Working Capital Management

Study of Working Capital Management
A Project Report
On
A Study of Working Capital management

At
Perfect Circle India Limited Nasik.

Submitted by
Mr. Nitin D. Fegade

Project Guide
Prof. Mrs. Smita Dhande.

GIMR, Jalgaon.
In Part & Partial Fulfillment of the Requirement

For the award of degree of
Master of Business Administration

Year-2007-2009
GODAVARI INSTITUTE OF MANAGEMENT & RESEARCH
Affiliated to
NORTH MAHARASHTRA UNIVERSITY, JALGAON.
G.I.M.R., Jalgaon
ACKNOWLEDGEMENT
I am very thankful to our Director Mr. Prashant Warke Sir, for giving us a great
opportunity of preparing a project report on our specialization (Finance), which will
really improve our skill & will give us practical knowledge.
I am very thankful to our Prof. Mrs. Smita Dhande who has giving me a change to
study & select the subject of project according to my interest & I also thank her for
giving the valuable knowledge & support about project & helping me in all the way to
complete my project in systematic manner.
I wish to thank the Financial Controller of Perfect Circle India Ltd. Nasik Mr. Mayur
Bumb who has me by giving information regarding Project Report. I would also like
to thanks Mr. J .V. Shule & Mr. S. R. Borole for helping me in project report. I wish
to thank all those who have helped me directly & indirectly to complete this project
report.
NITIN D. FEGADE
G.I.M.R., Jalgaon
INDEX
Sr. No.
Content
Page No.
1.
Introduction of Study
2.
Company Profile
3.
A Study of Working Capital
16
4.
Ratio Analysis
31
5.
Comparative Study of Financial

Statement
42
6.
Statistical Analysis of Financial

Data
47
7.
Conclusion
53
8.
Recommendation and Suggestions
54
9.
Bibliography
56
G.I.M.R., Jalgaon
1. Introduction of study.
1. Objectives of the study
2. Methodology
3. Scope of Study
4. Limitation of Study
G.I.M.R., Jalgaon
1. Objective of the study
1. To Study the working capital management.

2. To know the present financial position of the company.
3. To know the working capital performance of the company over the last 4 Years.
4. To draw the financial position of company with the help of Graph.
2. Methodology
The methodology of this study is analysis of the financial data for past 4 years. The
data is collect from the company records supplied in the form of financial accounts
daily audited.
The present study is aimed at to analyze the working capital performance of the
company by covering purely financial data & in the form of ratio & statements.
G.I.M.R., Jalgaon
3. Scope Of Study
The study was wider scope in terms of bank financing, liquidity & profitability of the
company, return on investment & risk etc. The study provides the necessary
information related to current asset & current liabilities of the company. The study
provides the information that how much amount a company level of working capital,
which can serve the company a desired profit.
4.Limitation Of Study
1. Perfect Circle India is a large automotive company with a turnover of more
than Rs. 50 million. Working capital statement prepare for entire organization
as a whole this is almost impossible to study the working capital management
of big organization in a project period of 2 months.
2. Due to absence of segment profitability it was very difficult to analyze the
segmental working capital benefits.
3. Presently no project is going on regarding its financial management, so this
project report is converted into a study project rather than work project.
G.I.M.R., Jalgaon
2. Company Profile.
1. About Company.
2. Corporate profile.
3. Financial Highlights.
4. Company Highlights.
5. Product Introduction.
6. Social Responsibility.
7. Awards.
G.I.M.R., Jalgaon
1. About Company
a. Name of company
Perfect Circle India Limited.
b. Corporate Offices
1, Sri Aurobindo Marg,
New Delhi-110016.
Magnet House. N.M. Marg,
Ballard Estate.
Mumbai-400038.
c. Registered & Administrative office.

20, MIDC Estate,
Satpur, Nashik-42007.
Maharashtra.
Tel: (0253) 2202800.
d. Manufacturing Facilities.
1. Piston Ring Division.
20, MIDC Estate.
2. Casting Division.
E-34, MIDC Estate.
G.I.M.R., Jalgaon
3. Ductile Plant.
19, MIDC Estate.
e. Board of Directors.
K. N. Subramaniam
Chairman
C. S. Patel
Padmini Khare Kaicker
Ranjit Barthakur
Gurdeep Singh
A. K. Agrawal.
f. Financial Controller.
Mayur Bumb
g. Company Secretary.
Anshul Bhargava
h. Bankers.
1. Union Bank of India.
2. Standard Chartered Bank.
i. Auditors.
Price Waterhouse & Co.
Chartered Accounts,
Mumbai.
G.I.M.R., Jalgaon
j. Solicitors.
Udwadia & Udeshi,
Mumbai.
2. Corporate Profile.
Perfect Circle India Limited, a very well known name in India auto component
industry, started manufacturing of piston ring & casting in 1976 at its manufacturing
facilities at Nasik. These facilities are state-of-the-art foundry for regular iron castings
& a machining plant.
The Company manufactures Piston Ring for application in Passenger Car, Jeep,
Light / Heavy Commercial vehicles, Tractor & stationary engines. Piston Rings are
self tensioned circular metal pieces, which are installed in piston grooves to provide
the movable seal between the combustion chamber & the crankcase. Ring are
critical component of the engine since they provide an effective seal to the
combustion gases & prevent lubrication oil from reaching the combustion chamber.
Its products are sold under the world-renowned brand name of Perfect circle piston
rings, have established strong presence both in domestic as well as overseas market
& are considered to be at the top end of the automotive component industry.
The company has financial cum technical collaboration with Dana Corporation, USA.
A fortune 500 company and a world leader in these product technologies. Certified
for both QS 9000 & ISO 9002, the company was the first in India its product category
to receive the ISO certification as far as back as 1993. The company also has
certification for ISO 14001 & OHSAS 18001 from Bureau VERITAS Quality
International, UK for environment management & health & safety respective.
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10

