CHAPTER 1

1
 EXECUTIVE SUMMARY

This project tells us about the fact and the figures of the figures of the company. As it help us
to tell the financial position of the company and its impacts in the market with the help of
financial statement analysis. In this project the company’s working capital have been
calculated on the basis of the annual reports taken from internet.

The actual working is done by using some formulas which help to give some statistical data
of the company. The company which is choose for execute this project is one of the listed
company. Tata motors of the one most famous and international level company. On the basis
of calculation of ratio and working capital we come to certain conclusion that the company is
facing some problem that there working capital constantly negative for all the year we taken,
which indicates company unable to cover its short term liabilities with its current assets. But
in last year’s working capital we can see the progress, as working capital is high (but is
negative) as compared to earlier year. The company has poor liquidity position.

2
 OBJECTIVE OF THE STUDY

Study of the working capital management is important because unless the working
capital is managed effectively, monitored efficiently planned 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 objectives are framed for a depth analysis.

1. To study the working capital management of Tata Motors limited.

2. To study the optimum level of current assets and current liabilities of the company
3. To study the liquidity position through various 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 Tata Motors limited.
6. To estimate the working capital requirement of Tata motors limited .

3
CHAPTER 2

4
 COMPANY PROFILE

Tata Motors Limited is India’s largest automobile company, with consolidated revenues of
INR 123133 crores (USD 27 billion) in 2010-11. It is the leader in commercial vehicles in
each segment, and among the top three in passenger vehicles with winning products in the
compact, midsize car and utility vehicle segments. It is the world’s fourth largest truck and
bus manufacturer. The company’s over 25,000 employees are guided by the vision to be ”best
in the manner in which we operate, best in the products we deliver, and best in our value
system and ethics.” Established in 1945, Tata Motors’ presence indeed cuts across the length
and breadth of India. Over 6.5 million Tata vehicles ply on Indian roads, since the first rolled
out in 1954. The company’s manufacturing base in India is spread across Jamshedpur
(Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand),
Sanand (Gujarat) and Dharwad (Karnataka). Following a strategic alliance with Fiat in 2005,
it has set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon
(Maharashtra) to produce both Fiat and Tata cars and Fiat power trains. The company’s
dealership, sales, services and spare parts network comprises over 3,500 touch points; Tata
Motors also distributes and markets Fiat branded cars in India. Tata Motors, the first
company from India’s engineering sector to be listed in the New York Stock Exchange
(September 2004), has also emerged as an international automobile company. Through
subsidiaries and associate companies, Tata Motors has operations in the UK, South Korea,
Thailand, Spain and South Africa. Among them is Jaguar Land Rover, a business comprising
the two iconic British brands that was acquired in 2008. JLR supports two state of the art
engineering and design facilities and three manufacturing plants (Sol hull, Castle Bromwich
& Hale wood) in the UK. In 2004, Tata Motors acquired the Daewoo Commercial Vehicles
Company, South Korea’s second largest truck maker. The rechristened Tata Daewoo
Commercial Vehicles Company has launched several new products in the Korean market,
while also exporting these products to several international markets. Today two-thirds of
heavy commercial vehicle exports out of South Korea are from Tata Daewoo. In 2005, Tata
Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach
manufacturer, and subsequently the remaining stake in 2009. Hispano’s presence is being
expanded in other markets. In 2006, Tata Motors formed a joint venture with the Brazil-based
Marco polo, a global leader in body-building for buses and coaches to manufacture fully-built
buses and coaches for India and select international markets. In 2006, Tata Motors entered
into joint venture with Thonburi Automotive Assembly Plant Company of Thailand to

5
manufacture and market the company’s pickup vehicles in Thailand. The new plant of Tata
Motors (Thailand) has begun production of the Xenon pickup truck, with the Xenon having
been launched in Thailand in 2008. Tata Motors (SA) (Proprietary) Ltd., Tata Motors’ joint
venture with Tata Africa Holding (Pty) Ltd., has its assembly plant in South Africa at
Rosslyn, north of Pretoria, in the Gauteng province of South Africa. The plant can assemble,
from semi knocked down (SKD) kits, light, medium and heavy commercial vehicles ranging
from 4 – 50 tonnes. Tata Motors is also expanding its international footprint, established
through exports since 1961. The company’s commercial and passenger vehicles are already
being marketed in several countries in Europe, Africa, the Middle East, South East Asia,
South Asia, CIS, Russia and South America. It has franchisee/joint venture assembly
operations in Bangladesh, Ukraine, and Senegal. The foundation of the company’s growth
over the last 65 years is a deep understanding of economic stimuli and customer needs, and
the ability to translate them into customer-desired offerings through leading edge R&D. With
over 4,500 engineers and scientists, the company’s Engineering Research Centre, established
in 1966, has enabled pioneering technologies and products. The company today has R&D
centres in Pune, Jamshedpur, Lucknow, Dharwad in India, and in South Korea, Spain, and the
UK. It was Tata Motors, which developed the first indigenously developed Light Commercial
Vehicle, India’s first Sports Utility Vehicle and, in 1998, the Tata Indica, India’s first fully
indigenous passenger car. Within two years of launch, Tata Indica became India’s largest
selling car in its segment. In 2005, Tata Motors created a new segment by launching the Tata
Ace, India’s first indigenously developed mini truck. In January 2008, Tata Motors unveiled
its People’s Car, the Tata Nano, which India and the world have been looking forward to. The
Tata Nano has been subsequently launched, as planned, in India in March 2009. A
development, which signifies a first for the global automobile industry, the Nano brings the
comfort and safety of a car within the reach of thousands of families. Designed with a family
in mind, it has a roomy passenger compartment with generous leg space and head room. It
can comfortably seat four persons. Its mono-volume design will set a new benchmark among
small cars. Its safety performance exceeds regulatory requirements in India. Its tailpipe
emission performance too exceeds regulatory requirements. In terms of overall pollutants, it
has a lower pollution level than two-wheelers being manufactured in India today. The lean
design strategy has helped minimize weight, which helps maximize performance per unit of
energy consumed and delivers high fuel efficiency. The high fuel efficiency also ensures that
the car has low carbon dioxide emissions, thereby providing the twin benefits of an
affordable transportation solution with a low carbon footprint. In May 2009, Tata Motors

