Working Capital Management, Elecon

A

PROJECT REPORT

ON

“FINANCIAL STRATEGY & WORKING CAPITAL MANAGEMENT”

OF

ELECON ENGINEERING CO. LTD

Submitted to

G.H.PATEL POST GRADUATE INSTITUTE OF BUSINESS MANAGEMENT

VALLABH VIDYANAGAR

Submitted by

YUVRAJSINH GOHIL

(2010-2012)

WORKING CAPITAL MANAGEMENT 2011

Preface

To start any business, First of all we need finance and the success of that business entirely

depends on the proper management of day-to-day finance and the management of this short-

term capital or finance of the business is called working capital management. Working

Capital is the money used to pay for the everyday trading activities carried out by the

business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies

and so on. I have tried to put my best effort to complete this task on the basis of skill that I

have achieved during the last one year study in the institute. I have tried to put my maximum

effort to get the accurate statistical data. However I would appreciate if any mistakes are

brought to me by the reader.

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Acknowledgement

A work is never a work of an individual. I owe a sense of gratitude to the intelligence and co-

operation of those people who had been so easy to let me understand what I needed from time

to time for completion of this exclusive project. I am greatly indebted to my guides

Mr. ROMESH PRAJAPATI and Mr. NIRMAL THAKKAR faculties guide for Finance

(summer internship), G.H.P.I.B.M. & Mr. H.C. SHAH, CFO, Finance Department, and

corporate office, ELECON Engineering Ltd, Vallabh Vidyanagar for their constant guidance,

advice and help which enabled me to finish this project report properly in time. I am also

grateful to Mr. H.J.JANI Director of G.H.P.I.B.M. for permitting me to undertake this study.

Last but not the least, I would like to forward my gratitude to my friends & other faculty

members who always endured me and stood with me and without whom I could not have

completed the project.

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Index

Particular Page No.

Certificate 1

Preface 2

Acknowledgement 3

Industry Overview 5

Establishment 7

Business Profile 8

Company Profile 9

Clients 13

Competitors 15

Research Methodology 16

Relevance of the Study 16

Opportunities and Threats 17

MHE Division 17

Gear Division 18

Internal Control System 18

Corporate Financial Strategy 18

Working Capital Management 21

Conclusion 55

Suggestions And Findings 55

Bibliography 56

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Industry Overview

Engineering Sector: Market & Opportunities

India's engineering industry is highly competitive with a number of players in each segment.

The engineering sector has been growing, driven by growth in end user industries and the

new projects being taken up in the power, railways, infrastructure development, and private

sector investments fields amongst others. The industry attracted FDI inflows of US$ 1,196.7

million from August 1991-July 2006 India's exports of engineering goods are valued at US$

27 billion during 2006-07 which represents a 6 per cent growth over the exports for 2005-06

(US$ 20 billion). The engineering sector accounted for 14 per cent of the country's total

exports. It is also noteworthy that 40 per cent of India's engineering export is from the small

and medium enterprises (SME) sector. According to Engineering Exports Promotion Council

(EEPC), engineering exports could touch US$ 30 billion by 2008-09. In such a scenario,

India, driven by the engineering sector, will emerge as a key global manufacturing hub.

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Industry demand is driven by investments in core sectors

The demand from this sector depends largely on GDP growth, which in turn is a function of

expenditure in core segments like power, railways, and infrastructure development, private

sector investments, and the speed at which projects are implemented. The power sector is the

largest contributor to the revenues of engineering companies. Engineering majors like Bharat

Heavy Electricals Limited (BHEL) and ABB Limited derive a significant chunk of their

revenues (69 per cent and 60 per cent, respectively) through the supply of equipment to the

power sector. Infrastructure is another key area of operation. Larsen & Toubro Limited, for

example, garners around 35 per cent of its sales from infrastructure activities like

engineering, design and construction of industrial projects, social and physical projects like

housing, hospitals, information technology (IT) parks, expressways, bridges, ports, and

water/effluent treatment projects. The industrial segment contributes to around 30 per cent of

the total revenues of the engineering sector. While India’s engineering industry has

capabilities in manufacturing the range of machinery required by the different user sectors,

the rapid rise in demand has led to a large part of the machinery requirements being met

through imports. This indicates the size of opportunity for investment in the engineering and

capital goods sector in India. The engineering industry has attracted FDI inflows of US$

1,196.73 million from August 1991-July 2006.

Indian Engineering goods are gaining acceptance in overseas markets

India’s exports of engineering goods are valued at US$ 27 billion during 2006-07 which

represents a 36 per cent growth over the exports for 2005-06 US$ 20 billion). The

engineering sector accounted for 14 per cent of the country’s total exports. It is also

noteworthy that 40 per cent of India’s engineering export is from the small and medium

enterprises (SME) sector. A key driver for increased engineering exports is the trend towards

shifting of global manufacturing bases to countries like India that offer lower costs and good

engineering talent. This trend is expected to continue and boost exports of engineering goods

from India over the next 5 years. According to Engineering Exports Promotion Council

(EEPC), engineering exports could touch

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US$ 30 billion by 2008-09. In such a scenario, India, driven by the engineering sector, will

emerge as a key global manufacturing hub. The nature of Indian engineering exports is also

changing with time. India is fast moving from exporting low value goods to developing

countries to more sophisticated goods targeted at developed countries. Capital goods account

for 27 per cent of total engineering exports. Exports to European Union countries and North

America accounted for 19 per cent and 17 per cent respectively, of total engineering exports

in 2005-06. Engineering goods worth US$ 3.34 billion were exported to USA alone in April

– Feb 2006-07.

Growing Demand

Capacity creation and transformation in sectors such as infrastructure, power, mining, oil &

gas, refinery, steel, automotive, consumer durables are driving growth in the engineering

industry. The framework below captures some of the key factors that are contributing to

domestic and international demand for engineering goods from India. Restructuring of the

state electricity boards in different states, growth of private sector players and focus on

capacity creation have driven growth in the power sector.

Establishment:

Elecon Engineering Company Limited has been originated from “Milling Trading

Company” established in 1914 and function as a house of machinery imports. In 1951, the

Milling Trading Company imported an idea of establishing an indigenous organization to

manufacture material handling equipment in the country and thus ELECON came into

existing in 1951 at Goregaun, Mumbai. Before Incorporation, it was working in the form of

partnership firm to carry out manufacturing and dealing in Material Handling Equipment.

Partnership firm was dissolved in 1959 and Shri B.I.Patel took over as a proprietor. On 11th

January 1960 it was incorporated as a Private Limited Company. But later in the year 1961,

the company was converted in to Public Limited Company.

The Name of company is derived from its two main products namely ELEVATOR &

CONVEYOR, thus it is ELECON. After getting valuable experience of the decade

ELECON shifted to Vallabh Vidyanagar from Mumbai in the year 1962. ELECON

commenced manufacture of reduction Gear Units in 1962 and set up a separate Gear Division

in the year 1976. It was the first to introduce modular design concept, case hardened and

ground gear technology in India.

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It has grown over the years to be known as a pioneer of the concept of mechanised way of

Bulk Material Handling Equipment in India. During the span of more than 4 decades,

Elecon has encompassed all the major core sectors through its supplies of highly

sophisticated equipment bearing ample testimony of the symbolic mark of Elecon's

unbeatable technology. Elecon has thus, made its presence felt through consistent and

satisfactory performance of its equipment in such core sectors as fertilizer, cement,

coal/power generation, chemical, steel plant and port mechanization etc., across the country.

Business Profile

Currently EECL’s operations are divided into two divisions: Material Handling Equipment

(MHE) division and Gear division. The company's production facilities in Gujarat state are

state of-the-art, with machinery installed from internationally renowned suppliers

Klingelnberg, Holler and Jurist, and a fully integrated Oracle ERP. In the MHE division,

EECL caters to various industries and enjoys a respectable position in core sectors like Steel,

Fertilizer, Cement, Coal, Power Stations, Sugar, Chemical and Rubber Industry. The

company is also amongst the largest manufacturers of Industrial Gears and Power

Transmission products in India. The Gear division designs, supplies and services products

like Worm Gears, Helical Gears, Spiral Bevel Helical Gears and different type of couplings

for power transmission equipment industry. The company has technical collaboration with

Rank AG; Germany for Vertical Roll Mill Gearboxes, high speed gear boxes, Marine

Gearboxes and with PIV, Germany for Spiral Bevel and Helix-Bevel drives Gearboxes. The

revenue streams are diversified with exposure to wide variety of core industries for both the

segments. The company has also forayed into manufacturing of 1-2 MW capacity wind mill

gear boxes and is said to have tied up with a couple of wind energy players for the same. The

company markets its products in India as well as in international markets, including

Singapore, Australia, South Africa, China, and Dubai (UAE). The exports, consisting majorly

of industrial gears, amounted to less than 10% of revenues. However, in the near term, we

expect the exports to grow at faster pace due to synergies flowing from the acquisition.

