INTRODUCTION OF STUDY

The project undertaken is on WORKING CAPITAL MANAGEMENT in

TRINITY PHARMACEUTICAL PVT LTD, THRISSUR.
Working capital is refers to execs of current asset over
current liability. Working capital is how much is liquid assets that a company
has on hand. Researcher want to study how the company is organized to
meet the planned or un expected expenses and to study the capacity to meet
the short-term obligation of the business firm. It involves the relationship
between a firms short-term assets and its short term liabilities. Whatever
may be the organization working capital plays an important role as the
company needs capital for its day to day expenditure. Thousands of
companies fail each year due to poor working capital management practices.
Entrepreneurs often don't account for short term disruptions to cash and are
forced to close their operation. On the whole Working Capital Management
performs a key function and is of top priority for every finance manager. It
describes about how the company manages its working capital and the
various steps that are required in the management of working capital. Cash is
the lifeline of a company. If this lifeline deteriorates, so does the company's
ability to fund operations, reinvest and meet capital requirements and
payments. Understanding a company's cash flow health is essential to
making investment decisions. Working capital refers to the cash a business
requires for day-to-day operations or more specifically for financing the
conversion of raw materials into finished goods which the company sells for
payment. Among the most important items of working capital are levels of
inventory accounts receivable and account payable. Any company should
have a right amount of cash and lines of credit for its business needs at all
times. This study help know company risk and how to manage the working
.

capital and to know the working capital position of TRINITY

PHARMACEUTICAL PVT LTD.

OBJECTIVES OF THE STUDY

To estimate the earning capacity of firm
To analyze the working capital management factors
To analyze financial performance of company with reference to its
working capital components
To analyze the need for working capital for organization
To measure the efficiency of firm
To see how the day to day operations of the company takes place

NATURE OF THE PROBLEM

Funds are needed in every business for carrying on day-to-day operations.
Working capital funds are regarded as the life blood of a business firm. A
firm can exist and survive without making profit but cannot survive without
working capital funds. Working capital refers to the circulating capital
required to meet the day to day operations of a business firm. The goal of
working capital management is to manage the firms assets and liabilities in
such a way that a satisfactory level of working capital is maintained. Nature
of working capital management is concerned with the problems that arise in
attempting to manage the current assets current liabilities and the inter
relationship that exist between them .The current assets refer to those assets
which in the ordinary course of business can be or will be converted in to
cash within one year without undergoing a diminution in value and without
disrupting the operations of the firm .The major current assets are cash
marketable securities, accounts receivables and inventory. Current liabilities
are those liabilities which are intended at their inception to be paid in the
ordinary course of business within a year out of the current assets or the
earnings of the concern .The current liabilities are accounts payable, bills
payable, bank overdraft and outstanding expense. At one given time both the
current assets and current liabilities exist in the business. The current assets
and current liabilities are flowing round in a business like an electric current.
The working capital plays the same role in the business as the role of heart in
human body.
The firm must estimate its working capital very
accurately because excessive working capital results in unnecessary
accumulation of inventory and wastage of capital whereas shortage of
.

working capital affects the smooth flow of operating cycle and business fails
to meet its commitment. The amount of working capital directly depends
upon the length of operating cycle. Operating cycle refers to the time period
involved in production. It starts right from acquisition of raw material and
ends till payment is received after sale. The working capital is very
important for the smooth flow of operating cycle. If operating cycle is long
then
more working capital is required whereas for companies having short
operating cycle, the working capital requirement is less. The firms operating
at large scale need to maintain more inventory, debtors, etc. So they
generally require large working capital whereas firms operating at small
scale require less working capital. If a company is using labor intensive
technique of production then more working capital is required because
company needs to maintain enough cash flow for making payments to labor
whereas if company is using machine-intensive technique of production then
less working capital is required because investment in machinery is fixed
capital requirement and there will be less operative expenses. In case of
production cycle, if production cycle is long then more working capital will
be required because it will take long time for converting raw material into
finished goods whereas when production cycle is small lesser funds are tied
up in inventory and raw materials so less working capital is required.

HYPOTHESIS
A hypothesis is a useful tool to form a tentative answer to a problem or
question at the outset of a project, which helps guide the direction of the
research and analysis to solve the problem. Hypotheses have three
characteristics:
They are initial hunches or intuitive answers to questions asked.
Hypotheses form a basis for testing it through analysis to either
support or reject that initial hunch.

