complexes?
- No, as such property dealers/builders engaged in sale/purchase/development of properties
are not to be considered under the scheme.

Scheme

SME SMART SCORE : Loan Product Based On Credit Score

Purpose

Term Loan and Working capital (FB+NFB) facility for MSE & C&I Segment
Industrial and trading enterprises.

Eligibility

The target segment consists of individually managed proprietorship/ partnership


concerns or closely held private/ public limited companies.
The chief promoter/chief executive should be below 66 years of age.
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Loan Amount

Stock statement

Rs. 5 lacs to Rs. 50 lacs


The loan quantum will be a minimum of 20% of projected sales and/or 67%
of project cost
Quarterly

Type of Security
Primary: - Hypothecation of stocks / machinery / equipment
Collateral: - Upto Rs. 10 lacs- Nil (eligible cases to be covered under CGTMSE)
Above Rs. 10 lacs- Min. 50% of loan amount
Repayment Period

Term Loan: Not exceeding 6 years (excluding moratorium period not


exceeding 6 months.
Cash Credit: On Demand (Renewal every two years with annual review of
account)

Rate of Interest
Loan Amount
CASH CREDIT
TERM LOAN
Rs.5 lacs & < Rs.25 lacs 3.00% p.a. above Base 3.50 % p.a. above Base
Rate
Rate
Rs.25 lacs to Rs.50 lacs 3.50 % p.a. above Base 4.00 % p.a. above Base
Rate
Rate

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4 INTRODUCTION
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.
4.1 INTRODUCTION OF WORKING CAPITAL
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.

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
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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.

4.2 TYPES OF WORKING CAPITAL


1. Gross working capital
Total or gross working capital is that working capital which is used for all the current assets.
Total value of current assets will equal to gross working capital. In simple words, it is total
cash and cash equivalent on hand. But remember, we do not account of current liabilities in
gross working capital.
2. Net Working Capital
Net working capital is the excess of current assets over current liabilities.
Net Working Capital = Total Current Assets Total Current Liabilities
This amount shows that if we deduct total current liabilities from total current assets, then
balance amount can be used for repayment of long term debts at any time. It also measure
of both a company's efficiency and its short-term financial health.
3. Permanent Working Capital
Permanent working capital is that amount of capital which must be in cash or current assets
for continuing the activities of business. It also shows minimum amount of all current assets
that is required at all times to ensure a minimum level of uninterrupted business operations.

4. Temporary Working Capital


Sometime, it may possible that we have to pay fixed liabilities, at that time we need working
capital which is more than permanent working capital, then this excess amount will be
temporary working capital. In normal working of business, we dont need such capital.
4.3 DETERMINANTS OF WORKING CAPITAL
1.Nature of business
Working capital requirement of a firm basically influenced by the nature of its business
trading and financial forms have a very small investment in fixed assets, but require a large
sum of money to be invested in working capital. Retails stores, for example must carry large
stock of a verity of good to satisfy varied and continuous demand of their customer.

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2. Market and demand condition
The working company related to its sales. It is difficult to precisely determine the relationship
between the volume of sales and working capital need. Current assets will have to be
employed before growth takes place. Then necessary to make planning of working capital for
a growing firm on a continuous basis.

3. Production Policy
Production policy is also main determinant of working capital requirement. Different
company may different production policy. Some companies stop or decrease the production
level in off seasons, in that time, company may also reduce the number of employees or
decrease the purchasing of new raw material, so, it will certainly decrease the amount of
working capital but on the side, some company may continue their productions in off season,
in that case, they need definitely large amount of working capital.
4. Credit Policy
Credit policy is relating to purchasing and selling of goods on credit basis. If company
purchases all goods on credit and sells on cash basis or advance basis, then it is certainly
company need very low amount of working capital. But if in company, goods are purchased
on cash basis, and sold on credit basis, it means, our earned money will receive after
sometime and we require large amount of working capital for continuing our business.

5. Dividend Policy
Dividend policy also effect working capital requirement. Company can distribute major part
of net profit. But, if there is no reserve, we have to invest large amount in working capital
because, lacking of reserve will affect on adversely on fulfill our liabilities. In that case, we
have to yield working capital by taking short term loan for paying uncertain liability.

6. Working Capital Cycle


Working capital cycle shows all steps which starts from cash purchasing of raw material
and then this converted into finished product, after this it is converted into sale, if it is credit
sale, debtors will also the part of working capital cycle and when we gets money from our
debtors, it is the final part of working capital cycle. If we receive fastly from our debtors, we
need small amount working capital. Otherwise, for purchasing new raw material, we need
more amount of working capital.
7. Manufacturing Cycle
Manufacturing cycle means- process of converting raw material into finished product. Long
manufacturing cycle will create the situation in which we require large amount of working
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capital. Suppose, we have to construct the building, for constructing colony of buildings, it
may consume the time more than 5 years, so according to this we need working capital.

8. Operating efficiency
The operating efficiency of the firm relates to the optimum utilization of all its resource at
minimum costs. The efficiency in controlling operating cost and utilizing fixed and current
assets leads to operating efficiency. The use of working capital is improved and pace of cash
conversion cycle is accelerated with operating efficiency. Better utilization improves
profitability and helps the releasing on working capital.
9. Price Level Changes
If there is increasing trend of products prices, we need to store high amount of working
capital, because next time, it is precisely that we have to pay more for purchasing raw
material or other service expenses. Inflation and deflation are two major factors which decide
the next level of working capital in business.
10. Effect of External Business Environmental Factors
There are many external business environmental factors which affect the need of working
capital like fiscal policy, monetary policy and bank policies and facilities.

4.4 IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the

solvency of the business by providing uninterrupted of production.


Goodwill: Sufficient amount of working capital enables a firm to make prompt

payments and makes and maintain the goodwill.


Easy loans: Adequate working capital leads to high solvency and credit standing can

arrange loans from banks and other on easy and favorable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash

discounts on the purchases and hence reduces cost.


Regular Supply of Raw Material: Sufficient working capital ensures regular supply of

raw material and continuous production.


Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It leads
to the satisfaction of the employees and raises the morale of its employees, increases
their efficiency, reduces wastage and costs and enhances production and profits.

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A study on Working Capital Management

Exploitation Of Favorable Market Conditions: If a firm is having adequate working


capital then it can exploit the favorable market conditions such as purchasing its
requirements in bulk when the prices are lower and holdings its inventories for higher

prices.
Ability To Face Crises: A concern can face the situation during the depression.
Quick And Regular Return On Investments: Sufficient working capital enables a
concern to pay quick and regular of dividends to its investors and gains confidence of

the investors and can raise more funds in future.


High Morale: Adequate working capital brings an environment of securities,
confidence, high morale which results in overall efficiency in a business.

4.5 DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL


1.

Excessive working capital means ideal funds which earn no profit for the firm
and business cannot earn the required rate of return on its investments.

2.

Redundant working capital leads to unnecessary purchasing and accumulation of


inventories.

3.

Excessive working capital implies excessive debtors and defective credit policy
which causes higher incidence of bad debts.

4.

It may reduce the overall efficiency of the business.

5.

If a firm is having excessive working capital then the relations with banks and
other financial institution may not be maintained.

6.

Due to lower rate of return n investments, the values of shares may also fall.

7.

The redundant working capital gives rise to speculative transactions.

4.6 DISADVANTAGES OF INADEQUATE WORKING CAPITAL


Every business needs some amounts of working capital. The need for working capital arises
due to the time gap between production and realization of cash from sales. There is an
operating cycle involved in sales and realization of cash. There are time gaps in purchase of
raw material and production; production and sales; and realization of cash.
Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

To incur day-to-day expenses and overload costs such as office expenses.


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A study on Working Capital Management

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and spares
and finished stock.

