A project report on impact of current assets on working capital

“Impact of Current Assets on Working Capital”. AT

OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED (OTPL)
Contents
Sl. No. Titles Page No.
I Chapter 1
 Introduction 3
 Literature Review 37

 Statement of the Problem 39
39
 Purpose of the Study
39
 Scope of the study
40
 Objectives of the Study

II Chapter 2
 Organization Profile 41
 Organization Chart 50

 Data Collection Method 52

III Chapter 3
 Results & discussion with Charts & graphs 53
 Findings 77

 Suggestions 78
79
 Conclusions

IV Chapter 4
 Appendix 80
 Bibliography 80

 Joining Report 81
82
 Weekly Reports

Babasabpatilfreepptmba.com 1



Introduction: -

The project is assigned to me “Impact of Current Assets on Working Capital”. At

Oilgear Towler Polyhydron Private Limited (OTPL). The various information regarding

classification, determinants, components, sources, arrangement operating cycle have been

also discussed and aspects relating to the perspective of Oilgear Towler Polyhydron

Private Limited (OTPL).

Ratio Analysis has been carried out using Financial Information for last three

accounting years i.e. from 2003 to 2005; Ratios like Current Ratio, Working Capital

Turnover Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio have also been

analyzed. A Statement of Changes in Working Capital has also been analyzed and

attached Turnover & Performance of the Company for last three years has also been

analyzed.



MEANING & DEFINITION OF WORKING CAPITAL: -

Working capital in simple terms is the amount of funds, which a company, must

have to finance its day-to-day operation, it can be regarded as part/portion of capital,

which is, employed in short operation.

Every organization invests their funds in two terms of capital namely,

1. Fixed Capital.

2. Working Capital

The amount invested in the assets like Plant and Machinery, Building, Furniture

etc, blocked on permanent basis and is called Fixed Capital Organization not only

requires Fixed Capital, but also need of fund to meet day to day operations for short term

purpose, such funds is called Working Capital.

A Study of Working Capital is of major part of the external and internal analysis

because of its close relationship with the current day to day operation of business.

Working Capital consists broadly for that position/the assets of a business that are used at

related current operations and is represented by raw materials, stores, work in process and

finished goods merchandise, note/bill receivable.



Definition of Working Capital: -

Genestenberg: -

“ Working Capital means Current Assets of a company that are changed in the

ordinary course of business, from one to another, for ex, from cash to inventories,

inventories to receivable, receivable to cash”.

Gathman & Dug wall: -

“Working Capital as excess of current assets over current liabilities.”

Westen & Brigham: -

“ Working capital refers to a term investment in short term assets cash, short term

securities accounts receivables and inventories.”

J. Smith: -

“ The Sum of the current assets is the working capital of the business.”

“WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES”.



Working capital cycle: -

Introduction

The working capital cycle can be defined as:

The period of time, which elapses between the point at which, cash begins to be

expended on the production of a product and the collection of cash from a customer

The diagram below illustrates the working capital cycle for a manufacturing firm




The upper portion of the diagram above shows in a simplified form the chain of

events in a manufacturing firm. Each of the boxes in the upper part of the diagram can be

seen as a tank through which funds flow. These tanks, which are concerned with day-to-

day activities, have funds constantly flowing into and out of them.

 The chain starts with the firm buying raw materials on credit.

 In due course this stock will be used in production, work will be carried out on the

stock, and it will become part of the firm’s work in progress (WIP)

 Work will continue on the WIP until it eventually emerges as the finished product

 As production progresses, labor costs and overheads will need to be met

 Of course at some stage trade creditors will need to be paid

 When the finished goods are sold on credit, debtors are increased

 They will eventually pay, so that cash will be injected into the firm

Each of the areas – stocks (raw materials, work in progress and finished goods), trade

debtors, cash (positive or negative) and trade creditors – can be viewed as tanks into and

from which funds flow.

Working capital is clearly not the only aspect of a business that affects the amount

of cash:



 The business will have to make payments to government for taxation

 Fixed assets will be purchased and sold

 Lessors of fixed assets will be paid their rent

 Shareholders (existing or new) may provide new funds in the form of cash

 Some shares may be redeemed for cash

 Dividends may be paid

 Long-term loan creditors (existing or new) may provide loan finance, loans

will need to be repaid from time to time, and

 Interest obligations will have to be met by the business.

Unlike movements in the working capital items, most of these ‘non-working

capital’ cash transactions are not everyday events. Some of them are annual events (e.g.

tax payments, lease payments, dividends, interest and, possibly, fixed asset purchases and

sales). Others (e.g. new equity and loan finance and redemption of old equity and loan

finance) would typically be rarer events.




COMPONENTS OF WORKING CAPITAL

There are two components of Working Capital

A. Current Assets

B. Current Liabilities

A. Current Assets
An asset is termed as current assets when it is acquired either for the purpose of

selling or disposing of after taking some required benefit through the process of

manufacturing of which constantly changes in form and contributes to transactions take

place with the operation of the business although such assets does continue for long in the

same form.

Components of Current Assets are as follows:

 Cash & Bank Balance

 Stock of Raw Material at cost- work in process and Finished Goods.

 Advanced Recoverable in Cash or kind or kind or for value to be received.

 Security deposits with electricity board-telephone department balances with

customers.



 Deposits under the company scheme.

 Prepaid Expenses.

 Miscellaneous Stores implements goods in transit.

 Advanced payment of income takes credit certificates.

 Excise duty and sales tax recoverable.

 Outstanding debts for a period exceeding six months.

CO-RELATION BETWEEN CURRENT ASSETS AND WORKING CAPITAL

The working capital is in simple terms is the amount of funds which company

must have to finance its day-to-day operations. The interaction between current assets

and current liability is main theme of theory of working capital. In general terms working

capital means difference between current assets and current liabilities.

The current assets are main source of working capital. It refers to those assets,

which can be converted into cash within a year. The current assets are inventories, cash

and bank balance, sundry debtors, loans and advances etc

Current asset management is one the most important aspect of the overall

financial management. The efficient management of working capital can determine its

profitability skill of every financial manager lies in the efficient management requires

maintaining proper relationship between current asset and current liability. Therefore,

planning and control of current asset is he most important function of finance manager.



A study of working of working capital is major part of external and internal

analysis. Because, of its close relationship with current day-to-day operations of business.

Working capital consists broadly the assets of business that are used at current operations

which was represented by raw materials, stores, WIP, and finished goods, merchandise,

bills receivable. Etc.

Characteristics of Current Assets

While managing the working capital bear in mind of two characteristics of

Current assets.

1. Short life span.

2. Swift transformation into other assets forms.

Current assets a life span, cash balance may be held idle for a week or two

accounts receivable may have life span of 32 to 60 days and inventories may be need for

2 to 60 days. It s depends upon time require in the activities of procurement of,

production, sales and collection, and the degree of synchronization among them.

Each Current Assets swiftly transform into other asset cash is used for requiring

raw materials: raw material are transform in to finished goods, finished goods are

generally sold on credit are convertible into account receivable and finally accounts

receivable on realization, generate cash.




The short life span of working capital component and they swift transformation

from one from to another has certain implication.

