1.

1 WORKING CAPITAL:

Capital required for a business can be divided into two categories, Fixed capital and working
capital. Fixed capital is the part of total capital which is used for purchasing permanent a fixed
asset like land, Buildings, Plant and machinery, furniture and fixtures, vehicles, etc. This capital
is invested by organization in the beginning of running the business. In addition to fixed capital
an organization requires additional capital for financing day today activities like purchase of
Raw materials, payment of direct and indirect expenses, carrying out production, investment in
stocks and stores, receivables and assets to be maintained in the form of cash is generally known
as working capital (fluctuating capital). In other words, this capital refers to the investment in
current assets such as cash inventory, receivables, etc. All such assets are likely to be convertible
into cash within one a year.

MEANING OF WORKING CAPITAL:

The capital used for performing day to day activities, purchases of Raw material, making
payment of direct and indirect expenses, carrying out of production of goods and services,
investment in stocks, stores, etc is called as working capital. All assets consisting of working
capital revolve around cash. Firstly, cash is used to purchase of raw materials, which when
certain expenses are in carried on it gets itself converted into semi finished goods and finally into
inventory of finished products. Inventory (finished goods), after adding certain profit margin to
it, is sold to the customers, which may take the form of cash or receivables or debtors.
Receivables or debtors when realized again take the form of cash and the cycle goes on. The
revolving nature of current assets consisting of working capital has been cleared with the help of
following chart:

Receivables Sales

Cash Finished goods

Raw materials Work in progress

materials
Because of this revolving nature of the assets consisting working capital, later is also known as
'fluctuating' or 'floating' or ' circulating' capital.

DEFINITIONS OF WORKING CAPITAL:

J.M. Mill: -
"The sum of the current assets is the working capital of the business"

Shubin: -
"Working capital is the amount of funds necessary to cover cost of operating theenterprise."

Hoag landi : -
"Working capital is descriptive of that capital which is not fixed. But the more common use of
the working capital is to consider it as the difference between the block value of the current
assets and current liabilities."

Gerestenberg: -
"Circulating capital wears current assets of a company that are changed in the ordinary course of
business from one to another, as for example, from cash to inventories, inventories to
receivables, and receivables to cash.The accounting principles of board of American institute of
Certified Public Accountants has defined the working capital as under: "Working capital is
represented by the excess of current assets or current liabilities and identifies the relatively liquid
portion of the total enterprise capital which constitutes a margin or buffer for maturing
obligations within the ordinary operating cycle of the business."

Backer and Malett-

“Working capital means sum of current assets only”
Thus working capital means investment made by a business organization in short-term current
assets like cash, debtors, etc. one also conclude that working capital is that part of capital which
need for financing the current need of the business.
TYPES OF WORKING CAPITAL:

Gross working capital:

Gross working capital means the total current assets without deductingcurrent liabilities. This
equal to the cash balance and the amount blocked in debtors stocks, etc.

Net working capital:

Net working capital means total current assets minus total currentliabilities. It means net current
assets. This capital indicates the amount available to meet short term liabilities or debt of the
business organizations.

Permanent of fixed working capital:

This capital represents the value of the current assets required on continuing basis over the entire
year and for several years. Permanent working capital is the minimum amount of current assets
which is needed to conduct business even during the dullest season of the year. Thus, the
minimum level of current assets is called permanent or fixed working capital is the part of capital
permanently blocked in current assets. This amount changes from year to year depending on
growth of the company and the stage of the business cycle in which it operates. It is used to
produce goods necessary to satisfy the customer's demand.

It has the following characteristics

a) It is classified on the basis of time.
b) It constantly changes from one asset to another and continuously remains in the business.
c) Size of this capital increases with the growth of business operations.

Temporary or variable working capital

This component represents a certain amount of fluctuations in current assets during a short
period. These fluctuations are increases or decreases in current assets. Generally these are in
cyclical nature. This is called as additional capital required at different times during the operating
year. This capital is used to meet seasonal needs of a firm or organization is called seasonal or
variable working capital . Additional funds or capital specifically used to meet extraordinary
needs or contingencies arising due to strikes, fire, unexpected competition, rising price
tendencies launching of advertisement campaigns.

