A Project on

Working Capital Management of Reliance Infra

Submitted to University of Mumbai in partial fulfillment of the requirement
for the award of the Degree of
MASTERS IN MANAGEMENT STUDIES (MMS)
Submitted By
Geetal Thakare
B-79 (Finance)
Batch 2012-14
Under the Guidance of
Prof. Mayur Malviya
NCRDs SIMS

NCRDs Sterling Institute of Management Studies

Affiliated to the University of Mumbai
Plot No. 93/93A, Sector 19, Nerul(E), Navi Mumbai 400706
Tel: 022-27702282, Fax: 022-27722290

CERTIFICATE by the INSTITUTE

This is to certify that ___________________________________ (Name) a student
of ______ (discipline) _______ from ____________________________________
(Institute/University) has done/is doing his/her semester project at
__________________ from __________to __________under my guidance.
The project work entitled _______________________________________
embodies the original work done by___________________during his/her above
full semester project training period.
Date:
Name of the Faculty Guide

Authorize

Signatory
___________________________
Place Your College Name with Stamp

Director

DECLARATION

I hereby declare that the project work entitled Working Capital Management of
Reliance Infra is a record of an original work done by me under the guidance of Prof.
Mayur Malviya, Faculty Member, NCRDs Sterling Institute of Management Studies, and
this project has not performed the basis for the award of any Degree or Diploma and
similar project if any.

Geetal Thakare
B-79 (Finance)
Batch 2012-2014

Acknowledgement

The success and final outcome of this project required lots of guidance and assistance
from many people and I am extremely fortunate to have got this all along the completion
of my project.
I owe my profound gratitude to our Director Mr. Henry Babu who gave me this
opportunity to work for my project which helped me a lot to acquire great knowledge. I
am also grateful to my mentor Prof. Mayur Malviya who guided and encouraged me all
along, till the completion of my project work.
I am heartily thankful and fortunate enough to get constant encouragement, support and
guidance from all teaching staffs of management department which helped me in
successful completion of my project work. Also I would like to extend my regards to all
the non-teaching staff for the timely support.
Geetal Thakare
Finance

INDEX
S. No.

Topic

Page no.

1
2
3

EXECUTIVE SUMMARY
RESEARCH METHODOLOGY

6
7
9

4
5
6
7
8
9
10
11
12
13
14
15
16

LITERATURE REVIEW
INTRODUCTION OF WORKING CAPITAL
CLASSIFICATION OF WORKING CAPITAL
ADEQUACY OF WORKING CAPITAL
EVILS OF INADEQUATE WORKING CAPITAL
WORKING CAPITAL MANAGEMENT
IMPORTANCE OF WORKING CAPITAL MANAGEMENT
FACTORS DETERMINING WORKING CAPITAL
REQUIREMENTS
WORKING CAPITAL FINANCING
METHODS OF ESTIMATING WORKING CAPITAL REQUIREMENT
RECEIVABLES MANAGEMENT

WORKING CAPITAL RATIO

INVENTORY MANAGEMENT

12
15
17
19
20
21
22
26
28
29
33
37
42

ANALYSIS 1: R. INFRA

17
18
19

43
COMPARITIVE ANALYSIS
CONCLUSIONS

BIBLOGRAPHY

54
55

CHAPTER 1

EXECUTIVE SUMMARY

This project is based on prospect of WORKING CAPITAL MANAGEMENT & THEIR

TYPES. It plays a crucial role in keeping the wheels of business enterprise running. Use of
working capital is providing the ongoing investment in short-term assets that a company
5

needs to operate. A second purpose of working capital is addressing seasonal or cyclical

financing needs.
Working capital is the flow of ready funds necessary for the working of the enterprise. It
consists of funds invested in current asset of that asset, which in the ordinary course of
business, can be turned into cash within a brief period without undergoing reduction in
value and without disruption of organization .It also throws light on Evils of inadequate
working capital, Evils of excessive working capital, Role of cash and bank in working capital
management.
Further the project reveals about receivables management, inventory management and
analysis of ratio.
Apart from this the project highlights the analysis of one company - Reliance Infra

CHAPTER 2

RESEARCH METHODOLOGY

Chapter discussed the objectives of this study and in this project I will discuss about the
research methodology which is followed to carry out this project i.e. the universe, locale
of our study, Sample selection, Data Collection, data analysis and field experience. As
in organization like Reliance Infra , working capital constitute a major portion of its
resources, a thorough study of its working capital management has been done broadly
covering: Receivables Management, Cash Management, and Inventory Management

Objectives of the Project

To study working capital management process.

To study receivable management of the company.

To study the process of cash and inventory management.

To know how to determine the optimal level of current assets

To explain how the financial manager combines the current asset decision with the
liability structure decision.

Data collection:

The secondary data used is collected from the articles on WCM published in
magazines and from the various papers by Ernst and Young and Price Water
House Coopers.

The secondary data is collected from the employees working in Reliance Infra.

RELEVANCE OF THE PROJECT

The working capital management is crucial for some industries as the capital
required/blocked is different in each case. When a company has too little working
capital, it can face financial difficulties and may even be forced toward bankruptcy. This
is true of very small company and billion-dollar organization. A company with this
problem may pay creditors late or even skip payments. It may borrow money in an
attempt to remain afloat. If late payments have affected the companys credit rating, it
may have difficulty obtaining a loan at an affordable interest rate.
In some types of businesses, it isnt as much of a problem to have a lower amount of
working capital. Company that are operated on as cash basis, have fast inventory
turnovers, and can generate cash quickly dont necessarily need as much working
capital. For example, a grocery store might meet these requirements and do well with
less working capital.
Reliance Infra being a working capital intensive company requires knowing the effect of
its current methods. The company made a team to study the working capital
management and to conduct a financial analysis. And in the process we also determine
credit worthiness of the company as well as study its position with respect to its
competitors.

CHAPTER 3

LITERATURE REVIEW

A Study of Working Capital Management of

Cement Industries in India
International Refereed Journal
1asst. Prof. Acharekar Sachin Vilas Vijaya, 2prof. Shingare Vishal Sundar Rama1
K.J.Somaiya College of Science & Commerce, Vidyavihar (E) Mumbai 400 0772
Bhimrao T. Pradhan, College Shahpur
Cement industry, which has been signed out from investigation in the present study, is
indeed the
Back bone of economic growth in any country. A thick relationship has been found
between the
level of economic growth and the quantum of cement consumption in developed as well
developing countries. Cement industry, through its forward linkages provides the
maximum stimulus to growth in other industry also. One employee in cement
manufacturing activity supports eight to ten persons in related activities. In India, since
independence, great emphasis has been laid on the development of cement industry. It
is one of the key basic industries in India. It plays dominant role in the national
economy. Cement industry ranks second after the Iron and steel industry. Cement is
indispensable in building and construction works. The production and consumption of
cement, to a large extent, indicates a countrys progress. The development of transport,
infrastructure, irrigation and power projects etc. depends to a very large extent on the
availability of the cement.
The per capita consumption level of cement is regarded as one of the indicators of
development and standard of living in a nation. Keeping in mind the above importance
of the cement industry in the economic development, it is required to do an in- depth
9

