CHAPTER- 1

1. Introduction:

Working Capital:

In simple terms working capital means that the amount of funds that a business require
finance for its day-to-day operations of the business and hence it is considered as the life
blood of any business. It is an excess of current assets over current liabilities. In other words
the amount of current assets which is more than current liabilities is known as working
capital. If current liabilities are nil then, working capital will equal to current assets. It shows
strength of business in short period of time. Working capital management involves managing
the relationship between a firm’s short term assets and its short-term liabilities. The
management of working capital assumes great importance because shortage of working
capital funds is perhaps the biggest possible cause of failure of many business units in recent
times. There it is of great importance on the part of management to pay particular attention to
the planning and control for working capital.

Aluminium:

Aluminium occurs in abundance on the surface of the earth. It is available in various forms
such as oxides, sulphates, silicates, phosphate, etc. But is commercially produced mainly
from Bauxite. It is one of the most common non-ferrous metals and it is used for a range of
particular applications. These include , utilization in the aerospace industry , food and drink
packaging/storage , kitchen wear , electronics , construction , automotive industry , shipping
and many more too numerous to list. Aluminium is the third most abundant element (after
oxygen and silicon) and the most abundant metal, in the Earth’s crust. It makes up about 8%
by weight of the Earth’s solid surface.

NALCO:

National Aluminium Company Limited (NALCO) is a Navratna CPSE under ministry of

Mines. It was established on 7th January,1981 , with its registered office at Bhubaneswar. It is
one of the largest integrated Bauxite-Alumina-Aluminium-Power complex in the country.
The company is a group ‘A’ CPSE , having integrated and diversified operations in mining ,
metal and power. The company registered a record net-profit of Rs 1732 crore in 2018-19 ,
which is the highest in a decade and sales turnover of Rs 11386 crore in financial year 2018-
19 which is the highest since inception. The company has a 68.25 lakh TPA Bauxite mine
and 21.06 lakh TPA (normative capacity) Alumina Refinery located at Damanjodi in Karaput
district of Odisha and 4.60 lakh TPA Aluminium smelter and 1200MW captive power plant
located at Angul , Odisha.

2. Objective:

a. To perceive the significance of various sources of working capital.

b. Examine how cash management, inventory management and trade credit management
affects working capital management.
c. Analyzing the effectiveness of working capital management in the profitability of the
company.
d. To know the net working capital position of NALCO.
e. To understand the impact of various component of current assets and current
liabilities in working capital management of NALCO.

3. Literature Review:

Smith Keith V. (1973) believes that Research which concerns shorter range or working
capital decision making would appear to have been less productive. The inability of financial
managers to plan and control properly the current assets and current liabilities of their
respective firms has been the probable cause of business failure in recent years. Current
assets collectively represent the single largest investment for many firms, while current
liabilities account for a major part of total financing in many instances. This paper covers
eight distinct approaches to working capital management. The first three - aggregate
guidelines, constraints set and cost balancing are partial models; two other approaches -
probability models and portfolio theory, emphasize future uncertainty and interdepencies
while the remaining three approaches - mathematical programming, multiple goals and
financial simulation have a wider systematic focus.

Natarajan Sundar (1980) is of the opinion that working capital is important at both, the
national and the corporate level. Control on working capital at the national level is exercised
primarily through credit controls. The Tandon Study Group has provided a comprehensive
operational framework for the same. In operational terms, efficient working capital consists
of determining the optimum level of working capital, financing it imaginatively and
exercising control over it. He concludes that at the corporate level investment in working
capital is as important as investment in fixed assets. And especially for a company which is
not growing, survival will be possible only so long as it can match increase in operational
cost with improved operational efficiency, one of the most important aspects of which is
management of working capital.

Bhattacharyya Hrishikes (1987) tries to develop a comprehensive theory and tool of

working capital management from the system’s point of view. According to this study,
capital is often used to refer to capital goods consisting of a great variety of things, namely,
machines of various kinds, plants, houses, tools, raw materials and goods-in-process. A
finance manager of a firm looks for these things on the assets side of the balance sheet. For
capital he turns his attention to the other side of the balance sheet and never commits a
mistake. His purpose is to balance the two sides in such a way that net worth of the firm
increases without increasing the riskiness of the business. This balancing is financing, i.e.,
financing the assets of the firm by generating streams of liabilities continuously to match with
the dynamism of the former. The study is an improvement of the concept of Park and
Gladson who were not able to capture the entire techno-financial operating structure of a
firm.

Singh (1988) studies on Managing Working Capital by Strategic Choice is innovative one
which effectively requires an understanding of the processes underlying the cash cycle.
Managers project and evaluate working capital needs using three different approaches —
industry norms, economic model, and strategic choice. Singh illustrates the processes
underlying working capital flow and discusses the problems in each of the three approaches
to managing working capital. Some companies have shifted to using the strategic choice
approach to gain competitive advantage. To solve the working capital related problem he has
targeted the following objectives: to know the risk in WCM i.e. Liquidity Risk, Risk of
opportunity Loss, Delay centers.

