WORKING CAPITAL MANAGEMENTINTRODUCTIONWorking capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital equals to current assets. Working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.Working capital is the difference between the current assets and the current liabilities. It is the amount invested by the promoters on the current assets of the organisation.The basic calculation of the working capital is done on the basis of the gross current assets of the firm.working capital = current assets - current liabilitiesWorking capital managementDecisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.Decision criteriaBy definition, working capital management entails short-term decisionsgenerally, relating to the next one-year periodwhich are "reversible". These decisions are therefore not taken on the same basis as capital-investment decisions (NPV or related, as above); rather, they will be based on cash flows, or profitability, or both. One measure of cash flow is provided by the cash conversion cyclethe net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. In this context, the most useful measure of profitability is return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See economic value added (EVA). Credit policy of the firm: Another factor affecting working capital management is credit policy of the firm. It includes buying of raw material and selling of finished goods either in cash or on credit. This affects the cash conversion cycle.Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. The policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable. Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materialsand minimizes reordering costsand hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid over productionsee Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic quantity Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances. Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

WORKING CAPITAL - Meaning of Working CapitalCapital required for a business can be classified under two main categories via,1) Fixed Capital2) Working CapitalEvery business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as p&m, land, building, furniture, etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the purchase of raw material, payment of wages and other day to- day expenses etc.These funds are known as working capital. In simple words, working capital refers to that part of the firms capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.CONCEPT OF WORKING CAPITALThere are two concepts of working capital:1. Gross working capital2. Net working capitalThe gross working capital is the capital invested in the total current assets of the enterprises current assets are thoseAssets which can convert in to cash within a short period normally one accounting year.CONSTITUENTS OF CURRENT ASSETS1) Cash in hand and cash at bank2) Bills receivables3) Sundry debtors4) Short term loans and advances.5) Inventories of stock as:a. Raw materialb. Work in processc. Stores and sparesd. Finished goods6. Temporary investment of surplus funds.7. Prepaid expenses8. 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 LIABILITIES1. 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:5. It is qualitative concept, which indicates the firms ability to meet to its operating expenses and short-term liabilities.6. IT indicates the margin of protection available to the short term creditors.7. It is an indicator of the financial soundness of enterprises.8. It suggests the need of financing a part of working capital requirement out of the permanent sources of funds.

CLASSIFICATION OF WORKING CAPITALWorking 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 capitalPERMANENT OR FIXED WORKING CAPITALPermanent 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 CAPITALTemporary 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 CAPITALi. SOLVENCY OF THE BUSINESS: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production.ii. Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill.iii. Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favorable terms.iv. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost.v. Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw material and continuous production.vi. 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.vii. Exploitation Of Favorable MarketConditions: 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.viii. Ability To Face Crises: A concern can face the situation during the depression.ix. 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.x. 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 CAPITALEvery 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 CAPITAL1. 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 transactionsDISADVANTAGES OF INADEQUATE WORKING CAPITALEvery 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 REQUIREMENTS1. NATURE OF BUSINESS: The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they 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.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 CAPITALManagement 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 as1. 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 ANALYSISAs 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 ANALYSISA 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 ratio3. Absolute liquid ratio4. Inventory turnover.5. Receivables turnover.6. Payable turnover ratio.7. Working capital turnover ratio.8. Working capital leverage9. Ratio of current liabilities to tangible net worth.2. FUND FLOW ANALYSISFund 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 capitalb) 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 BUDGETA 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 LIQUIDITYThe 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 RATIOSLiquidity 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 RATIO2. QUICK RATIO3. ABSOLUTE LIQUID RATIO1. CURRENT RATIOCurrent 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 LIABILITESThe two components of this ratio are:1) CURRENT ASSETS2) CURRENT LIABILITESCurrent 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 RATIOe.g (Rupees in crore).Year201120122013

Current Assets81.2983.1213,6.57

Current Liabilities27.4220.5833.48

Current Ratio2.96:14.03:14.08:1

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 2011 to 2013. The current ratio of company is more than the ideal ratio. This depicts that companys liquidity position is sound. Its current assets are more than its current liabilities.2. QUICK RATIOQuick 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 LIABILITESWhere Quick Assets are:1) Marketable Securities2) 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 RATIOe.g. (Rupees in Crore)Year201120122013

Quick Assets44.1447.4361.55

Current Liabilities27.4220.5833.48

Quick Ratio1.6 : 12.3 : 11.8 : 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. Companys quick ratio is more than ideal ratio. This shows company has no liquidity problem.3. absolute liquid ratioAlthough 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 LIABILITESAbsolute liquid assets = cash & bank balances.e.g. (Rupees in Crore)Year201120122013