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Company Profile:

Name : ELECON ENGINEERING COMPNAY LIMITED

Establishment Year: 1951

Punch Line: Always a step ahead in technology

Registered Office: Anand – Sojitra Road,

V.V. Nagar-388120

Gujarat, INDIA

Web Site: www.elecon.com

Board of Directors

Shri Prayasvin Patel (Chairman and Managing Director)

Shri Chirayu R. Amin

Shri Prashant Amin

Shri Pradip M. Patel

Shri Hasmukhlal S. Parikh

Dr. Amritlal C. Shah

Chief Financial Officer Shri Hemendra C. Shah

Secretary

Shri Paresh M. Shukla

Auditors

Thacker Butala Desai Chartered Accountants Navsari

Bankers

State Bank of India

Bank of Boroda

EXIM Bank of India

Axis Bank Limited

HDFC Bank Limited

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http://www.elecon.com/


IDBI Bank Limited

Associate Bankers

ICICI Bank Limited

HDFC Bank Limited

ABN AMRO Bank

Branch Offices

- Ahmedabad - Asanol - Banglore

- Dhanbad - Kolkatta - Chennai

- Nagpur - Jamshedpur - Mumbai

- New Delhi - Bilaspur - Pune

- Secunderabad

Vision

Create global presence in power transmission by innovating and developing products to

enhance value and satisfaction of our Customers.

We adapt to the changes and meet the challenges by creative entrepreneurship, empowered

teamwork, continuous improvements, and environment friendly practices and optimize

profits to delight our stakeholders.

Mission

Elecon is committed to

Be present in all the leading & emerging markets of the world by expanding, collaborating and associating with other partners and consolidating our presence in already penetrated markets.

Remain "Always A Step Ahead in Technology" by Continuously investing in research and development to cater to new applications, industries and segments as well as improvement to four existing product ranges.

Empower human resources to promote entrepreneurship, team spirit leading to value enhancement for our Customers and Stakeholders.

Follow environment friendly practices to protect environment and continuously review and improve products and processes throughout the supply chain. Upliftment of society at large and well being of our employees.

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Manufacturing

Elecon is the first company in India to have manufactured sophisticated equipment for

Bulk Material Handling. Its product range includes design, engineering,

manufacture, supply, erection and commission of:

1. Wagon tipplers

2. Bucket wheel stacker/reclaimers

3. Barrel-type blender reclaimers

4. Fertilizer reclaiming scrapers

5. Limestone pre-homegenizing and blending plants

6. Single and twin bucket wheel bridge-type reclaimers

7. Crawler-mounted trippers

8. Stationary and shiftable conveying systems for open cast lignite mines

9. Integrated coal handling plants for power stations

10. Underground mining conveyors

11. Open-cast conveying systems

12. Ferrous and non-ferrous foundry products

Elecon has developed and perfected its skills in design, manufacture, erection and

commissioning of coal handling plants. Over the years, Elecon has expanded its skills

and expertise to include the designing and execution of turnkey contracts for:

1. Crushing

2. Screening

3. Stacking

4. Blinding, and

5. Reclaiming plants

for bulk materials such as limestone, iron-ore, bauxite, overburden, rock

phosphate and fertilizer.

A separate Gear division manufactures

1. Helical and Bevel Helical Gear boxes

2. Worm Gear boxes

3. Elevator Traction Machines (Lift Gear boxes)

4. Couplings

5. Wind Mill Gear boxes

6. High Speed Gear boxes

7. Planetary Gear boxes

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8. Marine Gear boxes

9. Geared Motors

10. Custom built Gear boxes

11. Vertical Roller Mill Drive (VRM)

Elecon has expertise in providing customized gear boxes for Steel Mills, High Speed

Turbines, Sugar Mills, Marine vessels, Coast Guard Ships, Plastic Extrusions,

Antena Drives and for Satellites in the Indian Space Programme.

Associated Company/Group Company

1. Eimco Elecon (India) Ltd.,

This group co. is into mining equipments lately, Elecon Engi. Co. has sold a windmill

to Eimco Elecon at a cost of Rs. 35mn.

2. Emtici Engi. Ltd.,

This is the marketing arm of the group. All foreign branches are in JV with this

company and they handle the marketing for both Elecon Engi. As well as Eimco

Elecon.

3. Power Build Elecon Gears Ltd.,

This company manufactures and provides geared motors to group companies.

4. Ringspann Elecon (India) Ltd.,

Elecon group collaboration with ringspann Gmbh-for manufacture of disc brakes, etc.

5. Prayas Castings Ltd.,

This company handles the casting related work in the manufacturing process.

6. VVN Manufacturing Ltd.

This company handles the fabrication part of the manufacturing process.

7. Akaaish Mechatronics Ltd.,

This company handles the repairs and maintenance of machines on the shop floor

level for entire Elecon group of companies.

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8. Elecon Info. Technology Ltd.,

This company handles the maintenance and repair of all the IT related hardware and

software services including the ERP support for oracle 11i business suite.

9. Specialty Wood Pack Pvt. Ltd.,

Make packing items for the company.

10. Elecon Australiya Pty.ltd.,

JV with Emitici Engi. for Australian market.

11. Elecon Africa Pty. Ltd.,

JV with Emitici for African Market.

12. Elecon Singapore Pte. Ltd.,

JV with Emitici Engi. for Singapore market.

13. Elecon Middle east F2co- Dubai

QUALITY POLICY

It is the Policy of ELECON to attain standards of quality and reliability in system of

quality and reliability in system Performance, which are benchmarks in equipments and

turnkey Bulk Material Handling Systems which includes price, delivery and all interfaces

between our customers and us. All employees are committed to the goals of this Quality

Policy under the overall leadership of the Managing Director.

Major Clients of Elecon:

PowerStation :

Electricity board of various states like

UP, Maharashtra, Rajasthan, Gujarat, Karnataka & MP.

Cement Plants :

Ambuja Cement

Grasim Cement

Madras Cement

L&T Cement

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Chittor Cement

Zuari Cement

Mahi Cement (Indore)

Laxmi Cement

J.K.Cement

Fertilizer Plants :

GSFC

IFFCO

Chambal Fertilizer

WRO Gulf

Shree Ram Fertilizer

Export Plants :

Coal handling Plant (Thailand)

Fertilizer Plant (Bangladesh)

Torro Cement (Uganda)

Heema Cement (Uganda)

Coal Crushing Plant (Indonesiya)

Other Clients :

Tisco

KRIBHCO

Raymond Ltd.,

A.C.C. Ltd.,

Balco

Birla Corporation

Grasim Industries

Essar Steel Ltd.,

GACL

GNFC

Jindal Steel etc.

Major competitors of ELECON:

Fenner Engi. Co. Ltd., -Chennai.

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FFE Minerals India Ltd., -Chennai

Hyderabad Minerals India Ltd., -Hoogly,W.B.

Kripp Industries India Ltd., -Pune

L & T :td., -Chennai

Man Takraf (India) Pvt. Ltd., -Chennai

McNally Bharat Engi. Co. Ltd., -Calcutta

Svedala BHM Pvt. Ltd., -Thane

TRF Ltd., -Calcutta

Engi Project India Ltd.,

Navin Project Limited -New Delhi

Indiana Conveyors Ltd., -Mumbai

Technimont ICB Ltd., -Mumbai

GRSB

Research Methodology:

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Research is, an original contribution to the existing stock of knowledge making for its

advancement. It is the pursuit of truth with the help of study, observation, comparison and

experiment. In short, the search for knowledge though objective and systematic method of

finding solution to a problem is research. The systematic approach concerning generalization

and the formulation of a theory is also research. As such the term ‘research’ refers to the

systematic method consisting of enunciating the problem, formulating hypothesis, collecting

the facts or data, analyzing the facts and reaching certain conclusions either in the form of

solutions(s) towards the concerned problem or in certain generalizations for some theoretical

formulation.

Relevance of the Study:

ELECON is very efficient firm, which mainly covers engineering machineries, parts and

Gearboxes products to achieve profitability. Relevance includes the worth or reason behind

carrying out research project.