3 . Financial
Highlights
Sr.No.
Particular
2003 -04 2004 -05 2005 -06 2006 -07 2007-08
Sales (Rs. Million)
621
716.3
692.2
787
839.6
Profit before dep. &
114.2
147.8
74.3
(30.1)
82.8
50
91.1
12.7
(121.3)
(23.2)
36
56.4
2.2
(113.7)
(24.4)
18.4
20.6
10.7
(3.8)
9.8
Interest (Rs. Million)

3
Profit Before Tax

(Rs. Million)
Profit After Tax

(Rs. Million)
PBDIT as % to
sales
PBT as % to sales
12.7
1.8
(15.4)
(2.7)
PAT as % to sales
5.8
7.9
0.3
(14.4)
(2.8)
Return on Net worth 8.9
12.8
0.01
(36.5)
(8.5)
1.0
98
13.3
13
9.3
8.6
%
9
10
Face Value per share
Net Worth per share
11
Earnings per share
8.6
1.7
0.07
(3.4)
(0.7)
12
Dividend per share
0.6
0.6
G.I.M.R., Jalgaon
11
13
Dividend cover
2.2
2.8
0.1
( Times)
4 . Company Highlights.
1. 2007 -2008.
1. Sales up by 6.7%
2.Export Sales Rs. 380.7 Million
3.45.3% Export to Total Sale
4. Plate Exports Rs.90.6 Million
2. 2006 -2007.
1. Sales up by 13.7%
2. Export Sales Rs. 387 Million
3. 49% Export to Total Sale
3. 2005-2006
1. Export sales Rs. 293.6 Million (42.4% of sale).
2. New addition in product Portfolio Shims & Plates, Ductile Castings.
3. Sale from Casting EOU commenced.
4. 2004-2005.
1. 15% Overall business Growth.
2. 72% Growth in Exports, 43% of sales.
3. Rs. 1.7 Earnings per share.
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12
5 . Product Introduction.
1. Piston Ring.
Piston rings are self-tensioned circular metal pieces which are installed in 7 piston
grooves to provide a movable seal between the combustion chamber & the
crankcase.
Function of piston rings.
1. Sealing of Combustion chamber.
2. Controlling oil consumption.
3. Heat Transfer.
Types of Piston Ring.
1. Compression Rings.
2. Oil Rings.
6 . Social Responsibilities
A part from its business activities, the company believes in contributing to the
betterment of the society at large. Being leading manufacturer of automotive
components & systems, it has always been the ethos of Anand Group of companies
to promote community welfare. With this aim, Anand Group has set up its welfare
wing-SNS foundation in 1976.
This NGO has established its welfare centers throughout the country where its
facilities are located. These centers focus on education, health, sustainable live hood
G.I.M.R., Jalgaon
13

& natural resource management with governance & social justice as cross cutting
agenda. The programmers also focus on empowering women through activities such
as vocational training life skills & academic education.
Government of India has given due recognition to this welfare wing by granting 50%
tax
exemption
under
section
80G
of
the
Income
Tax
Act,
1961.
7 . Awards.
In recognition of the sharp focus by the company on value-added exports, Perfect
Circle India Ltd. received an Award from the Engineering Exports, Promotion Council
of India, and western region for its performance in achieving highest exports.
Exporters of automotive components, spare parts & accessories.
The National Productivity Council has awarded the company for the second time a
Certificate of Merit in the Light Engineering sector for its performance in productivity.
Perfect Circle India limited is the first Indian Company to achieve the various type
certifications for quality system, Standard for environment & Standard for Safety &
Health.
1. OHSAA 18001: 1999 - Standard for Safety & Health.
2. ISO14001: 2004 - Standard for environment
3. IOS/TS 16949 - Quality system
4. Nation Productivity Award - 1995, 96, 98.
5. ACMA award for productivity 1997, 98.
6. Golden peacock National Quality Award 1998.
7. NIMA Excellence Award 2001.
8. Excellence Award for highest growth in exports - 1996-97.
Perfect circle India Ltd. Company is certified by Bureau Veritas Quality

International (BVQI) UK.
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14
3. A Study of Working Capital

1. Introduction
2. Meaning.
3. Principal of working capital.
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15
4. Importance of working capital.

5. Factors affecting the working capital
6. Sources of working capital.
7. Managing Debtors / Creditors / Inventory.
1. Introduction.
Working capital management is concerned with the problems that arise in attempting
to manage the current assets, the current liabilities & the inter-relationship that exist
between them. Working capital is nothing but the difference between the current
assets & current liabilities. The term current assets refers to those assets which in
ordinary course of business can be, or will be turned into cash within one year
without disrupting the operations of the firm. The major current assets are cash,
marketable securities, accounts receivable & inventory.
Capital required for the business can be classified into two main categories.
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16

1. Fixed Capital.
2. Working Capital.
In case of manufacturing units, Current assets comprises of raw materials, semi
finished goods, receivables, cash, etc. These assets go through the operating cycle
of the business units & based on the operating cycle requirements / quantum for
working capital is decided.
In case of trading concerns current assets comprises of stocks, debtors / receivables
& advance paid to supplier of stocks where as in service activity current assets
comprises of expenses on wages, rent, electricity etc.
2. Meaning.
Working capital is the capital required to carry out day-to-day activates of a firm.
According to Gene Stenberg, Working capital means current assets of a company
that are chafed in the ordinary course of business from one from to another as for
example, from cash to inventories, inventories to receivables, receivables into cash.
The goal of working capital management is to manage the firms current assets &
current liabilities in such a way that a satisfactory level of working capital is
maintained.
3. Principal of working capital.

a . Principal of risk variation.
Risk refers to the inability of the firm to meet its obligations as & when this becomes
due. There is a definite relationship between the degree of risk & profitability. A
conservative management prefers to minimize risk by maintaining a high level of
current assets while a liberal management assumes greater risk by reducing working
capital. However the goal of the management should be to establish a suitable trade
of between profitability & risk.
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17

b . Principal of cost of capital.
This says that a sound working capital management should try to achieve a proper
balance between costs of capital & degree of risk involved in raising that capital.
c . Principal of Overdraft Equity Position.