4.7 COMPONENTS OF WORKING CAPITAL

4.7.1 CASH MANAGEMENT


Cash management refers to a broad area of finance involving the collection, handling, and
usage of cash. It involves assessing market liquidity, cash flow, and investments. Cash
management is a broad term that refers to the collection, concentration, and disbursement of
cash. The goal is to manage the cash balances of an enterprise in such a way as to maximize
the availability of cash not invested in fixed assets or inventories and to do so in such a way
as to avoid the risk of insolvency.
In banking cash management, or treasury management, is a marketing term for certain
services related to cash flow offered primarily to larger business customers. It may be used to
describe all bank accounts (such as checking accounts) provided to businesses of a certain
size, but it is more often used to describe specific services such as cash concentration, zero
balance accounting, and automated clearing house facilities. Sometimes, private banking
customers are given cash management services.

MOTIVES OF CASH MANAGEMENT


The Transaction motive:
Maintaining cash for the purpose of meeting cash needs arising in the ordinary course
of doing business.
Includes regular payments like wages, utilities, acquisition of fixed assets and
inventories
Note that the amount of cash needed for transaction requirements depends on the
nature of business and varies from industry to industry.
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A study on Working Capital Management

The Precautionary motive:


Maintaining of cash balance as buffer for UNEXPECTED needs that may arise.
Either holding in cash or marketable securities that can be liquidated easily.
The Speculative motive:
Holding cash for potential profit making situation like purchasing raw materials in
bulk in anticipation of a fall in price.
4.7.2 RECEIVABLE MANAGEMENT
Management of trade credit is commonly known as Management of Receivables. Receivables
are one of the three primary components of working capital, the other being inventory and
cash, the other being inventory and cash. Receivables occupy second important place after
inventories and thereby constitute a substantial portion of current assets in several firms. The
capital invested in receivables is almost of the same amount as that invested in cash and
inventories.
When goods and services are sold under an agreement permitting the customer to pay for
them at a later date, the amount due from the customer is recorded as accounts receivables;
So, receivables are assets accounts representing amounts owed to the firm as a result of the
credit sale of goods and services in the ordinary course of business. The value of these claims
is carried on to the assets side of the balance sheet under titles such as accounts receivable,
trade receivables or customer receivables. This term can be defined as "debt owed to the firm
by customers arising from sale of goods or services in ordinary course of business."

AVERAGE COLLECTION PERIOD AND AGEING SCHEDULE


The collection of BOOK DEBTS can be monitored with the use of average collection period
and ageing schedule.
The average collection period measures the length of time it takes to convert your average
sales into cash. This measurement defines the relationship between accounts receivable and
your cash flow.
The ageing schedule highlights the debtors according to the age or length of time of the
outstanding debtors.

Guidelines for Effective Receivables Management

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A study on Working Capital Management


1. Have the right mental attitude to the control of credit and make sure that it gets the
priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and
customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before you offer credit. Use credit agencies,
bank references, industry sources etc.
6. Establish credit limits for each customer and stick to them.
7. Continuously review these limits when you suspect tough times are coming or if
operating in a volatile sector.
8.

Keep very close to your larger customers.

9. Invoice promptly and clearly.


10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor your debtor balances and ageing schedules, and don't let any debts get too
large or too old.

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A study on Working Capital Management


ASPECT OF CREDIT POLICY A credit policy establishes guidelines that govern grant or
reject credit to a customer, what should be the level of credit granted to a customer etc. A
credit policy can be said to have a direct effect on the volume of investment a company
desires to make in receivables. A company falls prey of many factors pertaining to its credit
policy. In addition to specific industrial attributes like the trend of industry, pattern of
demand, pace of technology changes, factors like financial strength of a company, marketing
organization, growth of its product etc. also influence the credit policy of an enterprise.
Credit policy of every company is at large influenced by two conflicting objectives
irrespective of the native and type of company. They are liquidity and profitability. Liquidity
can be directly linked to book debts. Liquidity position of a firm can be easily improved
without affecting profitability by reducing the duration of the period for which the credit is
granted and further by collecting the realized value of receivables as soon as they fails due.
To improve profitability one can resort to lenient credit policy as a booster of sales, but the
implications are: 1. Changes of extending credit to those with week credit rating.
2. Unduly long credit terms.
3. Tendency to expand credit to suit customer's needs; and
4. Lack of attention to over dues accounts.
DETERMINATION OF CREDIT POLICY:
The evaluation of a change in a firm's credit policy involves analysis of:
1. Opportunity cost of lost contribution.
2. Credit administration cost and risk of bad-debt losses.
In order to achieve the goal of maximizing the value of the firm the evaluation of investment
in receivables accounts should involve the following four steps:
1. Estimation of incremental operating profit,
2. Estimation of incremental investment in accounts receivables,
3. Estimation of the incremental rate of return of investment,
4. Comparison of incremental rate of return with the required rate of return.
The reality, it is rather a different task to establish an optimum credit policy as the best
combination of variables of credit policy is quite difficult to obtain. The important variables
of credit policy should be identified before establishing an optimum credit policy. The three
important decisions variables of credit policy are:
1. Credit terms,
2. Credit standards, and
3. Collection policy.
1. Credit Terms
Credit terms refer to the stipulations recognized by the firms for making credit sale of the
goods to its buyers. In other words, credit terms literally mean the terms of payments of the
receivables. A firm is required to consider various aspects of credit customers, approval of
credit period, acceptance of sales discounts, provisions regarding the instruments of security

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for credit to be accepted are a few considerations which need due care and attention like the
selection of credit customers can be made on the basis of firms, capacity to absorb the bad
debt losses during a given period of time. However, a firm may opt for determining the credit
terms in accordance with the established practices in the light of its needs. The amount of
funds tied up in the receivables is directly related to the limits of credit granted to customers.
These limits should never be ascertained on the basis of the subjects own requirements, they
should be based upon the debt paying power of customers and his ledger record of the orders
and payments. There are two important components of credit terms which are detailed
below:- (A) Credit period and (B) Cash discount terms

(A)Credit period
Credit period is the duration of time for which trade credit is extended. During this time the
overdue amount must be paid by the customers. A long period credit term may boost sales but
its also increase investment in receivables and lowers the quality of trade credit. While
determining a credit period a company is bound to take into consideration various factors like
buyer's rate of stock turnover, competitors approach, the nature of commodity, margin of
profit and availability of funds etc. The period of credit diners form industry to industry. In
practice, the firms of same industry grant varied credit period to different individuals. as most
of such firms decide upon the period of credit to be allowed to a customer on the basis of his
financial position in addition to the nature of commodity, quality involved in transaction, the
difference in the economic status of customer that may considerably influence the credit
period. The general way of expressing credit period of a firm is to coin it in terms of net date
that is, if a firm's credit terms are "Net 30", it means that the customer is expected to repay his
credit obligation within 30 days. Generally, a free credit period granted, to pay for the goods
purchased on accounts tends to be tailored in relation to the period required for the business
and in turn, to resale the goods and to collect payments for them. A firm may tighten its credit
period if it confronts fault cases too often and fears occurrence of bad debt losses. On the
other side, it may lengthen the credit period for enhancing operating profit through sales
expansion. Anyhow, the net operating profit would increase only if the cost of extending
credit period will be less than the incremental operating profit. But the increase in sales alone
with extended credit period would increase the investment in receivables too because of the
following two reasons: (i) Incremental sales result into incremental receivables,
(ii) The average collection period will get extended, as the customers will be granted more
time to repay credit obligation.
Determining the options credit period, therefore, involves locating the period where marginal
profit and increased sales are exactly off set by the cost of carrying the higher amount of
accounts receivables.