CURRENT ASSETS CYCLE

Finished Goods

AC Receivable WIP

Wages / Factory Raw Materials
overhead

Suppliers
Cash

1. Decisions relating to working capital management are repetitive and frequent.

2. The difference between profit and present value is insignificant.



3. The close interaction among working capital components implies that efficient

management one component cannot undertake without simultaneous consideration of

other components.

Working capital means assets of the company that are changed in the ordinary

capital of business term to another. For ex, from another as for as from cash to

inventories, inventories to debtors and again debtors in to cash where it is collected.

Working capital refers to a term investment in short term assets cash; short-term

securities account receivable and inventories. Current asset management that affects a

firm liquidity is at another important finance function. In addition to the management of

long-term assets, Current assets should be managed efficiently for safe guarding the firm

against the dangerous of liquidity and insolvency. Investment in Current Assets affects

the firm profitability, liquidity and risk.

Current Liabilities:

Components of Current Liabilities are as follows:

 Non-Refundable non-interest bearing advances against subscription to shares.

 Sundry Creditors for the goods and expenses.

 Income tax deducted at sources from contractors.

 Expenses Payable.



 Amount due to promoter of company.

 Unclaimed Dividend.

 Security Deposits.

 Dealers Deposits.

 Liabilities for bills discounted.

IMPORTANCE OF WORKING CAPITAL: -

Working Capital is most important in every organization whether it is a small or

big concern. Therefore it is said that, working capital is the blood and center at a

business.

1. Adequately Working Capital creates certainty, security and confidence in the

minds of the person in the might as well in the minds of creditors and workers.

2. It creates a good credit standing for the firm because credit standing depends upon

the ability to pay promptly. A company with adequate working capital is always

able to meet C.L. in time.

3. It ensure solvency and stability of the enterprise it also ensures continuity in

production and sales.

4. It enables the company to take advantage of cash discount allowed by the

suppliers of raw materials or merchandise.

5. It enables the prestige of the company and the morale of its workers because a

company with adequately working capital is always able to pay wages and

salaries promptly and regularly.



6. It enables the company to procure loans terms banks on easy and competitive

terms.

7. In terms of boon it enables the company to meet increasing demand of its product.

8. In the time of depression, it enables the company to overcome the crises

successfully.

9. It enables the company to hold up inventory and wait for better marketing

opportunities so as to secure higher prices.

10. It enable the company on its business successfully and achieve progress and

prosperity,

METHODS OF ESTIMATING WORKING CAPITAL: -

 Conventional Method: -

According to the conventional method, cash inflows and outflows are matched

with each other. Greater emphasis is laid on liquidity and greater importance is attached

to current ratio, liquidity ratio, etc., which pertain to the liquidity of a business.

 Operating cycle method:

In order to understand what gives rise to differences in the amount of timing of

cash flows, we should first know the length of time which is required to convert cash into

resources, resources into final product, the final product into receivables and receivables

back into cash.




CLASSIFICATION OF WORKING CAPITAL




A. On the basics of Concept

(a) Net Working Capital:

This is the difference between current assets and current liabilities. Current

Liabilities are those that are expected to mature within an accounting year and include

creditors, bills payable and outstanding expenses.

Investment is current assets represent a very significant portion of the total

investment in assets. In case of public limited companies in India, current assets

constitute around 60% of the total capital employed. Therefore the finance manager

should attention to working capital management.

Working Capital Management is no doubt significant for all firms, but its

significance is enhanced in cases of small firms. A small firm has more investment in

current assets than fixed assets and therefore current assets should be efficiently

managed.

The working capital needs increase as the firm grows. As sales grow, the firm

needs to invest more in debtors and inventories. The finance manager should be aware of

such needs and finance them quickly.

Current Assets can be finance through long-term and short-term sources. The

ratio of long-term to short-term source will depend on whether the firm is aggressive of



conservative. It the firm is aggressive then it will finance a part of its permanent current

assets with short-term funds. On the other hand, a conservative firm will finance its

permanent assets and also a part of temporary current assets with long-term financing.

(b) Gross Working Capital

This refers to the firm’s investment in current assets. Current Assets are the assets

which can be converted into cash within a short period say, an accounting year. Current

assets include cash, debtors, and bill receivable, short-term securities. etc.

A. On the basis of Time

a. Permanent Working Capital

Permanent Working Capital is permanently locked up in the circulation of current

assets. It covers the minimum amount requested for maintaining the circulation of current

assets.

i. Initial Working Capital

At its inception and during the formative period of its operations a company must

have enough cash fund to meet its obligations. The need for initial working capital is for

every company to consolidate its position.

ii. Regular Working Capital



It refers to the minimum amount of liquid capital required to keep up the

circulation of the capital from the cash inventories to account receivable and from

account receivables to back again cash. It consists of adequate cash balance on hand and

at bank, adequate stock of raw materials and finished goods and amount of receivables.

b. Variable Working Capital

It refers to the past of the Working Capital that changes with the volume of

business; it may be divided into two classes.

i. Seasonal Working Capital

There is many line of business where the volumes of operations are different and

hence the amount of working capital varies with seasons. The capital required to meet

the seasonal needs of the enterprise knows as Seasonal Working Capital.

ii. Special Working Capital

The capital required to meet any special operations such as experiments with new

products or new techniques of production and making interior advertising campaign etc,

is also know as Special Working Capital.

B. Other Determinants of Working Capital



In order to manage the Working Capital optimally; on has to give due

consideration to the factors that influence the amount of Working Capital to be

maintained.

SOURCES OF WORKING CAPITAL: -




1. Long Term Sources of Working Capital: -

The following are the some important of the long

term sources of working capital.

A. Issue of Shares: Issuing shares can finance a part of long-term working capital.

B. Issue of Debenture: Long Term Working Capital can be collected by the way of

issuing the debentures.

C. Retained Profits: Accumulated large profit can also consider as a source of financing

the long-term capital.

D. Term Loans: - The mid and term loan above three year are also important source of

financing the long term working capital needs.

E. Reserves and Surplus: -These are also useful for financing long-term working

capital.




SHORT TERM SOURCES OF WORKING CAPITAL: -

Duration for this generally do not exceeds one year. Its sources are

 INTERNAL SHORT TERM SOURCES

1. Depreciation Funds: Depreciation Funds created out of the profit is good source for

short-term source of financing working capital.

2. Provision for Taxation: Provision made for the companies, can use taxation as a

source of working capital during the intermediate period.

3. Accrued Expenses: The company executives postpone the payment of certain

expenditures due the date of finalization of account. These accrued expenses are useful as

working capital

 EXTERNAL SHORT TERM SOURCES.

1. Trade Credit: Trade Credits extended by one business unit to the other on the

purchase sale of goods and equipments are very important.



2. Bank Credit: - Commercial banks are providing a greater part of working capital in

the form of over drafts cash credit and short-term loans.

3. Credit Papers: - Bills Payable, promissory notes etc are usefully for working capital

requirements.

4. Customer Credit: Amount may also be obtained from customer and these amounts

can be used for purchasing raw materials, paying expenses etc.

5. Financial Corporation: The financial corporation likes IDBI, IFCI, ICICI, etc,

advances loans for various types of assistance.

6. Government Assistance: State and Central Government, of the country provide

short-term finance industries on easy terms.

