A

TRAINING PROJECT REPORT

ON

Working Capital Management

MARUTI SUZUKI INDIA LIMITED. GURGAON
SUBMITTED IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT
OF THE AWARD OF DEGREE OF

BACHELOR OF BUSINESS ADMINISTRATION

TO

MAHARISHI DAYANAND UNIVERSITY, ROHTAK

Submitted By
Haobam jemson singh

Roll NO 17111 BBA 5th (2017-2020)

 Under the supervision of

Mr. Hemant Mangal

(Dy. Manager Finance)

Global Institute Of Technology & Management

FARUKH NAGAR GURGAON

RESEARCHER’S DECLARATION

I declare that the summer training report entitled “Working capital management in Maruti
Suzuki India LTD” is a record of independent research work carried out by me under the
supervision and guidance of Mr. HEMANT MANGAL.
DATE: NAKUL SHARMA

BBA 2nd year

ACKNOWLEDGEMENT

Any accomplishment requires the effort of many people and this work is not different.
Regardless of the source, I wish to express my gratitude to those who may have contributed to
this work, even though anonymously.
First I would like to express my deepest sense of gratitude to GLOBAL INSTITUTE OF
TECHNOLOGY & MANAGEMENT for providing me with an opportunity for training and
encouragement in conducting the research work.

I would like to pay my sincere thanks to my project guide, Mr. Hemant Mangal (Dy. manager
Finance of Maruti Suzuki India LTD) under whose guidance I was able to complete my project
successfully. I have been fortunate enough to get all the support, encouragement and guidance
from him needed to explore, think new and initiate.

I also extend my sincere thanks to for providing me the opportunity to undergo summer training
in Maruti Suzuki India LTD.

My final thanks goes out to my parents, family members, teachers and friends who encouraged
me countless times to persevere through this entire process.

NAKUL SHARMA

PREFACE

I had under gone my summer training with Maruti Suzuki India Ltd. A student can
gain this practical knowledge when he comes to same environment. He/she must have
knowledge to tackle various types of problems, which arise in business. He/she can be
able to do it, when actually faces the problem.

This is only possible during training period. A student may have a sufficient attitude
for his/her future job, but systematic practical training is essential to bring in his
confidence for job performance, mental preparation, which enable him to take a future
job responsibility.

As discussed above importance and objectives of training, besides all this, such
training solves following purposes:

 Developing skills

In this ability, to perform work efficiently & effectively is being developed.

 Modifying attitude.

Developing good attitude on the part of the training in regard to actual job requirement
that is management.

 Transmitting information

Information about the company, its product, services & policies.

So, as total above, I had the privilege of receiving my practical training in Maruti
Suzuki India Ltd. The management of company offered excellent learning situation &
sufficient facilities, to fulfill the objectives of the training.

NAKUL SHARMA
 TABLE OF CONTENT

Certificate

Declaration

Acknowledgement

Preface

Chapter- 1

a) Introduction
b) Problem statement
c)Objectives
d)Significance of the study
e)Focus of the study

Chapter- 2
 a) Industry profile
b) Company profile
c) Conceptualization

Chapter- 3

Research Methodology

Chapter 4

Analysis and Interpretation

Chapter- 5

a) Findings
b)Recommendations
c) Conclusion
d) Limitation

Appendix

Bibliography

Annexure
CHAPTER-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 firm’s 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 Guthmann & Doughal-

“Excess of current assets over current liabilities”.

1. 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)”.

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 shareholders wealth. To
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 labour 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.

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 firm’s investment. 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.

The concept of working capital was, first evolved by Karl Marx. Marx used 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’.
Types 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.

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.

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 quite 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.
 1. 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 of Maruti Suzuki India Ltd.

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 of the Maruti Suzuki India Ltd.

6. To estimate the working capital requirement of Maruti Suzuki India Ltd.

7. To study the operating and cash cycle of the company.

CHAPTER-2
COMPANY
PROFILE
 2. Company profile

MARUTI SUZUKI INDIA LIMITED

Maruti Suzuki India Limited (MSIL, formerly Maruti Udyog Limited) is a subsidiary of Suzuki
Motor Corporation of Japan. Maruti Suzuki is a leading manufacturer of passenger vehicles in
India. Lovingly referred to as the people's car maker; over the past three decades Maruti Suzuki
has changed the way people in India commute and travel.

The company has two manufacturing facilities located at Gurgaon and Manesar, south of New
Delhi, India. Both the facilities have a combined capability to produce over a 1.5 million
(1,500,000) vehicles annually. The company plans to expand its manufacturing capacity to 1.75
million by 2013.

The Company offers 15 brands and over 150 variants ranging from people's car Maruti 800 to
the latest Life Utility Vehicle, Ertiga. The portfolio includes Maruti 800, Alto, Alto K10, A-star,
Estilo, WagonR, Ritz, Swift, Swift DZire, SX4, Omni, Eeco, Kizashi, Grand Vitara, Gypsy and Ertiga.
In an environment friendly initiative, in August 2010 Maruti Suzuki introduced factory fitted CNG
option on 5 models across vehicle segments. These include Eeco, Alto, Estilo, Wagon R and Sx4.
With this Maruti Suzuki became the first company in India to introduce factory fitted CNG
vehicles.

In terms of number of cars produced and sold, the Company is the largest subsidiary of Suzuki
Motor Corporation. Cumulatively, the Company has produced over 10 million vehicles since the
roll out of its first vehicle on 14th December, 1983.

Maruti Suzuki is the only Indian Company to have crossed the 10 million sales mark since its
inception. In 2011-12, the company sold over 1.13 million vehicles including 1,27, 379 units of
exports.

The Company employs over 9000 people (as on 31st March, 2012). Maruti Suzuki's sales and
service network is the largest among car manufacturers in India. The Company has been rated
first in customer satisfaction in the JD Power survey for 12 consecutive years. Besides serving
the Indian market, Maruti Suzuki also exports cars to several countries in Europe, Asia, Latin
America, Africa and Oceania.
Vision and core values

MSIL’S OPERATIONS

Pressing and Blanking

 Steel coils, procured from steel makers, are cut into sheets.
 These sheets are pressed into various parts of the car like doors, body etc

Welding

 The separate parts are welded together using a process called spot welding.
 The completely welded “WHITE BODY” is ready for its next journey.

Painting
  CATHODE ELECTRO DEPOSITION: 1st coat of paint on white body.
 INTERMEDIATE/TOP COAT: 2nd and 3rd paint of coat after 1st coat.
 TOUCH UP LINE/ FINAL INSPECTION: Final inspection of the painted body

Machining

 5 BASIC ENGINE COMPONENTS: “Cylinder block,head, crank shaft, camshaft, trans case”
 MACHINING PROCESS: Different machining processes to manufacture machined
components
 OPERATION INSPECTION: Inspection of critical dimension of components

Engine Assembly

 ENGINE ASSEMBLY: Assembling of 5 basic components and various other parts of engine
 FIRING TEST: Adjustment of rpm and checking of other parameters

Assembly

 TRIM LINE: Fitment of lighter components viz wiring harnesses, head lamp, AC etc
 CHASSIS LINE: Fitment of heavier components viz engine, axle, breaks, etc
 FINAL LINE: Fitment of seats, AC gas filling, and final adjustments

Vehicle Inspection

 FIRST APPEARANCE: Initial inspection of vehicle to check appearance and adjustment

related problems
 DRUM TESTER: Inspection of break performance and other functions of the vehicle
 EMISSION CHECK: checking of emission conformity as per government regulations
  SHOWER TESTER: Endurance testing of the vehicle to pass the water shower at 1.5
kg/cm2 pressure.
 FINAL INSPECTION: Final roll out of the vehicles after final inspection

Sales and Dispatch

 HANDOVER TO SALES AND DESPATCH: for delivery to dealers

CHAPTER-3
 2. Research methodology

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.