study of the problems faced by the industry especially in the area of working capital
management. The study aims to analyse the working capital issues like liquidity and
profitability aspects of the working capital management. It also analyse the various
sources of working capital finance
Strategies for improving working capital management by Dorothy Rule, Director
and Global Head of Liquidity and Investments, Citigroup Global Transaction
Services: The article explains the importance of information integration and the need
for liquidity management. It also discusses contrasting approaches to maximising
liquidity like concentrating funds worldwide, Asian subsidiaries funding each other and
global treasury or moving excess balances directly to global treasury.
Trends in Working Capital Management and its Impact on Firms performance by
Kesseven Padachi: The paper examines the trend in working capital needs and
profitability of firms to identify the causes for any significant differences between the
industries. The dependent variable, return on total assets is used as a measure of
profitability and the relation between working capital management and corporate
profitability is investigated for a sample of 58 small manufacturing firm.
Liberating cash- Reducing working capital levels by Laura Greenberg: The paper
discusses that well-capitalized companies are positioned not only to survive the
financial crisis today, but also to emerge victorious and thrive when skies turn blue
again. Establishing and adhering to tight working capital standards enables a firm to
continue its operations with sufficient funds to both satisfy maturing short-term debt and
meet upcoming operational expenses.
Best practices for treasury and working capital management: The
PricewaterhouseCoopers Global Best Practices team researches and writes about
leading business practices in todays global marketplace. Best practices are the means
by which leading companies have achieved top performance, and they serve as goals
for other companies striving for excellence. Best practices are not the definitive answer
to a business problem but should serve as a source of creative insight for business
process improvement.

10

The new liquidity paradigm: Focus on working capital: The article focuses on the
efforts of corporate treasurers to improve working capital management in line with the
emergence of the new liquidity paradigm brought about by the recent economic crisis. It
outlines some of the common misperceptions about working capital optimization
initiatives. It presents the findings of an in-depth analysis of working capital-intensive
industries conducted by Citi's Financial Strategy Group. It discusses the components of
working capital such as procure to pay and order to cash.

11

CHAPTER 4

INTRODUCTION OF WORKING CAPITAL

Working capital is the employment of current assets and current liabilities in such a way
as to increase short-term liquidity. Working capital management is a significant fact of
financial management due to the fact that it plays a crucial role in keeping the wheels
of business enterprise running. Working capital management is concerned with the
short-term financial decisions, which have been comparatively neglected in the
literature of finance. Shortage of funds for working capital has caused many
businesses to fail. Lack of efficient and effective utilization of working capital leads to
low rate of returns on capital employed or even compels to sustain loses. The need for
skilled working capital has become greater in recent years.
A firm usually invests a part of its permanent capital in fixed assets and keeps a part of
it for working capital, for example meeting day-to-day requirements. The requirement of
working capital varies from firm to firm, depending on the nature of business,
production policy, market conditions, seasonality of operation, condition of supply etc.
Working capital to a company is like a blood of human body. It is the most vital
ingredient of business. Working capital if carried out effectively and efficiently and
consistently, will assure the health of an organization.
Every organization has to arrange for adequate funds for meeting day-to-day
expenditure, apart from investment from fixed assets. Working capital is the flow of
ready funds necessary for the working of the enterprise. It consists of funds invested in
current asset of that asset, which in the ordinary course of business, can be turned into
cash within a brief period without undergoing reduction in value and without disruption
of organization. Current liabilities are those indented to be paid in ordinary course of
business within a short period of time.

12

Working capital serves the fallowing purposes: 1.

To meet the cost of inventories, raw materials purchases, work in progress,

finished goods etc.

2.

To pay wages and salaries.

3.

To meet overhead cost, factory cost, office and administration cost, taxes, selling
distribution expense, packing, advertisements etc.

CASH

INVENTORIES

RECEIVABLES

FIG 1.1 CIRCULATION OF CURRENT ASSET

13

DEFINITION OF WORKING CAPITAL

In case of gross working capital, it is the concept that focus attention of two aspects of
current asset management:
1.

Optimum investment in current asset.

2.

Financing of current assets.

Following definitions of working capital place emphasis on gross working capital.

1.

According to Mead, Mallot & Field. Working capital means current assets.

2.

According to Bonneville. Working capital is any acquisition of funds which

increase the current asset, increases working capital, for they are one and the same.

3.

According to J.S Mills. The sum of current asset is the working capital of the
firm.
Now let us look at the definitions of net working capital. It reflects the modern concept of
working capital, which is also most commonly used. According to the new concept of
working capital it refers to the difference between current asset and current liability. It is
the excess of current asset over current liability. Current liabilities refer to the claims of
outsiders, which are expected to mature for payment within an accounting year. It
includes creditors for goods, bills payable, bank overdraft etc. The concept may be
better understood in the fallowing equation: WORKING CAPITAL = CURRENT ASSET CURRENT LIABILITY.
The net working capital (a) indicate the liquidity position of the firm and (b)
suggest the extend to which working capital needs to be financed by permanent
sources of fund. Both the net and gross concept of working capital is the two facets of
working capital management.
Net working capital may be of the following type:
Positive and quantitive net working capital: - It arises when current asset exceeds
current liability.
Negative or quantities net working capital: - It occurs when current liabilities are in
excess of current asset.

14

CHAPTER 5

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified on the fallowing basis:

1.

On the basis of concept:

I.

Gross working capital (represented by the total current asset).

II.

Net working capital (excess of current asset over current liabilities).

2.

On the basis of periodicity of requirements:

Fixed or permanent working capital: It represents that part of capital permanently locked
up in the current asset to carry out the business smoothly. This investment in current asset
increase as the size of business expands. Examples of such investment are those required
to maintain the minimum stock of raw material, work in progress, finished products, loose
tools and equipments. This arrangement requires minimum cash balance to be kept in
reserve for payment of wages salaries and all other current expenditure throughout the
year.
The permanent fixed working capital may again be subdivided into fallowing:
(A) Regular working capital: It is the minimum amount of liquid capital required to keep up
the circulation of the capital from cash to inventories; to receivables and again to cash. This
includes sufficient minimum cash balance to discount all bills and to maintain adequate
supply of raw material etc.
(B) Reserve margin or cushion working capital: It is the excess capital over the needs of
regular working capital, that should be kept in reserve for contingencies, that may arise at
any time. These contingencies include rising price, strikes, business decompressions,
special operation such as experiment with new product etc.

15

Variable working capital: Variable working capital changes with the increase or decrease
in the volume of business.
It may be subdivided into fallowing: -

{A} Seasonal variable working capital: The working capital required to meet the seasonal
liquidity of business is seasonal variable working capital.

{B} Special variable working capital: It is that part of variable working capital, which is
required for financing special operation such as extensive marketing campaigns,
experiment with product or methods of production, carrying of special jobs etc.

