A STUDY ON WORKING CAPITAL MANAGEMENT

Submitted by
A.PADMA ABINAYA
(Reg.15311052)

Submitted to Pondicherry University in partial fulfilment

of the requirements for the award of the Post Graduate degree
in Master of Commerce (Accounting & Taxation).

Under the guidance of

DR.S.SHIJIN

Department of commerce
School of management
Pondicherry University

1
 DR.S. SHIJIN,
Professor of commerce
Department of Commerce
School of management
Pondicherry University
Puducherry-605 014.

CERTIFICATE

This is to certify that the project entitled A STUDY ON WORKING CAPITAL

MANAGEMENT submitted to the Pondicherry University in partial fulfilment of the
requirement for the award of the degree of Master of Commerce (Accounting & Taxation) is a
record of original project work done by A.PADMA ABINAYA(Reg.No:15311052) in the
Department of Commerce, Pondicherry University, under my supervision and guidance and that
the project has not formed the basis before for any degree/ diploma/fellowship or any other
similar titles and it represents an independent work done by the candidate.

DR.S.SHIJIN
Department of commerce
Counter signed by (Guide and Supervisor)

Dr. MALABIKA DEO

(Head of the department of commerce)
Place: Puducherry
Date:

2
Department of Commerce
Pondicherry University
Puducherry-605 014.

DECLARATION

I hereby declare that the project entitled A STUDY ON WORKING CAPITAL

MANAGEMENT submitted to the Pondicherry University in partial fulfilment of the
requirement for the award of the degree of Master of Commerce (Accounting & Taxation)is a
record of original project work done by me in the department of commerce, Pondicherry
University, under the supervision and guidance of Dr. SHIJIN S and that the project has not
formed the basis before for any degree/ diploma/fellowship or any other similar titles.

Place: Puducherry

Date:

A.PADMA ABINAYA

3
 ACKNOWLEDGEMENT

No creation in this world is a solo effort. Behind every successful endeavour, there lies a
fathomless sea of gratitude to those who lend a hand to fulfil it. Writing this dissertation has been
one of the most difficult but exciting tasks I had ever done so far in the voyage of my education.
This dissertation was never solely the work of the author but building on a collection of thoughts
that has developed through time, hard work and effort of many proficient people. Their flawless
guidance and support have helped me in making this work a reality.

First and foremost, I bow my head with gratitude before the God who showered his blessings
upon me throughout my life and even during the creation of this dissertation.

I would like to extend my heartfelt thanks to Dr. MALABIKADEO, the Head of the Department
of
Commerce, Pondicherry University, for providing the opportunity to carry out this project.

I am deeply indebted to my guide Dr. SHIJIN S for not only his valuable and enlightened,
guidance but also for the freedom he rendered me during this project work.

I duly express my gratitude to my professors and faculty members of the Commerce department
of Pondicherry University DR.P.NATARAJAN, Dr.D. LAZAR, Dr.G. SHANMUGA
SUNDARAM, Dr. P. S. VELMURUGAN and DR.K.B.NIDEESH, Dr.V.Kavitha for their help
in my dissertation however least it may be.

I am thankful to friends and other classmates, well-wishers who with their magnanimous and
generous help and support made it a relative easier affair.

My heart goes out to my parents who bear with me all the trouble I caused then with smile during
the entire study period and beyond

Place: Puducherry

Date:

A.PADMA ABINAYA

4
 TABLE OFCONTENTS

S.No. Chapter Name Page No.

1 Introduction 1

1.1 Objective of the study 3

1.2 Scope of the study 4

1.3 Limitations of the study 13

2 Review of literature 14

3 Profile of the company 19

4 Data analysis and interpretations 22-40

5 Findings and Conclusion 41

5
 CHAPTER 1
INTRODUCTION

6
1. PREAMBLE:

Working capital may be regarded as lifeblood of a business. Working capital refers to the
amount required by the company for its day-to-day operations. It involves firms short term
current assets and short term liabilities. Working capital is mainly concerned with inventory
management, receivables management, cash management and payables management. The aim of
working capital management is firms ability to continue its operation and to have sufficient cash
flow to satisfy both maturing short- term debt and upcoming operational expenses. The basic
objective of working capital is to manage the firms current assets and current liabilities in such a
way that a satisfactory level of working capital is maintained. Working capital has great effect on
firms profitability and liquidity, so working capital should be managed in such a way which will
ensure higher profitability and proper liquidity to the business concern. Every business needs
funds for two purposes, long term funds are required to create production facilities through
purchase of fixed assets, such as, plant, machineries, land, buildings etc. Investments in these
assets represent 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 purchase of raw
materials, payment of wages, and other expenses, these funds are known as working capital.
Working capital is also known as revolving or circulating capital or short term capital.

At the beginning of business venture, cash is provided by owners and lenders. A

part of this cash is invested in machinery, furniture, equipment, building and other forms of fixed
assets which are not sold during the normal course of business. The remaining cash is used as
working capital to meet the current requirements of a business enterprise, such as purchase of
service, raw materials or merchandise. When a firms products or finished goods are sold, it is
known as cash or receivables. When receivables are collected, cash is available for the purchase
of merchandise. This flow of cash explains about circular flow of working capital. Working
capital is essentially circulating capital.

Brown and Harvard, compares the working capital with a river which is always
there but whose water level is constantly changing. Simply working capital is defined as the
difference between current assets and current liabilities.

7
1.1.1 Components of working capital:

The term working capital refers to the gross working capital and represents the amount of
funds invested in current assets. Current assets are those assets which in ordinary course of
business can convert into cash within short period of one accounting year.