(B) Cash Discount Terms


The cash discount is granted by the firm to its debtors, in order to induce them to make the
payment earlier than the expiry of credit period allowed to them. Granting discount means
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reduction in prices entitled to the debtors so as to encourage them for early payment before
the time stipulated to the i.e. the credit period. According to Theodore N. Beckman, "Cash
discount is a premium on payment of debts before due date and not a compensation for the so
called prompt payment,'*2 Grant of cash discount beneficial to the debtor is profitable to the
creditor as well. A customer of the firm i.e. debtor would be realized from his obligation to
pay Soon that too at discounted prices. On the other hand, it increases the turnover rate of
working capital and enables the creditor firm to operate a greater volume of working capital.
It also prevents debtors from using trade credit as a source of working capital. Cash discount
is expressed is a percentage of sales. A cash discount term is accompanied by (a) the rate of
cash discount, (b) the cash discount period, and (c) the net credit period. For instance, a credit
term may be given as "1/10 Net 30" that mean a debtor is granted 1 percent discount if settles
his accounts with the creditor before the tenth day starting from a day after the date of
invoice. But in case the debtor does not opt for discount he is bound to terminate his
obligation within the credit period of thirty days. Change in cash discount can either have
positive or negative implication and at times both. Any increase in cash discount would
directly increase the volume of credits sale. As the cash discount reduces the price of
commodity for sale. So, the demand for the product ultimately increase leading to more sales.
On the other hand, cash discount lures the debtors for prompt payment so that they can relish
the discount facility available to them. This in turn reduces the average collection period and
bad debt expenses thereby, bringing about a decline in the level of investment in receivables.
Ultimately the profits would increase.

2. Credit Standards
Credit standards refers to the minimum criteria adopted by a firm for the purpose of short
listing its customers for extension of credit during a period of time. Credit rating, credit
reference, average payments periods a quantitative basis for establishing and enforcing credit
standards. The nature of credit standard followed by a firm can be directly linked to changes
in sales and receivables. In the opinion of Van Home, "There is the cost of additional
investment in receivables, resulting from increased sales and a slower average collection
period. A liberal credit standard always tends to push up the sales by luring customers into
dealings. The firm, as a consequence would have to expand receivables investment along
with sustaining costs of administering credit and bad-debt losses. As a more liberal extension
of credit may cause certain customers to the less conscientious in paying their bills on time.
Contrary, to these strict credit standards would mean extending credit to financially sound
customers only. This saves the firm from bad debt losses and the firm has to spend lesser by a
way of administrative credit cost. But, this reduces investment in receivables besides
depressing sales. In this way profit sacrificed by the firm on account of losing sales amounts
more than the cost saved by the firm.
Prudently, a firm should opt for lowering its credit standard only up to that level where
profitability arising through expansion in sales exceeds the various costs associated with it.
That way, optimum credit standards can be determined and maintained by inducing tradeoff
between incremental returns and incremental costs.

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3. Collection Policy
All the above stated reasons compel a firm to formulate a collection programme to obtain
recovery or receivables from delinquent account. Such progarmme may consist of following
steps:
Monitoring the state of receivables,
Dispatch of letter to customer whose due date is near.
Telegraphic and telephone advice to customers around the due date.
Threat of legal action to overdue accounts, and
Legal action against overdue account.
Collection policy refers to the procedures adopted by a firm (creditor) collect the amount of
from its debtors when such amount becomes due after the expiry of credit period. R.K.
Mishra States, "A collection policy should always emphasize promptness, regulating and
systematization in collection efforts. It will have a psychological effect upon the customers,
in that; it will make them realize the obligation of the seller towards the obligations granted. "
The requirements of collection policy arises on account of the defaulters i.e. the customers
not making the payments of receivables in time. As a few turnouts to be slow payers and
some other non-payers. A collection policy shall be formulated with a whole and sole aim of
accelerating collection from bad-debt losses by ensuring prompt and regular collections.
Regular collection on one hand indicates collection efficiency through control of bad debts
and collection costs as well as by inducing velocity to working capital turnover. On the other
hand it keeps debtors alert in respect of prompt payments of their dues. A credit policy is
needed to be framed in context of various considerations like short-term operations,
determinations of level of authority, control procedures etc. Credit policy of an enterprise
shall be reviewed and evaluated periodically and if necessary amendments shall be made to
suit the changing requirements of the business. It should be designed in such a way that it coordinates activities of concerns departments to achieve the overall objective of the business
enterprises. finally, poor implementation of good credit policy will not produce optimal
results.
COLLECTION OF ACCOUNTS RECEIVABLES:
Despite of firm's best precautionary efforts in escaping the bad and doubtful debts, there
always exist certain number of unpaid accounts on the due date. Three-well-known causes of
failure of such payments on the part of debtors (i.e. firm's customer) can be sited as:
It may happen at times that the due date of payment slips from debtors mind and he delays
in making good the payments at the right time.
It may incidentally occur at the time of grant of credit that a firm fails to access and
interpret the character, capacity, capital, Collateral and conditions correctly and appropriately.
There may arise a considerable change in the financial position of a debtor after the credit
has been granted to him by the firm.
All the above stated reasons compel a firm to formulate a collection programme to obtain
recovery or receivables from delinquent account. Such progarmme may consist of following
steps:
Monitoring the state of receivables,
Dispatch of letters to customers whose due date is near.
Telegraphic and telephone advice to customers around the due date.
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Threat of legal action to overdue accounts, and
Legal actions against overdue accounts.

4.7.3 INVENTORY MANAGEMENT

Effective inventory management is all about knowing what is on hand, where it is in use,
and how much finished product results.

Inventory management is the process of efficiently overseeing the constant flow of units into
and out of an existing inventory. This process usually involves controlling the transfer in of
units in order to prevent the inventory from becoming too high, or dwindling to levels that
could put the operation of the company into jeopardy. Competent inventory management also
seeks to control the costs associated with the inventory, both from the perspective of the total
value of the goods included and the tax burden generated by the cumulative value of the
inventory.

Balancing the various tasks of inventory management means paying attention to three key
aspects of any inventory. The first aspect has to do with time. In terms of materials acquired
for inclusion in the total inventory, this means understanding how long it takes for a supplier
to process an order and execute a delivery. Inventory management also demands that a solid
understanding of how long it will take for those materials to transfer out of the inventory be
established. Knowing these two important lead times makes it possible to know when to
place an order and how many units must be ordered to keep production running smoothly.

4.7.3.1 MOTIVES OF INVENTORY MANAGEMENT

1) Transaction Motive : The Company may be required to hold the inventory in order to
facilitate the smooth and uninterrupted production and sale operations. It may not be possible
for the company to procure the raw material whenever necessary. There may be a time lag
between the demand for the material and its supply. Hence it is needed to hold the raw
material inventory. Similarly it may not be possible to produce the goods immediately after
they are demanded by the customers. Hence it is needed to hold the finished goods inventory.
They need to hold work in progress may arise due to production cycle.
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2) Precaution Motives: In addition to the requirement to hold the inventory for routine
transactions, the company may like hold them to guard against risk of unpredictable changes
in demand and supply forces. Eg. The supply of raw material may get delayed due to factors
like strike, transport, disruption, short supply, lengthy processes involved in import of raw
material etc. hence the company should maintain sufficient level of inventory to take care of
such situations. Similarly, the demand for finished goods may suddenly increases (especially
in case of seasonal type of products) and if the company is unable to supply them, it may
mean gain of competition. Hence, company will like to maintain sufficient supply of finished
goods.
3) Speculative Motive: The Company may like to purchase and stock the inventory in the
quantity which is more than needed for production and sales purpose. This may be with the
intention to get advantage in term of quantity discounts connected with bulk purchasing or
anticipating price rise.