Zaman M. (1991) studies the working capital management practices of Public Sector Jute
Enterprises in Bangladesh which have been found to be seriously affected. This has been
attributed to several factors like low demand for jute goods and serious competition in the
international market, insufficient inventory management policy, poor collection policy and
inefficient cash policy. The author has formulated a long term flexible and operational
working capital management model. In conclusion he has suggested the model which would
certainly help improve the working capital management practices of the jute industry in
particular and other public enterprises as well in Bangladesh.

Peel et al (1996) submitted that for small companies to manage and control their working
capital effectively; both internal and external working capital drivers must be taken into
consideration, and also consideration of how sensitive such drivers are to changes in the
business or market. Thus, a firm must be able to minimise inventory, control supply and
apply payment pressure on customers. Due to inefficient management of working capital,
many corporations lose billions annually. A good example is the study published by REL
Consultancy Group on IT companies in 2002. . A problem that is exacerbated when the
economy worsens as it did during 2001. REL examined operational data from 90 of the
largest publicly traded IT companies in the United States, with annual minimum revenue of
$450 million. It took the companies an average of 69 days to convert sales into cash in 2001,
nine days longer than the average in 2000, a lag that cost $10 billion in lost cash flow,
according to REL. This is to say, vendors took longer to collect on their sales.

Hossain Saiyed Zabid and Akon Md. Habibur Rahman (1997) emphasise the basic
objective of working capital management i.e., to arrange the needed working capital funds at
the right time, at right cost and from right source with a view to achieving a trade-off between
liquidity and profitability. The analysis reveals that BTMC had followed an aggressive
working capital financing policy taking the risk of liquidity. There was uninterrupted
increasing trend in negative net working capital throughout the period of the study which
suggested that BTMC had exploited the entire short-term sources available to it without
considering the actual needs.

Ahmed Habib (1998) points out that when the interest rate is included; money loses its
predictive power on output. The study explicates this finding by using a rational expectations
model where production decisions of firm required debt finance working capital. Working
capital is an important factor and its cost, the rate of interest, affects the supply of goods by
firms. Monetary policy shocks, thus, affect the interest rate and the supply side, and as a
result price and output produced by firms. The model indicates that this can cause the
predictive power of monetary shocks on output to diminish when the interest rate is used in
empirical analysis. The model also alludes to the effects of monetary policy on the price level
through the supply side (cost push) factors.
 Shin and Soenen (1998) pointed out a firm‘s working capital results from the time lag
between the expenditure for the purchase of raw materials and the collection from sale of
finished goods. According to their submission, this entails various areas of company‘s
operational management that includes receivables, inventories management, management and
use of trade credit, etc.

Batra G. S. and Sharma A. K. (1999) analyze the working capital position of Goetze (I)
Ltd. with the help of various ratios. They are of the view that the working capital position in
the company is quite satisfactory although they have suggested a few measures for further
improvement in management of working capital, like necessity of greater attention in the
inventory control; active sales department, speedy dispatch of orders and reduction of
dependency on trade creditors.

Garg Pawan Kumar (1999) suggests that working capital should be financed with both the
sources – long-term as well as short-term sources of funds. He further suggests that
permanent working capital should be obtained with the help of long-term sources of finance
while variable/ fluctuating working capital should be collected through short-term sources of
finance. Efficient utilization of working capital enhances operating efficiency as well as
income of the units.

Jain P. K. and Yadav Surendra S. (2001) study the corporate practices related to
management of working capital in India, Singapore and Thailand. In this paper the authors
have tried to understand the working capital management and current assets and current
liabilities, and their inter-relationship. Further the authors have shown an aggregative analysis
of current assets and current liabilities in terms of major liquidity ratios. It also states working
capital position in terms of these ratios pertaining to various industries. From the paper one
can infer that the available data in respect of the sample companies from the three countries
confirm the wide inter-industry variations in liquidity ratios. Towards the end, the authors
suggest that serious consideration needs to be given by the respective governments as well as
industry groups in these three countries in order to take corrective measures to take care of
and rectify the areas of concern.
Howorth Carole and Westhead Paul (2003) have tried to find out the working capital
management routines of a large random sample of small companies in the UK. Considerable
variability in the take-up of eleven working capital management routines was detected.
Principal components analysis and cluster analysis confirmed the identification of four
distinct ‘types’ of companies with regard to the patents of working capital management.
While the first three ‘types’ of companies focused upon cash management, stock or debtors
routines respectively, the fourth ‘type’ was less likely to take-up any working capital
management routines. The objective of the study is to encourage additional research rather
than to provide an exhaustive overview of all the factors associated with the take-up of
working capital management routines by small companies. The results suggest that small
companies focus only on areas of working capital management where they expect to improve
marginal returns.

