A STUDY ON WORKING CAPITAL MANAGEMENT IN ELECTRONICS CORPORATION OF INDIA LTD

A Project Report submitted in partial fulfillment for the award of the Degree of Master of Business Administration

BY: SHIRISHA GURRAM HT.NO: 09J91EOO42 MASTER OF BUSINESS ADMINISTRATION DEPARTMENT OF MANAGEMENT STUDIES

VDIYA BHARATHI INSTITUTE OF TECHNOLOGY

NBA Accredited, AICTE approved, Affiliated to JNTU Pembarthy (V), jangaon (M), warangal (Dist) -501510.

2009-2011

DECLARATION

I hereby declare that this Project Report titled A STUDY ON WORKING CAPITAL MANAGEMENT OF ELECTRONCIS CORPORATIONS OF INDIA LIMITED is a bonfire work submitted to the Department of Business Management JNTU, Hyderabad.

I also declare that this project work is the result of my own effort and it is not submitted to any other University for the award of any degree /diploma / certificate or published any time before.

DATE: PLACE: S HIRISHA GURRAM

ACKNOWLEDGEMENTS

First and foremost I thank Sri. J.S. ANAND Addl. General Manager of ECIL Company who has given me a opportunity to carry out my project in an esteemed organization like ECIL. I thank Sri. A. SRINIVAS RAO Senior Accounts Manager of ECIL who has guided me in my project work. I am greatly thankful to him for his unweaving commitment through provoking discussions and constructive comments to improve my work. I express my deep gratitude to Mr

G KRANTHI KUMAR

Asst.Professor in Management Studies as an internal guide who encouraged me in every way to get this project into a solid form. I express my sincere thanks for his advice and encouragement during the preparation and progress of this project. It is of great opportunity to render our sincere and honest thanks to Prof Mr. R.RAJASHAKER REDDY Management this project. Head for Department of Studies for his timely guidance and highly

interactive attitude which helped me a lot successful completion of

SHIRISHA GURRAM

CERTIFICATE

This is to certify that a project report

A STUDY ON WORKING

CAPITAL MANAGEMENT OF ELECTRONICS CORPORATION OF INDIA LTD is a bonafied work submitted by MISS. SHIRISHA GURRAM(09J91E0042) in partial fulfillment of the requirement for the award of degree Master of Business Administration (MBA) from VBIT (affiliated to Jawaharlal Nehru Technological University, Hyderabad). Certified further that to the best of our knowledge the work presented in this report has not been submitted to any other university or institution for the award of any degree or diploma.

Head of the department guide Mr. R. Rajashakar Reddy Kranthi Kumar M.B.A (Professor & Head) M.B.A (Assistant Professor)

Project

Mr. G.

Vidya Bharthi Institute of Tech, Vidya Bharathi Institute of Tech, Pembarthy (v), jangaon (m) Pembarthy (v), jangaon(m) Warangal (Dist). Warangal (Dist). .

INTRODOCTION

INTRODUCTIONS TO THE PROJECT AT ECIL

Working capital refers to the investment by a company in shortterm assets such as cash, marketable securities accounts and inventories. It is observed that , some PSUs are loaded with high volumes of inventory leading to obsolescence with consequent to profit / loss A/C . liquidity while resulting in blockage of funds three by drastically affecting the performance of the organization. In case of ELECTRONICS CORPORATION OF INDIA LIMITED , there is variety of high tech nature not similar to each other working capital management . Hence challenge task. Business needs funds for the purpose of its establishment and to carry out its day to day operations. Current assets and Current liabilities in a leading public sector ELECTRONICS CORPORATION OF INDIA LIMITED (under government of India). The above study is aimed at analyzing in working capital in ECIL. In this context it is proposed to take project study in reputed public sector undertaking covering working capital are the fixed assets such as plant and machinery, land and building, furniture etc. ECIL is chosen as it is a central public sector unit of long standing. The project study aims analyze discuss conclude and suggest measures for further controls. The project is design to provide study of working capital in ECIL .

OBJECTIVES OF THE STUDY:

The case study of WORKING CAPITAL MANAGEMENT under taken with the following objectives.
To analyze the current assets and current liabilities with a

view to point out the liability of the company.

To discuss the pattern of working capital in relation to total net asset and gross fixed asset with a view to highlight whether the company has been operating with high/low amount of working capital.

To examine the pattern of financing the working capital requirements in order to bring out the relative importance of short term/long term sources of funds.

To present the turnover of working capital and its components with a view to analyze the efficiency with which the working capital and its components were used.

To analyze the funds flow to find out the ways and means of corporation.

NEED FOR THE STUDY:

In public sector undertakings there has been increase in net profit, gross margin, gross profit, gross sales, internal resources generation, export earning and contribution to the exchequer during 2003-2004. A detailed analysis of the public sector industry wise profitability reveal that 50% of the PSUs are loss making another 50% are highly profitable like mainly SAIL, GAIL, BALCO, HOCL, BHEL are some of the major contribution for profit. In 2003 budget, the government has announces for revival and restructuring of the sick PSUs by allocating a budget around Rs.2000 cores. The main reason attributed for loss making due to flaws in financial aspects and indiscipline in managing the resources particularly finances. In the 21st century the government stressed the disinvestments policies for the most of the companies including high profit earning companies. The shift of government for disinvestments has given an enormous amount of around Rs.80000 cores from this Disinvestments policy.

PUBLIC SECTORS ENTERPRISES: Government believes that the process of disinvestments should increase competition and not decrease it, government emphasized, stressing that there should be a link between disinvestments and the provision of basic social good; government said revenues generated through disinvestments would be used for designated social sector spending.

Reiterating governments commitment to a strong and effective public sector, government was in favor of developing full managerial and commercial autonomy to successful profit- making companies, operating in a 1. Disinvestment policy

2. Strengthen puss where appropriate in order to facilitate investment. 3. Privatization of partially puss where the units are making loss with 49% share capital of private holders
4.

Treatment of chronic sick units for its revival plan for strategic industries and balance to go with private partners.

Public sectors under three categories:` Core sector life defense, steel, cement, ect. Related manufacturing sectors. Second category includes those industries, which can weed out the unwanted expenditure and manpower to make the companies viable and profitable.

The third category were loss making industries which are going to be listed under, Disinvestments policy with a share capital of 26% or 51% to the well organized companies like Tata, Birla, Reliance etc. As already stated above the main reason attributed, for loss making are due to flaws in financial management particularly investment appraisal and working capital management as a lot of indiscipline in managing these areas. Hence the study of working capital management has been taken up in managing current assets and current liabilities. Arranging short term financing controlling the moment of cash,

administrating, accounts receivable and monitoring investment inventories. PERIOD OF THE STUDY:

The study is made for a period of five years i.e., from 2005-06 to 2009-10.