4.7.3.2 INVENTORY MANAGEMENT TECHNIQUES


MANAGING INVENTORIES EFFICIENTLY DEPENDS ON TWO QUESTIONS
1. How much should be ordered?
2. When it should be ordered?
The first question how much to order relates to ECONOMIC ORDER QUANTITY
and The second question when to orderarises because of uncertainty and relates to
determining the RE-ORDER POINT.

ECONOMIC ORDER QUANTITY [ EOQ ]


The ordering quantity problems are solved by the firm by determining the EOQ (or the
Economic Lot Size ) that is the optimum level of inventory.
There are two types of costs involved in this model.

ordering costs

carrying costs

The EOQ is that level of inventory which MINIMIZES the total of ordering and carrying
costs.
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Reorder Point
The reorder point ("ROP") is the level of inventory when an order should be made with
suppliers to bring the inventory up by the Economic order quantity ("EOQ").
The reorder point for replenishment of stock occurs when the level of inventory drops down
to zero. In view of instantaneous replenishment of stock the level of inventory jumps to the
original level from zero level.
In real life situations one never encounters a zero lead time. There is always a time lag from
the date of placing an order for material and the date on which materials are received. As a
result the reorder point is always higher than zero, and if the firm places the order when the
inventory reaches the reorder point, the new goods will arrive before the firm runs out of
goods to sell. The decision on how much stock to hold is generally referred to as the order
point problem, that is, how low should the inventory be depleted before it is reordered.
The two factors that determine the appropriate order point are the delivery time stock which
is the Inventory needed during the lead time (i.e., the difference between the order date and
the receipt of the inventory ordered) and the safety stock which is the minimum level of
inventory that is held as a protection against shortages due to fluctuations in demand.
Therefore:

Reorder Point = Normal consumption during lead-time + Safety Stock

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5 OBJECTIVES OF THE STUDY

To study the need for analyzing the working capital management.


To study the liquidity position through various working capital related
ratios.
To ascertain the financial appraisal of working capital by using selected ratios.
To study the working capital assessment/financing concept used by the bank.

To make suggestions based on the finding of the study

6 LITERATURE REVIEW

Idowu and Ogundipe(2012) researched the relationship between working capital management
and value creation for shareholders. The standard measure for working capital management is
the cash conversion cycle (CCC). Cash conversion period reflects the time span between
disbursement and collection of cash. It is measured by estimating the inventory conversion
period and the receivable Conversion period, less the payables conversion period. Their
research found strong evidence of a negative relation between profitability and cash
conversion cycle meaning that shorter the days of working capital, higher the profitability.
Their findings also indicate a positive impact in the shareholders value.
Ngwenya Sam(2012) studied that the relationship between working capital management and
profitability of companies listed on the johannesburg stock exchange. Efficient working
capital management is an integral component of the overall corporate strategy to create
shareholders wealth. The researcher suggested that suggested that managers could increase
their companys profitability by effectively managing the CCC and its components.
Saswata Chatterjee (2010) focused on the importance of the fixed and current assets in the
successful running of any organization. It poses direct impacts on the profitability liquidity.
There have been a phenomenon observed in the business that most of the companies
increase the margin for the profits and losses because this act shrinks the size of working
capital relative to sales. But if the companies want to increase or improve its liquidity, then
it has to increase its working capital. In the response of this policy the organization has to
lower down its sales and hence the profitability will be affected due to this action.
Nazir & Afza(2009) studied that the concept of working capital management. In the present
environment of cut-throat competition, business does not have any other option than cutting
the cost of its operations in order to be competitive as well as financially viable. Customer
demands, competition, labour costs, and operating environment volatility have a negative
impact on the return on investment. For companies, in order to be competitive and to
maximize shareholders wealth, there is a need for effective working capital management. In
practice, working capital management has become one of the most important issues in

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organizations, where many financial managers are struggling to identify the basic working
capital drivers and an appropriate level of working capital.
Sen. M (2009) examined the ISE (Istanbul Stock Exchange) listed firms and checked out
the relationship with the working capital. According to them there is negative relationship
among variables. His research uncovered the importance of the finance directors who act as
moderators or catalysts to increase the productivity of the firm in other words they
positively affect the firms performance.
Smith & Fletcher(2009) studied that Various methods have been applied in measuring
working capital management. The traditional methods of measuring working capital
management such as current ratio (CR), quick ratio, and net working capital have been
criticized for inconsistency, as their usefulness entirely depends on a skilful interpretation.
Ganesan(2007) stated that the working capital meets the short-term financial requirements of
a business enterprise. It is the investment required for running day-to-day business. It is the
result of the time lag between the expenditure for the purchase of raw materials and the
collection for the sales of finished products. The components of working capital are
inventories, accounts to be paid to suppliers, and payments to be received from customers
after sales. Financing is needed for receivables and inventories net of payables. The
proportions of these components in the working capital change from time to time during the
trade cycle. The working capital requirements decide the liquidity and profitability of a firm
and hence affect the financing and investing decisions.
Garcia-Teruel & Martinez-Solano(2007) studied that Various methods have been applied in
measuring working capital management- proxies to measure working capital management
include the CCC, the weighted CCC, the comprehensive liquidity index, the net liquid
balance, the net trade cycle, and Emerys Lambda. Although there are other methods that
have been used successfully to measure working capital management, the CCC still remains
the most popular method used internationally as a proxy for measuring working capital
management despite its limitations.
Harris (2005) Working capital management is a simple and straightforward concept of
ensuring the ability of the firm to fund the difference between the short term assets and short
term liabilities. Nevertheless, complete mean and approach preferred to cover all its
companys activities related to vendors, customer and product.
Lamberson Morris(1995) studied that the Changes in working capital of
small firms in relation to changes in economic activity. The Author found
that Their investment in working capital, as measured by the inventory to
total assets and current assets to total assets ratios, were relatively stable
over the time period of this study. Findings suggest that working capital
management practices of small firms in response to changes in economic
activity do not follow commonly held expectations.

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7 Research Methodology
The study is based on conceptual framework. The study is investigated the working capital
management of the bank. The study is done on the primary and secondary data i.e. primary
data is collected by the personal interaction with the officers and employees of the bank and
secondary data is collected from the records, files etc. The sampling unit is the set of
elements that are required to conduct the research i.e. financial statements. The sampling unit
for the study is last five years financial statements i.e. Balance-sheet and P/L account. For the
analysis of data, we will use MS-Excel as an analysis tool.

8 Data Analysis and Interpretation


Ratio Analysis of Working Capital Management
In order to analyze the financial and operational performance of any firm, the ratio analysis is
very much useful and the ratio analysis can be classified into leverage ratios, liquidity ratios
and turnover ratios. Leverage ratios: Leverage is a measure of degree of risk shouldered by
the firm versus its financiers. The assets are financed by the tangible net worth of the firm
and financiers.

MARC
H
2009
AUD.

MARC
H
2010
AUD.

MARC
H
2011
AUD

701.86

660.21

720.24

883.04 1029.20

1 Net sales

701.86

660.21

720.24

883.04 1029.20

2 Operating profit

107.47

45.66

57.62

75.47

58.33

3 Profit before tax

112.34

49.97

60.75

79.64

61.44

16.01%

7.57%

8.43%

9.02%

5.97%

31ST
FINANCIAL RATIOS
Domestic sales

MARC
H
2012
AUD

MARC
H
2013
AUD

Export sales
Oth.sales/income E.duty/Dis.

