Arss Project Study

8/9/2019 Arss Project Study

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WORKING CAPITAL MANAGEMENT ARSS INFRASTRUCTURE PROJECTS LTD.

A Project report

on

Working capital management of ARSS infrastructure ltd

A project report submitted for the partial fullfillment of

POST GRADUATE DIPLOMA IN MANAGEMENT

Submitted by

Prakash kumar sahoo

Roll no-PGDM9040

HDF SCHOOL OF MANAGEMENT

AT-Naranpur,belagachhia,cuttack

APPROVED BY AICTE

(2009-2011)


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CERTIFICATE

9MNXNXYTXFYNXK^YMFYYMJXZRRJWUWTOJHY\TWPTK Mr. Prakashkumar

sahoo9NYQJI


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ACKNOWLEDGEMENT

It gives me immense pleasure to present this project report on Working Capital

Management carried out at ARSS infrastructure projects Ltd. In partial

fulfillment of post-graduate course of PGDM.

No work can be carried out without the help and guidance of various persons. I

am happy to take this opportunity to express my gratitude to those who have

been helpful to me in completing this project report.

At the outset I would like to thank Mr. R.R. SINGH sir Head of Dept.(Accounts) for their valuable advice and guidance during my project

for timely help concerning various aspects of project. I also thanks to all staff

members of account department for help me to complete the summer internshipprogram.

I would be failing in my duty if I do not express my deep sense of gratitude to

Prof.Nanda sir without his guidance it wouldn t have been possible for me to

complete this project work.

Lastly I would like to thank my parents, friends and well wishers who

encouraged me to do this research work and all those who contributed directly

or indirectly in completing this project to whom I am obligated to.

Prakash kumar sahoo

PGDM


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DECLAIRATION

I, Prakash kumar sahoo Student of PGDM 2009-2011studying at HDF

school of Management, cuttack,orissa declare that the project work

entitled Working Capital management of ARSS infrastructure Projects

Ltd. was carried by me in the partial fulfillment of PGDM program under

the AICTE .This project was undertaken as a part of academic curriculum

according to the AICTE'S rules and norms and it has not commercial

interest and motive. It is my original work. It is not submitted to any other

organization for anyother purpose.

DATE:

PLACE:

Prakash kumar sahoo

PGDM


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CONTENTS

Chpter No. Particular Page No.

Certificate

AcknowledgementDeclairation

ContentsList of tables

List of Charts

I

IIIII

IVV

VI

11.11.2

1.31.4

1.5

WORKING CAPITAL MANAGEMENTIntroduction

Need of working capital

Gross W.C and Net W.CTypes of working capital

Determinants of W.C

2

2.12.2

2.32.4

RESEARCH METHODOLOGY

IntroductionTypes of Reserch methodology

Objective of he studyScope and limitation of the study

3

3.1

3.2

3.3

3.4

3.5

3.6

3.7

WORKING CAPITAL SIZE AND ANALYSISworking capital level

Working capital trend analysis

Current assets analysis

Current liability analysis

Changes of working capital

Operating cycle

Working capital leverage

-4 Working Capital Ratio analysis

5.1 Introduction

5.2 Role of ratio analysis

5.3 Limitations of ratio analysis

5.4 Classifications of ratios

5.5 Efficiency ratio

5.6 Liquidity ratio


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5 Working Capital components5.1 Receivables management

5.2 Inventory management

5.3 Cash management

6 Working Capital Finance and Estimation

6.1 Introduction.

6.2 Sources of working capital finance.

6.3 Working capital loan and interest.

6.4 Estimation of working capital.

7 Conclusions andrecomandations7.1 Conclusion

7.2 Recommendations

8

Appendices

8.1 Bibliography

8.2 Balance sheets


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CHAPTER-1

Working capital management

1) Introduction

2) Need of working capital

3) Gross w.c & Net w.c

4) Types of working capital

5) Determinants of working capital


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8

WORKING CAPITAL MANAGEMENT

1.1)Introduction

More business fails for lack of cash than for want of profit. Efficient management

of working capital is one of the pre-conditions for the success of an enterprise.Efficient management of working capital means management of various componentsof working capital in such a way that an adequate amount of working capital is

maintained for smooth running of a firm and for fulfilment of twin objectives ofliquidity and profitability. While inadequate amount of working capital impairs the

firms liquidity. Holding of excess working capital results in the reduction of the

profitability. But the proper estimation of working capital actually required, is adifficult task for the management because the amount of working capital varies across

firms over the periods depending upon the nature of business, production cycle, creditpolicy, availability of raw material, etc.

Thus efficient management of working capital is an important indicator of soundhealth of an organisation which requires reduction of unnecessary blocking of capital

in order to bring down the cost of financing.

Working capital managementWorking capital management is concerned with the problems arise in attempting to

manage the current assets, the current liabilities and the inter relationship that exist

between them. The term current assets refers to those assets which in ordinary course

of business can be, or, will be, turned in to cash within one year without undergoing

a diminution in value and without disrupting the operation of the firm. The major

current assets are cash, marketable securities, account receivable and inventory.Current liabilities ware those liabilities which intended at there inception to be paid

in ordinary course of business, within a year, out of the current assets or earnings of

the concern. The basic current liabilities are account payable, bill payable, bank

over-draft, and outstanding expenses.

The goal of working capital management is to manage the firm s current assets


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and current liabilities in such way that the satisfactory level of working capital

is mentioned. The current assets should be large enough to cover its current liabilities

in order to ensure a reasonable margin of the sa fety.

Definition:-

1. According to Guttmann & Dougall -

Excess of current assets over current liabilities .

1. According to Park & Gladson-

The excess of current assets of a business (i.e. cash, accounts receivables,inventories) over current items owned to employees and others (such as salaries &

Wages payable, accounts payable, taxes owned to government) .

1.2) Needofworking capital management

The need for working capital gross or current assets cannot be over emph asized. As

already observed, the objective of financial decision making is to maximize the

shareholders wealth. To achieve this, it is necessary to generate sufficient profits can

be earned will naturally depend upon the magnitude of the sales among oth er things

but sales can not convert into cash. There is a need for working capital in the form of

current assets to deal with the problem arising out of lack of immediate realization of

cash against goods sold. Therefore sufficient working capital is nec essary to sustainsales activity. Technically this is refers to operating or cash cycle. If the company

has certain amount of cash, it will be required for purchasing the raw material may

be available on credit basis. Then the company has to spend some amount for labour

and factory overhead to convert the raw material in work in progress, and ultimately

finished goods. These finished goods convert in to sales on credit basis in the form

of sundry debtors. Sundry debtors are converting into cash aft er expiry of credit

period. Thus some amount of cash is blocked in raw materials, WIP, finished goods,

and sundry debtors and day to day cash requirements. However some part of current

assets may be financed by the current liabilities also. The amount r equired to be

invested in this current assets is always higher than the funds available from current

liabilities. This is the precise reason why the needs for working capital arise


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1.3) Gross working capital and Net working capitalThere are two concepts of working capital management

1. Gross working capital

Gross working capital refers to the firm's investment In current assets. Current

assets are the assets which can be convert in to cash within one financial year

includes cash, short term securities, debtors, bills receivable and inventory.