16

CHAPTER 6

ADEQUACY OF WORKING CAPITAL

Working capital or investment in current asset is a must for meeting the day-to-day
expenditure on salaries, wages rent, advertising etc and for maintaining the fixed asset.
Large-scale capital in fixed asset is often determined by relatively small amount of current
asset. The heart of industry, working capital, if weak the business cannot prosper and
survive, although there may be a large investment of fixed assets. Inadequate as well as
superfluous working capital is dangerous for the health of the industry.
Inadequate working capital is disastrous, whereas superfluous working capital is a criminal
waste. Both situations are unwarranted in a sound business organization. Adequacy of
working capital is the lifeblood and controlling nerve center of a business.
Some of the uses of adequate working capital are:
1) CASH DISCOUNT: By adequate working capital the business can avail the advantage of
cash discount by paying cash for the purpose of raw material and merchandise. If proper
cash balance is maintained, this will reduce the cost of production.
2) SENSE OF SECURITY AND CONFIDENCE: Adequate working capital create a sense
of security, confidence and loyalty throughout the business and also among its
consumers, creditors and business associates .The proprietor, official or manager of a
concern are carefree, if they have proper capital arrangements because they need not
worry for the payment of business expenditure or creditors.
3) SOLVENCY AND CONTINUOUS PRODUCTION: In order to maintain the solvency of
business, it is essential that sufficient amount of funds are available to make all the
payments in time as and when they are due. In the absence of working capital,
production will suffer in the era of cutthroat competition and business can never flourish
in the absence of adequate working capital.
4)

SOUND GOODWILL AND INCREASED DEBT CAPACITY: Promptness of payment in

business creates goodwill and increases the debt capacity of the firm. If the investors and
borrowers are confident that they will get their due interest and payment of principle in time,

17

a firm can raise funds from market, purchase goods on credit and borrow short term loans
from bank etc.
5)

EASY LOANS FROM THE BANK: An adequate working capital helps the company to
borrow unsecured loans from the bank, because the excess provides a good security to the
unsecured loans. If the business has a good credit standing and trade reputation, bank
favors in granting seasonal loans.

6)

DISTRIBUTION OF DIVIDEND: Short of working capital, a company cannot distribute

dividend to its shareholders in spite of sufficient profits. To make up for the deficiency of
working capital, profits are to be retained in business. On the other hand ample dividend
can be declared and distributed to the market value of share and increase by sufficient
working capital.

7)

EXPLOITATION OF GOOD OPPORTUNITIES: Good opportunity can be exploited

through adequacy of capital in a concern. For example A company may make off seasons
purchase, resulting in substantial saving or it can fetch big supply orders resulting in good
profits.

8)

MEETING UNSEEN CONTINGENCY: As stock piling of finished goods becomes

necessary, depression shoots up the working demand of capital. If a company maintain
adequate working capital, unseen contingencies such as financial crisis due to heavy loses,
business oscillation etc can easily be overcome.

9)

INCREASE IN EFFICIENCY OF FIXED ASSETS: Proper maintenances and adequate

working capital increase the efficiency of fixed asset of business. It has been rightly said,
the fate of large scale investment in fixed capital is often determined by a relatively small
amount of current asset.

18

10)

HIGH MORALE: The provision of adequate working capital improves the morale of the

executive as they get an environment of security, certainty and confidence, which is a great
psychological factor in improving the overall efficiency of business and of the person who is
at the helm of affair in the company. CHAPTER 7

EVILS OF INADEQUATE WORKING CAPITAL

Some of the evils of not having adequate working capital in a business firm or a
company are as follows:
1)

LOSS OF CREDIT WORTHINESS AND GOODWILL: A firm losses its credit

worthiness and goodwill if it fails to honors its current liability. It finds it difficult to procure
the required funds for its business operation on easy terms. This leads to reduced
profitability and production interruption.

2)

NO BENEFIT FROM FAVORABLE OPPORTUNITY: With inadequate working

capital a firm fails to undertake profitable projects. It prevents the firm from availing the
benefit of available opportunity and stagnate its growth.

3)

FAILURE TO AVAIL CREDIT OPPORTUNITY: Due to inadequate working capital a

firm fail to avail attractive credit opportunities.

4)

OPERATING INEFFICIENCIES: Inadequate working capital leads to operating

inefficiencies, as day-to-day commitment cannot be met.

5)

LOW RATE OF RETURN ON FIXED ASSET: Inadequate working capital leads to a

lowering down of rate of returns of fixed asset, as it cannot be efficiently utilized or
maintained due to inadequacy of working capital.

6)

INCREASE IN BUSINESS RISKS: Inadequate working capital increases the

business risk of the firm. Unable to discharge its current liability it is liable to be declared as
insolvent. Thus inadequate working capital posses a serious threat to the working and
survival of the firm.

7)

CANNOT ACHIEVE PROFIT TARGET: Due to inadequate working capital the firm
cannot achieve its profit target, as it cannot put into operation, its operating plans due to
shortage of working capital.

19

8)

LOW MORALE OF BUSINESS EXECUTIVES: Inadequate working capital

adversely lowers the morale of the firms executive, as they do not have an environment of
certainty safety and confidence, which is necessary psychological factor in improving the
overall efficiency of a business firm.
CHAPTER 8

WORKING CAPITAL MANAGEMENT

Working capital is the money used to make goods and attract sales. The less working
capital is used to attract sale, the higher is it likely to be the return of investment. Working
capital management is about the commercial and financial aspect of inventory, credit,
marketing, royalty and investment policy. The higher the profit margin, lower is it likely to be
the level of working capital tied up in creating and selling titles. The faster that we create
and sell the books the higher is it likely to be the return on investment.
Now let us look at some of the definitions of working capital management:
PROF K V SMITH: Working capital management is concerned with problems that arise in
attempting to manage the current asset, the current liability and the interrelation that exist
between them.
WESTON AND BRIGHAM: Working capital management refer to all aspect of
administration of both current asset and current liability.
JAMES C VAN HORNE: Current asset, by definition are asset normally converted into
cash within one year. Working capital management is concerned with the administration of
these asset-namely cash and marketable securities.
Now let us look at some of the main and important objective of working capital
management:
1. To decide upon the optimum level of investment in various current asset I.e. determining
the size of working capital.
2. By optimizing the investment in current asset and by reducing the level of current liability,
the company can reduce the locking up of funds in working capital and thereby it can
improve the return on capital employed in the business.
3. To decide upon the optimum mix of short-term funds in relation to long-term capital.
20

4. The company should always be in a position to meet its current obligation, which should
be properly supported by current assets available with the firm. Maintaining excess fund in
working capital means locking of funds without any returns.
5. To locate appropriate source of short term financing.
CHAPTER 9

IMPORTANCE OF WORKING CAPITAL MANAGEMENT

According to Husband and Hockery, the prime object of management is to make a profit,
either or not this is accomplished, depend on the manner in which working capital is
accomplished. The primary object of working capital is management is to manage the
firms current asset and current liability in such a manner that a satisfactory level of working
capital is maintained. The firm may become insolvent if it cannot maintain a satisfactory
level of working capital. Working capital assist in increasing the profitability of the concern.
The working capital position decide the various policies in the business with receipt to
general operation viz importance of working capital.
Positive correlation between sale and current assets: There is a positive correlation
between the sale of the product of the firm and its current assets. Increase in the sale of the
product requires a corresponding increase in current assets. Therefore, the current asset
must be managed properly.
Investment in current asset: Generally more than half of the total capacity of the firm is
invested in current assets. Thus less than half of the capital is blocked in fixed asset.
Therefore management of working capital attracts the attention of the management.
No alternative for current asset: While fixed capital can be acquired on lease in
emergency, there is no alternative for current asset. Investment in current asset cannot be
avoided without substantial losses.
Important for small unit: The management of working capital is more important for small
unit because they do not relay on long term capital market and have easy access to short
term finance source such as trade credit, short term bank loans etc.

