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7/30/2019 Impact of Current Asset on Workng Cap
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Impact of Current Assets on Working Capital. AT
OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)
Babasabpatilfreepptmba.com
Contents
Sl. No. Titles Page No.
I Chapter 1
Introduction
Literature Review
Statement of the Problem
Purpose of the Study
Scope of the study
Objectives of the Study
3
37
39
39
39
40
II Chapter 2
Organization Profile
Organization Chart
Data Collection Method
41
50
52
III Chapter 3
Results & discussion with Charts & graphs
Findings
Suggestions
Conclusions
5377
78
79
IV Chapter 4
Appendix
Bibliography
Joining Report
Weekly Reports
80
80
81
82
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Introduction: -
The project is assigned to me Impact of Current Assets on Working Capital. At
Oilgear Towler Polyhydron Private Limited (OTPL). The various information regarding
classification, determinants, components, sources, arrangement operating cycle have been
also discussed and aspects relating to the perspective of Oilgear Towler Polyhydron
Private Limited (OTPL).
Ratio Analysis has been carried out using Financial Information for last three
accounting years i.e. from 2003 to 2005; Ratios like Current Ratio, Working Capital
Turnover Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio have also been
analyzed. A Statement of Changes in Working Capital has also been analyzed and
attached Turnover & Performance of the Company for last three years has also been
analyzed.
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MEANING & DEFINITION OF WORKING CAPITAL: -
Working capital in simple terms is the amount of funds, which a company, must
have to finance its day-to-day operation, it can be regarded as part/portion of capital,
which is, employed in short operation.
Every organization invests their funds in two terms of capital namely,
1. Fixed Capital.
2. Working Capital
The amount invested in the assets like Plant and Machinery, Building, Furniture
etc, blocked on permanent basis and is called Fixed Capital Organization not only
requires Fixed Capital, but also need of fund to meet day to day operations for short term
purpose, such funds is called Working Capital.
A Study of Working Capital is of major part of the external and internal analysis
because of its close relationship with the current day to day operation of business.
Working Capital consists broadly for that position/the assets of a business that are used at
related current operations and is represented by raw materials, stores, work in process and
finished goods merchandise, note/bill receivable.
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Definition of Working Capital: -
Genestenberg: -
Working Capital means Current Assets of a company that are changed in the
ordinary course of business, from one to another, for ex, from cash to inventories,
inventories to receivable, receivable to cash.
Gathman & Dug wall: -
Working Capital as excess of current assets over current liabilities.
Westen & Brigham: -
Working capital refers to a term investment in short term assets cash, short term
securities accounts receivables and inventories.
J. Smith: -
The Sum of the current assets is the working capital of the business.
WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.
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Working capital cycle: -
Introduction
The working capital cycle can be defined as:
The period of time, which elapses between the point at which, cash begins to be
expended on the production of a product and the collection of cash from a customer
The diagram below illustrates the working capital cycle for a manufacturing firm
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The upper portion of the diagram above shows in a simplified form the chain of
events in a manufacturing firm. Each of the boxes in the upper part of the diagram can be
seen as a tank through which funds flow. These tanks, which are concerned with day-to-
day activities, have funds constantly flowing into and out of them.
The chain starts with the firm buying raw materials on credit.
In due course this stock will be used in production, work will be carried out on the
stock, and it will become part of the firms work in progress (WIP)
Work will continue on the WIP until it eventually emerges as the finished product
As production progresses, labor costs and overheads will need to be met
Of course at some stage trade creditors will need to be paid
When the finished goods are sold on credit, debtors are increased
They will eventually pay, so that cash will be injected into the firm
Each of the areas stocks (raw materials, work in progress and finished goods), trade
debtors, cash (positive or negative) and trade creditors can be viewed as tanks into and
from which funds flow.
Working capital is clearly not the only aspect of a business that affects the amount
of cash:
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The business will have to make payments to government for taxation
Fixed assets will be purchased and sold
Lessors of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form of cash
Some shares may be redeemed for cash
Dividends may be paid
Long-term loan creditors (existing or new) may provide loan finance, loans
will need to be repaid from time to time, and
Interest obligations will have to be met by the business.
Unlike movements in the working capital items, most of these non-working
capital cash transactions are not everyday events. Some of them are annual events (e.g.
tax payments, lease payments, dividends, interest and, possibly, fixed asset purchases and
sales). Others (e.g. new equity and loan finance and redemption of old equity and loan
finance) would typically be rarer events.
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COMPONENTS OF WORKING CAPITAL
There are two components of Working Capital
A. Current Assets
B. Current Liabilities
A. Current Assets
An asset is termed as current assets when it is acquired either for the purpose of
selling or disposing of after taking some required benefit through the process of
manufacturing of which constantly changes in form and contributes to transactions take
place with the operation of the business although such assets does continue for long in the
same form.
Components of Current Assets are as follows:
Cash & Bank Balance
Stock of Raw Material at cost- work in process and Finished Goods.
Advanced Recoverable in Cash or kind or kind or for value to be received.
Security deposits with electricity board-telephone department balances with
customers.
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Deposits under the company scheme.
Prepaid Expenses.
Miscellaneous Stores implements goods in transit.
Advanced payment of income takes credit certificates.
Excise duty and sales tax recoverable.
Outstanding debts for a period exceeding six months.
CO-RELATION BETWEEN CURRENT ASSETS AND WORKING CAPITAL
The working capital is in simple terms is the amount of funds which company
must have to finance its day-to-day operations. The interaction between current assets
and current liability is main theme of theory of working capital. In general terms working
capital means difference between current assets and current liabilities.