7. Loan from Directors: - One enterprise can also obtain loan from its directors,

officers, M.D. etc




EFFICIENT UTILIZATION OF WORKING CAPITAL MANAGEMENT

Well working capital management refers to the administration of all aspects of the

current assets and liabilities. It is necessary to get maximum benefit.

There is a direct relation between sale and working capital needs. As sale grows

the firm needs capital to invest in inventories and book debts.

A) Cash Management: -

Cash is required to meet the firm’s transactions and precautionary needs. The firm

needs cash to make payments for acquisition of resources and services, for the normal

consist of the business. It keeps addition funds to meet any emergency situation.

Cash Management involves three things.

 Managing cash flow in and out of the firm.

 Managing cash flow within the firm.

 Financing deficit or investing surplus cash. And thus controlling of cash balance at

the point of time.

B) Inventory Management: -



Inventories play very significant role in working capital. It is single most sizable

investment in working material, indigenous raw material, spares, stock, tools, the

maintenance, and goods in progress, stock of packing materials, stationary etc. To

manage inventories efficiently and effectively answer should be sought from the

following questions.

 How much should be ordered?

 When should be ordered?

The aim of inventory management thus should be to avoid excessive and

inadequate levels of inventories and to maintain sufficient inventories for the smooth

production and sales operation.

C) Management of Receivables: -

Business firm generally sell goods on credit to facilitate sales. When goods are

sold on credit finished goods are converted into receivable. Receivable when realized

generate cash for forecasting standard ratio of accounts receivables based on analysis of

part data of two years. Recession’s analysis and making may be appeared.

D) Operating Cycle: -

Operating Cycle refers to length of time required to complete the series of events

as stated below in case of manufacturing enterprise, which is cyclical in nature.

For a manufacturing firm, cash is spent on acquiring raw materials, which are

transformed in to work in progress. The work in progress is then converted in to finished



goods. Finished goods take the form sales, which may be credit or cash. Credit sales

convert in to sundry debtors, bills receivables, which after some time, gets converted in to

cash. This cycle repeats.

OPERATING CYCLE OF MANUFACTURING COMPANY

Cash

Debtors / BR Raw Materials

Sales of goods Work in Progress

Finished Goods

IMPORTANCE OF OPERATING CYCLE

Operating cycle concept is a new concept in working capital management, which

has been gaining more and more importance in recent years. This concept emphasizes the

importance of time factors in the conversion of raw materials into final product and then

in to sales resulting in cash collection, right from the acquisition of raw materials,

normally operating cycle passes through the following stages.

1. Acquisition of raw materials.

2. Work in Progress.



3. Stock of finished goods.

4. Sale and realization of sales proceeds.

Operating cycle concept plays an important role in determining the working

capital requirement of firm. Duration of manufacturing process right from the acquisition

of raw materials till they are sole out after being converted into final products and the

cash is realized determines the amount of working capital required. Longer the operating

cycle greater will be the amount of working capital required and shortest operating cycle

requires limited amount of working capital. Therefore, an efficient management should

try to reduce the time elapsed in these consecutive stages in operating cycle.




DETERMINANTS OF WORKING CAPITAL: -

A firm should plan its operations in such a way that it should have neither too

much not too of little working capital. The working capital requirement is determined by

a wide variety of factors. These factors, however, affect different enterprise differently.

They also vary from time to time. In general, the following factors are involved in a

proper assessment of the quantum of working capital required.

The following are the some important determinants of working capital

1. General Nature of Business

The working capital requirements of an enterprise are basically related to the

conduct of business. Enterprise falls in to some broad categories depending on the nature

of their business. For instance, public utilities have certain features which have a bearing

on their working capital needs. The two relevant features are,

1. The cash nature of business, that is, cash sale.

2. Sale of services rather than commodities.

In a view of these features, they do not maintain big inventories and have,

financial enterprise. The nature of their business is such that they have to maintain a

sufficient amount of cash, inventories, and book debts.

2. Production Cycle



Another factors which have a bearing on the quantum of working capital is the

production cycle. The term “Production or manufacturing cycle” refer to the time

involved in the manufacture of goods. It covers the time-span between the procurement

of finished goods. Funds have to be necessarily tied up during the process of

manufacture, necessitating enhanced working capital. In other words, there is some time

gap before raw material becomes finished goods. To sustain such activities the need for

working capital is obvious. The longer the time span (i.e. Production Cycle), the larger

will be the tied up fund and, therefore, the larger is the working capital needed and vice-

versa.

3. Business Cycle

The working capital requirements are also determined by the nature of business

cycle. Business fluctuations lead to cyclical and seasonal changes, which, in turn, cause a

shift in the working capital position, particularly for temporary working capital

requirement. The variations in business condition may be in two directions,

1. Upward Phase: - When boom conditions prevail,

2. Downswing Phase: - When economic activity is marked by a decline.

During the upswing of business activity, the need for working capital is likely to

grow to cover the lag between increased sales and receipt of cash as well as to finance

purchase of additional material to cater to the expansion of the level of activity.

4. Production Policy



The quantum of working capital is also determined by production policy. In case

of certain lines of business, the demand for products is seasonal, that is, they are

purchased during certain months of the year. There are two options to open to such

enterprise: either they confine production only to period when goods are purchased or

they follow a steady production policy throughout the year and product goods at a level

to meet the peak demand. In former case, there are working force and physical facilities

without adequate production and sale.

5. Credit Policy

The credit policy relating to sales and purchases, also affects the working capital.

The credit policy influences the requirements of working capital in two ways,

1. Through the credit terms granted by the firm to its customers/buyers of goods.

2. Credit Terms available to the firm from its creditors.

1. The credit terms granted to customers have a bearing on the magnitude of

working capital by determining the level of book debts. The credit sales result in higher

book debt (receivables). Higher book debts mean more working capital. On the other

hand, if liberal credit terms are available from the suppliers of goods (trade creditors), the

need of working capital is less. The working capital requirements of a business are, thus,

affected by the terms purchase and sale, and role given to credit by company in it’s

dealing with creditors and debtors.

2. Credit terms fixed by an enterprise are affected by the prevailing trade practices

as well as changing economic conditions. If, for example, competition were keen, there

would pressure to grant generous credit terms. Nevertheless, there is wide scope for



managerial discretion in working out a suitable credit policy relevant to each customer

based on the merits of each case. For instance, liberal credit facilities can be extended on

the basis of credit rating. This will avoid the problem of having excess working capital.

6. Growths and Expansion

As a company grows, it is logical to expect that a larger amount of working

capital is required. It is, of course, difficult to determine precisely the relationship

between the growth in the volume of business of a company and the increase in its

working capital. The composition of working capital in a growing company also shifts

with economic circumstance and corporate practices. Other things, being equal, growth

industries require more working capital than those that are static.

7. Profit Level

The level of profit earned differs from enterprise to enterprise. In general, the

nature of the product, hold on the market, quality of management and monopoly power

would by and large determine the profit earned by a firm. A priori, it can be generalized

that a firm dealing in a high quality product, having a good marketing arrangement and

enjoying monopoly power in the market, is likely to earn high profit and vice-versa.

Higher profit margin would improve the prospects of generating more internal funds

thereby contributing to the working capital pool.