6
ushered in a new era in the Indian automobile industry, in keeping with its pioneering
tradition, by unveiling its new range of world standard trucks called Prima. In their power,
speed, carrying capacity, operating economy and trims, they will introduce new benchmarks
in India and match the best in the world in performance at a lower life-cycle cost. In October
2010, Tata Motors launched the Tata Aria, the first Indian four-wheel drive crossover. The
Tata Aria redefines several benchmarks with its design and technologies, offering class
leading features that take comfort and safety to a new height. Tata Motors is equally focused
on environment-friendly technologies in emissions and alternative fuels. It has developed
electric and hybrid vehicles both for personal and public transportation. It has also been
implementing several environment-friendly technologies in manufacturing processes,
significantly enhancing resource conservation. Through its subsidiaries, the company is
engaged in engineering and automotive solutions, construction equipment manufacturing,
automotive vehicle components manufacturing and supply chain activities, machine tools and
factory automation solutions, high-precision tooling and plastic and electronic components
for automotive and computer applications, and automotive retailing and service operations.
Mr. Ratan N. Tata (Chairman) Mr. Ravi Kant Mr. Nusli N. Wadia Mr. S. M. Palia Dr. R. A.
Mashelkar, Mr. Nasser Munjee, Mr. Subodh Bhargava, Mr. V. K. Jairath, Mr. Ranendra Sen,
Dr. Ralf Speth, Mr. P. M. Telang.

7
 PRODUCT PROFILE

TIAGO BOLT

HEXA ARIA

TRUCKS TATA MAGIC

8
 INTRODUCTION TO WORKING CAPITAL

Working capital (abbreviated WC) is a financial metric which represents operating

liquidity available to a business, organization or other entity, including governmental entity.
Along with fixed assets such as plant and equipment, working capital is considered a part of
operating capital. Gross working capital equals to current assets. Net working capital (NWC)
is calculated as current assets minus current liabilities. It is a derivation of working capital,
that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If
current asset are less than current liabilities, an entity has a working capital deficiency, also
called a working

Capital deficit. A company can be endowed with assets and profitability but short
of liquidity if its assets cannot readily be converted into cash. Positive working capital is
required to ensure that a firm is able to continue its operations and that it has sufficient funds
to satisfy both maturing short-term debt and upcoming operational expenses. The
management of working capital involves managing inventories, accounts receivable and
payable, and cash.

Working capital = Current assets – Current liabilities

If a company' s current assets do not exceed its current liabilities, then it may run into
trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A
declining working capital ratio over a longer time period could also be a red flag that
warrants further Analysis. For example, it could be that the company' s sales volumes
are decreasing and, as are result, its accounts receivables number continues to get smaller and
smaller.

9
Working capital management

Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-
term assets and its short-term liabilities. The goal of working capital management is to ensure
that the firm is able to continue its operations and that it has sufficient cash flow to satisfy
both maturing short-term debt and upcoming operational expenses. A managerial accounting
strategy focusing on maintaining efficient levels of both components of working capital,
current assets and current liabilities, in respect to each other. Working capital management
ensures a company has sufficient cash flow in order to meet its short-term debt obligations
and operating expenses.

By definition:

Working capital management entails short-term decisions—generally, relating to the next

one-Year period—which is " reversible. These decisions are therefore not taken on the
same basis as Capital-investment decisions (NPV or related, as above); rather, they will be
based on cash flows, Or profitability, or both.

10
 THEORY OF WORKING CAPITAL

Financial Management is that managerial activity which is concerned with the planning and
controlling of the firm’s financial resources. Financial management focuses on finance
manager performing various tasks as Budgeting, Financial Forecasting, Cash Management,
Credit Administration, Investment Analysis, Funds Management, etc. which help in the
process of decision making. Financial management includes management of assets and
liabilities in the long run and the short run. The management of fixed and current assets,
however, differs in three important ways: Firstly, in managing fixed assets, time is very
important; consequently discounting and compounding aspects of time element play an
important role in capital budgeting and a minor one in the management of current assets.
Secondly, the large holdings of current assets, especially cash, strengthen firm’s liquidity
position but it also reduces its overall profitability. Thirdly, the level of fixed as well as
current assets depends upon the expected sales, but it is only the current assets, which can be
adjusted with sales fluctuation in the short run. Here, we will be focusing mainly on
management of current assets and current liabilities. Management of current assets needs to
seek an answer to the following question: 1. Why should you invest in current assets? 2. How
much should be invested in each type of current assets? 3. What should be the proportion of
short term and long-term funds to finance the current assets? 4. What sources of funds should
be used to finance current assets?