The current assets are main source of working capital. It refers to those assets,
which can be converted into cash within a year. The current assets are inventories, cash
and bank balance, sundry debtors, loans and advances etc
Current asset management is one the most important aspect of the overall
financial management. The efficient management of working capital can determine its
profitability skill of every financial manager lies in the efficient management requires
maintaining proper relationship between current asset and current liability. Therefore,
planning and control of current asset is he most important function of finance manager.
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A study of working of working capital is major part of external and internal
analysis. Because, of its close relationship with current day-to-day operations of business.
Working capital consists broadly the assets of business that are used at current operations
which was represented by raw materials, stores, WIP, and finished goods, merchandise,
bills receivable. Etc.
Characteristics of Current Assets
While managing the working capital bear in mind of two characteristics of
Current assets.
1. Short life span.
2. Swift transformation into other assets forms.
Current assets a life span, cash balance may be held idle for a week or two
accounts receivable may have life span of 32 to 60 days and inventories may be need for
2 to 60 days. It s depends upon time require in the activities of procurement of,
production, sales and collection, and the degree of synchronization among them.
Each Current Assets swiftly transform into other asset cash is used for requiring
raw materials: raw material are transform in to finished goods, finished goods are
generally sold on credit are convertible into account receivable and finally accounts
receivable on realization, generate cash.
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The short life span of working capital component and they swift transformation
from one from to another has certain implication.
CURRENT ASSETS CYCLE
1. Decisions relating to working capital management are repetitive and frequent.
2. The difference between profit and present value is insignificant.
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Finished Goods
A\C Receivable WIP
Raw Materials
SuppliersCash
Wages / Factory
overhead
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3. The close interaction among working capital components implies that efficient
management one component cannot undertake without simultaneous consideration of
other components.
Working capital means assets of the company that are changed in the ordinary
capital of business term to another. For ex, from another as for as from cash to
inventories, inventories to debtors and again debtors in to cash where it is collected.
Working capital refers to a term investment in short term assets cash; short-term
securities account receivable and inventories. Current asset management that affects a
firm liquidity is at another important finance function. In addition to the management of
long-term assets, Current assets should be managed efficiently for safe guarding the firm
against the dangerous of liquidity and insolvency. Investment in Current Assets affects
the firm profitability, liquidity and risk.
Current Liabilities:
Components of Current Liabilities are as follows:
Non-Refundable non-interest bearing advances against subscription to shares.
Sundry Creditors for the goods and expenses.
Income tax deducted at sources from contractors.
Expenses Payable.
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Amount due to promoter of company.
Unclaimed Dividend.
Security Deposits.
Dealers Deposits.
Liabilities for bills discounted.
IMPORTANCE OF WORKING CAPITAL: -
Working Capital is most important in every organization whether it is a small or
big concern. Therefore it is said that, working capital is the blood and center at a
business.
1. Adequately Working Capital creates certainty, security and confidence in the
minds of the person in the might as well in the minds of creditors and workers.
2. It creates a good credit standing for the firm because credit standing depends upon
the ability to pay promptly. A company with adequate working capital is always
able to meet C.L. in time.
3. It ensure solvency and stability of the enterprise it also ensures continuity in
production and sales.
4. It enables the company to take advantage of cash discount allowed by the
suppliers of raw materials or merchandise.
5. It enables the prestige of the company and the morale of its workers because a
company with adequately working capital is always able to pay wages and
salaries promptly and regularly.
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6. It enables the company to procure loans terms banks on easy and competitive
terms.
7. In terms of boon it enables the company to meet increasing demand of its product.
8. In the time of depression, it enables the company to overcome the crises
successfully.
9. It enables the company to hold up inventory and wait for better marketing
opportunities so as to secure higher prices.
10. It enable the company on its business successfully and achieve progress and
prosperity,
METHODS OF ESTIMATING WORKING CAPITAL: -
Conventional Method: -
According to the conventional method, cash inflows and outflows are matched
with each other. Greater emphasis is laid on liquidity and greater importance is attached
to current ratio, liquidity ratio, etc., which pertain to the liquidity of a business.
Operating cycle method:
In order to understand what gives rise to differences in the amount of timing of
cash flows, we should first know the length of time which is required to convert cash into
resources, resources into final product, the final product into receivables and receivables
back into cash.
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CLASSIFICATION OF WORKING CAPITAL
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conservative. It the firm is aggressive then it will finance a part of its permanent current
assets with short-term funds. On the other hand, a conservative firm will finance its
permanent assets and also a part of temporary current assets with long-term financing.
(b) Gross Working Capital
This refers to the firms investment in current assets. Current Assets are the assets
which can be converted into cash within a short period say, an accounting year. Current
assets include cash, debtors, and bill receivable, short-term securities. etc.
A. On the basis of Time
a. Permanent Working Capital
Permanent Working Capital is permanently locked up in the circulation of current
assets. It covers the minimum amount requested for maintaining the circulation of current
assets.
i. Initial Working Capital
At its inception and during the formative period of its operations a company must
have enough cash fund to meet its obligations. The need for initial working capital is for
every company to consolidate its position.
ii. Regular Working Capital
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It refers to the minimum amount of liquid capital required to keep up the
circulation of the capital from the cash inventories to account receivable and from
account receivables to back again cash. It consists of adequate cash balance on hand and
at bank, adequate stock of raw materials and finished goods and amount of receivables.
b. Variable Working Capital
It refers to the past of the Working Capital that changes with the volume of
business; it may be divided into two classes.
i. Seasonal Working Capital
There is many line of business where the volumes of operations are different and
hence the amount of working capital varies with seasons. The capital required to meet
the seasonal needs of the enterprise knows as Seasonal Working Capital.
ii. Special Working Capital
The capital required to meet any special operations such as experiments with new
products or new techniques of production and making interior advertising campaign etc,
is also know as Special Working Capital.