8. Dividend Policy



Another appropriation of profit, which has a bearing on working capital, is

dividend payment. The payment of dividend consumes cash resources and, thereby,

affects working capital to that extent. Conversely, if the firm does not pay dividend but

retains the profits, working capital increase. In theory, a firm should retain profits to

preserve cash resources and, at the same time, it must pay dividends to satisfy the

expectations of investors. When profits are relatively small, the choice is between

retention and payment. The choice must be made after taking in to account all the

relevant factors.

9. Depreciation Policy

Depreciation Policy also exerts an influence on the quantum of working capital.

Depreciation charges do not involve any cash outflows. The affect of depreciation policy

on working capital is, therefore, indirect. In the first place, depreciation affects the tax

liability and retention of profits. Depreciation is allowable expenditure in calculating net

profits. Enhanced rates of depreciation lower the profits and, therefore, the tax liability

and, thus, more cash profits. Higher depreciation also means lower disposable profits and,

therefore, a smaller dividend payment. Thus, cash is preserved. In the second place, the

selection of method of depreciation has important financial implication.

10. Price level Changes

Changes in the price level also affect the requirement of working capital. Rising

prices necessitate the use of more funds for maintaining an existing level of activity. For



the same level of current assets, higher cash outlays are required. The effect of rising

prices is that a higher amount of working capital needed. However, in the case of

companies, which can raise their prices proportionately, there is no serious problem

regarding working capital.

11. Operating Efficiency

The operating efficiency of the management is also an important determinant of

the level of working capital. The management can contribute to a sound working capital

position through operating efficiency. Although the management cannot control the rise

in prices, it can ensure the efficient utilization of resources by eliminating waste,

improving co-ordination, and a fuller utilization of existing resources and so on.

Efficiency of operations accelerates the pace of cash cycle and improves the working

capital turnover. It releases the pressure on working capital by improving profitability

and improving the internal generation of funds.




Techniques of Working Capital Management: -

Working Capital management involves deciding upon the amount and

composition of current asset and how to finance the asset. This decision involves trade

off between risk and profitability.

Working Capital Balances are measured from the financial dates of the

company’s balance sheet. A study of the causes for changes of working capital that take

place in the balance from time to time is necessary. These changes can be measured in

rupee amount and also in percentage by comparing current assets, current liabilities and

working capital over the given period.

The importance tools of Working Capital are,

1. Ratio Analysis of Working Capital: -

1. Ratio analysis of working capital.

2. Turnover of working capital Ratio.

3. Current Ratio.

4. Current Debt tangible net worth.

5. Inventory Turnover Ratio.

6. Debtor Turnover Ratio.




2. Funds Flow Analysis of Working Capital: -

It is an effective management tool to study how funds have been produced for a

business and how they have been employed. This technique helps to analyze change in

working capital components between two data. The comparison of current asset and

current liability at the beginning and at the end of specific period show changes in such

type of current assets and resources from which Working Capital has been obtained funds

flow statement contributes materially to the financial aspects.

3. Working Capital Budget: -

The working capital budget is an important phase of overall financing budgeting.

This budgeting should be distinguished from a cash budget that is designed to measure all

the financial repayment of loans, term loan and similar item. On the other hand working

capital repayment and assure that they are duly provided for. The objective of that budget

is to secure an effective utility of investment.

4. Trend Analysis: -

A trend analysis indicates the change, which has been taking place from time to

time of an individual item of current assets. Assets and utility and net working capital on

the basis of some standards year and its effect on working capital portion. It enables

creative the upward and down ward trend of current assets and current liabilities. These

are usage measured from review of comprehensive balance sheet of a concern at the end

of account year and result is drawn on the basis of trend shown by them.




Literature Review: -

Working Capital management is concerned with the problems that arise in

attempting to manage the current assets and current liabilities and the interrelationship

that exists between them.

The term Current Assets refer to those assets, which in the ordinary course of

business can be, or will be converted in to cash within one year without undergoing a

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

are cash, marketable securities, accounts receivable and inventory.

The term Current Liabilities refer to those liabilities, which are intended at their

inception, to be paid in the ordinary course of business, within a year out of current assets

or earning of the concern. The basic current liabilities are accounts payable, bills payable,

banks overdraft and outstanding expenses.

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

and liabilities in such a way that a satisfactory level of working capital is maintained.

This is so because, if the firm cannot maintain a satisfactory level of working capital, it is

likely to become insolvent and may even be forced into bankruptcy. The current assets

should be large enough to cover its current liabilities in order to ensure a reasonable



margin of safety. Each of the current assets must be managed efficiently in order to

maintain the liquidity of the firm while not keeping too high a level of any one of them.

A proper balance between Current Assets and Current Liabilities is, therefore, the main

theme of the theory of working capital management.

Working Capital refer to that part of total capital which is kept invest in current

assets that are required for regular business operation. In accounting, working capital is

taken to mean the difference between Current Assets and Current Liabilities.

 According to Genestenberg: -

“Working Capital means Current Assets of a company that are changed in the

ordinary course of business, from one to another, for ex, from cash to inventories,

inventories to receivable, receivable to cash”.

 Management Problem

The Company wants to study its working capital efficiency where current

assets are main constituents of working capital management. The company wants to

avoid two dangerous points i.e excessive and inadequate investment in current

assets. Investment in Inventories and Debtors should be minimized so that it can

maximize its cash and bank balance.

 Research Problem: -



Research Problem is to maximize the company’s cash and bank balance through

the study of “Impact of Current Assets on Working Capital”.

 Statement of the Problem: -

The study has been undertaken in the organization for the purpose to know the

company’s working capital management through the study of “Impact of Current

Assets on Working Capital”.

 Purpose of the Study:-

The Purpose of the Study of working capital in Oilgear Towler Polyhydron

Private Limited is to analyze the working capital with the help of financial ratios and to

check how the company is maintaining the working capital.

The study should be made on the basis of the followings,

1. Financial Statements.

2. Financial Ratios.

 Scope of the Study: -

The working capital is spread to some important departments in Oilgear Towler

Polyhydron Private Limited. The departments are,



1. Finance Department.

2. Design Department.

3. Production Department.

 Objective of the Study: -

The following are the some importance objective of the study of working capital

management.

1. To analyze the working capital of the organization.

2. To analyze the effect of current assets on working capital.

3. To study financial performance of organization with the help of ratios.

4. To study the working capital and recommend the suitable working capital of the

year to the organization.




1. INTRODUCTION: -

OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED, (Now popular by

its short name OTPL) was formerly known as Polyhydron Systems Private Ltd. The

company established in the year 1985. The company, Polyhydron System Private Ltd,

was one of the four independently run engineering concern managed by a group of

entrepreneurs well known in the country for their quality products, fair approach to

business ethics. The group is known in the country as Polyhydron.