SCOPE OF THE STUDY:

Scope is limited to the extent of analyzing the working capital of the company by calculating various components of working capital through the help of the ratios, trend analysis and funds flow.

SOURCES OF INFORMATION:

The sources of information are divided into two (a) Primary and (b) Secondary. Most of the data is collected through secondary source i.e., printed matter. This data is from the annual reports and original records of ECIL. And the data collected by way of primary source is through the personal interview with the finance manager.

METHODOLOGY:

Working capital analysis is done through the various components by using ratio analysis, trend analysis and funds flows. The techniques used as per the theoretical practice addressing the liquidity position and turnover ratios and their overall trends.

Those are crucial for any informed judgment regarding the financial state of affairs a company. This analysis has been done with the help of the following TOPICS.

1. Study of various components and its analysis.

2. Ratio analysis and trend analysis.

3. Conclusions and suggestions.

Limitations of the study :

The study is limited to a period of only five years.

The financial positions as reflected in the annual report are true only for last day of the accounting year and it may not be relevant for the remaining part of the year .

The period study is restricted to ELECTRONICS CORPORATION

OF INDIA

LIMITED. Therefore it is not possible to have inter

firm comparison for the purpose of the study .

Working capital management principles are applicable to ELECTRONICS CORPORATION OF INDIA LIMITED.

COMPANY PROFILE

COMPANY PROFILE ECIL was setup under the Department of Atomic Energy on 11th April, 1967 with a view to generate a strong indigenous capability in the field of professional grade electronics. The initial accent was on total self-reliance and ECIL was engaged in the Design, Development, Manufacture and Marketing of several products with emphasis on three technology lines viz. Computers, Control Systems and Communications. Over the years, ECIL pioneered the development of various complex electronics products without any external technological help and scored several 'firsts' in these fields prominent among them being countries. First First First First First Electronic Voting Machines Solid State Cockpit Voice Recorder Radiation Monitoring & Detection Systems Automatic Message Switching Systems Operation & Maintenance Center For E-108 Exchange

The company played a very significant role in the training and growth of high caliber technical and managerial manpower especially in the fields of Computers and Information Technology. Though the initial thrust was on meeting the Control & Instrumentation requirements of the Nuclear Power Program, the expanded scope of self-reliance pursued by ECIL enabled the company to develop various products to cater to the needs of

Defense, Civil Aviation, Information & Broadcasting, Telecommunications, Insurance, Banking, Police, and Para-Military Forces, Oil & Gas, Power, Space Education, Health, Agriculture, Steel and Coal sectors and various user departments in the Government domain. ECIL thus evolved as a multi-product company serving multiple sectors of Indian economy with emphasis on import of country substitution and development of products & services that are of economic and strategic significance to the country. VISION: To contribute to the country in achieving self reliance in strategic electronics. MISSION: ECIL's mission is to consolidate its status as a valued national asset in the area of strategic electronics with specific focus on Atomic Energy, Defense, Security and such critical sectors of strategic national importance.

OBJECTIVES: To continue services to the country's needs for the peaceful uses Atomic Energy. Special and Strategic requirements of Defense and Space, Electronics Security Systems and Support for Civil Aviation sector. To establish newer technology products such as Container Scanning Systems and Explosive Detectors. To explore new avenues of business and work for growth in strategic sectors in addition to working for realizing technological solutions for the benefit of society in areas like Agriculture, Education, Health, Power, Transportation, Food, Disaster Management etc. To progressively company. improve shareholder value of the

To strengthen the technology base, enhance skill base and ensure succession planning in the company.

To consciously work for finding export markets for the company's products.

JOINT VENTURE: Electronics Corporation of India Limited (ECIL) entered into collaboration with OSI Systems Inc. (www.osi-systems.com) and set up a Joint Venture "ECIL-RAPISCAN LIMITED". This Joint Venture manufactures the equipments manufactured by RAPISCAN, U.K and U.S.A with the same state of art Technology. Requisite Technology is supplied by RAPISCAN and the final product is manufactured at ECIL facility. ECIL-RAPISCAN have supplied many X-RAY BAGGAGE/CARGO INSPECTION SYSTEMS (XBIS) of this Technology to high profile Indian Customers like Customs, Airports Authority, Parliament House, Defense, Air lines, State Police etc. ECIL-RAPISCAN exported XBIS to Tribhuvan International Airport, Kathmandu, Nepal, X-Ray generators to USA and Malaysia. ECIL-RAPISCAN continues to receive large number of orders from existing as well as new customers. This is basically due to strength in

Latest International Technology Quality Assurance The exhaustive spares inventory to meet the spares requirement Strong Manufacturing and After Sales Service set up in 10 different centers located all over India.

Achievements, Awards and Felicitations:

The company received corporate award from Institution of Electronics & Telecommunication Engineers (IETE) for performance excellence in Electronic Instruments & Instrumentation 2007 & India Gandhi National Memorial Award for excellence in Indian industries. The Green site Award-2003 was presented to ECIL by the Atomic Energy Regulatory Board (AERB) on November 21, 2004 in recognition of the green areas developed and

maintained by ECIL comprising of lawns, gardens and tree plantation. Certificate of merit for Excellence in MOU performance from the ministry of heavy industries.

DIVERSIFICATION:

ECIL has been incorporated in 1967 to make the country self-reliant. Growing in this direction the company is imbibing the latest technology and doing the R&D work over the absorbed technology for the development. As the global market has become competitive in view of fast changing technologies, the product and technology are becoming obsolete. Under such a situation ECIL has been phasing out many products/projects and diversifying the range of projects as per the market demands.

Limited

Electronics Corporation of India

A Govt. of India (Department of Atomic Energy) Enterprise

HYDERABAD

ORGANISATIONAL CHART OF ECIL

Chairman & Managing Director

Director (Finance)

Director (Technical)

Director (Personal)

Chief Vigilance Officer

Finan ce Group

Strategi c Busines s Units (GMs/H ODs)

Corpora te Busines s Develop ment

Zones/ Branc hes

Service Divisio ns (Qualit y& Safety)

Perso nal Group

Enginee ring Service s

TURNOVER:

The company maintained a tempo of growth rate in sales during the last five years and registered the following turnover.