Features:

a) It is not always gainfully employed, though it may change from one asset to another,
as permanent working capital does.

b) It is particularly suited to business of a seasonal or cyclical nature.

c) It is arranged from temporary source i.e. short term loan, deposits, bank over drafts etc.

Balance sheet working capital:

Usually this capital is determined on the basis of current assets and current liabilities shown in
closing balance sheet of the concern. It means the net current assets as on last date of the balance
sheet.

Cash working capital:

This capital is the net current assets if realized at its book value. The cash realize from current
appearing is really less than the book value because i) Debtors includes profit margin ii)
Depreciation included in over valuation of stock of finished goods. The concept of this capital
makes proper adjustment in balance sheet working capital for the items to arrival at cash
working capital. The cash working capital indicated the working capital at cost because stocks
and debtors are at cost.

Positive working capital:

When a net current asset is in positive figure. Therefore it is called positive working capital.
This working capital shows favorable liquidity solvency position of the company.
Negative working capital:
In this case, difference between current assets and current liabilities is negative figure. Therefore,
it is called are negative working capital. It means current liabilities are more than the current
assets. This capital indicates lack of liquidity and adverse solvency position of the company.

Objectives of working capital management

The main objectives of working capital management are:

 Maintaining the working capital operating cycle and to ensure its smooth operation.
Maintaining the smooth operation of the operating cycle is essential for the business to
function. The operating cycle here refers to the entire life cycle of a business. From the
acquisition of the raw material to the smooth production and delivery of the end products
– working capital management strives to ensure smoothness, and it is one of the main
objectives of the concept.

 Mitigating the cost of capital. Minimizing the cost of capital is another very important
objective that working capital management strives to achieve. The cost of capital is the
capital that is spent on maintaining the working capital. It needs to be ensured that the
costs involved for maintenance of healthy working capital are carefully monitored,
negotiated and managed.

 Maximising the return on current asset investments. Maximising the return on current
investments is another objective of working capital management. The ROIon currently
invested assets should be greater than the weighted average cost of the capital so that
wealth maximization is ensured.

IMPORTANCE OR ADVANTAGES OF ADEQUATE WORKING CAPITAL:

Working capital is like the heart of business. If it becomes weak, the business hardly can proper
or survive. But no business can run successfully without an adequate amount of working capital.
Following are the few advantages give importance of adequate working capital in the business.
1. Cash discount:
Adequate amount of working capital enables the firm to avail cash discount facilities offered by
suppliers. The amount of cash discount reduces cost of purchases.
2. Creation of goodwill:
Adequate amount of working capital enables the firm to make prompt payment of short-term
liabilities is the base to create and maintain goodwill.
3. Ability to face crisis:
Amount of adequate working capital facilitates to meet situations of crisis and emergencies. It
makes able to withstand periods of depression smoothly.
4. Credit-worthiness:
It enables the firm to run its business more efficiently because there is no delay in getting loan
from bank and other financial institutions on easy and favorable terms and conditions.
5. Regular supply of Raw materials:
Adequate amount of working capital permits the carrying of inventories of a level that would
enable a business to serve satisfactorily the need of its customers. Thus it ensures regular supply
of raw materials for continuing productions in future.
6. Expansion of market:
A firm having adequate working capital can create favorable market condition. It is possible to
purchases required material at lower rate and holds its inventories for higher rate. Thus it helps to
maximize profits.
7. Increase in productivity:
Fixed assets of the firm cannot work without sufficient amount of working capital. Because large
scale investment in various fixed assets is largely depending on the manner in which its current
assets are managed.
8. Research pro gramme :
It is not possible to undertake research programme , innovations and technical developments
without having sufficient amount of working capital in the organizations.
9. High morale:
Maintaining of sufficient amount of working capital makes us possible to create environment of
security, confidence, high morale among the staff and it helps in creating overall efficiency of
the business.
10. Liquidity and solvency:
A sound position of working capital enables a firm to make payment of dividends to
its investors regularly. This helps in gaining confidence in the mind of investors and also helps in
creating favorable market environment to raise additional funds in the near future.
11. Contented labour force:
A firm having enough amount of working capital will be in a position to pay its workers well and
in advance. This way contented labour force contributes to increased production of quality
goods.