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

liabilities. Current liabilities are those claims of outsiders which are expect ed to

mature for payment within an accounting year and include creditors, bills payable and

outstanding expenses. Net working capital can be positive or negative Efficient

working capital management requires that firms should operate with some amount

of net working capital, the exact amount varying from firm to firm and depending,

among other things; on the nature of industries.net working capital is necessary

because the cash outflows and inflows do not coincide. The cash outflows resulting

from payment of current liabilities are relatively predictable. The cash inflow are

however difficult to predict. The more predictable the cash inflows are, the less net

working capital will be required.

The concept of working capital was, first evolved by Karl Marx. Marx used

the term variable capital means outlays for payrolls advanced to workers

before the completion of work. He compared this with constant capital which

according to him is nothing but dead labour . This variable capital is nothing

wage fund which remains blocked in terms of financial management, in work -

in-process along with other operating expenses until it is released through sale

of finished goods. Although Marx did not mentioned that workers also gave


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credit to the firm by accepting periodical payment of wages which funded a

portioned of W.I.P, the concept of working capital, as we understand today

was embedded in his variable capital .

1.4) Typeofworking capital

The operating cycle creates the need for current assets (wor king capital).

However the need does not come to an end after the cycle is completed to

explain this continuing need of current assets a destination should be drawn

between permanent and temporary working capital.

1) Permanent working capital or fixed working capitalThe need for current assets arises, as already observed, because of the cash

cycle. To carry on business certain minimum level of working capital is

necessary on continues and uninterrupted basis. For all practical purpose, this

requirement will have to be met permanent as with other fixed assets. This

requirement refers to as permanent or fixed working capital

2) Temporary working capital or variable working capital Any amount over andabove the permanent level of working capital is temporary, fluctuating or variable,

working capital. This portion of the required working capital is needed to meetfluctuation in demand consequent upon changes in production and sales as result of

seasonal changes

Temporary or variable working capital

permanent or

fixed working capital

TIME TIME

AM

OU

NT

Of

WOR

K

I

NG

CA

P

I

A

MO

UN

T

Of

W

OR

K

IN

G

C

A

P

I


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Graph shows that the permanent level is fairly castanet; while temporary

working capital is fluctuating in the case of an expanding firm the permanentworking capital line may not be horizontal. This may be because of changes indemand for permanent current assets might be increasing to support a rising level ofactivity.

1.5) Determinants ofworking capital

The amount of working capital is depends upon a following factors

1. Natureofbusiness

Some businesses are such, due to their very nature, that their requirement of

fixed capital is more rather than working capital. These bu sinesses sell services

and not the commodities and that too on cash basis. As such, no founds are

blocked in piling inventories and also no funds are blocked in receivables. E.g.

public utility services like railways, infrastructure oriented project etc . there

requirement of working capital is less. On the other hand, there are some

businesses like trading activity, where requirement of fixed capital is less but

more money is blocked in inventories and debtors.

2. Lengthofproduction cycle

In some business like machine tools industry, the time gap between the

acquisition of raw material till the end of final production of finished products

itself is quit high. As such amount may be blocked either in raw material or

work in progress or finished goods or even in debtors. Naturally there need of

working capital is high.

3. Size andgrowthofbusiness

In very small company the working capital requirement is quit high due to high

overhead, higher buying and selling cost etc. as such medi um size business

positively has edge over the small companies. But if the business start growing

after certain limit, the working capital requirements may adversely affect by the


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increasing size.

4. Business/ Trade cycle

If the company is the operating in the time of boom, the working capitalrequirement may be more as the company may like to buy more raw material,

may increase the production and sales to take the benefit of favorable market,

due to increase in the sales, there may more and more amount of funds blocked

in stock and debtors etc. similarly in the case of depressions also, working

capital may be high as the sales terms of value and quantity may be reducing,

there may be unnecessary piling up of stack without getting sold, the receivable

may not be recovered in time etc.

5. Terms ofpurchase and sales

Some time due to competition or custom, it may be necessary for the company

to extend more and more credit to customers, as result which more and more

amount is locked up in debtors or bills receivables which increase the working

capital requirement. On the other hand, in the case of purchase, if the credit is

offered by suppliers of goods and services, a part of working capital

requirement may be financed by them, but it is necessary to purchase on cash

basis, the working capital requirement will be higher.

6. Profitability

The profitability of the business may be vary in each and ev ery individual case,

which is in turn its depend on numerous factors, but high profitability will

positively reduce the strain on working capital requirement of the company,

because the profits to the extend that they earned in cash may be used to meet

the working capital requirement of the company.

7) Operatingefficiency

If the business is carried on more efficiently, it can operate in profits which

may reduce the strain on working capital; it may ensure proper utilization of

existing resources by eliminating the waste and improved coordination etc.


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CHAPTER-2

Research Methodology

1)Introduction2)Types of research methodology

3)Objective of the study

4)Scope and limitation of the study


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2.1) Introduction

Research methodology is a way to systematically solve the research problem. It may

be understood as a science of studying now research is done systematically. In that

various steps, those are generally adopted by a researcher in studying his problem

along with the logic behind them. It is important for research to know not only theresearch method but also know methodology. The procedures by which researcher go

about their work of describing, explaining and predicting phenomenon are called

methodology. Methods comprise the procedures used for generat ing, collecting and

evaluating data. All this means that it is necessary for the researcher to design his

methodology for his problem as the same may differ from problem to p roblem.

Data collection is important step in any project and success of any project will

be largely depend upon now much accurate you will be able to collect and how

much time, money and effort will be required to collect that necessary data, this

is also important step.

Data collection plays an important role in research work. Without proper data

available for analysis you cannot do the research work accurately.

2.2) Types of data collection

There are two types of data collection methods available .

1. Primary data collection

2. Secondary data collection

1) Primary data

The primary data is that data which is collected fresh or first hand, and for first


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time which is original in nature. Primary data can collect through personal

interview, questionnaire etc. to support the secondary data.

2) Secondary data collection methodThe secondary data are those which have already collected and stored.

Secondary data easily get those secondary data from records, journals, annual

reports of the company etc. It will save the time, money and efforts to collect

the data. Secondary data also made available through trade magazines, balance

sheets, books etc.

This project is based on primary data collected through personal interview of

head of account department and other concerned staff member of finance department.

But primary data collection had limitations such as matter confidential informationthus project is based on secondary information collected through five years annual

report of the company, supported by various books and internet sides. The datacollection was aimed at study of working capital management of the company .

Project is based on

1. Annual report of ARSS 2004-2005

2. Annual report of ARSS 2005-2006

3.Annual report of ARSS 2006-20074.Annual report of ARSS 2007-2008

5.Annual report of ARSS 2008-2009

6.Annual report of ARSS 2009-2010

2.3) OBJECTIVES OF THE STUDY

Study of the working capital management is important because unless the working capital ismanaged effectively, monitored efficiently planed properly and reviewed periodically at regular

intervals to remove bottlenecks if any the company can not earn profits and increase its turnover.With this primary objective of the study, the following further objectives are framed for a depth

analysis.