B. Other Determinants of Working Capital
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In order to manage the Working Capital optimally; on has to give due
consideration to the factors that influence the amount of Working Capital to be
maintained.
SOURCES OF WORKING CAPITAL: -
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SHORT TERM SOURCES OF WORKING CAPITAL: -
Duration for this generally do not exceeds one year. Its sources are
INTERNAL SHORT TERM SOURCES
1. Depreciation Funds: Depreciation Funds created out of the profit is good source for
short-term source of financing working capital.
2. Provision for Taxation: Provision made for the companies, can use taxation as a
source of working capital during the intermediate period.
3. Accrued Expenses: The company executives postpone the payment of certain
expenditures due the date of finalization of account. These accrued expenses are useful as
working capital
EXTERNAL SHORT TERM SOURCES.
1. Trade Credit: Trade Credits extended by one business unit to the other on the
purchase sale of goods and equipments are very important.
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2. Bank Credit: - Commercial banks are providing a greater part of working capital in
the form of over drafts cash credit and short-term loans.
3. Credit Papers: - Bills Payable, promissory notes etc are usefully for working capital
requirements.
4. Customer Credit: Amount may also be obtained from customer and these amounts
can be used for purchasing raw materials, paying expenses etc.
5. Financial Corporation: The financial corporation likes IDBI, IFCI, ICICI, etc,
advances loans for various types of assistance.
6. Government Assistance: State and Central Government, of the country provide
short-term finance industries on easy terms.
7. Loan from Directors: - One enterprise can also obtain loan from its directors,
officers, M.D. etc
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EFFICIENT UTILIZATION OF WORKING CAPITAL MANAGEMENT
Well working capital management refers to the administration of all aspects of the
current assets and liabilities. It is necessary to get maximum benefit.
There is a direct relation between sale and working capital needs. As sale grows
the firm needs capital to invest in inventories and book debts.
A) Cash Management: -
Cash is required to meet the firms transactions and precautionary needs. The firm
needs cash to make payments for acquisition of resources and services, for the normal
consist of the business. It keeps addition funds to meet any emergency situation.
Cash Management involves three things.
Managing cash flow in and out of the firm.
Managing cash flow within the firm.
Financing deficit or investing surplus cash. And thus controlling of cash balance at
the point of time.
B) Inventory Management: -
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Inventories play very significant role in working capital. It is single most sizable
investment in working material, indigenous raw material, spares, stock, tools, the
maintenance, and goods in progress, stock of packing materials, stationary etc. To
manage inventories efficiently and effectively answer should be sought from the
following questions.
How much should be ordered?
When should be ordered?
The aim of inventory management thus should be to avoid excessive and
inadequate levels of inventories and to maintain sufficient inventories for the smooth
production and sales operation.
C) Management of Receivables: -
Business firm generally sell goods on credit to facilitate sales. When goods are
sold on credit finished goods are converted into receivable. Receivable when realized
generate cash for forecasting standard ratio of accounts receivables based on analysis of
part data of two years. Recessions analysis and making may be appeared.
D) Operating Cycle: -
Operating Cycle refers to length of time required to complete the series of events
as stated below in case of manufacturing enterprise, which is cyclical in nature.
For a manufacturing firm, cash is spent on acquiring raw materials, which are
transformed in to work in progress. The work in progress is then converted in to finished
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goods. Finished goods take the form sales, which may be credit or cash. Credit sales
convert in to sundry debtors, bills receivables, which after some time, gets converted in to
cash. This cycle repeats.
OPERATING CYCLE OF MANUFACTURING COMPANY
Cash
Debtors / BR Raw Materials
Sales of goods Work in Progress
Finished Goods
IMPORTANCE OF OPERATING CYCLE
Operating cycle concept is a new concept in working capital management, which
has been gaining more and more importance in recent years. This concept emphasizes the
importance of time factors in the conversion of raw materials into final product and then
in to sales resulting in cash collection, right from the acquisition of raw materials,
normally operating cycle passes through the following stages.
1. Acquisition of raw materials.
2. Work in Progress.
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Another factors which have a bearing on the quantum of working capital is the
production cycle. The term Production or manufacturing cycle refer to the time
involved in the manufacture of goods. It covers the time-span between the procurement
of finished goods. Funds have to be necessarily tied up during the process of
manufacture, necessitating enhanced working capital. In other words, there is some time
gap before raw material becomes finished goods. To sustain such activities the need for
working capital is obvious. The longer the time span (i.e. Production Cycle), the larger
will be the tied up fund and, therefore, the larger is the working capital needed and vice-
versa.
3. Business Cycle
The working capital requirements are also determined by the nature of business
cycle. Business fluctuations lead to cyclical and seasonal changes, which, in turn, cause a
shift in the working capital position, particularly for temporary working capital
requirement. The variations in business condition may be in two directions,
1. Upward Phase: - When boom conditions prevail,
2. Downswing Phase: - When economic activity is marked by a decline.
During the upswing of business activity, the need for working capital is likely to
grow to cover the lag between increased sales and receipt of cash as well as to finance
purchase of additional material to cater to the expansion of the level of activity.