DANGER OF INADEQUATE WORKING CAPITAL:

When a firm had inadequate amount of working capital, it faces the following problems.

a)It may not be able to take advantages of cash discount.

b)It cannot buy its requirements in bulk and unable to utilize production facilities fully.

c)It may not be able to take advantages of profitable business opportunities.

d)It may not be able to pay its dividends because of non- availability of funds.

e)It shows low liquidity leads low profitability. Low profitability results in low liquidity.

f)It is not possible to pay short terms liabilities due to inadequate working capital. This leadsto
borrow loan or funds at high rate of interest.

g)Credit worthiness of a firm may be damaged due to lack of liquidity. It will lose itsreputation.
Thus firm may not be able to get credit liabilities.

h)Low liquidity position may lead to liquidate the firm because it cannot be able to meet itsdebts
at the date of maturity.
DANGER OF EXCESS WORKING CAPITAL:
When a firm has excess working capital arise the following problems.

a)A firm may be tempted to over trade and lose heavily.

b)A firm may purchase more inventories unnecessarily which leads the problem of theft,waste,
losses, etc.

c)It created imbalance between liquidity and profitability.

d)Excess working capital means idle funds means not earning of profits. In this case rate ofreturn
on investments falls.

E) It may make greater production which may not have matching demand. Fund will be blocke
donly. No possibility of profits.

F) It may lead carelessness about cost of production. It means there will be high cost
of production and it leads to less profit.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT:

a)Nature of business: -
Working capital requirements of an enterprise are basically related toconduct of the business.
Public utility undertakings like electricity, water supply, Railways, etcneed very limited working
capital because they offer cash sales only and supply services, not products, and as such no funds
are tied up in inventories and receivables. But at the same time,trading firm need large amount of
working capital in current assets like inventories, cash,receivables etc but they have less
investment in fixed assets.
b)Terms of purchases and sales: -
Credit terms granted by the concerns to its customers aswell as credit terms granted by its
supplier also affect the working capital. It credit terms of purchases are more favorable and
those sales less liberal, less cash will be invested in theinventory. Working capital requirement
can be reduced it terms of credit are more. The ratioof credit and cost purchases or sales affect
the level of working capital. If firms purchases oncredit and sales cash then requires less working
capital and if firm purchases on cash and saleson credit, then it requires large working capital.
This means funds are tied up in debtors and bills receivables.

c)Manufacturing cycle: -
The quantum of work capital needed is influenced by the length ofmanufacturing cycle. The
manufacturing process always involves time lag between the timewhen raw materials are fed into
the production line and finished products are finally turned out by it. The length of period of
manufacture in turn needs on the nature of product as well as production technology used by a
concern.

d)Size of business unit: -

Amount of working capital requirement is depending on the scaleof operation of the business
organization. Large business organization performs large businessactivities which require huge
working capital than small scale organization.

e)Turnover of inventories: -
A business organization having low turnover of inventorywould need more working capital
where as high turnover of inventory need small or limitedworking capital.

f)Turnover of circulating capital: -

The speed with which circulating capital completes itscycle if conversion of cash into inventory
of raw material, raw material into finished goods,finished goods into debts and debts into cash,
which decides need of working capital in theorganization. Slow movement of working capital
cycle necessitates large provision of workingcapital.
g)Seasonal variations production: -
In case of seasonal production in the industries likesugar, oil, mills, etc need more working
capital during peak seasons as well as slack seasons.

h)Degree of mechanization: -
In highly mechanized concerns having low degree ofindependence, on labour, requirement of
working capital reduced. Conversely, in labourintensive industries greater sum of working shall
be required to pay wages and related facilities.

i)Growth and expansion: -

Every firm wants to grow over a period of time and with theincrease in its size, the working
capital requirements are bound to increase. The growingcompany would need, therefore, larger
amount of working capital.