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

TURNOVER Rs. 652 cores Rs. 918 cores Rs. 936 cores Rs. 994 cores Rs. 1114 cores

PERFORMANCE AT A GLANCE
(Rupees In Cores) Particular s Sales (Net) Production (RV) 200910 10 58 11 14 200809 9 75 9 94 200708 9 42 9 36 200607 91 8 91 2 200506 65 2 65 4

Material Consumed Contributi on Expenses Salaries & Wages Repairs & Maintenanc e Interest Paid Depreciatio n Selling Expenses R&D expenditur e Other Expenses Total Fixed Exp Operating profit Other Income Profit Before Tax Net Profit Capital Employed

7 13 4 01 2 96 4 20 8 24 20 33 4 05 -4 58 54 42 7 62 76 29 40 59 19 14 18 6 22 10 22 24 27 89 05

6 32 3 04 3 42 5 19 13 32 21 17 4 49 55 46

4 4 5 8 2 2 3 2

47 9 43 5 19 5 5 2 1 2 3 6 3 2 1 7 2 2 78 46 1 60 33 19 7 8

38 26 17

2 2

3 1

3 4 1 93 1 34 7 06 7 47 29 4 49 1 2 3 2 4 5 2 01

CHAPTER - 3

THEORETICAL BACKGROUND

WORKING CAPITAL MANAGEMENT

MEANING OF WORKING CAPITAL:

Capital required for a business can be classifies under two main categories: Fixed Capital Working Capital

Every business needs funds for two purposes for its establishments and to carry out day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land and building, furniture etc. Investments in these assets are representing that part of firms capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short term purposes for the purchasing of raw materials, payments of wages and other day to day expenses etc. These funds are known as working capital. In simple words, Working capital refers to that part of the firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories.

CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital: Balance Sheet concepts Operating Cycle or circular flow concept

1) BALANCE SHEET CONCEPT: There are two interpretation of working capital under the balance sheet concept:

Gross Working Capital Net Working Capital The term working capital refers to the Gross working capital and represents the amount of funds invested in current assets . Thus, the gross working capital is the capital invested in total current assets of the enterprises. Current assets are those assets which are converted into cash within short periods of normally one accounting year. Example of current assets is:

Constituents of Current Assets: Cash in hand and Bank balance

Bills Receivable Sundry Debtors Short term Loans and Advances Inventories of Stock as: Raw Materials Work in Process Stores and Spaces Finished Goods Temporary Investments of Surplus Funds Prepaid Expenses Accrued Incomes

The term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities or say: Net Working Capital = Current Assets Current Liabilities. NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:

When the current assets exceed the current liabilities, the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period of normally one accounting year of the current assets or the income of the business. Examples of current liabilities are:

CONSTITUENTS OF CURRENT LIBILITIES: Bills Payable Sundry Creditors or Account Payable Accrued or Outstanding Expenses Short term Loans, Advances and Deposits Dividends Payable Bank Overdraft

Provision for Taxation, appropriation of profits

If does

not

amount to

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital.

2) OPERATING CYCLE OR CIRCULATING CASH FORMAT: Working Capital refers to that part of firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Funds thus invested in current assets keep revolving fast and being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence it is also known as revolving or circulating capital. The circular flow concept of working capital is based upon this operating or working capital cycle of a firm. The cycle starts with the purchase of raw material and other resources And ends with the realization of cash from the sales of finished goods. It involves purchase of raw material and stores, its conversion into stocks of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stocks into sales, debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. The speed/ time of duration required to complete one cycle determines the requirements of working capital longer the period of cycle, larger is the requirement of working capital.

CA SH Raw Mater ial

Debto rs

WORKING CAPITAL CYCLE

Finish ed Goods WIP

The gross operating cycle of a firm is equal to the length of the inventories and receivables conversion periods. Thus,

Gross Operating Cycle = RMCP +

Where,

RMCP = Raw Material Conversion Period WIPCP = Work in- Process Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables Conversion Period

However, a firm may acquire some resources on credit and thus defer payments for certain period. In that case, net operating cycle period can be calculated as below:

Net Operating Cycle Period = Gross

Further, following formula can be used to determine the conversion periods.

Raw Material Conversion Period

Average Stock of Raw Material. Raw Material Consumption per day

Work in process Conversion Period Average Stock of Work-in-Progress Total Cost of Production per day

Finished Goods Conversion Period Average Stock of Finished Goods Total Cost of Goods sold per day

Receivables Conversion Period Average Accounts Receivables Net Credit Sales per day

Payable Deferral Period Average Payable Net Credit Purchase per day

CLASSIFICATION OR KIND OF WORKING CAPITAL:

Working capital may be classified in two ways: On the basis of concept On the basis of time On the basis of concept, working capital is classified as gross working capital and net working capital. The classification is important from the point of view of the financial manager.

On the basis of time, working capital may be classified as: Permanent or Fixed working capital Temporary or Variable working capital.

KINDS OF WORKING CAPITAL

ON THE BASIS OF CONCEPT ON THE BASIS OF TIME

GROSS WORKING CAPTIAL

NET WORKING CAPITAL

PEARMINENT OR FIXED WORKING CAPITAL

TEMPORARY OR VARIABLE WORKING CAPITAL

REGULAR WORKING CAPITAL

RESERVE WORKING CAPITAL

SEASONAL WORKING CAPITAL

SPECIAL WORKING CAPITAL

1) PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operations.

2. TEMPRORAY OR VARIABLE WORKING CAPITAL: Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variables working capital can be further classified as second working capital and special working capital. The capital required to meet the seasonal needs of the enterprises is called the seasonal working capital.

Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business
IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL:

Working capital is the life blood and nerve centre of a business. Just a circulation of a blood is essential in the human body

for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows: Solvency of the Business Goodwill Easy Loans Cash discounts Regular supply of Raw Materials Regular payments of salaries, wages & other day to day commitments. Exploitation of favorable market conditions Ability of crisis Quick and regular return on investments High morals

THE NEED OR OBJECTS OF WORKING CAPITAL: The need for working capital cannot be emphasized. Every business needs some amount of working capital. The need of working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycle involved in the sales and realization of cash. There are time gaps in purchase of raw materials and production, production and sales. And sales, and realization of cash, thus , working capital is needed for the following purposes: For the purchase of raw materials , components and spaces To pay wages and salaries To incur day to day expenses and overhead costs such as fuel, power and office expenses etc. To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers. To maintain the inventories of raw materials, work in- progress, stores and spares and finished stock.

FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT:

The working capital requirements of a concern depend upon a large number of factors such as nature and size of the

business, the characteristics of their operations, the length of production cycle , the rate of stock turnover and the state of economic situation. However the following are the important factors generally influencing the working capital requirements.

