Concept of Working Capital

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital

2. Net working capital

The gross working capital is the capital invested in the total current assets of the

enterprises current assets are those

Assets which can convert in to cash within a short period normally one accounting

year.

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Net

working capital is the excess of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS – CURRENT

LIABILITIES.

Net working capital can be positive or negative. When the current assets

exceeds the current liabilities are more than the current assets. Current

liabilities are those liabilities, which are intended to be paid in the ordinary

course of business within a short period of normally one accounting year out

of the current assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation , if it does not amt. to app. Of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working

capital is an accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometimes preferred to the concept of working capital for the following

reasons:

1. It enables the enterprise to provide correct amount of working

capital at correct time.

2. Every management is more interested in total current assets with

which it has to operate then the source from where it is made

available.

3. It take into consideration of the fact every increase in the funds of

the enterprise would increase its working capital.

4. This concept is also useful in determining the rate of return on

investments in working capital. The net working capital concept,

however, is also important for following reasons:

It is qualitative concept, which indicates the firm’s ability to meet to

its operating expenses and short-term liabilities.

IT indicates the margin of protection available to the short term

creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital

requirement out of the permanent sources of funds.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o On the basis of concept.

o On the basis of time.

On the basis of concept working capital can be classified as gross working

capital and net working capital. On the basis of time, working capital may be

classified as:

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effective

utilization of fixed facilities and for maintaining the circulation of current assets. Every firm

has to maintain a minimum level of raw material, work- in-process, finished goods and cash

balance. This minimum level of current assts is called permanent or fixed working capital as

this part of working is permanently blocked in current assets. As the business grow the

requirements of working capital also increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to

meet the seasonal demands and some special exigencies. Variable working capital can further

be classified as seasonal working capital and special working capital. The capital required to

meet the seasonal need of the enterprise is called seasonal working capital. Special working

capital is that part of working capital which is required to meet special exigencies such as

launching of extensive marketing for conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is

required for short periods and cannot be permanently employed gainfully in the business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

SOLVENCY OF THE BUSINESS: Adequate working capital helps in

maintaining the solvency of the business by providing uninterrupted of

production.

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

prompt payments and makes and maintain the goodwill.

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

standing can arrange loans from banks and other on easy and favorable terms.

Cash Discounts: Adequate working capital also enables a concern to avail

cash discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures

regular supply of raw material and continuous production.

Regular Payment Of Salaries, Wages And Other Day TO Day Commitments: It leads to the satisfaction of the employees and raises the

morale of its employees, increases their efficiency, reduces wastage and costs

and enhances production and profits.

Exploitation Of Favorable Market Conditions: If a firm is having

adequate working capital then it can exploit the favorable market conditions

such as purchasing its requirements in bulk when the prices are lower and

holdings its inventories for higher prices.

Ability To Face Crises: A concern can face the situation during the

depression.

Quick And Regular Return On Investments: Sufficient working

capital enables a concern to pay quick and regular of dividends to its investors

and gains confidence of the investors and can raise more funds in future.

High Morale: Adequate working capital brings an environment of

securities, confidence, high morale which results in overall efficiency in a

business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its

business operations. It should have neither redundant or excess working capital

nor inadequate nor shortages of working capital. Both excess as well as short

working capital positions are bad for any business. However, it is the inadequate

working capital which is more dangerous from the point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL

1. Excessive working capital means ideal funds which earn no

profit for the firm and business cannot earn the required rate of

return on its investments.

2. Redundant working capital leads to unnecessary purchasing

and accumulation of inventories.

3. Excessive working capital implies excessive debtors and

defective credit policy which causes higher incidence of bad

debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations

with banks and other financial institution may not be

maintained.

6. Due to lower rate of return n investments, the values of shares

may also fall.

7. The redundant working capital gives rise to speculative

transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises

due to the time gap between production and realization of cash from sales. There is an

operating cycle involved in sales and realization of cash. There are time gaps in purchase of

raw material and production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

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

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

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and

spares and finished stock.

