CHAPTER I

INTRODUCTION AND DESIGN OF THE STUDY

1.1 INTRODUCTION

Working capital is a financial metric, which represents operating

liquidity available to a business. Along with fixed assets such as plant

and equipment, working capital is considered a part of operating

capital. It is calculated as current assets minus current liabilities. If

current assets are less than current liabilities, an entity has a working

capital deficiency, also called a working capital deficit. A company can

be endowed with assets and profitability but short of liquidity if its

assets cannot readily be converted into cash. Positive working capital

is required to ensure that a firm is able to continue its operations and

that it has sufficient funds to satisfy both maturing short-term debt and

upcoming operational expenses.

Working capital management is concerned with the problems

that arise in attempting to manage the current liabilities and the inter-

relationship that exists between them. The term ‘current assets’ refers

to those assets which in the ordinary course of business can be, or will

be converted into cash within one year, without undergoing a

diminution in value and without disrupting the operations of the firm.

The major current assets are cash, marketable securities, accounts

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receivable and inventory. Current liabilities are those liabilities which

are intended, at their inception, to be paid in the ordinary course of

business, within a year, out of the current assets or earnings of the

concern. The basic current liabilities are accounts payable, bills

payable, bank overdraft, and outstanding expenses. The goal of

working capital management is to manage the firm’s current assets and

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

maintained. This is so because if the firm cannot maintain a

satisfactory level of working capital, it is likely to become insolvent

and may even be forced into bankruptcy. The current assets should be

large enough to cover its current liabilities in order to ensure a

reasonable margin of safety. Each of the current asserts must be

managed efficiently in order to maintain the liquidity of the firm it is

not keeping too high a level of any one of them. Each of the short-term

sources of financing must be continuously managed to ensure that they

are obtained and used in the best possible way. The interaction

between current assets and current liabilities therefore, the main theme

of the theory or working management.

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1.2 STATEMENT OF THE PROBLEM

Decisions relating to working capital and short term financing

are referred to as working capital management. These involve

managing the relationship between a firm's short-term assets and its

short-term liabilities. The goal of working capital management is to

ensure that the firm is able to continue its operations and that it has

sufficient cash flow to satisfy both maturing short-term debt and

upcoming operational expenses.

By definition, working capital management entails short term

decisions - generally, relating to the next one year period - which are

"reversible". These decisions are therefore not taken on the same basis

as capital investment decisions. Rather they will be based on cash

flows and / or profitability. One measure of cash flow is provided by

the cash conversion cycle - the net number of days from the outlay of

cash for raw material to receiving payment from the customer. As a

management tool, this metric makes explicit the inter-relatedness of

decisions relating to inventories, accounts receivable and payable, and

cash. Because this number effectively corresponds to the time that the

firm's cash is tied up in operations and unavailable for other activities.

A few key performance ratios of a working capital management

system are the working capital ratio, inventory turnover and the

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collection ratio. Ratio analysis will lead management to identify areas

of focus such as inventory management, cash management, accounts

receivable and payable management.

Working capital management involves the relationship between

a firm's short-term assets and its short-term liabilities. Working Capital

is the money used to make goods and attract sales. The less working

capital used to attract sales, the higher is likely to be the return on

investment. Working capital management is about the commercial and

financial aspects of inventory, credit, purchasing, marketing, and

royalty and investment policy. The higher the profit margin, the lower

is likely to be the level of working capital tied up in creating and

selling titles. The faster that we create and sell the goods,the higher is

likely to be the return on investment. In this context, the researcher has

made an attempt to study the working capital management and

financial performance of the Sri Gajendra Paper & Board Private

Limited.

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1.3 SCOPE OF THE STUDY

This is the case study of Sri Gajendra Paper & Board Private

Limited. This study covers an analysis of working capital management

and overall performance of this company with the help of financial

ratios. This study is purely from the management point of view and not

from the workers point of view.

1.4 OBJECTIVES OF THE STUDY

The following are the main objectives of the present study.

• To study about he profile of the Sri Gajendra Paper &

Board Private Limited, Palani

• To assess the impact of working capital ratio on

profitability.