NATURE OR CHARACTERSTICS OF A BUSINESS: The nature and the working capital requirement of enterprises are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprises involve in providing services. The amount required also varies as per the nature, an enterprises involved in production would required more working capital then a service sector enterprise. MANAFACTURE PRODUCTION POLICY: Each enterprises in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time and other may follow the principles of demand based production in which production is based on the demand during the particular phase of time. Accordingly the working capital requirements vary for both of them. OPERATIONS: The requirement of working capital fluctuates for seasonal business. The working capital needs of such business may increase considerably during the busy season and decrease during the operations. MARKET CONDITION: If there is a high competition in the chosen project category then one shall need to offer sops like credit, immediate delivery of goods etc for which the working capital requirement will be high. Otherwise if there is no competition or less competition in the market then the working capital requirements will be low. AVALBILITY OF RAW MATERIAL: If raw material is readily available then one need not maintain a large stock of the same thereby reducing the working capital investment in the raw material stock . On

other hand if raw material is not readily available then a large inventory stocks need to be maintained, there by calling for substantial investment in the same.
GROWTH AND EXAPNSION:

Growth and Expansions in the volume of business result in enhancement of the working capital requirements. As business growth and expands it needs a larger amount of the working capital. Normally the needs for increased working capital funds processed growth in business activities.

PRICE LEVEL CHANGES : Generally raising price level require a higher investment in the working capital. With increasing prices, the same levels of current assets needs enhanced investments.

MANAFACTURING CYCLE: The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period the need for working capital would be more. At time business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of the working capital requirement is made keeping this factor in view. Each constituents of the working capital retains it form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement the duration at various stages of the working capital cycle is estimated. Thereafter proper value is assigned to the respective current assets, depending on its level of completion. The basis for assigning value to each component is given below:

COMPONENTS OF WORKING CAPITAL BASIS OF VALUATION

Stock of Raw Material Stock Of Work-in-progress Stock of Finished Goods Debtors Cash

Purchase of Raw Material At cost of Market value which is lower Cost of Production Cost of Sales or Sales value Working Expenses

Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or overassessment of the working capital and both of them are dangerous.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY:

The following are the general principles of a sound working capital management policy:

PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY

PRINCIPLES OF RISK

PRINCIPLES OF COST OF CAPITAL

PRINCIPLE S OF EQUITY

PRINCIPLES OF MATURITY OF

1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY):

Risk here refers to the inability of a firm to meet its obligations as and when they become due for payment. Larger investment in current Assets with less dependence on short term borrowings, increase liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investments in current assets with greater dependence on short term borrowings, reduces liquidity and increase profitability. In other words there is a definite inverse relationship between the degree of risk and profitability. In other words, there is a definite inverse relationship between the risk and profitability. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management assumes greater risk by reducing working capital. However, the goal of management should be to establish a suitable tradeoff between profitability and risk.

2. PRINCIPLES OF COST OF CAPITAL:

The various source of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher and risk however the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two. 3.PRINCIPLE OF EQUITY POSITION:

The principle is concerned with planning the total investments in current assets. According to this principle, the amount of working capital invested in each component should be adequately justified by a firms equity position. Every rupee invested in current assets should contribute to the net worth of the firm. The level of current assets may be measured with the help of two ratios: 1. Current assets as a percentage of total assets and 2. Current assets as a percentage of total sales

While deciding about the composition of current assets, the financial manager may consider the relevant industrial averages.
5. PRINCIPLES OF MATURITY OF PAYMENT:

The principle is concerned with planning the source of finance for working capital. According to the principles, a firm should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments. Generally shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater the inability to meet its obligations in time.

CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL: Growth may be stunted. It may become difficult for the enterprises to undertake profitable projects due to non availability of working capital. Implementations of operating plans may brome difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds. Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital. The business may fail to honor its commitment in time thereby adversely affecting its creditability. This situation may lead to business closure. The business may be compelled to by raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchase and reducing selling price by offering discounts . both the situation would affect profitable adversely.

Now availability of stocks due to non availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business over assessments of working capital also has its own dangerous. CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL: Excess of working capital may result in un necessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system & cash management. It may make management complacent leading to its inefficiency. Over investment in working capital makes capital less productive and may reduce return on investment. Working Capital is very essential for success of business & therefore needs efficient management and control. Each of the components of working capital needs proper management to optimize profit. INVENTORY MANAGEMNT: Inventory includes all type of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously stock out costs should be minimized. Business therefore should fix the minimum safety stock level reorder level of ordering quantity so that the inventory costs is reduced and outs management become efficient. RECEIVABLE MANAGEMENT: Given a choice, every business would prefer selling its produce on cash basis. However, due to factors like trade policies , prevailing market conditions etc. Business are compelled to sells their goods on credit. In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating current assets in the form of debtors or account receivables. Investment in the type of current assets needs proper and effective management as, it gives rise to costs such as: Cost of carrying receivables Cost of bad debts losses Thus the objective of any management policy pertaining to accounts receivables would be to ensure the benefits arising due to the receivables are more than the costs incurred for the

receivables and the gap between benefit and costs increased resulting in increase profits. An effective control of receivables Help a great deal in properly managing it. Each business should therefore try to find out coverage credit extends to its clients using the below given formula:

Average Credit = (Extend in days)

Total amount of receivable Average credit sale per day

Each business should project expected sales and expected investments in receivable based on various factor, which influence the working capital requirement. From this it would be possible to find out the average credit days using the above given formula. A business should continuously try to monitor the credit days and see that the average. Credit offer to clients is not crossing the budgeted period otherwise the requirement of investment in the working capital would increase and as a result, activities may get squeezed. This may lead to cash crisis.

CASH BUDGET: Cash budget basically incorporates estimates of future inflow and outflows of cash cover a projected short period of time which may usually be a year, a half or a quarter year . Effective cash management is facilitated if the cash budget is further broken down into months, weeks or even a daily basis.

There are two components of cash budget are: 1. Cash inflows 2. Cash outflows

The main source for these flows are given here under: 1. Cash Sales 2. Cash received from debtors

3. Cash received from Loans, deposits etc. 4. Cash receipts other revenue income 5. Cash received from sale of investment or assets.

CASH OUTFLOWS: 1. Cash Purchase 2. Cash payments to Creditors 3. Cash payment for other revenue expenditure 4. Cash payment for assets creation 5. Cash payments for withdrawals, taxes. 6. Repayments of Loan etc.