Meszek Wieslaw and Polewski Marcin (2006) examine the profiles of selected
construction companies from the viewpoint of working capital formation and their
management strategies applied to working capital. The analysis is based on the financial
ratios. The authors conclude with the observation that complex working capital management
requires controlling methodology to be developed. A specific character of the construction
industry, including operational factors and market requirements make working capital
management a task exceeding the financial sphere, as it embraces the issues of organization
of investment processes, the organization of production processes and logistics.

Ganesan Vedavinayagam (2007) studies the impact of working capital management on

profitability through ANOVA test where the financial statements of 349 telecom units or
enterprises are analyzed. The relationship between working capital management efficiency
and profitability and the impact of working capital management on the same has been tested.
At the end of the study the author has minutely observed that the working capital
management efficiency in telecommunication industry is poor. And he suggests that the
telecommunication industry should improve working capital management efficiency.

Dinesh M. (2008) explicates the concepts of working capital, the different challenges being
faced by the business firms in managing working capital and the strategies to be adopted for
its prudent management. The author concludes with the view that most of the businesses
failed not for want of profit but for lack of cash. The fast growth in production and sales may
cause the business to utilize all of the financial resources seeking growth and making assets
such as inventories, accounts receivable and other assets as more illiquid.

Dr.Khatik S. K. and Jain Rashmi (2009) state that the management of working capital is
one of the most important and key resources of an organization for its day-to-day operations.
Working capital can be taken as funding resources for routine activities of business. It is the
most vital and important part of fund management and profitability for business. The writer
has analyzed the working capital position of MPSEB (Madhya Pradesh State Electricity
Board) by ratio analysis technique and it was found that the position of current ratio, quick
ratio, acid-test ratio, working capital ratio, inventory turnover ratio are not up to the standard
benchmark.

Narender, Menon and Shwetha (2009) focuses on the Factors Determining Working
Capital Management in Cement Industry. This paper investigates the use of net liquid balance
(NLB) and working capital requirement (WCR) as measures of investing Working Capital
Management of the industry. The authors studied the effect of dependent variable i.e. WCR
and NLB that are influenced significantly by the size, debt-equity ratio, business indicator,
firm performance, growth of the firm, operating cash flow. A sample of 50 companies has
been considered for the purpose of the study. The data consist of companies in cement
industry for period of ten years commencing from 1995 to 2006. The results of the study
show that NLB is affected by two independent factors such as size and debt-equity ratio. On
the one hand the WCR is considered as dependent variable where as the independent factors
that impact significantly are size of the firm, operating cash flow, business indicator, growth
of the firm. From the study it can be concluded that only the size of the firm affects both of
the NLB and WCR in the company‘s working Capital management.

Ramudu(2009) conducted an empirical study on Working Capital Structure and Liquidity

position of Indian Commercial Vehicles Industry. As working capital plays a key role in the
process of wealth maximization of shareholders, so the author attempted to study the
effectiveness of structuring the working capital. The data relating to six variables such as
current ratio, quick ratio, ratio of current ratio to total sales, current assets turnover ratio, and
working capital turnover ratio, for a period of ten years (1995-2004) were used for the
purpose of the analysis. Applying statistical tools like average, correlation and one-way
ANOVA in the study, he concluded that inventories formed the highest percentage in the
working capital structure followed by trade receivables and loans and advances whereas cash
and bank balances formed very negligible part. Further, the study revealed the variation
between current assets turnover ratio and working capital turnover ratio was very high across
the industry, which in turn, implies the sample companies achieved higher sales with less
working capital.
 Bardia and Kastia(2010) carried out a comparative study with respect to liquidity
management in two leading pharmaceuticals of India, Torrent Pharma and Cipla. It covers a
period of nine years (2000-01 to 2008-09) and uses six different liquidity ratios such as
current ratio, quick ratio, inventory turnover ratio, debtor turnover ratio, current assets
turnover ratio, working capital turnover ratio. The study result reveals that both the
companies are following more or less same working capita practice. However credit and
collection policy of Torrent is more effective than Cipla.

Chawala, Harkwat and Khairnar (2010), studies on Working capital management and its
impact on profitability of the firm is a comprehensive one in the field of working capital
management. In this study, they have selected a sample of 3 firms from petrochemical
industry for a period of 5 years from 2004-2009. They have studied the effect of different
variable of working capital management including the average collection period, inventory
turnover in days, average payment period, cash conversion cycle (CCC) and current ratio on
the gross operating profitability of the firms. Person‘s correlation and linear regression t-test
are used for analysis. The results show that there is a strong negative relationship between
variables of the working capital management (WCM) and profitability of the firm. It means
that as the cash conversion cycle increases it will lead to decreasing profitability of the firm,
and managers can create a positive value for the shareholders by reducing the cash
conversion cycle to a possible minimum level. They found that there is a significant negative
relationship between liquidity and profitability. They also found that there is a negative
relationship between net working capital of the firm and its profitability.