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

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, head of SQC 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

Project is based on

1. Annual report of Maruti Suzuki India Ltd. 2006-07

2. Annual report of Maruti Suzuki India Ltd 2007-08

3. Annual report of Maruti Suzuki India Ltd 2008-09

4. Annual report of Maruti Suzuki India Ltd 2009-10

5. Annual report of Maruti Suzuki India Ltd 2010-11

CHAPTER-4
 Analysis of the Problem under Study

Funds available for period of one year or less is called short term finance. In India short term
finance is used as working capital finance. Two most significant short term sources of finance for
working capital are trade credit and bank borrowing. Trade credit ratio of current assets is about
40%, it is indicated by Reserve Bank of India data that trade credit has grown faster than the
growth in sales. Bank borrowing is the next source of working capital finance. The relative
importance of this varies from time to time depending on the prevailing environment. In India
the primary source of working capital financing are trade credit and short term bank credit.
After determine the level of working capital, a firm has to consider how it will finance. Following
are sources of working capital finance.

Sources of working Capital Finance

1) Trade credit

2) Bank Finance

3) Letter of credit

1) Trade credit

Trade credit refers to the credit that a customer gets from suppliers of goods in the normal
course of business. The buying firms do not have to pay cash immediately for the purchase
made. This deferral of payments is a short term financing called trade credit. It is major source
of financing for firm. Particularly small firms are heavily depend on trade credit as a source of
finance since they find it difficult to raised funds from banks or other sources in the capital
market. Trade credit is mostly an informal arrangement, and it granted on an open account
basis. A supplier sends goods to the buyers accept, and thus, in effect, agrees to pay the amount
due as per sales terms in the invoice. Trade credit may take the form of bills payable. Credit
terms refer to the condition under which the supplier sells on credit to the buyer, and the buyer
required repaying the credit. Trade credit is the spontaneous source of the financing. As the
volume of the firm’s purchase increase trade credit also expand. It appears to be cost free since
it does not involve explicit interest charges, but in practice, it involves implicit cost. The cost of
credit may be transferred to the buyer via the increased price of goods supplied by him.

2) Bank finance for working capital

Banks are main institutional source of working capital finance in India. After trade credit, bank
credit is the most important source of financing working capital in India. A bank considers a
firms sales and production plane and desirable levels of current assets in determining its
working capital requirements. The amount approved by bank for the firm’s working capital is
called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking
system. In practice banks do not lend 100% credit limit; they deduct margin money.

Forms of bank finance:-

 Term Loan
 Overdraft
 Cash credit
 Purchase or discounting of bills

 Term Loan
In this case, the entire amount of assistance is disbursed at one time only, either in cash or the
company’s account. The loan may be paid repaid in installments will charged on outstanding
balance.

 Overdraft
In this case, the company is allowed to withdraw in excess of the balance standing in its Bank
account. However, a fixed limit is stipulated by the Bank beyond which the company will not
able to overdraw the account. Legally, overdraft is a demand assistance given by the bank i.e.
bank can ask repayment at any point of time.

 Cash credit
In practice, the operations in cash credit facility are similar to those of those of overdraft facility
except the fact that the company need not have a formal current account. Here also a fixed limit
is stipulated beyond which the company is not able to withdraw the amount.

 Bills purchased / discounted

This form of assistance is comparatively of recent origin. This facility enables the company to get
the immediate payment against the credit bills / invoice raised by the company. The banks hold
the bills as a security till the payment is made by the customer. The entire amount of bill is not
paid to the company. The company gets only the present worth of amount of bill from of
discount charges. On maturity, bank collects the full amount of bill from the customer.

3) Letter of credit

In this case the exporter and the importer are unknown to each other. Under these
circumstances, exporter is worried about getting the payment from the importer and importer is
worried as to whether he will get goods or not. In this case, the importer applies to his bank in
his country to open a letter of credit in favor of the exporter whereby the importers bank
undertakes to pay the exporter or accept the bills or draft drawn by the exporter on the
exporter fulfilling the terms and conditions specified in the letter of credit. Banks have been
certain norms in granting working capital finance to companies. These norms have been greatly
influenced by the recommendation of various committees appointed by the Reserve Bank of
India from time to time. The norms of working capital finance followed by bank since mid-70
were mainly based on the recommendations of the Tendon committee. The Chore committee
made further recommendations to strengthen the procedure and norms for working capital
finance by banks.

Table 5.1-Working capital loan and interest

(Rs.in millions)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Working Capital term

Loan from Bank 8152 7622 3527 2670 1967

Consortium of Bank
Working Capital
Demand Loan 5482 1919 905 359 728

Foreign Currency
Demand Loan 4965 5383 4451 5286

Cash Credit Account 6094 3848 1589 4579 5952

Export Packaging Credit 587 1398 6736 11907 19655

Foreign Bill Discount

from bank 431 1518 494

Letter of Credit 728

Total 21474 21270 18634 23966 33588

Interest on Working
Capital 1801 2060 1947 1960 3549
Chart5.1-

Interest on Working Capital

4000
3500
3000
2500
2000
Interest on Working
1500 Capital
1000
500
0
2006-07 2007-08 2008-09 2009-10 2010-11

Chart No.5.2
 Interest on Working Capital

4000
3500
3000
2500
Interest on Working
2000
Capital
1500
1000
500
0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

Maruti Suzuki India Ltd takes huge working capital loan to fulfill the requirement of working
capital, thus company had paid huge amount of interest on working capital loan. Company
raised the funds for working capital through term loan from bank, and working capital loan from
consortium of banks. Maruti Suzuki India Ltd. also used cash credit account but cash credit is not
cost free source of working capital because it involves implicit cost. The supplier extending trade
credit incurs cost in the form of opportunity cost of funds invested in accounts receivable. The
annual opportunity cost of forgoing cash discount can be very high. Therefore Maruti Suzuki
India Ltd. should compare the opportunity cost of trade credit with the cost of other sources of
credit while making its financial decisions.
Estimation of working capital

After considering the various factors affecting the working capital needs, it is necessary to
forecast the working capital requirements. For this purpose, first of all estimate of all current
assets should be made, these should be followed by the estimation of all current liabilities.
Difference between the estimated current assets and estimated current liabilities will represent
the working capital requirements.

The estimation of working capital requirement of MSIL is based on few assumptions such as
follows.