Absolute Liquid Assets4.691.795.06

Current Liabilities27.4220.5833.48

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 ratiosFunds 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 Ratio2. Debtors Turnover Ratio3. Creditors Turnover Ratio4. Working Capital Turnover RatioThe 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 inventoryInventory 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)Year201120122013

Cost of Goods sold110.6103.296.8

Average Stock73.5936.4255.35

Inventory Turnover Ratio1.5 times2.8 times1.75 times

Interpretation : These ratio shows how rapidly the inventory is turning into receivable through sales. In 2012 the company has high inventory turnover ratio but in 2013 it has reduced to 1.75 times. This shows that the companys inventory management technique is less efficient as compare to last year.2. Inventory conversion period:Inventory conversion period = 365 (net working days) inventory turnover ratioe.g.Year201120122013

Days365365365

Inventory Turnover Ratio1.52.81.8

Inventory Conversion Period243 days130 days202 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 Ratiob) Average Collection PeriodDebtors Turnover Ratio = Total Sales (Credit) Average DebtorsDebtors velocity indicates the number of times the debtors are turned over during a year. Generally higher the value of debtors 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 2e.g.Year201120122013

Sales166.0151.5169.5

Average Debtors17.3318.1922.50

Debtor Turnover Ratio9.6 times8.3 times7.5 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 RatioThe 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 RatioYear201120122013

Days365365365

Debtor Turnover Ratio9.68.37.5

Average Collection Period38 days44 days49 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 competitors 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 CapitalWorking Capital Turnover = Sales Networking Capitale.g.Year201120122013

Sales166.0151.5169.5

Networking Capital53.8762.52103.09

Working Capital Turnover3.082.41.64

Interpretation : This ratio indicates low much net working capital requires for sales. In 2013, 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)Year2010-20112011-20122012-2013

Inventories37.1535.6975.01

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 2010-2011 is 45%, in 2011-2012 is 43% and in 2012-2013 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)Year2010-20112011-20122012-2013

Cash Bank Balance4.691.795.05

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 2011 the cash is 4.69 crores but in 2012 it has decrease to 1.79. The result of that it disturb the firms manufacturing operations. In 2013, it is increased upto approx. 5.1% cash balance. So in 2013, the company has no problem for meeting its requirement as compare to 2012.debtors :(Rs. in Crores)Year2010-20112011-20122012-2013

Debtors17.3319.0525.94

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)Year2010-20112011-20122012-2013

Current Assets81.2983.15136.57

Interpretation : This graph shows that there is 64% increase in current assets in 2013. 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)Year2010-20112011-20122012-2013

Current Liability27.4220.5833.48

Interpretation : Current liabilities shows company short term debts pay to outsiders. In 2013 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)Year2010-20112011-20122012-2013

Net Working Capital53.8762.53103.09

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.

MEANING OF INVESTMENTIn simple terms, Investment refers to purchase of financial assets. While Investment Goods are those goods, which are used for further production.

Investment implies the production of new capital goods, plants and equipments. John Keynes refers investment as real investment and not financial investment.Investment is a conscious act of an individual or any entity that involves deployment of money (cash) in securities or assets issued by any financial institution with a view to obtain the target returns over a specified period of time.Target returns on an investment include:1. Increase in the value of the securities or asset, and/or2. Regular income must be available from the securities or asset.

TYPES OF INVESTMENTDifferent types or kinds of investment are discussed in the following points.

AUTONOMOUS INVESTMENTInvestment which does not change with the changes in income level, is called as Autonomous or Government Investment.Autonomous Investment remains constant irrespective of income level. Which means even if the income is low, the autonomous, Investment remains the same. It refers to the investment made on houses, roads, public buildings and other parts of Infrastructure. The Government normally makes such a type of investment.

INDUCED INVESTMENTInvestment which changes with the changes in the income level, is called as Induced Investment. Induced Investment is positively related to the income level. That is, at high levels of income entrepreneurs are induced to invest more and vice-versa. At a high level of income, Consumption expenditure increases this leads to an increase in investment of capital goods, in order to produce more consumer goods.FINANCIAL INVESTMENTInvestment made in buying financial instruments such as new shares, bonds, securities, etc. is considered as a Financial Investment.However, the money used for purchasing existing financial instruments such as old bonds, old shares, etc., cannot be considered as financial investment. It is a mere transfer of a financial asset from one individual to another. In financial investment, money invested for buying of new shares and bonds as well as debentures have a positive impact on employment level, production and economic growth.REAL INVESTMENTInvestment made in new plant and equipment, construction of public utilities like schools, roads and railways, etc., is considered as Real Investment.Real investment in new machine tools, plant and equipments purchased, factory buildings, etc. increases employment, production and economic growth of the nation. Thus real investment has a direct impact on employment generation, economic growth, etc.PLANNED INVESTMENTInvestment made with a plan in several sectors of the economy with specific objectives is called as Planned or Intended Investment. Planned Investment can also be called as Intended Investment because an investor while making investment make a concrete plan of his investment.