Negi. Sankpal, Chakraborty and Mathur (2010) carried out a study on Working Capital
Management and firm‘s performance considering sample size of fifty manufacturing
companies. The period of study was for five years i.e. from 2003- 2008. The study was
carried out by developing a regression model where operating profit margin is taken as
dependent variable where as asset turnover ratio debt to total asset ratio current asset to total
asset ratio, trade debtor to current asset ratio, current liability to total asset ratio, no. of
inventory days, no. of days for accounts payable, current asset to current liabilities are
considered as independent variable. The findings of the study indicate that current asset to
total asset, total debtors to total asset and inventory days are directly related variables with
working capital management and have significantly negative effects on firm profitability.
 Agarwal (2011) carried out an empirical study on the management of working capital in
Maruti Suzuki India Limited. Considering the data for a period of 9 years, the author focuses
on the relationship between liquidity and profitability and risk. The study result discloses that
there is no relation between profitability and liquidity while profitability has a positive
relationship with risk. This indicates that the firm gives little importance to the liquidity
issues related with working capital management.

Jain,Singh and Kapoor(2011) carried out a study on the working capital management
practices in Reliance Industries Limited. Covering the period of ten years i.e. from 2001-2009
they sought to analyse the significance of debtor, cash, loans & advances, inventory and their
Turnover Ratios in the management of working capital. The study also focuses on the
practice of zero working capital in Reliance Industries. The study result concluded that RIL
has maintained satisfactory liquidity ratio, and at the same time, the components of current
assets have not occupied substantial share, vis-a-vis, its total sales which may be an
indication of its efficiency in managing its working capital.

Rahman Mohammad M. (2011) focuses on the co-relation between working capital and
profitability. An effective working capital management has a positive impact on profitability
of firms. From the study it is seen that in the textile industry profitability and working capital
management position are found to be up to the mark.

Dr Panigrahi Ashok Kumar (2012) studies the relationship between working capital
management and profitability of ACC Cement Company, the leading cement manufacturer of
the country for assessing the impact of working capital management on profitability during
the period 1999-2000 to 2009-10. The study is based on secondary data. The main objective
of the study was to find whether the working capital management affects the performance of
the firm. It can be deduced that there is a moderate relationship between working capital
management and the firm’s profitability.

Kushalappa S.and Kunder Sharmila (2012) closely study the relationship between working
capital management policies and profitability of the thirteen listed manufacturing firms in
Ghana. At the end of the study, a significantly negative relationship between profitability and
accounts receivable days is found to exist. Profitability is significantly positively influenced
by the firm’s cash conversion cycle (CCC), current assets ratio and current asset turnover. It
is also suggested that managers can create value for the shareholders by creating incentives to
reduce their accounts receivable to 30 days.

Turan M. S., Bamal Sucheta, Vashist Babita and Turan Nidhi (2013) attempt to examine
the relationship between working capital management and profitability by making an inter
sector comparison of two manufacturing industries i.e. Chemical industries and
Pharmaceutical industries. 50 companies from each sector based on market capitalization and
listed on BSE and 500 indices were selected for the research for the period from 2002 to
2011. At the end of the analysis it was concluded that in spite of similar nature of both the
industries in the manufacturing sector, working capital management variables affect
profitability indices more strongly in the chemical industry than in the pharmaceutical
industry. It was also observed that both the industries have a significant relationship between
profitability and working capital management variables. Besides, working capital
management variables affect more strongly the profitability indices of chemical industry than
those of pharmaceutical industry.

Kaur Harsh V. and Singh Sukhdev (2013) analyse empirically BSE 200 manufacturing
companies spread over 19 industries for the period 2000 to 2010. The study explores scope to
increase the efficiency and profitability of 145 companies by improving the parameters of
analysis. The study tests the relationship between the working capital score and profitability
measured by income to current assets and income to average total assets. This article
concentrates on cash conversion efficiency and planning the operating cycle days. At the end,
the study emphasizes that efficient management of working capital significantly affects
profitability.

Akoto Richard K., Vitor Dadson A. and Angmor Peter L. (2013) closely study the
relationship between working capital management policies and profitability of the thirteen
listed manufacturing firms in Ghana. At the end of the study, a significantly negative
relationship between profitability and accounts receivable days is found to exist. Profitability
is significantly positively influenced by the firm’s cash conversion cycle (CCC), current
assets ratio and current asset turnover. It is also suggested that managers can create value for
the shareholders by creating incentives to reduce their accounts receivable to 30 days.
3.Research Methodology:
This project is carried out by considering NALCO as the sample unit which is the largest
aluminium producer in India. The report is completely based on the data collected from the
secondary source which includes Annual Report of the company and collected from
NALCO website etc. The data were processed and analysed using MS Excel. The whole
study is based on secondary data of National Aluminium Company Limited and two of its
units, mine and Refinery plant situated at Damanjodi.
Sampling:
Sampling refers to the process through which the population is presented in a study , whereby
a small selection is made to give a depiction of the entire population profile. Sampling is
necessary when there is a challenge in collecting and analysing data from each single member
of the population, whether they are objects, people or organisations. In the present case,
sampling helps reduce the time and cost it would take to investigate the entire population of
NALCO.
Time period:
In order to accomplish the present study the data have been taken for a period of 7 years i.e
from 2012-13 to 2018-19.
Types of Research:
Types of research are very important to research something in the company or somewhere
else. There are many researches which suits for different areas to find out the problems in an
organisation. I have been used two types of Researches for my project work that is historical
Research and quantitative Research.
 Historical Research:
Through historical research I have found the growth strategy of NALCO and its actual
progress towards achievement that.
 Quantitative research:
This research has been undertaken to measure the quantity or amount of the company.
I glanced at company’s Balance sheet and profit and loss account to have an idea of
the financial performance of NALCO since last 7 years.
Sources of data collection:
a. Annual Report of NALCO , Damanjodi.
b. Annual Audited Accounts.
c. Balance Sheet.
 d. Profit and Loss Accounts.
Tools and Techniques:

CHAPTER – 2

Concept and Contents of Working Capital Management

1. Working Capital Management:

Every business needs investment to procure fixed assets, which remain in use for a longer
period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’.
Business also needs funds for short-term purposes to finance current operations. Investment
in short term assets like cash, inventories, etc. is called ‘Short term Funds’ or ‘Working
Capital. The ‘Working Capital’ can be categorised, as funds needed for carrying out day-to-
day operations of the business smoothly. The management of the working capital is equally
important as the management of long-term financial investment.

Every running business needs working capital. Even a business which is fully equipped
with all types of fixed assets required is bound to collapse without
 adequate supply of raw materials for processing;
 cash to pay for wages, power and other costs;
 The ability to grant credit to its customers.
All these require working capital. Working capital is thus like the lifeblood of a business.
The business will not be able to carry on day- to-day activities without the availability of
adequate working capital.

Working capital cycle involves conversions and rotation of various constituents or

components of the working capital. Initially ‘cash’ is converted into raw materials.
Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get
converted into work in process and then into finished goods. When sold on credit, the
finished goods assume the form of debtors who give the business cash on due date. Thus
‘cash’ assumes its original form again at the end of one such working capital cycle but in the
course it passes through various other forms of current assets too. This is how various
components of current assets keep on changing their forms due to value addition. As a result,
they rotate and business operations continue. Thus, the working capital cycle involves
rotation of various constituents of the working capital.

While managing the working capital, two characteristics of current assets should be kept in
mind viz. (a) short life span, and (b) swift transformation into other form of current assets.

Each constituent of current asset has comparatively very short life span. Investment remains
in a particular form of current assets for a short period. The life span of current assets depend
upon the time required in the activities of procurement; production, sales and collection and
degree of synchronization among them. A very short life span of current assets results into
swift transformation into other form of current assets for a running business.
Working capital management has a significant role in financial management due to
the fact it plays a pivotal role in keeping the wheels of a business enterprise running. In
common, the management of current assets is called the Working Capital Management. In
any business firm whether it is a trading business or a manufacturing business, they need
some asset, in terms of money. As we know that money is the lifeblood of any business,
shortage of funds for working capital has caused many businesses to fail and in many cases
has retarded their growth. Lack of efficient and effective utilization of working capital leads
to earn low rate of return on capital employed or even compel sustain losses. The need for
skill working capital management has become greater in recent years. These assets may be
for short term or temporary purpose or long-term purposes. Long-term funds may be required
for many purposes like acquisition of fixed asset, diversification and expansion of business
on modernization of plants and machinery and research and development. But funds are also
needed for short-term purposes i.e for day-to-day requirement. We will hardly find that any
business does not require any amount of working capital for its normal operations. The
requirements of working capital varies from firm to firm, its dependence upon the nature of
the business like production policies, market conditions, season ability of operations,
conditions of supplies, etc. Working capital is used for procurement of raw materials,
payment of wages to workmen and for meeting the routine expenses.
As well all know that only a successful sales progress can earn profit for the business but
these days credit system is prevailing in the present competitive market. So the sale is not
converted into cash instantly. This system requires some times lag between sales of goods
and receipt of payment. So need for short term funds in the form of current assets are required
in case of lack of immediate realization of cash against goods sold. Another problem may
arise if the finished goods are in the stocks and within the given period it could not be sold
and some goods like raw materials, semi finished goods are also in the stock and hence funds
are blocked in different types of inventory. For the successful running of the business, it
require sufficient amount of funds. So the management of these funds or current assets is
termed as Working Capital Management is carried out effectively, efficiently and consistently
will assure the health of an organisation.