j)Policy regarding dividend: -

Dividend policy of a firm will also influence the workingcapital position. The company which
declares large amount of dividends in the form of cashrequires large working capital to pay off
such dividends. But sometimes, companies issues bonus shares by way of dividend in such cases
working capital requirements will becomparatively less. This is depending on Psychology of
shareholders i.e. whether they prefercash income or capital appreciation.

k)Inflation: -
A business concern requires more working capital during the inflation period .This factor may be
compensated to some extent by rise in selling price of inventory.

l) Changes in technology: -
Changes in production technology have an impact on the need of more working capital.

m) Depreciation policy: -
Charges of depreciation on assets do not involve any cash outflows. Depreciation affects tax
liability and retention profits. It is allowable expenditure while calculating net profits. Higher
depreciation will mean lower disposal of profit and there fore dividend will be paid in smaller
amount. Thus cash will be preserved.

ASSET ADMINISTRATION :

I. Introduction: Asset management is defined as maintaining a desired level of service at the

lowest life cycle cost. In simple terms, it provides a means of determining the best way to spend
your limited dollars to achieve the maximum impact. In these times of “doing more with less,”
it’s about “doing less better.” There is no way to achieve everything you want to with a severely
reduced budget, but it is possible with Asset Management techniques to achieve the maximum
result within the available funding. Asset management provides a framework to make data
driven decisions about how to operate, maintain, repair, rehabilitate, and replace assets.

II. Five core components of Asset Management

The five core components of asset management are: current state of the assets, level of service,
criticality, life cycle costing, and long term funding. Each of these concepts will be described in
more detail below.

The current state of the assets inventories all of the physical components of your facility. It is
the most straightforward aspect of asset management.

The level of service enables you to set goals for the facility regarding what services you want
to provide. This component is the most underappreciated part of asset management. Many
people feel that goal setting is not important. However, goal setting changes one’s thinking
about the facility operation and how the assets are managed.

Criticality enables a manager to determine which assets are the most vital to the sustained
operation of the facility. The criticality component is the heart and soul of asset management.
Understanding criticality allows a manager to make informed decisions about the best way to use
the limited financial and personnel resources.

Life cycle costing uses the information regarding the first three components – what assets the
facility owns, what you want them to do and which ones are critical to the sustained operation to
make informed decisions about operation and maintenance and asset replacement. This portion
of the process is the most complex, but allows the best use of limited dollars.

The final component is the long term funding. In this component, the facility managers must
determine how much money they need to operate and maintain the assets and how much they
need to replace or rehabilitate the assets over time. They must then determine how to obtain the
necessary funding. This component requires communication of information to governing bodies
and funding agencies to ensure that decision makers have the best information possible when
making funding decisions.

III. Current State of the Assets

The current state of the assets covers the basic questions of:

1. what assets do I own

2. where are they located

3. what condition are they in

4. what are their remaining useful lives, and

5. what are the replacement values.

This step of the process includes completing an inventory of all of the assets in the system. It
also involves gathering data about the assets. The data should be of the best quality possible and
include information that is important to the facility managers. The information should be kept up
to date and any inaccurate information should be revised as soon as the errors are discovered.
Each asset should be given a unique ID number. A method of storing the data should be
determined. It can include anything from a pen and paper inventory to a generic database or
spreadsheet to a commercial product. There are many, many products on the market at all
different price ranges that will address whatever the needs of the system are. One tip when
conducting an asset inventory is to take digital pictures of the assets that are visible. It helps in
the data collection process and it creates a permanent record of the assets. If you take pictures
over time, you can also look at trends in the asset conditions.