ELECON ENGINEERING CO. LTD., Products many kind of products in different plants

but the selling, promoting and distribution activities are involved in mainly marketing

phenomena. (EMTICI DEPARTMENT)

One of the main products is ELEVATORS & CONVEYOURS which is extensively

produced by ELECON. In which Pulley, Imp actor, Cranes are sold in open market.

The main relevance of study or conducting research is to know the exact current assets and

current liabilities or present situation of the company.

There are another reason behind study is to know the cash management and inventory

turnover ratio of the company.

One another aspect of relevance is to know Profit and Growth of the company by help of

Working Capital.

Through this study we can also known the credit sales of the company, credit terms,

collection period of the company, short term and long-term finance of the company than also

we can know the finance from other financial institutions.

Opportunities and Threats

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Global economy has stabilized and entering a period of weak growth. The impact of the

financial turmoil resulted in registering negative growth rates by most developed countries

for successive quarters in 2008-09. Central Governments and Central Banks around the world

took unprecedented actions like expanding Government balance sheet significantly to

stimulate demand, sharply reducing interest rates to near zero levels, which flooded the

market with liquidity to ride over the turmoil. These radical measures have helped recovery

across the globe.

Particularly, India has been gaining prominence in the investment plans of most global

investors. The growth rate in India has been far better than other emerging economies

primarily due to higher reliance on domestic demand for growth. Exports constitute only 20%

of the total GDP of the country and slowdown in export is unlikely to derail the economy

from the growth path.

Infrastructure is likely to be one of the key growth drivers for Indian economy. Government

aims to increase the infrastructure spending to 9% of the GDP by FY12 compared to 5.5% at

present. The spending on the infrastructure is likely to benefit the revenue and earnings

growth of many related sectors. As your Company caters to infrastructure projects also, this

would be one of the growth engines of the future of your Company.

Opportunity in the infrastructure sector is huge and with Government’s clear focus on the

sector, there will be huge order flows in coming years.

MHE Division

The Company believes in quality and is committed to offer satisfaction to its clients. This is

helping the Company to have continuous flow of orders and enquiries, which in turn helps the

Company to grow in the volatile economic situation. The Government of India (GOI) has lot

to do for development of infrastructure. Material Handling Equipment industry is catering to

the growing and rapidly changing needs of the core industries such as Coal, Cement, Power,

Port, Mining, Fertilizers and steel plants. Due to various stimulus packages of GOI and global

recovery, all these sectors are back on track of growth. However, delay in execution and poor

execution of projects hampers the development of the economy and these sectors.

Gear Division

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Your Company’s reputed specialization, in this segment, is being recognized by its clients by

providing good business. These results in an opportunity to look for, find and make

improvements as well as cost savings changes throughout its products. Catering to the needs

of almost all sectors of industry helps your Company to have balanced growth amidst

unpredictable economic conditions. The impact of fluctuation in Steel and other raw material

prices has been mitigated to a great extent by using various tools of hedging.

Internal Control System

Internal Controls are continuously evaluated by the Internal Auditors and Management.

Findings from internal audits are reviewed by the Management and by the Audit Committee

and corrective actions and controls have been put in place/ wherever necessary. Scope of

work of Internal Auditors covers review of controls on accounting, statutory and other

compliances.

Corporate Strategy

Financial

Strengthening organization to manage multiple businesses with cost efficiency To become financially sound so that Company can face any severe recession

Business

Benchmark against the best in all businesses Improve delivery and performance Continued thrust on modernization and upgradation of manufacturing facilities along

with tie-ups resulting in higher value addition and higher profitability

Future Plans

Aggressively pursuing to explore international markets and targeting to achieve export turnover to the extent of 15 to 20% High speed gears Gears for Plastic Industry Entering in the business of manufacturing of Wind Mill Gear Boxes and targeting to

become Major player in 1-2 MW Segment Elecon will invest more than Rs 1000 mn in Wind Mill Gear Box facility Entered into Technical Collaboration Agreement with Renk, AG of Germany to

design & manufacture gearbox for Vertical Rolling Mill to be used in Cement and Coal Industry

Signed a Technical Collaboration Agreement for availing the technology to design and manufacture the Lift Gear box with Haisung Industrial Company Limited of Korea.

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Prospects

Increasing investments in the core sector mainly thermal power projects, steel, cement, mining and port sector would increase the prospects of MHE business, where EECL is one of the leading and established players having a wide range of product portfolio focusing on turnkey projects.

EECL being the industry leader with almost 27% market share and having presence in all segments of industrial gear especially in large gear boxes where its is the sole domestic player would directly benefit from the surge in demand from the increased investment in industrial and infrastructure sector. Further, its shift to higher size/high value gears and introduction of new products will not only increase its competitiveness in the domestic industry where it is the industry leader, but also increase the opportunities in the export market. Increasing rush for non conventional energy generation by the industries, supported by government, following awareness of global warming, is expected to increase the demand of wind mills in India and in turn, gear boxes for WTGs, where EECL plans to diversify in near future.

Financial Strategy:-

Capital Structure:-

Debt-equity Ratio

The ratio of debt and equity in the organization should be done in such a way that the company is able to meet its interest payment as well as create wealth for the owner in the form of return on investment and capital appreciation. The capital structure should be such that the company‟s management is able to manage the funds judicially. The debt- equity ratio of Elecon for 2006-07 was 1.51.

Financial Instruments:-

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The financial Instruments to be chosen should be done by taking into consideration the long term effects of the proportion and types of financing options being taken up. The bottom-line should be to get the appropriate fund with least cost of capital so that the profits can be increased. At Elecon financial instruments like shares, debentures, bonds etc is used. The financial instruments which have been used by the organization have been chosen rationally and in future also the company will ensure this decision.

Modes of finance:-

The cheapest mode of financing options should be verified and chosen so that it does not create a hurdle in the functioning of the company and also the profits can be increased year to year. At Elecon different options like term loan, FCCBs, working capital demand loan, packing credit foreign currency loan etc is used as modes of finance.

Pricing/Timing:-

This is important in the case when the organization is going to raise money from the public in the form of a Public Issue. The pricing of shares to be issued in the primary market should be air and justified. The timing of entry in the financial market is very crucial for the organization. The entry should not be during unfavorable times when the sentiments of the public are not so positive. Thus appropriate measures should be taken and this step should be taken after giving due consideration. In our company the money to be raised from public has already been done and the share of the company is already listed and is doing well as compared to the markets thus this decision is to be taken care in case of raising loans from banks and institutions and the sentiments and policies should be examined while raising money.

Dividend Policy:-

The dividend is the returns which the shareholders expect in the form of a return on their shares being invested in the company. It should be ensured that enough profits are generated in the company so as to meet the high level of costs and create profits for the shareholders and giving them the returns in the form of dividend. The company has very well taken care of this decision and has distributed its part of profits from time to time in the form of dividends. This year dividend recommended was 75%.

Investor Communication:-

The results of the company should declared at the end of every year and it should be communicated to the employees and to the stakeholders of the organization so as to make them aware about the organization‟s bottom lines and also give them a sense of belongingness. At Elecon, the communication is being done regularly from time to time to its stakeholders through different form of media to make them aware about the happenings of the company and the special events or achievements.

Corporate Governance:-

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The Ethics Policy of the organization should be developed to ensure that the work is conducted in adherence with high ethical and legal principles and sets standards of professionalism and integrity for all employees and operations. Appropriate ethical behavior continues to be reviewed as part of the Group's internal control process on an ongoing basis. The company tries to follow the norms and its processes and procedures are designed in such a way that they conform to the legal aspects of the business. In line with global practices, the company is committed to maintain the highest standards of corporate governance, reinforcing the relationship between the company and its shareholders.

Working Capital Management

“More business fails for lack of cash than for want of profit…”

Efficient management of working capital is one of the pre-conditions for the success of an

enterprise. Efficient management of working capital means management of various

components of working capital in such a way that an adequate amount of working capital is

maintained for smooth running of a firm and for fulfillment of twin objectives of liquidity

and profitability.

While inadequate amount of working capital impairs the firm’s liquidity. Holding excess

working capital results in the reduction of the profitability. But the proper estimation of

working capital actually required, is a difficult task for the management because the amount

of working capital varies across firms over the periods depending upon the nature of

business, production cycle, credit policy, availability of raw material, etc.

Thus efficient management of working capital is an important indicator of sound health of an

organization which requires.

Meaning of Working Capital

Working capital is the amount of capital that a business has available to meet the day to- day

cash requirements of its operations, or more specially, for financing the conversion of raw

material into finished goods, which the company sells for payment. Funds are also needed for

short-term purposes for the purpose of raw materials, 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 firm’s capital, which is required for

financing short-term or current assets such as cash, marketable securities, debt or sand

inventories.