EXAMPLES OF CURRENT ASSESTS:

Bills receivables
Cash and Bank balances
Short term loans and Advances
Accrued incomes
Money receivables within 12 months
Inventories such as Raw materials, Work-in-progress, Finished goods
Sundry debtors
Prepaid expenses

EXAMPLES OF CURRENT LIABILITIES:

Short-term borrowings
Dividends payable
Bank overdraft
Bills payable
Accounts payable
Any other payments due within 12 months
Statutory liabilities
Provident fund dues
Accrued or outstanding expenses
Sundry creditors

1.2 OBJECTIVES OF THE STUDY

To analyze the working capital management of the company. For understand the management of
working capital at GT Electronic private limited. And to measure financial capacity of the
company. Suggest ways for better management and control of working capital at the concern.

1.2.1 Aspects of working capital management:

8
 There are many aspects of working capital management, which have important function of
financial management:

Time: Working capital management requires much of the finance managers time.
Investment: Working capital represents a large portion of the total investment in assets.
Credibility: Working capital management has great significance for all firms but it is very critical
for small firms.
Growth: The need of working capital is directly related to the firms growth.
Net working capital=current assets-current liabilities.

1.2.2 Concept of working capital:

The following are concepts of working capital:

Gross working capital:

Gross working capital, usually referred to as working capital, represents investment in current
assets such as marketable securities inventories and bills receivables etc. The gross working
capital is financial or going to be concept and deals with the problem of managing individual
current assets in short term. Gross concept is suitable for company form of organization.

Gross working capital= Total current Assets

Net working capital:

Net working capital represents the difference between current assets and current liabilities. The
net working capital can be positive or negative. When current assets exceed current liabilities, the
net working capital can be positive. When current liabilities exceed current assets, the net working
capital becomes negative. The net working capital concept is an accounting concept and deals
with management of net value of current assets in the long-term. Net working capital is suitable
for sole trader, partnership firm.

Net Working Capital= Current Assets-Current liabilities

Both the working capital is important for the company for the efficient management of the
company.

1.3 SCOPE OF THE STUDY

Working capital management is a primary function. The solvency and liquidity position is
linked with working capital management decision. The scope of working capital management is

9
 about current assets and current liabilities satisfactory level. A study of working capital is to
observe the purpose for which it is created.

Types of working capital:

The Types of working capital is explained below:

Working capital
management

Value Time

Gross working Net working Permanent Temporary

capital capital

Based on the value:

Working capital is divided into, they are

Gross working capital

Net working capital

Gross working capital:

Gross working capital refers to amount invested in current assets that are employed in the
business process.

Net working capital:

Net working capital refers to the difference between current assets and current liabilities.

Based on time:

Working capital is divided into, they are

10
 Permanent working capital
Temporary working capital

Permanent working capital:

Permanent working capital refers to a part of investment in current assets is permanent. It

covers the minimum level necessary for maintaining the circulation of current assets. It is also
known as fixed working capital. Permanent working capital means it is not fixed in long term, as
the business grows, it will also grow. There are two types of permanent working capital, they are

Regular working capital:

It is type of working capital which is normally used in normal course of business for the working
capital cycle to flow smoothly.

Reserve working capital:

It is type of working capital which need to be maintained over and above regular working capital
for contingencies which may arise due to unexpected situations.

TEMPORARY

PERMANENT

TIME

Temporary working capital:

Temporary working capital is the temporary fluctuation of net working capital over and
above the permanent working capital. It is the additional working capital requirement arising out
of seasonal demand.

11
 TEMPORARY

PERMANENT

TIME

1.3.1 OPERATING OR WORKING CAPITAL CYCLE:

A tool for working capital management is operating cycle. It analyzes the inventory,
accounts payables and accounts receivables cycle in number of days

For instance:

Accounts receivables - number of days to collect

Inventory number of days it takes to turn the sale of a product

Accounts payable number of days it takes by supplier.

Operating cycle definition:

I.M. Pandey describes operating cycle as Operating cycle is the time duration involved in the
acquisition of resources, conversion of raw materials into work-in-progress into finished goods,
conversion of finished goods into sales and collection of sales.

1.3.2 Operating capital cycle:

12
 cash

raw
material
debtors s labour
overhea
d

work-in-
stock
progress

Operating cycle helps in forecast, control and determination of working capital. It indicates the
performance of company. The duration of working capital cycle vary from firm to firm.

Operating cycle =R+W+F+D-C

Where,

R= Raw materials storage period.

W= Work-in-progress holding period.

F= finished goods storage period.

D= Debtors collection period.

C= Credit period availed.

The various components of operating cycle as shown below:

1) Raw materials storage period = Average stock of raw materials

Average cost of raw material consumption per day

2) Work-in-progress holding period = Average work-in-progress inventory

13
 Average cost of production per day

3) Finished goods storage period = Average stock of finished goods

Average cost of goods sold per day

4) Debtors collection period = Average book debts

Average credit sales per day

5) Credit period availed = Average trade creditors

Average credit purchase per day

1.3.3 IMPORTANCE OF ADEQUATE WORKING CAPITAL:

The work of manager is to ensure that the amount of working capital available in the concern is
neither too large nor too small for its requirements. Excessive and inadequate level of working
capital is harmful for the company, excessive working capital is, in which no profit is earned and
inadequate working capital interprets the production.

If the working capital becomes weak, the company cannot survive and business will not
happen without adequate working capital.