1. To study the working capital management of ARSS infrastructure projects private Ltd.

2. To study the optimum level of current assets and current liabilities of the company.

3. To study the liquidity position through various working capital related ratios.

4. To study the working capital components such as receivables accounts, cash management,


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Inventory position

5. To study the way and means of working capital finance of the ARSS infrastructure

projects pvt. Ltd.

6. To estimate the working capital requirement of ARSS infrastructure projects pvt.Ltd7. To study the operating and cash cycle of the company.

2.4) SCOPE & LIMITATIONS OF THE STUDY

Scopeofthe study

The scope of the study is identified after and during the study is conducted. The study of working

capital is based on tools like trend Analysis, Ratio Analysis, working capital leverage, operating

cycle etc. Further the study is based on last 6 years Annual Reports of ARSS infrastructure projects

pvt Ltd.And even factors like competitor s analysis, industry analysis were not considered while

preparing this project.

Limitations ofthe study

Following limitations were encountered while preparing this project:

1) Limiteddata:-

This project has completed with annual reports; it just constitutes one part of data collection i.e.

secondary. There were limitations for primary data collection because of confidentiality.

2) Limited period:-

This project is based on five year annual reports. Conclusions and recommendations are based on

such limited data. The trend of last five year may or may not reflect the real working capital

position of the company

3) Limited area:-

Also it was difficult to collect the data regarding the competitors and their financial information.

Industry figures were also difficult to get.


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CHAPTER-IV

Working capital level and analysis

1)Working capital level

2)Working capital trend analysis

3)Current assets analysis

4)Current liability analysis

5)Changes ofworking capital

6)Operating cycle

7)Working capital leverage


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Working capital level

The consideration of the level investment in current assets should avoid two danger points

excessive and inadequate investment in current assets. Investment in current assets should bejust adequate, not more or less, to the need of the business firms. Excessive investment in

current assets should be avoided because it impairs the firms profitability, as idle investment

earns nothing. On the other hand inadequate amount of working capital can be threatened

solvency of the firms because of its inability to meet its current obligation. It should be

realized that the working capital need of the firms may be fluctuating with changing business

activity. This may cause excess or shortage of working capital frequently. The management

should be prompt to initiate an action and correct imbalance.

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

A) Current

Assets

Inventories 58,429,517 104,206,335 73,298,835 622,103,160 1,882,704,940 3,701,088,12

Sundry Debtors 1,165,300 71791868 145,136,306 653,574,370 428,533,465 786122901

Cash and Bank

Balances

19,100,114 50,648,882 116,425,792 373,999,265 717,214,943 1,095,090536

Loans andAdvances

48,575,716 81,219,576 205,984,507 506,967,157 557,410,278 1,406480936

Total ofA (Gross

W.C.)

127,270,647 307866661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501

B) Current

Liabilities

Current liabilities 42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152

Provision 7,535,964 9,823,827 35,261,598 92,135,009 172,295,570 258,380,043

Total ofB 50,168,731 131,472,347 141,025,428 951,070,095 1,320,224,186 1,705,834,194

NetW.C. (A-B) 77,101,916 176394314 399,820,011 1,205,573,857 2,265,639,440 5,28,294,8307

Working Capital TrendAnalysis:

In working capital analysis the direction at changes over a period of time is of crucial

importance. Working capital is one of the important fields of management. It is therefore very

essential for an analyst to make a study about the trend and direction of working capital over

a period of time. Such analysis enables as to study the upward and downward trend in current

Table ........Size of working capital


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assets and current liabilities and its effect on the working capital position.

Analysis of working capital trends provide as base to judge whether the practice and

privilege policy of the management with regard to working capital is good enough or an

important is to be made in managing the working capital funds.

WORKING CAPITAL SIZE OF ARSS

Years 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Net w.c 77101906 176394314 399820011 1205573857 2265639440 5282948307

W.C indices 100 228.78 518.56 1563.61 2938.49 6851.9

Working Capital Indices base year 2004-2005 taken as 100

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

1000

2000

3000

4000

5000

6000

7000

8000

100 228.78

518.56

1563.61

2938.49

6851.9

Working capital indices

working capital indices Exponential Regressionfor working capitalindices

years

w.cindices

Table .........working capital size


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Observations:

The net working capital of ARSS Infrastructure Projects Limited is continuously increasing from

2004-05 as the indices shows in the figure. The working capital indices of 2009-10 compared to2004-05 is as 68 times because the current assets are increasing continuously where as the current

liabilities are not as increased as current assets. There is sudden increase in current assets of 2007-

08 compared to its previous year i.e. 2.98 times. In 2007-08 the company has taken four projects in

road, five projects in railway, one project in irrigation of rupees worth 72686 lacs, 29113 lacs, and

6636 lacs continously. While in 2008-09, the company has taken only three projects of rupees worth

18098 lacs. The no of projects taken in FY 2009-10 are ....... so the value of current assets

increased. However the current liabilities of the company increased only 38.56 crores. In current

liability of the company two things are included i.e. sundry creditors and the provisions (taxes,

fringe benefit tax, dividend, tax on proposed dividened). The company is bidding for good projects

because it has sufficient amount of reserves and surplus as well as inventories that means it is using

its long term securities as well as short term securities for its bidding and execution of the

projects.

Current asseets:

Total assets are basically classified in two parts as fixed assets and current assets. Fixed

assets are in the nature of long term or life time for the organization. Current assets convert in

the cash in the period of one year. It means that current assets are liquid assets or assets

which can convert in to cash within a year.

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

A)

Current

Assets

Inventories 58,429,517 104,206,335

73,298,835 622,103,160 1,882,704,940 3,701,088,128

SundryDebtors

1,165,300 71791868 145,136,306 653,574,370 428,533,465 786122901


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Cash and

Bank

Balances

19,100,114 50,648,882 116,425,792 373,999,265 717,214,943 1,095,090536

Loans and

Advances

48,575,716 81,219,576 205,984,507 506,967,157 557,410,278 1,406480936

Total of A(Gross

W.C.)

127,270,647 307866661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501

C.A

indices

100 241.89 424.96 1694.96 2817.51 5491.28

Compositionofcurrent assets in ARSS

Analysis of current assets components enable one to examine in which components theworking capital fund has locked. A large tie up of funds in inventories affects the profitability

of the business or the major portion of current assets is made up cash alone, the profitability

will be ........... because cash is non earning assets.

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

1000

2000

3000

4000

5000

6000

100241.89

424.96

1694.96

2817.51

5491.28Curr

t

t

Y

r

.

Table........:Current assets size and Current assets indices


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Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

inventories 45.90% 33.85 13.55 28.85 52.50 52.96

Sundrydebtors

0.92 23.32 26.83 30.31 11.95 11.25

Cash and

bank balance

15.01 16.45 21.52 17.34 20.00 15.67

Loans and

advances

38.17 26.38 38.09 23.51 15.54 20.12

total 100 100 100 100 100 100

Observation:The current assets increases as the sales increase. The excess of current assets is always

positive for the company but it is not always good. It may adversely affect the profitability ofthe firm. There are certain investments for which company pay interest. From the table of

composition of current assets, there is good amount of inventory available except one year

(2006-07). Excess amount of inventory is good for the company because the company is

diversifying its business into different sectors and there is no certainty about the projects

(time of the projects) in certain sectors. The loans and advances of the firm are in zigzag way.