Working capital is a valuation metric that is calculated as current assets minus current

liabilities. Working capital is also known as operating capital.

Current Assets

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This is any cash or assets that can be quickly turned into cash. Current assets are assets,

which can be converted into cash within an accounting year.

Constituents of Current Assets:

Cash in hand and bank balance

bills receivables

Sundry debtors (provision for bad debts)

Short term loans and advances

Inventories of stocks

Raw material

Work in progress

Stores and spares

Finished goods

Prepaid expenses

Accrual incomes

Current Liabilities

Current liabilities are those claims of outsiders, which are expected to mature for payment

within an accounting year.

Constituents of Current Liabilities:

Bills payable

Sundry creditors or account payable

Short term borrowings

Dividend payable

Bank overdraft

Provisions

Outstanding expenses

Unsacred income

Determinants of Working Capital

Working capital requirements of a concern depends on number of factors, each of which

should be considering carefully for determining the proper amount of working capital. It

maybe however be added that these factors affect differently to the different units and these

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keeps varying from time to time. In general, the determinants of working capital which are

common to all organizations can be summarized as under:

1. Nature of Business:

Need for working capital is highly depends on what type of business, the firm in. there are

trading firms, which needs to invest a lot in stocks, ills receivables, liquid cash etc. public

utilities like railways, electricity, etc., need much less inventories and cash. Manufacturing

concerns stands in between these two extends. Working capital requirement for

manufacturing concerns depends on various factors like the products, technologies, marketing

policies.

2. Production Policies:

Production policies of the organization are effects working capital requirements very highly.

Seasonal industries, which producesonly in specific season require more working capital.

Some industries which produce round the year but sale mainly done income special seasons

are also need to keep more working capital.

3. Size of Business:

Size of business is another factor to determines the need for working capital

4. Length of Operating Cycle:

Operating cycle of the firm also influence the working capital. Longer the orating cycle, the

higher will be the working capital requirement of the organization.

5. Credit Policy:

Companies; follows liberal credit policy needs to keep more working capital with them.

Efficiency of debt collection will also relevant in this matter. Credit availability form

suppliers also effects the company’s working capital requirements. Company doesn’t enjoy a

liberal credit from its suppliers will have to keep more working capital.

6. Business Fluctuation:

Cyclical changes in the economy also influencing the working capital. During boom period,

the tendency of management is top line up inventories of raw materials and finished goods to

avail the advantage of rising prove. This creates demand for more capital. Similarly during

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depression when the prices and demand for manufactured goods. Constantly reduce the

industrial and trading activities show a downward termed. Hence the demand for working

capital is low.

7. Current Asset Policies:

The quantum of working capital of a company is significantly determined by its’ current

assets policies. A company with conservative assets policy may operate with relatively high

level of working capital than its sales volume. A company pursuing an aggressive amount

assets policy operates with a relatively lower level of working capital.

8. Fluctuations of Supply and Seasonal Variations:

Some companies need to keep large amount of working capital due to their irregular sales and

intermittent supply. Similarly companies using bulky materials also maintain large reserves’

of raw material inventories. This will be increase the need of working capital. Some

companies manufacture and sell goods only during certain seasons. Working capital

requirements of such industries will be higher during certain season of such industries period.

9. Other Factors:

Effective coordination between production and distribution can reduce the need for working

capital. Transportation and communication means. If developed helps to reduce the working

capital requirement.

Excess or Adequate Working Capital

Every business concern should have adequate working capital torn its business operations. It

should not have redundant/excess working capital or inadequate/shortage of working capital.

Both excess as well as shortage of working capital situations are bad for any business.

However, out of the two, inadequacy or shortage of working capital is more dangerous from

the point of view of the firm.

Disadvantages of Redundant or Excess Working Capital:

1. Idle funds, non-profitable for business, poor ROI.

2. Unnecessary purchasing & accumulation of inventories over required level.

3. Excessive debtors and defective credit policy, higher incidence of B/D.

4. Overall inefficiency in the organization.

24 | P a g e


5. When there is excessive working capital, Credit worthiness suffers.

6. Due to low rate of return on investments, the market value of shares may fall.

Disadvantages or Dangers of Inadequate or Short Working Capital:

1. Cannot pay off its short-term liabilities in time.

2. Economies of scale are not possible.

3. Difficult for the firm to exploit favorable market situations.

4. Day-to-day liquidity worsens.

5. Improper utilization the fixed assets and ROA/ROI falls sharply.

Need for working capital

The basic objective of financial management is to maximize shareholder’s wealth. For this it

is necessary to generate sufficient profits. The extent to it, which the profit can be earned,

largely depends on the magnitude of sales. However sales do not convert into cash instantly.

There is invariable the time gap between the sales of goods and receipts of cash. There is,

therefore, a need for working capital in the form of Current Assets to deal with the problem

arising. Out of the lack of immediate realization of cash again goods sold. Therefore,

sufficient working capital is necessary to sustain sales activity.

Working capital is needed for the following purpose:

1. for the purchase of raw material, components and spares.

2. To incur day to day expenses and overhead costs such as fuel, power and office expenses,

etc.

3. To meet selling costs as packing, advertisement etc.

4. To provide credit facilities to the customers.

5. To maintain the inventories of raw material, work in progress, stores and spare and

finished goods.

6. To pay wages and salaries.

Meaning of working capital management

Working Capital Management is concerned with the problems that arise in attempting to

manage the Current Assets, Current Liabilities and the inter-relationship that exists between

them. Working Capital Management means the deployment of current assets and current

liabilities efficiently so as to maximize short-term liquidity. Working capital management

25 | P a g e


entails short term decisions -generally, relating to the next one year periods - which are

"reversible".

Steps involved in working capital management

1. Forecasting the Amount of Working Capital

2. Determining the Sources of Working

Objectives of Working Capital Management

1. Deciding Optimum Level of Investment in various WC Assets

2. Decide Optimal Mix of Short Term and Long Term Capital

3. Decide appropriate means of Short Term Financing

Forecasting /Estimation of Working Capital Management Requirement Factors to be

considered:

Total costs incurred on materials, wages and overheads. The length of the production cycle or

WIP, i.e., the time taken for conversion of raw material into finished goods. The length of the

sales cycle during which finished goods will to be kept waiting for sales. The average period

of credit allowed to customers. The amount of cash required to pay day to day expenses of

the business. The amount of cash required for advance payments if any. The average period

of credit will be allowed by the suppliers. Time – lag in the payment of wages and other

overheads

Operating Cycle

The working capital requirement of a firm depends, to a great extent upon the operating cycle

of the firm. The operating cycle may be defined as the time duration starting from the

procurement of goods or raw material and ending with the sales of realization. The length and

nature of the operating cycle may differ from one firm to another depending upon the size

and nature of the firm. Ina trading concern, there is a series of activities starting from

procurement of goods (saleable goods) and ending with the realization of sales revenue (at

the time of sale itself in the case of cash sales and at the time of debtors realization in case of

credit sales).similarly in case of manufacturing concern, this series starts from the

procurement of raw materials and ending with the sales realization of finished goods. In both

the cases, however, there is a time gap between the happening of the first event and the

happening of the last event. This time gap is called the operating cycle. Thus, the operating

26 | P a g e


cycle of a firm consists of the time required for the completion of the chronological

sequences of some or all of the following:

1. Procurement of raw material and services.

2. Conversion of raw material into work-in-progress.

3. Conversion of work-in-progress into finished goods.

4. Sale of finished goods (cash or credit)

5. Conversion of receivable into cash.

Operating Cycle Period

The length of time duration of the operating cycle of any firm can be defined as the sum of its

inventory conversion period and the receivable conversion period.

1. Inventory Conversion Period:

It is the time required for the conversion of raw material into finished goods sales. In a

manufacturing firm the inventory conversion period is consisting of raw material conversion

period (RMCP), work-in-progress conversion period (WPCP) and finished goods conversion

period (FGCP).

Raw material conversion period refers to the period for which the raw material is generally

kept in stores before it is issued to the production department.

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The work-in-progress conversion period (WPCP) refers to the period for which the raw

material remains in the production process before it is taken out as finished units.

The finished goods conversion period refers to the period for which finished units remains

in stores before being sold a customer.