WORKING CAPITAL MANAGEMENT Working Capital is the lifeblood and controlling

nerve of an organization. ONGC being a large organization, dealing in exploration and
exploitation of hydrocarbons requires a large amount of funds. The complexity and risks
involved in exploration business like whole procedure of search of oil, geographical and
physical conditions, day to day reduction in oil reserves and many other things tend to
maintain a substantial amount of working capital. Hence, there is a need for proper
management of working capital, so that day by day operations do not hamper; at the same
time there would not be any idle investment in working capital. Working Capital is the
amount of capital that a business has available to meet the day to day cash requirements of its
operations. It is concerned with the problem arise in attempting to manage the current assets,
the current liabilities and the inter relationship that exist between them. Working Capital is
the difference between resources in cash or readily convertible into cash and organizational
commitments for which cash will soon be required or within one year without undergoing a

11
diminution in value and without disrupting the operation of the firm. It also refers to the
amount of current Assets that exceeds current Liabilities. [1] Working Capital refers to that
part of the firm capital, which is required for financing Short-Term or Current Assets such as
Cash, Marketable Securities, Debtors and Inventories. Working Capital is also known as
Revolving or Circulating Capital or Short Term Capital. 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. Capital
required for a business can be classifies under two main categories: Fixed Capital Working
Capital Every business needs funds for two purposes for its establishments and to carry out
day to day operations. Long term funds are required to create production facilities through
purchase of fixed assets such as plant and machinery, land and building, furniture etc.
Investments in these assets are representing that part of firm’s capital which is blocked on a
permanent or fixed basis and is called fixed capital. Funds are also needed for short term
purposes for the purchasing of raw materials, payments of wages and other day to day
expenses etc. These funds are known as working capital. In simple words, Working capital
refers to that part of the firm’s capital which is required for financing short term or current
assets such as cash, marketable securities, debtors and inventories.

CONCEPTS OF WORKING CAPITAL: There are two concepts of working capital:

Balance Sheet concepts Operating Cycle or circular flow concept BALANCE SHEET
CONCEPT: There are two interpretation of working capital under the balance sheet concept:
Gross Working Capital Net Working Capital The term working capital refers to the Gross
working capital and represents the amount of funds invested in current assets. Thus, the gross
working capital is the capital invested in total current assets of the enterprises. Current assets
are those assets which are converted into cash within short periods of normally one
accounting year. Example of current assets is: Constituents of Current Assets: Cash in hand
and Bank balance Bills Receivable Sundry Debtors Short term Loans and Advances
Inventories of Stock as: o Raw Materials o Work in Process o Stores and Spaces o Finished
Goods Temporary Investments of Surplus Funds Prepaid Expenses Accrued Incomes The
term working capital refers to the net working capital. Net working capital is the excess of
current assets over current liabilities or say: Net Working Capital = Current Assets – Current
Liabilities. NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE: When the
current assets exceed the current liabilities, the working capital is positive and the negative

12
working capital results when the current liabilities are more than the current assets. Current
liabilities are those liabilities which are intended to be paid in the ordinary course of business
within a short period of normally one accounting year of the current assets or the income of
the business. Examples of current liabilities are: CONSTITUENTS OF CURRENT
LIBILITIES: Bills Payable Sundry Creditors or Account Payable Accrued or Outstanding
Expenses Short term Loans, Advances and Deposits Dividends Payable Bank Overdraft
Provision for Taxation, If does not amount to appropriation of profits. The gross working
capital concept is financial or going concern concept whereas net working capital is an
accounting concept of working capital. OPERATING CYCLE OR CIRCULATING CASH
FORMAT: Working Capital refers to that part of firm’s capital which is required for
financing short term or current assets such as cash, marketable securities, debtors and
inventories. Funds thus invested in current assets keep revolving fast and being constantly
converted into cash and these cash flows out again in exchange for other current assets.
Hence it is also known as revolving or circulating capital. The circular flow concept of
working capital is based upon this operating or working capital cycle of a firm. The cycle
starts with the purchase of raw material and other resources. [2] And ends with the realization
of cash from the sales of finished goods. It involves purchase of raw material and stores, its
conversion into stocks of finished goods through work in progress with progressive increment
of labor and service cost, conversion of finished stocks into sales, debtors and receivables and
ultimately realization of cash and this cycle continuous again from cash to purchase of raw
materials and so on. The speed/ time of duration required to complete one cycle determines
the requirements of working capital longer the period of cycle, larger is the requirement of
working capital. Receivable conversion period (RCP) Raw material storage conversion
period (RMSCP) Cash received form Debtors and paid to suppliers of raw materials Sales of
finished Raw materials Goods introduced into process Finished Goods Produced Finished
goods conversion Period (FGCP) Work in process Conversion period (WIPCP) The gross
operating cycle of a firm is equal to the length of the inventories and receivables conversion
periods. Where, RMCP = Raw Material Conversion Period WIPCP = Work-in-Process
Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables
Conversion Period However, a firm may acquire some resources on credit and thus defer
payments for certain period. In that case, net operating cycle period can be calculated as
below: Further, following formula can be used to determine the conversion periods. Raw
Material Conversion Period = Average Stock of Raw Material / Raw Material Consumption
per day Work in process Conversion Period = Average Stock of Work-in Progress/ Total

13
Cost of Production per day Finished Goods Conversion Period = Average Stock of Finished
Goods / Total Cost of Goods sold per day Receivables Conversion Period = Average
Accounts Receivables / Net Credit Sales per day Payable Deferral Period = Average
Payable / Net Credit Purchase per day.