The hypothesis is what the process of discovery focuses upon.

Hypothesis usually considered as the principle instrument in research. A

hypothesis is an assumption or a statement that may or may not be true. The
hypothesis tested on the basis of information obtained from a sample.
Hypothesis tests are used in business and industry for making decisions.
Decision makers often face situation where in they are interested in testing
hypothesis on the basis of available information and they take decision on
the basis of such testing. The testing of hypothesis is an important
characteristic of the scientific method. A research tries to establish
relationship among certain variables. This leads to form a certain opinion or
idea or belief about the relation he wishes to establish. These tentative
opinion or idea are called hypothesis. Hypothesis is a normal question that
he intense to resolve .It is a tentative proposition formulated for empirical
testing .It is a tentative answer to a research question. It is tentative because
its validity remains to be tested .A researcher conducting a research has to
start somewhere. This point of start called hypothesis.
There are two types of hypothesis

 Null hypothesis
Alternative hypothesis

NULL HYPOTHESIS

The hypothesis that is proposed with the intent of receiving rejection

for them is called null hypothesis. A type of hypothesis used in statistics that
proposes that no statistical significance exists in a set of given observations.
The null hypothesis attempts to show that no variation exists between
variables, or that a single variable is no different than zero. It is presumed to
be true until statistical evidence nullifies it for an alternative hypothesis. The
null often refers to the common view of something while the alternative
hypothesis is what the researcher really thinks is the cause of a phenomenon.
This requires that we hypothesis the opposite of what is desired to be proved.
It is denoted by H0
H0-The working Capital Management at Trinity Pharmaceutical (PVT) LTD
is Effective

ALTERNATIVE HYPOTHESIS

Rejection of null hypothesis leads to the acceptance of alternative

that hypothesis. The alternative hypothesis specifies that values/ relation
which the researcher believes hold true. The alternative hypothesis denoted

by H1 or Ha is the hypothesis that sample observation are influenced by

some non-random cause

H1- The Working Capital Management at Trinity Pharmaceutical (PVT) LTD

not Effective

HISTORY OF THE INDUSTRY

The origins of Ayurveda have been traced back to 5,000 BCE

and earlier, when they originated as an oral tradition. Some of the concepts
of Ayurveda have been discovered since the times of Indus Valley
Civilization. The first recorded form of Ayurveda as medical texts evolved
from the Vedas Ayurveda is a discipline of the upaveda or "auxiliary
knowledge" in Vedic tradition. The origins of Ayurveda are also found in
Atharvaveda, which contains 114 hymns and incantations described as
magical cures for disease. There are various legendary accounts of the origin
of Ayurveda, e.g. that it was received by Dhanvantari from Brahma,
181Tradition also holds that the writings of Ayurveda were influenced by a
lost text by the sage Agnivesa.ayurveda has been a lively system of health
with an unbroken practice since 3000 years .although ,ayurveda as a system
of medicine has been in practice in India for centuries but its growth as an
industry has commenced only few years back Ayurveda is the oldest system
among all life sciences, originated in India thousands of years ago. It is not
easy to decide the exact period of its origin as this is not the work of a single
person and of few

years but of thousands of thinkers, philosophers and

investigators through ages.

Ayurveda is evolved from the quest to have
a happy life, through a deep understanding of creation and its maintenance
perceived and conceived by the Rishis or seers of ancient India. They
revealed the deepest truths perceived and conceived by the Rishis or seers of
ancient India. They revealed the deepest truths profounder of Ayurveda the
wish to have healthy and happy life grew into the higher faculty of their
consciousness. They knew that the protective power and device was
ingrained in life itself. They observed and analyzed the events related to
.

living beings at higher conscious level through their meditative practices.