4. Production Policy
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managerial discretion in working out a suitable credit policy relevant to each customer
based on the merits of each case. For instance, liberal credit facilities can be extended on
the basis of credit rating. This will avoid the problem of having excess working capital.
6. Growths and Expansion
As a company grows, it is logical to expect that a larger amount of working
capital is required. It is, of course, difficult to determine precisely the relationship
between the growth in the volume of business of a company and the increase in its
working capital. The composition of working capital in a growing company also shifts
with economic circumstance and corporate practices. Other things, being equal, growth
industries require more working capital than those that are static.
7. Profit Level
The level of profit earned differs from enterprise to enterprise. In general, the
nature of the product, hold on the market, quality of management and monopoly power
would by and large determine the profit earned by a firm. A priori, it can be generalized
that a firm dealing in a high quality product, having a good marketing arrangement and
enjoying monopoly power in the market, is likely to earn high profit and vice-versa.
Higher profit margin would improve the prospects of generating more internal funds
thereby contributing to the working capital pool.
8. Dividend Policy
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Techniques of Working Capital Management: -
Working Capital management involves deciding upon the amount and
composition of current asset and how to finance the asset. This decision involves trade
off between risk and profitability.
Working Capital Balances are measured from the financial dates of the
companys balance sheet. A study of the causes for changes of working capital that take
place in the balance from time to time is necessary. These changes can be measured in
rupee amount and also in percentage by comparing current assets, current liabilities and
working capital over the given period.
The importance tools of Working Capital are,
1. Ratio Analysis of Working Capital: -
1. Ratio analysis of working capital.
2. Turnover of working capital Ratio.
3. Current Ratio.
4. Current Debt tangible net worth.
5. Inventory Turnover Ratio.
6. Debtor Turnover Ratio.
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2. Funds Flow Analysis of Working Capital: -
It is an effective management tool to study how funds have been produced for a
business and how they have been employed. This technique helps to analyze change in
working capital components between two data. The comparison of current asset and
current liability at the beginning and at the end of specific period show changes in such
type of current assets and resources from which Working Capital has been obtained funds
flow statement contributes materially to the financial aspects.
3. Working Capital Budget: -
The working capital budget is an important phase of overall financing budgeting.
This budgeting should be distinguished from a cash budget that is designed to measure all
the financial repayment of loans, term loan and similar item. On the other hand working
capital repayment and assure that they are duly provided for. The objective of that budget
is to secure an effective utility of investment.
4. Trend Analysis: -
A trend analysis indicates the change, which has been taking place from time to
time of an individual item of current assets. Assets and utility and net working capital on
the basis of some standards year and its effect on working capital portion. It enables
creative the upward and down ward trend of current assets and current liabilities. These
are usage measured from review of comprehensive balance sheet of a concern at the end
of account year and result is drawn on the basis of trend shown by them.
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1. Finance Department.
2. Design Department.
3. Production Department.
Objective of the Study: -
The following are the some importance objective of the study of working capital
management.
1. To analyze the working capital of the organization.
2. To analyze the effect of current assets on working capital.
3. To study financial performance of organization with the help of ratios.
4. To study the working capital and recommend the suitable working capital of the
year to the organization.
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marketed very reasonable price, the company manufacturing Redial Piston Pumps, Relief
Valves, and Directional Control Valves. And SPICA MOUCLD CYLINDERS
PRIVATE LIMIED, established in Jan 06 for manufacture of Mould Cylinders to be
exported to Italy. This company is yet to commence its production.
OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED: -
From its inspection has been manufacturing OIL HYDRAULIC SYSTEMS &
HYDRAULIC ACTUATORS & has later added PISTION type accumulators to its range
of products.
1. COLLABORATION
The company entered into a joint venture collaboration agreement with the
OILGEAR COMPANY, OILGEAR TOWLER INTERNATIONAL DIVISION, USA in
Dec 1993.
THE OILGEAR COMPANY is a world famous for its Electro-Hydraulic and
Hydraulics products such as sophisticated pumps, valves and systems and especially
known in the technology of world for its contribution to the technology of Metal
Extrusion and Metal forming systems. The company also has its subsidiaries in Australia,
Canada, France, Germany, Great Britain, Italy, Japan, and Korea & Spain.
Participated in following Business Areas
Market Oilgear products in the Indian market. Include products like piston, pumps,
solenoid valves, prefil valves and cartridge valves.
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Market Hydraulic and Electro hydraulic and subsystems for presses and machines.
Install, commission, and service, Hydraulic and Electro hydraulic systems
manufacturing by the Oilgear Company in Asian and South East Asian countries.
Assemble, service, repairs and test Oilgear products.
Design, manufacturing, sell, Install, repair, and service Hydraulic and Electro
hydraulic systems and subsystems, cylinders and other equipment in Asian and South
East Asian countries.
2. THE CONSTITUTION OF THE COMPANY: -
Name
OILGEAR TOWLER POLYHYDRON PRIVATE
LIMITED (OTPL)
Constitution A private limited company registered under
companies act 1956
Location
Registered Office
Plot No 4, R.S. No- 608/2, BEMCIEL
UDYAMBAG BELGAUM, 590008
KARNATAKA STATE, INDIA.
Phone: - 0831-2441157; Fax: - 0831-2441610
Works Plot No 34 & 37B
Village Kuttalwadi
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4.1) LAND AND BUILDING
Land and the site of the registered office 11054 Sq.ft (1026 Sq.m.)
Building and the site of the registered office- 4830 Sq.ft (450 Sq.m.)
Land at site of plant 1- 2200 Sq.ft. (204 Sq.m.)