1. Gross sales will increase by 40%

2. Receivables collection period will be 90 day as per standards fixed by company.

3. Unnecessary balance of Cash may reduce by finance management.

4. For working capital finance company can use maximum trade credit.

5. Inventory holding period can be 60 days instead of present 95 days.

Table 5.2-Estimation of the working capital

 For the year 20010-11 for MSIL

Particulars Estimated Amount (Rs. In Millions)

Current Assets

Inventories (Holding Period 60 Days) 40254

Sundry Debtors(Avg. Collection Period 90 Days 50921

Cash & Bank Balance 5666

Other Assets 1345

Loan & Advances 25543

Total of A 123729

B) Current Liabilities

Current Liabilities (40% Increment) 60484

Provisions(40% increment) 4632

Total of B 65116

Net Working Capital (A-B) (Estimated) 58613

Observations

Maruti Suzuki India Ltd took benefit of such position to raise the funds for working capital
finance. In the year 2005-06 term loan from bank was the major source of finance, but it
reduced by 75% it indicate that company changed the finance policy to get benefit sources like
term credit (export package credit) which is not directly affect on cost of finance. In the year
2005-06 company used letter of credit but after that company not used such facility from third
person, company start own offices in foreign country to transactions. Company used the cash
credit account for working capital finance such as cash credit facility provided by co-operative
and national banks.

Company required such huge amount for working capital finance because liquidity of the
company locked in debtors. Company had around 50 % receivables account of total current
assets. Company fixed normal collection period of 90 days, but collection system of the
company was not able to collection from debtors within credit term. Company has receivable
but not liquidity to payment of creditors thus company took cash credit and credit term, which
increased the interest on working capital finance by around 96% from year 2006 to year end
2010. Cash management of the company is more conservative thus company carry huge amount
in terms of liquid assets.

5. Interpretation of result

Working capital level

The consideration of the level investment in current assets should avoid two danger points
excessive and inadequate investment in current assets. Investment in current assets should be
just adequate, not more or less, to the need of the business firms. Excessive investment in
current assets should be avoided because it impairs the firm’s profitability, as idle investment
earns nothing. On the other hand inadequate amount of working capital can be threatened
solvency of the firms because of it’s inability to meet it’s current obligation. It should be realized
that the working capital need of the firms may be fluctuating with changing business activity.
This may cause excess or shortage of working capital frequently. The management should be
prompt to initiate an action and correct imbalance.

Table 6.1- Size of working capital

(Rs. In Millions.)

A) Current Assets

Inventories 9180 10827 15437 18373 27430

Sundry Debtors 13346 16200 22304 28305 44051

Cash & Bank Balance 2228 1378 1127 22619 3566

Other Assets 1556 349 329 571 1010

Loan & Advances 7765 7341 7271 7577 10751

Total of A(Gross W.C) 34075 36095 46468 77445 86808

B) Current Liabilities

Current Liabilities 14515 16572 20019 30789 43203

Provisions 138 308 369 3018 2549

Total of B 14653 16880 20388 33807 45752

 Net W.C(A-B) 19422 19215 26080 43638 41056

Working capital trend analysis

In working capital analysis the direction at changes over a period of time is of crucial
importance. Working capital is one of the important fields of management. It is therefore very
essential for an analyst to make a study about the trend and direction of working capital over a
period of time. Such analysis enables as to study the upward and downward trend in current
assets and current liabilities and its effect on the working capital position.

In the words of S.P. Gupta “The term trend is very commonly used in day-today conversion
trend, also called secular or long term need is the basic tendency of population, sales, income,
current assets, and current liabilities to grow or decline over a period of time.”

According to R.C.galeziem “The trend is defined as smooth irreversible movement in the series.
It can be increasing or decreasing.”

Emphasizing the importance of working capital trends, Man Mohan and Goyal have pointed out
that “analysis of working capital trends provide as base to judge whether the practice and
privilege policy of the management with regard to working capital is good enough or an
important is to be made in managing the working capital funds.

Further, any one trend by itself is not very informative and therefore comparison with

Illustrated their ideas in these words, “An upwards trends coupled with downward trend or
sells, accompanied by marked increase in plant investment especially if the increase in planning
investment by fixed interest obligation”
 Table 6.2-Working capital size

(Rs. In Millions)

Years 2006-07 2007-08 2008-09 2009-10 2010-11

Net W.C(A-B) 19423 19217 26081 43640 41013

W.C Indices 100 98.84 134.28 224.68 211.16

Chart6.1- Working capital indices

 W.C Indices

250

200

150
W.C Indices
100

50

0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

It was observed that major source of liquidity problem is the mismatch between current
payments and current receipts from the Comparison of funds flow statements for five years. It
was observed that in the year 2004-05 current assets increased by around 29% and current
liabilities increased only by 19% which affect as working capital increased by 35%. In the year
2005 to 2006 net working capital increased to Rs 4364 million from Rs. 2608 million, the
increase in working capital is close to 67%. While current assets increased by 66% and current
liabilities by 65%. It shows that management is using long term funds to short term
requirements. And it has fallen to Rs.4101 million in the year 2007 because current assets gone
up by only 12%, current liabilities grown by 35%. This two together pushed down the net
working capital to the present level. The fall in working capital is a clear indication that the
company is utilizing its short term resources with efficiency.
Current assets

Total assets are basically classified in two parts as fixed assets and current assets. Fixed assets
are in the nature of long term or life time for the organization. Current assets convert in the
cash in the period of one year. It means that current assets are liquid assets or assets which can
convert in to cash within a year.

Table 6.3-Current assets size

(Rs. In Millions)

Particulars 2006-07 2007-08 2008-09 2009-10 2010-11

Inventories 9180 10827 15437 18373 27430

Sundry Debtors 13346 16200 22304 28305 44051

Cash & Bank Balance 2228 1378 1127 22619 3566

Other assets 1556 349 329 571 1010

Loan & Advances 7765 7341 7271 7577 10751

Total of C.A 34075 36095 46468 77445 86808

C.A indices 100 105.93 136.37 227.27 254.75

Chart6.2- C.A. Indices

 C.A indices

300

250

200

150 C.A indices

100

50

0
2006-07 2007-08 2008-09 2009-10 2010-11

Composition of current assets

Analysis of current assets components enables one to examine in which components the
working capital fund has locked. A large tie up of funds in inventories affects the profitability of
the business or the major portion of current assets is made up cash alone, the profitability will
be decreased because cash is non earning assets.

Table 6.4- composition of current assets

(No. in %)

Particulars 2006-07 2007-08 2008-09 2009-10 2010-11

Inventories 26.94 29.99 33.22 23.72 31.6

Sundry Debtors 39.16 44.88 48 36.55 50.74

Cash & Bank Balance 6.54 3.82 2.42 29.21 4.11

 Other assets 4.57 0.97 0.71 0.74 1.16

Loan & Advances 22.79 20.34 15.65 9.78 12.39

Total of C.A 100 100 100 100 100

Chart6.3- Current assets components

60

50

40 Inventories
Sundry Debtors
30 Cash & Bank Balance
Other assets
20 Loan & Advances

10

0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

It was observed that the size of current assets is increasing with increases in the sales. The
excess of current assets is showing positive liquidity position of the firm but it is not always good
because excess current assets then required, it may adversely affects on profitability. Current
assets include some funds investments for which company pay interest. The balance of current
assets is highly increased in year 2005-06, because of increase in cash balance. Cash balance of
the company increased in the same year because company got some encashment of deposits in
the schedule Banks as current account Rs.439 million and fixed deposits (out of ZCCB funds)
Rs.1785 million. Current assets components show sundry debtors are the major part in current
assets it indicates that the inefficient collection management. Over investment in the debtor
affects liquidity of firm for that company has raised funds from other sources like short term
loan which incurred the interest.