14
 TATA MOTORS OPERATING CYCLE

The operating cycle of Tata Motors Ltd is as follows: Procurement of raw material The
operating cycle for a company primarily begins with the purchase of raw materials, which are
paid for after a delay representing the creditor’s payable period. Tata Motors is a capital
goods manufacturer. Some raw materials are procured from outside, some manufactured by
its own. Sometimes it may happen that company needs product in the form of raw material
manufactured by its own SBU’s. In this case stock is transferred within the company but it
won’t be considered as actual sale and no sale tax levied but it is liable to pay excise duty
since excise duty is paid on production and it is the liability of manufacturer. Conversion of
Raw material into finished goods These purchased raw materials are then converted by the
production unit into finished goods and then sold. The time lag between the purchase of raw
materials and the sale of finished goods is known as the inventory period. Labor: Labor is
vital for conversion of inputs into finished goods. There are three types of labor here: Skilled
Labor: Here a labor hour rate is fixed and the number of hours required performing that work
is determined and on the basis of this labor expenses are determined. This is treated as fixed
overheads. Casual labor: This is not permanent labor. They are paid on daily basis to perform
work of a non- recurrent nature. They are sourced from the Contractors of the Company.
Vendoring: When there is a capacity constraint then a part of the work is done by vendors
and the parts manufactured by these vendors are assembled. This is also called job work.
Conversion of Work-in-progress into finished goods, Sale of Finished Goods are sold either
on cash basis or credit basis. Upon sale of finished goods on credit terms, there exists a time
lag between the sale of finished goods and the collection of cash on sale. This period is
known as the accounts receivables period Conversion of Receivables into Cash There are
basically two ways available to vendors to pay their dues to Tata Motors Ltd. These are: Cash
Payment method In this a vendor is supposed to clear his dues within a limited amount of
time and mode of payment must be highly liquid. The vendors can pay by demand drafts, pay
orders, or cheques of party which are subject to realization. Channel Financing Channel
financing is used to receive fast money from debtors. Most of the firms generally sell goods
or services on credit and it takes a little time to realize. Hence, receivables form an important
part of working capital management

15
 COMPONENT AND BASIC VALUATION OF WORKING
CAPITAL

Stock of Raw Material Purchase of Raw Material Stock of Work -in- Process At cost of
Market value which is lower Stock of finished Goods Cost of Production Debtors Cost of
Sales or Sales Value Cash Working Expenses Each constituent of the working capital is
valued on the basis of valuation Enumerated above for the holding period estimated. The total
of all such valuation becomes the total estimated working capital requirement. The
assessment of the working capital should be accurate even in the case of small and micro
enterprises where business operation is not very large. We know that working capital has a
very close relationship with day-to-day operations of a business. Negligence in proper
assessment of the working capital, therefore, can affect the day-to-day operations severely. It
may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working
capital may cause either under-assessment or over-assessment of the working capital and both

of them are dangerous.

16
 NEED & IMPORTANCE 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 labor and factory overhead to convert the raw material I work in progress, and ultimately
finished goods.

Importance of working capital

Working capital is very important in finance.

 Working capital represents the funds available with the company for day to day

operations. Working capital finances the cash conversion cycle.

 Essentially working capital is the answer to the question: “how much short term
funding

do you need to operate this business?”. Short term funding is important because, with

long term funding already in place, the business still needs short term funding to operate.

Without the short term funding, the business will go bankrupt.

 Another concept is net working capital which means surplus of current assets over

Current liabilities. A positive NWC is good for a company.

17
 GROSS WORKING CAPITAL & NET
WORKING CAPITAL

Two definitions of working capital are in vogue namely the net working capital and the

Gross Working Capital. As such gross working capital is the sum of all current assets of a

Company, whereas net working capital is the excess of current assets over current liabilities.
This

Clearly implies that it is the net working capital that holds significance for the investors as it
tells

A lot about a company’s profitability and risk.

 Gross working capital:

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

 Net working capital:

Net working capital refers to the difference between current assets & current
liabilities. Current liabilities are those claims of outsiders which are expected to
matures for payment within an accounting year and include creditors, bills payable
and outstanding expenses. Net working capital can be positive or negative.
Working capital of a company is one of the most important measures in any financial
Statement that is also easy to calculate. It is a reflection of the current financial
condition of a company that enables investors to know about the health (financial) of
a company. However, there are two terms called gross working capital and net
working capital that are also used commonly. People remain confused between these
two as they cannot differentiate between them. This article will threadbare these two
concepts to remove any doubts from those who are interested in the health of a
company.
As told earlier, working capital refers to its financial health and is calculated by

18
Subtracting its current liabilities from its current assets. If it is positive, it means that
the
Company is in good financial health and can pay its short term debts by selling its
current assts. Ifit is negative, the company cannot meet its debt liabilities even if it
sells its current assets such as cash, accounts receivables and inventory. When
working capital is in red, it is a signal that company’s operational efficiency is going
down or it is not generating enough sales and in the worst possible scenario, negative
working capital may result in bankruptcy for a company. As such, working capital is
a good indicator for investors to invest or shy away from a company.

19
 TYPES OF WORKING CAPITAL

Working capital is divided into various types based balance sheet view and operating
cycle view. Balance sheet view divides working capital into gross working capital
and net working capital and operating cycle view divides the working capital into
permanent and temporary working capital.

1. Permanent working capital :

The need for current asset arises, as already observed, because of the cash
cycle. To carry on the business certain minimum level working is necessary
on continues basis. This requirement refers to as permanent or fixed working
capital.

2. Temporary working capital:

Any amount over and above the permanent level working capital is
temporary, fluctuating or variable, working capital. This portion of required
working capital is need to meet fluctuation in demand consequent upon
change in production and sales as result of seasonal changes wage fund which
remain blocked in terms of financial management.