2. Receivable Conversion Period (RCP):

It is the time required to convert the credit sales into cash realization. It refers to the period

between the occurrence of credit sales and collection from debtors. The total of Inventory

conversion period (ICP) and Receivable conversion period (RCP) is also known as total

operating cycle period (TOCP) the firm might be getting some credit facilities from supplier

of raw material, wages earners etc. This period for which the payment to these parties are

deferred or delayed is known as deferred period (DP).the net operating cycle (NOC) of the

firm is arrived at by deducting the DP from TOCP.

NOC =TOCP-DP=ICP+RCP-DP

For calculating total operating cycle period (TOCP) and net operating cycle (NOC), the

following formula is being used:

RMCP (Raw Material Conversion Period)

= Average Raw material stock × 365 / Total Raw material consumption

WPCP (Work –in- Process Conversion Period)

= Average Work-in-progress × 365 / Total cost of production

FGCP (Finished Goods Conversion Period)

= Average Finished Goods × 365 / Total Cost of goods sold

RCP (Receivables Conversion Period)

= Average Receivable × 365 / Total Credit sales

DP (Deferred Period)

= Average Creditors × 365 / Total Credit purchase

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Average Raw Material / Raw Material Conversion Period

2010

Average raw material = opening stock of raw material + closing stock of raw material /

2

=9,420.77 + 14,317.94 / 2

=11869.35

Raw Material Consumption

= 57,859.71 / 365

=163.99

RMCP = 11869.35 / 163.99

=72 day

2009

Average raw material = opening stock of raw material + closing stock of raw material /

2

= 14,317.94 + 10,226.30 / 2

= 12272.12


= 58,655.28 / 365

= 160.69

RMCP = 12272.12 / 160.69

= 76 day

2008

Average raw material = opening stock of raw material + closing stock of raw material/ 2

= 10226.30 + 6784.72 / 2

= 8505.5


= 52,446.21 / 365

= 143.68

RMCP = 8505.5 / 143.7

= 59 day

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Average Work in Progress / Cost of Production per Day

2010

Average Work In Progress = Op. Stock of Work In Progress + Closing Stock of Work

In Progress / 2

=21,378.85+19,064.99/2

=20,221.92

Cost of Pro. Per Day = Sales - Transaction Cost/365

=103,497.02 – 233.94/365

=282.91

WICP= 20,221.92 / 282.91

=71 day

2009

Average Work In Progress = Op. Stock of Work In Progress + Closing Stock of Work

In Progress / 2

= 12,282.45 + 21,378.85 / 2

= 16830.65


= 86,538.48 - 158.40/365

= 236.65

WICP=16830.65 / 236.65

= 71 day

2008

Average work in progress = op. Stock of work in progress +closing Stock of work in

progress / 2

= 8136.52 + 12282.45 / 2

= 10209.48


= 83,209.29 - 174.04/365

= 227.49

WICP = 10206.48 / 227.49

= 45 day

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Avg. finish good inventory / cost of goods sold

2010

Average Finish Good Inventory = Opening Stock of Finish Stock +Closing Stock of

Finish Stock / 2

= 2,758.11 + 1,605.49/ 2

= 2181.8

Cost of Goods Sold = 74,814

FGCP= (2181.8 / 74,814) × 365

2009


Finish Stock / 2

= 1,304.87 + 2,758.11/ 2

= 2031.47

Cost of Goods Sold = 57981.11

FGCP= (2031.47 / 57981.11) × 365

= 13 days

2008


Finish Stock / 2

= 740.80 + 1304.87 / 2

= 1022.84

Cost of Goods Sold = 66995.33

FGCP = (1022.87 / 66995.33) ×365

= 6 days

Average Debtors / Credit Sales

2010

Avg. Debtors = 51,766.00 + 47,173.58 / 2

= 49,469.79

Credit sale = 79727.82

BDCP = (49,469.79 / 79727.82) × 365

= 226 day

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2009

Avg. Debtors = 47,173.58 +49,231.61 / 2

= 48202.59

Credit sale = 78961.32

BDCP = (48202.59 / 78961.32) × 365

= 222 day

2008

Avg. Debtors = 49,231.61 + 38198.60 / 2

= 43715.10

Credit Sale = 73067.57

BDCP = (43715.10 / 73067.57) ×365

= 218 day

Average Creditor’s / Credit Purchase

2010

Average Creditors = 29,469.05 + 28,167.81 / 2

= 28,818.43

Credit Purchase = 75,587.92

CCP = (28,818.43 / 75,587.92) × 365

=139 day

2009

Average Creditors = 28,167.81 + 27,526.23 / 2

=27847.02

Credit Purchase = 73747.68

CCP = (27847.02 / 73747.68) × 365

= 135 days

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2008

Average Creditors=27,526.23 + 20,395.53 / 2

=23960.88

Credit Purchase =59906.12

CCP =(23960.88 / 59906.12) × 365

=145 days

Time and Money concept in Working Capital Cycle

Each component of working capital (namely inventory, receivables and payables) has two

dimensions. TIME and MONEY, when they come to manage it will call working capital.

Time is Money:

If we can get money to move faster around the cycle (e.g. collect money due from debtors more

quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the

business will generate more cash or it will need to borrow less money to fund working capital. As a

consequence, we can reduce the cost of bank interest or will have additional free money available to

support additional sales growth or investment. Similarly, we can also negotiate the improved terms

with suppliers. E.g. get longer credit or an increased credit limit; we effectively create free finance to

help future sales.

IF WE THEN

Collect receivables (debtors)faster We release cash from cycle

Collect receivables(debtors)faster Our receivables soak up cash

Get better credit(in terms of duration or

amount from suppliers) We increase our cash resources

Shift inventory(stocks)faster We free up cash

Move inventory(stocks) slower We consume more cash

Type of Working Capital

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On the basis of Concept

1. Gross working capital:

The gross working capital refers to the firm’s investment in all the assets taken together. The

total of investment in all the individual current assets is the gross working capital.

For example: if a firm has a cash balance of Rs. 50,000,debtors of Rs.70,000 and inventory of

raw material and finished goods has been assessed at Rs.1,00,000,then the gross working

capital of the firm is Rs.2,20,000 (i.e. ,Rs50,000 + Rs.70,000 + Rs.1,00,000).

2. Net Working Capital:

The term net working capital may be defined as the excess of total current assets over total

current liabilities. Current liabilities refer to those liabilities which are payable within a

period of 1 year. The net working capital may either be positive or negative. If the total

current assets are more than total current liabilities, then the difference is known as positive

net working capital, otherwise the difference is known as negative net working capital. The

networking capital measures the firm’s liquidity. The greater the margin, the better will be the

liquidity of the firm.

Net Working Capital= Total Current Assets – Total Current Liabilities

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A financial manager must consider both (gross and net working capital) because they provide

different interpretation. The gross working capital denotes the total working capital or the

total investment in current assets. This will help avoiding

1. The unnecessarily stoppage of work or chance of liquidation due to insufficient working

capital, and

2. Effects on profitability (overflowing working capital implies cost).

3. The gross working capital also gives an idea of total funds required for maintaining current

assets.

On the other hand, net working capital refers to the amount of funds that must be invested by

firm; more or less are regularly in current assets. The net working capital also denotes the net

liquidity being maintained by the firm.

On The Basis Of Time

1. Permanent /Fixed Working Capital:

Permanent working capital may be defined as the minimum level of current assets, which is

required by a firm to carry on its business operations. Every firm has to maintain a minimum

level of raw materials, work-in-progress, finished goods and cash balances.

For example-extra inventory of finished goods will have to be maintained to support the peak

periods of sale. Permanent working capital is permanently needed for the business and

therefore, it should be financed out of long term funds.

2. Fluctuating /Variable Working Capital:

It is the extra working capital needed to support the changing production and sales activities

of the firm. The amount of temporary working capital keeps on fluctuating on time to time on

the basis of business activity. Both kind of working capital –permanent and fluctuating

(temporary) are necessary to facilitate production and sales through the operating cycle. The

amount over and above permanent working capital is temporarily variable or fluctuating.

Sources of Working Capital

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The company can choose to finance its current assets by

1. Long term sources

2. Short term sources

3. A combination of them.

Long term sources of permanent working capital include equity and preference shares,

retained earnings, debentures and other long term debts from public deposits and financial

institution. The long term working capital needs should meet through long term means of

financing. Financing through long term means provides stability, reduces risk or payment and

increases liquidity of the business concern. Various types of long term sources of working

capital are summarized as follow:

1. Issue of Shares:

It is the primary and most important sources of regular or permanent working capital. Issuing

equity shares as it does not create and burden on the income of the concern. Nor the concern

is obliged to refund capital should preferably raise permanent working capital.

2. Retained Earnings:

Retain earning accumulated profits are a permanent sources of regular working capital. It is

regular and cheapest. It creates not charge on future profits of the enterprises.