Name of the other three companies are,

1. HYLOC HYDROTECTINIC PRIVATE LIMITED.

2. POLYHYDRON PRIVATE LIMITED.

3. SPICA MOUCLD CYLINDERS PRIVATE LIMIED.

The oldest company in the group is HYLOC HYDROTECTINIC PRIVATE

LIMITED, The Company started in 1974 and is engaged in manufacturing complete

range of Hydraulic Tubes coupling for metric tubes flanged fitting, shut of valves and

needle valves POLYHYDRON PRIVATE LIMITED. As founded in 1984 and is known

in the country for its modern and sophisticated management techniques and quality



marketed very reasonable price, the company manufacturing Redial Piston Pumps, Relief

Valves, and Directional Control Valves. And SPICA MOUCLD CYLINDERS

PRIVATE LIMIED, established in Jan –06 for manufacture of Mould Cylinders to be

exported to Italy. This company is yet to commence its production.

OILGEAR TOWLER POLYHYDRON PRIVATE LIMITED: -

From its inspection has been manufacturing OIL HYDRAULIC SYSTEMS &

HYDRAULIC ACTUATORS & has later added PISTION type accumulators to its range

of products.

1. COLLABORATION

The company entered into a joint venture collaboration agreement with the

OILGEAR COMPANY, OILGEAR TOWLER INTERNATIONAL DIVISION, USA in

Dec 1993.

THE OILGEAR COMPANY is a world famous for its Electro-Hydraulic and

Hydraulics products such as sophisticated pumps, valves and systems and especially

known in the technology of world for its contribution to the technology of Metal

Extrusion and Metal forming systems. The company also has its subsidiaries in Australia,

Canada, France, Germany, Great Britain, Italy, Japan, and Korea & Spain.

Participated in following Business Areas

 Market Oilgear products in the Indian market. Include products like piston, pumps,

solenoid valves, prefil valves and cartridge valves.



 Market Hydraulic and Electro hydraulic and subsystems for presses and machines.

 Install, commission, and service, Hydraulic and Electro hydraulic systems

manufacturing by the Oilgear Company in Asian and South East Asian countries.

 Assemble, service, repairs and test Oilgear products.

 Design, manufacturing, sell, Install, repair, and service Hydraulic and Electro

hydraulic systems and subsystems, cylinders and other equipment in Asian and South

East Asian countries.

2. THE CONSTITUTION OF THE COMPANY: -

Name OILGEAR TOWLER POLYHYDRON PRIVATE

LIMITED (OTPL)

Constitution A private limited company registered under

companies act 1956

Registered Office

Location Plot No 4, R.S. No- 608/2, BEMCIEL

UDYAMBAG BELGAUM, 590008

KARNATAKA STATE, INDIA.

Phone: - 0831-2441157; Fax: - 0831-2441610
Works Plot No 34 & 37B

Village Kuttalwadi



P.O. Navage, Belgaum, 590014

(0091)(831) 2411528 (4 lines)

(0091)(831) 2411576

otplbgmpl2@oilgear.co.in

Phone 91831-2441157, 2441459

E-mail otplbgm@sanchearnet.com

Works (0091)(831) 2411528 (4 lines)

(0091)(831) 2411576

otplbgmpl2@oilgear.co.in

 Board of Directors: -

Chairman Mr. Robert Drake.
Managing Director Mr. V.K.Samant.
Director Production Mr. H.D. Kadrolkar.
Director Commercial Mr. N. Radhakrishana Rao
Director Finance Mr. D.S. Chitnis
Director Mr. Srikanth Srinivasan.

 Collaborators - THE OILGEAR COMPANY

OILGEAR TOWLER INTERNATIONAL DIVISION, USA.

4. ASSETS: -



4.1) LAND AND BUILDING

Land and the site of the registered office – 11054 Sq.ft (1026 Sq.m.)

Building and the site of the registered office- 4830 Sq.ft (450 Sq.m.)

Land at site of plant 1- 2200 Sq.ft. (204 Sq.m.)

Building at site of plant 1- 1622 Sq.ft (51 Sq.m.)

Land site of the works 258,100 Sq.ft (23978 Sq.m.)

Building Site of the works 25,000 Sq. ft (2322 Sq.m.).

4.2) MACHINERY, HANDLING, EQUIPMENT AND TEST RIGS

Laths 3 No s Painting Equipment 2 Sets
Horizontal Bore 3 No s Electro Static Cleaner 1 No s
CNC Machine Center 1 No s Cleaning Machine 2 No s
CNC Vertical Machine Center 1 No s Pallet Trucks 2 No s
Drilling Machine 3 No s Air Compressors 3 No s
Milling Machine 1 No s Prgauge Calibrator 1 No s
Surface Machine 2 No s Hardness Tester 1 No s
Honing Machine 1 No s Pumps Test Stands 3 No s
Hack Saws 2 No s Valve Test Stands 1 No s
TIG Welding Set 1 No s Generating Stands 3 No s
Flame Cutting Equipments 1 Set Over head Cranes 3 No s
Arc Welding Set 2 No s

4.3) OFFICE AND EQUIPMENT

Communication: -

Head Office: -

Phone lines 6 Nos.

Fax lines 1 No

E-mail 1 No

Electronic Exchange 10*30 Capacities.




Works: -

Phone lines 6 Nos.

Fax line 1 No.

E-mail 1 No

Electronic Exchange 10*30 Capacities.

4.4) DATA PROCESSING

Computer ---- 24 Nos. For

Design Accountancy

Inventory Planning

Sales Purchase

Administration.

5) STAFF: -

Sales 7 Engineers + 4 Support

Purchase 2 Officers + 3 Support



Planning 1 Engineer

Design 9 Engineers + 1 Support

Accounts and Administrations 6 Officers + 3 Supports

Manufacturing 3 Engineers + 40 Supports

Servicing 3 Engineers + 4 Support

Quality Assurance 1 Engineers + 1 Support

6) FACILITIES: -

6.1) In House

Design - Designing of mechanical and electro hydraulic

systems Auto card 2000 solid works 2001 + Cosmos works.

Machining -

Metal Cutting

Turning

Milling

Prilling & Tapping



Surface Grinding

Honing

Welding –

TIG Welding.

ARC Welding

Surface Treatment -

Cleaning by Kerosene

Phosphating

Painting.




Methodology adopted and data collection: -

The nature of the study was collection analysis and interpretation of working

capital management in “OTPL” The information about this was gathered through

following sources.

• Primary Data: -

Primary Data are those, which are collected fresh and for the first time, and thus it

happens to be original in character.

The primary sources of data are collected from the financial executives through

personal discussion in the light of the set objectives. Along with this, informal discussion

with other, member of the finance.

• Secondary Data: -

Secondary Data are those have already been collected by someone else and while

already been passed through statistical process.

• Annual Report of the Company.

• Annual Accounts of the Company.

• Ledger Profit and Loss Account.




STATEMENT SHOWING CHANGES IN WORKING CAPITAL IN 2003

OTPL

Particulars 2002 2003 Increase Decrease

A) Current Assets

1. Inventories. 1,43,29,584 1,82,87,763 39,58,179 ---------

2. S. Debtors 1,47,19,225 1,62,67,703 15,48,478 ---------

3. Cash & Bank Balance 96,70,212 99,24,482 2,54,270 ---------

4. Other C. Assets. 5,04,462 6,83,065 1,78,603 ---------

5. Loans & Advances. 23,58,269 18,000,63 --------- 5,52,206

TOTAL 4,15,81,752 4,69,69,076

B) Current Liabilities

1. Current Liabilities 88,76,844 1,27,30,292 -------- 39,53,448

2. Provision 56,67,201 47,89,238 8,77,963 ------------

TOTAL 1,45,44,045 1,76,19,530

Working Capital

(A-B) 2,70,37,707 2,93,49,456 68,17,493 45,05,654

Net Increase in

Working Capital 23,11,839 23,11,839

GRAND TOTAL 2,93,49,456 2,93,49,456 68,17,493 68,17,493




INTERPRETATION

As we can see in the above year 2002-03, there is an increase in the working

capital by Rs. 23,11,839. This is because:

1. As we can see that there is a great increase in Current Assets as the company is

looking to invest more in the inventory of raw material in this year, because of the

shortage of raw material in the market, so overall there is increase in the current

assets. But in current assets loans and advance are decreased.