20
 OPERATING CYCLE
The need of working capital arrived because of time gap between production of goods of and
their actual realization after sale. This time gap is called operating cycle or working capital
cycle. The operating cycle of company consists of time period between procurements of
inventory and collection of cash from receivables. The operating cycle is the length of time
between the company’s outlay on raw material, wages and other expenses and inflow of cash
from sales of goods.

Operating cycle is important concept in management of cash and management of cash

working capital. The operating cycle reveals the time that elapse 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.

21
 SOURCE OF WORKING CAPITAL FINANCE:

1) Trade credit:

Trade credit, deferment of payment for goods or services purchased by one company from
another, granted by the seller for a short period, primarily to give the buyer a means of
financing inventories. This type of credit (known as open-book account credit), recorded by
the seller as accounts receivable and by the buyer as accounts payable, is most prevalent in
U.S. domestic trade. International trade and trade within many European countries are more
often financed by means of trade acceptances and promissory notes.

The extent and pattern of trade credit within an industry depend on a number of factors,
including the average rate of turnover of stock, the nature of the goods involved—e.g., their
perishability—the relative sizes of the buying and selling firms, and the degree of
competition. If inventories of goods turn over quickly, for example, it is likely that a large
amount of very short-term credit will be extended. Longer-term credit will be extended for
goods with slow rates of turnover. As would be expected, large companies are likely to be net
lenders to smaller ones.

2) Bank finance:

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 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.

22
Forms of bank finance:

1. Terms loan

2. Overdraft

3. Cash credit

4. Purchase or discounting of bills

1) Term loan: In this case, the entire amount of assistance is disturbed at one time only,
either in cash or the company’s account. The loan may be paid repaid in instalments
will charged on outstanding balance.
2) Overdraft: In this case, the company is allowed to withdraw in excess of the balance
outstanding in its bank account. However, a fixed 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.

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

4) Bill 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 entire amount of bills not paid to the
company. This company gets only the present worth of amount of bills from the
discount charges. On maturity, bank collects the full amount of bill from the
customer.

5) 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 wills gets good or not. In this case,

23
the importer applies to his bank in his country to open a letter of credit in favour of
exporter whereby the importers bank undertakes to pay the exporter or accept the bills
or draft drawn by the exporter.

DETERMINANTS OF WORKING CAPITAL

24
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
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 funds are
blocked in pilling 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.
2) Length of production cycle: In some business like machine tool industry, the
time gap between the acquisition of raw material till the end of final production of
finished
a. Products itself is high. As such amount may be blocked either in raw material
or work in
b. Progress or finished goods or even debtors. Naturally there need of working
capital is
c. High.
3) Size and growth of business: In 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 starts growing after certain limit, the working capital requirement 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
market, may 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 valve 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 credits to customers, as a
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

25
 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 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.

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.

CHANGES IN WORKING CAPITAL

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

26
1. Changes in sales and operating expenses:-
The change in sale and operating expenses may be due to three reasons
 There may be long run trend of change e.g. The prize of row material say oil
may constantly raise necessity the holding of the large inventory.
 Cyclic changes in economy dealing to ups and downs in business activity will
influence the level of working capital both permanent and temporary.
 Changes in seasonality in sales activities.

2. 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 asset and sales volume.

3. 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.
A change in operating expenses rise or full will have similar effect on the level of
working following working capital statement is prepared on the base of balance sheet
of last two year

27
CHAPTER 3

REVIEW OF LITERATURE

28
The purpose of this chapter is to present a review of literature relating to the working capital
management. Although a working capital is an important ingredient in the smooth working of
business entities, it has not attracted much attention of scholars.Whatever studies have
conducted, those have exercise profound influence on the understanding of working capital
management good number of the studies which pioneered work in this area have been
conducted abroad, following which, Indian scholars have also conducted research studies
exploring various aspects of working capital special studies have been have been undertaken,
mostly economists, to study the dynamics of inventory investment which often represented
largest components of total working capital.

Working capital refers to that part of the firm’s capital which is required for financing short
term or current assets such as cash, marketable securities, debtors and inventories. Funds,
thus, invested in current assets keep revolving fast and being constantly converted into cash
and this cash flow out in exchange for other current assets. Hence it is also known as
circulating capital or revolving capital or short term capital.

According to Eljelly:

Elucidated that efficient liquidity management involves planning and controlling current
assets and current liabilities in such a manner that eliminates the risk of inability to meet due
short tem obligation and avoids excessive investment in these assets. The relation between
profitability and liquidity was examined, as measured by current ratio and avoids excessive
investment in these assets. The relation between profitability and liquidity was examined, as
measured by currents ratio and cash gap (cash conversion cycle) on a sample of joint stock
companies in Saudi Arabia using correlation and regression analysis. The study found that
cash conversion cycle was of more importance as a measure of liquidity than the current ratio
that affects profitability. The size variable was found to have significant effect on profitability
at the industry level. The result was stable and had important implication for liquidity
management in various Saudi companies. First, it was clear that there was a negative
relationship between profitability and liquidity indicators such as current ratio and cash gap
in Saudi sample examined. Second, the study also revealed that there was great variation
among industries with respects to the significant measure of liquidity.

According to Ghosh and Maji, in 2003: this paper made an attempt to examine the
efficiency of working capital management of the Indian cement companies during 1992 –
1993 to 2001 – 2002. For measuring the efficiency of working capital management,

29
performance, utilization, and overall efficiency indices were calculated instead of using some
common working capital management ratios. Setting industry norms as target-efficiency
levels of the individual firms, this paper also tested the speed of achieving that target level of
efficiency by an individual firm during the period of study. Findings of the study indicated
that the Indian Cement Industry as a whole did not perform remarkably well during this
period.