2. Meaning of Working Capital:

Working capital is defined as the “excess of current assets over current liabilities”.
a) Current Assets:
Current assets are those assets that will be converted into cash within the current
accounting period or within the next years as a result of ordinary operations of the
business.
Resources of current assets:-
 Cash and bank balance
 Trade receivables
 Period expenses
  Short term advances
 Temporary investments
Cash is used for purchasing the raw materials, to pay wages and other manufacturing things.
After manufacturing the product, finished goods are put in the stock-in- inventory and then
goods will be sold for the receivable accounts.
b) Current Liabilities:
Current liabilities are those debts of the firm that have to be paid during the current
accounting period or within a year. Current liabilities includes:-
 Creditors for goods purchased
 Outstanding expenses
 Short term borrowing
 Advance received against sales
 Taxes and Dividends payable
 Other liabilities maturing within a year
3. Classification of Working Capital:
Working capital can be classified into two ways:-
I. On the basis of concept
II. On the basis of time
I. On the basis of concept:
On the basis of concept working capital is classified as:
i. Gross working capital
ii. Net working capital
(i) Gross Working Capital:
The term Gross Working Capital is referred to the firm’s investment in current assets.
(ii) Net Working Capital:
The term “Net Woking Capital” can be defined into two ways i.e
 It is the difference between current assets and current liabilities.
 Net working capital is that portion of a firm’s assets which is financed with long-
term funds. As we know that the task of financial manager is to manage the
working capital efficiently to ensure sufficient liquidity of any business firm is
measured by its ability to satisfy short-term obligations as they become due.
II. On the basis of time:
On the basis of time the working capital may be classified as:
 i. Permanent or fixed working capital
ii. Temporary or variable working capital
(i) Permanent or Fixed Working Capital:
Permanent or fixed working capital is the minimum amount that is required to ensure
effective utilisation of fixed facilities and for maintaining the circulation of current assets.
There is always a minimum level of current assets, which is continuously required by the
enterprise to carry out its normal business operations.
This minimum level of current assets is called permanent or fixed working capital as this
part of capital is permanently blocked in current assets. As the business grows, the
requirement of permanent working capital also increases due to the increase in current assets.
The permanent working capital can be further classified as regular working capital and
reserve working capital required to ensure circulation of current assets from cash to
inventories, from inventories to receivables and from receivables to cash and so on. Reserve
working capital is the excess amount over the requirement for regular working capital that
may arise at unstated periods such as strikes, rise in prices, depression, etc.

There are five important sources of permanent or long term working capital:-
(a) Shares:-
Issue of shares is the most important sources for raising the permanent or long-term
capital. A company can issue various types of shares as equity shares, preference shares and
deferred shares. Preference shares carry preferential rights in respect of dividend at fixed rate
and in regard to the repayment of capital at the time of winding up of the company. Equity
shares do not have any fixed commitment charge and the dividend in these shares is to be
paid subject to the availability of sufficient profits.
(b) Debentures:-
A debenture is an instrument issued by the company acknowledging its debt to its holder.
The debenture holders are the creditors of the company. A fixed rate of interest is paid on
debentures. The interest on debenture is a charge against profit and loss account. The
debentures may be of various kinds such as simple, unsecured debentures, secured or
mortgaged debentures, redeemable debentures, irredeemable debentures, convertible
debentures and non-convertible debentures.
(c) Public Deposits:-
Public deposits are the fixed deposits accepted by a business enterprise directly from
the public. Public deposits as a source of finance have a number of advantages such as very
simple and convenient source of finance, taxation benefits, trading on equity, low need of
securities and an inexpensive source of finance but it is not free from danger such as
uncertain, unreliable, unsound and inelastic source of finance.
(d) Ploughing Back of Profits:-
It means the reinvestments by concern of its surplus earnings in its business. It is an
internal source of finance and is most suitable for an established firm for its expansion,
modernization and replacement. The various advantages are cheaper; there is no need to keep
securities; there is no dilution of control; it ensures stable dividend policy and gains
confidence of the public.
(e) Loans from Financial Institution:-
Financial institutions such as Commercial Bank, Life Insurance Corporation, etc. provide
short-term, medium-term and long-term loans. This source of finance is more suitable to meet
the medium-term demand of working capital. Interest is charged on such loans at a fixed rate
and the amount of the loan is to be repaid by way of instalments in a number of years.

(ii) Temporary or Variable Working Capital:

Temporary or variable working capital is the amount of working capital that is required
to meet the seasonal demands and some special exigencies. Variable working capital can be
further classified as seasonal working capital and special working capital. The capital
required to meet the seasonal needs of the enterprise is called seasonal working capital.
Special working capital is that part of working capital which is required to meet special
exigencies such as lunching of extensive marketing campaign for conducting research.