2. As we can see there is decrease of Rs. 39,53,448 in the liabilities of the company,

which is good for the company. But Rs. 8,77,963 increases provisions.

3. So from all the above calculation we can see that there is good increase in the

working capital. So we can say that company is more likely to increase there

inventory because they thinking it for the long term perspective.



STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004

OTPL PVT LTD (Rs. In Thousand)


A) Current Assets

1. Inventories 18,288 34,600 16,312 -------

2. S. Debtors 16,298 32,122 15,854 -------

3. Cash & Bank Bal. 9,924 12,492 2,568 -------

4. Other C. Assets 6,83 9,45 2,62 -------

5. Loans & Advances 1,806 1,939 1,33 -------

TOTAL 46,969 82,098


1. Current Liabilities 12,830 28,541 ---------- 15,711

2. Provision 4,789 7,664 ---------- 2,875

TOTAL 17,619 36,205

Working Capital

(A-B) 29,350 45,893 35,129 18,586

Net Increase in Working

Capital 16,543, 16,543

GRAND TOTAL 45,893 45,893 35,129 35,129



INTERPRETATION

In the above table it is seen that, there is an increased in the working capital by

Rs.16, 543 in the year 2003-04, this is because: -

1. As we can see in the above table that in the Current assets are increased, because of

increase in inventories, debtors, cash and bank balance, loans and advance and also

increase in other current assets.

2. As we can see there is overall decrease in current liabilities. Because of current

liabilities are decreased by Rs. 15,711 and also provision are also decreased by Rs.

2,875.

3. So as the liabilities have decreased this year and there is increase in current assets, so

there is increase in working capital.

STATEMENT SHOWING CHANGES IN THE WORKING CAPITAL IN 2004



OTPL PVT LTD (Rs. In Thousand)


A) Current Assets

1. Inventories 34,600 28,042 -------- 6,558

2. S. Debtors 32,122 47,790 15,668 -------

3. Cash & Bank Bal 12,492 10,084 -------- 2,408

4. Other C. Assets 9,45 6,056 5,111 -------

5. Advance to Suppliers ------- 1,215 1,215 -------

6. Loans & Advances 1,930 1,771 -------- 1,59

TOTAL 82,098 94,958 21,994 9,125


1. Current Liabilities 28,541 26,531 2,210 --------

2. Advance from customer --------- 9,082 ------ 9,082

3. Provision 7,664 6,778 8,86 -------

TOTAL 36,205 42,191 3,096 9,082

Working Capital (A-B) 45,896 52,767 25,090 18,207

Net Increase in Working Capital 6,874 6,883

GRAND TOTAL 52,767 52,767 25,090 25,090

INTERPRETATION




In the above table it is seen that, there is an increased in the working capital by

Rs.6, 883 in the year 2004-05, this is because: -

1. As we can see of the Current Assets side there is decrease in Inventories, cash and

bank balance and loans and advances. There is an increased in sundry debtors, other

current assets and company also given the advance to supplies by Rs. 1,215. This

decrease in Inventory because there is unavailability of their main raw material.

Because of the shortage of it in the market.

2. Current Liabilities side there has been increased in current liabilities and provisions of

Rs. 2,210 and Rs. 8,86 respectively and also company has taken the advance from

customers of Rs. 9,082.

3. So, looking above calculation we see that working capital of the company is

increased, because current assets are more than current liability. Working Capital is

increased from Rs. 6,874 to Rs. 6,883. Because in this year company has taken the

advance from customer and given advance to suppliers.

RATIO ANALYSIS

Meaning: -



Ratio Analysis is a widely used tool of financial analysis. It defined as the

systematic use of to interpret the financial statement so that the strength and weakness

of a firm well as its historical performance and current financial condition can be

determined. This relationship can be expressed

1. Percentage says net profits are 25 percent of sales.

2. Proportion of numbers (the relationship between net profit and sales is 1:4), these

alternative methods of expressing items which are related to each other are, for the

purpose of financial analysis, referred to as ration analysis.

Types of Ratios

Ratio can be classified into following categories,

1. Current Ratios.

2. Net Working Capital Ratios.

3. Total Assets Turnover Ratios.

4. Inventory Turnover Ratios.

5. Fixed Assets Turnover Ratios.

6. Creditors Turnover Ratios.

7. Creditors Collection Period.

8. Debtors Turnover Ratios.

9. Debtors Collection Period.

10. Gross Profit Margin Ratios.

MERITS AND DEMERITS OF THE RATIO: -




Merits of the Ratio: -

The following are the some important merits of the ratio

1. Ratio Analysis reflects the working efficiency of a concern.

2. Since, ratio analysis relates the financial health of a concern, insurance other

financial institution relay on them while judging loan application and in taking

vital investment decision.

3. It helps in establishing trends since the result are preparing plans for the future.

4. It is helpful in forecasting likely events in future.

Demerits of the Ratio: -

The following are the some important demerits of the ratio.

1. The striking aspect of ratio analysis is the absence of an explicit theoretical

structure; different methods of collection are adopted by different concerns.

2. For concert analysis inside information must be known by the analyst since most

concern report to portray of easy picture of the financial attachments.

3. Change in the basis of accounting may pose difficulty in analysis ratios between

one period

1. Current Ratios: -



It can be calculated as current assets divided by current liabilities. The current

ratio measures the relative ability of a company to pay its short-term debts. The ratio is

used to reveal how well a company could meet a sudden demand to pay off its short-term

creditors.

Formulas,

Current Ratio = Current Assets

Current Liabilities

Particulars 2002-2003 2003-2004 2004-2005
Current Assets 4,69,69,00 8,20,98,000 9,49,58,000

0
Current Liabilities 1,76,19,00 3,62,05,000 4,21,91,000

0
Current Ratio 2.66 2.26 2.25



Current Ratio

2.8
2.6

Ratios
2.4 Current Ratio
2.2
2
2002-2003 2003-2004 2004-2005
Years

Interpretation: -

As a conventional rule, a current ratio of 2:1 or more considered satisfactory. The

OTPL Company, has current ratio is 2.66:1; therefore, it may be interpretated to be

satisfactory company. The current ratio represents a margin of safety for creditors. The

higher the current ratio, the greater the margin of safety, so, there has been increased in

the ratio during 2002-2003, when compared with 2003-2004 and 2004-2005. So, larger

the amount of current assets in relation to current liabilities, the more the firm’s ability to

meet its current obligation. Firm with less than 2:1, current ratio may be doing well,

while firm with 2:1 or even higher current ratio may be struggling to meet their

obligations. This is so because, if Rs.2 is your Current Assets and Rs.1 is Your Current

Liabilities. Thus Current Ratio shown is 2:1, which is an Ideal Ratio.