RESEARCH METHODOLOGY

Research methodology in a way is are turn game plan for conducting research .research
methodology has many dimension. It includes not only the research methods but also

30
considers the logic behind the methods uses in the context of the study and complains why
only a Particular method of technique has been used. Descript research procedure was used
for describing the recent situation in the organization and analytical research to analyze the
result by using research tool.

Data source and collection method:

Secondary data:

Here will be done the analysis on the basis of secondary data which include:

Balance sheet of the company.

Tools used:

I was using the different tools to analyze the working capital management of Tata motor ltd.

Analysis through the working capital ratio

Current ratio and

Quick ratio.

Satistical tool:

The tool used in this study was MS EXCEL AND MS WORD.

Time frame of the study: Two years financial statement of TATA MOTORS.

FACTORS INFLUENCING THE WORKING CAPITAL

REQUIREMENT

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All firms do not have the same WC needs .The following are the factors that affect the WC
needs: Nature and size of business: The WC requirement of a firm is closely related to the
nature of the business. We can say that trading and financial firms have very less investment
in fixed assets but require a large sum of money to be invested in WC. On the other hand
Retail stores, for example, have to carry large stock of variety of goods little investment in
the fixed assets. Also a firm with a large scale of operations will obviously require more WC
than the smaller firm. The following table shows the relative proportion of investment in
current assets and fixed assets for certain industries: Current assets (%) Fixed assets (%)
Industries 10-20 80-90 Hotel and restaurants 20-30 70-80 Electricity generation and
Distribution 30-40 60-70 Aluminum, Shipping 40-50 50-60 Iron and Steel, basic industrial
chemical 50-60 40-30 Tea plantation 60-70 30-40 Cotton textiles and Sugar 70-80 20-30
Edible oils, Tobacco 80-90 10-20 Trading, Construction Manufacturing cycle: It starts with
the purchase and use of raw materials and completes with the production of finished goods.
Longer the manufacturing cycle larger will be the WC requirement; this is seen mostly in the
industrial products. Business fluctuation: When there is an upward swing in the economy,
sales will increase also the firm’s investment in inventories and book debts will also increase,
thus it will increase the WC requirement of the firm and vice-versa. Production policy: To
maintain an efficient level of production the firm’s may resort to normal production even
during the slack season. This will lead to excess production and hence the funds will be
blocked in form of inventories for a long time, hence provisions should be made accordingly.
Since the cost and risk of maintaining a constant production is high during the slack season
some firm’s may resort to producing various products to solve their capital problems. If they
do not, then they require high WC. Firm’s Credit Policy: If the firm has a liberal credit policy
its funds will remain blocked for a long time in form of debtors and vice-versa. Normally
industrial goods manufacturing will have a liberal credit policy, whereas dealers of consumer
goods will a tight credit policy. Availability of Credit: If the firm gets credit on liberal terms
it will require less WC since it can always pay its creditors later and vice-versa. Growth and
Expansion Activities: It is difficult precisely to determine the relationship between volume of
sales and need for WC. The need for WC does not follow the growth but precedes it. Hence,
if the firm is planning to increase its business activities, it needs to plan its WC requirements
during the growth period. Conditions of Supply of Raw Material: If the supply of RM is
scarce the firm may need to stock it in advance and hence need more WC and viceversa.
Profit Margin and Profit Appropriation: A high net profit margin contributes towards the WC
pool. Also, tax liability is unavoidable and hence provision for its payment must be made in

32
the WC plan, otherwise it may impose a strain on the WC. Also if the firm’s policy is to
retain the profits it will increase their WC, and if they decide to pay their dividends it will
weaken their WC position, as the cash will flow out. However this can be avoided by
declaring bonus shares out of past profits. This will help the firm to maintain a good image
and also not part with the money immediately, thus not affecting the WC position.
Depreciation policy of the firm, through its effect on tax liability and retained earnings, has
an influence on the WC. The firm may charge a high rate of depreciation, which will reduce
the tax payable and also retain more cash, as the cash does not flow out. If the dividend
policy is linked with net profits, the firm can pay fewer dividends by providing more
depreciation. Thus depreciation is an indirect way of retaining profits and preserving the
firms WC position.

CLASSIFICATION OF WORKING CAPITAL RATIO

33
Working capital ratio means, ratios which are related with working capital management, e.g.
Current assets, current liabilities, liquidity, profitability, and risk turn off these ratios are
classified as follows:

1) Efficiency ratio:

The ratios compounded under this group indicate of the organization to use the
various to use the various kinds of assets by converting them the form of sale. This
ratio also called activity ratio or assets management ratio. As the assets basically
categorized as fixed assets and 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