1.3.4 Advantages of adequate working capital:

Able to face crisis and emergency issues

Firm able to operate its business efficiently
Helps in getting regular return on investment
Maintains goodwill of the frim
Banks provide loans easily

1.3.5 Factors Affecting Working Capital:

The major factor that affects working capital, they are:

Volume of Sales:

14
If there is rise in sales, the company will require additional permanent working capital. If the sale
is decreasing there will be reduction in permanent working capital.

Seasonal Factors:

For example: take an ice cream manufacturing company, the sale ice cream will be high during
summer season and will be low during winter season. So the need for working capital of such
firm will likely to increase during summer season and decrease significantly during winter.

Changes in Technology:

Change in technology will have impact on working capital. If the firm changes to automation, this
process will reduce requirements of working capital. If the firm uses labor, the requirements of
working capital are high.

Nature and Size of Business:

The requirement of working capital is directly related to conduct of the business. Public
undertakings like electricity, the need for working capital will be limited because they offer cash
sales and services. And for the trading firms they have to invest more amounts in fixed assets
along with sizeable working capital.

Rapidity of turnover:

Higher the inventory turnover, lower the need for working capital requirements. The company has
to maintain its inventory control.

Growth/Expansion Phase:

The level of working capital requirements depends on the growth of the company. If the company
is expanding its activities, it needs more working capital.

1.3.6 KEY AREAS OF WORKING CAPITAL:

Treasury Management
Receivable Management
Inventory Management.

Treasury and Cash management:

15
 Treasury management is defined as the corporate handling of all financial matters, the
generation of external and internal funds for business, the management of currencies and cash
flows and the complex, strategies, policies and procedures of corporate finance.

Treasury management deals with

Working capital management

Financial risk management

The goals of treasury management are as follows:

Maximize the return on the available cash

Minimize interest cost on borrowings
Mobilize as much cash as possible for corporate ventures.

Inventory Management:

Inventories are the main part of working capital and therefore it is important that inventory is
properly maintained. It is the process of ensuring that a company always has the products it needs
on hand and keeps costs as low as possible.

The main objectives of inventory management are as follows:

To maintain inventory at appropriate levels to avoid excessive or shortage of

inventory.
To keep inventory at high level to perform sales and production smoothly
To minimize carrying cost of inventory
To reduce losses of theft and wastage
To ensure that the supply of raw material and finished goods will remain continues

Management of Receivables:

The basic objective of management of sundry debtors is to optimize the return on investment on
these assets known as receivables. Large amount are tied up in sundry debtors, there may be
chances of bad debts and there will be cost of collection of debts. If sundry debtors are low, sales
may be restricted. Therefore management of receivables is an important issue.

Aspects of Management of Debtors:

16
Credit policy:

The credit policy depends upon of firm provides to work determine whether or not to extend
credit to customer, how much credit to customer. If a firm slow paying to credit also, investment
account funds increases and default risk also high.

Credit period:

Credit period is nothing but a firms extension of credit time and expansion of sales competition.

Credit discount:

Cash discount is a reduction in payment offered to customers to induce them to repay credit
amount within a specified period of the time which is less than normal credit period.

Collection period:

It is actual collection period, it indicates that lower collection period, investment in accounts
receivable will be lower and vice versa. For the fast turnover of working capital prompt collection
is needed.

Management of Payables (creditors):

Accounts payable refers to purchasing of raw material and other goods on trade credit. The
company should manage its creditors for efficient operating cycle. Company must be sure that
they pay creditors in time and if not it creates bad image among suppliers.

Cost of availing trade credit:

1. Price:
If company pays suppliers in time, they can avail discount. It creates implicit cost.
2. Cost of managing:
Payables management involves administrative cost
3. Loss of goodwill:
It depends on how shortly the credit is repaid by the company.

1.4 DATA AND METHODOLOGY:

1.4.1 Methodology of study:

17
 The study is conducted at GT Electronic private limited. The study of working capital
management is purely based on secondary data and all the information is available within the
company itself in the form of records. To get proper understanding of this concept, I have done
the study of the balance sheets, profit and loss accounts, cash accounts, trial balance, and cost
sheets.

1.4.2 Design of the study:

The data was analyzed by using techniques of ratio analysis such as current ratio, quick
ratio, and working capital turnover ratio, inventory turnover ratio, Debtors turnover ratio. By
checking the level of working capital of the firm one can easily find out the profitability position.
Level of working capital is measured using current assets and current liabilities.

1.4.3 Limitations of study:

The datas are collected mainly on the basis of secondary data. Due to busy work schedule,
detailed discussion was not possible.

18
 CHAPTER-2
LITERATURE REVIEW

Jose (1996) in his article "Corporate returns and Cash Conversion Cycle of US Firms" examined
the relationship between aggressive working capital management and profitability of the firms.

19
Cash conversion cycle is a measure of working capital management whereas shorter cash
conversion cycle represents the aggressiveness of working capital management .They concluded
that exist significant negative relationship between cash conversion cycle and profitability which
indicated that more aggressive working capital management was associated with higher
profitability.

Deloof,( 2003): discussed that most firms had a large amount of cash invested in working capital.
It can therefore be expected that the way in which working capital is managed will have a
significant impact on profitability of those firms. Using correlation and regression tests he found a
significant negative relationship between gross operating income and the number of days accounts
receivable, inventories and accounts payable of Belgian firms. On basis of these results he
suggested that managers could create value for their shareholders by reducing the number of days
accounts receivable and inventories to a reasonable minimum. The negative relationship between
accounts payable and profitability is consistent with the view that less profitable firms wait longer
to pay their bills.