Current liabilities

Current liabilities mean the liabilities which have to pay in current year. It includes sundry
creditor’s means supplier whose payment is due but not paid yet, thus creditors called as
current liabilities. Current liabilities also include short term loan and provision as tax provision.
Current liabilities also includes bank overdraft. For some current assets like bank overdrafts and
short term loan, company has to pay interest thus the management of current liabilities has
importance

Table 6.5-Current liabilities size

(Rs. In Crore)

Particulars 2006-07 2007-08 2008-09 2009-10 2010-11

Current Liabilities 14515 16572 20019 30789 43203

Provisions 138 308 369 3018 2594

Total of C.L 14653 16880 20388 33807 45797

Indices of C.L 100 115.19 139.13 230.7 312.52

Chart6.4

Indices of C.L

350

300

250

200
Indices of C.L
150

100

50

0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

Current liabilities show continues growth each year because company creates the credit in the
market by good transaction. To get maximum credit from supplier which is profitable to the
company it reduces the need of working capital of firm. As a current liability increase in the year
2006-07 by 35% it reduce the working capital size in the same year. But company enjoyed over
creditors which may include indirect cost of credit terms.

Changes in working capital

There are so many reasons to changes in working capital as follow

1. Changes in sales and operating expenses:-

The changes in sales and operating expenses may be due to three reasons
1. There may be long run trend of change e.g. The price of row material say oil
may constantly raise necessity the holding of large inventory.

2. Cyclical changes in economy dealing to ups and downs in business activity will influence the
level of working capital both permanent and temporary.

3. Changes in seasonality in sales activities

4. Policy changes:-

The second major case of changes in the level of working capital is because of policy changes
initiated by management. The term current assets policy may be defined as the relationship
between current assets and sales volume.

5. Technology changes:-

The third major point if changes in working capital are changes in technology because changes
in technology to install that technology in our business more working capital is required.

Observations

Working capital decreased in the year 2009 to 2010 because:

1. Sales increased by around 35%, where cost of raw material purchased increased by
42% and manufacturing expanses increased by 51%.
2. Cost of material and manufacturing expanses increased because of inflation, which was
6.63% in Feb. 2010 increased from 4%in 2009.
Operating Cycle

The need of working capital arrived because of time gap between production of goods and their
actual realization after sale. This time gap is called “Operating Cycle” or “Working Capital Cycle”.
The operating cycle of a company consist of time period between procurement of inventory and
the collection of cash from receivables. The operating cycle is the length of time between the
company’s outlay on raw materials, wages and other expanses and inflow of cash from sales of
goods. Operating cycle is an important concept in management of cash and management of
cash working capital. The operating cycle reveals the time that elapses between outlays of cash
and inflow of cash. Quicker the operating cycle less amount of investment in working capital is
needed and it improves profitability. The duration of the operating cycle depends on nature of
industries and efficiency in working capital management.

Calculation of operating cycle

To calculate the operating cycle of Maruti Suzuki India Ltd used last five year data. Operating
cycle of the Maruti Suzuki India Ltd. vary year to year as changes in policy of management about
credit policy and operating control.
Table 6.7- Operating cycle

(No. of Days)

Year 2006-07 2007-08 2008-09 2009-10 2010-11

ADD

Raw Material Holding Period 70 66 58 54 58

WIP Period 2 4 3 2 1

Finished Goods Holding Period 51 58 47 39 36

Receivable Collection Period 155 133 116 107 109

Gross Operating Cycle 278 261 224 202 204

LESS

Creditors Payment Period 169 178 122 130 130

Net Operating Cycle 109 83 102 72 74

Chart6.5
 Net Operating Cycle

120

100

80

60 Net Operating Cycle

40

20

0
2006-07 2007-08 2008-09 2009-10 2010-11

Chart6.6

200
180
Raw Material Holding
160 Period
140 WIP Period
120
Finished Goods
100
Holding Period
80
Receivable Collection
60 Period
40 Creditors Payment
Period
20
0
2006-07 2007-08 2008-09 2009-10 2010-11
Observations

Operating cycle of Maruti Suzuki India Ltd. shows the numbers of day are decreasing in recent
year it is reflect the efficiency of management. Days of operating cycle shows period of lack of
funds in current assets, if no of day are more than it increases the cost of funds as taken from
outside of the business. In 2004-05 shows the high no. of days because of reduced of creditors
holding period.

Working capital leverage

One of the important objectives of working capital management is by maintaining the optimum
level of investment in current assets and by reducing the level of investment in current assets
and by reducing the level of current liabilities the company can minimize the investment in the
working capital thereby improvement in return on capital employed is achieved. The term
working capital leverage refers to the impact of level of working capital on company’s
profitability. The working capital management should improve the productivity of investment in
current assets and ultimately it will increase the return on capital employed. Higher level of
investment in current assets than is actually required means increase in the cost of Interest
charges on short term loans and working capital finance raised from banks etc. and will result in
lower return on capital employed and vice versa. Working capital leverage measures the
responsiveness of ROCE (Return on Capital Employed) for changes in current assets. It is
measures by applying the following formula,

Working capital leverage= % Change in ROCE / %Change in Current Assets

Return on capital employed= EBIT/ Total Assets

The working capital leverage reflects the sensitivity of return on capital employed to changes in
level of current assets. Working capital leverage would be less in the case of capital intensive
capital employed is same working capital leverage expresses the relation of efficiency of working
capital management with the profitability of the company.
Table 6.8-Calculation of working capital leverages.

Year 2007-08 2008-09 2009-10 2010-11

ROCE 12.32 14.89 15 18.48

% Change in ROCE 36.88 20.86 0.745 23.2

% Change in C.A 5.93 28.83 65.99 12.09

W.C Leverages 6.22 0.72 0.011 1.92

Chart6.7- W.C. Leverage

 W.C Leverages

4
W.C Leverages
3

0
2007-08 2008-09 2009-10 2010-11

Chart6.8-

90
80
70
60 Series5
Series4
50
Series3
40
Series2
30 Series1
20
10
0
Year 2007-08 2008-09 2009-10 2010-11
Observations

Working capital leverage of the company has decreased in the year 2007 as compare to the year
2003-04 reduction in working capital shows the inefficient current assets management. In the
year 2004-05 and 2005-06 the current assets has increased by high rate of 28% and 65%
respectively. It adversely affects on ROCE, which increased by only rate of 20.86% and 0.74%
respectively, that resulted in push down the working capital leverage to 0.72 and 0.011
respectively. When investment in current assets is more than requirement that increases the
cost of funds raised from short term sources may be bank loans, which affected on profitability
of the Maruti Suzuki India Ltd

Ratio analysis is the powerful tool of financial statements analysis. A ratio is defined as “the
indicated quotient of two mathematical expressions” and as “the relationship between two or
more things”. The absolute figures reported in the financial statement do not provide
meaningful understanding of the performance and financial position of the firm. Ratio helps to
summaries large quantities of financial data and to make qualitative judgment of the firm’s
financial performance.