2) 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

34
 BALANCE SHEET
and PROFIT & LOSS
ACCOUNT OF:
TATA MOTORS

35
BALANC
E SHEET.
[TATA MOTORS LTD.] Balance Sheet
Date: 31-03-2017
Assets 2017 2016 2015
Non-Current Assets
(a) Property, plant and equipment 17,364.77 17,573 17, 389.9
(b) Capital work- n-progress 1,870.93 1,557.95 1,516.91
(c) Goodwill 99.09 99.09 99.09
(d) Other intangible assets 2,773.69 3,403.47 3221.45
(e) Intangible assets under development 5,366.03 4,128.58 3841
(f) Investments in subsidiaries, joint 14,778.87 14,590.41 14,581.90
ventures and associates
(g) Financial assets
(i) Investments 528.37 627.07 626.26
(ii) Loans and advances 389.61 252.93 310.73
(ii) Other financial assets 196.32 102.92 158.6
(h) Non-current tax assets (net) 724.58 79,963.00 647.24
(i) Other non-current assets 1,856.28 1,679.01 1,612.76
45,948.54 44,814.31
44,005.84
Current Assets
(a) Inventories 5,504.42 5,117.920 5,019.46
(b) Investments in subsidiaries, joint 15.54
ventures and associates
(c) Financial assets
(i) Investments 2400.92 1,745.840 4.68
(ii)Trade receivables 2128.00 2,045.580 1448.39
(iii)Cash and cash equivalents 188.39 427.070 1066.47
(iv)Bank balances other than 97.67 361.350 83.94
(iii)above (v)Loans and advances 231.35 484.440 342.58
(vi)Other financial assets 100.76 125.200 40.47
(d) Current tax assets (net) 129.49 3.840 106.62
(e) Other current assets 1,807.06 1,550.450 1345.91
12,588.06 11,861.69
9,474.06

Total Assets
58,536.60 56,676.00 53,479.90
Liabilities and Owner's Equity
Equity
(a) Equity share capital 679.22 679.18 643.78
(b) Other equity 20,129.93 22,583 14505.58
20,809.15 23,262
Liabilities
Non-Current Liabilities
(a) Financial liabilities
(i) Borrowings 13,686.09 10,599.96 12234.88
36
 (ii) Other financial 1,123.66 2,911.84 3749.76
liabilities (b)Provisions 850.71 750.89 711.54
(c) Deferred tax liabilities (net) 97.95 71.39 66.34
(d) Other non-current liabilities 321.24 378.07
380.86
Total current liabilities 16,079.65 14,712.15 17143.38
Current Liabilities
(a) Financial labilities
(i) Borrowings 537.52 3,654.72 8173.02
(ii) Trade payables [ includes dues of micro 7,015.21 5,141.17 5000.18
and small enterprises ₹
123.27
crores (as at March 31, 2016 ₹
crores and as at April 1, 2015 128.40
crores)] ₹
(iii) Acceptances 139.43 4,379.29 3,887.28 3950.53
(iv) Other financial liabilities 2,465.14 3,784.19 2324.9
(b) Provisions 467.98 450.27 378.77
(c) Current tax liabilities (net) 80.64 79.27 60.5
(d) Other current liabilities 1,864.02 1,704.84
1299.26
16,809.80 18,701.74 21187.16
Total Liabilities and Owner's Equity 53,698.60 56,676.00 53479.9

37
 PROFIT & LOSS ACCOUNT OF TATA MOTORS
Profit & Loss account of
------------------ in Rs. Cr. -----------------
Tata Motors
Mar '17 Mar '16 Mar '15

12 mths 12 mths 12 mths

Income
Sales Turnover 49,100.41 46,646.67 39,524.34
Excise Duty 4,736.41 4,276.85 3229.6
Net Sales 44,364.00 42,369.82 36,294.74
Other Income 892.58 1,769.71 1,477.66
Stock Adjustments 251.43 -22.94 878.82
Total Income 45,508.01 44,116.59 38,651.22
Expenditure
Raw Materials 32,179.46 30,043.29 28,367.83
Power & Fuel Cost 440.03 402.36 395.88
Employee Cost 3,558.52 3,026.75 3,091.46
Other Manufacturing
Expenses
454.48 424.61 437.47
Selling and Admin Expenses 848.36 670.01 0.00
Miscellaneous Expenses 5,888.39 5,464.32 6,118.40
Total Expenses 43,369.24 40,031.34 38,441.04
Mar '17 Mar '16

12 mths 12 mths

Operating Profit 1,246.19 2,315.54 -1,237.48

PBDIT 2,138.77 4,085.25 240.18
Interest 1,590.15 1,481.11 1,612
PBDT 548.62 2,604.14 -1,371.50
Depreciation 2,969.39 2,453.75 2,603.22
Profit Before Tax -2,420.77 150.39 -3,974.72
PBT (Post Extra-ord Items) -2,420.77 150.39 -3,974.74
Tax 59.22 -83.84 764.23
Reported Net Profit -2,479.99 234.23 -4,738.95
Total Value Addition 11,189.78 9,988.05 10,043.21
Equity Dividend 61 61 0.00
Corporate Dividend Tax 12 12 0.00
Per share data (annualised)

Shares in issue (lakhs) 33,958.51 32,186.80

33,956.80
Earning Per Share (Rs) -7.3 0.69 -14.72
Equity Dividend (%) 9 0 0.00
book valve 61.28 68.51 46.10

RATIO RELATED TO WORKING CAPITAL

38
 Working capital turnover ratio:-

Particulars 2014-2015 2015-2016 2016-2017

Sales 36229.6 42369.82 44364.00
Net W.C 11713.10 6840.05 9059.74
W.C turnover 3.09 6.19 4.89

Working capital turnover ratio = Sales

Net working capital

OBSERVATION:

High working capital ratio indicates the capabilities of the organisation to achieve
maximum sales with minimum investment in working capital. Company’s working
capital ratio shows mostly more than three. In the year 2015-2016 the ratio was
around 6.19, it indicates that the capability of the company to achieve maximum sales
with the minimum investment in working capital.

 Current asset turnover ratio:-

Current asset turnover ratio = Sales

Current asset

Particulars 2014-2015 2015-2016 2016-2017

Sales 36294.74 42369.82 44364.00
Current asset 9474.06 11861.69 12588.06
Current asset TOR 3.83 3.57 3.52

OBSERVATION:

39
It indicates the sale achieved for every one time investment in current asset. Higher
will be the ratio higher will be the current asset management. The current asset
turnover ratio shows increasing trend only in year 2014-2015 afterward it shows
decreasing trend, in current asset management efficiency has decreased.