2. Quick Ratio

It establishes a relationship between quick or liquid, assets and current liabilities.

An asset is liquid if it can be converted in to cash immediately or reasonably soon

without a loss of value. Cash is most liquid assets. Other assets, which are considered to



be relatively liquid and included in the quick assets, are debtors, and bills receivable and

marketable securities. Inventories are considered to be less liquid, inventories normally

requires some time for realizing in to cash; their value also has a tendency to fluctuate.

Formula

Quick Ratio = Current Assets – Inventories

Current Liabilities

Quick Ratio
Particulars 2002-2003 2003-2004 2004-2005
Current Assets
2 4,69,69,000 8,20,98,000 9,49,58,000
(-) Inventory 1,82,88,000 3,46,00,000 2,80,42,000
1.5
Total 2,86,81,000 4,74,98,000 6,69,16,000
Ratios

(/) Current Liabilities
1 1,76,19,000 3,62,05,000
Quick Ratio 4,21,91,000
Quick Ratio 1.62 1.31 1.58
0.5
0
2002-2003 2003-2004 2004-2005
Years

Interpretation: -

Generally a quick ratio is 1:1 is considered to represent a satisfactory current

financial condition. In the year 2002-03 quick ratio was 1.62 and there has been

decreased in the year compared to 2003-04 and 2004-05.

The high ratio indicates that all debtors may not be quick and cash may be

immediately needed to pay operating expenses. It should be noted that inventories are not

absolutely non-liquid to a measurable extent inventories are available to meet current



obligations. So the company can suffer from shortage of funds. On the other hand, a

company with low ratio in the year 2003-04 and 204-05, indicates that quick ratio may

really be prospering and paying its current obligation in time if it has been turning over

its inventories efficiently.

3. Total Assets Turnover Ratio: -

The Total assets turnover ratio in addition to, or instead the net current assets,

This ratio shows the firm’s ability in generating sale from all the financial resource

committed to total assets

Formula,

Total Assets Turnover Ratio = Net Sales

Total Assets

Particulars 2002-2003 2003-2004 2004-2005
Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Total Assets 2,69,95,000 2,57,87,000 2,52,21,000
Total Assets Turnover Ratio 2.12 4.21 4.24



Total Assets Turnover Ratio

5
4

Ratios
3 Total Assets
2 Turnover Ratio
1
0
2002-2003 2003-2004 2004-2005
Years

Interpretation: -

There has been increased in the year 2004-05, when compared to 2002-2003 and

2003-2004. And high ratio indicates that in the year 2004-05, that ratio shows the firm’s

ability in generating sales from all financial resources.

4. Inventory Turnover Ratio: -

It indicate the efficiently of the firm in producing the selling its product. The ratio

indicates how fast inventory is sold. A high ratio is good from viewpoint of liquidity and

vice versa. A low ratio would signify that inventory does not sell and stay on the shelf or

in warehouse for a long time.

Inventory Turnover Ratio = Net Sales

Inventory

Particulars 2002-2003 2003-2004 2004-2005
Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Inventory 1,82,88,000 3,46,00,000 2,80,42,000
Inventory Turnover Ratio 3.13 3.14 3.81



Inventory Turnover Ratio

5
4
Ratios
3 Inventory Turnover
2 Ratio
1
0
2002-2003 2003-2004 2004-2005
Years

Interpretation: -

There has been increased in the ratio in the year 2004 –2005, when compared

with 2002-2003 and 2003-2004. In the year 2004-2005, indicates high ratio, it means,

Inventory turnover ratio implies good inventory management and very high ratio calls for

a careful analysis. It may indicate under investment in inventory. While a Low ratio

indicate in the year 2002-2003, that, it may be result in use of inferior quality of goods

and over investment in sales in the 2003-2004.

4. Fixed Assets Turnover Ratio: -

Fixed Assets Turnover Ratio measures Sales per rupees investment in Fixed

Assets. It measures the efficiency of fixed assets employed in the organization. High

degree of ratio indicates high efficiency of assets utilization vice-versa.

Fixed Assets Turnover Ratio = Net Sales

Fixed Assets




Particulars 2002-2003 2003-2004 2004-2005

Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Fixed Assets 3,69,41,000 3,72,38,000 3,83,06,000
Fixed Assets Turnover Ratio 1.55 2.91 2.79

Fixed Assets Turnover Ratio

4

3
Ratios

Fixed Assets
2
Turnover Ratio
1

0
2002-2003 2003-2004 2004-2005
Years

Interpretation: -



There has been increased in the ratio during 2002-2003 and 2004-2005, when

compared with 2003-2004. A low ratio in the year 2002-2003 indicates in efficiency use

of assets, and the next two years (2003-2004 and 2004-2005) shows high ratio, which

means that increasing efficiency of fixed assets employed in the organization. One of the

cautions to be kept in the mind is when fixed assets are old and substantially depreciated

the ratio tenders to be high, because, the denominator of the ratio will be low.

5. Creditors Turnover Ratio: -

It is the ratio between the Sales and Creditors or Net Credit Purchase and average

amount of creditors. It is an important tool of analysis as a firm can maintain minimum

amount of Current Assets, as credit from suppliers is easily available.

Creditor Turnover Ratio = Net Sales

Creditors

Particulars 2002-2003 2003-2004 2004-2005

Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Creditors 1,28,30,000 2,85,41,000 2,63,31,000
Creditors Turnover Ratio 4.47 3.80 4.06



Creditors Turnover Ratio

5
4.5
Ratios 4 Creditors Turnover Ratio
3.5
3
2002-2003 2003-2004 2004-2005
Years

Interpretation: -

In the year 2002-2003, there was been increased when compared to 203-2004 and

2004-2005. In the year 2002-2003 indicate high ratio means the sales of the year very

low as compared to 2003-2004 and 2004-2005 and also creditors are low as compared to

2003-2004 and 2004-2005.

6. Creditors Collection Period: -

This ratio is the difference between Days and Creditors turnover ratios.

Formula,

Creditors Collection Period = Days

Creditors Turnover Ratio




Particulars 2002-2003 2003-2004 2004-2005

Days 365 365 365
Creditors Turnover Ratio 4.47 3.80 4.06
Creditors Collection Period 81.65 96.05 89.90

Creditors Collection Period

150

100
Ratios

Creditors Collection
50 Period

0
2002-2003 2003-2004 2004-2005
Years

Interpretation: -

In the year 2002-2003, there was increase when compared to 2003-2004 and

2004-2005. The high ratio of 2002-2003 indicates that the sales of the year is very low as

compared to 2003-2004 and 2004-2005, and also creditors are low as compared to as

compared to 2003-2004 and 2004-2005. While low ratio in the year 2003-2004 indicates

that creditors are high as compared to other year.

7. Debtors Turnover Ratio: -



It indicate the how many times debtors turnover each year. Generally, the higher

the ratio of debtor’s turnover, the more efficient is the management of credit. The ratio

measured how will reveal the days of debts to be colleted.

