Working Capital Management

1.1) Introduction:

Working Capital Management

Working capital management is concerned with the problems arise in attempting to manage the current
assets, the current liabilities and the inter relationship that exist between them. The term current assets
refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one
year without undergoing a diminution in value and without disrupting the operation of the firm. The
major current assets are cash, marketable securities, account receivable and inventory. Current liabilities
ware those liabilities which intended at their inception to be paid in ordinary course of business, within a
year, out of the current assets or earnings of the concern. The basic current liabilities are account payable,
bill payable, bank over-draft, and outstanding expenses. The goal of working capital management is to
manage the firms current assets and current liabilities in such way that the satisfactory level of working
capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a
reasonable margin of the safety.
Definition:1. According to Guttmann & Dougall-Excess of current assets over current liabilities.
2. According to Park & Gladson-The excess of current assets of a business (i.e. cash, accounts
receivables, inventories) over current items owned to employees and others (such as salaries & wages
payable, accounts payable, taxes owned to government).

1.2) Need of working capital management

The need for working capital gross or current assets cannot be over emphasized. As already observed, the
objective of financial decision making is to maximize the to shareholders wealth. Achieve this, it is
necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the
sales among other things but sales cannot convert into cash. There is a need for working capital in the
form of current assets to deal with the problem arising out of lack of immediate realization of cash against
goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is
refers to operating or cash cycle. If the company has certain amount of cash, it will be required for
purchasing the raw material may be available on credit basis. Then the company has to spend some
amount for labor and factory overhead to convert the raw material in work in progress, and ultimately
finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors.
Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is
blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements.
However some part of current assets may be financed by the current liabilities also. The amount required

to be invested in this current assets is always higher than the funds available from current liabilities. This
is the precise reason why the needs for working capital arise

1.3) Gross working capital and Net working capital

There are two concepts of working capital management

1. Gross working capital

Gross working capital refers to the firms investment I current assets. Current assets are the assets which
can be convert in to cash within year includes cash, short term securities, debtors, bills receivable and
inventory.

2. Net working capital

Net working capital refers to the difference between current assets and current liabilities. Current
liabilities are those claims of outsiders which are expected to mature for payment within an accounting
year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or
negative efficient working capital management requires that firms should operate with some amount of
net working capital, the exact amount varying from firm to firm and depending, among other things; on
the nature of industries.net working capital is necessary because the cash outflows and inflows do not
coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The
cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net
working capital will be required. he concept of working capital was, first evolved by Karl Marx. Marx
used T the term variable capital means outlays for payrolls advanced to workers before the completion
of work. He compared this with constant capital which according to him is nothing but dead labour.
This variable capital is nothing wage fund which remains blocked in terms of financial management, in
work-in- process along with other operating expenses until it is released through sale of finished goods.
Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical
payment of wages which funded a portioned of W.I.P, the concept of working capital, as we understand
today was embedded in his variable capital.

1.4) Type of working capital

The operating cycle creates the need for current assets (working capital). However the need does not
come to an end after the cycle is completed to explain this continuing need of current assets a destination
should be drawn between permanent and temporary working capital.

1) Permanent working capital

The need for current assets arises, as already observed, because of the cash cycle. To carry on business
certain minimum level of working capital is necessary on continues and uninterrupted basis. For all

practical purpose, this requirement will have to be met permanent as with other fixed assets. This
requirement refers to as permanent or fixed working capital

2) Temporary working capital

Any amount over and above the permanent level of working capital is temporary, fluctuating or variable,
working capital. This portion of the required working capital is needed to meet fluctuation in demand
consequent upon changes in production and sales as result of seasonal changes
The following Graph shows that the permanent level is fairly castanet; while temporary working capital is
fluctuating in the case of an expanding firm the permanent working capital line may not be horizontal.
This may be because of changes in demand for permanent current assets might be increasing to support a
rising level of activity

1.5) Determinants of working capital

The amount of working capital is depends upon a following factors

1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather
than working capital. These businesses sell services and not the commodities and that too on cash basis.
As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. E.g.
public utility services like railways, infrastructure oriented project etc. there requirement of working
capital is less. On the other hand, there are some businesses like trading activity, where requirement of
fixed capital is less but more money is blocked in inventories and debtors.

2. Length of production cycle

In some business like machine tools industry, the time gap between the acquisition of raw material till the
end of final production of finished products itself is quit high. As such amount may be blocked either in
raw material or work in progress or finished goods or even in debtors. Naturally there need of working
capital is high.