CHAPTER 4

WORKING CAPITAL WITH REFERENCE TO ELECTRONICS CORPORATION OF INDIA LTD

ELECTRONICS CORPPORATION OF INDIA LTD

Electronics, with its wide and varied applications has attained the status of an all-pervasive industry today. The world electronic scene has undergone profound and breathtaking changes. It has penetrated every field in consumer and capital goods. From fan regulators to airplane instruments, electronics has taken over and possesses a threat to render obsolete all Electromechanical controls and relays. Next to inflation and population, electronics seems to be an explosive growth. Mankind has witnessed significant progress in wide variety of disciplines; especially nuclear energy and space science have displayed the highest growth rate. The most vital contributor to their remarkable pace is electronics. Electronics enable man to probe the unknown vast expanses of space. The rate of growth of electronics industry in any country is considered to be an indicator of the industrial and social progress. A nation desirous of getting into the forefront of industrialization can ill-afford to neglect the vital industry, strengthening of which would give a direct impetus to economic growth. Today electronics pervades diverse fields of endeavor nuclear energy, space industry, communications, defense, medicine, agriculture etc., are only a few to name it is ever expanding with a tremendous pace. In this direction Electronic Corporation of India incorporated with an aim to produce electronic equipments, projects, catering to the needs of atomic energy, defense, telecommunication, power sector, and oil sector. The slogan of Electronic Corporation of India self sufficiency by development indigenous technology. The Electronic corporation of India Ltd was stated with an authorized capital of Rs. 10 Cores, consisting of one-lakhs shares of Rs. 1.00 each. One each share Rs. 80/- were called up and paid up which is Rs. 80 Lakhs. As against this 31 st April 1997 the paid up capital was Rs.59.25 Cores.

The major courses of finance were government of India and its agencies, in the Ninth Five Year Plan; the unit has decided to finance its working capital requirements and plant replacements

from the internal sources. The fixed assets of the company were
R. 51 Lakhs in 1967-68 and rose to (Rs. 4304 lakhs in 19997-98 after depreciation and Rs. 15306 lakhs before depreciation.) The sales of the unit showed a spectacular rise. In 1967-68 the sales were Rs. 9 lakhs, which touched (Rs. 34,173 lakhs in 1997-98. The sales increased 10 times in a period of two decades, from 1997-98.), This was achieved when there was a severe competition in the field of electronics from internal and external agencies. The department of electronics government of India has estimated that the future present sales of electronics goods in our country are Rs. 2000 Cores and it is estimated to touch an incredible figure of Rs. 20,000 Cores by the turn of the century. Electronic Corporation of India Ltd is well setup to reap the benefits from this bountiful harvest. The Dividend of 5% on paid up capital was paid in 1972-73.

The company achieved AAA rating by CR CIL for best financial management with limited resources of working capital and equity. Some of the business games have also achieved ISO which indicates quality products being manufactured. Business is always built by the people and by ECIL has built an environment, where people can give their best. The unit has employed 928 people in 1967-68 increased to (7075 in 1997-98). Out of whom many are technical skilled personnel.

OPERATING CYCLE:
The continuing flow from cash to suppliers to inventory, to account receivable, and back into cash is called operating cycle it is the time duration required to convert sales into cash after the conversion of resources into inventories.

Phase I Phase II Phase III

: Conversion of cash into inventory : Conversion of Inventory into receive : Conversion of receivables into cash

From

operating

cycle

it

is

clear

the

working

capital

requirements depends on the level of operations and the length of operating cycles. Monitoring the duration of the operating cycle is an important ingredient of working capital control. In this context The following points are to be taken into account before arriving the NORM or finding out hold up of cycle. T is very essential that all those components of working capital are to more as desired to enable the company to operate under health atmosphere. Raw materials stock stage depends on the regularity of supply, transportation time degree of obsolesce, price fluctuation and economics of bulk purchases. Particularly the Electronic industry has to plan procurements with accuracy, as these items are becoming obsolete at faster phase due to rapid change in technology. It can be seen

from world market, that Japan which has market threat for other countries. entered electronic industry late and become the leaders as well as The main reason being, the Japanese while starting the industry they purchases the latest and most updated technology items in all most all areas of electronic and with their in house research and development and reverse engineering, they overtook the other reputed companies of the world like Hewlett Packard, USA, Tektronix of USA, Marconi of Italy, Babcock of UK, and some companies of France, W. Germany. Therefore there is severe threat in procurement of material either less or excess of quantity required due to high rate of obsolesce.

Working in progress and finished goods also are of same nature. Therefore the PPC should plan the production cycle with least duration to overcome the problems explained above. However, in ELECTRONIC CORPORATION OF INDIA LIMITED these most of the items produced are against order. The emphasis here is that even after having an order and material, if the correct and latest or compatible technology is not imbibed there are very high chances of WIP or finished goods becoming obsolete. As regard sundry debtors, ECIL is mainly catering to the needs of defense, Telecom, Nuclear Power Projects GNPPO and Atomic Energy and now diversified the product range due to new atomic power project NPP the terms are cost hence all the expenses incurred on material and labor and overheads are reimbursed fully with a stagger payment IR 35% along with order, 25% after drawing and documentation and 35% payments at the time of dispatch and balance 5% after words warranty period. These assets are essentially circulating in nature. That is to say that the business bys raw-material with cash available and

then the raw materials are processed in which stage they convert themselves into work-in-progress and ultimately these get converted into finished goods. Apart of these finished goods i.e., in the shape of accounts receivables as result of credit sales and other part will be converted back to cash when the sales are realized. Thus starting with cash, the cycle comes back to cash for cyclical utilization as above. The company has to take the technology development and cut throat competition with global as well as internal private companies before monitoring the behavior of overall operating cycle and its individual components. For this purpose the following may be done. Time series analysis Cross-section analysis In the time series analysis the duration of the cooperating cycle and its individual components is compared over a period of time for the same firm. In cross section analysis the duration of the operating cycle and its individual components it compares with that of the other companies of the comparable nature viz. BEL, Bangalore, Instrumentation Limited, Kota, Semi conductors Devises, Punjab and almost all states owned Electronic Industries like Keltron, Melborune, Aptron, Uptrn, etc. From these nature of these assets, it is evident that any business should carry on its business with as minimum as possible amount of working assets and that it should aim at a rapid turnover of the working capital such that these business operating can ever go on smoothly. So the essence of working capital Management consists in determining the optimum needs for working capital and a capital held remains optimum consistent with needs of business.

DATA ANALYSIS
WORKING CAPITAL ESTIMATION

Current Assets Loans & advances Current assets Inventories Work In Progress Ram Materials Finished Goods Total Inventories

2009-10

2008-09

2007-08

2006-07

2005-06

9539.72 8720.71 1207.44 19467.87

4337.8 7547.77 795.41 12680.80

2572.46 3621.75 689.92 6884.13

3233.87 2987.32 634.65 6855.84

3799.20 3234 648.76 7681.96

Debtors Cash & Balances Loans and advances

141744.8 7 31147.46 14580.22

143600.8 6 23318.45 17252.58

127003. 59 26794.2 3 24617.1 7

98870.9 0 24502.2 7 14506.7 144735. 71

79468.6 8 18940.9 4 13655.9 8 119747. 56

Net Current Assets

206940.4 2

196852.8 7

185299. 12

Current Liabilities Provisions

128722.3 3 12177.44

118876.2 4 9479.11

96109.7 1 25867.9 1

88292.4 6 19236.4 4

80273.7 0 11504.1 9

Net Current Liabilities

140899.7 7

127355.3 5

121977. 62

107528. 90

91777.2 9

CHAPTER- 5

ANALYSIS OF THE STUDY

WORKING CAPITAL ANALYSIS AND RATIOS:

1. LIQUIDITY RATIOS

A). Current Ratio =

ANALYSIS:

Current Assets Current Liabilities

A current ratio of 2:1 is usually considered as ideal ratio. If current ratio is less than 2, it indicates that the business does not enjoy adequate liquidity. However, a high current ratio of more than 3 indicates that the firm is having idle funds and has not invested them properly. If a business has an undertaking with its bakers to meet its working capital requirements at short notice, a minimum current ratio of 1.33 is expected.