21

Chapter 10
FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS
Now let us look at the various factors determining the working capital requirement in a
business firm:
(A) Nature of businesses: The amount of working capital is related to the nature of
business. It concerns, where the cost of raw material used in manufacture of a product is
very large in production to its total cost of manufacture, the requirement of working capital
will be very large. For instance a cotton or sugar mills require a large amount of working
capital. On the other hand firms requiring large amount of investment in fixed asset require
less working capital. Public utility concern like Indian Railways, require a lesser amount of
working capital as compared to trading or manufacturing concern, partly because of cash
nature of their business and partly because, they are selling service instead of a commodity
and there is no need of maintaining inventories.
(B) Size of business unit: The general principle in this regard is that the bigger the size of
business, the larger will be the amount of working capital required, because the larger
business unit are required to maintain big inventories for the flow of the business and to
spend more in carrying out the business operation smoothly.
(C) Seasonal variation: Strong seasonal variation create special problem of working
capital in controlling the internal financial swings in many companies such as sugar mills,
oil mills, woolen mills etc. These require larger amount of working capital in the season to
purchase the raw material in large quantity and utilize them throughout the year. They
adjust their production schedule and maintain a steady rate of production in off seasons.
Thus they require larger amount of working capital during season.

22

(D) Time consumed in manufacture: The average time taken in the process of
manufacture is also an important factor in determining the amount of working capital. The
larger the period of manufacture the larger will be the working capital required. Capital
goods industries managed to minimize their investment in working capital by asking
advances from consumers as work proceeds in their orders.
(E) Turnover of circulating capital: Turnover means ratio of annual gross sales to
average working asset. It means the speed with which circulating capital complete its
round, or number of times the amount invested in working asset has been converted into
cash by sale of finished goods and reinvested in working asset during the year. The faster
the sales, the larger the turnover. Conversely greater the turnover, larger the volume of
business to be done with given working capital. It requires lesser amount of working capital
in spite of larger sale because of great turnover.
(F) Labor intensive versus capital intensive industries: In labor intensive industries,
larger working capital is required because of regular payment of heavy wage bills and more
time taken in completing the manufacturing process. On the other hand the capital
intensive industry requires require lesser amount of working capital because of heavy
investment in fixed asset and shorter period in many acquiring processes.
(G) Need to stockpile raw material and finished goods: The industry, where it is
necessary to stockpile the raw material and finished goods increase the amount of working
capital, which is tied up in stock and stores. In some line of business where the materials
are bulky and best purchased in large quantity such as cements, stockpiling of raw material
is very usual and used. In companies where labor strike is very frequent like public utility
concern, stockpiling of raw material is advisable. In certain industries which are seasonal in
nature, finished goods stock have to be in large quantity which require large working
capital.
(H) Terms of purchase and sale: Cash or credit terms of purchase and sale also affect the
amount of working capital .If a company purchase all goods in cash and sells its finished
product on credit, it will require a large amount of working capital .On the other hand a
concern having credit facility and allows no credit to its customers will require less amount

23

of working capital. Terms and conditions of purchase and sale are generally governed by
prevailing trade practice and by changing economic conditions.
(I) Conversion of current asset into cash: The need of having cash in hand to meet the
day to day requirement like payment of wage and salary, rent etc has an important bearing
in deciding the adequate amount of working capital. The greater the cash requirement,
higher will be the need of working capital. A company has ample stock of liquid current
asset will require lesser amount of working capital because it can encash its assets
immediately in open market.
(J) Growth and extension of business: Growing concern requires more working capital
than that which is static. It is logical to except larger amount of working capital in a going
concern to meet its growing need of funds and for its expansion programs through it varies
with economic condition and corporate practice.
(K) Business cycle fluctuation: Business cycle affect the requirement of working capital
At times, when the prices are going up and boom condition prevail, the management seek
to pile up big stock of raw material to have an advantage of lower price and maintain a big
stock of finished goods with an expectation to earn more profit by selling it at higher price in
future. The expansion of business unit caused by the inflationary condition creates demand
for more and more working capital. Depression involves the locking up of big amount in
working capital as the inventories remain unsolved and book debts uncollected. The
reduction in the volume of business may result in increasing the cash position because of
reduction in inventories and receivable that usually accompanies decline in sale and
shortening in capital expenditure. In such case shortage of working capital develops.
(L) Profit margin and profit appropriation: Some firms enjoy a leading position in the
market due to quality product and good marketing management or monopoly power in the
market and thereby earn huge profits. It contributes towards working capital, provided it is
earned in cash. Cash profit can be found by adjusting the non-cash item like depreciation,
outstanding expense, accumulated losses and expense written off in net profit. But in
practice the whole cash inflows are not considered as cash available for use as cash is
used up to increase the other asset like, book debts and fixed asset stock etc. In a
growing concern working capital requirement will be estimated on how the cash available is
24

rightfully used. Even if the net profit is earned in cash, whole of it is not available for
working capital purpose. The contribution towards working capital is effected by the way in
which profit are appropriated and affected by tax action, dividend, depreciation and reserve
policy.
(M) Price level changes: The financial manager should predict the effect of price level
changes on working capital requirement of the firm. Rising price level will require a higher
level of working capital to maintain the same level of current asset, as it will require higher
investments. However if companies reverse their product prices, they will not face a severe
working capital problem. Thus the effect of rising price will be different for different firm
depending upon their price policy and its nature.
(N) Dividend policies: There is a well-established relationship between dividend and
working capital in companies where successive dividend policy is followed. The changes in
working capital position bring about an adjustment in dividend policy. In order to maintain
an established dividend policy, the management gives due consideration to its effect on
cash requirements. Storage of cash may induce the management to reduce cash dividend.
Strong cash position may justify the cash dividend, even if earnings are not sufficient to
cover the payments. Shortage of cash is one of the reasons for issue of stock dividend. On
the other hand if the company follow the policy of retention of profit in business, the working
capital position will be quite adequate, alternatively, if the whole of the profit are distributed
among the shareholders, companies working capital position will suffer.
(O) Close coordination between production and distribution policy: This will reduce
the demand of working capital.
(P) An absence of specialization in the distribution of products: This will require more
working capital as such concerns will have to maintain its own marketing organization.
(Q) If the means of transporting and communication are less developed: More
working capital is required in such areas to store the material and finished goods.
(R) Hazards in a particular business also decide the magnitude of working capital
required.