According to this principal working capital adjusted in each component of current
assets should be adequately justified by a firms equity position.
d . Principal of Maturity of Payment.

According to this principal, a firm should make every effort to relate maturities of
payment to its flows of internally generated funds.
4. Importance of working capital.

Working capital is the life blood & nerve center of a business. Just as circulation of
blood is essential for maintaining human life, working capital is very essential to
maintain the smooth running for a business. The advantages are as follows.
a . Solvency of the business.

Adequate working capital helps in maintaining solvency of the business by enabling
uninterrupted flow of production.
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18

b . Good will.
Sufficient working capital enables a business concern to make prompt payments,
thereby creating & marinating goodwill.
c . Easy loans.
A concern having adequate working capital high solvency & good credit standing can
arrange loans from bank & others on easy & favorable terms.
d . Cash Discounts.
Adequate working capital also enables a concern to avail cash discount on
purchase, thus reducing production cost.
e . Regular Supply of Raw Materials.
Sufficient working capital ensures this & hence continuous production.
f . Regular Payment of Salary & Wages.
A company which has ample working capital can make regular payment of salaries,
wages & other day to day commitments. This raises level of efficiency, reduces
wastages & minimizes cost while simultaneously enhancing production & profits.
g . Exploitation of Favorable Market conditions.

This can be done by exploiting favorable market condition such as purchasing
requirements in bulk when the prices are lower & there by hedging inventories
against higher procurement costs.
h . Ability to Face Crisis.

Working Capital helps to face business crisis in emergencies, such as depressions,
because during such periods there generally an increased pressure on working
G.I.M.R., Jalgaon
19

capital.
i . Quick & Regular Returns on Investments.

Sufficiency of working capital enables a concern to pay quick & regular dividend to
its investors, as there may not be much pressure to plough back profits.
j . High Morale.
Adequacy of working capital creates an environment of security, confidence, high
morale & overall efficiency in a business.
5. Factors Affecting on Working Capital.

Following are the factors that affecting the working capital. These factors also can be
called as the determinants of the working capital.
a . Nature of business.
In some business organizations, the sales are mostly on cash basis & the operating
cycle is very short. In these concerns the working capital requirement is
comparatively less. Mostly service giving companies come in this category. In
manufacturing concerns, usually the operating cycle is very long & a firm has to give
credit to customer improving sales. In such cases the requirement for working capital
is more.
b . Market conditions.
Due to competition in the market, the demands for working capital fluctuate. In a
competitive environment, a business firm has to give liberal credit to the customer.
Similarly it will also have to maintain a large inventory of finished goods to services
the customers promptly. In t his situation, larger amount of working capital will be
needed.
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20

On the other hand, when a firm is in the sellers market, it can be made on cash
basis & there will be no need to maintain large inventory of finished goods because
customers can be serviced with delay.
c . Production Policy.
Working capital policy also fluctuates according to the production policy. Some
products have a seasonal demand but in order to eliminate the fluctuations in the
working capital, the manufacture plans the production in a steady flow through out
the year. This policy will even out the fluctuations in working capital.
d . Seasonal Fluctuations.
A firm who is producing products with seasonal demands requires more working
capital during peak seasons while the demand for working capital will go down
during the slack seasons.
e . Growth & Expansion activities.
The working capital needs of the firm increase as it terms of sates or fixes assets. A
growing firm may need to invest fund in fixed assets in order to sustain its growth
production & sales. This will in turn increase investment in current assets which will
result in increase in working capital needs.
f . Operating Efficiency.
The operating efficiency of the firm relates to the optimum utilization of resources at
minimum cost. The firm will be effectively contributing to its working capital if it is
efficient in controlling operating costs. The working capital is utilized & cash cycle is
reduced which decreases working capital needs.
g. Credit Policy.
The working capital requirements of a firm depend to a greater on the credit policy
followed by a firm or its debtors. A liberal credit policy followed by a firm will result in
G.I.M.R., Jalgaon
21

huge fund blocked in debtors which will enhance the need for working capital. This
situation will be further deteriorating if the collection procedure is also slack. If a
liberal credit policy is followed without inquiring into the credit policy is followed
without inquiring into the collection procedure is also slack. If a liberal credit policy is
followed without inquiring into the credit worthiness of customers, there can be a
problem of recovery in future will further push up the working capital requirements.
The working capital is also affected by the credit policy followed by the firms
creditors. If the creditors are ready to supply materials & goods on liberal credits
working capital requirements are substantially reduced. On the other hand, if
purchases are mainly for cash working capitals go up. While planning the working
capital due attention should be given to word the credit policies followed by the firm
& its creditors.
h . Dividend Policy.
A company has to pay dividends in cash as per the company Act, 1956. If a liberal
policy is followed for dividends more working capital will be required. The needs for
the working capital will be substantially reduced if dividend policy is conservative.
i . Sales Growth.
As the sales grow, the working capital need also go up. Actually it is very difficult to
establish an exact production of increase in current assets, as a result of increase in
sales. Advance planning of working capital become essential because current assets
will have to be employed even before growth in sales take place.
Once sales start increasing, they must be sustained, for this a firm will have to
expand its production facilities which will require more investments in fixed assets.
G.I.M.R., Jalgaon
22

This will in turn result in more requirements of current assets which will increase
working capital needs.
6. Sources of Working Capital.
Cheapest & best sources of cash exist as working capital right with in business.
Good management of working capital will generate cash will help improve profits &
reduce risks. Bear in mind that the cost of cash flows in a cycle in to around & out of
a business. It is the business life blood & every managers primary task is to help
keep it flowing & to use the cash flows to generate profits. If a business is operating
profitably, then it should in theory generate cash surpluses. If it doesnt generate
surpluses the business will eventually run out of cash & expire about the vital
distribution between profit & cash flows.
The faster a business expands the more cash it will need for working capital &
investment. The providing credit to customers & holding stocks can represent a
substantial proportion of a first total profit.
There are two elements in the business cycles that absorb cash Inventory (Stocks
& work in progress) & Receivables (Debtors owing you money); the main sauces of
cash are Payables (Your creditors & Equity & loans)
It can be tempting to pay cash if available for fixed assets e.g. computers, plant,
vehicles etc. If you do pay cash remember that this is now longer available for
working capital. Therefore if cash is tight, consider other ways, of financing capital
investment loans, equity, leasing etc. Similarly, if you pay dividends or increase
drawing, these are cash outflows & like water flowing down a plough whole they
remove liquidity from the business.
a . Additional sources of 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 share holders.
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23