Muhammad, Sabo et.al.(2015) examined the impact of working capital management on

corporate profitability of seven firms listed on the floor of the Nigerian Stock for the periods of
2008 to 2012. Secondary data from annual reports and accounts of the sampled companies and the
Nigerian Stock Exchange Fact book was collected for the study. Descriptive statistics and GLS
regression analysis through STATA 11 were used to analyze the data. Positive relationship among
Average Collection Period (ACP), Current Ratio (CR) and the size of the firm (LOGSIZE) with
Profitability and a negative relationship with Inventory Turnover Period (ITP), Average Payment
Period (APP) were found. It was suggested that cash collected should be re-invested into short-
term investment to generate profits.

K T, Srinivas undertook a research to study working capital management through ratio analysis at
Karnataka Power Corporation limited. The association between traditional and alternative
working capital measures and return on investment (ROI), specifically in industrial firms listed on
the Johannesburg Stock Exchange (JSE) was evaluated. It was concluded that the financial
position of the company was sound as the company made an effort to increase its production and
net profit. It was also concluded that though the companys earnings were increasing every year
but the companys funds were not properly utilized.

20
NCEAR (1966) The first and foremost formals study conducted and compiled on working capital
management in India was by the National council of applied Economic Research (NCEAR) in
1966. The council published a report on Structure of Working Capital which confined to the
analysis of the composition of working capital with special reference to fertilizers, Cement and
Sugar industries. The prime objective of the study was to examine as to the study revealed that
working capital management practices were highly unplanned and hence the establishment of
suitable accounting policies, costupuring system and inventory controlling techniques in the
above-mentioned industries. This study highlights the significance of suitable and appropriate
working capital management policies in the success of the business.

Misra (1975) has studied the problem of working capital in a selected six public enterprises for a
period of 1960-61 to 1967 68. The importance and findings of the study are :
1) Selected enterprises are not able to utilize working capital efficiently.
2) In all enterprises excess inventory is noticed which is due to lack of inventory control,
defective inventory management and also due to a congenial organization. Inordinate delays in the
releases of foreign exchange and issue of import licenses are also some reasons for overstock of
inventory. It is found that receivable turnover ratio is very low due to the generous credit granting
and inadequate collection policy. In all the selected enterprises, the size of cash is found to be
very much high on account of improper planning and control of cash.

Vijaya (1977) study conducted on working capital management in six cooperative and seven
private sector companies in the sugar industry of Tamil nadu found that the growth in current
assets had registered more than that of sale indicating poor working capital management. The
application of correlation analysis revealed that there was a negative correlation between return
on investment and Working capital. The study revealed that majority of the investment was in
inventory (63.16%) followed by receivables (22.53%). On an overall basis the working capital
management in private sector was found to be better than that of the public sector.

Gangadhar (1981) study examined the statistical trends in working capital position among
medium, large and small public, private limited companies in the Indian corporate sector during
1961 76. The application of second parabola revealed that the current assets formed relatively
higher proportion of total net assets in private limited companies than that of public limited
companies. This study also revealed that in case of medium and large scale public limited
companies there appeared to be a lead lag relationship between gross fixed assets and current
assets over the study period.

Ghosh (1983) study proves in to the existing practice of working capital in crane manufacturing
industry in India. The study findings indicate that the management of individual components of
working capital was erratic. The collection mechanism followed by the sample companies was
very unplanned and the companies took more time that allowed in collecting the cash from the
customers. The study also revealed that payable to the suppliers were equally delayed keeping
highest portion of payable pending for more than allowed period. The study recommended the
immediate need for streamlining the working capital management practices.

21
Akkihal (1984) study of 94 small scale industries in Hubli Dharwad Municipal Corporation
(HDMC) in the state of Karnataka revealed that he management of working capital in sample
industries was found to be highly unplanned. The study concentrated on the ratios like current
ratio, inventory turnover ratio, fixed assets turnover ratio, total assets turnover ratio, earnings
power and gross profit margin. The application of ratio analysis has revealed that the
mismanagement of working capital had adverse effect on the performance of the industries.

Khandelwal (1985) carried on half complete empirical research initiated by late N.M Agarwal,
among forty small scale industries in Jodhpur industrial estate. The study attempted to investigate
in to working capital management process and practices among the selected units between the
years 1975 1980. The study revealed that the sample firms held more investments in inventories
than required and management of receivables constituted as much as 50% of total current assets.
Highlighting the sickness in Jodhpur Industrial estate the study attributed the main reason to
inefficient management of working capital. Based on findings the study suggested that the
entrepreneurs need to be educated about the basic concepts and efficient way of working capital
management.

Rajeshwar (1985) in his study among a few selected public enterprises in India, tried to examine
the working capital policies adopted by the sample units. He attempted to assess the degree of
effective management of working capital components with a special emphasis on inventories. The
study revealed that no samples company clearly defined working capital policies and hence
majority of them could not achieve efficiency in working capital management. The study also
revealed that the investment in inventories in sample units soared up from 63% in 1971 -72 to
66% in 1976-77. It was further found out that majority of such investment was made in finished
goods inventory which indicated that the units did not manage the working goods inventory
which indicated that the units did not manage the working capital in a planned way. The study
recommended to recognize prudent management of working capital as a vital part of financial
management.

Mukerjee (1986) in his study on management of working capital in public Enterprises in

respect of central government industrial undertakings, and covering a period from 1974 75 to
1978-79 has found that, the current assets increased due to the accumulation of inventories and
current liabilities increased due to increase in financing through payables, the Overall Size of the
workings capital had been significantly influenced by the overall size of sales and output, the
working capital requirement of the units were not ascertained based on the considerations as
suggested for prudent financial management, there was a significant negative correlations
between overall profitability and size of working capital, there was an over investment in
structural determinants and huge size of working capital and due to faulty financial policies
adopted by the units, the liquidity and profitability has a very significant negative correlations.