The main sources of short-term working capital are as follows:-

(a) Indigenous Bankers:-
Private moneylenders and other country bankers used to be the only source of finance
prior to the establishment of commercial banks. They used to charge very high rate of interest
and exploited the customers to the larger extent possible. But now-a-days with the
development of commercial banks they have lost their monopoly.
(b) Trade Credit:-
Trade credit refers to the credit extended by the suppliers of goods in the normal course
of business. The credit-worthiness of a firm and the confidence of its suppliers are the main
basis of securing trade credit. It is an easy and convenient method of finance. It is flexible as
the credit increases with the growth of the firm. It is informal and spontaneous sources of
finance.
(c) Instalment Credit:-
This is another method by which the assets are purchased and the possession of goods is
taken immediately but the payment is made in instalments over a pre-determined period of
time. Generally, interest is charged on the unpaid price or it may be adjusted in the price.
(d) Advances:-
Some business houses get advances from their customers and agents against orders and
this is a short-term source of finance for them. It is a cheap source of finance and in order to
minimize their investment in working capital, some firms having long production cycle,
especially the firms manufacturing industrial products prefer to take advances from
customers.
(e) Factoring or accounts receivable credit:-
A commercial bank may provide finance by discounting the bills or invoices of its
customers. Thus, a firm gets immediate payment for sales made on credit. A factor is a
financial institution which offers service relating to management and financing of debts
arising out of credit sales. Factors render services varying from bill discounting facilities
offered by the institution by commercial banks to a total take over administration of credit
sales including maintenance of sales ledger, collection of accounts receivable, credit control
and protection from bad debts, provision of finance and rendering of advisory services to
their clients.
(f) Accrued Expenses:-
Accrued expenses are the expenses that have been incurred but not yet due and hence not
yet paid also. These simply represent a liability that a firm has to pay for the service already
received by it. The most important items of accruals are wages and salaries, interest and
taxes.
(g) Deferred Income:-
Deferred incomes are incomes received in advance before supplying goods and services.
They represent funds received by a firm for which it has to supply goods and services in
future. These funds increase the liquidity of a firm and constitute an important source of
short-term finance.
(h) Commercial Paper:-
Commercial paper represents unsecured promissory notes issued by firms to raise short-
term funds. Commercial paper is a cheaper source of raising short-term finance as compared
to the bank credit and proves to be effective even during period of tight bank credit. Only
large companies enjoying high credit rating and sound financial health can use it as a source
of finance. Another disadvantage of commercial paper is that it cannot be redeemed before
the maturing date even if the issuing firm has surplus funds to pay back.

4. The need of Working Capital:

Any company cannot neglect the need for working capital. The needs for working capital
arise due to the time gap between the production and realization of cash from sales. The
working capital is need for the following purpose:-
 For the purchase of raw materials, components and spares.
 To pay wages and salaries.
 To incur day-to-day expenses and overhead costs.
 To meet the saving costs as packing, advertisement etc.
 To provide credit facilities to the customers.
Greater the size of the company, larger will be the requirement of working capital. The need
of working capital goes on increasing with the growth and expansion of the business till it
attains maturity. At maturity the amount of working capital is called the normal working
capital.

5. Necessity of maintaining adequate amount of working capital:

i. Solvency of the business:-
Adequate working capital helps in maintaining solvency of the business firm to pay its
debt on time by working capital continuously. This will be possible if the working capital is
adequate.
ii. Goodwill:-
Sufficient working capital enables a company to create and maintain goodwill through
prompt payments.
iii. Easy loans:-
A company’s adequate working capital creates favourable and easy conditions to arrange
the loans.
iv. Cash discount:-
Adequate working capital avail cash discount and reduces cost.
v. Regular supply of raw materials:-
 Sufficient working capital regulates continuous production as it ensures regular supply of
raw materials.
vi. Regular payment of salaries, wages and day-to-day commitments:-
A company with ample working capital can make regular payments to their employee who
in turn raises the morale and their efficiency and reduces wastages and enhances production
and profit.
vii. Exploitation of favourable market condition:-
Company having adequate working capital can exploit favourable conditions as
purchasing its requirement in bulk when the prices are lower and by holding its inventories
for higher prices.
viii. Ability to face prices:-
Company having adequate working capital can face the crisis in emergencies like
depression easily.
ix. Quick and regular return on investment:-
Sufficiency of working capital enables a company to pay quick and regular dividend to its
investor as there may not be much pressure to plough back profits which creates a favourable
market to raise additional funds in the future..
x. High Morale:-
Adequacy of working capital creates an environment of security, confidence and high
morale, which in turn increases the overall efficiency of the company.