Role of ratio analysis

Ratio analysis helps to appraise the firms in the term of their profitability and efficiency of
performance, either individually or in relation to other firms in same industry. Ratio analysis is
one of the best possible techniques available to management to impart the basic functions like
planning and control. As future is closely related to the immediately past, ratio calculated on the
basis historical financial data may be of good assistance to predict the future. E.g. On the basis
of inventory turnover ratio or debtor’s turnover ratio in the past, the level of inventory and
debtors can be easily ascertained for any given amount of sales. Similarly, the ratio analysis may
be able to locate the point out the various arias which need the management attention in order
to improve the situation. E.g. Current ratio which shows a constant decline trend may be
indicate the need for further introduction of long term finance in order to increase the liquidity
position.

Limitations of ratio analysis

1. The basic limitation of ratio analysis is that it may be difficult to find a basis for making the
comparison

2. Normally, the ratios are calculated on the basis of historical financial statements. An
organization for the purpose of decision making may need the hint regarding the future
happiness rather than those in the past. The external analyst has to depend upon the past which
may not necessary to reflect financial position and performance in future.

3. The technique of ratio analysis may prove inadequate in some situations if there is differs in
opinion regarding the interpretation of certain ratio.

4. As the ratio calculates on the basis of financial statements, the basic limitation which is
applicable to the financial statement is equally applicable In case of technique of ratio analysis
also i.e. only facts which can be expressed in financial terms are considered by the ratio analysis.

5. The technique of ratio analysis has certain limitations of use in the sense that it only
highlights the strong or problem areas; it does not provide any solution to rectify the problem
areas.

Classification of working capital ratio

Working capital ratio means ratios which are related with the working capital management e.g.
current assets, current liabilities, liquidity, profitability and risk turnoff etc. these ratio are
classified as follows

1. Efficiency ratio
The ratios compounded under this group indicate the efficiency of the organization to use the
various kinds of assets by converting them the form of sale. This ratio also called as activity ratio
or assets management ratio. As the assets basically categorized as fixed assets and current
assets and the current assets further classified according to individual components of current
assets viz. investment and receivables or debtors or as net current assets, the important of
efficiency ratio as follow

1. Working capital turnover ratio

2. Inventory turnover ratio

3. Receivable turnover ratio

4. Current assets turnover ratio

5. Liquidity ratio

Liquidity ratio

The ratios compounded under this group indicate the short term position of the organization
and also indicate the efficiency with which the working capital is being used. The most
important ratio under this group is follows

1. Current ratio

2. Quick ratio

3. Absolute liquid ratio

1) Working capital turnover ratio

It signifies that for an amount of sales, a relative amount of working capital is needed. If any
increase in sales contemplated working capital should be adequate and thus this ratio helps
management to maintain the adequate level of working capital. The ratio measures the
efficiency with which the working capital is being used by a firm. It may thus compute net
working capital turnover by dividing sales by working capital.

Working capital turnover ratio= Sales/ Net working capital

Table 6.9 - W.C turnover

(Rs. In Millions)

Particulars 2006-07 2007-08 2008-09 2009-10 2010-11

Sales 31402 39612 60481 85901 120848

Net W.C 19422 19213 26081 43646 41019

W.C. Turnover 1.62 2.06 2.32 1.97 2.95

Chart No. 6.9

 W.C. Turnover

3.5

2.5

2
W.C. Turnover
1.5

0.5

0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

High working capital ratio indicates the capability of the organization to achieve maximum sales
with the minimum investment in working capital. Company’s working capital ratio shows mostly
more than two, except for the year 2005-06 because of excess of cash balance in current assets
which occurred due to encashment of deposits. In the year 2007 the ratio was around3, it
indicates that the capability of the company to achieve maximum sales with the minimum
investment in working capital.

2) Inventory turnover ratio

Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products.
It is calculated by dividing the cost of goods sold by average inventory:

Table 6.10- inventory turnover

 (Rs. In Crore)

Particulars 2006-07 2007-08 2008-09 2009-10 2010-11

Cost of Goods Sold 23770 30030 46490 64590 92890

Average Inventory 9180 10000 13140 16900 22900

inventory Turnover 2.59 3 3.54 3.82 4.05

Chart no. 6.10-

inventory Turnover

4.5
4
3.5
3
2.5
inventory Turnover
2
1.5
1
0.5
0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

It was observed that Inventory turnover ratio indicates maximum sales achieved with the
minimum investment in the inventory. As such, the general rule high inventory turnover is
desirable but high inventory turnover ratio may not necessary indicates the profitable situation.
An organization, in order to achieve a large sales volume may sometime sacrifice on profit,
inventory ratio may not result into high amount of profit.

3) Receivable turnover ratio

The derivation of this ratio is made in following way

Receivable turnover ratio = Gross sales/Average account receivables

Gross sales are inclusive of excise duty and scrap sales because both may enter in two
receivables by credit sales. Average receivable calculate by opening plus closing balance divide
by 2. Increasing volume of receivables without a matching increase in sales is reflected by a low
receivable turnover ratio. It is indication of slowing down of the collection system or an extend
line of credit being allowed by the customer organization. The latter may be due to the fact that
the firm is losing out to competition. A credit manager engage in the task of granting credit or
monitoring receivable should take the hint from a falling receivable turnover ratio use his
market intelligence to find out the reason behind such failing trend. Debtor turnover indicates
the number of times debtors turnover each year. Generally the higher the value of debtor’s
turnover, the more is the management of credit.

Debtor’s turnover ratio =365/ Receivable turnover ratio

Table 6.11- Calculation of debtor’s turnover ratio (Rs. In Crore)

Particulars 2006-07 2007-08 2008-09 2009-10 2010-11

Gross Sale 31410 41760 63640 91020 127420

Avg. Debtors 13350 14780 19250 25370 36180

Receivable Turnover 2.35 2.83 3.31 3.59 3.52

Chart No. 6.11

 Receivable Turnover

4
3.5
3
2.5
2 Receivable Turnover
1.5
1
0.5
0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

It was observed from receivable turnover ratio that receivables turned around the sales were
less than 4 times. The actual collection period was more than normal collection period allowed
to customer. It concludes that over investment in the debtors which adversely affect on
requirement of the working capital finance and cost of such finance.

4) Current assets turnover ratio

Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current
assets .current assets includes the assets like inventories, sundry debtors, bills receivable, cash
in hand or bank, marketable securities, prepaid expenses and short term loans and advances.
This ratio includes the efficiency with which current assets turn into sales. A higher ratio implies
a more efficient use of funds thus high turnover ratio indicate to reduced the lock up of funds in
current assets. An analysis of this ratio over a period of time reflects working capital
management of a firm.