They could see with their higher senses, the measures and means that
protected and relieved the human beings of ailments. The life- stream carries
in its flow, wisdom for its own support and protection that manifests through
some enlightened persons during each cycle of time only in that sense
Ayurveda can be said to have a beginning. Otherwise it is as beginning-less
as life itself and runs parallel to it through all time.
First documentation of Ayurveda is found in the
Vedas the world's oldest existing literature. The exact period of Vedas

is

also not known because for an unknown period, the Vedic sciences have
been communicated from generation to generation through verbal means.
However historians believe that the period of documented literature falls
between 2000 BC to 1000 BC. This was the period of sincere investigations,
observations, and conclusions at higher conscious level by enlightened
scholars and disciples then to communicate them to suitable deserving.
At the end of the Vedic period the progressive establishment of scientific
Ayurveda began. There were conferences of Rishis, to discuss and exchange
their experiences which they have made through sensory as well as
extrasensory perceptions, finally to establish a well accepted principle
scientifically. Minutes of these congresses are compiled in the form of
samhitas. Those are basis of Ayurvedic learnings and practice even today.
Carakasamhita, susurta samhita and astangahrdaya are the most important
and popular among these samhita those are compiled approximately
between1500 BC to 500 AD. In these texts all eight clinical branches of
Ayurveda are described together with its fundamental principles. 3rd century
onward, Ayurveda enjoyed a big revolution in the form of origin of
Rasashastra Use of mercury and several other minerals came in to practice.
These have been used after
Certain difficult processing. Medicaments prepared through these techniques
had several advantages over earlier ways of treatments. These have been fast
but safe in action and much effective in very small doses.
.

Even today these medicaments have very special

place in Ayurvedic medical practice and often show miraculous results in
difficult situations. In 16th Century Paracelsus, practiced and propagated this
system in Europe. This progress continued until the establishment of British
rule in India. With the establishment of the British rule, the flow of western
culture, science and medicine began. Patronized by the government, it put
off all chances of development and evolution for the Indian sciences.
Western medical education became dominant. At Government level
Ayurveda became a second-class option. However it has always been a
primary health care system for more than eighty percent of the population,
practiced traditionally in the families. In the latter days of British rule
Ayurveda had drawn the attention of the scholars in the country as well as
abroad. Indologists of the west became interested in Ayurveda together with
other sciences and philosophies documented in Sanskrit language. Same
time a strong feeling for renaissance of Indian sciences grew with a patriotic
and nationalistic spirit as part of Indias freedom movement. As a result
establishment of Ayurvedic.
Institutes and publication of books took place, however with
a very slow pace and mostly without a Government support. After India
became independent in 1947, it found itself at the cross-roads. On one side,
there was a tremendous attraction towards modernization and scientific as
well as technological establishments in the hearts of the Indians desirous of
fast advancement and equality with other nations of the world and on the
other, there was also the strong attachment to the glorious past which was
not clearly in accordance with what was now regarded as logical and valid.
Not that it is irrational, but its rationale is beyond the understanding of
contemporary scientific thinking. We are today facing a world, steeped in the
spirit of science which is analytical in method and verifiable by laboratory
methods alone and which is not willing to any theory that cannot be put into
.

the test tube and shown though it may be proved valid in its outcomes.
Ayurveda gradually gained ground and new institutes began to be
established. Today more than 250 Ayurvedic colleges, research centers and
several hundred hospitals have been established. Interest in Ayurveda in the
West began in the mid 1970's as Ayurvedic teachers from India began
visiting the United States and Europe.

PRESENT STATUS OF THE INDUSTRY

Ayurveda has been a lively system of health with an unbroken

practice since 3000 years Although, Ayurveda as a system of
medicine has

Been in practice in India for centuries but its growth as an

industry has commenced only a few years back. This was mainly on account
of lack of
Awareness and initiative by its practitioners industry and even the
Government. He classical drugs like Dashmmolarishta and Arjunarishta are
also in practice since then . In recent past, the tradition of preparation of
medicines by the Ayurvedic practitioner has almost come to an end. Now we
find a much organized and commercial production of Ayurvedic medicines
in big factories. Ayurveda and its products are becoming popular with
increasing demand the world over. The pressure of the people of the
respective countries to adopt Ayurvedic products have amounted to many
.

countries now allowing and regularizing sale of these products in to their

countries. This has boosted the globalization process. But this initial phase is
primarily the phase of enquiry and curiosity Ayurveda has to live up to the
expectations, forever. Hence, Ayurveda needs immediate and extensive
reorientation to gain scientific credibility as this traditional old system of
medicine if given the opportunity, is poised for an unprecedented expansion
globally. There is, therefore, a need to transform Ayurveda into a dynamic,
scientifically validated and evidence based which takes its roots from rich
knowledge base of oral tradition and scriptures. The major hurdle in the
wider acceptability of Ayurveda and its products is the
Lack of proper standardization techniques and its unpreparedness to accept
global challenges