3. Size and growth of business

In very small company the working capital requirement is quit high due to high overhead, higher buying
and selling cost etc. as such medium size business positively has edge over the small companies. But if
the business start growing after certain limit, the working capital requirements may adversely affect by
the increasing size.

4. Business/ Trade cycle

If the company is the operating in the time of boom, the working capital requirement may be more as the
company may like to buy more raw material, may increase the production and sales to take the benefit of
favorable market, due to increase in the sales, there may more and more amount of funds blocked in stock
and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms
of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold,
the receivable may not be recovered in time etc.

5. Terms of purchase and sales

Some time due to competition or custom, it may be necessary for the company to extend more and more
credit to customers, as result which more and more amount is locked up in debtors or bills receivables
which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is
offered by suppliers of goods and services, a part of working capital requirement may be financed by
them, but it is necessary to purchase on cash basis, the working capital requirement will be higher.

6. Profitability

The profitability of the business may be vary in each and every individual case, which is in turn its
depend on numerous factors, but high profitability will positively reduce the strain on working capital
requirement of the company, because the profits to the extent that they earned in cash may be used to
meet the working capital requirement of the company .

7) Operating efficiency
If the business is carried on more efficiently, it can operate in profits which may reduce the strain on
working capital; it may ensure proper utilization of existing resources by eliminating the waste and
improved coordination etc.

Research Methodology

2.1) Introduction

Research methodology is a way to systematically solve the research problem. It may be understood as a
science of studying now research is done systematically. In that various steps, those are generally adopted
by a researcher in studying his problem along with the logic behind them. It is important for research to
know not only the research method but also know methodology. The procedures by which researcher go
about their work of Describing, explaining and predicting phenomenon are called methodology. Methods
comprise the procedures used for generating, collecting and evaluating data. All this means that it is
necessary for the researcher to design his methodology for his problem as the same may differ from
problem to problem. Data collection is important step in any project and success of any project will be
largely depend upon now much accurate you will be able to collect and how much time, money and effort
will be required to collect that necessary data, this is also important step. Data collection plays an
important role in research work. Without proper data available for analysis you cannot do the research
work accurately.

2.2) Types of data collection

There are two types of data collection methods available.
1. Primary data collection
2. Secondary data collection
1) Primary data
The primary data is that data which is collected fresh or first hand, and for first time which is original in
nature. Primary data can collect through personal interview, questionnaire etc. to support the secondary
data.
2) Secondary data collection method
The secondary data are those which have already collected and stored. Secondary data easily get those
secondary data from records, journals, annual reports of the company etc. It will save the time, money and
efforts to collect the data. Secondary data also made available through trade magazines, balance sheets,
books etc. This project is based on primary data collected through personal interview of head of account
department, and other concerned staff member of finance department. But primary data collection had
limitations such as matter confidential information thus project is based on secondary information
collected through five years annual report of the company, supported by various books and internet sides.
The data collection was aimed at study of working capital management of the company

2.3) OBJECTIVES OF THE STUDY

Study of the working capital management is important because unless the Working capital is
managed effectively, monitored efficiently planed properly and reviewed periodically at regular
intervals to remove bottlenecks if any the Company cannot earn profits and increase its
turnover. With this primary Objective of the study, the following further objectives are framed for
a depth Analysis.
1. To study the working capital management
2. To study the optimum level of current assets and current liabilities of the Company.
3. To study the liquidity position through various working capital related ratios.
4. To study the working capital components such as receivables accounts, cash management,
Inventory position
5. To study the way and means of working capital finance
6. To estimate the working capital requirement
7. To study the operating and cash cycle of the company.

2.4) SCOPE & LIMITATIONS OF THE STUDY

Scope of the study
The study of working capital is based on tools like trend Analysis, Ratio Analysis, working capital
leverage, operating cycle etc. Further the study is based on last 5 years Annual Reports of
Creamline dairy products Ltd. And even factors like competitors analysis, industry analysis were
not considered while preparing this project.
Limitations of the study
Following are the limitations of the study being conducting:
1) Limited data:This project has to be done on the basis of the annual reports; it just constitutes one part of data
collection i.e. secondary. There are limitations for primary data collection because of
confidentiality.
2) Limited period:This project is based on five year annual reports. Conclusions and recommendations are based
on such limited data. The trend of last five year may or may not reflect the real working capital
position of the company
3) Limited area:Also it is difficult to collect the data regarding the competitors and their financial information.
Industry figures were also difficult to.