Current assets Turnover ratio= Sales/ Current assets

Table 6.12-Calculation of current assets turnover ratio

(Rs.In Crore)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Gross Sales 31410 41760 63640 91020 127420

Current Assets 13350 14780 19250 25370 36180

Current Assets Turnover 2.35 2.83 3.31 3.59 3.52

Chart No.6.12

Current Assets Turnover

4
3.5
3
2.5
2 Current Assets Turnover
1.5
1
0.5
0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

It was observed that current assets turnover ratio does not indicate any trend over the period of
time. Turnover ratio was 0.92 in the year 2002-03 and increase to 1.10 and 1.30 in the year 2004
and 2005 respectively, but it decreased in the year 2005-06, because of high cash balance. Cash
did not help to increase in sales volume, as cash is non earning asset. In the year 2006-07
company increased its sales with increased investment in current assets, thus current assets
turnover ratio increased to 1.39 from 1.1 in the year 2005-06.

1) Current ratio

The current is calculated by dividing current assets by current liabilities:

Current assets

Current assets include cash and those assets which can be converted in to cash within a year,
such marketable securities, debtors and inventories. All obligations within a year are include in
current liabilities. Current liabilities include creditors, bills payable accrued expenses, short term
bank loan income tax liabilities and long term debt maturing in the current year. Current ratio
indicates the availability of current assets in rupees for every rupee of current liability.

Table 6.13-Current ratio (Rs. In Crore)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Current Assets 34080 36100 46470 77450 86810

Current Liabilities 14650 16880 21010 33810 41010

Current Ratio 2.33 2.14 2.21 2.29 2.12

Chart No.6.13
 Current Ratio

2.35

2.3

2.25

2.2
Current Ratio
2.15

2.1

2.05

2
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

The current ratio indicates the availability of funds to payment of current liabilities in the form
of current assets. A higher ratio indicates that there were sufficient assets available with the
organization which can be converted in cash without any reduction in the value. As ideal current
ratio is 2:1, where current ratio of the firm is more than 2:1, it indicates the unnecessarily
investment in the current assets in the form of debtor and cash balance. Ratio is higher in the
year 2005-06 where cash balance is more than requirement which came through encashment of
deposits of ZCCB funds.

2) Quick ratio

Quick ratios establish the relationship between quick or liquid assets and liabilities. An asset is
liquid if it can be converting in to cash immediately or reasonably soon without a loss of value.
Cash is the most liquid asset .other assets which are consider to be relatively liquid and include
in quick assets are debtors and bills receivable and marketable securities. Inventories are
considered as less liquid. Inventory normally required some time for realizing into cash. Their
value also is tendency to fluctuate. The quick ratio is found out by dividing quick assets by
current liabilities.

Quick ratio = Current asset – Inventory/ Current liabilities

Table 6.14- Quick Ratio

(Rs. In Crore)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Liquid Current Assets 24901 25273 31032 59071 5938

Current Liabilities 14650 16883 20392 33810 4580

Quick Ratio 1.7 1.5 1.52 1.75 1.3

Chart No.6.14
 Liquid Current Assets

70000

60000

50000

40000 Liquid Current

30000 Assets

20000

10000

0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

Quick ratio indicates that the company has sufficient liquid balance for the payment of current
liabilities. The liquid ratio of 1:1 is suppose to be standard or ideal but here ratio is more than
1:1 over the period of time, it indicates that the firm maintains the over liquid assets than actual
requirement of such assets. In the year 2006-07 company had Rs.1.79 cash for every 1 rupee of
expenses; such a policy is called conservative policy of finance for working capital, Rs. 0.79 is the
ideal investment which affects on the cost of the fund and returns on the funds.

3) Absolute liquid ratio

Even though debtors and bills receivables are considered as more liquid then inventories, it
cannot be converted in to cash immediately or in time. Therefore

while calculation of absolute liquid ratio only the absolute liquid assets as like cash in hand cash
at bank, short term marketable securities are taken in to consideration to measure the ability of
the company in meeting short term financial obligation. It calculates by absolute assets dividing
by current liabilities.

Absolute liquid ratio = Absolute liquid assets/ Current liabilities

Table 6.15- Absolute liquid ratio

(Rs.In Millions)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Absolute Liquid Assets 2221 1372 1220 22611 3562

Current Liabilities 14650 16881 20392 33810 45800

Quick Ratio 0.156 0.081 0.059 0.0688 0.077

Chart No.6.15

50000
45000
40000
35000
30000
Absolute Liquid Assets
25000
Current Liabilities
20000
15000
10000
5000
0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

Absolute liquid ratio indicates the availability of cash with company is sufficient because
company also has other current assets to support current liabilities of the company. In the year
2005-06 absolute liquid ratio increased because of company carry more cash balance, as a cash
balance is ideal assets company has to take control on such availability of funds which is affect
on cost of the funds.
Working Capital management Components

1) Receivables Management

2) Inventory Management

3) Cash Management

Receivables Management

Receivables or debtors are the one of the most important parts of the current assets which is
created if the company sells the finished goods to the customer but not receive the cash for the
same immediately. Trade credit arises when firm sells its products and services on credit and
does not receive cash immediately. It is essential marketing tool, acting as bridge for the
movement of goods through production and distribution stages to customers. Trade credit
creates receivables or book debts which the firm is expected to collect in the near future. The
receivables include three characteristics

1) It involve element of risk which should be carefully analysis.

2) It is based on economic value. To the buyer, the economic value in goods or services passes
immediately at the time of sale, while seller expects an equivalent value to be received later on

3) It implies futurity. The cash payment for goods or serves received by the buyer will be made
by him in a future period.

Objective of receivable management

The sales of goods on credit basis are an essential part of the modern competitive economic
system. The credit sales are generally made up on account in the sense that there are formal
acknowledgements of debt obligation through a financial instrument. As a marketing tool, they
are intended to promote sales and there by profit. However extension of credit involves risk and
cost, management should weigh the benefit as well as cost to determine the goal of receivable
management. Thus the objective of receivable management is to promote sales and profit until
that point is reached where the return on investment in further funding of receivables is less
.than the cost of funds raised to finance that additional credit

Table 6.16-Size of receivables of AG Industries

(Rs.In Crore)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Sundry Debtors 13346 16200 22305 28305 44051

Indices 100 121.39 167.12 212.09 330.06

Chart6.17-

Indices

350

300

250

200
Indices
150

100

50

0
2006-07 2007-08 2008-09 2009-10 2010-11

Average collection period

 The average collection period measures the quality of debtors since it indicate the speed of their
collection. The shorter the average collection period, the better the quality of the debtors since
a short collection period implies the prompt payment by debtors. The average collection period
should be compared against the firm’s credit terms and policy judges its credit and collection
efficiency. The collection period ratio thus helps an analyst in two respects.

1. In determining the collectability of debtors and thus, the efficiency of collection efforts.

2. In ascertaining the firm’s comparative strength and advantages related to its credit policy and
performance.

The debtor’s turnover ratio can be transformed in to the number of days of holding of debtors.