3. Issue of Debentures:

It creates a fixed charge on future earnings of the company. Company is obliged to pay

interest. Management should make wise choice in procuring funds by issue of debentures.

4. Long Term Debt:

Company can raise fund from accepting public deposits, debts from financial institution like

banks, corporations etc. the cost is higher than the other financial tools.

5. Other Sources:

Sale of idle fixed assets, securities received from employees and customers are examples of

other sources of finance.

Short Term Sources of Temporary Working Capital

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Temporary working capital is required to meet the day to day business expenditures. The

variable working capital would finance from short term sources of funds. And only the period

needed. It has the benefits of, low cost and establishes closer relationships with banker. Some

sources of temporary working capital are given below:

1. Commercial Bank:

A commercial bank constitutes significant sources for short term or temporary working

capital. This will be in the form of short term loans, cash credit, and overdraft and though

discounting the bills of exchanges.

2. Public Deposits:

Most of the companies in recent years depend on this source to meet their short term working

capital requirements ranging from six month to three years.

3. Various credits:

Trade credit, business credit papers and customer credit are other sources of short term

working capital. Credit from suppliers, advances from customers, bills of exchanges, etc.

helps to raise temporary working capital.

4. Reserves and Other Funds:

Various funds of the company like depreciation fund. Provision for tax and other provisions

kept with the company can be used as temporary working capital. The company should meet

its working capital needs through both long term and short term funds. It will be appropriate

to meet at least 2/3 of the permanent working capital equipment form long term sources,

whereas the variables working capital should be financed from short term sources. The

working capital financing mix should be designed in such a way that the overall cost of

working capital is the lowest, and the funds are available on time and for the period they are

really required.

Sources of Additional Working Capital

1. Existing cash reserves

2. Profits (when you secure it as cash)

3. Payables (credit from suppliers)

4. New equity or loans from shareholder

5. Bank overdrafts line of credit

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6. Long term loans

If we have insufficient working capital and try to increase sales, we can easily over stretch

the financial resources of the business. This is called overtrading. Early warning signs include

1. Pressure on existing cash

2. Exceptional cash generating activities. Offering high discounts for clear cash

payment

3. Bank overdraft exceeds authorized limit

4. Seeking greater overdrafts or lines of credit

5. Part paying suppliers or there creditor.

6. Management pre occupation with surviving rather than managing.

Trade Off Between Profitability and Risk

In evaluating the firm’s working capital position an important consideration is the trade-off

between profitability and risk. In other words, the level of NWC has a bearing on profitability

and risk. The term profitability used in this context is measured by profit after expenses.

The term risk is defined as the profitability that a firm will become technically insolvent so

that it will not be able to meet its obligation when they become due for payment. It is assured

that greater amount of NWC, the less risk prone the firm is, or greater the NWC, the more

liquid is the firm, and therefore the less likely it is to become technically insolvent.

Conversely lower level of NWC and liquidity are associated with increasing level of risk.

A firm must have adequate WC. It should neither be excessive nor inadequate. Excessive WC

means the firms has idle funds, which are in no profit for the firm. This situation decreases

both risk and profitability of the firm. Inadequate WC means the firm doesn’t have sufficient

funds for running its operation which ultimately results in production interruption, and

lowering down the profitability.

The Lower level of WC increases the risk but has the potentiality of increasing the

profitability also.

The above principle is based on the following assumption:

1. There is direct relationship between profitability and risk.

2. Current assets are less profitable than fixed assets

3. Short term funds are less expensive than long term funds.

Effect of level of CA on Profitability-Risk Trade Off

38 | P a g e


The effect of level of CA’s on profitability risk trade-off can be shown using the ratio of CA

to TA. This ratio indicates the percentages of TA’s that are in form of CAs. An increase in

the ratio will lead to decline in profitability because CAs is less profitable than FAs. It would

also increase risk of technical insolvency because increase in CA assuming no change in CL

will increase NWC. Conversely a decrease in ratio will result in increase in profitability as

well as risk.

Effect of level of CL on risk profitability trade-off:

The effect of CL can be demonstrated by using the ratio of CL to TAs. This portion of the

short term financing is which is less expensive as compared to long term financing. These

will therefore, be a decline in cost and corresponding rise in profitability. The increased ratio

will also increase risk because assuming no change in CA, this would decrease in NWC. The

consequence of decrease in the ratio is exactly opposite to the result of an increase. Thus it

will lead to decrease in profitability and risk.

STATEMENT SHOWING WORKING CAPITAL REQUIREMENT (RS IN laces)

39 | P a g e


PARTICULARS 2009-10 2008-09 2007-08 2006-07 2005-06

(A) CURRENT ASSETS

[I]Stock of Stores, Loose Tools,

Dies Mechanical, Electrical and

Electronic Spares (as taken, valued

and certified by the Management)

at lower of cost or net realizable

value

1,193.30 1,461.36 1,272.71 1,185.70 760.21

[II]Stock-in-Trade (as taken,

valued and Certified by the

Management)

(i)Raw Materials (at lower of cost

or net realizable value)9,420.77 14,317.94 10,226.30 6,784.72 6,643.15

(ii)Semi-Finished Goods (at lower

of cost or net realizable value)19,064.99 21,378.85

12,282.458,136.52 5,980.13

(iii) Finished Goods (at lower of

cost or net realizable value)1,605.46 2,758.11 1,304.87 740.80 1,926.75

(iv)Goods-in-Transit (at Cost) 233.94 158.40 174.04 48.00 1,080.36

[III] Sundry Debtors(Un secured,

Considered Good

(i)Outstanding for a period

Exceeding six month13,166.55 11,959.53 13,965.12 6,312.86 3,714.84

(ii)Others 38,592.00 35,214.05 35,266.49 32,485.74 17,702.75

[IV] Cash and Bank Balances

(i) Cash on Hand 8.25 5.40 7.48 7.19 7.30

(ii) Balance with Scheduled

Banks

(1)In Current Account 1,288.81 745.24 468.52 532.18 563.10

(2) Bank Deposit 2,535.60 5,322.64 255.68 717.00 1,890.00

(3) Unpaid Dividend Bank

Account 48.59 32.59 20.56 19.53 10.29

LOANS AND ADVANCES

[I] Loans to Staff 7.00 11.47 17.08 15.73 14.86

[II] Advances recoverable in 3,195.54 4,503.31 3,671.86 3117.02 2255.11

40 | P a g e


Cash or in Kind or for value to be

received

[III] Balance with Collector of

Custom, Port Trust, Excise etc.1,092.35 1,938.34 1,834.06 830.88 792.41

[IV] Advance Payment of

Income Tax(Net of Provision)1,172.54 1,038.67 196.48 ----------- -----------

TOTAL 92625.69 100845.9 80963.68 60933.87 43342.18

(B) CURRENT LAIBILITIES

[I]Sundry Creditors 29,469.48 28,167.81 27,526.23 20,395.53 15,281.09

[II]Advance from Customer 8,529.91 12,569.49 5,185.15 4,544.00 5,874.94

[III]Dividend Warrants issued but

not encased (Unpaid) 48.59 32.59 20.56 19.53 11.56

[IV]Interest accrued but not due 634.83 97.16 162.85 57.19 55.27

PROVISIONS

[I]Provision for Gratuity 574.57 680.58 479.20 ----------- 98.06

[II]Proposed Dividend 1,392.92 1,392.92 1,392.92 4 63.86 306.52

[III]Tax on Proposed Dividend 231.35 236.73 236.73 78.83 42.99

TOTAL 40,881.65 43,177.28 35,003.64 25,558.94 21,670.43

NET WORKING CAPITAL (A-B) 51,744.04 57,668.61 45,960.04 35,374.93 21,671.75

Interpretation:

Working capital is the funding that a company needs to support its accounts

receivable and inventory, and is offset by the amount of funding it obtains from its

suppliers through accounts payable.

Working capital can have a much greater impact on a company’s cash flows than the

results of its operations. One of the best ways to positively impact the amount of cash

flow that a company spins off is to take tight control of its working capital and

eliminate much of the investment in this area.

After analysis the 5 year data we can conclude that the Working Capital requirement

is increasing year by year. We are looking increasing pattern in working capital.

41 | P a g e


The company is managing working capital very precisely as we know that Elecon

Engineering is high working capital oriented organization. The sale is increasing year

by year which results into increase in working capital requirement. Elecon is getting

new order at regular interval as it gives importance to quality.