4 PBT/Net sales

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A study on Working Capital Management

5 Profit after tax

110.00

46.93

57.28

75.53

56.66

6 Cash accruals

113.98

51.60

61.83

80.35

61.90

7 PBDIT

583.95

498.75

479.76

662.08

778.02

27.47

29.47

29.47

29.47

29.47

8 Paid up capital
9
1
0
1
1
1
2
1
3
1
4

Tangible net worth


Adjusted TNW

335.64 381.48 407.49 489.27 552.07


1201.35 1261.26 1140.99 1507.39 1621.14

TOL/TNW

19.81

18.96

18.94

19.15

18.69

TOL/Adjusted TNW

-5.53

-5.73

-6.77

-6.22

-6.37

Current ratio

0.81
0.82
0.85
0.83
0.84
1246.23 1292.44 1163.63 1550.33 1673.17

NWC

1 Income
Income is the consumption and savings opportunity gained by an entity within a specified
timeframe, which is generally expressed in monetary terms. However, for households and
individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents
and other forms of earnings received in a given period of time."

year
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013

Income
701.86
660.21
720.24
883.04
1029.2

% Inc/Dec
-5.93%
9.09%
22.60%
16.55%

36

A study on Working Capital Management

Income
1200

1029.2

1000
800

883.04
701.86

660.21

720.24

600

Income

400
200

20
13
20
12
-

20
12
20
11
-

20
11
20
10
-

20
10
20
09
-

20
08
-

20
09

Data Interpretation:
The above table shows that income of the bank increases every year. Increase in income
increases the funds of the firm. It is good sign for the firm. It represents of the firms liquidity
position.

2 Operating Profit
The profit earned from a firm's normal core business operations. This value does not include
any profit earned from the firm's investments (such as earnings from firms in which the
company has partial interest) and the effects of interest and taxes.

year

Operating
profit

% Inc/Dec

2008-2009

107.47

2009-2010

45.66

-57.51%

2010-2011
2011-2012

57.62
75.47

26.19%
30.98%
37

A study on Working Capital Management


2012-2013

58.33

-22.71%

Operating profit
120

107.47

100
75.47

80
60

58.33

57.62

45.66

Operating profit

40
20

20
13
20
12
-

20
12
20
11
-

20
11
20
10
-

20
10
20
09
-

20
08
-

20
09

Data Interpretation:
The above table shows that operating profit decrease in 2010 by 57.51% as compared to
2009. After that it increases continuous two years and in 2013 it again decreases by 22.71%
due to increase in expenses. Operating profit shows the liquidity of the firm.

3 Profit Before and after tax


Net Profit before Tax equals sales revenue minus cost of goods sold and all expenses except
for taxes. It is also known as pre-tax book income (PTBI), net operating income before taxes
or simply pre-tax Income.
The net amount earned by a business after all taxation related expenses have been deducted.
The profit after tax is often a better assessment of what a business is really earning and hence
can use in its operations than its total revenues.

YEAR

PBT

PAT

38

A study on Working Capital Management


2008-2009

112.34

2009-2010

49.97

2010-2011

60.75

2011-2012

79.64

2012-2013

61.44

120

110.00
46.93
57.28
75.53
56.66

112.34
110

100
79.64
75.53

80
60

49.97
46.93

61.44
56.66

60.75
57.28

PBT
PAT

40
20
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

Data Interpretation:
The above table shows that In 2009 operating profit before and after tax 112.34 and 110.00
respectively. After that it decreases every year as compared to 2009. To maintain profit at
high level, decrease expenses so that profitability of the firm increases.

4 PBT/Net Sales
Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of
profitability. It is calculated by finding the net profit as a percentage of the revenue.

Net Profit before Tax equals sales revenue minus cost of goods sold and all expenses except
for taxes. It is also known as pre-tax book income (PTBI), net operating income before taxes
or simply pre-tax Income.

39

A study on Working Capital Management


Net sales is the amount of sales generated by a company after the deduction of returns,
allowances for damaged or missing goods and any discounts allowed.
PBT/Net
sales

YEAR

%Inc/Dec

2008-2009

16.01%

2009-2010

7.57%

-52.72%

2010-2011
2011-2012
2012-2013

8.43%
9.02%
5.97%

11.36%
7.00%
-33.81%

PBT/Net sales
16.01%

20
13

PBT/Net sales

20
12
-

20
12

20
11
-

20
11

5.97%

20
10
-

20
10

20
09
-

20
08
-

9.02%

8.43%

7.57%

20
09

18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

Data Interpretation:
The above table shows that In 2009 this ratio is 16.01% and this ratio is less every year as
compared to 2009. This means profitability decreases. To increase it, decrease the selling and
administrative expense which increases every year.

5 PBDIT
PBDIT is an acronym for profit before depreciation, interest, and taxes. Earning before
depreciation, paying interest and tax is known as PBDIT.

40

A study on Working Capital Management

YEAR

%
Inc/Dec

PBDIT

2008-2009 583.95
2009-2010 498.75

-14.59%

2010-2011 479.76

-3.81%

2011-2012 662.08

38.00%

2012-2013 778.02

17.51%

PBDIT
778.02
662.08

583.95

498.75

479.76

20
13
20
12
-

20
12
20
11
-

20
11
20
10
-

20
09
-

20
08
-

20
10

PBDIT

20
09

900
800
700
600
500
400
300
200
100
0

Data Interpretation:
The above table shows that In 2010 PBDIT decreases by 14.59%, in 2011 decreases by
3.81%, in 2012 increases by 38% and in 2013 increases by 17.51%. The percentage increase
in 2013 is less than as compared to 2012. We can increase PBDIT by decreasing selling and
administrative expenses. PBDIT shows the financial position of a firm.

6 Paid up Capital
Paid-up capital is money that a company has received from the sale of its shares, and
represents money that is not borrowed. A company that is fully paid-up has sold all available
shares, and thus cannot increase its capital unless it borrows money through debt or is
authorized to sell more shares.

41

A study on Working Capital Management

YEAR

Paid up Capital

2008-2009

27.47

2009-2010
2010-2011
2011-2012
2012-2013

29.47
29.47
29.47
29.47

Paid up Capital
30
29.5
29
28.5
28
27.5
27
26.5
26

29.47

29.47

29.47

29.47

Paid up Capital

20
13
20
12
-

20
12
20
11
-

20
11
20
10
-

20
10
20
09
-

20
08
-

20
09

27.47

Data Interpretation:
The above table shows that in 2009 paid up capital of bank is 27.47 and increased in 2010
from 27.47 to 29.47. Banks capital remains same from last four years that means bank
doesnt borrow more money from RBI and has no more new accounts.

7 Tangible Net Worth


A measure of the physical worth of a company, which does not include any value derived
from intangible assets such as copyrights, patents and intellectual property. Thus, it represents
the supposed liquidation proceeds a company would fetch if its operations were to cease
immediately.
YEAR
2008-2009
2009-2010
2010-2011
2011-2012

Tangible Net
Worth
335.64
381.48
407.49
489.27

Inc/Dec
45.84
26.01
81.78
42

A study on Working Capital Management


2012-2013

552.07

62.8

Tangible Net Worth


600

489.27

500
400

335.64

552.07

381.48 407.49

300

Tangible Net Worth

200
100

20
13

20
12
-

20
12

20
11
-

20
11

20
10
-

20
10

20
09
-

20
08
-

20
09

Data Interpretation:
The above table shows that tangible net worth increases from the last five years. In 2010 it
was increased by 45.84, in 2011 by 26.01, in 2012 81.78 and in 2013 by 62.8 as compared to
previous years respectively. That means bank has more tangible assets so bank is in good
liquid position.

8 Adjusted Tangible Net Worth


Adjusted tangible Net Worth represents total asset less intangible assets and total outside
liabilities; also called net tangible assets. Intangible assets include nonmaterial benefits such
as goodwill, patents, copyrights, and trademarks.