25

CHAPTER 11

WORKING CAPITAL FINANCING

The main source of working capital financing, namely, trade credit, bank credit, RBI
framework/regulation of bank credit/finance/advances, factoring and commercial papers will
be discussed in this chapter.
1. TRADE CREDIT: Trade credit refers to the credit extended by the suppliers of goods and
service in normal course of transaction/business/sale of the firm. According to trade
practice, cash is not paid immediately for purchase but after an agreed period of time.
There is however, no formal/specific negotiation of trade credit It is an informal
arrangement between buyer and seller. There is no legal instrument of acknowledgement
of debt, which is granted on an open account basis.
(a) ADVANTAGES: - Trade credit as a source of short-term working capital finance has
certain advantages. It is easily available. Moreover it is flexible and spontaneous source of
finance. The availability and magnitude of trade credits is related to the size of operation of
a firm in relation to sales/purchase. If the credit purchase of goods decline, availability of
credit will also decline. Trade credit is also an informal, spoteganous source of finance. Not
requiring negotiation and formal agreement, trade credit is free from the restriction
associated with formal/negotiated source of finance/credit.
2 .COST: Trade credit does not involve any explicit interest charged. However there is an
implicit cost of trade credit. It depends on trade credit offered by suppliers of goods. The
smaller the difference between the payment day and the end of the discount period, the
larger is the annual interest/cost of trade credit.
3.BANK CREDITS: It is the primary institutional source of working capital finance in India.
In fact it represent the most important source of financing of credit asset. It can be provided
by banks in five ways
(a) Cash/credit overdrafts: Under cash credits, the bank specifies a predetermined
borrowing/credit limit. The borrowers can draw/borrow up to the stipulated credit/overdraft
limit. Similarly repayment can be made wherever desired during the period. The interest is
26

determined on the basis of the running balance/amount actually utilized by borrower and
not on the sanctioned amount.
(b)Loans: Under the arrangement the entire amount of borrowing is credited to the current
account of the borrower .The borrower has to pay interest on the total amount.
4.Bills purchased/discounted: -The amount made available under this arrangement is
covered by the cash credit and the overdraft limit. Before discounting the bill the bank
satisfies itself with the credit worthiness of the drawer and the genuineness of the bill. To
popularize the scheme, the discounting banker asks the drawer of the bill (i.e. the seller of
the goods) to have his bills accepted by the drawee bank.
(a)Term loans for working capital: Under this arrangement, banks advance loans for
three to seven years repayable in yearly and half yearly installments.
(b)Letter of credit: While the other forms of bank credit are direct forms of financing in
which banks provide funds as well as bears risk, letter of credit is an indirect form of
working capital financing and bank assume only the risk, the credit being provided by the
supplier.

27

CHAPTER 12

METHODS OF ESTIMATING WORKING CAPITAL REQUIREMENT

Now let us look at some of the ways used by a business firm in estimating the
working capital requirement:
Operating cycle method: Operating cycle is a period that a business enterprise takes in
converting cash back into cash.
It has the fallowing four stages.

The raw material and stores inventory stage.

The semi finished goods or work in progress stage

The finished goods inventory stage.
The accounts receivable and book debt stage.
Each of he above stage is expressed in terms of days of relevant activity. Each requires
a level of investment to support it. The sum of these stage wise investments will be total
amount of working capital of the firm. The fallowing formulae can be used to express the
framework of the operating cycle.
T = (S * C) + W + F + B
Where
T

Stands for the total period of operating cycle in number of days

Stands for the number of days of raw material and stores

Consumption requirement held in raw material and store
Inventory

The number of days of purchase in trade creditors

The number of days of cost of production held in W.I.P

The number of days of cost of sales held in finished goods

The number of days of sale in book debt

28

CHAPTER 13

RECEIVABLES MANAGEMENT
The receivables represent an important component of current asset of a firm. The
purpose of this chapter is to analyze the importance of efficient management of
receivables, within the framework of a firms objective of value maximizing. The first section
of this chapter discusses the objective of receivables management. This is followed by an
indebt analysis of three crucial aspect of management of receivables.
Before understanding the objectives of receivables management let us first understand
the two concepts, which forms an important part in receivables management, namely
debtors and creditors.
Debtors: Debtors (Accounts Receivable) are customers who have not yet made payment
for goods or services, which the firm has provided. The objective of debtor management is
to minimize the time-lapse between completion of sales and receipt of payment.
The costs of having debtors are:
1.Opportunity costs (cash is not available for other purposes);
2.Bad debts.
Debtor management includes both pre-sale and debt collection strategies.
Pre-sale strategies include:
1.

Offering cash discounts for early payment and/or imposing penalties for late
payment;

2.

Agreeing payment terms in advance;

3.

Requiring cash before delivery;

4.

Setting credit limits;

29

5.

Setting criteria for obtaining credit;

6.

Billing as early as possible;

7.

Requiring deposits and/or progress payments.

Post-sale strategies include:
1 .Placing the responsibility for collecting the debt upon the center that made the sale;
2. Identifying long overdue balances and doubtful debts by regular analytical reviews;
3. Having an established procedure for late collections, such as
- A reminder;
- a letter;
- cancellation of further credit;
- telephone calls;
- use of a collection agency;
- legal action.
Creditors; Creditors (Accounts Payable) are suppliers whose invoices for goods or
services have been processed but who have not yet been paid. Organizations often regard
the amount owing to creditors as a source of free credit. However, creditor administration
systems are expensive and time-consuming to run. The over-riding concern in this area
should be to minimize costs with simple procedures.
While it is unnecessary to pay accounts before they fall due, it is usually not worthwhile to
delay all payments until the latest possible date. Regular weekly or fortnightly payment of
all due accounts is the simplest technique for creditor management.
Electronic payments (direct credits) are cheaper than cheque payments, considering that
transaction fees and overheads more than balance the advantage of delayed presentation.
Some suppliers are unenthusiastic to receive payments by this method, but in view of the
significant cost advantage (and the advantages to the suppliers themselves) departments
30

may wish to encourage suppliers to accept this option. However, electronic payments are
likely to be used in combination with, rather than as a replacement for, cheque payments.

Objectives of receivables management:

The term receivables are defined as debts owed to the firm by customers arising from
sale of goods or service in the ordinary course of business. When a firm makes an ordinary
sale of goods or service and does not receive payment the firm grant credit and credits
account receivable. Receivables management is also known as trade credit management
and thus, account receivables represent an extension of credits to customers, allowing
them a reasonable period of time in which to pay the goods received.
The sale of goods on credit is an essential part of modern competitive economic
systems. Infact, credit sales and therefore receivables are treated as marketing tools to aid
the sale of goods. The objective of receivable management is to promote the sale and
profits until that point is reached where the return on investment in further funding
receivable is less than the cost of funds raised to finance that additional credit (i.e.) cost of
capital.
Now let us see some costs in receivable management:

1.Collection cost: Collection costs are administrative costs incurred in collecting the
receivables from the customers to whom credit sale have been made.
2.Capital cost: The increased level of account receivable is an investment in asset. They
have to be financed thereby incurring a cost. The cost on the use of additional capital, to
support the credit sale, which alternatively, profitably employed is therefore a part of the
cost of receivables.
3.Delinquency cost: These cost arise out of the failure of customers to meet their
obligation when payment on credit sale becomes dew after the expiry of credit period. Such
cost is called delinquency cost.

31

4.Default cost: Finally the firm may not be able to recover the overdue because the
inability of the customers to pay. Such that are treated as bad debts and have to be written
off, as they cannot be realized is called default cost.