The loans and advances should be minimum as the high loans create a greater amount of

interest. The company was doing well from 2006-07 to 2008-09 as the company had taken

four projects in road, five in railway, and one in irrigation. But in 2009-10 it has increased


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because of the ARSS took good projects. The company is doing better in sundry debtors inprevious two years. The company had taken its amount from its debtors. Cash and bank

balances is good for all the years.

Current liabilities

Current liabilities mean the liabilities which the company have to pay in current financial year. It

includes sundry creditors means supplier whose payment is due but not paid yet, thus creditors

called as current liabilities.Current liabilities also include short term loan and provision as tax

provision. Current liabilities also includes bank overdraft. For some current assets like bank

overdrafts and short term loan, company has to pay interest thus the management of current

liabilities has importance

current liability size

particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010Current

liabilities

42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152

Provision 7,535,964 9,823,827 35,261,598 92,135,009 172,295,570 258,380,043

Total ofB 50,168,731 131,472,347 141,025,428 951,070,095 1,320,224,186 1,705,834,194

Indices of

C.L

100 262.06 281.1 1895.7 2631.56 3400.19

Table........current liability size and its indices

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

500

1000

1500

2000

2500

3000

3500

4000

Current liability indices

C.L indices

ExponentialRegression for C.Lindices

Years

C.Lindices


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Figure.......Current liability indices

ObservationIn current liabilities of the company only the sundry creditors and the provision (provision for

taxation, fringe benefit tax, dividend and proposed dividend) are included. Current liabilities

show continues growth each year except in 2006-07 and 2009-10 because company createsthe credit in the market by good transaction. To get maximum credit from supplier which is

profitable to the company it reduces the need of working capital of firm. As a current liability

increased in the year 2007-08 by 574.39% it also increased the working capital size in the

same year. But company enjoyed over creditors which may include indirect cost of credit

terms in future.

CHANGES IN WORKING CAPITAL

Current liabilities show continues growth each year because company creates the credit in the

market by good transaction. To get maximum credit from supplier which is profitable to the

company it reduces the need of working capital of firm. As a current liability increase in the year

2006-07 by 35% it reduce the working capital size in the same year. But company enjoyed overcreditors which may include indirect cost of credit terms.

4.5) Changes in working capital

There are so many reasons to changes in working capital as follow1. Changes in sales and operating expanses:-The changes in sales and operating expanses may be due to three reasons

1. There may be long run trend of change e.g. The price of row material

say oil may constantly raise necessity the holding of large inventory.

2. Cyclical changes in economy dealing to ups and downs in business

activity will influence the level of working capital both permanent and

temporary.

3.Changes in seasonality in sales activities

4. Policy changes:-

The second major case of changes in the level of working capital is because of policy changes

initiated by management. The term current assets policy may be defined as the relationshipbetween current assets and sales volume.

5. Technology changes:-The third major point if changes in working capital are changes in technology because changes in

technology to install that technology in our business more working capital is required

A change in operating expanses rise or full will have similar effects on the levels of working

following working capital statement is prepared on the base of balance sheet of last two year.


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STATEMENT OF CHANGES IN WORKING CAPITAL

changes in working capital

particulars 2008-2009 2009-2010 increase decrease

A)Current assets

inventories 1882704940 3701088128 1818383188

Sundry debtors 428533465 786122901 357589436

Cash and bank

balances

717214943 1095090536 377875593

Loans and

advances

557410278 1406480936 849070658

Total current

assets

3585863626 6988782501 3402918875

B)Current

liabilities

Current liabilities 1147928616 1447454152 299525536

provision 172295570 258380043 86084473

Total current

liabilities

1320224186 1705834194 385610008

Net working

capital

2265639440 5282948306 3017308866

Observation

There is a positive working capital which shows the further growth as the company is

expanding its business into other sectors of the construction. The working capital increased

due to the following reasons:

1) There is 50% increase in the inventories from previous year because the company is takingnew projects in new sectors with good worth.

2) The current liabilities of the firm is very less.3) The increased total current liabilities is very less compared to the total current assets.

Operating cycle

The need of working capital arrived because of time gap between production of


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goods and their actual realization after sale. This time gap is called Operating

Cycle or Working Capital Cycle . The operating cycle of a company consist oftime period between procurement of inventory and he collection of cash from

receivables. The operating cycle is the length of time between the company's

outlay on raw materials, wages and other expanses and inflow of cash fromsales of goods. Operating cycle is an important concept in management of cash

and management of cash working capital. The operating cycle reveals the time

that elapses between outlays of cash and inflow of cash. Quicker the operating

cycle less amount of investment in working capital is needed

and it improves profitability. The duration of the operating cycle depends on

nature of industries and efficiency in working capital management.

In manufacturing concern ,the working capital cycle/operating cycle starts

with the purchase of raw material and ends with the realisation of cash from thesale of finished products.This cycle involves purchase of raw material and

stores,its conversion through into stocks of finished goods through work-in-

progress with progressive increment of labour and service costs,conversion of

finished stock into sales,debtors and receivables and ultimately realisation of

cash and this cycle continues again from cash to purchase

DEBTORS

(RECEIVABLES)

FINISHED GOODSCASH

RAW MATERIALS WORK-IN-PROCESS


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[working capital cycle/operating cycle]

The speed with which the working capital completes one cycle determines the

requirements of working capital-longer the period of the cycle larger is therquirement of working capital

Calculationofoperating cycleofARSS

ITEMS 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

1.Raw material

2.Work-in -progress

3.finished goods

Total

2.Debtors conversion period

3.Gross working capital cycle

4.Payment deferal period

NET WORKING CAPITALCYCLE

Observation:

The inventory conversion period of the company is almost same in financial

years from 2005 to 2009 but in the financial year 2009-10 there is sudden

increase (double times) from its previous year. Raw Material consumption in

2009-10 decreased from previous years while raw material inventory increased.

The maximum projects of the company (with joint ventureCompany) finished

in the May 2010 as NIRAJ-ARSS joint venture total value of the projects

26288 lacs. The company is engaged in bidding of big projects so the company

keeps a better raw material inventory in FY 2009-10. Also the company has a

vision of taking tenders of good projects in next financial year.ARSS infrastructure Projects Limited is a construction company and its

coustomers are the Government of different states, Ministry of Railway,

Ministry of Infrastructure and the Government agencies like SAIL, NTPC etc.

so there is no any debtors available among its coustomers because the

Government or their agencies pays the money instantaneouslybefore/ during or

after the project.


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The companys debtors are joint venture companies. Sometimes the ARSS and

its joint venture companies do the project but th e company incurres the whole

cost. And there is delayed in payment by its joint venture companies. That

comes under the debtors collection period. Common sense tells that longer a

company has money out, the more risk it is taking .But there is one positiveaspect that will boost the confidence among the companies .The company is not

purchasing on credit from its supplier. So in credit deferral period the credit

purchases taken as a whole sundry creditors. These sundry creditors are for the

bank loans, Advances etc. In all the years from 2005 to 2009 the creditors

deferral period is 360 days which is good for the company. The company is

enjoying the money of its creditors.