YEAR
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013

Adj.Tangible Net
Worth
-1201.35
-1261.26
-1140.99
-1507.39
-1621.14

Inc/Dec
-59.91
120.27
-366.4
-113.75

43

A study on Working Capital Management

Adj.Tangible Net Worth


20
13

20
12
-

20
12

20
10

20
11

20
11
-

-600

20
10
-

20
08
-

-400

20
09
-

-200

20
09

Adj.Tangible Net
Worth

-800
-1000
-1200
-1400

-1140.99
-1201.35
-1261.26

-1600
-1800

-1507.39
-1621.14

Data Interpretation:
The above table shows that adjusted tangible net worth decreases from last five years.
It means bank has very less tangible assets i.e. .cash, cars etc. As it represents true net worth,
bank has no net worth. Bank has no own source of income, it take money from RBI and from
customers deposits.

9 TOL/TNW
TOL/TNW is nothing but debt-equity ratio.
TOL represents Total outside Liability
TNW represents Total Net worth

%
Inc/Dec

YEAR

TOL/TNW

2008-2009

19.81

2009-2010

18.96

-4.29%

2010-2011

18.94

-0.11%

2011-2012

19.15

1.11%

2012-2013

18.69

-2.40%

44

A study on Working Capital Management

TOL/TNW
20
19.8
19.6
19.4
19.2
19
18.8
18.6
18.4
18.2
18

19.81

18.96

19.15

18.94

20
13

TOL/TNW

20
12
-

20
12
20
11
-

20
11
20
10
-

20
10
20
09
-

20
08
-

20
09

18.69

Data Interpretation:
The above table shows that TOL/TNW ratio decreases from 2009 to 2010. That means
liabilities or debt of a bank are more than banks net worth. Too much debt is not good for the
firm. Although borrowing some money to grow the company is acceptable, we want to be
sure that a company has not taken on too much debt. Some businesses, such as banks have
total liabilities far in excess of their equity.

10 Current Ratio
A liquidity ratio that measure a company's ability to pay short-term obligations.
The Current Ratio formula is:

A current asset is an asset on the balance sheet which is expected to be sold or otherwise used
up in the near future, usually within one year, or one operating cycle whichever is longer.
Typical current assets includes, cash equivalents, accounts receivable, inventory, the portion
of prepaid accounts which will be used within a year, and short-term investments.
A company's debts or obligations that are due within one year. Current liabilities appear on
the company's balance sheet and include short term debt, accounts payable, accrued liabilities
and other debts.
YEAR
2008-2009
2009-2010
2010-2011

Current ratio
0.81
0.82
0.85

% Inc/Dec
1.23%
3.66%
45

A study on Working Capital Management


2011-2012
2012-2013

0.83
0.84

-2.35%
1.20%

Current ratio
0.86

0.85

0.85

0.84

0.84

0.83

0.83

0.82

0.82

Current ratio

0.81

0.81
0.8

20
13
20
12
-

20
12
20
11
-

20
11
20
10
-

20
10
20
09
-

20
08
-

20
09

0.79

Data Interpretation:
The above table shows that current ratio increases from 2009 to 2011 then decrease in 2012
and then again increase in 2013. That means bank have enough cash or assets to pay off their
short term liabilities. Bank is in a quite liquid position as current ratio is a measurement of
liquidity of a company.

11 Net Working Capital


Net Working Capital is a measurement of the operating liquidity available for a company to
use in developing and growing its business. The working capital can be calculated very
simply by subtracting a companys total current liabilities from its total current assets.

YEAR

NWC

% Inc/Dec

2008-2009

-1246.23

2009-2010

-1292.44

3.71%

2010-2011

-1163.63

-9.97%

2011-2012

-1550.33

33.23%

2012-2013

-1673.17

7.92%

46

A study on Working Capital Management

NWC
20
13
20
12
-

20
12

20
10

20
11

20
11
-

-600

20
10
-

20
08
-

-400

20
09
-

-200

20
09

NWC

-800
-1000
-1200
-1400

-1246.23

-1292.44

-1163.63

-1600

-1550.33

-1800

-1673.17

Data Interpretation:
The above table shows that Bank have negative working capital every year. Its not a bad sign
for the bank since some companies with long investments often have negative working
capital. Another reason for negative working capital may be that Bank itself have no income
or fund, banks borrow money from RBI and invest in long term investment.

FUND FLOW STATEMENT


Fund flow statement is a statement prepared to analyze the reasons for changes in the
financial position of the company. It shows the inflow and outflow of funds. It is used to
explain the changes in working capital position of the company.

31ST

FUNDS FLOW
STATEMENT
SOURCES
USES
Long term

MARC
H
20092010

MARC
H
20102011

MARC
H
20112012

MARC
H
20122013

AUD.
79.86
107.56
-27.70

AUD
171.51
0.26
171.25

AUD
104.72
473.30
-368.58

AUD
105.48
193.32
-87.84

47

A study on Working Capital Management


surplus/deficit

600

473.3

400
200

107.56
79.86

171.51
171.25
104.72
0.26

0
-200

193.32
105.48

USES

2009-2010
-27.7 2010-2011 2011-2012 2012-2013
-87.84

-400

SOURCES
Long term
surplus/deficit

-368.58

-600

Data Interpretation:
The above table shows that sources of funds i.e. inflow funds increase in 2011 and then
decrease in 2012, again increase in 2013. The uses of funds i.e. outflow funds decreases in
2011 and then increase in 2012, again decrease in 2013. That means in 2011 there is a long
term surplus due to decrease in assets or use of funds and there is long term deficit in 20112013 due to increase in fixed assets and other non-current assets.

3 Assessed Bank Finance


31ST MARCH MARCH MARCH MARCH MARCH
2009
2010
2011
2012
2013
ASSESSED BANK
FINANCE
AUD.
AUD.
AUD
AUD
AUD
1 Assessed Bank Finance
310.54
342.16
509.56
1080.99
884.06
2 NWC to Total CA
Bank Finance to Total
3 C.A.
Sundry creditors to Total
4 C.A.
5 Other CL to Total C.A.
Inventories to Net
6 sales(Days)
Receiv. to Gross
7 sales(Days)
S.Creditors to
8 Purchases(Days)

-23.07%

-21.76%

-17.75%

-19.82%

-19.35%

5.75%

5.76%

7.77%

13.82%

10.22%

117.32%

116.00%

48

109.98% 106.00% 109.13%

A study on Working Capital Management

1 Assessed Bank finance


Assessed bank finance is a financing or borrowings (short-term) from other banks. It means
all current liabilities that are borrowed from other banks.

Assessed Bank
Finance
310.54
342.16
509.56
1080.99
884.06

YEAR
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013

%
Inc/Dec
10.18%
48.92%
112.14%
-18.22%

Assessed Bank Finance


1200

1080.99

1000

884.06

800
400

Assessed Bank
Finance

509.56

600
310.54

342.16

200

20
13
20
12
-

20
12
20
11
-

20
11
20
10
-

20
10
20
09
-

20
08
-

20
09

Data Interpretation:
The above table shows that bank finance increases every year from 2009-2012 and decrease
in 2013 by 18.22%. It means short borrowings from other banks increases from 2009 to 2012
and decease in 2013. Increase in current liabilities every year is not good but after analysis
we find that bank has sufficient current assets to pay off their current liability.
2 NWC to total current assets

49

A study on Working Capital Management


Net Working Capital to Total current Assets ratio, is defined as the net current assets (net
working capital) of a company expressed as a percentage of its total current assets.
Therefore, the formula is:
(current assets-current liabilities)/current assets *100

NWC to total current


assets
-23.07%
-21.76%
-17.75%
-19.82%
-19.35%

YEAR
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013

NWC to total current assets


20
13

20
12
-

20
12

20
11
-

20
11

20
10
-

20
10

20
09
-

20
08
-

-5.00%

20
09

0.00%

NWC to total current


assets

-10.00%
-15.00%
-17.75%
-19.82%-19.35%
-21.76%
-25.00% -23.07%
-20.00%

Data Interpretation:
The above table shows that NWC to total current assets decreases in 2010 and 2011 as
compared to 2009 and increase in 2012 and 2013 but not more than 2009. It means that
current liabilities increases rapidly every year as compared to current assets so there is
decrease in the ratio.
3 Bank finance to total current assets
Bank finance to total current assets ratio is defined as how much percentage of current assets
are required to pay off the bank finance (i.e. short-term borrowings from other banks).