Investment in the current asset is also increasing with increase in the span. On the

other hand there is also increase in the current liabilities. From the above statement

we can say that current assets and current liabilities go hand in hand.

SALES

PARTICULARS 2009-10 2008-09 2007-08 2006-07 2005-06

MHE 51,431.59 37,490.13 30812.56 35102.13 15743.86

Gear (Transmission Equipment) 38,357.28 36,132.05 35,873.70 28423.36 21017.08

WTG & Electricity Generation 317.53 605.24 1,960.53 123.31 665

Export Sales 6,364.92 4,064.98 3,703.30 2430.7 2190.08

Miscellaneous Sales 727.16 668.92 717.49 567.04 261.57

TOTAL SALES 97,198.48 78,961.32 73,067.58 66646.54 39877.59

Interpretation:

Here we have the sales figure of last 5 years. From the available data we can say that the sale

is increasing with increasing span. There should Sales increasing by 67%, 9%, 8% and 23%

in each every consecutive year. By this growth we can say that the company is growing very

rapidly in engineering sector. With increasing sales the company is trying to make a great

presence in the market. Elecon is also entering in new business which results into increase in

sales revenue.

Material Handling Equipment Sales Industry wise

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(Sources - Annual Report 2010)

Interpretation: The sales of Material handling equipment from different industries, the highest

sales in the Power sector (55.83%), Steel (20.80%) and the lowest sales in wind mill (1.72%)

industries.

Gear Sales Industry Wise

(Sources - Annual Report2010)

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Interpretation:

The sales in Gear with different industries, the highest sales in the material handling

equipment (23%), Steel Conversion (15%), Sugar (10%), and the lowest sales in the

Chemical & Fertilizers industry (3%), mining industry(3%).

Inventories:

PARTICULARS 2009-10 2008-09 2007-08 2006-07 2005-06



(ii)Semi-Finished Goods (at lower

of cost or net realizable value)19,064.99 21,378.85

12,282.458,136.52 5,980.13




TOTAL 30,325.16 38,613.29 23,987.66 15,710.40 15,627.39

Interpretation:

In the first category, raw materials, an inventory increase can be caused by over purchasing

by a company, the elimination of a finished good that used to require specific raw materials,

or deliberate over purchasing by a company because of a very low level of inventory

accuracy that requires a company to keep excessive stocks on hand in order to avoid stock-

out problems. By analyzing 5 year data we can about inventories we can say that the levels of

inventories are increasing year by year. There is an increasing trend in the inventory level. As

compare d to last year the level of inventory has been increased by 60 % which indicates the

growth of the company in engineering sector. It is fact that the company uses more

inventories when there is demand in the market and Elecon is having in great demand when

quality comes first than other things. From other point of view we can say that the liquidity of

the firm is blocked in inventories but proper inventory on other side is good due to

uncertainty of availability of raw material in time.

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Current Assets:

PARTICULARS 2009-10 2008-09 2007-08 2006-07 2005-06

CURRENT ASSETS

[I]Stock of Stores, Loose Tools,

Dies Mechanical, Electrical and

Electronic Spares (as taken,

valued and certified by the

Management) at lower of cost or

net realizable value

1,193.30 1,461.36 1,272.71 1,185.70 760.21

[II]Stock-in-Trade (as taken,

valued and Certified by the

Management)



(ii)Semi-Finished Goods (at

lower of cost or net realizable

value)

19,064.99 21,378.8512,282.45

8,136.52 5,980.13




[III] Sundry Debtors(Un

secured, Considered Good



(ii)Others 38,592.00 35,214.05 35,266.49 32,485.74 17,702.75

[IV] Cash and Bank Balances

(i) Cash on Hand 8.25 5.40 7.48 7.19 7.30

(ii) Balance with Scheduled

Banks

(1)In Current Account 1,288.81 745.24 468.52 532.18 563.10

(2) Bank Deposit 2,535.60 5,322.64 255.68 717.00 1,890.00

(3) Unpaid Dividend Bank

Account 48.59 32.59 20.56 19.53 10.29

TOTAL 87158.26 93,354.1 75,244.2 56970.24 40,279.8

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Interpretation:

Current assets are important to businesses because they are the assets that are used to fund

day-to-day operations and pay ongoing expenses and depending on the nature of the business.

From the above table of 5 year current assets we can say that there is increasing trend in

current assets as the business is of such nature there is increase in blockage of money in

current assets more as compared to fixed assets. The level of current assets has been

decreased by 6.6% as compared to last year.

Sundry Debtors

PARTICULARS 2009-10 2008-09 2007-08 2006-07 2005-06



(ii)Others 38,592.00 35,214.05 35,266.49 32,485.74 17,702.75

TOTAL 51758.55 47,173.58 49,229.61 38,798.60 21,417.59

Interpretation:

In the above table five years debtors’ information is given I which we can see that there is

increase in debtors except last year. The change might be occurred due to change in

collection policy, credit policy and others. A simple logic is that debtors increases only when

sales increases. More and more debtors higher the chances of bad debts. When sales are

increases the profit also increases. If company decreases the debtors they can use the spare

money in many investment plans.

Loans and Advances:

PARTICULARS 2009-10 2008-09 2007-08 2006-07 2005-06

(I) Loans to Staff 7.00 11.47 17.08 15.73 14.86

(ii) Advances recoverable in Cash or

in Kind or for value to be received3,195.54 4,503.31 3,671.86 3117.02 2255.11

(iii) Balance with Collector of

Custom, Port Trust, Excise etc.1,092.35 1,938.34 1,834.06 830.88 792.41

(iv) Advance Payment of Income

Tax(Net of Provision)1,172.54 1,038.67 196.48 ----------- -----------

TOTAL 5,467.43 7,491.79 5,719.48 3963.63 3,062.38

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Interpretation:

If we analyze the above table we can say that there is increase in loans and advances in more

or less percentage. The company is providing loans to staff which is good symptoms. Most of

the advances are given to the government for the purpose of taxes and other duties. From the

above table we can say that company is sincere in paying taxes and duties. The advances

recoverable are high which is good for the company. In the year 2008-09 the loans and

advances are increased by 30 % as compared to previous year which contribute highly to the

current assets.

Current Liabilities

PARTICULARS 2009-10 2008-09 2007-08 2006-07 2005-06

CURRENT LAIBILITIES

[I]Sundry Creditors 29,469.48 28,167.81 27,526.23 20,395.53 15,281.09

[II]Advance from Customer 8,529.91 12,569.49 5,185.15 4,544.00 5,874.94

[III]Dividend Warrants issued

but not enchased (Unpaid) 48.59 32.59 20.56 19.53 11.56

[IV]Interest accrued but not due 634.83 97.16 162.85 57.19 55.27

TOTAL 38,682.81 40,867.05 32,894.79 25,016.25 21,222.86

Interpretation:

The obligations are such as deferred dividend, trade credit, and unpaid taxes, arising in the

normal course of a business and due for payment within a year. If we analyze the above table

we can say that each and every item in the current liabilities reveals uneven trend. But at

aggregate level it shows an increasing trend Elecon is charging 50 % of advance from the

customer which increases the current liabilities of the company. In 2008-09 current liabilities

has been increased by 24% the main reason behind that is increase in advances from the

customer. It indicates change in sales policy .While in 2007-08 current liabilities has been

increased because of increase in other liabilities by32%. The company having minimum

liability has good prestige in the market.

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Provisions

PARTICULARS 2009-10 2008-09 2007-08 2006-07 2005-06

[I]Provision for Gratuity 574.57 680.58 479.20 ----------- 98.06

[II]Proposed Dividend 1,392.92 1,392.92 1,392.92 4 63.86 306.52

[III]Tax on Proposed Dividend 231.35 236.73 236.73 78.83 42.99

TOTAL 2198.84 2,310.23 2,108.85 542.69 447.57

Interpretation:

Above table indicates that company is making provision of only 3things i.e. gratuity,

dividend and dividend tax. Company is continuously paying dividend to its shareholders each

and every year. Company is also providing more emphasis on paying gratuity to their

employees it shows company‘s awareness. The provisions increases with increases in time

span. The provisions are increased by 10% in 2008-09 while it increased by nearly

300%which indicates the company’s presence in the market by providing regular dividend.

Working Capital Analysis

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

of working capital is very much essential for the smooth running of the business. And the

most important part is the efficient management of working capital in right time. The

liquidity position of the firm is totally effected by the management of working capital. So, a

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

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

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

number of devices, such as:

1. RATIO ANALYSIS

2. FUND FLOW STATEMENT

3. BUDGETING

Ratio Analysis

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

analysis can be employed for measuring short-term liquidity or working capital position of a

firm.