WORKING CAPITAL LEVERAGE

One of the important objectives of working capital manageme nt is by maintaining theoptimum level of investment in current assets and by reducing the level of

investment in current assets and by reducing the level of current liabilities thecompany can minimize the investment in the working capital thereby improve ment

in return on capital employed is achieved. The term working capital leverage refersto the impact of level of working capital on company s profitability. The working

capital management should improve the productivity of investment in current assets

and ultimately it will increase the return on capital employed. Higher level ofinvestment in current assets than is actually required means increase in the cost ofInterest charges on short term loans and working capital finance raised from banks

etc. and will result in lower return on capital employed and vice versa. Workingcapital leverage measures the responsiveness of ROCE (Return on CapitalEmployed)for changes in current assets. It is measures by applying the following formula,

% Changes in ROCE

Working capital leverage= % Changes in current assets

EBITReturnon capital employed=

Total assets

The working capital leverage reflects the sensitivity of return on capital employed to

changes in level of current assets. Working capital leverage would be less in the case


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of capital intensive capital employed is same working capital leverage expresses the

relation of efficiency of working capital management with the profitability of the

company.

CALCULATION OFWORKING CAPITAL LEVERAGE

YEAR 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

EBIT 17013036 42850664 139926233 378403100 705936654 1210851636

Total assets 160749473 299889528 667642027 1983096501 3731842651 7866688809

ROCE% 10.58 14.29 20.96 19.08 18.91 15.39

%Change in

ROCE

N.A 35.07 46.68 -8.96 -0.89 -18.61

Current assets 127270647 307866661 540845439 2156643952 3585863626 6988782501

%change in

current assets

N.A -758.09 75.67 298.75 66.27 94.89

Working capital

leverage

N.A -0.05 0.62 -0.03 -0.01 -0.20

Working Capital Ratio Analysis


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WORKING CAPITAL RATIO ANALYSIS

IntroductionRole of ratio analysis

Limitations of ratio analysis

Classifications of ratio

Efficiency ratio

Liquidity ratio


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5.1) Introduction

Ratio analysis is the powerful tool of financial statements analysis. A ratio is define asthe indicated quotient of two mathematical expressions and as the relationship

between two or more things . The absolute figures reported in the financial statement

do not provide meaningful understanding of the performance and financial positionof the firm. Ratio helps to summaries large quantities of financial data and to makequalitative judgment of the firms financial performance

5.2) Roleofratio analysisRatio analysis helps to appraise the firms in the term of there profitability and

efficiency of performance, either individually or in relation to other firms in same

industry. Ratio analysis is one of the best possible techniques available tomanagement to impart the basic functions like planning and control. A

is closely related to the immediately past, ratio calculated on the basis historical

financial data may be of good assistance to predict the future. E.g. On the basisof inventory turnover ratio or debtor s turnover ratio in the past, the level ofinventory and debtors can be easily ascertained for any given amount of sales.

Similarly, the ratio analysis may be able to locate the point out the various ariaswhich need the management attention in order to improve the situation. E.g.Current ratio which shows a constant decline trend may be indicate the need for

further introduction of long term finance in order to incr ease the liquidityposition. As the ratio analysis is concerned with all the aspect of the firm's

financial analysis liquidity, solvency, activity, profitability and overallperformance, it enables the interested persons to know the financial and

operational characteristics of an organization and take suitable decisions.

5.3) Limitations ofratio analysis

1. The basic limitation of ratio analysis is that it may be difficult to find abasis for making the comparison

2.Normally, the ratios are calculated on the basis of historical financialstatements. An organization for the purpose of decision making mayneed the hint regarding the future happiness rather than those in the past.

The external analyst has to depend upon the past which may notnecessary to reflect financial position and performance in future.

3. The technique of ratio analysis may prove inadequate in some situationsif there is differs in opinion regarding the interpretation of certain ra tio.


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4. As the ratio calculates on the basis of financial statements, the basiclimitation which is applicable to the financial statement is equallyapplicable In case of technique of ratio analysis also i.e. only facts which

can be expressed in financial terms are considered by the ratio analysis.

5. The technique of ratio analysis has certain limitations of use in the sensethat it only highlights the strong or problem arias, it dose not provide any

solution to rectify the problem arias .

6. For the intra firm comparison, the comparison may be false becausedifferent firms use different accounting policies as some firms use

LIFO (Last in First out) method while some use FIFO (First inFirst out).

Classificationofratio:-

Basically on the basis of working capital management it can be characterized intofollowing ratios

1) Activity Ratio:

Activity ratio is an indicator of how rapidly a firm converts various accounts into

cash or sales. The sooner management can convert assets into sales or cash, the more

actively the firm run. This ratio is also called Asset Management Ratio. As the assetsbasically categorized as fixed assets and current assets and again further the current

assets classified according to individual components of current assets viz.Inventories, Sundry Debtor, and receivables etc. The important Activity ratios are as

follows

(i) Working Capital Turnover Ratio

(ii) Inventory Turnover Ratio

(iii) Receivable Turnover Ratio

(iv)Current Asset Turnover Ratio

1)Working Capital Turnover Ratio:


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A company uses working capital to fund operations and to purchase inventory. Theseoperation and inventory are then converted into sales revenue for the company. The

working capital turnover ratio is used to analyze the relationship between the cash

used to fund operation and sales generated from these operations. In a general sense,the higher the working capital turnover, the better because it means that the companyis generating a lot of sales compared to the cash it uses to fund the sales.

Sales

Working Capital Turnover Ratio=

Net Working Capital

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

sales 295777455 602467051 1338321101 3136709419 6243752255 10065504283

Net W.C 77101916 176394314 399820011 1205573857 2265639443 5282948306

W.C TOR 3.83 3.42 3.35 2.60 2.76 1.91

Observations

Years2004-2005

2005-20062006-2007

2007-20082008-2009

2009-2010

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

3.83

3.42 3.35

2.62.76

1.19

W.C TOR

Power Regression for

Year

W.CTOR


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The working capital turnover ratio of ARSS declined from 2004 -05 to 2009-10,however it increased in 2008-09. The reciprocal of the ratio is 0.26, 0.29, 0.30, 0.38,0.36, and 0.52 continuously. It means that for one rupee of sales, the company needs

Rs 0.26, 0.29, 0.30,0.38, 0.36, and 0.52. In previous years the company incurred less

money for sales while in these years specially in 2009 -10 it is unable to take projectsin that amount. The company is increasing its sales by increasing in the net workin gcapital.

Inventory turnoverratio

cost of goods sold

Inventory TOR =Average inventory

Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Cost of

goods sold

467324486 1119159494 2051226344 422819852

3

6644038328

Average

inventory

81317926 88752585 347700997.5 125240406

0

2791896534

Inventory

TOR

5.75 12.61 5.9 3.38 2.38

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

2

4

6

8

10

12

14

5.75

12.61

5.9

3.38

2.38

Inventory Turnover Ratio

Inventory TOR

Years

InventoryTOR

Figure.......Inventory Turnover Ratio


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Observation:

Inventory turnover ratio basically tells about the efficiency of the firm in taking

the project and to accomplish that. The inventory turnover shows how rapidly

the inventory is turning into receivables through sales. A high inventory

turnover ratio is good because the no of days converting the inventories into the

sales will become less. As in 2006-07 the inventory turnover ratio is 12.61

times so the inventory holding days is only 29 days while from 2007-08 to 2009-10 the inventory turnover ratio decreasing means the no of days in inve ntory

converting is increasing. This can bad for the organization as this createsunnecessary tie-up of funds,reduced profit, and increasedcosts.