Benefits:
The benefits are increased sales and anticipated profits because of a more
liberal policy. When firms extend trade credits, that is, invest in receivables; they intend to
increase the sales. The impact of liberal trade credit policy is likely two take two forms. First
it is oriented to sales expansion. In other words a firm may grant trade credit to increase
sale to existing customers. Secondly the firm gives trade credit to protect its current sales
against competitions.
Credit policies:
The credit policy of the firm provides a framework to determine (a) whether or not
to extend credit to a costumer (b) how much credit to extend.
The credit policy decision of a firm has two broad dimensions
1.Credit standards
2.Credit analysis

32

CHAPTER 14

WORKING CAPITAL RATIO

Working capital ratios indicate the ability of a business concern in meeting its current
obligation as well as its efficiency in managing the current asset in the generation of sales.
These ratios are applied to evaluate the efficiency with which the firm manages and make
use of its current assets. The fallowing three categories of ratio are used for efficient
management of working capital (a) efficiency ratios (b) Liquidity ratios (c) Structural health
ratios.
Efficiency ratio: This ratio is computed by dividing the working capital by sale. This ratio
helps to measure the efficiency of utilization of networking capital. It signifies for an amount
of sale a relative amount of working capital is needed. If any increase in sale is
contemplated, working capital should be adequate and thus this ratio is useful for
maintaining adequate level of working capital.
Inventory turnover ratio: This ratio indicate the effectiveness and efficiency of the
inventory management .The formulae is as fallows
INVENTORY TURNOVER RATIO = SALES / CURRENT ASSET
This ratio shows how speedily the inventory is turned into accounts receivable through
sales. The lower the inventory of sales ratio, the more efficiently the inventory is said to
manage and vice versa.
Current assets turnover ratio: This ratio formula is:
CURRENT ASSET TURNOVER RATIO = SALES / CURRENT ASSETS
This ratio indicates the efficiency with which the current asset turn into sales. The lower the
current asset to sales ratio, it implies a more efficient use of funds. Thus, a high turnover

33

rate indicates reduced lock up of funds in current assets. An analysis of this ratio over a
period of time reflects working capital management of a firm.
Liquidity ratio: This ratio indicate the extend of soundness of the current financial position
of an undertaking and the degree of safety provided to the creditors. The higher the current
ratio, the larger amount of rupee available, per rupee for current liability, the more the firms
ability to meet current obligation and the greater safety of funds of short term creditors. The
liquidity ratio formulae is
LIQUIDITY RATIO = CURRENT ASSET, LOANS, ADVANCES/ CURRENT LIABILITY
Current assets are those assets, which can be converted into cash within an accounting
year. Current liability and provisions are those liability that are payable within a year. A
current ratio of 2: 1 indicates a highly solvent position. Banks consider a current ratio of 1:
3: 1 as minimum acceptable level for providing working capital finance. The constituents of
the current asset are as important as current asset themselves for evaluation of companies
solvency position.
Quick ratio: This ratio is a more refined tool to measure the liquidity of an organization.
It is a better test of financial strength than the current ratio, because it excludes very slow
moving inventories and the item of current asset, which cannot be converted into cash
easily. This ratio shows the extend of cushion of protection provided from the quick assets
to the current creditors. A quick ratio of 1: 1 is usually considered satisfactorily through it is
again a rule of the thumb only.
Structural health ratio: This ratio explains the relationship between current asset and total
investment in current asset. A business enterprise should use its current asset effectively
and economically because it is out of the management of these assets that profits accrue.
A business will end up in losses if there is any lacuna in managing assets to the advantage
of business. Investment in fixed assets being inelastic in nature there is no elbowroom to
make an amendment in this sphere and its impact on profitability remains minimal. This
structural ratio can be indicated as
S.H.R = NET ASSETS / CURRENT ASSET

34

An analysis of current assets composition enable one to examine in which components the
working capital funds are locked up. Large tie up of funds in inventories effect profitability of
the business adversely owing to carry over cost .in addition losses are likely to occur by the
way of depreciation, decay, obsolesce, evaporation and so on. Receivable constitute
another component of current assets If the major portion of current assets are made of
cash alone the profitability will be decreased because cash is a non earning asset. If the
portion of cash balance is excessive then it can be said that management is not efficient to
employ surplus cash.
Debtor turnover ratio: This ratio shows the extend of trade credit granted and the
efficiency in the collection of debts and thus it is an indicative of trade credit management.
The lower the debtor to sale ratio the better the trade credit management and better the
quality of debtors. The lower debtor means prompt payment by customers. An excessive
long collection period on the other hand indicates a very liberal ineffective inefficient credit
and collection policy.
DEBTOR TURNOVER RATIO = SALES / DEBTORS
Average collection period measures how long it takes to collect amounts from debtors. The
actual collection period can be compared with the stated credit terms of the company. If it is
longer than those terms, this indicate some insufficiency in the procedure of collecting
debts.
Bad debts to sale ratio: This ratio indicates the efficiency of the controlled procedure of
the company. The actual ratio is compared with the target of norms to decide whether or
not it is acceptable.
Creditor turnover period: The measurement of creditor turnover period shows the
average time taken to pay for goods and service by the company. In general the longer the
credit period achieved the better, because delay in payments means that the operation of
the company is financed interest free by suppliers funds. But there will be point beyond
which if they are operating in a sellers market, may harm the company. If too long a period
is taken to pay creditors, the credit rating of the company may suffer, thereby making it
more difficult to obtain supplier in future.

35

CREDIT TURNOVER PERIOD = CREDITORS * 365 / PURCHASES.

36

Some of the symptoms of poor working capital management are:

1. Excessive carriage of inventory over the normal levels required for business will result in
more balance in trade creditors account. More creditors balance will cause strain on the
management in management of cash.
2. Working capital problem will arise when there is a show down in collection of debtors.
3. Sometimes capital goods will be purchased from the funds available for working capital.
This will result in the working capital and its impact on the operation of the company.
4. Unplanned production schedule will cause excessive stock of finished goods or failure in
meeting dispatch schedule. More funds kept in the form of cash will not generate any profit
for the business.
5. Inefficiency in using potential trade credit require more funds for financing working
capital.
6. Overtrading will cause shorta ge of working capital and its ultimate effect is on the
operation of the company.
7. Dependence in short term source of finance for financing permanent working capital
causes less profitability and will increase strain on management in managing working
capital.
8.Inefficiency in cash management will cause embezzlement of cash

37

Chapter 15

INVENTORY MANAGEMENT
Inventories symbolize the second largest asset categories for manufacturing companies,
next only to plant and equipments. The proportion of inventories to total asset varies
between fifteen to thirty percent. Inventories are stocks of the product a company is
manufacturing for sale and component that make up the product. There are three types of
inventories: raw materials, work in progress and finished goods. Raw materials are
materials and components that are inputs in making the final product. The work in progress,
also called stock in progress, refer to goods in intermediate stage of production. Finished
goods consist of the final products that are ready for sale. While manufacturing firms
generally hold all three types of inventories, distribution firms hold mostly finished goods.
As inventory management has important financial implication, the financial manager has
the responsibility to ensure that the inventory properly monitored and controlled.
The three general motives for holding the inventories are:
1. The transaction motives that emphasis the need to maintain inventories to facilitate
smooth production and sales operation.
2. The precautionary motive that necessitates holding of inventories to guard against the
risk of unpredictable change in demand and supply force and other factors.
3. The speculative motive which influence the decision to increase and reduce the
inventory level to take advantage of price fluctuations.
The objectives of holding inventory are:
1. To maintain a large size of inventory for efficient and smooth production and sales
operation.
2. To maintain a minimum investment in inventories to maximize profitability.
The objective of inventory management should be to determine and maintain optimum level
of inventory investment. The firm should always avoid a situation of over investment or
under investment in inventories. If there is over investment in investment then it would
result in unnecessary tie up of firms funds, loss of profit, excessive carrying cost and risk of
liquidity. Maintaining an inadequate level of inventories is also dangerous. The
consequence of under investment in inventories will lead to production hold up and failure
38

to meet delivery commitments. The aim of inventory management thus should be to avoid
excessive and inadequate level of inventories and to maintain sufficient inventories for
smooth production and sales operation. Efforts should be made to place an order at the
right time and with the right source to acquire the right quantity at he right place and quality.