Panda (1986) study of small scale units in the state of Orissa, examines the issues like optimum
investment of funds in current assets, relationship between sales growth and working capital
needs, the role of banks in meeting working capital requirements. The study revealed that
management of working capital was neglected by majority of sample units, which lead to
incurrence of loss. It was found that long term funds were highly limited to the firms and hence

22
majority of small scale industries depended on short term credit in meeting working capital
requirements.

Jain (1988) in his study among ten manufacturing trading and services industries in the state of
Rajasthan, brought out various working capital management practices followed by the selected
companies. The study found out that the companies had both over investment and under
investment problems. The study strongly recommended for the release of excess funds in working
capital and to invest the same in short term or long term assets. On the other hand, the study
recommended that the companies should avoid underinvestment in working capital if they wanted
higher profit margins.

23
 CHAPTER-3
GT ELECTRONICS PRIVATE LIMITED A
PROFILE

24
3.1 INTRODUCTION:

GT Elektronik ltd was founded in Nabburg, Germany in 1984. It was initially started
operations with smaller number of employees.
Following rapid growth, both the production site and capacity were significantly increased
in 1996 and DIN EN ISO 9001 certification was achieved.
In 2002 GT electronic India was founded to meet the demand of global market.GT
mechatronics followed by 2005 due to increasing demand of the local market.
GT Electronic (India) Pvt. Ltd., on "ISO 9001-2000 Company and 100% EOU, is one of
the leading manufacturers and exporters of Transformers (conventional and toroidal),
chocks and inductive components where 250 employees are working

3.2 ACHIEVEMNETS:

The companys success is based on more than 650 highly qualified employees. They always aim
to satisfy need through their self-starting, efficient and flexible approach. Furthermore companys
wide ranges of products are of interest to both SMEs and large companies. They translate
individual needs into tangible solutions, which then present as functioning prototypes. The
companys most valued asset, are employees.

3.3 LOCATIONS:

GT elektronik located at Nabburg, Germany and Pondicherry, India, we manufacture wound

wire products, ranging from single items to large volumes, and from handmade to fully automated
production. Hereby we have the opportunity to use both, state of the art manufacturing equipment
and jigs and tools made in our own tools shop.

3.4 MANAGEMENT POLICY:

The management policy from GT group defines our aims, corporate values and corporate
philosophy. Our focus is being successful together with our partners (customers, employees and
suppliers).We understand our aspiration for customer and employee satisfaction, conservation of
resources, constant improvement of products and environment performance, the commitment to
comply with applicable legal requirements, management and monitoring because of transparency
of these targets as an obligation.

3.5 ISO CERTIFICATION:

The company has received ISO 9001:2008 by the certification body of TUV SUD South
Asia private limited
License for the quality management system certification by Bureau of Indian standards.
Under Environmental Management Systems IS/ISO 14001:2004

25
PRODUCT INFORMATION:

Transformers

Coils

Converters

Chokes

Tape wound cores.

26
 CHAPTER-4

WORKING CAPITAL MANAGEMENT OF GT ELECTRONIC PVT-LTD

27
 Working capital is nerve system of any business. Without proper working capital
management company cannot achieve its objectives and not possible to maintain financial
soundness. So in this perspective present study is undertaken to study working capital
management through ratio analysis at GT Electronics private limited.

The nature of working capital is described with the help of nature of operating cycle of the firm.
The process starts when firm uses cash to purchase raw materials and pay manufacturing
expenses. When the goods are sold, either cash is received or accounts receivable, are created.
Accounts receivables are collected from debtors. This process is defined as circulating nature of
current assets. The speed of circulation of working capital or the turnover of current assets is an
indicator of the degree of efficiency of the management. The faster the turnover, higher the degree
of efficiency. Cash converted into raw materials, raw material into work-in-progress, work-in-
progress into finished products, finished products into debtors

The current asset should be large enough to cover its current liabilities in order to
ensure a reasonable margin of safety. The interaction between current assets and current liabilities
is the main theme of working capital management.

CURRENT RATIO:

The current ratio is a financial ratio that shows the proportion of current assets to current
liabilities. The current ratio is used as an indicator of a company's liquidity. Current Assets are
those assets, which are easily convertible into cash within one year. This includes cash in hand,
cash at bank, sundry debtors, bills receivable, short term investment or marketable securities,
stock and prepaid expenses. Current Liabilities are those liabilities which are payable within one
year. This includes bank overdraft, sundry creditors, bills payable and outstanding expenses.

Current Ratio = Current Assets

Current Liabilities

28
 YEAR CURRENT CURRENT CURRENT RATIO
ASSETS LIABILITIES
2015 5725336 2783778 2.05:1
2014 5099055 2558302 1.99:1
2013 5116250 2305630 2.21:1
2012 5629122 2228288 2.52:1
2011 3676736 2395918 1.53:1
2010 3942572 2665514 1.47:1
2009 3346443 2183685 1.53:1
2008 3795918 3349963 1.33:1

CURRENT RATIO
3

2.5

2
current ratio
1.5

0.5

0
2015 2014 2013 2012 2011 2010 2009 2008

29
Interpretation:

Current ratio is measures of companys short-term and long-term obligations. Generally, current
ratio of 2:1 is considered to be acceptable, which means a current asset is twice as large as current
liabilities. If current ratio is less than 1(current liabilities exceeds current assets), the company
may have problem in meeting its short-term financing. However lower value does not implicate a
critical position. If ratio is higher, the company may not be efficiently managing its short-term
financials. But companies follow different ideal ratios.