3) Debtors Turnover Ratio:

A firm sells goods and/ or services for cash and credit. When the firm extends

credits to its coustomers, debtors (Accounts Receivables) are created in the

firms accounts. The liquidity position of the firm depends on the quality of

debtors to great extent.

Gross Sales

Debtors Turnover Ratio =

Average Debtors

For an Infrastructure Company like ARSS the gross sales considers as the

contract revenue.

The scrap values are not included in Gross Sales because it further comes into

sales with other income. Average Debtors calculated by opening plus closingbalance divide by 2.Increasing volume of receivables without a matching

increase in sales is reflected by a low receivable turnover ratio. It is indication

of slowing down of the collection system or an extend line of credit being allowed by

the customer organization. The latter may be due to the fact that the firm is losing out to

competition. A credit manager engage in the task of grantingcredit or

monitoring receivable should take the hint from a falling receivable turnover


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ratiouse his market intelligence to find out the reason behind such failing trend.

Debtor turnover indicates the number of times debtors turnover each year.Generally the higher the value of debtors turnover, the more is the

management of credit.

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Gross sales 295777455 602467051 1338321101 3136709419 6243752255 10065504283

Averagedebtors

1632619 36478584 216928175 399355338 541053918 607328183

D.T.R 181.2 16.52 6.17 7.85 11.54 16.57

A.C.P.* 2 22 58 46 31 22

Observation:Debtors Turnover ratio indicates the no of times debtors turnover each year.

Higher the value of debtors turnover, the more efficient is the management of

credit because the collection period of the debtors will low. Maximum debtors

turnover ratio in all five years is 16.57 in 2009-10. It increases from 2006-07

also there is sudden jump in collecting the amount of debtors in 2008-09 and in

2009-10. The increased Debtors Turnover Ratio shows the better

Table........Debtor turnover ratio and avarage collection period

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

1

2

3

4

5

6

7

8

9

10

16.52

6.17

7.85

11.54 16.57

Debtors Turnover Ratio

D.T.R

Year

D.T.R


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management in debtors collection (from its joint venture companies).

Current Asset Turnover Ratio:

Current assets turnover ratio is calculate to know the firms efficiency of

utilizing the current assets .current assets includes the assets like inventories,

sundry debtors, bills receivable, cash in hand or bank, marketable securities,

prepaid expenses and short term loans and advances.This ratio includes the

efficiency with which current assets turn into sales. A higher ratio implies a

more efficient use of funds thus high turnover ratio indicate to reduced the lock

up of funds in current assets. An analysis of this ratio over a period of timereflects working capital management of a firm.

Sales

Current Asset Turnover Ratio=

Current Assets

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Sales 295777455 602467015 1338321101 3136709419 6243752255 10065504283

C.A 127270647 307866662 540845439 2156643952 3585863626 6988782501

C.A TOR 2.32 1.96 2.47 1.45 1.74 1.44

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

0

0.5

1

1.5

2

2.5 2.

2

1.96

2.47

1.45

1.74

1.44

Curr

t Ass

ts

ur

v

r !"

ti

C.A#

$%

&

' (rs

C.A

)

0

1

Table......Current assets Turnover Ratio


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Observation:

This ratio is very significant as it shows how fast the current assets turns into

sales. The current asset turnover ratio is in haphazard way but comparing to

2006-07 the ratio is low in recent years. In previous years the ratio was good.

The current asset changes in sales in 155days, 184 days, and 146 dayscontinuously in 2004-05, 2005-06, and 2006-07. While in 2007-08, 2008-09,

2009-10 the days are 248 days, 207 days, and 250 days continuously. The increasing no of days of current asset turnover ratio because company can maintain

high levelof inventory for upcoming its projects.

Current Ratio:

The current ratio is a crude and quick measure of the firms liquidity. The

current is calculated by dividing current assets by current liabilities:

Current Assets

Current Ratio =

Current Liabilities

Current assets include cash and those assets which can be converted in to cash

within a year,such marketable securities, debtors and inventories. All

obligations within a year are include in current liabilities. Current liabilities

include creditors, bills payable accrued expenses, short term bank loan income

tax liabilities and long term debt maturing in the current year. Current ratio

indicates the availability of current assets in rupees for every rupee of current


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liability.

This ratio is important as the value of the current assets may decrease orincrease but the value of the current liabilities is always constant. That has to be

paid.

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Current

assets

127270647 307866662 540845439 2156643952 3585863626 6988782501

Currentliabilities

42632767 121648520 105763831 858935086 1147928616 1447454152

Current ratio 2.99 2.53 5.11 2.51 3.12 4.83

Observation:

As a conventional rule, a current ratio of 2 to 1 or more is considered

satisfactory. In all the years the current ratio of ARSS is more than 2. It means

the company has its short term securities (cash & bank balances, Inventories,

Inventories, loans and advances) to fulfill it's short term liabilities (sundry

creditors, provision for taxation). Also the current ratio shows the margin of

safety for its creditors. Higher the ratio greater will be the margin of safety.

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

1

2

3

4

5

6

2.99

2.53

5.11

2.51

3.12

4.83

Curr2

3 t 45

ti6

Curr7 8

t9

@

tiA

YB C rD

Cur

rE

Ft

G

H tiI


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41

QuickRatio:

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, 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 assetsby current liabilities:-

Current Assets - Inventories

Quick Ratio =

Current Liabilities

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

C.A 127270647 307866662 540845439 2156643952 3585863626 6988782501

Inventories 58429517 104206335 73298835 622103160 1882704940 3701088121

Quick C.A 68841130 203660 326 467546604 1534540792 1703158686 3287694373

C.L 42632767 121648520 105763831 858935086 1147928616 1447454152

Quick ratio 1.61 1.67 4.42 1.79 1.48 2.27

Table.......Quick Ratio


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Observation:

The quick ratio of 1 to 1 is considered as satisfactory financial condition. The

company has not a very high ratio throughout except one year 2006 -07. In2006-07 the company had high value of cash & bank balances, sundry debtors

etc. whereas the sundry creditors andprovision were compairatively low. High

quick ratio will benefit to the company in its bidding activities i.e It shows the

financial strength of the company.

Working Capital Management Components

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1.611.67

4.42

1.79

1.48

2.27

Quick PQ

tiR

QuickS

T

tiU

V

W X Y

Qu

ick

a

b tic

Figure.......Current Ratio


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Receivables Management

Inventory Management

Cash Management


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44

Receivable Management:

Introduction:-


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45

Receivables or debtors are the one of the most important parts of the current assets which is createdif the company sells the finished goods to the customer but not receive the cash for the same

immediately. Trade credit arises when firm sells its products and services on credit and dose notreceive cash immediately. It is essential marketing tool, acting as bridge for the movement of goods

through production and distribution stages to customers. Trade credit creates receivables or book

debts which the firm is expected to collect in the near future. The receivables include threecharacteristics:

1) It involve element of risk which should be analyse carefully.2) It is based on economic value. To the buyer, the economic value

in goods or services passes immediately at the time of sale, while seller expects an equivalent value

to be received later on.