6. Factors That Influence the Need of Working Capital Management:

i. Nature of Business:-
The working capital requirement of a firm basically depends upon the nature of its
business. Public utility undertakings like electricity, water supply and railways need very
limited working capital because they offer cash sales only and supply service, not products
and as such no funds are tied up in inventories and receivables. On the other hand trading and
financial firms require less investment in fixed asset but have to invest large amounts in
current assets; as such they need large amount of working capital. The manufacturing
undertakings also require sizable working capital along with fixed investment.
ii. Size of the Business / Scale of operation:-
The working capital requirements of a concern are directly influenced by the size of its
business that may be measured in terms of scale of operations. Greater the size of a business
unit, generally larger will be the requirement of working capital. In some cases a smaller
concern may need more working capital due to high overhead charges, inefficient use of
available resources and other economic disadvantages of small size.
iii. Production Policy:-
In certain industry the demand is subject to wide fluctuation due to seasonal variations.
The requirement of working capital, in such case depends upon the production policy. The
production could be either kept steady by accumulating inventories during slack periods with
a view to meet high demand during the peak season or the production could be curtailed
during slack season and increased during the peak season. If the policy is to keep production
steady by accumulating inventories it will require higher working capital.
iv. Manufacturing process / Length of Production Cycle:-
In manufacturing business, the requirements of working capital increase in direct
proportion to length of manufacturing process. Longer the process period of manufacture,
larger is the amount of working capital required. The longer the manufacturing time, the raw
material and other supplies have to be carried for a longer period in the process with
progressive increment of labour and service costs before the finished good is finally obtained.
v. Seasonal Variation:-
In certain industries raw material is not available throughout the year. They have to buy
raw materials in bulk during the season to ensure uninterrupted flow and process them during
the entire year. A huge amount is, thus, blocked in the form of material inventories during
such season, which gives rise to more working capital requirement. Generally, during the
busy season, a firm requires larger working capital than in the slack season.
vi. Working Capital Cycle:-
In a manufacturing concern the working capital cycle starts with the purchase of raw
materials and ends with the realization of cash from the sale of finished products. This cycle
involves purchase of raw materials and stores, its conversion into stocks of finished goods
through work-in-progress with progressive increment of labour and service cots, conversion
of finished stock into sales, debtors and receivables and ultimately realization of cash and this
cycle continues again from cash to purchase of raw material and so on. The speed with which
the working capital completes one cycle determines the requirements of working capital
longer the period of the cycle larger is the requirement of working capitals.
vii. Rate of Stock Turnover:-
There is a high degree of inverse co-relationship between the quantum of working capital
and the velocity or speed with which the sales are affected. A firm having a high rate of stock
turnover will need lower amount of working capital as compared to a firm having low rate of
turnover.
viii. Credit Policy:-
The credit policy of a concern in its dealings with debtors and creditors influence
considerably the requirements of working capital. A concern that purchases its requirements
on credit and sells it product /services on cash requires lesser amount of working capital. On
the other hand a concern buying its requirements for cash and allowing credit to its
customers, shall need larger amount of working capital as very huge amount of funds are
bound to be tied up in debtors and bill receivables.
ix. Business Cycle:-
Business cycle refers to alternative expansion and contraction in general business activity.
In a period of boom i.e when the business is prosperous, there is a need for larger amount of
working capital due to increase in sales, rise in prices, optimistic expansion of business etc. in
the times of depression i.e when there is a down swing of the cycle, the business contracts,
sales decline, difficulties are faced in collections from debtors and firms may have a large
amount of working capital lying idle.
x. Rate of Growth of Business:-
The working capital requirements of a concern increase with the growth and expansion of
its business activities. Although, it is difficult to determine the relationship between the
growth in the volume of business and the growth in the working capital of a business, yet it
may be concluded that for normal rate of expansion in the volume of business, we may have
retained profits to provide for more working capital but in fast growing concerns, we shall
require larger amount of working capital.
xi. Earning Capacity and Dividend Policy:-
Some firms have more earning capacity than others due to quality of their products,
monopoly condition, etc. such firm with high earning capacity may generate cash profits
from operations and contribute to their working capital. The dividend policy of a concern also
influences the requirements of its working capital. A firm that maintains a steady high rate of
cash dividend irrespective of its generation of profits needs more working capital than the
firm that retains larger part of its profits and does not pay so high rate of cash dividend.
xii. Price Level Changes:-
Changes in the price level also affect the working capital requirement. Generally, the
rising prices will require the firm to maintain larger amount of working capital as more funds
will be required to maintain the same current assets. The effect of rising price may be
different for different firms. Some firms may be affected much while some others may not be
affected at all by the rise in prices.
xiii. Other Factors:-
Certain other factors such operating efficiency, management ability, irregularities of
supply, import policy, asset structure, importance of labour, banking facility, etc. also
influence the requirement of working capital.
 CHAPTER- 3

Analysis and Interpretation

Objective of the Study:

 To understand the practical aspects of working capital management.
 To understand the role of ratios in working capital management.
 To understand the day to day income and expenses of the organization.

Research Type:
This Research is purely based on Secondary Research.

Data Referred for Analysis:

Annual Report of NALCO (last 7 years)

Ratio Analysis:
Ratio analysis is the powerful tool of financial statements analysis. A ratio is define 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 technique available to manage for 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 areas 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. As the ratio analysis is concerned with all the
aspect of the firm’s financial analysis liquidity, solvency, activity, profitability and overall
performance, it enables the interested persons to know the financial and operational
characteristics of an organization and take suitable decisions.

Financial ratio analysis:

Financial ratio analysis involves calculating certain standardized relationship between
figures appearing in the financial statements and then using those relationships called ratios
to analyze the business' financial position and financial performance. Due to varying size of
businesses different comparison of two businesses is not possible. Certain techniques have to
be applied in simplifying the financial statements and making them comparable. These
include financial ratio analysis and common-size financial statements.

First of all, various components of working capital as taken from the financial statements of
NALCO for the 7 years is studied.