In this case for the year 2011, 2010 and 2008 the current ratio is 1.53, 1.47 and
1.33, which is equal to 1 and in the year 2014, 2015 it is equal to ideal ratio 2:1. In the year 2012
the current ratio is more than 1, the company might have problem in short-term financial
obligations. The company took measures to maintain its current ratio.

Increase in current ratio over a period of time suggests that, there is improved
liquidity of the company. Decreasing current ratio signifies that company liquidity position is not
good. Seasonal fluctuations also considered in current ratio.

QUICK RATIO:

Quick ratios establish the relationship between quick or liquid assets and liabilities. An asset is
liquid if it can be converting in to cash immediately or reasonably soon without a loss of value.
Cash is the most liquid asset .other assets which are consider to be relatively liquid and include in
quick assets are debtors and bills receivable and marketable securities. Inventories are considered
as less liquid. Inventory normally required some time for realizing into cash. Their value also is
tendency to fluctuate. The quick ratio is found out by dividing quick assets by current liabilities

Quick Ratio = Liquid Assets

Current Liabilities

YEAR LIQUID CURRENT QUICK RATIO

ASSETS LIABILITIES
2015 2878836 2783778 1.03:1
2014 1720955 3558302 0.48:1
2013 2562550 2305630 1.11:1
2012 2509922 2228288 1.12:1
2011 1754443 3775918 0.46:1
2010 1416672 2665514 0.53:1
2009 1191243 2183685 0.54:1

30
 2008 698236 3359315 0.20:1

QUICK RATIO
1.2

0.8

QUICK RATIO
0.6

0.4

0.2

0
2015 2014 2013 2012 2011 2010 2009 2008

Interpretation:

Quick ratio indicates companys short-term liability. The ideal ratio is is 1:1 or higher and varies
widely by industry. If the ratio is Higher, the company has greater liquidity. If quick ratio is
higher, company might keep more cash in hand or have problem in collecting receivables. If the
quick ratio is lower than 1:1 the company uses short-term assets to pay short-term liabilities.
Moreover higher quick ratio is needed when company has difficulty in borrowing short-term
obligations.

In this case the quick ratio for 2008, 2011 and 2014 is less than 1, so the company may
have problem in paying short-term liabilities and in the year 2009, 2010 which is approximately
equal to the ratio 1:1. In the year2012, 2013 and 2015 the quick ratio is 1:1. As a result the
company tries to maintain the quick ratio of 1:1

31
INVENTORY TURNOVER RATIO:

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products.
This ratio is otherwise called as stock turnover ratio. It is calculated by dividing the cost of goods
sold by average inventory:

Inventory Turnover Ratio = Cost of goods sold

Average Inventory

YEAR COST OF GOODS AVERAGE INVENTORY

SOLD INVENTORY TURNOVER RATIO
2015 5452660 1035622 5.27 times

2014 7718544 1271853 6.07 times

2013 6039922 1009930 5.98 times

2012 5553413 1083335 5.13 times

2011 7587018 1253409 6.05 times

2010 7368022 1405483 5.24 times

2009 6784949 1121947 6.05 times

2008 5763691 1020997 5.65 times

32
 INVENTORY TURNOVER RATIO
6.2

5.8

5.6
INVENTORY TURNOVER
5.4 RATIO

5.2

4.8

4.6
2015 2014 2013 2012 2011 2010 2009 2008

Interpretation:

Inventory turnover ratio shows how efficiently inventory is managed by comparing cost of goods
sold with average inventory. This measures how many times average inventory is sold during a
period. When inventory turnover is having low rate, it implies that company bought too many
goods and sales is not occurred. High rate of inventory implies that purchasing function is tightly
managed otherwise the company had unexpected strong sales. Companys inventory turnover
ratio gives an idea about how well it manages its resources.

In case of this company, it maintained its inventory well, say 5 turns a period. But in
2014, 2011 and 2009 the ratio is 6 times, according to company which is high comparing with
other years.

33
DAYS SALES IN INVENTORY:

The days sales in inventory calculation, also called days inventory outstanding or simply days in
inventory, measures the number of days it will take a company to sell all of its inventory. In other
words, the days sales in inventory ratio show how many days a company's current stock of
inventory will last.

Days sales in inventory = 365 days

Inventory turnover ratio

YEAR DAYS SALES IN INVENTORY

2015 69
2014 60
2013 61
2012 71
2011 60
2010 70
2009 60
2008 65

34
 DAYS SALES IN INVENTORY
72
70
68
66
DAYS SALES IN
64
INVENTORY
62
60
58
56
54
2015 2014 2013 2012 2011 2010 2009 2008

Interpretation:

Days sales in inventory measures the number of days company takes to sell its inventory. This
calculation shows liquidity of inventory. A shorter day of inventory means the company converts
inventory into cash sooner. More liquid inventory means the companys cash flows will be better.

In the year 2012 the sales is higher as shown in the above chart followed by the year 2010
and 2015. In the year 2014, 2011 and 2009 the sales is slow and results in low liquidity of
inventory. The company fails to maintain its inventory turnover in these years. But as a result in
2015 the sale of inventory is 71 days which is good for company compared to other years.