• To evaluate the financial performance of Sri Gajendra

Paper & Board Private Limited

• To offer suggestions and findings to improve the working

capital management.

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1.5. OPERATIONAL DEFINITION OF CONCEPTS

1.5.1 Working Capital

Working capital means the excess of current assets over current

liabilities.

1.5.2 Ratio Analysis

The relationship between two figures expressed mathematically

is called “Ratio”. It is a numerical relationship between two numbers

which are related in some manner. It is calculated by dividing one by

another. Ratio analysis is a technique of analysis and interpretation of

financial statements.

1.5.3 Inventory

Inventory means stock of raw materials, work in progress and

finished goods.

1.5.4 Raw materials

Raw materials means the items which are in their original form

for processing and production.

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1.5.5 Work – in – Progress

Work – in – progress means semi – finished goods.

1.5.6 Current Liabilities

Current liabilities includes trade creditors, bills payable, bank

overdrafts, tax payable, proposed dividends, and outstanding expenses.

1.6 PERIOD OF STUDY

This study covers a period of five years from 2004-2005 to 2008-2009.

1.7 METHODOLOGY

This study is based entirely on secondary data. The reports of the

case unit for the past five years commencing from 2004-2005 to 2008-

2009 constituted the basis of the study. The case study method is

followed. The gaps in the secondary data were filled up from the

official records of the case unit. To supplement it the information have

been collected from related books, periodicals, journals and internet.

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1.8 COLLECTION OF DATA

The data for the present study was collected by the researcher by

visiting the libraries of various universities such as Bharathiyar

University, Coimbatore and Madurai Kamarajar University, Madurai.

The annual report of the Sri Gajendra Paper & Board Private Limited.,

from 2004-2005 to 2008-2009 formed the basis of data for the study.

1.9 FRAMEWORK ANALYSIS

Working capital management of the mills has been analysed

with the help of ratios. To analyse the working capital management

and financial performance, financial strength ratio, turnover ratio, and

profitability ratios are calculated. The calculated ratios are presented

in the form of tables and diagrams.

1.10 LIMITATIONS

The study is carried out at micro level and it is restricted only to

the Sri Gajendra Paper & Board Private Limited. Hence the findings of

the study may not be generalized. Since the study is based on the

secondary data, all the limitations of secondary data are also applicable

for this study. The findings of the study are applicable only for the

period of five years i.e. from 2004-2005 to 2008-2009.

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1.11 SCHEME OF REPORT

The present study consists of five chapters. The first chapter

deals with ‘The Design of the Study’. It covers, introduction, statement

of the problem, objectives of the study, scope of the study, operational

definitions of concept, methodology, and collection of data, period of

study, framework analysis, limitations and scheme of report. ‘A

Historical Perspective of Paper Industry’ deals with the introduction,

history of textiles in India, Indian Paper industry’s structure and

growth, profile of the Sri Gajendra Paper & Board Private Limited,

milestones achieved by the company, infrastructure, products, quality,

management, market and future plans.

The second chapter analyses the working capital management of

Sri Gajendra Paper & Board Private Limited with the help of ratios.

Current ratio, quick ratio, absolute liquid ratio, inventory turnover

ratio, debtors turnover ratio, average collection period ratio, ratio of

current assets to proprietor’s fund ratio, working capital turnover ratio,

total assets turnover ratio and net working capital ratio.

The third chapter review of literature.

The fourth chapter ‘Working capital Management’ of Sri

Gajendra Paper & Board Private Limited’ analyses the financial

position of the study unit from the years 2004-2005 to 2008-2009. For

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analyzing the financial performance of Sri Gajendra Paper & Board

Private Limited, many ratios were used namely, gross profit ratio, net

profit ratio, operating profit ratio, expenses ratio, debt-equity ratio,

return on capital employed ratio, proprietary ratio, return on total assets

ratio and return on shareholders fund ratio.

The fifth chapter ‘The Summary of Findings, Suggestions and

Conclusion’, deals with the findings of the present study and offers

suitable suggestions to improve the working capital management of Sri

Gajendra Paper & Board Private Limited.

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