Table 6.17- avg. collection period (Rs. In Crore)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Gross Sales 1410 41760 63640 91020 127420

Average Debtors 13350 14780 19250 25370 36180

Receivable Turnover 2.35 2.83 3.31 3.59 3.52

Average Collection Period (Days) 155 129 110 101 103

ChartNo.6.17
 Average Collection Period (Days)

180
160
140
120
100 Average Collection
80 Period (Days)
60
40
20
0
2006-07 2007-08 2008-09 2009-10 2010-11

Observations

The size of receivables are staidly increasing it indicates that the company was allowing more
credit year to year, but it was not bad signal because as receivables were supporting to the
increase in the sales. Average collection period are reducing to present situation, but as
compare with the normal collection period allowed to customer by Maruti Suzuki India Ltd. of
90 days, it was clear that the company required increasing our efficiency of collection of
receivables. All the above factors directly or indirectly affects in the debtors turnover ratio,
current ratio and working capital ratio. For effective management of credit, the firm should lay
down clear cut guidelines and procedure for granting credit to individual customers and
collecting individual accounts should involve following steps: (1) Credit information (2) Credit
investigation (3) Credit limits (4) Collection procedure.

Inventory Management
The term ‘inventory’ is used to designate the aggregate of those items of tangible assets which
are

1. Finished goods (‘saleable’)

2. Work-in-progress (‘convertible’)

3. Material and supplies (‘consumable’)

In financial view, inventory defined as the sum of the value of raw material and supplies,
including spares, semi-processed material or work in progress and finished goods. The nature of
inventory is largely depending upon the type of operation carried on. For instance, in the case of
a manufacturing concern, the inventory will generally comprise all three groups mentioned
above while in the case of a trading concern, it will simply be by stock- in- trade or finished
goods.

Objective of inventory management

In company there should be an optimum level of investment for any asset, whether it is plant,
cash or inventories. Again inadequate disrupts production and causes losses in sales. Efficient
management of inventory should ultimately result in wealth maximization of owner’s wealth. It
implies that while the management should try to pursue financial objective of turning inventory
as quickly as possible, it should at the same time ensure sufficient inventories to satisfy
production and sales demand. The objectives of inventory management consist of two
counterbalancing parts:

1. To minimize the firm’s investment in inventory

2. To meet a demand for the product by efficiently organizing the firms production and sales
operation.

This two conflicting objective of inventory management can also be expressed in term of cost
and benefits associated with inventory. That the firm should minimize the investment in
 inventory implies that maintaining an inventory cost, such that smaller the inventory, the better
the view point .obviously, the financial manager should aim at a level of inventory which will
reconcile these conflicting elements. Some objective as follow

1. To have stock available as and when they are required.

2. To utilize available storage space but prevents stock levels from exceeding space available.

3. To maintain adequate accountability of inventories assets.

4. To provide, on item – by- item basis, for re-order point and order such quantity as would
ensure that the aggregate result confirm with the constraint and objective of inventory control.

To keep low investment in inventories carrying cost an obsolesce losses to the minimum.

Table 6.18-Size of inventory

(No. Of Days)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Raw Material 3582 4182 6343 8213 14052

W.I.P 13 43 31 22 113

Finished Goods 4424 4671 6354 15013 22693

Other Inventories 1181 1932 2710 3613 9831

Total 9200 10828 15438 26861 46689

Indices 100 117.74 167.9 292.17 510.88

Chart No.6.18-

Indices

600

500

400

300 Indices

200

100

0
2006-07 2007-08 2008-09 2009-10 2010-11

Inventory components

The manufacturing firm’s inventory consist following components

i) Raw material

ii) Work- in-progress

iii) Finished goods

To analyze the level of raw material inventory and work in progress inventory held by the firm
on an average it is necessary to examine the efficiency with which the firm converts raw
material inventory and work in progress into finished goods.

Chart No.6.19-

25000

20000

15000 Raw Material

W.I.P
10000 Finished Goods

5000

0
2006-07 2007-08 2008-09 2009-10 2010-11

Inventory holding period

 The reciprocal of inventory turnover gives average inventory holding in percentage term. When
the numbers of days in year are divided by inventory turnover, we obtain days of inventory
holding (DIH).

Table 6.20- inventory holding period

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Inventory Turnover 2.59 3 3.54 3.82 4.06

Days of Inventory Holding 141 122 103 96 90

Raw Material Turnover 5.07 5.58 6.31 6.76 5.85

Raw Material Holding Period 72 65 58 54 62

Chart No.6.20-

Days of Inventory Holding

160
140
120
100
Days of Inventory
80
Holding
60
40
20
0
2006-07 2007-08 2008-09 2009-10 2010-11

Chart6.21-

160

140

120

100 Days of Inventory

Holding
80
Raw Material Holding
60 Period

40

20

0
2006-07 2007-08 2008-09 2009-10 2010-11
Observations

Size of inventory of Maruti Suzuki India Ltd. was increasing with the increase the sales. The
inventory size was increasing because of increment in the finished goods stock; it indicates that
the company reduced the liquidity of finished goods. High inventory turnover ratio is showing
that the maximum sales turnover is achieved with the minimum investment in the inventories.
Raw material

turnover has reduced in the year 2007 it indicates that company are investing more in raw
material purchasing; thus raw material holding period has increased in the same year to 62 days
from 54 days in the previous year 2006. Overall inventory holding period has reduced because
of increases in the inventory turnover and sales volume.

Management of Cash

Cash is common purchasing power or medium of exchange. As such, it forms the most
important component of working capital. The term cash with reference to cash management is
used in two senses, in narrow sense it is used broadly to cover cash and generally accepted
equivalent of cash such as cheques, draft and demand deposits in banks. The broader view of
cash also induce hear- cash assets, such as marketable sense as marketable securities and time
deposits in banks. The main characteristics of this deposits that they can be really sold and
convert in to cash in short term. They also provide short term investment outlet for excess and
are also useful for meeting planned outflow of funds. We employ the term cash management in
the broader sense. Irrespective of the form in which it is held, a distinguishing feature of cash as
assets is that it was no earning power. Company have to always maintain the cash balance to
fulfill the dally requirement of expenses.

Motive of holding cash

There are four motives for holding cash as follow

1. Transaction motive

2. Precautionary motive

3. Speculative motive

4. Compensating motive

Transaction motive

Cash balance is necessary to meet day-to-day transaction for carrying on with the operation of
firms. Ordinarily, these transactions include payment for material, wages, expenses, dividends,
taxation etc. there is a regular inflow of cash from operating sources, thus in case of AG
Industries there will be two-way flow of cash- receipts and payments. But since they do not
perfectly synchronize, a minimum cash balance is necessary to uphold the operations for the
firm if cash payments exceed receipts.

Always a major part of transaction balances is held in cash, a part may be held in the form of
marketable securities whose maturity conforms to the timing of anticipated payments of certain
items, such as taxation, dividend etc

Precautionary Motive

Cash flows are somewhat unpredictable, with the degree of predictability varying among firms
and industries. Unexpected cash needs at short notice may also be the result of following:

1. Uncontrollable circumstances such as strike and natural calamities.

2. Unexpected delay in collection of trade dues.

3. Cancellation of some order for goods due unsatisfactory quality.

4. Increase in cost of raw material, rise in wages, etc.

 Speculative motive:

Speculative cash balances may be defined as cash balances that are held to enable the firm to
take advantages of any bargain purchases that might arise. While the precautionary motive is
defensive in nature, the speculative motive is aggressive in approach. However, as with
precautionary balances, firms today are more likely to rely on reserve borrowing power and on
marketable securities portfolios than on actual cash holdings for speculative purposes.