Building at site of plant 1- 1622 Sq.ft (51 Sq.m.)
Land site of the works 258,100 Sq.ft (23978 Sq.m.)
Building Site of the works 25,000 Sq. ft (2322 Sq.m.).
4.2) MACHINERY, HANDLING, EQUIPMENT AND TEST RIGS
4.3) OFFICE AND EQUIPMENT
Communication: -
Head Office: -
Phone lines 6 Nos.
Fax lines 1 No
E-mail 1 No
Electronic Exchange 10*30 Capacities.
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Laths 3 No s Painting Equipment 2 Sets
Horizontal Bore 3 No s Electro Static Cleaner 1 No s
CNC Machine Center 1 No s Cleaning Machine 2 No s
CNC Vertical Machine Center 1 No s Pallet Trucks 2 No s
Drilling Machine 3 No s Air Compressors 3 No s
Milling Machine 1 No s Prgauge Calibrator 1 No s
Surface Machine 2 No s Hardness Tester 1 No s
Honing Machine 1 No s Pumps Test Stands 3 No s
Hack Saws 2 No s Valve Test Stands 1 No s
TIG Welding Set 1 No s Generating Stands 3 No s
Flame Cutting Equipments 1 Set Over head Cranes 3 No s
Arc Welding Set 2 No s
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Works: -
Phone lines 6 Nos.
Fax line 1 No.
E-mail 1 No
Electronic Exchange 10*30 Capacities.
4.4) DATA PROCESSING
Computer ---- 24 Nos. For
Design Accountancy
Inventory Planning
Sales Purchase
Administration.
5) STAFF: -
Sales 7 Engineers + 4 Support
Purchase 2 Officers + 3 Support
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Methodology adopted and data collection: -
The nature of the study was collection analysis and interpretation of working
capital management in OTPL The information about this was gathered through
following sources.
Primary Data : -
Primary Data are those, which are collected fresh and for the first time, and thus it
happens to be original in character.
The primary sources of data are collected from the financial executives through
personal discussion in the light of the set objectives. Along with this, informal discussion
with other, member of the finance.
Secondary Data: -
Secondary Data are those have already been collected by someone else and while
already been passed through statistical process.
Annual Report of the Company.
Annual Accounts of the Company.
Ledger Profit and Loss Account.
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STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2003
OTPL
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Particulars 2002 2003 Increase Decrease
A) Current Assets
1. Inventories.
2. S. Debtors
3. Cash & Bank Balance
4. Other C. Assets.
5. Loans & Advances.
TOTAL
B) Current Liabilities
1. Current Liabilities
2. Provision
TOTAL
Working Capital
(A-B)
Net Increase in
Working Capital
GRAND TOTAL
1,43,29,584
1,47,19,225
96,70,212
5,04,462
23,58,269
4,15,81,752
88,76,844
56,67,201
1,45,44,045
2,70,37,707
23,11,839
2,93,49,456
1,82,87,763
1,62,67,703
99,24,482
6,83,065
18,000,63
4,69,69,076
1,27,30,292
47,89,238
1,76,19,530
2,93,49,456
2,93,49,456
39,58,179
15,48,478
2,54,270
1,78,603
---------
--------
8,77,963
68,17,493
68,17,493
---------
---------
---------
---------
5,52,206
39,53,448
------------
45,05,654
23,11,839
68,17,493
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INTERPRETATION
As we can see in the above year 2002-03, there is an increase in the working
capital by Rs. 23,11,839. This is because:
1. As we can see that there is a great increase in Current Assets as the company is
looking to invest more in the inventory of raw material in this year, because of the
shortage of raw material in the market, so overall there is increase in the current
assets. But in current assets loans and advance are decreased.
2. As we can see there is decrease of Rs.39,53,448 in the liabilities of the company,
which is good for the company. But Rs. 8,77,963 increases provisions.
3. So from all the above calculation we can see that there is good increase in the
working capital. So we can say that company is more likely to increase there
inventory because they thinking it for the long term perspective.
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STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004
OTPL PVT LTD (Rs. In Thousand)
Particulars 2003 2004 Increase Decrease
A) Current Assets
1. Inventories
2. S. Debtors
3. Cash & Bank Bal.
4. Other C. Assets
5. Loans & Advances
TOTAL
B) Current Liabilities
1. Current Liabilities
2. Provision
TOTAL
Working Capital
(A-B)
Net Increase in Working
Capital
GRAND TOTAL
18,288
16,298
9,924
6,83
1,806
46,969
12,830
4,789
17,619
29,350
16,543,
45,893
34,600
32,122
12,492
9,45
1,939
82,098
28,541
7,664
36,205
45,893
45,893
16,312
15,854
2,568
2,62
1,33
----------
----------
35,129
35,129
-------
-------
-------
-------
-------
15,711
2,875
18,586
16,543
35,129
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INTERPRETATION
In the above table it is seen that, there is an increased in the working capital by
Rs.16, 543 in the year 2003-04, this is because: -
1. As we can see in the above table that in the Current assets are increased, because of
increase in inventories, debtors, cash and bank balance, loans and advance and also
increase in other current assets.
2. As we can see there is overall decrease in current liabilities. Because of current
liabilities are decreased by Rs.15,711 and also provision are also decreased by Rs.
2,875.
3. So as the liabilities have decreased this year and there is increase in current assets, so
there is increase in working capital.
STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004
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OTPL PVT LTD (Rs. In Thousand)
Particulars 2004 2005 Increase Decrease
A) Current Assets
1. Inventories
2. S. Debtors
3. Cash & Bank Bal
4. Other C. Assets
5. Advance to Suppliers
6. Loans & Advances
TOTAL
B) Current Liabilities
1. Current Liabilities
2. Advance from customer
3. Provision
TOTAL
Working Capital (A-B)
Net Increase in Working Capital
GRAND TOTAL
34,600
32,122
12,492
9,45
-------
1,930
82,098
28,541
---------
7,664
36,205
45,896
6,874
52,767
28,042
47,790
10,084
6,056
1,215
1,771
94,958
26,531
9,082
6,778
42,191
52,767
52,767
--------
15,668
--------
5,111
1,215
--------
21,994
2,210
------
8,86
3,096
25,090
25,090
6,558
-------
2,408
-------
-------
1,59
9,125
--------
9,082
-------
9,082
18,207
6,883
25,090
INTERPRETATION
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Ratio Analysis is a widely used tool of financial analysis. It defined as the
systematic use of to interpret the financial statement so that the strength and weakness
of a firm well as its historical performance and current financial condition can be
determined. This relationship can be expressed
1. Percentage says net profits are 25 percent of sales.
2. Proportion of numbers (the relationship between net profit and sales is 1:4), these
alternative methods of expressing items which are related to each other are, for the
purpose of financial analysis, referred to as ration analysis.
Types of Ratios
Ratio can be classified into following categories,
1. Current Ratios.
2. Net Working Capital Ratios.
3. Total Assets Turnover Ratios.
4. Inventory Turnover Ratios.
5. Fixed Assets Turnover Ratios.
6. Creditors Turnover Ratios.
7. Creditors Collection Period.
8. Debtors Turnover Ratios.
9. Debtors Collection Period.
10. Gross Profit Margin Ratios.
MERITS AND DEMERITS OF THE RATIO: -
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Current Ratio
2
2.2
2.4
2.6
2.8
2002-2003 2003-2004 2004-2005
Years
Rat
ios
Current Ratio
Interpretation: -
As a conventional rule, a current ratio of 2:1 or more considered satisfactory. The
OTPL Company, has current ratio is 2.66:1; therefore, it may be interpretated to be
satisfactory company. The current ratio represents a margin of safety for creditors. The
higher the current ratio, the greater the margin of safety, so, there has been increased in
the ratio during 2002-2003, when compared with 2003-2004 and 2004-2005. So, larger
the amount of current assets in relation to current liabilities, the more the firms ability to
meet its current obligation. Firm with less than 2:1, current ratio may be doing well,
while firm with 2:1 or even higher current ratio may be struggling to meet their
obligations. This is so because, if Rs.2 is your Current Assets and Rs.1 is Your Current
Liabilities. Thus Current Ratio shown is 2:1, which is an Ideal Ratio.
2. Quick Ratio
It establishes a relationship between quick or liquid, assets and current liabilities.
An asset is liquid if it can be converted in to cash immediately or reasonably soon
without a loss of value. Cash is most liquid assets. Other assets, which are considered to
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be relatively liquid and included in the quick assets, are debtors, and bills receivable and
marketable securities. Inventories are considered to be less liquid, inventories normally
requires some time for realizing in to cash; their value also has a tendency to fluctuate.
Formula
Quick Ratio = Current Assets Inventories
Current Liabilities
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Particulars 2002-2003 2003-2004 2004-2005
Current Assets 4,69,69,000 8,20,98,000 9,49,58,000
(-) Inventory 1,82,88,000 3,46,00,000 2,80,42,000
Total 2,86,81,000 4,74,98,000 6,69,16,000
(/) Current Liabilities 1,76,19,000 3,62,05,000 4,21,91,000
Quick Ratio 1.62 1.31 1.58
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Quick Ratio
0
0.5
11.5
2
2002-2003 2003-2004 2004-2005
Years
Ratios
Quick Ratio
Interpretation: -
Generally a quick ratio is 1:1 is considered to represent a satisfactory current
financial condition. In the year 2002-03 quick ratio was 1.62 and there has been
decreased in the year compared to 2003-04 and 2004-05.
The high ratio indicates that all debtors may not be quick and cash may be
immediately needed to pay operating expenses. It should be noted that inventories are not
absolutely non-liquid to a measurable extent inventories are available to meet current
obligations. So the company can suffer from shortage of funds. On the other hand, a
company with low ratio in the year 2003-04 and 204-05, indicates that quick ratio may
really be prospering and paying its current obligation in time if it has been turning over
its inventories efficiently.
3. Total Assets Turnover Ratio: -
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The Total assets turnover ratio in addition to, or instead the net current assets,
This ratio shows the firms ability in generating sale from all the financial resource
committed to total assets
Formula,
Total Assets Turnover Ratio = Net Sales
Total Assets
Particulars 2002-2003 2003-2004 2004-2005Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Total Assets 2,69,95,000 2,57,87,000 2,52,21,000
Total Assets Turnover Ratio 2.12 4.21 4.24
Total Assets Turnover Ratio
0
1
2
3
4
5
2002-2003 2003-2004 2004-2005
Years
Ratios
Total Assets
Turnover Ratio
Interpretation: -
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There has been increased in the year 2004-05, when compared to 2002-2003 and
2003-2004. And high ratio indicates that in the year 2004-05, that ratio shows the firms
ability in generating sales from all financial resources.
4. Inventory Turnover Ratio: -
It indicate the efficiently of the firm in producing the selling its product. The ratio
indicates how fast inventory is sold. A high ratio is good from viewpoint of liquidity and
vice versa. A low ratio would signify that inventory does not sell and stay on the shelf or
in warehouse for a long time.