 Inventory turnover ratio

Particulars 2014-2015 2015-2016 2016-2017

Cost of goods sold 38441 40031.34 43369.24
Average inventory 4440.99 5068.69 5311.17
Inventory TOR 8.65 7.89 8.16

Inventory turnover ratio = Cost of goods sold

Average inventory

OBSERVATION:

It was observer that inventory turnover ratio indicates maximum sales achieved with
the minimum investment in the inventory. According to above chart we can see that
stock management has deteriorated. In the year 2014-2015 ratio was 8.65 and has

decreased to 8.16 in year 2016-2017. We can say that stock management is not good.

 Current ratio

Particulars 2014-2015 2015-2016 2016-2017

Current asset 9474.06 11861.69 12588.06
Current liabilities 21187.16 18701.74 21647.80

40
 Current ratio 0.44 0.63 0.58

Current ratio = Current asset

Current liabilities

OBSERVATION:

Current ratio is that which measures a comnpany’s ability to pay short term and
obligations. It indicates the short term solvency. Ideally it must be two times but if its
is below one, it indicates inadequacy of current asset to repay current liabilities.
Though current ratio is showing increasing ratio in year 2015-2016, it is constantly
below one.

 Receivable turnover ratio

Particulars 2014-2015 2015-2016 2016-2017

Gross Sales 36294.74 42369.82 44364.00
Average debtors 1448.39 2045.580 2128.00
Receivable TOR 25.05 21.69 20.84

RECEIVABLE TURNOVER RATIO = Gross sales

Average account receivable

OBSERVATION:

It indicates number of times the debtors were recovered in a year. Higher the ratio
higher will be the efficiency of the collection department. As shown in chart ratio in
2014-2015 it was 25.05 times, in 2015-2016 it was 21.69 times, in year 2016-2017 it

41
was 20.84 times. It indicates decreasing trend which means that collection
department’s efficiency is decreasing year by year.

 Liquid ratio

Particulars 2014-2015 2015-2016 2016-2017

Current asset - 4454.6 7083.64 6743.77
inventories
Current liabilities- 21187.16 18701.74 21647.80
bank overdraft
Liquid ratio 0.21 0.36 0.32

Liquid ratio = Current asset – Inventories

Current liabilities – bank overdraft

OBSERVATION:

In accounting, the terms liquidity is defined as the ability of the company to make it financial
obligation as they come due. The liquidity ratio, then is a computation that is used to
measure a company’s ability to pay it short term debts. Even it indicates the short
term solvency. Ideally it must be one time but if it is below it, it indicates inadequacy
of current asset to repay current liability. Though current ratio is showing increasing
trend in year 2015-2016, it is constantly below one.

CALCULATION FOR WORKING CAPITAL

42
Particulars
Current Assets 2,017 2,016 2,015
(a) Inventories 5,504.42 5,117.920 5,019.46
(b) Investments in subsidiaries,joint ventures and associates 15.54
(c) Financialassets
(i) Investments 2400.92 1,745.840 4.68
(ii)Trade receivables 2128.00 2,045.580 1448.39
(iii)Cashand cashequivalents 188.39 427.070 1066.47
(iv)Bankbalances other than (iii)above 97.67 361.350 83.94
(v)Loans and advances 231.35 484.440 342.58
(vi)Other financial assets 100.76 125.200 40.47
(d) Current tax assets (net) 129.49 3.840 106.62
(e) Other current assets 1,807.06 1,550.450 1345.91
12588.06 11861.69 9,474.06

Current Liabilities
(a) Financiallabilities
(i) Borrowings 5,375.52 3,654.72 8173.02
(ii) Trade payables [ includes dues of micro and small
enterprises ₹ 123.27 crores (as at March 31, 2016 ₹ 128.40 7,015.21 5,141.17 5000.18
crores)]
(iii) Acceptances 4,379.29 3,887.28 3950.53
(iv) Other financial liabilities 2,465.14 3,784.19 2324.9
(b) Provis ons 467.98 450.27 378.77
(c) Current tax liabilities (net) 80.64 79.27 60.5
(d) Other current labilities 1,864.02 1,704.84 1299.26
21,647.80 18,701.74 21,187.16

Net Working Capital = Current Assets - Current Liabilities -9,059.74 -6,840.05 -11,713.10

OBSERVATION OF WORKING CAPITAL

As from the above table and graph we observe that the working capital is negative of all three
years which shows liquidity is very low.

Working capital has decreased negatively from -11713.10 to -6840.05 fromyear 2015to
year2016

In year 2017there is slight rise in working capital from -6840.05 to -9059.74 but still
negative.

As we can observe that trade payables are showing increasing trend more than decreasing it
means creditors are providing more time for payables which is good for any company.

43
 CONCLUSION

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

working capital management of Tata Motors has revealed that:

 The working capital of TATA MOTORS is negative of all three years, which
indicates company is unable to cover its short term liabilities with its current assets.
 Working capital of company has firstly decreasing trend and then increasing trend but
still the working capital of company is negative which indicates poor liquidity
position.
 The working capital of the company is negative as companies short term borrowings
and other liabilities are more.

44
  Debtors are recovering at faster rate and creditors are paid constantly which indicates
that good for the company.

BIBLIOGRAPHY

BOOKS REFERRED

1. I.M Pandey – Financial Management- Vikas publishing house Pvt ltd.

2. K.V. Smith – Management of Working Capital- Mc Grow Hill New York.

WEBSITES

1. www.tatamotors.com
2. www.google.com

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