3) It implies futurity. The cash payment for goods or serves receivedby the buyer will be made by him in a future period.

Objective of Receivable Management:

The sales of goods on credit basis are an essential part of the modern competitive economic system.The credit sales are generally made up on account in the sense that there are formal

acknowledgements of debt obligation through a financial instrument. As a marketing tool,they areintended to promote sales and there by profit. However extension of credit involves

risk and cost, management should weigh the benefit as well as cost to determine the goal ofreceivable management. Thus the objective of receivable management is to promote sales and profit

until that point is reached where the return on investment in further funding of receivables is lessthan the cost of funds raised to finance that additional credit.

Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Sundry Debtor 71791868 145136306 653574370 428533465 786122901

Indices 100 202 910 597 1095

Table..........Size Of Receivables

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

200

400

600

800

1000

1200

100

202

910

597

1095

Receivables Indices

Receivables Indices

Years

ReceivablesIndices


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46

Average Collection Period:

The average collection period measures the quality of debtors since it indicate

the speed of their collection. The shorter the average collection period, the

better the quality of the debtors since a short collection period implies theprompt payment by debtors. The average collection

period should be compared against the firms credit terms and policy judges

its credit and collection efficiency. The collection period ratio thus helps ananalyst in two respects:

1. In determining the collectability of debtors and thus, the efficiency of

collection efforts.

2. In ascertaining the firms comparative strength and advantages related to its

credit policy

and performance.

The debtors turnover ratio can be transformed in to the number of days of

holding of debtors:-

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Gross sales 295777455 602467051 1338321101 3136709419 6243752255 10065504283

Avg.Debtors 1632619 36478584 216928175 399355338 541053918 607328183

D.T.R 181.17 16.52 6.17 7.85 11.54 16.57

A.C.P* 2 22 58 46 31 22

Table.............Average collection period


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ObservationThe average collection period increased from 2004-05 to 2006-07 and then it

decreases from 2006-07 to 2009-10. The increasing average collection period showsthe inefficiency of the management in collecting the debtors money while the

decreasing average collection period shows the efficient management and bettercredit policy. The reason behind average collection period is high due to debtors

turnover ratio is low. In 2006-07 the company had taken a no of projects but thecompany did projects alone. So there is no chance of debting in 2006-07. While in2007-08 the company had taken 10 projects on the joint venture basis. Companys

share is 100% in those projects. In 2008-09 and 2009-10 the company has taken 3and 5 projects on the joint venture basis so there is case of debting.

Inventory Management:

In financial view, inventory defined as the sum of the value of raw material and

supplies,including spares, semi-processed material or work in progress and finishedgoods. The nature of inventory is largely depending upon the type of operation

carried on. A firm neglecting the management of inventories will be jeopardizing itslong term profitability and may fail ultimately. It is possible to reduce the inventory

to a certain level without affecting production and sales, by using simple inventoryplanning and controlling technique. The reduction in excessive inventories carries a

favourable impact on the companys profitability. Maintaining inventories involves

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

0

50

100

150

200

250

300

2

22

258

46

3122

Average cd

e e ecf

id

g perid

d(I g days)

average ch

i i

ecp

ih q

peri

h

d

years

Averagec

r

s

s

ec

t ir

u

peri

r d


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48

tying up of the companys funds and incurrence of storage and handling cost. Thereare three components: Raw material, Work in progress; and finished goods involvedin inventory management.

ObjectiveofInventory Management:

In the case of Inventory Management, the firm is faced with the problem of meeting

two conflicting needs:

1) To maintain a large amount of inventory for efficient and smooth production;2) To maintain a minimum amount of inventory for increasing the profitability;

But the firms avoid both the cases. In the first case, the firms avoid overinvestmentbecause of:-

(a) unnecessary tie-up of the firms funds and loss of profits (b) excess carrying cost

(c)risk of liquidity. Another danger of holding excess inventories is deterioration of

the inventories. Maintaining a minimum level of inventories is also dangerous. Theconsequences of under-investment in inventories are: (a) production hold -ups (b)failure to deliver commitments. So the aim of inventory management is:

(1)To ensure a continuous supply of raw material to facilitate unin terruptedproduction;

(2) To maintain a sufficient stock of the raw material in period of short supply and

overprices;

(3) To maintain sufficient finished goods inventory for smooth sales operation, and

efficient customer service;

(4)To maintain the carrying cost and time;(5)To control investment in inventories and keep at optimum level;

Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Raw

materials

1803094 1517210 10008237 255489710 464589560

W.I.P 69724520 57300640 560122560 1512045660 2523687458

FinishedGoods

32678721 14480985 40523740 81715450 651456230

Stores and

spares

0 0 11448623 33454120 61354880

Total 104206335 73298835 622103160 1882704940 3701088128


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Indices 100 70.34 597.o 1806.7 3551.7

Inventory Components:The firms inventory consist following components

(i) Raw material(ii) Work- in-progress

(iii) Finished goods

To analyze the level of raw material inventory and work in progress inventory held by the

firm on an average it is necessary to examine the efficiency with which the firm converts raw

material inventory and work in progress into finished goods.

Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Raw Material 1.73 2.07 1.6 13.57 12.55

W.I.P 66.91 78.17 90.03 80.31 68.18

Finished Goods 31.36 19.75 6.51 4.34 17.6

Stores&Spares 0 0 1.84 1.78 1.66

Total(%) 100 100 100 100 100

Table.......Size of inventory

2005v 5006 2006v 2007 2007v 2008 2008v 2009 2009v 2010

0

500

1000

1500

2000

2500

3000

3500

4000

100 70w 34

597

1806 w 7

3551 w 7

x nveny

o y n

ce

nven

o

y

n

ce

ea

nven

o y

n

ce

Figure........Inventory indices

Table........Inventory components(%)


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Observation:

As the ARSS Infrastructure Projects Limited is a construction company. And it takes project

of different segment in construction sector like road, railway, irrigation, aviation, marine,

jetty etc. The companys inventory work in progress is very high in terms of cash as well as

2005- 2006 2006- 2007 2007- 2008 2008- 2009 2009- 2010

0

10

20

30

40

50

60

70

80

90

100

1.73 2.07 1.6

13.57 12.55

66.91

78.17

90.03

80.31

68.18

31.36

19.75

6.514.34

17.6

0 01.84 1.78 1.66

Raw Mat

al

W.I.P

F

h

d G

d

St

&Spares

Figure......Inventory components in %

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

10

20

30

40

50

60

70

80

90

100

1.73 2.07 1.6

13.5712.55

66.91

78.17

90.03

80.31

68.18

31.36

19.75

6.514.34

17.6

0 01.84 1.78 1.66


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in terms of % and it increases year by year. The company is taking a no of projects which

completes in more than one year because of season factor.