(Rupees in Lakhs)

Years

Current Assets
119747.56 144735.71

Current Liabilities
91777.89 107528.90

Ratios

2005-06 2006-07

1.30 1.34

2007-08 2008-09 2009-10

185299.12 214268.70 206940.42

121977.62 145771.18 140899.77

1.51 1.46 1.46

1.55 1.5 1.45 1.4 Ratios 1.35 1.3 1.25 1.2 1.15 1.34 1.3

1.51 1.46 1.46

Current Ratio

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

INTERPRETATION:

The Current Ratio of 2009-10 is 1.46 (approximately) which is same as the last years current ratio and it is better that company reaches to the minimum ideal ratio i.e., 1.33 which indicates the co., does not enjoy the adequate liquidity. Since the current ratio has been less than 2, the liquidity position is not strong. So ECIL need to maintain the proper liquidity.

B). Acid test/ Quick Ratio =

Liabilities

Quick Assets Current

[Quick assets = Current assets- Inventories]

ANALYSIS:
Ideal ratio of a quick ratio is 1:1. A quick ratio of less than 1 is indicative of inadequate liquidity of the business. A very high quick ratio is also not advisable, as funds can be more profitably employed.

(Rupees in Lakhs)

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

Quick Assets
112065.60 137879.87 178414.99 201587.72 187472.55

Current Liabilities
91777.89 107528.90 121977.62 145771.18 140899.77

Ratios
1.22 1.28 1.46 1.38 1.33

1.5 1.45 1.4 1.35 Ratios 1.3 1.25 1.2 1.15 1.1

1.46 1.38 1.33 1.28 1.22

Quick Ratio

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

Years

INTERPRETATION:
The acid-test ratio is a rigorous measure of a firms ability to service short-term liabilities. The usefulness of the ratio lies in the fact that it is widely accepted as the best available test of the liquidity position of a firm. Generally, an acid-test ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. If the ratio is lower than the standards, it implies that financial position of the concern to be unsound and real cash will have to be provide for the payment of liabilities. The quick ratio in last five years is near as per the norm of 1.5:1 which indicates favorable position. In 2005-06 the ratio is 1.22 and during 2009-10 it is 1.33 where ECIL is having the ability to pay its current liabilities.

a) Absolute Liquidity Ratio = Cash + Marketable securities Current Liabilities

(Rupees in Lakhs)

Yea Cash & Bank rs Balance

200506 200607 200708 200809 200910 18940.94 24502.27 26794.23 23318.45 31147.46

Current Liabilities
91777.89 107528.90 121977.62 145771.18 140899.77

Ratio s
0.206 0.227 0.219 0.159 0.221

0.25 0.206 0.2 0.15 Ratios 0.1 0.05 0

0.227

0.219 0.159

0.221

Absolute Liquid Ratio

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

INTERPRETATION:
The actual ratio is calculated with cash & bank balance to current liabilities, the absolute ratio indicates the quickest convertibility & easily meeting the current obligations. The period of study indicate a low absolute liquid ratio of 0.159 in the year 2008-09. This low trend is due to various comments made by statutory & government auditors for holding such a huge cash & bank balance. ECIL maintained quite same levels of absolute liquidity ratio in rest of the years.

2. LEVERAGE RATIOS
a)

Debt-equity Ratio =

Long term liabilities Share holders

funds

ANALYSIS:
Some financial experts opinion that debt should include current liabilities also. However this is not a popular practice. Preference share capital is normally treated as a part of shareholders funds, but if the preference shares are redeemable, they are taken as a part of long-term debt. The ideal ratio is 2:1. A firm with a debtequity ratio of 2 or less exposes its creditors to relatively lesser risks. A firm with a high debt equity ratio exposes its creditor to greater risk.

(Rupees in Lakhs)

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

Debt
17693.97 25292.05 25047.27

Share holders funds Ratios

15488.12 16337.12 16337.12 16337.12 16337.12 1.08 1.54 1.53

Ratios

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

1.54 1.08

1.53

Debt-equity

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

INTERPRETATION:
The debt-equity of the company is nil during the years 2005-06 and 2006-07 which is favorable to company as Debt-equity ratio of 2 or less exposes its creditors to relatively lesser risks. In the later years debt-equity ratio is raised to 1.53 in the year 2009-10 from 1.54 in 2008-09.

b)

Fixed Assets Ratio =

Fixed Assets Capital Employed

[Capital employed = equity share capital+ preference share capital+ reserves& surplus+ long term liabilitiesfictitious assets]

ANALYSIS:
A financially well-owned company will have its fixed assets financed by long-term funds. Therefore, the fixed assets ratio should never be more than 1. A ratio of 0.67 is considered as ideal ratio.

(Rup ees in Lakhs)

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

Fixed Assets
6942.72 7481.75 7231.94 9093.43 9452.61

Capital Employed
34913 44689 70554 77590 76228

Ratio s
0.19 0.16 0.10 0.11 0.12

Ratios

0.2 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

0.19 0.16 0.11 0.12

0.1

Fixed assets ratio

2005-06

2006-07

2007-08 Years

2008-09

2009-10

INTERPRETATION:
The fixed assets ratio in period of study is very less than the ideal ratio 0.67 which indicates that, ECIL is not financially well managed and it is very weak at its fixed assets. The company should try to improve its fixed assets.

c)

Solvency Ratio =

Total Liabilities Total Assets

ANALYSIS:
Generally lower the ratio of total liabilities to total assets is more satisfactory or stable is the long-term solvency position of a firm. The ideal ratio is 1:2

(Rupees in Lakhs)

Years

Total Liabilities
91777.89 107528.90 121977.62 145771.18 140899.77

Total Assets
128120.63 153936.62 195671.25 227859.13 225229.37

Ratios

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

0.71 0.69 0.62 0.63 0.62

0.72 0.7 0.68 0.66 Ratio 0.64 0.62 0.6 0.58 0.56

0.71 0.69

0.62

0.63

0.62 Solvency Ratio

2005-06

2006-07

2007-08 Years

2008-09

2009-10

INTERPRETATION:
The peak ratio is 0.71 during 2005-06 and the lowest being 0.62 in the yeas 2007-08 and 2009-10. The liabilities to assets ratio is less than which is satisfactory and stable in long-term solvency position of ECIL.