Advantages of cash management

Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither
profit nor losses but without cash, profit remains meaningless for an enterprise owner.

1. A sufficient of cash can keep an unsuccessful firm going despite losses

2. An efficient cash management through a relevant and timely cash budget may enable a firm
to obtain optimum working capital and ease the strains of cash shortage, fascinating temporary
investment of cash and providing funds normal growth.

3. Cash management involves balance sheet changes and other cash flow that does not appear
in the profit and loss account such as capital expenditure.

Table 6.21-Size and indices of cash in Maruti Suzuki India Ltd.

(Rs. In Crore)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Cash And Bank Balance 2228 1378 1127 22619 3566

Indices 100 61.88 50.61 1015.6 160.08

Chart No.6.21

Indices

1200

1000

800

600 Indices

400

200

0
2006-07 2007-08 2008-09 2009-10 2010-11

Cash cycle:-

One of the distinguishing features of the fund employed as working capital is that constantly
changes its form to drive ‘business wheel’. It is also known as ‘circulating capital’ which means
current assets of the company, which are changed in ordinary course of business from one form
to another, as for example, from cash to inventories, inventories to receivables and receivables
to cash. Basically cash management strategies are essentially related to the cash cycle together
with the cash turnover. The cash cycle refers to the process by which cash is used to purchase
the row material from which are produced goods, which are then send to the customer, who
later pay bills. The cash turnover means the number of time firms cash is used during each year.
 Table 6.22 (Days)

Particular 2006-07 2007-08 2008-09 2009-10 2010-11

Inventory Holding Period 123 128 108 95 95

(+) Account Receivable Period 155 133 116 107 109

(-) Account Payable Period 169 178 122 130 130

Cash Cycle 109 83 102 72 74

Observations

The size of the cash in the current assets of the company indicates the miss cash management of
the company. The cash balance in the year 2005-06 was extremely increased; because of
encashment of deposits from schedules bank of ZCCB funs. Company failed to proper
investment of available cash. After the study of cash management it mentioned above it can be
conclude that management of cash involve three things: a) Managing cash flow into and out of
the firm. b) Managing cash inflow within the firm, c) Financial deficit or investing surpluses cash
and thus controlling cash balance at a point of a time. The firm should hold an optimum balance
of cash and invest any temporary excess amount in short term marketable securities such as
treasury bills, commercial papers, certificates of deposit, bank deposits and inter corporate
CHAPTER-5
 Recommendations

Recommendation can be use by the firm for the betterment increased of the firm after study
and analysis of project report on study and analysis of working capital. I would like to
recommend.

1. Company should raise funds through short term sources for short term requirement of funds,
which comparatively economical as compare to long term funds.

2. Company should take control on debtor’s collection period which is major part of current
assets.

3. Company has to take control on cash balance because cash is non earning assets and
increasing cost of funds.

4. Company should reduce the inventory holding period with use of zero inventory concepts.

Over all company has good liquidity position and sufficient funds to repayment of liabilities.
Company has accepted conservative financial policy and thus maintaining more current assets
balance. Company is increasing sales volume per year which supported to company for sustain
2nd position in the world and number one position in Asia.
 Conclusion

Working capital management is important aspect of financial management. The study of

working capital management of. has revealed that the current ration was as per the standard
industrial practice but the liquidity position of the company showed an increasing trend. The
study has been conducted on working capital ratio analysis, working capital leverage, working
capital components which helped the company to manage its working capital efficiency and
affectively.

1. Working capital of the company was increasing and showing positive working capital per
year. It shows good liquidity position.

2. Positive working capital indicates that company has the ability of payments of short terms
liabilities.

3. Working capital increased because of increment in the current assets is more than increase in
the current liabilities.

4. Company’s current assets were always more than requirement it affect on profitability of the
company.

5. Current assets are more than current liabilities indicate that company used long term funds
for short term requirement, where long term funds are most costly then short term funds.

6. Current assets components shows sundry debtors were the major part in current assets it
shows that the inefficient receivables collection management.
7. In the year 2006-07 working capital decreased because of increased the expenses as
manufacturing expenses and increase the price of raw material as increased in the inflation rate.

8. Inventory was supporting to sales, thus inventory turnover ratio was increasing, but company
increased the raw material holding period.

9. Study of the cash management of the company shows that company lost control on cash
management in the year 2005-06, where cash came from fixed deposits and ZCCB funds,
company failed to make proper investment of available cash.

Limitations of the study

Following limitations were encountered while preparing this project:

1) Limited data:-

This project has completed with annual reports; it just constitutes one part of
data collection i.e. secondary. There were 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 was difficult to collect the data regarding the competitors and their financial information.
Industry figures were also difficult to get.
 8. Bibliography
Books Referred

1. I. M. Pandey - Financial Management - Vikas Publishing

House Pvt. Ltd. - Ninth Edition 2006

2. M.Y. Khan and P.K. Jain, Financial management – Vikas

Publishing house ltd., New Delhi.

3. K.V. Smith- management of Working Capital- Mc-Grow-

Hill New York

4. Satish Inamdar- Principles of Financial Management-

Everest Publishing House

Websites References

1. www.jains.com

2. www.google.co.in

3. www.workingcapitalmanagement.com
 9. Annexure

Balance Sheet (Rs. In Milions)

March11 March10 March 09 March 08 March 07

 Sources of funds

Owner’s fund

Equity share capital 1445 1445 1445 1445 1445

Share application money 135 135 27 14.82 10

Preference share capital 145 189 189 192 194

Reserves & surplus 137230 116906 92004 82709 73654

Loan funds

Secured loans 312 265 1 1 1

Unsecured loans 2781 7949 6988 9001 1223

Total 3903 8214 6989 9002 1224

Uses of funds

Fixed assets

Gross block 1,314.87 979.00 799.12 629.30 505.16

Less: revaluation reserve - - - - -

Less: accumulated depreciation 363.75 315.70 270.33 234.82 193.42

Net block 951.12 663.29 528.79 394.48 311.74

Capital work-in-progress 99.83 84.70 64.57 41.80 10.02

Investments 390.57 315.82 177.44 82.60 8.21

 Net current assets

Current assets loans & advances 1,746.96 1,456.11 978.84 915.71 603.54

Less: current liabilities & provision 849.48 647.76 523.98 406.27 268.41

Total net current assets 897.48 808.34 454.87 509.44 335.13

Miscellaneous expenses not written - - - - -

Total 2,339.00 1,872.16 1,225.67 1,028.32 665.1

Notes

Book value of unquoted investments 390.56 275.81 177.43 82.59 8.20

Market value of quoted investments 0.02 0.03 0.02 0.02 -

Contingent liabilities 335.04 161.10 211.80 82.32 32.26

Number of equity 723.76 720.55 614.81 583.53 583.53

shareoutstanding(lacs)