UNPLANNED INVESTMENTInvestment done without any planning is called as an Unplanned or Unintended Investment. In unplanned type of investment, investors make investment randomly without making any concrete plans. Hence it can also be called as Unintended Investment. Under this type of investment, the investor may not consider the specific objectives while making an investment decision.GROSS INVESTMENTGross Investment means the total amount of money spent for creation of new capital assets like Plant and Machinery, Factory Building, etc.NET INVESTMENTNet Investment is Gross Investment less (minus) Capital Consumption (Depreciation) during a period of time, usually a year.It must be noted that a part of the investment is meant for depreciation of the capital asset or for replacing a worn-out capital asset. Hence it must be deducted to arrive at net investment.

Investment DecisionsInvestment decisions of a firm are generally known as the capital budgeting, or capital expenditure decision. It is defined as the firm decision to invest its current funds most efficiently in the long-term assets in anticipation of an expected flow of benefits over a series of years (the long-term assets are those that affects the firms operations beyond the one-year period) it includes expansion, acquisition, modernization and replacement ofthe long-term assets, sale of a division or business(divestment), change in the methods of sales distribution, an advertisement campaign, research and development programme and employee training, shares (tangible and intangible assets that create value). .According to Experts, investment decisions is decisions that influence a firms growth in the long-term, affect the risk of the firm, involve commitment of large amount of funds, are irreversible or reversible at substantial loss, and among the most difficult decisions to make. Horne, define investment decisions as the allocation of capital to investment proposal whose benefits are to be realized in the future and includes, new product or expansion of existing products, replacement ofequipment or buildings, research and development, exploration and others.

Objectives of Investment decision in Business:-The fundamental objectives of all business decisions is to maximize the return on stock holders equity, there are others factor shaping effective capital allocation strategies and tactics. Financial management, therefore, can be effective only if it is based on well formulated multiple goals and objectives, for a profit making organization, the primary objective may be to maximize the value of shareholders wealth, to maximize the total resources, or to maximize owner equity over the long run.

Importance Of Investment DecisionsInvestment decisions require special attention because of the following reasons:i. They influence the firms growth in the long run,ii. They affect the risk of the firm,iii. They involve commitment of large amount of funds,iv. They are irreversible, or reversible at substantial loss,v. They are among the most difficult decisions to make Growth: The effect of investment decisions extend into the future and have to be endured for a longer period than the consequences of the current operating expenditure. A firms decision to invest in long term asset has a decisive influence on the rate and direction of growth. A wrong decision can prove disastrous for the continued survival of the firm; unwanted or unprofitable expansion of asset will result in heavy operating costs to the firm. On the other hand, inadequate investment in asset would make it difficult for the firm to compete successfully and maintain its market share.

Risk: A long-term commitment of fund may also change the risk complexity of the firm. If the adoption of an investment increase average gain but causes frequent fluctuations in its earnings, the firm will become more risky. Thus, investment decisions shape the basic character of a firm.

Funding: Investment decisions generally involve large amount offunds, which make it imperative for the firm to plan its investment programmes very carefully and make advance arrangement for procuring finances internally and externally.Irreversible: Most investment decisions are irreversible. It is difficult to find a market for such capital items once they have been acquired. The firm will incur heavy losses if such assets are scrappedComplexity: Investment decisions are among the firms most difficult decisions. They are an assessment of future events, which are difficult to predict. It is really a complex problem to correctly estimate the future cash flows of an investment. Economic, political, social and technology forces cause the uncertainty in cash flow estimation.

Factors influencing investment decisionCapital investment decisions are not governed by one or two factors, because the investment problem is not simply one of replacing old equipment by a new one, but is concerned with replacing an existing process in a system with another process which makes the entire system more effective. We discuss below some of the relevant factors that affects investment decisions:Management Outlook: If the management is progressive and has an aggressively marketing and growth outlook, it will encourage innovation and favor capital proposals which ensure better productivity on quality or both. In some industries where the product being manufactured is a simple standardized one, innovation is difficult and management would be extremely cost conscious. In contrast, in industries such as chemicals and electronics, a firm cannot survive, if it follows a policy of 'make-do' with its existing equipment. The management has to be progressive and innovation must be encouraged in such cases.