DEBTORS TURNOVER RATIO:

This establishes the relationship between credit sales and average accounts receivable. Debtors
turnover ratio indicates the efficiency of the business concern towards the collection of amount
due from debtors. The ratio is calculated as:

Debtors Turnover Ratio = Credit Sales

Average Accounts Receivables

35
YEAR CREDIT AVERAGE ACCOUNTS DEBTORS TURNOVER
SALES RECEIVABLES RATIO
2015 5452660
634807 8.59 times
2014 7718544
533401 14.47 times
2013 6039922
625764 9.65 times
2012 5553413
627608 8.85 times
2011 7587018
489655 15.49 times
2010 7368022
503138 14.64 times
2009 6784949
452662 14.99 times
2008 5763691
368524 15.64 times

DEBTORS TURNOVER RATIO

18
16
14
12
DEBTORS TURNOVER
10
RATIO
8
6
4
2
0
2015 2014 2013 2012 2011 2010 2009 2008

36
Interpretation:

Debtors turnover ratio measures how many times company can turn its accounts
receivables into cash during that period. In this case higher ratio is more favorable that is
collecting receivables frequently over the year. This ratio tells about quality of credit sales and
receivables. A company with higher ratio shows that credit sales are likely to collect than a
company with lower ratio.

In this company the debtors turnover ratio for the year 2014, 2011, 2010, 2009, 2008 is
having higher ratio, this implies that receivables are collected sooner compared with other years
2015, 2013, 2012 which has low ratio of 8.59, 9.65 and 8.85. As a result in these years the
receivables are collected slowly.

AVERAGE COLLECTION PERIOD:

This ratio gives an indication of the efficiency of the credit and collection policy of the firm and it
will directly affect the cash position of the company, it is a test of speed in which debtors are
converted in to cash, thus debtor ratio is an important tool of analyzing the efficiency of cash
management of a company.

Average Collection period = 365 days

Debtors Turnover period

YEAR AVERAGE COLLECTION PERIOD

2015
42
2014
25
2013
38
2012
41
2011
24
2010
25
2009
24
2008
23

37
 AVERAGE COLLECTION PERIOD
45
40
35
30
25 AVERAGE
20 COLLECTION PERIOD
15
10
5
0

Interpretation:

In the year 2014, 2013, 2011, 2009 the collection period is shorter, a shorter period means prompt
collection. But in the year 2012 the collection period is very high comparing with other years
2015, 2010, 2008, higher collection period implies that company takes long time to collect its
receivables.

WORKING CAPITAL RATIO:

It signifies that for an amount of sales, a relative amount of working capital is needed. If any
increase in sales contemplated working capital should be adequate and thus this ratio helps
management to maintain the adequate level of working capital. The ratio measures the efficiency
with which the working capital is being used by a firm. It may thus compute net working capital
turnover by dividing sales by working capital.

Working Capital Ratio = Net Sales

Net Working capital

YEAR NET NET WORKIG WORKING CAPITAL

SALES CAPITAL TURNOVER RATIO
2015 545266 2941558 1.85
0
2014 771854 2540753 3.04
4

38
 2013 603992 2810620 2.15
2
2012 555341 3400834 1.63
3
2011 758701 1280818 5.92
8
2010 736802 1277058 5.77
2
2009 678494 1162758 5.84
9
2008 576369 445955 1.92
1

WORKING CAPITAL TURNOVER RATIO

7

4 WORKING CAPITAL
TURNOVER RATIO
3

0
2015 2014 2013 2012 2011 2010 2009 2008

Interpretation:

Working capital turnover ratio indicates companys effectiveness in using its working capital. A
working capital turnover ratio is generally considered high when it is greater than the turnover
ratios of similar companies.

39
 In the year 2014, 2010 and 2009 the working capital turnover ratio is high compared
to other years. In the year 2008, 2012 and 2015 which have lower turnover ratio. We cannot come
to conclusion as this year is low and other year is low because we need find similar companys
working capital also.

CURRENT ASSETS TURNOVER RATIO:

Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current
assets. A higher ratio implies a more efficient use of funds thus high turnover ratio indicate to
reduce the lock up of funds in current assets. An analysis of this ratio over a period of time
reflects working capital management of a firm.

Current Assets Turnover Ratio = Sales

Current Assets

YEAR SALES CURRENT CURRENT ASSETS TURNOVER

ASSETS RATIO
2015 5452660 5725336 0.95
2014 7718544 5099055 1.51
2013 6039922 5116250 1.18
2012 5553413 5629122 0.99
2011 7587018 3676736 2.06
2010 7368022 3942572 1.87
2009 6784949 3346443 2.03

40
 2008 5763691 3795918 1.52

CURRENT ASSETS TURNOVER RATIO

2.5

1.5 CURRENT ASSETS

TURNOVER RATIO

0.5

0
2015 2014 2013 2012 2011 2010 2009 2008

Interpretation:

Assets turnover ratio measures companys ability to generate sales from its assets by comparing
net sales with current assets. Higher turnover ratio mean the company is using its assets more
efficiently. Lower ratio mean that the company is not using its assets efficiently. Like working
capital turnover ratio, current assets turnover ratio depends on similar type of industry

In this case, 2008, 2009, 2011 and 2014 have higher current assets turnover ratio
compared to other years, this signifies that company uses its assets efficiently to generate sales. In
the year 2015, 2012 the ratios are low, it implies that current assets are efficiently used.