The company did not concern about the stores and spares in the period of 2005 and 2006. But

as the stores and spares plays a important role in the construction industry examples for

equipments. So from 2007 onwards the company made a certain account in the inventories. In

2008-09 the recession was happening. The company was unable to good projects because of

the downturn in the industry. As mentioned earlier the company had taken only three projects

in the railway segment in 2008-09. So the raw material remained high and the finished goods

remained low.

Inventory Holding Period:

The reciprocal of inventory turnover gives average inventory holding in percentage term.

When the no of days in a year (said as 360) are divided by inventory turnover, days of

inventory holding (DIH) can obtain

360

DIH =

Inventory Turnover

To examine the efficiency of the firm (how the firm converts raw material into work in

process and work-in-process into finished goods), raw material inventory and work in process

inventory should be known. The raw material inventory should be related to materials

consumed, and work-in-process to the cost of production.


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Material consumed

Raw Material Inventory Turnover =

Avg. Raw Material Inventory

Cost of Production

Work-in-Process Inventory Turnover =

Avg. work-in-process inventory


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Cash Management:

Cash is common purchasing power or medium of exchange. As such, it forms the most

important component of working capital. The term cash with reference to cash management

is used in two senses, in narrow sense it is used broadly to cover cash and generally accepted

equivalent of cash such as cheques, draft and demand deposits in banks. The broader view of

cash includes near cash items, such as marketable securities or bank time deposits. The basic

characteristic of near-cash assets is that they can readily be converted into cash. They also

provide short term investment outlet for excess and are also useful for meeting planned

outflow of funds. Irrespective of the form in which it is held, a distinguishing feature of cash

as assets is that it has no earning power. Company have to always maintain the cash balance

to fulfill the dally requirement of expenses. There are four primary motives for maintain the

cash as follow:

Cash management is concerned with the managing of:

(i) Cash flows into and out of the firm,

(ii) Cash flows within the firm, and

(iii) Cash balances held by the firm at a point of the time by financing deficit or investing

surplus cash.

Motives for Holding Cash:

The firms need to hold cash may be attributed to the following three motives:

Transaction Motive:

The transactions motive requires a firm to hold cash to conduct its business in the ordinary

course. The firm needs cash primarily to make payments, for purchases, wages and salaries,


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operating expenses, taxes, dividends etc. There should be a proper channel between the cash

inflow and cash outflow in the firm. For periods when cash payments exceed cash receipts,

the firm should maintain some cash balance to be able to make required payments. Usually

the firm maintains such accounts to meet anticipated payments whose timings is not perfectly

matched with cash receipts.

The Precautionary Motive:

The precautionary motive is the need to hold cash to meet contingencies in the future. It helps

in the future. The precautionary amount of cash depends upon the predictability of cash

flows. If cash flows are predicted with accuracy, less cash will be maintained for emergency.

If the firm is able to borrow at short notice there will less need for precautionary balance.

Generally the precautionary balance held in marketable securities and relatively less in cash.

The speculative Motive:

The speculative motive relates to the holding of cash for investing in profit making

opportunities as and when they arise. As the firm can postpone materials purchasing when

the price of materials is high. And make purchase in future when the price of materials falls.

The primary motives to hold cash and marketable securities are: the transactions and the

precautionary motives.

AdvantageofCash Management:

Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither

profit nor losses but without cash, profit remains meaningless for an enterprise owner.

1. A sufficient of cash can keep an unsuccessful firm going despite losses;

2. An efficient cash management through a relevant and timely cash budget may enable a

firm to obtain optimum working capital and ease the strains of cash shortage, fascinating


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temporary investment of cash and providing funds normal growth;

3. Cash management involves balance sheet changes and other cash flow that do not appear

in the profit and loss account such as capital expenditure;

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Cash &Bank

balance

19100114 50648882 116425792 373999265 717214943 1095090536

Indices 100 265.18 609.55 1958.09 3755.02 5733.42

Observation:

The cash and bank balances of ARSS was continuously increasing from 2005-06 to 2009-10.

The reason of increasing cash and bank balances was the increasing no of projects with their

value. The company entered into new areas and earned increasing profits. There was a sharp

increase in cash and bank balances in 2007-08 from its previous year (i.e. 212.23%

increase). There was increase due to 10 projects of railway, road, irrigation taken.

Table.........Cash&Bank balance Indices

Figure.........Cash & Bank balance indices

2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

1000

2000

3000

4000

5000

6000

100265.18

609.55

1958.09

3755.02

5733.42

Cash&Bank balancendices

Indices

Years

Cas

h&B

an

kb

ala

nce

indic

es


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Cash Cycle:

One of the distinguishing features of the fund employed as working capital is that constantly

changes its form to drive business wheel. It is also known as circulating capital which

means current assets of the company, which are changed in ordinary course of business from

one form to another, as for example, from cash to inventories, inventories to receivables and

receivables to cash.


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Working capital finance and estimation

Introduction

Sources ofcapital finance

Working capital loan andinterest

Estimationofworking capital


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Introduction:

Funds available for period of one year or less is called short term finance. In India short term

finance are used as working capital finance. Two most significant short term sources of

finance for working capital are trade credit and bank borrowing. Trade credit ratio of current

assets is about 40%, it is indicated by Reserve Bank of India data that trade credit has grown

faster than the growth in sales. Bank borrowing is the next source of working capital finance.

The relative importance of this varies from time to time depending on the prevailing

environment. In India the primary source of working capital financing are trade credit and

short term bank credit. After determine the level of working capital, a firm has to consider

how it will finance. Following are sources of working capital finance.

Sources of Working Capital Finance:

1) Trade credit

2) Bank Finance

1) Trade credit:

Trade credit refers to the credit that a customer gets from suppliers of goods in the normal

course of business. The deferral of payment in short term financing is called trade credit. It is

major source of financing for firm. Particularly small firms are heavily depend on trade credit


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as a source of finance since they find it difficult to raised funds from banks or other sources

in the capital market. Trade credit is mostly an informal arrangement, and it granted on an

open account basis.

For ARSS infrastructure Projects Limited the sundry creditors are the trade credit finance

which is shown in the balance sheet of the firm.

2) Bankfinance:

Banks are main institutional source of working capital finance in India. After trade credit,

bank credit is the most important source of financing working capital in India. A banks

considers firms contract revenue and services and desirable levels of current assets in

determining its working capital requirements. The amount approved by bank for the firms

working capital is called credit limit. Credit limit is the maximum funds which a firm can

obtain from the banking system. In practice banks do not lend 100% credit limit; they deduct

margin money.

There are two types of loans involved as bank finance in ARSS Infrastructure Projects

Limited.

1) Secured loans in which the term loan, working capital loan; and loan from NBFCs. The

working capital loan is secured by way of mortgages of land and building and hypothecation

of plant and machinery, stock and book debts.

2) Unsecured loans in which the loans from banks and from others are included.

(Amount in crores)

Particulars 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

W.C loan 12.34 23.04 48.33 139.06 288.54

Interest 1.64 2.89 7.34 23.99 46.33


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2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

0

500000000

1000000000

1500000000

2000000000

2500000000

3000000000

3500000000

123413232230446691

483320993

1390672703

2885494519

W.C loj

n

Exponk

ntij

lRegress ion for

W.C lo

j

n

Table.........Working capital loan size

Documents

Arss Project Study