50

A study on Working Capital Management

YEAR

Bank fin to Total


CA

2008-2009

5.75%

2009-2010

5.76%

2010-2011

7.77%

2011-2012

13.82%

2012-2013

10.22%

Bank fin to Total CA


16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

13.82%
10.22%
7.77%

Bank fin to Total CA

20
13

20
12
-

20
12

20
11
-

20
11

20
10
-

20
10

20
09
-

20
08
-

20
09

5.75% 5.76%

Data Interpretation:
The above table shows that bank finance to total current asset ratio increases i.e. from 5.75%
to 13.82% from 2009 to 2012 due to increase in borrowings from other banks and decrease in
2013 i.e. 10.22% due to decrease in borrowings from other banks this year. This ratio
represents how much current assets goes in paying the current liabilities i.e. bank finance.

4 Other CL to total CA
The other current liability to total current asset ratio is defined as how much current assets are
required to pay off their other current liability i.e. short-term borrowings from others

2008-2009

Other CL to total
CA
117.32%

2009-2010
2010-2011

116.00%
109.98%

YEAR

51

A study on Working Capital Management


2011-2012
2012-2013

106.00%
109.13%

Other CL to total CA

20
13

Other CL to total CA

20
12
-

20
12

20
11
-

20
11

20
10
-

20
10

20
09
-

20
08
-

20
09

120.00%
117.32%
118.00%
116.00%
116.00%
114.00%
112.00%
109.98%
109.13%
110.00%
108.00%
106.00%
106.00%
104.00%
102.00%
100.00%

Data Interpretation:
The above table shows that ratio of other CL to total CA decreases from 117.32% to 106.00%
from 2009-2012 and then increases to 109.13% in 2013.
4 Efficiency Ratio
Ratios that are typically used to analyze how well a company uses its assets and liabilities
internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of
liabilities, the quantity and usage of equity and the general use of inventory and machinery.

31ST

1
2
3
4

EFFICIENCY
RATIOS
Net sales/TTA
PBT/TTA
Op.Costs/Net sales
Inv.+Recv./Net
sales(Days)

MARC
H
2009

MARC
H
2010

MARC
H
2011

MARC
H
2012

MARC
H
2013

AUD.
0.10
1.61%
18.06%

AUD.
0.09
0.66%
25.82%

AUD
0.09
0.75%
34.46%

AUD
0.09
0.81%
26.04%

AUD
0.09
0.57%
25.22%

2267

2562

2607

2601

2617

1 Net sales/TTA
Asset turnover ratio is the ratio of a company's sales to its assets. It is an efficiency ratio
which tells how successfully the company is using its assets to generate revenue.
Total Asset Turnover Ratio = Net Sales /Average Total Assets
52

A study on Working Capital Management

YEAR

Net sales/TTA

2008-2009
2009-2010
2010-2011
2011-2012
2012-2013

0.10
0.09
0.09
0.09
0.09

Net sales/TTA
0.11

0.1

0.1
0.1

0.09

0.09

0.09

0.09

0.09

Net sales/TTA

0.09
20
13

20
12
-

20
12

20
11
-

20
11

20
10
-

20
10

20
09
-

20
08
-

20
09

0.08

Data Interpretation:
The above table shows that Asset turnover ratio, In 2009 is 0.10 and 0.09 in 2010-2013. It
means it decreases after 2009 year. If a company can generate more sales with fewer assets it
has a higher turnover ratio which tells it is a good company because it is using its assets
efficiently. A lower turnover ratio tells that the company is not using its assets optimal. Bank
has higher turnover ratio in 2009 so its a good position for bank.
2 PBT/TTA
This ratio measures the efficiency of the total assets in generating the net profit.
Formula:
Return on assets= PBT/Total Assets
YEAR
PBT/TTA
2008-2009
1.61%
2009-2010
0.66%
2010-2011
0.75%
2011-2012
0.81%
2012-2013
0.57%

53

A study on Working Capital Management

PBT/TTA
2.00%

1.61%

1.50%
0.81%
0.66% 0.75%
0.57%

1.00%

PBT/TTA

0.50%

20
120
13

20
12

20
11
-

20
11

20
10
-

20
10

20
09
-

20
08
-

20
09

0.00%

Data Interpretation:
The above table shows that bank do not efficiently utilize their assets. The efficiency of the
bank decreases in 2010, increase in 2011-2012 and then again decrease in 2013. It means
bank is not able to efficiently use their assets to generate net profit.
3 Op. costs/Net sales
A ratio that shows the efficiency of a company's management by comparing operating
expense to net sales. Calculated as:
Operating expense/net sales
YEAR
OP.costs/Net sales
2008-2009
18.06%
2009-2010
25.82%
2010-2011
34.46%
2011-2012
26.04%
25.22%
2012-2013

OP.costs/Net sales

20
13

OP.costs/Net sales

20
12
-

20
11
20
10
-

20
08
-

20
09

40.00%
34.46%
35.00%
26.04%
25.82%
30.00%
25.22%
25.00% 18.06%
20.00%
15.00%
10.00%
5.00%
0.00%

54

A study on Working Capital Management


Data Interpretation:
The above table shows that this ratio is 18.06% in 2009, increase in 2010 and 2011 i.e.
25.82% and 34.46% respectively. The smaller the ratio, the greater the organization's ability
to generate profits. In 2010 and 2011 organization is not able to generate profits due to high
ratio.

4 Inv.+Recv./Net sales(Days)
This ratio represents Time it takes to collect accounts receivable. It shows the relationship
between unpaid sales and the total sales revenue. It is considered high if it is near to 1.0,
because that means a significant amount of cash is tied up with the slow paying customers.
Formula: Total accounts receivable (outstanding in an accounting period) sales revenue (in
the same period).
Inv.+Recv./Net
sales(Days)
2267
2562
2607
2601
2617

YEAR
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013

Inv.+Recv./Net sales(Days)
2700

2607

2562

2600

2617

2601

2500
2400

Inv.+Recv./Net
sales(Days)

2267

2300
2200
2100

20
13
20
12
-

20
12
20
11
-

20
11
20
10
-

20
10
20
09
-

20
08
-

20
09

2000

Data Interpretation:
The above table shows that time taken to collect receivables increases every year. It means
that customers are very slow paying.

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A study on Working Capital Management

5 Risk Rating Ratios


31ST
RISK RATING RATIOS
1 Current ratio
2 TOL/TNW
3 PAT/Net Sales
4 PBDIT/Intt.
PBDIT/Tot.capital emp.
5 (ROCE)
Inv./N.sales+Rec./Gr.sales(
6 Days)

MARC MARC MARC MARC MARC


H
H
H
H
H
2009
2010
2011
2012
2013
AUD. AUD.
AUD
AUD
AUD
0.81
0.82
0.85
0.83
0.84
19.81
18.96
18.94
19.15
18.69
15.67
%
7.11% 7.95% 8.55% 5.51%
1.25
1.12
1.16
1.15
1.09
8.36%

6.55%

5.90%

6.71%

7.16%

2267

2562

2607

2601

2617

1 Current Ratio
A liquidity ratio that measure a company's ability to pay short-term obligations.
The Current Ratio formula is:

Particular

2009

2010

2011

2012

2013

Current ratio

0.81

0.82

0.85

0.83

0.84

Data Interpretation:
A current ratio between 1.0 and 1.5 is average: less than 1.0 is a risk: over 1.5 is not a risk.
However, this is only one ratio: there are many ratios, some important, most are beyond the
requirement of small company credit sales.
The above table shows that current ratio is less than 1 so that this is a risky position for the
firm.
2 TOL/TNW
TOL/TNW is nothing but debt-equity ratio.
TOL represents Total outside Liability
TNW represents Total Net worth

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A study on Working Capital Management


Particular

2009

2010

2011

2012

2013

TOL/TNW

19.81

18.96

18.94

19.15

18.69

Data Interpretation:
If this ratio is less than 50% then company using their own money, if it is 50-90% then
company use both external funds and equity and if it is above 90% then company uses
external funds to support business.
3 PAT/Net Sales
The net profit margin ratio is the most commonly used profit margin ratio.
A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs
and profits, are generated from revenues.
A low profit margin ratio indicates that the business is unable to control its production costs.
The profit margin ratio provides clues to the company's pricing, cost structure and production
efficiency.
The profit margin ratio is a good ratio to benchmark against competitors.