For studying the need of working capital in a business, one has to study the

business under varying circumstances such as a new concern requires a lot of

funds to meet its initial requirements such as promotion and formation etc. These

expenses are called preliminary expenses and are capitalized. The amount needed

for working capital depends upon the size of the company and ambitions of its

promoters. Greater the size of the business unit, generally larger will be the

requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and

expensing of the business till it gains maturity. At maturity the amount of working

capital required is called normal working capital.

There are others factors also influence the need of working capital in a business.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of working is

very limited in public utility undertakings such as electricity, water supply

and railways because they offer cash sale only and supply services not

products, and no funds are tied up in inventories and receivables. On the

other hand the trading and financial firms requires less investment in fixed

assets but have to invest large amt. of working capital along with fixed

investments.

2. SIZE OF THE BUSINESS: Greater the size of the business,

greater is the requirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep production

steady by accumulating inventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the

manufacturing time the raw material and other supplies have to be carried

for a longer in the process with progressive increment of labor and service

costs before the final product is obtained. So working capital is directly

proportional to the length of the manufacturing process.

5. SEASONALS VARIATIONS: Generally, during the busy

season, a firm requires larger working capital than in slack season.

6. WORKING CAPITAL CYCLE: The speed with which the

working cycle completes one cycle determines the requirements of

working capital. Longer the cycle larger is the requirement of working

capital.

DEBTORS

CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

7. RATE OF STOCK TURNOVER: There is an inverse co-relationship

between the question of working capital and the velocity or speed with

which the sales are affected. A firm having a high rate of stock turnover

wuill needs lower amt. of working capital as compared to a firm having a

low rate of turnover.

8. CREDIT POLICY: A concern that purchases its requirements on credit

and sales its product / services on cash requires lesser amt. of working

capital and vice-versa.

9. BUSINESS CYCLE: In period of boom, when the business is

prosperous, there is need for larger amt. of working capital due to rise in

sales, rise in prices, optimistic expansion of business, etc. On the contrary

in time of depression, the business contracts, sales decline, difficulties are

faced in collection from debtor and the firm may have a large amt. of

working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we

shall require large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have

more earning capacity than other due to quality of their products,

monopoly conditions, etc. Such firms may generate cash profits from

operations and contribute to their working capital. The dividend policy

also affects the requirement of working capital. A firm maintaining a

steady high rate of cash dividend irrespective of its profits needs working

capital than the firm that retains larger part of its profits and does not pay

so high rate of cash dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also affect the

working capital requirements. Generally rise in prices leads to increase in

working capital.

Others FACTORS: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that arises in

attempting to manage the current assets, current liabilities. The basic goal of

working capital management is to manage the current assets and current

liabilities of a firm in such a way that a satisfactory level of working capital is

maintained, i.e. it is neither adequate nor excessive as both the situations are

bad for any firm. There should be no shortage of funds and also no working

capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES

of a firm has a great on its probability, liquidity and structural health of the

organization. So working capital management is three dimensional in nature as

1. It concerned with the formulation of policies with regard to

profitability, liquidity and risk.

2. It is concerned with the decision about the composition and

level of current assets.

3. It is concerned with the decision about the composition and

level of current liabilities.

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business.

Adequate amount of working capital is very much essential for the smooth

running of the business. And the most important part is the efficient

management of working capital in right time. The liquidity position of the firm

is totally effected by the management of working capital. So, a study of

changes in the uses and sources of working capital is necessary to evaluate the

efficiency with which the working capital is employed in a business. This

involves the need of working capital analysis.

The analysis of working capital can be conducted through a number of

devices, such as:

1. Ratio analysis.

2. Fund flow analysis.

3. Budgeting.

1. RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The

technique of ratio analysis can be employed for measuring short-term liquidity

or working capital position of a firm. The following ratios can be calculated

for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source

from which additional funds were derived and the use to which these sources

were put. The fund flow analysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position

(working capital) business enterprise between beginning and ending of the

financial dates.

3. WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and

polices to be pursued in the future period time. Working capital budget as a

part of the total budge ting process of a business is prepared estimating future

long term and short term working capital needs and sources to finance them,

and then comparing the budgeted figures with actual performance for

calculating the variances, if any, so that corrective actions may be taken in

future. He objective working capital budget is to ensure availability of funds

as and needed, and to ensure effective utilization of these resources. The

successful implementation of working capital budget involves the preparing of

separate budget for each element of working capital, such as, cash, inventories

and receivables etc.

ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF LIQUIDITY

The short –term creditors of a company such as suppliers of goods of credit

and commercial banks short-term loans are primarily interested to know the

ability of a firm to meet its obligations in time. The short term obligations of

a firm can be met in time only when it is having sufficient liquid assets. So

to with the confidence of investors, creditors, the smooth functioning of the

firm and the efficient use of fixed assets the liquid position of the firm must

be strong. But a very high degree of liquidity of the firm being tied – up in

current assets. Therefore, it is important proper balance in regard to the

liquidity of the firm. Two types of ratios can be calculated for measuring

short-term financial position or short-term solvency position of the firm.

1. Liquidity ratios.

2. Current assets movements ‘ratios.

A) LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as and

when these become due. The short-term obligations are met by realizing

amounts from current, floating or circulating assts. The current assets should

either be liquid or near about liquidity. These should be convertible in cash

for paying obligations of short-term nature. The sufficiency or insufficiency

of current assets should be assessed by comparing them with short-term

liabilities. If current assets can pay off the current liabilities then the

liquidity position is satisfactory. On the other hand, if the current liabilities

cannot be met out of the current assets then the liquidity position is bad. To

measure the liquidity of a firm, the following ratios can be calculated:

1. CURRENT RATIO

2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general

liquidity and its most widely used to make the analysis of short-term

financial position or liquidity of a firm. It is defined as the relation between

current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITES

The two components of this ratio are:

1) CURRENT ASSETS

2) CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry

debtors, inventories and work-in-progresses. Current liabilities include

outstanding expenses, bill payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has

the ability to pay its current obligations in time. On the hand a low current

ratio represents that the liquidity position of the firm is not good and the firm

shall not be able to pay its current liabilities in time. A ratio equal or near to

the rule of thumb of 2:1 i.e. current assets double the current liabilities is

considered to be satisfactory.

CALCULATION OF CURRENT RATIO

Year 2006 2007 2008

Current Assets 81.29 83.12 13,6.57

Current Liabilities 27.42 20.58 33.48

Current Ratio 2.96:1 4.03:1 4.08:1

Interpretation:-

As we know that ideal current ratio for any firm is 2:1. If we see the current

ratio of the company for last three years it has increased from 2006 to 2008.

The current ratio of company is more than the ideal ratio. This depicts that

company’s liquidity position is sound. Its current assets are more than its

current liabilities.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio

may be defined as the relationship between quick/liquid assets and current or

liquid liabilities. An asset is said to be liquid if it can be converted into cash

with a short period without loss of value. It measures the firms’ capacity to

pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS

CURRENT LIABILITES

Where Quick Assets are:

1) Marketable Securities

2) Cash in hand and Cash at bank.

3) Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet

its current liabilities in time and on the other hand a low quick ratio

represents that the firms’ liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally

thought that if quick assets are equal to the current liabilities then the

concern may be able to meet its short-term obligations. However, a firm

having high quick ratio may not have a satisfactory liquidity position if it has

slow paying debtors. On the other hand, a firm having a low liquidity

position if it has fast moving inventories.

CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)

Year 2006 2007 2008

Quick Assets 44.14 47.43 61.55


Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

Interpretation :

A quick ratio is an indication that the firm is liquid and has the ability to

meet its current liabilities in time. The ideal quick ratio is 1:1. Company’s

quick ratio is more than ideal ratio. This shows company has no liquidity

problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid

than inventories, yet there may be doubts regarding their realization into

cash immediately or in time. So absolute liquid ratio should be calculated

together with current ratio and acid test ratio so as to exclude even

receivables from the current assets and find out the absolute liquid assets.

Absolute Liquid Assets includes :

ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g. (Rupees in Crore)

Year 2006 2007 2008

Absolute Liquid Assets 4.69 1.79 5.06


Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :

These ratio shows that company carries a small amount of cash. But

there is nothing to be worried about the lack of cash because company has

reserve, borrowing power & long term investment. In India, firms have

credit limits sanctioned from banks and can easily draw cash.

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn

profits. The efficiency with which assets are managed directly affects the

volume of sales. The better the management of assets, large is the amount of

sales and profits. Current assets movement ratios measure the efficiency

with which a firm manages its resources. These ratios are called turnover

ratios because they indicate the speed with which assets are converted or

turned over into sales. Depending upon the purpose, a number of turnover

ratios can be calculated. These are :

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets

include high amount of debtors due to slow credit collections and moreover if

the assets include high amount of slow moving inventories. As both the ratios

ignore the movement of current assets, it is important to calculate the turnover

ratio.

1. INVENTORY TURNOVER OR STOCK

TURNOVER RATIO :

Every firm has to maintain a certain amount of inventory of finished

goods so as to meet the requirements of the business. But the level of

inventory should neither be too high nor too low. Because it is harmful

to hold more inventory as some amount of capital is blocked in it and

some cost is involved in it. It will therefore be advisable to dispose the

inventory as soon as possible.

INVENTORY TURNOVER RATIO = COST OF GOOD SOLD

AVERAGE INVENTORY

Inventory turnover ratio measures the speed with which the stock is

converted into sales. Usually a high inventory ratio indicates an

efficient management of inventory because more frequently the stocks

are sold ; the lesser amount of money is required to finance the

inventory. Where as low inventory turnover ratio indicates the

inefficient management of inventory. A low inventory turnover implies

over investment in inventories, dull business, poor quality of goods,

stock accumulations and slow moving goods and low profits as

compared to total investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

2

(Rupees in Crore)

Year 2006 2007 2008

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times

Interpretation :

These ratio shows how rapidly the inventory is turning into receivable

through sales. In 2007 the company has high inventory turnover ratio but in

2008 it has reduced to 1.75 times. This shows that the company’s inventory

management technique is less efficient as compare to last year.

2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO

e.g.

Year 2006 2007 2008

Days 365 365 365

Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion Period 243 days 130 days 202 days

Interpretation :

Inventory conversion period shows that how many days inventories

takes to convert from raw material to finished goods. In the company

inventory conversion period is decreasing. This shows the efficiency of

management to convert the inventory into cash.

3. DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to increase its

sales and a liberal credit policy may result in tying up substantial funds of a

firm in the form of trade debtors. Trade debtors are expected to be converted

into cash within a short period and are included in current assets. So

liquidity position of a concern also depends upon the quality of trade

debtors. Two types of ratio can be calculated to evaluate the quality of

debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtor’s velocity indicates the number of times the debtors are turned

over during a year. Generally higher the value of debtor’s turnover ratio the

more efficient is the management of debtors/sales or more liquid are the

debtors. Whereas a low debtors turnover ratio indicates poor management of

debtors/sales and less liquid debtors. This ratio should be compared with

ratios of other firms doing the same business and a trend may be found to

make a better interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

2

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Average Debtors 17.33 18.19 22.50

Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times

Interpretation :

This ratio indicates the speed with which debtors are being converted or

turnover into sales. The higher the values or turnover into sales. The higher

the values of debtors turnover, the more efficient is the management of

credit. But in the company the debtor turnover ratio is decreasing year to

year. This shows that company is not utilizing its debtors efficiency. Now

their credit policy become liberal as compare to previous year.