IV. Level of Service

The level of service establishes what you want your assets to provide. It outlines the major goals
of the utility in order to provide the customers what they want. Goals can be in several different
areas, such as water quality, water loss, water conservation, or customer service and should be
“SMART” (specific, measurable, attainable, realistic or relevant, and time bound.) For example,
“The water utility will provide water at a minimum pressure of 50 psi 95% of the time.” This
goal is specific, you know exactly what the utility is trying to do. It is measurable because we
could check pressures at various points around the system and see if it met that minimum
standard. It is attainable if the facility has the pumping facilities or storage tank elevation to
meet that pressure. It is realistic or relevant if this is the level that customers want you to
maintain. It is time bound in that we are saying we will meet the level 95% of the time. We are
allowing for periods when the system may be undergoing repairs and the pressure may drop
below the minimum of 50 psi. The level of service goals can include both external goals (goals
you would share with the public or decision-makers) and internal goals (goals that would be
shared only within the utility.) Internal goals are items that are specific to operations, such as the
ratio of corrective to preventative work orders, and generally not well-understood by the
customers. It is important to measure how well you meet the goals periodically (monthly,
quarterly, semiannually, or annually) and to report the results to the public or decision-makers at
least annually.

V. Criticality

Not all assets are equally important to the sustained operation of the facility. Some assets are
much more critical than others. In order to determine which assets are more critical than others,
the following questions are key:
A. What is the probability of failure of any given asset and

B. What are the consequences if the asset does fail?

Based on the answers to these two questions it is possible to determine which assets are more
important to the operation than others. It is these assets that should be the focus of the utility’s
resources – money and personnel. The more resources are focused on the highest risk or highest
criticality assets, the greater the benefit for the money spent.

VI. Life Cycle Costing

The facility managers must make decisions regarding how they will operate and maintain their
assets as well as deciding when to continue to repair an asset verses replacing or rehabilitating it.
In general, spending more on O&M (operation and maintenance) means spending less on
replacement and vice versa. Since O&M is generally cheaper than asset replacement, it is
usually better to perform more O&M and do less replacement.

However, managers must balance how much O&M to do and specifically which activities to
perform based on the resources available. These choices involve thinking about criticality.
More O&M should be practiced on highly critical assets than less critical assets. Similarly,
decisions about asset replacement also involve criticality. A highly critical asset may be
replaced sooner because of its importance to the operation, while a lower criticality asset may
remain in operation longer and continue to be repaired as needed.

VII. Funding

The facility managers must determine how much money is needed for short term operation and
long term capital replacement projects. This amount of funding must be communicated to
decision-makers and this communication needs to include a communication and understanding
of the risk level that exists at different funding levels. The decision-makers can then make an
informed decision regarding how much of this funding.
VIII. Example

An example of how asset management could work in practice is presented below. A utility
believes that their pipe infrastructure is getting old and deteriorating and thinks that they will
need to replace all of the pipe. The cost of pipe replacement is estimated to be $8 million dollars
which is much more money than the system can afford. Furthermore, there are other priorities in
the system that are demanding money. The system knows they need another approach.

1. The first step would be to evaluate the pipe assets. This would include determining the pipe
types, sizes, location, and condition. The best way to complete the asset inventory of pipes
would be to generate a map of the pipes.

2. The second step would be to determine the level of service for pipe reliability. For example,
there might be a level of service goal such as “Pipes will be replaced when the break rate reaches
4 times the average break rate of the system.” With this level of service goal you could
determine which pipes are over the break rate, which are close to it, and which are well below.

3. The third step would be to evaluate each pipe segment (pipe segment can be defined by the
system) to see which are likely to fail and which will cause a serious consequence if they do fail.
When pipes are evaluated on the basis of probability of failure and consequence of failure it is
possible to rank the pipes in terms of risk to the system.

4. With this information, it is possible to develop a phased approach to pipe replacement. This
phased approach would include which pipe would be replaced each year given the funding
available.
RESEARCH METHODOLOGY:
This study was undertaken by visiting the Plant location of Strides Shasun Limited,Cuddalore
Unit, and spanned over a period of one month. The information was collected byinteracting and
interviewing with the concerned personnel of various functional departments.

1.5.1 RESEARCH DESIGN:

“
A Research design is the arrangement of conditions for collection and analysis of data in
a manner that aims to combine relevance to the research purpose with economy in procedure”
The research design followed to study the working capital management in Strides Shasun limited
is Analytical Research Design.

1.5.2 SOURCES OF DATA COLLECTION:

Primary Data:
Primary sources of data included interactions with Unit Head, Managers & Executives.
Secondary Data:
The major sources of secondary data were the document collected annual reports,
business journals, existing records and also from the website of the company.