5. Bank overdrafts or lines of credit.
6. Long-term loans.
b . Early Warning sings include.
1. Pressure on existing cash
2. Exceptional cash generating activities e.g. offering high discounts for early
cash payment.
3. Bank overdraft exceeds authorized limit.
4. Seeking greater overdrafts or other creditors.
5. Part paying suppliers or other creditors.
6. Paying bills in cash to secure additional supplies.
7. Management pre-occupation with surviving rather than managing.
8. Frequent short-term emergency requests to the bank (to help pay wages,
pending receipt of a cheque)
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24

c . Working Capital Cycle.
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25
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26

7. Managing Debtors/Creditors/Inventory.
a . Managing Debtors.
Cash flow can be significantly enhanced if the amounts owing to a business are
collected faster. Every business needs to know. Who owes them money.? How
much is owed.... For what it is owed.
Slow payment has a crippling effect on business in particular on small businesses
that can being to manage debtors, they will being to manage your business as you
will gradually lose control due to reduced cash flow & of coerce you could experience
an increased incidence of bad debt. The following measures will help manages your
debtors.
1. Have the right mental attitude to the control of credit & make sure that it gets
the priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly under stood by staff suppliers &
customers.
4. Be professional when accepting new accounts, & especially larger ones.
5. Check out each customer thoroughly before you offer credit. Use credit
agencies, bank references, industry sources etc.
6. Establish credit limits for each customer. & stick to them.
7. Continuously review these limits when you suspect tough times are coming or
if operating in a volatile sector.
8. Keep very close to your large customers.
9. Invoice promptly & clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit/ debit cards as a payment option.
12. Monitor your debtor balances & ageing schedules & dont let any debts get
too large or too old.
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Recognize that the linger someone owes you, the greater the chance you will never
get paid. If the average age of your debtors is getting longer, or is already very long,
you may need to look for the following possible defects.
Weak credit judgment.
1. Poor collection procedures.
2. Lax enforcement of credit terms.
3. Slow issue of invoices or statements.
4. Errors in invoices or statements.
5. Customer dissatisfaction.
Debtors sue over 90 days (unless within agreed credit term) should generally
demand immediate attention. Look for the warring sings of a future bad debt. For
example
1. Longer credit terms taken with approval particularly for smaller orders.
2. Use of post-dated checks by debtors who normally settle within agreed terms.
3. Evidence of customers switching to additional suppliers for the same goods.
4. New customers who are reluctant to give credit reference receiving part
payments from debtors.
The act of collecting money is one, which most people dislike for many reasons &
therefore put on the long finger because they convince themselves there is
something more urgent or important that demands their attention now.
There is nothing more important than getting paid for your product or service. A
customer who does not pay is not a customer. Here are a few ideas that may help
you in collecting money from debtors.
1.
Develop appropriate procedures for handling late payments.
2.
Track & pursue late payers.
3.
Get external help if your own efforts fail.
4.
Dont feel guilty asking until you get some satisfaction.
5.
In difficult circumstances, take what you can now & agree terms for the
remainder. It lessens the problem.
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6.
Make that call now & keep asking until you get some satisfaction.
7.
When asking for your money is hard on the issue but soft on the
person. Dont give the debtor any excuses for not paying.
8.
Make it your objective is to get the money not to score points or get even.
b. Managing Creditors (Payables)