41
CREDITORS TURNOVER RATIO:

This establishes the relationship between credit purchases and average accounts payable.
Creditors turnover ratio indicates the period in which the payments are made to creditors. The
ratio is calculated as:

Creditors Turnover Ratio = Credit Purchase

Accounts payable

YEAR CREDIT ACCOUNTS CREDITORS

PURCHASE PAYABLE TURNOVER RATIO
2015 5452660 1303376 4.18
2014 7718544 1310071 5.89
2013 6039922 1319441 4.58
2012 5553413 1133373 4.90
2011 7587018 1156872 6.56
2010 7368022 1045694 7.05
2009 6784949 1177939 5.76
2008 5763691 1032132 5.58

CREDITORS TURNOVER RATIO

8
7
6
5 CREDITORS
4 TURNOVER RATIO

3
2
1
0
2015 2014 2013 2012 2011 2010 2009 2008

Interpretation:

42
Creditors turnover ratio shows a companys ability to pay off its accounts payable by comparing
credit purchase to average accounts payable. This ratio helps company to pay off current suppliers
and vendors. Like current and working capital turnover ratio this ratio also differs from industry
to industry. Higher ratio is considered favorable than a lower ratio.

In this case, 2010 has 7.05 which is compared high with other years. And in
the 2011,2014,2008,2009 has also have high ratio of around 6 times which shows that the
company is able to pay off its suppliers in time, besides the year 2015,2013 and 2012 which has
low ratio.

AVERAGE PAYMENT PERIOD:

Average payment period means the average period taken by the company in making payments to
its creditors. It is computed by dividing the number of working days in a year by creditors
turnover ratio.

Average Payment Period = 365 days

Creditors Turnover Ratio

YEAR AVERAGE PAYMENT PERIOD

2015 87

2014 62

2013 80

2012 74

2011 56

2010 52

2009 63

2008 65

43
 AVERAGE PAYMENT PERIOD
100
90
80
70
60 AVERAGE PAYMENT
50 PERIOD
40
30
20
10
0
2015 2014 2013 2012 2011 2010 2009 2008

Interpretation:

Average payment period shows in how many days the company is able to its creditors during that
period. In this company the payment to creditors increased from year to year, so it is not good for
the company. In the year 2015 the payment period is very high compared to other years.

STATEMENT OF WORKING CAPITAL CHANGES:

PARTICULARS 2008 2009 2010 2011 2012 2013 2014 2015

CURRENT ASSETS
20712 254370 20198 21666 25068 28109 22438 20419
Inventories 44 6 60 70 18 66 94 94
62323 88219 72361 15256 92559 12260 12696
Trade receivables 8 385458 3 7 89 1 02 14
Cash and cash 10084 90690 62501 13179 11242 12837 19152
equivalents 50 308286 6 7 83 61 23 00
Short term loans and 13361 16143 27863 25543 34543 49852
advances 92986 108993 3 2 2 2 6 8
TOTAL CURRENT 37959 334644 39425 36767 56291 51162 50990 57253
ASSETS(A) 18 3 72 36 22 50 55 36
CURRENT LIABILITIES
32373 207280 25516 22833 20967 21913 24434 26228
Trade payables 32 9 19 99 68 15 44 17
11263 11389 11251 13152 11431 11485 16095
Other current liabilities 1 110876 5 9 0 5 8 6
TOTAL CURRENT 33499 218368 26655 23959 22282 23056 25583 27837
LIABILITIES(B) 63 5 14 18 88 30 02 78
NET WORKING 44595 116275 12770 12808 34008 28106 25407 29415

44
CAPITAL(A-B) 5 8 58 18 34 20 53 58

NET WORKING CAPITAL

4000000
3500000
3000000
2500000
net working capital
2000000
1500000
1000000
500000
0

Interpretation:

The Changes in Net working capital is mentioned in cash flow statement. A positive change in
working capital would lead to a lower cash flow than net income for a company. Positive working
capital indicates that the company is able to pay its sort-term liabilities. Also, a high working
capital indicates that company might able to expand its operations. Negative working capital
means business is currently not able to meet its short-term liabilities.

In this case for all years working capital is positive and in year 2012, 2013, 2015 the working
capital is high, it indicates that company is likely to expand its operation.

45
CHAPTER-5
CONCLUSION

46
SUMMARY:

The concept of working capital are divided in two ways i.e. gross, net. Working capital refers to
investment in current assets and current liabilities. Net working capital represents the position of
current assets and current liabilities. The ratio shows the financial position of the firm. The goal
of working capital management is to ensure that a firm is able to continue its operations and that it
has sufficient ability 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.

FINDINGS:

The total current assets of GT ELECTRONIC PVT LTD have been increased from the year 2008-
2015. The company also maintains its cash adequately. The net working capital increased in 2012
compared to the year 2008. Comparing the year 2008 and 2009 the net working capital is
decreased. The current ratio and quick ratio are maintained at ideal level. The turnover ratios are
increasing from year to year. The working capital turnover ratio has increased from the year 2008
to 2009. Average collection period increased from year 2014 to 2015, it means that company takes
longer period to collect its receivables. If the average payment period is increased, it is not good
for the company. From the present study it is found that company financial position was seeing to
be sound.

SUGGESTIONS:

The company utilizes its working capital efficiently. And current ratio and quick ratios are
maintained for better liquidity position. It can be suggested that the company should pay to its
creditors in time. Average collection period also takes longer time to collect receivables. In Days
sales in inventory the company takes longer time to sell its inventory. The company maintains its
financial position efficiently.

47
BIBLOGRAPHY

48
Websites:

www.accountingcoach.com

www.wikipedia.com

www.myaccountingcourse.com

www.iosrjournals.org

www.scribd.com

Books:

Management accounting by pillai and bhagavathy

CA-IPCC Management accounting study material

49