4. AVERAGE COLLECTION PERIOD :

Average Collection Period = No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average number of

days for which a firm has to wait before its receivables are converted into

cash. It measures the quality of debtors. Generally, shorter the average

collection period the better is the quality of debtors as a short collection

period implies quick payment by debtors and vice-versa.

Average Collection Period = 365 (Net Working Days)

Debtors Turnover Ratio

Year 2006 2007 2008

Days 365 365 365

Debtor Turnover Ratio 9.6 8.3 7.5

Average Collection Period 38 days 44 days 49 days

Interpretation :

The average collection period measures the quality of debtors

and it helps in analyzing the efficiency of collection efforts. It also helps to

analysis the credit policy adopted by company. In the firm average

collection period increasing year to year. It shows that the firm has Liberal

Credit policy. These changes in policy are due to competitor’s credit policy.

5. WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of

net working capital. This ratio indicates the number of times the

working capital is turned over in the course of the year. This ratio

measures the efficiency with which the working capital is used by the

firm. A higher ratio indicates efficient utilization of working capital

and a low ratio indicates otherwise. But a very high working capital

turnover is not a good situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

Working Capital Turnover = Sales

Networking Capital

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Networking Capital 53.87 62.52 103.09

Working Capital Turnover 3.08 2.4 1.64

Interpretation :

This ratio indicates low much net working capital requires for

sales. In 2008, the reciprocal of this ratio (1/1.64 = .609) shows that for sales

of Rs. 1 the company requires 60 paisa as working capital. Thus this ratio is

helpful to forecast the working capital requirement on the basis of sale.

INVENTORIES

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Inventories 37.15 35.69 75.01

Interpretation :

Inventories is a major part of current assets. If any company wants to

manage its working capital efficiency, it has to manage its inventories

efficiently. The graph shows that inventory in 2005-2006 is 45%, in 2006-

2007 is 43% and in 2007-2008 is 54% of their current assets. The company

should try to reduce the inventory upto 10% or 20% of current assets.

CASH BNAK BALANCE :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Cash Bank Balance 4.69 1.79 5.05

Interpretation :

Cash is basic input or component of working capital. Cash is needed to

keep the business running on a continuous basis. So the organization should

have sufficient cash to meet various requirements. The above graph is

indicate that in 2006 the cash is 4.69 crores but in 2007 it has decrease to

1.79. The result of that it disturb the firms manufacturing operations. In

2008, it is increased upto approx. 5.1% cash balance. So in 2008, the

company has no problem for meeting its requirement as compare to 2007.

DEBTORS :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Debtors 17.33 19.05 25.94

Interpretation :

Debtors constitute a substantial portion of total current assets. In India it

constitute one third of current assets. The above graph is depict that there is

increase in debtors. It represents an extension of credit to customers. The

reason for increasing credit is competition and company liberal credit policy.

CURRENT ASSETS :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Current Assets 81.29 83.15 136.57

Interpretation :

This graph shows that there is 64% increase in current assets in 2008.

This increase is arise because there is approx. 50% increase in inventories.

Increase in current assets shows the liquidity soundness of company.

CURRENT LIABILITY :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Current Liability 27.42 20.58 33.48

Interpretation :

Current liabilities shows company short term debts pay to outsiders. In

2008 the current liabilities of the company increased. But still increase in

current assets are more than its current liabilities.

NET WOKRING CAPITAL :

(Rs. in Crores)

Year 2005-2006 2006-2007 2007-2008

Net Working Capital 53.87 62.53 103.09

Interpretation :

Working capital is required to finance day to day operations of a firm.

There should be an optimum level of working capital. It should not be too

less or not too excess. In the company there is increase in working capital.

The increase in working capital arises because the company has expanded its

business.

Documents

Concept of Working Capital