Creditors are a vital part of effective cash management & should be managed
carefully to enhance the cash position.
Purchasing initiates cash outflows & an over-zealous purchasing function can create
liquidity problems. Consider the following.
1. Who authorize purchasing in your company is it tightly managed or spread
among a number of people?
2. Are purchase quantities geared to demand fore casts?
3. Do you use order quantities which take account of stock holding &
purchasing costs?
4. Do you know the cost to the company of carrying stock?
5. Do you have alternative sources of supply? If not get quotes from major
suppliers & shop around for the best discounts, credit terms, & reduce
dependence on a single supplier.
6. How many of your suppliers have a returns policy?
7. Are you in a position to pass on cost increases quickly through price
increases to your customers?
8. If a supplier of goods or services lets you down can you charge back the cost
of the delay?
9. Can you arrange (with confidence) to have delivery of supplies staggered or
on a just in time basis?
There is an old adage in business that if you can buy well then you can sell well.
Management of you creditors & supplies is just as important as the management of
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your debtors. It is important to look after your creditors slow payment by you may
create ill feeling & can signal that your company is inefficient (or in trouble)
Remember a good supplier is some one who will work with you to enhance the future
viability & profitability of your company.
c. Managing Inventory.
Managing inventory is a juggling act. Excessive stocks can place a heavy burden on
the cash resources of a business. Insufficient stocks can result in lost sales delays
for customers etc.
The key is to know how quickly your overall stock is moving or put another way, how
long each item of stock sit on shelves before being sold. Obviously, average stock
holding periods will be influenced by the nature of the business. For example a fresh
vegetable shop might turn over its entire stock every few days while a motor factor
would be much slower as it may carry a wide range of rarely-used spare parts in
case somebody needs them.
Now a day, many large manufactures operate on a just-in-time (JIT) basis where by
all the components to be assembled on a particular today, arrive at the factory early
that morning no earlier, no later. This helps to minimize manufacturing costs as JIT
stocks take up little space minimize manufacturing costs as JIT stocks take up little
space minimize stock holding & virtually eliminate the risks of obsolete or damaged
stock. Because JIT manufactures hold stock for a very short time, they are able to
conserve substantial cash. JIT is a good model to strive for as it embraces all the
principles of prudent stock management.
The key issue for a business is to identify the fast & slow stock moves with the
objectives of establishing optimum stock levels for each category & there by
minimize the cash tied up in stocks. Factors to be considered when determining
optimum stock levels in clued.
What are the projected sales of each product?
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1. How widely available are raw materials, components etc.?
2. How long does it take for delivery by suppliers?
3. Can you remove slow movers from your product range with out compromising
best sellers?
4. Remember that stock sitting on shelves for long periods of time ties up
money, which is not working for you. For better stock control try the following.
5. Review the effectiveness of existing purchasing & inventory systems.
6. Know the stock turn for all major items of inventory.
7. Apply tight controls to the significant few items & simplify controls for the trivial
many.
8. Sell off out dated or slow moving merchandise it gets more difficult to sell the
longer you keep it.
9. Consider having part of your product outsourced to another manufacture rater
than make it yourself.
10. Review your security procedures to ensure that no stock is going out the
back door
Higher than necessary stock levels tie up cash & cost more in insurance,
accommodation costs & interest charges.
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4. Ratio Analysis
1. Definition
2. Significance of Ratio Analysis
3. Types of Ratio Analysis
4. Limitation of Ratio Analysis
G.I.M.R., Jalgaon
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1. Definition
Ratio is a statistical yardstick that provides a measure of relationship between two
accounting figures. Ratio analysis of financial statements stands for the process of
determining & presenting the relationship of it & group of items in the statements.
Ratio analysis can be need both in the trend analysis & static analysis.
2. Significance of Ratio Analysis
The significance or importance off financial ratio analysis can be judged from the
following facts.
a . A useful tool in hands of analysis.
Ratio are exceptionally useful tools with which one can infer the financial
performance of the enterprise over a period of time with the help of ratio analysis
conclusion can be drawn regarding several aspects such as financial health
profitability & operational efficiency of the under taking. The financial health of the
concern can be known with the help of different short term obligation & long term
solvency. They indicate strengths & weakness of the firm in this respect.
Ratio can also pinpoint the operating efficiency of the firm i.e. whether the
management has utilized the firms assets correctly to increase the investors wealth
Ratio are also indicative of overall profitability of the concern. Thus, ratio is useful
tools in the hands of management & the other concerned to evaluate the firms
performance over a period of time by comparing the presents ratio with past once.
b. Inter firm comparison.

Ratio analysis provides inter firm comparison or comparison with industry averages
by comparison or comparison with industry averages by comparing the firms relative
position & its competitors. If comparison shows a variance the possible reasons of
variations may be identified & if results are negative the corrective actions may be
initiated immediately, to bring them in line it is also helpful in for warning he corporate
G.I.M.R., Jalgaon
33

sickness
&
helps
the
management
to
take
corrective
actions.
C. Trend Analysis.
Ratio analysis enables a firm to take time dimension into account. In other words, it
facilitated the management to know whether the financial position is improving or
deteriorating or is constant even the years by setting a trend with the help of ratios.
The analyst with the help of ratio analysis can know the direction of movement
whether favorable or unfavorable. An analysis of trend of strategic ratios may help
the management in the task of planning forecasting controlling.
Thus ratio analysis plays a very important role in the interpretation of the financial
statements correctly & to make the figures comparable & more meaningful.
3. Type of Ratios.
A.
Financial Ratio.
B.
Profitability Ratio.
C.
Turnover Ratio.
A. Financial Ratios.
1. Current ratio.
2. Acid test ratio.
3. Proprietary ratio.
4. Debt-Equity ratio.
G.I.M.R., Jalgaon
34

1. Current ratio.
The current ratio of measures its short term solvency, that is its ability to meet short
term obligation. As a measure of short terms / current financial liquidity it indicates
the rupees of current assets available for each rupee of current liability / obligation.
The higher is the current ratio, the larger is the amount of rupees available per rupee
of current liability, & the more is the firms ability to meet current obligations, & the
greater is the safety of short term creditors. Thus current ratio in a way is a measure
of margin of safety to the creditors.
It is however, important to note important to note that a very high ration of current
assets to current liabilities may be indicative of slack management practices, as it
might signal excessive inventories for the current requirement & poor credit
management in terms of overextended accounts receivables. At the same time the
firm a may not be making full use of its current borrowings capacity. There fore a firm
should have a reasonable current ratio.
Although there is no hard & fast rule, conventionally a current ratio of 2:1 is
considered satisfactory. The logic underlying the conventional rule is that even with a
drop out of 50% in the value of current assets, a firm can meet its obligations. That is
a 50% margin of safety is assumed to be sufficient to wards off the worst situations.
The rule of thumb (a current ratio 2:1) cannot, however be applied mechanically.
What is a satisfactory ratio will different funds to finance current assets, the nature of
industry & so on.
2. Acid Test Ratio

It is a rigorous measure of a firms ability to service sort term liabilities. The
usefulness of the ratio lies in the fact that it is widely accepted as the best available
test of liquidity position of a firm. The ratio provides, in a sense a check on the
liquidity position of a firm as shown by its current ratio. The quick ratio is more
rigorous & penetrating test of the liquidity position of a firm. Yet it is not a conclusive
test. Both the current & quick ratio should be considered in relation to the industry
G.I.M.R., Jalgaon
35

average to infer whether the firms short term financial position is satisfactory or not.
3. Proprietary ratio.
It is primarily the ratio between proprietors funds & total assets. It indicates the
strength of the funding of the company. As a very rough measure, it may be
suggested that 2/3 to 3/4 of the total assets should be financed by proprietors funds.
However, the optimum ratio is different in different lines of business. A high ratio will
definitely indicate high financial strength but a very high ratio will indicate inadequate
utilization of external equities.
4. Debt-Equity ratio.
This ratio is calculated to measure the comparative proportions of outsiders funds &
shareholders funds invested in the company. The Debt-Equity ratio indicates how
many rupees have come from borrowings for every rupee of shareholders funds.
Shareholders funds consist of equity share capital, preference share capital &
reserves & surplus. A low ratio will indicate that the management of the firm is
following a conservative policy which is quite satisfactory from creditors angle. But a
very conservative policy may not be very much satisfactory for shareholder because
the company is sacrificing the benefits of trading on equity in this case. On the other
hand, a very high ratio will indicate a risky situation as proportion of borrowed funds
is quite high.
G.I.M.R., Jalgaon
36