3. TURNOVER RATIOS

a)

Inventory Turnover Ratio = sold

Cost of goods Average

Inventory Where, C.G.S = sales gross profit Average Inventory = opening stock+ closing stock/2

(Rup ees in Lakhs) Particulars Sales (A) Gross Profit (B) C.G.S (C) (C = A-B) Opening Stock (D) Closing Stock (E) Average Inventory(F) (F=D+E/2) Ratio 200506 70029.0 3 6222.80 63806.2 3 6622.64 7681.96 7152.30 200607 100590. 15 20701.7 7 79888.3 8 7681.96 6855.84 7268.90 2007-08 100164. 90 200809 106078. 08 2009-10 118740.2 4

23405. 38
76759.5 2 6855.84 6884.13 6869.98

5036.7 2
101041. 36 6884.13 12680.9 8 9782.55

8370.72
110369.5 2 12680.98 19467.87 16074.42

8.92

10.90

11.17

10.32

6.86

12 10 8 6 4 2 0 8.92

10.9

11.17

10.32

6.86 Inventory turnover ratio

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

INTERPRETATION:
The low inventory turnover ratio implies dull business and low profits. In the recent year 2009-10, ECIL Company could not convert its inventory in to sales. The stock has been accumulated hugely compared to other previous years. It indicates the inefficiency of management. The inventory turnover ratio has increased to 11.17 in the year 2007-08 from 10.9 in the year 2006-07. This indicates that inventory is managed well.

b)

Debtors Turnover Ratio =

Net credit sales Average Debtors

ANALYSIS:
The analysis of the Debtors turnover ratio supplements the information regarding the liquidity of one item of current assets of the firm. This ratio measures how rapidly receivables are collected. A high ratio is indicative of shorter time-lag between credit sales and cash collection. A low ratio indicates that debts are not being collected properly.

(Rupe es in Lakhs)

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

Net Sales
65187.91 91790.61 94186.39 97463.11 105803.18

Average Debtors
79468.68 98870.90 127003.59 143600.86 141744.87

Ratios
0.82 0.92 0.74 0.67 0.74

Ratios

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

0.92 0.82 0.74 0.67 0.74 Debtors Turnover Ratio

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

INTERPRETATION:
The higher the debtor turnover ratio the greater the efficient of credit management. Low debtors turnover indicates inefficient management of debtors. In the year 2006-07, ECIL has a very good credit management by 0.92 Debtors turnover. In the later years it has decreased. In the current year, ratio has been decreased by 0.74 which shows there is lesser efficiency of credit management.

Average Collection Period:

Average collection period in days = 365 Days Debtors Turnover Ratio

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

365/DTR
365/0.82 365/0.92 365/0.74 365/0.67 365/0.74

ACP IN DAYS
445 396 493 544 493

INTERPRETATION:
There is a delay in collection period. The higher collection period an inefficient collection performance of ECIL. The ratio was recorded as 493 days in the year 2009-10, which is quite lower than previous year of 544 days. The company is unable to collect the money from customers in 2008-09 which is having a high collection period of 544 days. ECIL should try to reduce this collection period because there is more chance of bad debts. In last five years, 2006-07 was having a decent collection period compared to all other years. The ECIL management must take effective recovery measures, so that average collection period reduces, as bad debts will lock the funds available to the company.

c) Working Capital Turnover Ratio = Net sales Working capital

[Working capital = current assets current liabilities]

ANALYSIS:

A higher ratio indicates efficient utilization of working capital & a low ratio indicates otherwise. But low working capital turnover ratio is not a good situation for any firm.

(Rupees in Lakhs)

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

Net Sales
65187.91 91790.61 94186.39 97463.11 105803.18

Working capital
27969.67 37206.81 63321.50 68497.52 66040.65

Ratios
2.33 2.46 1.48 1.42 1.60

2.5 2 1.5 Ratios 1 0.5 0

2.33

2.46

1.48

1.42

1.6

Working capital ratio

2005-06

2006-07

2007-08 Years

2008-09

2009-10

INTERPRETATION:
Working capital is coming down every year which indicates there is no proper or effective utilization of the working capital. In 2005-06 working capital turnover is 2.33. The years 2007-08 & 2008-09 has

lower ratio. But in the year 2009-10 the ratio stood at 1.60 which shows the working capital ratio is increasing.

TREND RATIOS
These ratios of the magnitudes of a financial statement item in a series of statement to its magnitudes is one of the statements selected as the base may be called ratio, because they reveal the trend of the item with the passage of time. These trend ratios are index numbers of movements of the various financial factors of business.

Procedure for calculating trends

One year is taken as base year. Generally, the first or the last year is taken as base year. The figures of base year are taken as 100. The figures of base year are taken as 100. The trend percentages are calculated in relation to base year. If a figure in other year is less than the figure in base year, the trend percentage will be less than 100 and it will be more than 100 if figure is more than the base year figure. Each years figure is divided by the base year figure. Trend Ratio = Present year value x 100 Base year value The base period should be carefully selected. The base period should be a normal period. The accounting procedures and conventions used for collecting data and preparation of financial statements should be similar, otherwise the figures will not be
comparable.

The interpretation of trend analysis involves a cautious study. The mere increase or decrease in trend percentage may give misleading results. For example, an increase of 20%in current assets may be treated favorable. If this increase in current assets is accompanied by an equivalent in current liabilities, then this increase will be unsatisfactory. The increase in sales may not increase profits if cost of production has gone up. Trends of Current Assets, Current Liabilities, Inventory for the last five years of ECIL: Sales &

(Rupees in Lakhs) Year Current Trend Current Trend

Ending 2006 2007 2008 2009 2010

Assets 119747.5 6 144735.7 1 185299.1 2 214268.7 0 206940.4 2 100.00 120.86 154.74 178.93 172.81

Liabilitie s 91777.89 107528.9 0 121977.6 2 145771.1 8 140899.7 7 100.00 117.16 113.43 119.50 96.65

(Rupees in Lakhs) Year Ending 2006 2007 2008 2009 2010 Sales 70029.0 3 100590.1 5 100164.9 0 106078.0 8 118740.2 4 Trend 100.00 143.64 143.03 151.47 169.55 Inventor y 7681.96 6855.84 6884.13 12680.98 19467.87 Trend 100.00 89.24 89.61 165.07 253.42

TREND PERCENTAGES 1000

Percentages

100 Current Assets Current Liabilities

10

1 2005-06 2006-07 2007-08 Years 2008-09 2009-10

TREND PERCENTAGES 1000

Percenatages

100 Sales Inventory 10

1 2005-06 2006-07 2007-08 Years 2008-09 2009-10

INTERPRETATION:

CURRENT ASSETS: By seeing the trends we can say that there is significant increase in the past five years. In almost every year the value of current assets were increased. The current assets value is increased year by year which is positive indicator for the company. In the year 2009 the current assets are higher to that of other years. CURRENT LIABILITIES: There is a gradual increase over the years. Almost 19% has been increased from the financial year 2005-06 to 2008-09. This is due to the increase in the short-term obligations of the company. But in the year 2009-10 the current liabilities have dropped to 96.65 % which shows the efficiency in controlling the levels of current liabilities of the firm. If the sales of the company also increase then it is fine. Otherwise without increase in the sales the current liabilities should be controlled. SALES: The sales of the company are increased hugely year by year to that of base year. Since there are very high number of orders are coming for ECIL it is able to reach its sales target every year. Sales are of same levels in the years 2006-07 and 2007-08. In the recent year 2009-10 the sales have increased to 69.55% more when compared to that of the financial year 2005-06. INVENTORY: The inventories of the company are decreased in the years 2006-07 and 2007-08. It has been decreased by around 11% when compared to the base year 2005-06. But in the next year 2008-09 the inventory levels are almost doubled and in the recent year 2009-10 the inventory trend has increased hugely 153% more comparing to base year. This high increase in trend is due to inefficiency of converting stock in to sales.

FUNDS FLOW STATEMENT:

The statement of change in financial position prepared to determine only the sources and uses of working capital between dates of two balance sheets is known as the funds flow statement networking capital determines the liquidity position of the firm. The statement of changes in working capital reveals to management the way in which working was obtained and used with this sight management can prepare the estimate of the working capital flows. A projected statement at changes in working capital is very much useful in the firms money range planning.

A. CONCEPT OF FUNDS OR WORKING CAPITAL FLOW: Firm will have some sanctions that will change net working capital and same that will not cause no changes in net working capital transactions which changes in net working capital includes most of the items of the profit and loss accounts and those business events which simultaneously affect both current and non-current balance sheet items. On other hand transactions, which do not increase or decrease working capital include those which affects only current or only non-current accounts.

B. SOURCE OF WORKING CAPITAL: 1. Funds from operations (adjusted net income). 2. Sale of non-current assets. i. ii. Sale of long-term bonds/debentures etc. investment, shares

Sale of intangible fixed assets like goodwill parents or copyright.

3. Long term financing. i.

ii.

Long-term borrowings debentures, funds etc.

(industrial

loans,

Issuance of equity and preference shares.

4. Short term financing such as bank borrowings.

C. USES OF WORKING CAPITAL:

1. Adjusted net loss-current assets. i. ii. iii. Purchase of long-term investments like share, bond, debentures etc. Purchase of tangible fixed assets equipment etc. Purchase of intangible fixed assets like goodwill, patents copyrights etc.

2. Repayments of long-term debt (debentures or bonds) and short term debts (bank borrowings). 3. Redemption of redeemable preference shares. Payments of cash dividend.

(Rs in Lakhs)
S.NO PARTICULERS 2009-10 2008-09 CHANGE

SOURCES 1 2 3 4 5 SHARE CAPITAL RESERVES AND SURPLUS SECURED LOANS UN SECURED LOANS CURRENT LIABILITIES TOTAL 16337 42946 10019 15029 140899 225230 16337 40457 20250 5041 128355 210440 0 2489 -10231 9988 12544 14790

APPLICATION OF FUNDS 1 FIXED ASSETS GROSS BLOCK LESS: DEPRECIATION NET BLOCK 23677 -14224 9453 23170 -14077 9093 507 -147 360

FIXED ASSETS IN TRANSIT & GROSS WORK IN PROGRESS 2 3 4 INVESTMENTS DEFFERD TAX CURRENT ASSETS INVENTORIES WORK IN PROGRESS RAW MATERIAL FINISHED GOODS TOTAL INVENTORIES 5 6 7 SUNDRY DEBTORS CASH AND BALANCES LOANS AND ADVANCES TOTAL

4650 165 4022

394 165 3938

4256 0 84 0 0

9540 8721 1207 19468 141745 31147 14580 225230

4338 7548 795 12681 143600 23318 17251 210440

5202 1173 412 6787 -1855 7829 -2671 14790

CHANGES IN WORKING CAPITAL 2009-2010

PARTICULERS SOURCES INCREASING IN RESERVES AND SURPLUS INCREASING IN DEPRICIATION INCREASING UNSECURED LOANS DECRESING IN SUNDRY DEBTORS INCRESING CURRENT LIABILITIES DECRESING IN LOANS ADVANCES TOTAL

2009-10

2489 147 9988 1855 12544 2671 29694

APPLICATIONS OF FUNDS DECRESING IN SECURED LOANS INCRESING GROSS BLOCK INCREASING IN FIT INCREASING DEFFERD TAX INCREASING INVENTORY INCREASING CASH AND BALANCES TOTAL 10231 507 4256 84 6787 7829 29694

CHAPTER- 6

CONCLUSIONS AND SUGGESTIONS

CONCLUSTIONS Working capital is the sum of the money invested in short term assets and used in the daily operations of a firm. Current assets are mainly composed of inventory, debtors and cash. The concepts of working capital are gross and net. The gross working capital refers to the total amount of working capital, where as net working capital is the difference between current assets and current liabilities.

During the period under study, the unit was operating with relatively large proportions of current assets investments to total assets and this trend was on increasing path. The unit has financed 100 percent of its current assets requirements through advances from cash. The share of bank borrowings in financing the inventory in spite of retaining nominal profits. The working turnover ratio tells us the efficiency of its usage. The efficiency of working capital usage has marginally improved in the ECIL during the period under study. The study of working capital composition has revealed that inventory formed a major portion of current assets, while cash and bank balances accounted for minor portion. The reasons for high proportion of inventory are the nature of long term project and accumulation of inventory resulting in lower rates of inventory turnover. Liquidity means, the ability of the firm to meet its current obligation as and when they become due. The liquidity position of the unit was moderate during the period under study with current ration has drastically come down from 1.87:1 o 1.23:1. The average collection period of the unit was at 114 days or 3.8 months in 2001-02, however the unit has long way to reach the norm of 30 days. Profitability is the ability to generate profits and is influences by various policies and decisions of the management.

SUGGESTIONS

The company should maintain adequate cash and bank balance to meet its short term requirement because in the year 2007-08 it was low

2 The company has to maintain the efficient level of inventory to avoid over stock. 3 The company has to introduce new schemes for speedy dispose of stocks and to improve the sales . The company has also optimally utilized the funds available . it is still shortage , it has to borrow funds for short term requirement .

5 Company should increase the along term finance to improve the liquidity position of the company.

BIBLOGRAPHY