An effective inventory management should:

1. Ensure a continuous supply of materials to facilitate uninterrupted production.
2. Maintain sufficient stock of raw material in periods of short supply and anticipate price
change.
3. Maintain sufficient finished goods inventory for smooth sales operation, and efficient
customer service.
4 .Minimize the carrying cost and time.
5 Control investment in inventories and keep it at an optimal level.

39

ECONOMIC ORDER QUANTITY:

There are two basic questions that should be considered in inventory management namely
(a) What should be the size of order? (b) At what level should the order be placed?
This includes three types of cost:
1. Ordering cost: It relates to purchased items that include expense on fallowing:
requisitioning, preparation of purchase order, expediting, transport and receiving and
placing in storage.
2. Carrying cost: It includes expenses on interest on capital locked up in inventory,
storage, and insurance, obsolesce and taxes. Carrying cost generally are 25% of the value
of inventory held.
3. Storage cost: It arises when inventories are short of requirement for meeting the need
of production or demand of customers. Inventory shortage may result in high cost, less
efficient and uneconomic production schedules, customer dissatisfaction and loss of sale.
Thus when a firm order in large quantities, in a bid to reduce the total ordering cost, the
average inventory, other things being equal, tends to be high thereby increasing the
carrying costs. In view of such relationship, minimization of overall inventory management
would require a consideration of trade off among these costs.
For determining Economic Order Quantity formula the fallowing symbols are used:
U

Annual usage/demand

Quantity ordered

Cost per order

Percent carrying cost

Price per unit

TC

Total cost of ordering and carrying

T.C = U * F * Q * P * C
The total cost of ordering and carrying cost is minimized when

40

Q = 2 FU / PC

STRATEGIES IN WORKING CAPITAL MANAGEMENT

At present more finance option are available to the finance manager to see the operation of
his firm go smoothly. Depending on the risks of business strategies is evolved to manage
the working capital.
Conservative working capital strategy: A conservative strategy suggests carrying high
levels of current asset in relation to sales. Surplus current asset enable the firm to absorb
sudden variation in sales, production plans, and procurement time without destructing
production plans. Additionally the higher liquidity level reduces the risk of insolvency. But
lower risk translates into lower returns. Large investment in current asset lead to higher
interest and carrying cost and encouragement for efficiency. But conservative policy will
enable the firm to absorb day o day risk. It assures continuous flow of operation and
illuminates worry about recurring obligation. Under this strategy, long term financing covers
more than the total requirement of capital. The excess cash is invested in short-term
marketable securities and in need these securities are sold off in the market to meet the
urgent requirement of working capital.
Aggressive working capital strategy: Under this approach current asset are maintained
just to meet the current liability without keeping cushions for the variation in working capital
needs. The companies working capital is financed by long-term source of capital and
seasonal variation are met through short-term borrowing. Adoption of this strategy will
minimize the investment in net working capital and ultimately it lowers the cost financing
working capital needs. The main drawback of this strategy is that it necessitates frequent
financing and also increase, as the firm is variable to sudden shocks.
A conservative current asset financing strategy would go for more long-term finance, which
reduces the risk of uncertainty associated with frequent refinancing. The price of this
strategy is higher financing cost since long-term rates will normally exceed short-term rates.
But when aggressive strategy is adopted, some time the firm runs into mismatches and

41

defaults. It is a cardinal principle of corporate finance that long term source and short-term
assets should finance long term asset by a mix of long and short-term source.
Efficient working capital management techniques are those that compressed operating
cycle. The length of operating cycle is equal to the sum of the length of the inventory period
and the receivable period. Just in time inventory management techniques reduce carrying
cost by slashing the time that goods are parked as inventories. To shorten the receivables
period without necessary reducing the credit period, corporate can offer trade discount for
prompt payment.

42

ANALYSIS 1:
R. INFRA
CURRENT SCENARIO
RInfra, the infrastructure development arm of the Anil Ambani-led Reliance Group
reported a 66.3% growth in its net sales on consolidated basis to `61,302.5 million in
Q3FY12, driven by higher sales from its engineering and construction (EPC) business
and electrical segment. The EPC business clocked revenue of `29,405.9 million, up
177.1% on YoY basis, as it largely undertakes construction of in-house projects and is
benefiting from a large number of projects that are under construction. On contrary,
operating profit margin (OPM) depreciated by 220bps to 13.0% on YoY basis, due to
193.6% rise in material cost & sub contract charges, which in turn capped the operating
profit growth of the company to 42.5% YoY at `795.5 million. Owed to 109.5% rise in
interest charges and 13% rise in taxation charges, the PAT before share of profit from
associate and minority interest reported a decline of 8% in Q3FY12 on YoY basis at
`3,186.5 million as against `3,468.8 million in Q3FY11.. As a result, the NPM
depreciated by 410bps YoY to 6.5%. RInfras EPC business reported income of
`29,405.9 million in Q3FY12, up 177.1% YoY driven by better execution in RPower
projects. As on December 2011, EPC segment had an order book position of `215,550
million. The order book comprises of 6 power projects of over 9,900 MW, one
transmission project of 1,500 kms along with 6 road projects totaling 570 kms. Further,
revenue from the electricity and infrastructure business grew by 20.3% and 95.8%
respectively on YoY basis. The company has also added 190,000 customers in its
power distribution circles in Mumbai and Delhi in 2011. The units sold in Mumbai and
Delhi stood at 1,599 million (-11.2% YoY) and 3,358 million (+8.4% YoY) respectively.
Besides, the company is developing 11 road projects out of which its 5 projects are
already operational, while five additional would begin generating revenue in next three
months. Meanwhile, the total assets under BOT basis reported a growth of 96% YoY at
`850 million and with the induction of Mumbai metro into BOT portfolio will add value for
the company.
43

COMPARITIVE ANALYSIS
In order to determine the performance of reliance infrastructure on the front of working
capital management, we have accumulated data for the last five years and tried to
analyze the going of reliance infra on various fronts of working capital. In this way, well
be able to better understand the nature of change (if any) in the working capital situation
of the organisation.
So first well look at various working capital ratios for the past five years and examine
the findings.

WORKING CAPITAL RATIO

The difference between current assets and current liabilities excluding short term bank
borrowing is called net working capital (NWC). Net Working Capital is sometimes used
as a measure of a firms liquidity.

Net working capital measures the firms potential reservoir of funds.

YEARS

2009

2010

2011

2012

2013

NET
WORKING
RATIO

0.42

0.26

0.09

0.16

0.10

44

0.45
0.4
0.35
0.3
0.25
Column3

0.2
0.15
0.1
0.05
0
2009

2010

2011

2012

2013

Interpretation:As it is shown in the graph, the following observations can be made:

1. A company having a higher NWC ratio has a greater ability to meet its current
obligations. From a conservative position of 2009 where the ratio was as high as 0.42,it
has now settled at 0.10 which is slightly on the lower side As this ratio represents a
firms potential reservoir of funds, a declining trend should be taken seriously and
appropriate remedial measures need to be taken so as to avert a more troubled
situation.