FORMULA :-
Current Assets
1. Current Ratio = __________________
Current Liabilities
Quick Assets
2. Quick Ratio = _______________
Current Assets
Proprietors funds
3. Proprietary Ratio = _______________
Total assets
G.I.M.R., Jalgaon
37
B. Profitability Ratios.
1. Operating Net Profit Ratio

2. Operating Ratio
3. Gross Profit Ratio
4. Net Profit Ratio
1. Operating Net Profit Ratio

This ratio establishes the relationship between operating net profit & sales. The
concept of operating net Profit is different from the concept of net profit. Operating
net profit = Net profit + Non operating expenses (-) non operating income.
Alternatively this profit can be also be calculated by deducting only operating
expenses from gross profits.
2. Operating Ratio
This ratio is reciprocal to the operating net profit to sales ratio. The cost of the good
sold + operating expenses are compared to net sales. Non operating expenses &
non operating incomes are excluded from this ratio. The higher this ratio, the lower is
the margin of operating profit. The ratio can be further analyzed to find out the
percentage of each type of expense to sales.
The gross profit is the difference between net sales & cost of goods sold. This ratio
shows the margin left after meeting the manufacturing costs. It measures the
efficiency of production as well as pricing. A high gross profit ratio means a high
G.I.M.R., Jalgaon
38

margin for covering other expenses, other than cost of goods sold. Therefore, higher
the ratio the better it is. It is also important for a business to maintain this ratio on a
higher side; otherwise it will be difficult to cover other expenses.
4. Net Profit Ratio
This ratio shows the earnings left for shareholders (equity & preference) as a
percentage of net sales. It measures the overall efficiency of all the functions of a
business firm like production, administration, selling, financing, pricing, tax
management etc. This ratio is very useful for prospective investors because it
reveals the overall profitability of the concern. Higher the ratio, the better it gives idea
of improved efficiency of the concern.
FORMULA
Operating net profit

1. Operating Net Profit Ratio = ___________________
X 100
Sales
Cost of goods sold + operating expense

2. Operating Ratio =
__________________________________
X 100
Net sales
Gross profit
3. Gross profit ratio = ___________
X 100
Sales
G.I.M.R., Jalgaon
39
Net profit
4. Net profit ratio= __________ X 100
Sales
C. Turnover Ratio.
1. Working capital turnover ratio

2. Debtors turnover ratio
3. Creditors turnover ratio
4. Inventory turnover ratio
5. Fixed assets turnover ratio
1. Working capital turnover ratio

This ratio compares the net sales with net working capital. The indication given by
this ratio is the number of times working capital is turned around in a particular
period.
The higher the ratio, the better is the utilization of working capital as well as lowers
the investment in working capital. However a very high working capital turnover ratio
is a sign of overtrading & a firm may face shortage of working capital.
2. Debtors turnover ratio

G.I.M.R., Jalgaon
40

This ratio indicates the credit policy followed by a business firm. The higher the ratio,
lower is the collection period. While low ratio indicates higher collection period. An
average collection period which is shorter than the credit period allowed by the firm
needs to be analyzed carefully. It may mean efficient credit management or
excessive conservatism in credit granting that may result in loss of some desirable
sales.
3. Creditors turnover ratio

This ratio indicates the credit period allowed by the creditors. A high turnover ratio
indicates that payment to creditors is quite prompt but it also implies the full
advantage of credit allowed by creditors is not taken. A low ratio indicates that
payment to creditors is not quite prompt & it needs to be improved.
4. Inventory turnover ratio

This ratio establishes relationship between cost of goods sold during a given period
& the average amount of inventory held during that period. The indication given by
this ratio is the number of times finished stock is turned over during a given
accounting period. Higher the ratio, the better it is because it shows rapid turnover of
stock. A low turnover ratio is indicative of slow moving stock.
5. Fixed assets turnover ratio
This ratio indicates the number of times fixed assets are being turned over during a
particular period. It is one of the indications of efficiency of using fixed assets in the
business. For manufacturing concerns, this ratio is very important. The reason is that
like current assets, fixed assets also contribute towards making sales. A high while
low ratio indicates that fixed assets are not being used efficiently.
FORMULA
Net Sales
G.I.M.R., Jalgaon
41

1. Working capital turnover ratio =
______________
Working capital
Credit sales
2. Debtors turnover ratio = ___________________
Debtors + Bills Receivable
Credit Purchases
3. Creditors turnover ratio =
________________________
Creditors + Bills Payable
Cost of goods sold

4. Inventory turnover ratio = ______________________
Average stock Inventory
Net Sales
5. Fixed assets turnover ratio = ______________
Net fixed assets
5. Comparative Study of Financial
G.I.M.R., Jalgaon
42
Statements
1. Balance sheet for last 4 Years.
2. Profit & Loss A/C for 4 Years.
1. Balance sheet for last 4 Years.
G.I.M.R., Jalgaon
43