Competitors Strategy:

Competitors' strategy regarding capital investment exerts significant influence on the investment decision of a company. If competitors continue to install more equipment and succeed in turning out better products, the existence of the company not following suit would be seriously threatened. This reaction to a rival's policy regarding capital investment often forces decision on a company'

Opportunities created by technological change: Technological changes create new equipment which may represent a major change in process, so that there emerges the need for re-evaluation of existing capital equipment in a company. Some changes may justify new investments. Sometimes the old equipment which has to be replaced by new equipment as a result of technical innovation may be downgraded to some other applications, A proper evaluation of this aspect is necessary, but is often not given due consideration. In this connection, we may note that the cost of new equipment is a major factor in investment decisions. However the management should think in terms of incremental cost, not the full accounting cost of the new equipment because cost of new equipment is partly offset by the salvage value of the replaced equipment. In such analysis an index called the disposal ratio becomes relevant.Disposal ratio = (Salvage value, Alternative use value) / Installed cost

Market forecast: Both short and long run market forecasts are influential factors in capital investment decisions. In order to participate in long-run forecast for market potential critical decisions on capital investment have to be taken.

Fiscal Incentives: Tax concessions either on new investment incomes or investment allowance allowed on new investment decisions, the method for allowing depreciation deduction allowance also influence new investment decisions.

Cash flow Budget: The analysis of cash-flow budget which shows the flow of funds into and out of the company may affect capital investment decision in two ways. 'First, the analysis may indicate that a company may acquire necessary cash to purchase the equipment not immediately but after say, one year, or it may show that the purchase of capital assets now may generate the demand for major capital additions after two years and such expenditure might clash with anticipated other expenditures which cannot be postponed. Secondly, the cash flow budget shows the timing of cash flows for alternative investments and thus helps management in selecting the desired investment project.

Non-economic factors: New equipment may make the workshop a pleasant place and permit more socializing on the job. The effect would be reduced absenteeism and increased productivity. It may be difficult to evaluate the benefits in monetary terms and as such we call this as non-economic factor. Let us take one more example. Suppose the installation of a new machine ensures greater safety in operation. It is difficult to measure the resulting monetary saving through avoidance of an unknown number of injuries. Even then, these factors give tangible results and do influence investment decisions.Investment Decisions Types There are many ways to classify investment. One classification is as follows: Expansion of existing business Expansion of new business Replacement and modernization.

Expansion and diversification

A company may add capacity to its existing product lines to expand existing operations. For example, the Gujarat state fertilizer company (GSFC) may increase its plant capacity to manufacture more urea. It is an example of related diversification. A firm may expand its activities in a new business. Expansion of a new business requires investment in new products and a new kind of production activity within the firm. If a packaging manufacturing company invests in a new plant and machinery to produce ball bearing, which the firm has not manufactured before, this represents expansion of new business or unrelated diversification. Sometimes a company acquires existing firms to expand its business. In either case, the firm makes investment in the expectation of additional revenue. Investments in existing or new products may also be called as revenue-expansion investments.

Replacement and modernization

The main adjective of modernization and replacement is to improve operating efficiency and reduce costs, cost savings will reflect in the increased profits, but the firms revenues may remain unchanged. Assets become outdated and obsolete with technological changes. The firm must decide to replace those assets with new assets that operate more economically. If a cement company changes from semi-automatic drying equipment to fully automatic drying equipment, it is an example of modernization and replacement. Replacement decisions help to introduce more efficient and economical assets and therefore, are also called cost-reduction investments however; replacement decisions that involve substantial modernization and technological improvement expand revenues as well as reduce costs.

Conclusion:-Globalization, accompanied by open trade and investment, provides the conditions for improved economic prosperity as well as environmental protection. Business continues to be an important and engaged actor in the pursuit of sustainable development, and in partnership with others, can make its contribution most effectively in the framework of economic growth, more open trade and investment and a conducive regulatory framework.Capital investment decisions are long-term corporate finance decisions relating to fixed assets and capital structure. Decisions are based on several inter-related criteria. Corporate management seeks to maximize the value of the firm by investing in projects which yield appositive net present value. When valued using an appropriate discount rate. These projects must also be financed appropriately. If no such opportunities exist, maximizing shareholders value dictates that management returns excess cash to shareholders. Capital investment decisions thus compromise an investment decision, a financial decision, and a dividend decisions. A positive investment decision can only be taken the application of ratio analysis.

BIBLIOGRAPHY:

www.investopedia.com/terms/w/workingcapitalmanagement.asp

http://en.wikipedia.org/wiki/Working_capital

http://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/working_capital_management/working_capital_management.htm

http://businesscasestudies.co.uk/business-theory/finance/investment-decisions.html

http://en.wikipedia.org/wiki/Investment_decisions

http://www.investopedia.com/walkthrough/corporate-finance/4/capital-investment-decisions/introduction.aspx32