45

CURRENT RATIO
Current ratio is calculated by dividing current assets by current liabilities:

Current assets include cash and those assets that can be converted into cash within a
year, such as marketable securities, debtors, inventories, loans and advances. All the
obligations maturing within a year are included in current liabilities.
Current liabilities include creditors, bills payable, accrued expenses, short term bank
loan, income tax liability and long-term debt maturing in the current year.
Significance

It indicates the availability of current assets in rupees for every one rupee of
current liability. A ratio of greater than one means that the firm has more current
assets than current claims against them. In India, the conventional rule is to have
a ratio of 1.33(internationally it is 2).

The current ratio represents the margin of safety for the creditors. The higher the
current ratio, the greater the margin of safety; the larger the amount of current
assets in relation to current liabilities, the more the firms ability to meet its
current obligations.

YEARS

2009

2010

2011

2012

2013

CURRENT

2.99

2.21

0.95

1.49

1.09

46

RATIO

3
2.5
2
1.5

Column3

1
0.5
0
2009

2010

2011

2012

2013

Interpretation:For the year 2009, Reliance Infra had a current ratio of 2.99 which got offset during the
subsequent years reaching as low as 0.95 in 2011.The situation got better in 2012 with
a ratio of 1.49 but again it has become critical with a ratio of 1.09 at the end of FY 13 .A
company with a falling current ratio needs to take strict actions otherwise in longer run,
the firm can found themselves in a difficult situation to clear their current liabilities

47

. ACID RATIO TEST (Liquid/Quick Ratio)

This ratio establishes the relationship between quick or liquid assets and current

liabilities.
An asset is liquid if it can be converted into cash immediately without a loss of value.
e.g. Cash, Debtors, Bills receivable and marketable securities. Inventories are
considered to be less liquid as it requires time for realizing into cash, their value also
has tendency to fluctuate.
Significance
Generally a quick ratio of 1:1 is considered to represent a satisfactory current financial
condition. This test is more significant as compare to current ratio to fulfill the firm s
obligations

YEARS

2009

2010

2011

2012

2013

ACID
RATIO

2.88

2.12

0.89

1.44

1.06

48

3
2.5
2
Column3

1.5
1
0.5
0
2009

2010

2011

2012

2013

Interpretation:Reliance Infra has a quick ratio of 1.06 at the end of FY13 which is consistent with the
current ratio for the same year. Generally a quick ratio of 1:1 is considered to represent
a satisfactory current financial situation, but it does not imply a sound financial position.
It should be kept in mind that all debtors may not be liquid, and cash may be
immediately needed to pay operating expenses. Thus a company with a high value of
quick ratio can suffer from shortage of funds if it has slow paying, doubtful and long
duration outstanding debtors. On other hand, a company with a low value of quick ratio
may really be operating with prosperity and paying its obligations in time if it has been
turning over its inventories efficiently

49

CASH RATIO
It shows the relationship between absolute liquid or super quick current assets and
liabilities. Absolute liquid assets include cash, bank balances, and marketable
securities. Since cash is the most liquid asset, a financial analyst may examine cash
ratio and its equivalent to current liabilities. Trade investments or marketable securities
are equivalent of cash; therefore, they may be included in the computation of cash ratio.

YEARS

2009

2010

2011

2012

2013

CASH
RATIO

4%

5%

5%

3%

65%

50

70%
60%
50%
40%
Column3
30%
20%
10%
0%
2009

2010

2011

2012

2013

Interpretation:1) The situation of 2009 is never recommended to have that much cash sitting idle with
the company. In the subsequent years the company has put the cash up to use by
investing it in different projects thus maintaining a cash ratio of 4-5%.
2) There is nothing to be worried about the lack of cash if the company has reserve
borrowing power. In India, firms have credit limits sanctioned from banks, and can easily
draw cash.

INVENTORY TURNOVER RATIO

Inventory turnover is calculated by dividing the cost of goods sold by the average
inventory. This ratio indicates the efficiency of the firm in producing and selling its
51

product, by indicating the number of times the inventory has been converted into sales
during

the

YEARS
INVENTOR
Y
TURNOVER
RATIO

period.

2009

2010

2011

2012

2013

16.44

19.69

24.74

28.20

33.44

35
30
25
20
Column3
15
10
5
0
2009

2010

2011

2012

Interpretation:52

2013

1. This ratio indicates the efficiency of the firm with which it manages and utilises its
assets, the speed with which the assets are converted into sales. As is evident from the
graph, RInfra has managed to outperform its previous year performances consistently.
2. This comes out as a good sign of the efficiency of the management in converting its
assets into sales. The ratio also implies continuous improvement in the operations of
the company.

DEBTORS TURNOVER
A Firm sells goods for cash and credit. Credit is used as a marketing tool by a no. of
companies. When the firm extends credits to its customers, debtors (accounts
receivables) are created. Debtors are convertible into cash over a short period of time,
therefore included in the current assets.
Debtors turnover is found by dividing credit sales by average debtors. Average debtors
are nothing but the average of the opening and closing balances of debtors.

53

Net credit sales consist of gross credit sales minus sales return.
When the information about credit sales, opening and closing balances of trade debtors
is not available then the ratio can be calculated by dividing total sales by closing

balances of trade debtors.

Debtors Turnover indicates the number of times debtors turnover each year. Generally,
the higher the value of debtors turnover, the more efficient the management of the
company.

YEARS

2009

2010

2011

2012

2013

DEBTORS
TURNOVER
RATIO

10.04

5.53

7.06

4.61

2.58

54

12
10
8
6

Series 3

4
2
0
2009

2010

2011

2012

2013

Interpretation:1) As stated earlier, the higher the value of debtors turnover, the more efficient the
management of the company. But as it is evident from the graph that the ratio is dipping
with each successive year, it serves as a sign of caution for the management to look
after.

55

CONCLUSIONS
In conclusion, good management of working capital is part of good financial management.
Effective use of working capital will add to the operational efficiency of a department;
optimal use will help to generate maximum returns.
Ratio analysis discussed in the beginning, can be used to identify working capital areas,
which require closer management. Various techniques and strategies, discussed above are
available for managing specific working capital items. Debtors, creditors, cash and in some
cases inventories are the areas most likely to be relevant to a firm

56

BIBLOGRAPHY:

www.bseindia.com
www.economictimes.com
www.financemaster.com
www.moneycontrol.com
www.gujaratambuja.com
www.relianceinfra.com
Financial Management I.M Pandey
RP Rustagis Financial Management
Trends in working capital management & its impactK Padachi(2006)
Impact of working capital management policies on profitability of a firmS
Vishnanai(2007)
An analysis of working capital managementV Ganeshan(2007)
Effects of working capital management on SME profitabilityPJ Gareia
Tervel(2007)
International Journal of Economics and FinanceK Anagnostopoulos(2009)
Relationship between working capital management and profitabilityAmarjeet
Gill,Nahum Biger,Neil Mathur(2010)
African Journal on Finance and ManagementWM Visemith(2004)

57