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The following ratios can be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

Fund Flow Analysis

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

additional funds were derived and the use to which these sources were put. The fund flow

analysis consists of:

Preparing schedule of changes of working capital

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.

Working Capital Budget

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

pursued in the future period time. Working capital budget as a part of the total budgeting

process of a business is prepared estimating future long term and short term working capital

needs and sources to finance them, and then comparing the budgeted figures with actual

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

future. He objective working capital budget is to ensure availability of funds as and needed,

and to ensure effective utilization of these resources.

The successful implementation of working capital budget involves the preparing of separate

budget for each element of working capital, such as, cash, inventories and receivables etc.

Analysis Of Short – Term Financial Position Or Test Of Liquidity

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

banks short-term loans are primarily interested to know the ability of a firm to meet its

obligations in time.

The short term obligations of a firm can be met in time only when it is having sufficient

liquid assets. So to with the confidence of investors, creditors, the smooth functioning of the

firm and the efficient use of fixed assets the liquid position of the firm must be strong but a

very high degree of liquidity of the firm being tied – up in current assets. Therefore, it is

important proper balance in regard to the liquidity of the firm.

Two types of ratios can be calculated for measuring short-term financial position or short-

term solvency position of the firm.

1. Liquidity ratios.

2. Current assets movements ratios.

A) Liquidity Ratios

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

become due. The short-term obligations are met by realizing amounts from current,

floating or circulating assts. The current assets should either be liquid or near about liquidity.

These should be convertible in cash for paying obligations of short-term nature. The

sufficiency or insufficiency of current assets should be assessed by comparing them with

short-term liabilities. If current assets can pay off the current liabilities then the liquidity

position is satisfactory. On the other hand, if the current liabilities cannot be met out of the

current assets then the liquidity position is bad. To measure the liquidity of a firm, the

following ratios can be calculated:

1. CURRENT RATIO

2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

1. Current Ratio

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

most widely used to make the analysis of short-term financial position or liquidity of a firm.

It is defined as the relation between current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS/CURRENT LIABILITES

The two components of this ratio are:

1) CURRENT ASSETS

2) CURRENT LIABILITES

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

inventories and work-in-progresses. Current liabilities include outstanding expenses, bill

payable, dividend payable etc. A relatively high current ratio is an indication that the firm is

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

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

to pay its current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e.

current assets double the current liabilities is considered to be satisfactory.

Current Ratio= Current assets / Current Liability

Interpretation:-

A conventional rule is that a current ratio of 2:1 or more is considered satisfactory. The current ratio of Elecon is more than 2:1.So it is sufficient and good for Elecon. It has more current asset then current claim so unit is able to meet current obligation in full and it can be said that its liquidity position is sound.

2. Quick Ratio

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash with a short period without loss of value. It measures the firms’ capacity to pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS / CURRENT LIABILITES

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2010 2009 2008 2007 2006

Current Assets 92626.7 100845.9 80963.7 60933.8 43341.3

Current Liabilities 40881.65 43177.28 35003.64 25621.5 21670.4

Current Ratio 2.27 2.33 2.31 2.37 2.00


Where Quick Assets are:

1) Marketable Securities

2) Cash in hand and Cash at bank.

3) Debtors

A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand a low quick ratio represents that the firms’ liquidity position is not good. As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal to the current liabilities then the concern may be able to meet its short-term obligations. However, a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors. On the other hand, a firm having a low liquidity position if it has fast moving inventories.

Quick ratio = (current assets- inventory) / current liability

Interpretation:

Generally quick – ratio of 1:1 is considered to represent a satisfactory to current financial condition and this ratio is sufficient. Elecon has ability to pay its current claim quickly. So, Elecon has sufficient current assets which convert in the cash immediately.

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, large is the amount of sales and profits. Current assets movement ratios measure the efficiency with which a firm manages its resources. These ratios are

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2010 2009 2008 2007 2006

Current Assets 92625.7 100845.9 80963.7 60933.8 43341.3

Inventory 31518.46 40074.66 25260.37 16895.7 16390.6

Current Liabilities 40881.65 43177.28 35003.64 25621.5 21670.4

Quick Ratio 1.49 1.41 1.59 1.71 1.24


called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Depending upon the purpose, a number of turnover ratios can be calculated.

These are:

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high amount of debtors due to slow credit collections and moreover if the assets include high amount of slow moving inventories. As both the ratios ignore the movement of current assets, it is important to calculate the turnover ratio.

1. Inventory Turnover Or Stock Turnover Ratio:

Every firm has to maintain a certain amount of inventory of finished goods so as to meet the requirements of the business. But the level of inventory should neither be too high nor too low. Because it is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in it. It will therefore be advisable to dispose the inventory as soon as possible. Inventory turnover ratio 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. Whereas the 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.

Inventory turnover = Netsales / average inventory

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2010 2009 2008 2007 2006

Net Sales 104637.05 95506.48 82643.51 72310.6 44248.1

Opening

Inventory

40074.66 25260.37 16895.7 16390.6 11995.6

Closing

Inventory

31518.46 40074.66 25260.37 16895.7 16390.6

Average

Inventory

35796.56 32667.51 21078.03 16643.15 14193.1

Inventory

Turnover

2.92 2.92 3.92 4.34 3.12


Interpretation:

Stock is a most important component of working capital. This ratio provides guidelines to the management while framing stock policy. It measures how fast the stock is moving through the firm and generating sales. It helps to maintain a proper amount of stock to fulfill the requirements of the concern. A proper inventory turnover makes the business to earn a reasonable margin of profit. It is visible from the chart that inventory turnover ratio shows decreasing trend from 2007 to 2009, since last two years it shows sound performance.

2. Debtors Turnover Ratio

Debtors turnover ratio indicates the relation between net credit sales and average accounts receivables of the year. This ratio is also known as Debtors’ Velocity. The ratio measures the receivables are collected, it suggest number of times amount of debtors collected during the year.This ratio indicates the efficiency of the concern to collect the amount due from debtors.

Debtors turnover = Net sales / Average Debtors

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 debtor’s efficiency. Now their credit policy becomes liberal as compare to previous years.

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2010 2009 2008 2007 2006

Net Sales 104637 95506.4882643.5

172310.6 44248.1

Opening

Debtors47173.58 49231.61 38798.6 21417.6 11396.8

Closing

Debtors51758.55 47173.58

49231.6

138798.6 21417.6

Average

Debtors49466.06 48202.59 44015.1 30108.2 16407.2

Debtors

Turnover2.12 1.98 1.87 2.4 2.69


Conclusion

The mission of Elecon is providing best quality to customers. It is financially very sound organization. The performance of the Elecon has been reasonably good. Due to constant work on the quality, better concentration on the material usage and proper prices the Elecon could improve maximum its performance. If Elecon give emphasis on human, it will useful in increasing production. Elecon is continuously trying to maximize the wealth of shareholders. As per my knowledge Elecon is running successfully and in Asia it is on number one position in Gear division. At last I wish bright future of Elecon, and may get first rank in allover world the overall performance of Elecon Engineering Company Limited is going on good track. The turnover has been increased by15.57% while the profit is increased by 14.19%. With the increase in capacity on account of the expansion projects being undertaken by the company. The recent boom in the engineering and technology sector has coupled with continuous thrust of government on infrastructure projects is expected to sustain healthy growth of engineering products demand. Almost all major players have announced substantial increase in capacity which results into increase in sales of Elecon. An increase in tax rates, transportation charges, railway freight, and cost of coal can add worries for the company.

Suggestions And Findings

Elecon is the fastest growing company in engineering world. I have taken a summer internship program for my MBA project at Elecon Engineering Ltd. I have prepared a project on Working Capital Management of Elecon. Following are some suggestions and findings of my research work:

Company’s main strength is its employees and company is properly taking care of that by providing safety working conditions, canteen facilities etc.

Elecon is investing more and more money in subsidiary companies for its faster growth.

Company’s working capital us enough to maintain company’s sales and other operations easily. Due to high goodwill the company is not getting any problem in getting short term finance.

Company is targeting to increase foreign exchange transactions and also trying to avoid hedging risk.

Company should try to utilize cheap source of finance for financing working capital requirements.

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Bibilograpy

Sites

www.elecon.com

www.moneycontrol.com

http://investing.businessweek.com/

Books

Financial Management – I.M.Pandey

Financial Management – Prasanna Chandra

Financial Statement Analysis – Dr. Anjan Bhattacharya

Annual Reports of Elecon Engineering Ltd of last 5 years

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Documents

Working Capital Management, Elecon