Inventory Turnover Ratio = Net Sales
Inventory
Interpretation: -
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Particulars 2002-2003 2003-2004 2004-2005Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Inventory 1,82,88,000 3,46,00,000 2,80,42,000
Inventory Turnover Ratio 3.13 3.14 3.81
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There has been increased in the ratio in the year 2004 2005, when compared
with 2002-2003 and 2003-2004. In the year 2004-2005, indicates high ratio, it means,
Inventory turnover ratio implies good inventory management and very high ratio calls for
a careful analysis. It may indicate under investment in inventory. While a Low ratio
indicate in the year 2002-2003, that, it may be result in use of inferior quality of goods
and over investment in sales in the 2003-2004.
4. Fixed Assets Turnover Ratio: -
Fixed Assets Turnover Ratio measures Sales per rupees investment in Fixed
Assets. It measures the efficiency of fixed assets employed in the organization. High
degree of ratio indicates high efficiency of assets utilization vice-versa.
Fixed Assets Turnover Ratio = Net Sales
Fixed Assets
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Particulars 2002-2003 2003-2004 2004-2005
Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Fixed Assets 3,69,41,000 3,72,38,000 3,83,06,000
Fixed Assets Turnover Ratio 1.55 2.91 2.79
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Fixed Assets Turnover Ratio
0
1
2
3
4
2002-2003 2003-2004 2004-2005
Years
Ratios
Fixed Assets
Turnover Ratio
Interpretation: -
There has been increased in the ratio during 2002-2003 and 2004-2005, when
compared with 2003-2004. A low ratio in the year 2002-2003 indicates in efficiency use
of assets, and the next two years (2003-2004 and 2004-2005) shows high ratio, which
means that increasing efficiency of fixed assets employed in the organization. One of the
cautions to be kept in the mind is when fixed assets are old and substantially depreciated
the ratio tenders to be high, because, the denominator of the ratio will be low.
5. Creditors Turnover Ratio: -
It is the ratio between the Sales and Creditors or Net Credit Purchase and average
amount of creditors. It is an important tool of analysis as a firm can maintain minimum
amount of Current Assets, as credit from suppliers is easily available.
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Creditor Turnover Ratio = Net Sales
Creditors
Creditors Turnover Ratio
3
3.5
4
4.5
5
2002-2003 2003-2004 2004-2005
Years
Ratios
Creditors Turnover Ratio
Interpretation: -
In the year 2002-2003, there was been increased when compared to 203-2004 and
2004-2005. In the year 2002-2003 indicate high ratio means the sales of the year very
low as compared to 2003-2004 and 2004-2005 and also creditors are low as compared to
2003-2004 and 2004-2005.
6. Creditors Collection Period: -
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Particulars 2002-2003 2003-2004 2004-2005
Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Creditors 1,28,30,000 2,85,41,000 2,63,31,000
Creditors Turnover Ratio 4.47 3.80 4.06
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This ratio is the difference between Days and Creditors turnover ratios.
Formula,
Creditors Collection Period = Days
Creditors Turnover Ratio
Creditors Collection Period
0
50
100
150
2002-2003 2003-2004 2004-2005
Years
Ratios
Creditors Collection
Period
Interpretation: -
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Particulars 2002-2003 2003-2004 2004-2005
Days 365 365 365
Creditors Turnover Ratio 4.47 3.80 4.06
Creditors Collection Period 81.65 96.05 89.90
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In the year 2002-2003, there was increase when compared to 2003-2004 and
2004-2005. The high ratio of 2002-2003 indicates that the sales of the year is very low as
compared to 2003-2004 and 2004-2005, and also creditors are low as compared to as
compared to 2003-2004 and 2004-2005. While low ratio in the year 2003-2004 indicates
that creditors are high as compared to other year.
7. Debtors Turnover Ratio: -
It indicate the how many times debtors turnover each year. Generally, the higher
the ratio of debtors turnover, the more efficient is the management of credit. The ratio
measured how will reveal the days of debts to be colleted.
Debtors Turnover Ratio= Net Sales
Debtors
Particulars 2002-2003 2003-2004 2004-2005
Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Debtors 1,62,68,000 3,21,22,000 4,77,90,000
Debtors Turnover Ratio 3.52 3.38 2.23
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Debtors Turnover Ratio
0
1
2
3
4
2002-2003 2003-2004 2004-2005
Years
Rat
ios
Debtors Turnover
Ratio
Interpretations: -
There has been increased debtor in the year 2002-2003 as compared to 2003-204
and 2004-2005, high ratio indicates of shorter time gap between credit sales and cash
collation. A low ratio shows that debts are not being colleted rapidly. So, the standard
norms this high ratio reveals that company has quite efficient management of debtors. In
the year 2000 & 2003 are showing equal turnover ratio.
8. Debtors Payment Period: -
The debtors payment period is mainly related to how many days debtors have
taken to complete a period and how much is debtors turnover ratio.
Debtors Payment Period = Days
Debtors Turnover Ratio
Particulars 2002-2003 2003-2004 2004-2005
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Days 365 365 365
Debtors Turnover Ratio 3.52 3.38 2.23
Debtors Collection Period 103.69 107.98 163.67
Debtors Collection Period
0
50
100
150
200
2002-
2003
2003-
2004
2004-
2005
Years
Ratios
Debtors Collection
Period
Interpretation: -
The shorter the collection period is better quality of debtors. Since, a short
collection period implies that prompt payment by debtors. In collection period having
some increase and decrease. So, we can find out that there is no uniformity in the debtors
collection period of the year.