(Fig. in, 000)
Particulars
31/03/2005
31/03/2006 31/03/2007 31/03/2008
Share Capital
3,33,37
3,33,37
3,33,37
3,33,37
Reserves & Surplus
40,88,69
39,20,36
27,81,43
25,36,97
Secured Loans
10,39,19
33,70,38
41,68,01
35,34,83
Unsecured Loans
11,63,91
11,46,91
18,95,96
16,97,58
Deferred Tax
4,08,39
3,94,95
2,43,94
2,32,96
70,33,55
91,65,97
94,22,71
83,35,70
Net Block
22,64,09
34,91,29
51,41,90
47,74,22
Capital Work-in-
4,71,38
11,80,62
1,14,64
7,16
27,35,47
46,71,91
52,56,54
47,81,38
Inventories
8,62,51
9,89,09
10,87,26
9,99,02
Sundry Debtors
10,37,04
14,69,82
14,70,98
15,71,23
Cash and Bank
11,78,42
5,86,09
1,30,50
1,28,61
25,94,06
30,64,74
31,07,59
26,45,92
Current Liabilities
11,43,76
14,07,92
15,29,23
16,90,95
Provisions
2,30,19
2,17,76
1,00,93
99,50
Sources of fund
Shareholders' Funds
Loan Funds
Liability (Net)
Total
Application of
Funds
Fixed Assets
progress
Total
Current Assets,
Loans, Advances
Balances
Loans and
Advances
Less: Current
Liabilities &
Provisions
G.I.M.R., Jalgaon
44

Net Current
42,98,08
44,94,06
41,66,17
35,54,33
----
----
----
----
70,33,55
91,65,97
94,22,71
83,35,71
Assets
Miscellaneous
Expenditure
Total
2. Profit & Loss Account A/c

(Fig. in, 000)
Particulars
31/03/
31/03/
31/03/ 2007
31/03/ 2008
2005
2006
Sales Net
65,99,53
63,91,34
71,70,43
76,97,29
Other Income
3,64,77
2,85,34
2,06,94
2,01,03
Total
69,64,30
66,76,68
73,77,37
73,77,37
Cost of Materials
16,36,49
17,65,55
21,38,09
217372
Personnel Expenses
8,98,77
10,13,87
13,31,56
130297
Income
Expenditure
G.I.M.R., Jalgaon
45

Other Expenses
29,51,70
31,53,12
42,08,24
359346
Depreciation
3,65,70
3,94,04
5,29,78
57796
Finance Charges
2,00,62
2,22,17
3,82,63
48184
Total
60,53,28
65,49,75
85,90,30
812995
1,26,93
(12,12,93)
(2,31,63)
Profit/(Loss) for the year Before 9,11,02

Tax
Provision for Tax
Current Tax
3,75,00
58,00
Deferred Tax
(70,15)
(13,44)
(1,51,01)
(10,98)
Fringe Benefit Tax
35,00
75,06
13,50
Total
6,06,17
47,37
(11,36,98)
(2,34,15)
25,37
8,36
Short Provision for tax in respect 42,30
of earlier years(Net)
Profit/(Loss) after Tax
5,63,87
22,00
(11,36,98)
(2,42,51)
Profit and Loss Account Balance
5,88,13
13,86,38
12,16,11
79,13
17,27,69
14,08,38
79,13
(1,63,38)
Transfer to General Reserve
1,14,00
2,21
Interim Dividend-Equity
83,34
83,34
Tax on Interim Dividend
10,93
11,69
Proposed Dividend -Equity
1,16,68
83,34
Tax on Proposed Dividend
16,36
11,69
Balance carried to Balance Sheet 13,86,38
12,16,11
79,13
(1,63,38)
Earnings per Share
0.07
-3.41
-0.73
Brought Forward from last

Balance Sheet
Add: Transfer from Debenture
5,75,69
Redemption Reserve
Profit Available for
Appropriation
Appropriations
(In Rs.)
1.69
Basic & Diluted of face value of

Re.1
G.I.M.R., Jalgaon
46
6. Statistical Analysis of Financial Data
1. Current Ratio
3. Net Profit Ratio
4. Working Capital Turnover Ratio
5. Fixed Assets Turnover Ratio
6. Pie Chart of Distribution of Income at last Year.
G.I.M.R., Jalgaon
47
1. Current Ratio.
Current Assets
1. Current Ratio = _________________
Current Liabilities
(Fig. in, 000)

Particular
2005
2006
Current Assets
46,57,67 42,98,08 44,94,06 41,66,17
Current Liabilities
13,73,66 13,73,95 16,15,68 16,30,16
Ratio
3.4
3.1
2007
2.8
2008
2.6
Interpretation:
Current ratio of company come down to 3.1, 2.8 & 2.6 as on years 2005, 2006 &
2007 respectively as against 3.4 as on 2004 as result of loss incurred during years.
However after giving treatment of slow moving stocks as on current assets and
implement revival measures it is expected to improve ratio.
G.I.M.R., Jalgaon
48
2. Gross Profit Ratio.

Gross Profit
Gross Profit ratio = ____________
X 100
Sales
(Fig. in, 000)

Particular
2005
2006
2007
2008
Gross Profit
4,99,94
9,11,02
1,26,93
- 12,12,93
Sales
55,61,60
65,99,53
63,91,34
71,70,43
Ratio
9.0
13.6
2.0
- 16.9
Interpretation:
As compared to last three years gross profit ratio like 9.0, 13.6 & 2.0 there is loss in
the year in 2007 as ratio -16.9 due to less profitability.
3. Net Profit Ratio.
Net profit
Net profit ratio = ___________ X 100
Sales
(Fig. in, 000)
Particular
2005
2006
2007
2008
Net Profit
3,60,06
5,63,87
22,00
-11,36,98
Sales
55,61,60 65,99,53 63,91,34 71,70,43
Ratio (%)
6.5
G.I.M.R., Jalgaon
8.5
0.34
-15.8
49

Interpretation:
Figures shown in table are declining as compared to previous years i.e. in year 2007
ratio is -15.8 as compared to year 2004 ratio is 6.5 from that it shows that company
bears loss.
4. Working Capital turnover ratio.