Particular

2009

PAT/Net
Sales

2010

15.67%

2011

7.11%

2012

7.95%

2013

8.55%

5.51%

Data Interpretation:
The above table shows that the profit margin ratio decreases every year till 2011 from 2009
and increase in 2012 and again decrease in 2013. A low profit margin ratio indicates that low
amount of earnings, required to pay fixed costs and profits, are generated from revenues.
4 PBDIT/Tot.capital emp.(ROCE)
Average Capital Employed is the average of the equity share capital and long term funds
provided by the owners and the creditors of the firm at the beginning and end of the
accounting period.
Particular

2009

PBDIT/Tot.capital
emp.(ROCE)

8.36%

2010

2011

6.55%

Data Interpretation:

57

5.90%

2012

6.71%

2013

7.16%

A study on Working Capital Management


The above table shows that ROCE ratio decreases till 2011 from 2009 and again starts
increases. ROCE should always be higher than the rate at which the company borrows,
otherwise any increase in borrowing will reduce shareholders' earnings.

5 PBDIT/Intt.
This ratio indicates the proportion of interest paid out of the profit earned. Higher ratio
signifies a lesser amount of profit paid as interest and lower ratio signifies a higher amount of
profit paid as interest.

Particular
PBDIT/Intt.

2009

2010

1.25

2011

1.12

2012

1.16

2013

1.15

1.09

Data Interpretation:
The above table shows that 2010 to 2013 pays higher amount of profit as interest as
compared to 2009.
6 Inv./N.sales+Rec./Gr.sales(Days)
This ratio represents Time it takes to collect accounts receivable. It shows the relationship
between unpaid sales and the total sales revenue. It is considered high if it is near to 1.0,
because that means a significant amount of cash is tied up with the slow paying customers.
Formula: Total accounts receivable (outstanding in an accounting period) sales revenue (in
the same period).
Particular

2009

Inv./N.sales+Rec./Gr.sales(Days)

2010

2267

2562

2011
2607

2012
2601

2013
2617

Data Interpretation:
The above table shows that this ratio increases every year. The higher the ratio, higher the
companys ability to recover the sales revenue.
Analysis of financing working capital
1. Customer Evaluation
Type
Total
Percentage
Proprietorship
8
80%
Partnership

20%

Total

10

100%

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A study on Working Capital Management

12
10

10
8

Total

Percentage
4
2

100%

80%

20%

0
Properitorship Partnership

0 0%
company

Total

Data Interpretation
The above table shows that 80% clients are proprietorship, 20% clients are partnership.
Thus we can say that the clients of the bank , consist of smaller concerns which are
proprietorship, partnership in nature.
2.Nature of Business
Type
Manufacturing
Services
Trading
Total
s

Total
1
2
7
10

Percentage
10%
20%
70%
100%

12

10

10
7

8
6
2
20%

70%

Total

100%

Percentage

To
ta
l

M
an
uf
ac
tu
rin
g

1
10%

Se
rv
ic
es

Tr
ad
in
g

59

A study on Working Capital Management

Data Interpretation
The above table shows that the nature of business carried by the clients. According to this
table, 70% clients are trading concerns, 20% are services and 10% are manufacturing firms.
Thus we can conclude that majority of the concerns are those engaged in trading.

3.Analysis of Working Capital and opinion for working capital financing by SBoP.
Opinion

Total no. of
companies
1
9
10

Reject
Accept
Total

Percentage
10%
90%
100%

12
10

10

8
Total

Percentage
4
2
0

100%

90%
10%

Reject

Accept

Total

Data Interpretation
This table shows that 10% cases are rejected whereas 90% cases are accepted for the working
capital financing. The rejection decision is taken due to the some reasons like in complete
documents, fraudness etc.

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A study on Working Capital Management


9 FINDINGS
The research is conducted with the data of past five years. And from this past five years data
the things that I have finds after the research done are:
1) Working capital of the company is decreasing and showing negative working capital per
year. It shows bad liquidity position.
2) Negative working capital indicates that company has unable for payments of short terms
liabilities.
3) Working capital decreased because of increment in the current liabilities is more than
increase in the current assets.
4) As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the
company for last five years it is less than 1. This depicts that companys liquidity position is
not sound. Its current liabilities are more than its current assets.
5) Income of the bank increases from the last five year.
6) Net profit decreases due to increase in selling and administrative expenses and interest
expense.
7) Receivables other than deferred and exports are the major part of assets.
8) From the last five years data depicts that a source of funds are less than uses of funds i.e.
inflows are less than outflows.
9) As we know If a company can generate more sales with fewer assets it has a higher
turnover ratio which tells it is a good company because it is using its assets efficiently. A
lower turnover ratio tells that the company is not using its assets optimal. In 2010-13 this
ratio is same and less than 2009.
10) ROCE should always be higher than the rate at which the company borrows; otherwise
any increase in borrowing will reduce shareholders' earnings. This ratio decreases till 2011 ad
increase in 2012 and 2013.
11) Bank finance more proprietorship than partnership customers and finance more trading
firms than manufacturing and services.

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A study on Working Capital Management


10 RECOMMENDATIONS
After interpretation and analysis, I am giving certain suggestions to the company which I
hope may be helpful for the Bank.
1) Bank should lower down their liabilities so that their working capital becomes positive.
The positive working capital represents the sound liquidity position of the bank.
2) Bank should increase their current assets to make the positive working capital and good
liquidity position of the company/Bank.
3) To increase the current ratio, decrease current liabilities or increase current assets.
4) For the surplus, Bank should increase their sources of funds by increase in capital;
decrease in fixed assets and due to decrease in fixed assets depreciation also decreases
5) Bank should utilize their assets so that their asset turnover ratio becomes high. It becomes
high by increase in income.
6) Bank should decrease their selling and administrative expense and also decrease their
interest expense by decreasing borrowings.
7) Bank should increase their profit so that their ROCE ratio should increase.
8) Bank should adopt better working capital management techniques to improve the
efficiency of the bank.

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A study on Working Capital Management

11 CONCLUSION
In the present study I have analyzed the working capital management of State Bank of
Patiala. The working capital of the bank is negative. The negative working capital shows that
liquidity position of the bank is not sound. If liquidity position is not sound then net profit of
the bank also decreases and ROCE also decreases. Bank s borrowings are more than total
assets of the bank. Due to this current ratio of the bank also decreases which is not a good
sign.
The positive working capital is a good sign for the bank. To make the working capital
positive, decrease the current liabilities and increase current assets. By doing this the liquidity
position of the bank becomes good, current ratio also increases, profit and ROCE also
increases.
Thus, Bank should adopt better Working Capital Management techniques for the sound
position of the bank.

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A study on Working Capital Management

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A study on Working Capital Management


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13 ANNEXURE

66

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