8. Gross Profit Margin Ratio: -
Gross Profit Margin Ratio is the result of relationship between price, sales,
volume and cost. A change in gross profit margin can be due to changes in any of these
factors. It represents the limit of beyond which fall in sales price are outside and tolerance
limit.
Gross Profit Margin Ratio = Gross Profit
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Net Sales
Particulars 2002-2003 2003-2004 2004-2005
Gross Profit 7,26,000 1,42,88,000 1,86,54,000
Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Gross Profit Margin Ratio 1.26 13.14 17.43
Gross Profit Margin Ratio
0
5
10
15
20
2002-2003 2003-2004 2004-2005
Years
Ratios
Gross Profit Margin
Ratio
Interpretation: -
There has been increased in the year 2004-2005 as compared to 2002-2003 and
2003-2004. The high ratio indicates that the company should earn a sufficient profit on
each rupee of sales. While low ratio indicate that in the year 2002-2003 that the company
will be meeting the operations expenses and no returns will be available to the owners.
And also high ratio indicate that a good management indicate that cost of production of
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the firm is relatively low, it may also indicate higher the sales price without a
corresponding increase in the cost of the goods.
CONSOLIDATED STATEMENT OF THE RATIOS FOR THREE YEARS
0
50
100
150
200250
300
Ratios
2002-
2003
2003-
2004
2004-
2005
Years
Consolidated Statement of RatiosGross Profit
Margin Ratio
Debtors
Collection
PeriodDebtorsTurnover Ratio
Creditors
Collection
PeriodCreditors
Turnover Ratio
Fixed Assets
FINDING AND SUGGESTIONS
Findings: -
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Sl. No Particulars 2002-2003 2003-2004 2004-2005
1. Current Ratio 2.66 2.26 2.25
2. Quick Ratio 1.62 1.31 1.58
3. Total Assets Turnover Ratio 2.12 4.21 4.24
4. Inventory Turnover Ratio 3.13 3.14 3.81
5. Fixed Assets Turnover Ratio 1.55 2.91 2.79
6. Creditors Turnover Ratio 4.47 3.80 4.06
7. Creditors Collection Period 81.65 96.05 89.90
8. Debtors Turnover Ratio 3.52 3.38 2.23
9. Debtors Collection Period 103.69 107.98 163.67
10. Gross Profit Margin Ratio 1.265 13.14 17.43
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1. Current Ratio of OTPL Company shows the solvency of the firm ability to repay its
liabilities. As ratio is decline to 2.66. It shows that company is in solvency state.
Current assets are should always be twice of current liabilities.
2. In a comparative statement of Balance Sheet, debtors were 1,47,19,000 in the year
2002-2003, and it has increased to 3,21,22,000 and 4,77,90,000 in the last two years.
Because increased in credit sales.
3. Total assets turnover ratio shows the ability to convert all its assets incurring fixed
assets to sales. As per the ratio calculated in the year 2002-2003 it was 2.12, which
was low ratio means firm is able to convert its total assets quickly into funds as per
the company ratio the firm is able to convert it assets because the ratio are higher
between 4.24 to 2.12, which was low ratio.
4. Inventory Turnover Ratio is increased from 3.13 to 3.81 in the year 2002-2003 and
2004-2005 respectively. It shows company has maintained good inventory policy.
5. Gross profit margin ratio shows that increasing year to year. It shows that company
should earn a sufficient profit on each rupee of cash.
Suggestions: -
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Impact of Current Assets on Working Capital. AT
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The working capital including all its related aspects is managed quite well by
OTPL. The finance department is carrying out its responsibilities efficiently. The entire
departments are collectively working hard for the progress of OTPL.
The following are the suggestions.
1. In a comparative Balance Sheet Debtors are increased from year to year (1,47,19,000
to 4,77,90,00). Even though debtors are increased which is favorable enough for the
company. But should take care while dealing against the loss due to doubtful and bad
debt.
2. The company net sale is very low in the year 2002-2003 Rs 5,73,73,000, as compared
to 2003-2004 Rs. 10,86,60,000. So, the company should manage its current assets,
which effects on production and ultimately on sales.
3. The Current Ratio of the company is decreased from 2.66 to 2.55 in the last three-
year (2003 to 2005). So, the current ratio should be maintained by the company in
such a way that the ratio does not follow below 2:1.
4. Company should give minimum payment time to get prompt payment by debtors.
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Conclusion
Working capital may be regarded as lifeblood of a business. Its effective
provision can do much to ensure the success of a business, while its inefficient
management can lead not only to loss of profits but also to the ultimate down fall of what
otherwise might be considered as a promising concern. A study of working capital is of
major importance to internal and external analysis because of its close relationship with
the current day to day operations of a business.
1. Here, I conclude that Changes in the financial year is showing increase in the working
capital, because company maintains its working capital properly in the year 2003 to
2005.
2. According to my calculation Current Assets main part of, the working capital of the
business. According to all Ratios, It shows that company maintains its ratio is very
well. So, In the year 2004-2005 company showing better position in the working
capital.
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BIBLOGRAPHY
Financial Management by books used from which I have taken help for the theory
part of the study:
M.V. Khan & P.K. Jain
I.M. Pandey
I have also used the trial balance of Oilgear Towler Polyhydron Private Limited
(OTPL). Those are from the year 2003-2005. Which provide by the official at
Belgaum Works.
I have meet with the different people at the Administrative Department at Oilgear
Towler Polyhydron Private Limited (OTPL). As also took their views and
information for my Study.
I have also took the help form the company site www.oilgear.co.in
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