Net sales
Working Capital turnover ratio = __________________
Working capital
(Fig. in, 000)
Particular
2005
2006
Net Sales
55,61,60 65,99,53 63,91,34 71,70,43
Working Capital
46,57,67 42,98,08 44,94,06 41,66,17
Ratio
1.2
1.6
2007
1.4
2008
1.7
Interpretation:
A high working capital turnover ratio indicates that capacity of the organization to
achieve to maximum sales with the minimum investment in debtors and inventory. It
indicates that gross working capital is turned over in the form of sales more number
of times.
5. Fixed assets turnover ratio.
Net Sales
Fixed assets turnover ratio = ________________
Net fixed assets
G.I.M.R., Jalgaon
50

(Fig. in, 000)
Particular
2005
2006
Net Sales
55,61,60 65,99,53 63,91,34 71,70,43
Net Fixed Assets
24,80,05 27,35,47 46,71,91 52,56,54
Ratio
2.24
2.41
2007
1.36
2008
1.36
Interpretation:
This needs improvement by way of increasing the sales and maximizing capacity.
Fixed asset turnover ratio of 1.36 is less than the standard ratio 1.66.
6. Pie Chart of Distribution of Income at last Year.
(Fig. in, %)
1.
Material Cost
26.5
2.
Finance Charges
4.7
3.
Excise Duty
8.7
4.
Income Tax
0.9
5.
Dividend
0.0
6.
Depreciation
6.6
7.
Retained Earnings
- 14.1
8.
Personnel Expenses 16.5
9.
Other Expenses
G.I.M.R., Jalgaon
52.1
51
G.I.M.R., Jalgaon
52
7.CONCLUSION
#.
Working capital management states to maintain low level of investment in

current asset. Company is maintaining very low percentage i.e. 28% of
current assets and also trying to reduce it further.
#.
Working capital management states to maintain a high proportion of current

liability to total liability and the company are trying to achieve the same. In
2004-05 the current liability was 29% which is further increasing during the
later years.
#.
Lowering level of investments in current assets, would lead to an increase in

the firms return on total assets and the use of short term debt is likely to result
in higher profit because debt will be paid off during period when it is not
needed. Accordingly company is maintaining reasonably decent current ratios.
So company need to improve its current ratio to some extent during future
years.
#.
Remaining ratios were less than median value due to less profitability.
#.
Company follows aggressive policy to finance its current assets because it

uses high proportion of short term financing to financed its current assets.
Company proves that the company which follows conservative policy of
maintains high level of current assets should be in better position to utilize
short term financing.
#.
Company is more concentrating on gross working capital, because company

is utilizing its working capital facility to substantial extent.
G.I.M.R., Jalgaon
53
8.RECOMMENDATION AND SUGGESTIONS
1. From the conclusion part it is clear that company should increase its current
ratio, which
should cover its current liabilities at least more than two
times , during the future years.

2. Company should change its policy to determining optimal level of current
assets. Presently company prefers more liquidity & follows conservative
policy.
3. Due to decrease in current asset, the liquidity position is going up for the
company; as a result companys finance cost is also decreasing.
4. Companys sales are increasing at the same time its investment in current
asset is decreasing every year. This is pure positive sign for bottom line.
5. Company should try to follow the median value of the entire ratio because
presently the ratios are leading towards lesser median value.
6. If company decreases its investment in current asset then it should also
decreases its level of current liability. in order to maintain a proper current
ratio & company should keep the level of current liability below 50% of the
current asset presently its percentage is leading towards higher side.
G.I.M.R., Jalgaon
54
SUGGESTIONS
1. Company should decrease the level of bank borrowings & sundry

creditors. Excess of bank borrowing increase the expense of the
company in terms of interest & if company takes the advance from its
creditors & in the absence of services & repayment due to some
reasons afterwards, it will decrease the goodwill of the company & the
company may be bound to pay interest on credit amount so, company
should avoid this situation.
2. Company should not increase its level of fixed assets because there is
still untapped potential to increase the capacity with the existing
investment.
3. To concentrate on gross working capital company should look on the

level of current asset financing needed to support current asset rather
than difference of current assets & current liabilities.
4. Aggressiveness is the present competitive market demand so company

should adopt aggressiveness in determining the level of current asset
& continue with the aggressiveness in the short term financing.
Aggressiveness involves risk but it creates high profit.
G.I.M.R., Jalgaon
55
9. BIBLOGRAPHY
Financial Management
I. M. PANDEY.
Financial Management
KHAN & JAIN.
Annual report of company:
2004-05
2005-06
2006-07
2007-08
G.I.M.R., Jalgaon
56

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Study of Working Capital Management

A Study of Working Capital management

Perfect Circle India Limited Nasik.

Mr. Nitin D. Fegade

Prof. Mrs. Smita Dhande.

In Part & Partial Fulfillment of the Requirement

Master of Business Administration

NORTH MAHARASHTRA UNIVERSITY, JALGAON.

Study of Working Capital Management

Study of Working Capital Management

A Study of Working Capital

Comparative Study of Financial

Statistical Analysis of Financial

Recommendation and Suggestions

Study of Working Capital Management

1. Objectives of the study

Study of Working Capital Management

1. Objective of the study

1. To Study the working capital management.

Study of Working Capital Management

Study of Working Capital Management

Study of Working Capital Management

c. Registered & Administrative office.

Study of Working Capital Management

Study of Working Capital Management

Study of Working Capital Management

2003 -04 2004 -05 2005 -06 2006 -07 2007-08

Sales (Rs. Million)

Profit before dep. &

Interest (Rs. Million)

Profit Before Tax

Profit After Tax

Return on Net worth 8.9

Face Value per share

Net Worth per share

Earnings per share

Dividend per share

Study of Working Capital Management

Study of Working Capital Management

Study of Working Capital Management

Perfect circle India Ltd. Company is certified by Bureau Veritas Quality

Study of Working Capital Management

3. A Study of Working Capital

Study of Working Capital Management

4. Importance of working capital.

Study of Working Capital Management

3. Principal of working capital.

Study of Working Capital Management

c . Principal of Overdraft Equity Position.

d . Principal of Maturity of Payment.

4. Importance of working capital.

a . Solvency of the business.

Study of Working Capital Management

g . Exploitation of Favorable Market conditions.

h . Ability to Face Crisis.

Study of Working Capital Management

i . Quick & Regular Returns on Investments.

5. Factors Affecting on Working Capital.

Study of Working Capital Management

Study of Working Capital Management

Study of Working Capital Management

1. Existing cash reserves.

Study of Working Capital Management

Study of Working Capital Management