Debtors Turnover Ratio= Net Sales

Debtors

Particulars 2002-2003 2003-2004 2004-2005

Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Debtors 1,62,68,000 3,21,22,000 4,77,90,000
Debtors Turnover Ratio 3.52 3.38 2.23

Debtors Turnover Ratio

4
3
Ratios

Debtors Turnover
2
Ratio
1
0
2002-2003 2003-2004 2004-2005
Years

Interpretations: -



There has been increased debtor in the year 2002-2003 as compared to 2003-204

and 2004-2005, high ratio indicates of shorter time gap between credit sales and cash

collation. A low ratio shows that debts are not being colleted rapidly. So, the standard

norms this high ratio reveals that company has quite efficient management of debtors. In

the year 2000 & 2003 are showing equal turnover ratio.

8. Debtors Payment Period: -

The debtor’s payment period is mainly related to how many days’ debtors have

taken to complete a period and how much is debtor’s turnover ratio.

Debtors Payment Period = Days

Debtors Turnover Ratio

Particulars 2002-2003 2003-2004 2004-2005

Days 365 365 365
Debtors Turnover Ratio 3.52 3.38 2.23
Debtors Collection Period 103.69 107.98 163.67




Debtors Collection Period

200
150
Ratios 100
Debtors Collection
Period
50
0
2002- 2003- 2004-
2003 2004 2005
Years

Interpretation: -

The shorter the collection period is better quality of debtors. Since, a short

collection period implies that prompt payment by debtors. In collection period having

some increase and decrease. So, we can find out that there is no uniformity in the debtor’s

collection period of the year.

8. Gross Profit Margin Ratio: -

Gross Profit Margin Ratio is the result of relationship between price, sales,

volume and cost. A change in gross profit margin can be due to changes in any of these

factors. It represents the limit of beyond which fall in sales price are outside and tolerance

limit.

Gross Profit Margin Ratio = Gross Profit

Net Sales




Particulars 2002-2003 2003-2004 2004-2005

Gross Profit 7,26,000 1,42,88,000 1,86,54,000
Net Sales 5,73,73,000 10,86,60,000 10,70,00,000
Gross Profit Margin Ratio 1.26 13.14 17.43

Gross Profit Margin Ratio

20
15
Ratios

Gross Profit Margin
10
Ratio
5
0
2002-2003 2003-2004 2004-2005
Years

Interpretation: -

There has been increased in the year 2004-2005 as compared to 2002-2003 and

2003-2004. The high ratio indicates that the company should earn a sufficient profit on

each rupee of sales. While low ratio indicate that in the year 2002-2003 that the company

will be meeting the operations expenses and no returns will be available to the owners.

And also high ratio indicate that a good management indicate that cost of production of

the firm is relatively low, it may also indicate higher the sales price without a

corresponding increase in the cost of the goods.

CONSOLIDATED STATEMENT OF THE RATIOS FOR THREE YEARS




Sl. No Particulars 2002-2003 2003-2004 2004-2005
1. Current Ratio 2.66 2.26 2.25
2. Quick Ratio 1.62 1.31 1.58
3. Total Assets Turnover Ratio 2.12 4.21 4.24
4. Inventory Turnover Ratio 3.13 3.14 3.81
5. Fixed Assets Turnover Ratio 1.55 2.91 2.79
6. Creditors Turnover Ratio 4.47 3.80 4.06
7. Creditors Collection Period 81.65 96.05 89.90
8. Debtors Turnover Ratio 3.52 3.38 2.23
9. Debtors Collection Period 103.69 107.98 163.67
10. Gross Profit Margin Ratio 1.265 13.14 17.43

Gross Profit
Consolidated Statement of Ratios Margin Ratio
Debtors
300 Collection
250 Period
200 Debtors
Ratios 150 Turnover Ratio
100
50 Creditors
0 Collection
2002- 2003- 2004- Period
2003 2004 2005 Creditors
Turnover Ratio
Years
Fixed Assets
Turnover Ratio
FINDING AND SUGGESTIONS Inventory
Turnover Ratio

Findings: - Total Assets
Turnover Ratio

Quick Ratio
1. Current Ratio of OTPL Company shows the solvency of the firm ability to repay its
Current Ratio
liabilities. As ratio is decline to 2.66. It shows that company is in solvency state.

Current assets are should always be twice of current liabilities.




2. In a comparative statement of Balance Sheet, debtors were 1,47,19,000 in the year

2002-2003, and it has increased to 3,21,22,000 and 4,77,90,000 in the last two years.

Because increased in credit sales.

3. Total assets turnover ratio shows the ability to convert all its assets incurring fixed

assets to sales. As per the ratio calculated in the year 2002-2003 it was 2.12, which

was low ratio means firm is able to convert its total assets quickly into funds as per

the company ratio the firm is able to convert it assets because the ratio are higher

between 4.24 to 2.12, which was low ratio.

4. Inventory Turnover Ratio is increased from 3.13 to 3.81 in the year 2002-2003 and

2004-2005 respectively. It shows company has maintained good inventory policy.

5. Gross profit margin ratio shows that increasing year to year. It shows that company

should earn a sufficient profit on each rupee of cash.

Suggestions: -

The working capital including all its related aspects is managed quite well by

OTPL. The finance department is carrying out its responsibilities efficiently. The entire

departments are collectively working hard for the progress of OTPL.



The following are the suggestions.

1. In a comparative Balance Sheet Debtors are increased from year to year (1,47,19,000

to 4,77,90,00). Even though debtors are increased which is favorable enough for the

company. But should take care while dealing against the loss due to doubtful and bad

debt.

2. The company net sale is very low in the year 2002-2003 Rs 5,73,73,000, as compared

to 2003-2004 Rs. 10,86,60,000. So, the company should manage its current assets,

which effects on production and ultimately on sales.

3. The Current Ratio of the company is decreased from 2.66 to 2.55 in the last three-

year (2003 to 2005). So, the current ratio should be maintained by the company in

such a way that the ratio does not follow below 2:1.

4. Company should give minimum payment time to get prompt payment by debtors.

Conclusion




Working capital may be regarded as lifeblood of a business. It’s effective

provision can do much to ensure the success of a business, while it’s inefficient

management can lead not only to loss of profits but also to the ultimate down fall of what

otherwise might be considered as a promising concern. A study of working capital is of

major importance to internal and external analysis because of its close relationship with

the current day to day operations of a business.

1. Here, I conclude that Changes in the financial year is showing increase in the working

capital, because company maintains its working capital properly in the year 2003 to

2005.

2. According to my calculation Current Assets main part of, the working capital of the

business. According to all Ratios, It shows that company maintains its ratio is very

well. So, In the year 2004-2005 company showing better position in the working

capital.



BIBLOGRAPHY

• Financial Management by books used from which I have taken help for the theory
part of the study:
 M.V. Khan & P.K. Jain
 I.M. Pandey

• I have also used the trial balance of Oilgear Towler Polyhydron Private Limited

(OTPL). Those are from the year 2003-2005. Which provide by the official at

Belgaum Works.

• I have meet with the different people at the Administrative Department at Oilgear

Towler Polyhydron Private Limited (OTPL). As also took their views and

information for my Study.

• I have also took the help form the company site www.oilgear.co.in


A project report on impact of current assets on working capital

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