AYURVEDA INDUSTRY IN WORLD

Ayurveda is a Medical Science developed

from Indian heritage for the ailed people to make healthy in natural way. The
antiquity of this Medical science to carbon date is difficult, but the
references push its development is long ago even 100 million years i.e. when
the Indian continent is an Island. This prime science of the Medical
Knowledge has taken different shapes by ethnic practices and postulated the
new theories by observation. The science of result oriented Ayurveda spread
not only in the Indian continent but also globally. History reveals that the
major portion of the over sea trade is with condiments and Herbs Today
.

Ayurveda is institutionally trained by the governance of CCIM and AYUSH.

There are around 250 Ayurveda Institutions in India produce around 13000
Ayurveda graduates every year. Out of this picture the major portion is
occupied by the Maharashtra and Karnataka along with Kerala. The number
of Institutions placed in these provinces covers 50% of the Graduates
(approx. 8000) and the next major part is taken by Gujarat. The rest of India
is looking towards Ayurveda as this branch seems to be a flawless and
reaction free. Recently even the commercial banks also interested in funding
the Ayurveda Researches.
EXIM bank (Export-Import Bank of India) has offered
a loan of 4.62 crore to Traditional Ayush Cluster of Tamilnadu to set up
infrastructure and products promotion and export deals A composite herbal
formulation named Perfomax has been developed by DRDO and found to
improve physical and mental performance in High Altitude and Hypoxic
Conditions. The Minister of State for Defense Dr M Pallam Raju launched
this product at a function held in Leh, Ladakh. This is an example how
Ayurveda can help mankind in different and difficult situations. In to two
major areas as the east and west .the eastern world accepts the ayurveda long
back and included it to their heath promotion.weern world is more
commericcalized and seek the balance of their health through alternative
remedies and invites the ayurveda as alternative medicine

AYURVEDA INDUSTRY IN INDIA

According to some sources, up to 80 percent of people in India

use some form of traditional medicine, a category which includes Ayurveda.
In 1970 the Indian Medical Central Council Act which aimed to standardize
qualifications for Ayurveda practitioners and provide accredited institutions
.

for its study and research was passed by the Parliament of India. In 1971 the
Central Council of Indian Medicine was established under the Department of
Ayurveda Yoga and Naturopathy, Unani, Siddha and Homoeopathy .Ministry
of Health and Family Welfare to monitor higher education in Ayurveda in
India. The Indian government supports research and teaching in Ayurveda
through many channels at both the national and state levels, and helps
institutionalize traditional medicine so that it can be studied in major towns
and cities. The state-sponsored Central Council for Research in Ayurvedic
Sciences is designed to do research on Ayurveda Many clinics in urban and
rural areas are run by professionals who qualify from these institutes. As of
2013, India has over 180 training centers offer degrees in traditional
Ayurvedic medicine. Ayurveda is one of the great gifts of the sages of
ancient India to mankind. It is one of the oldest scientific medical systems in
the world, with a long record of clinical experience. However, it is not only a
system of medicine in the conventional sense of curing disease. It is also a
way of life that teaches us how to maintain and protect health. It shows us
both how to cure disease and how to promote longevity. Ayurveda treats man
as a whole which is a combination of body, mind and soul. Therefore it
is a truly holistic and integral medical system.

CHARAKA- the Charaka Samhita is the oldest of the three and was
probably first compiled around 1500 BC. It is considered the prime work on
the basic concepts of Ayurveda. Charaka represents the Atreya School of
physicians. It is a systematic work divided into eight Sthanas or sections,
which are further divided into 120 chapters

SUSHRUTA- Sushruta represents the Dhanwantri School of surgeons,

and is considered in Ayurveda to be the father of surgery. Even a great
American society
of surgeons is named after Sushruta. In the Sushruta Samhita there are
sophisticated descriptions of diseases and surgical instruments.

ASHANTANGA HRIDYA- The next important authority in Ayurveda after

Charaka and Sushruta is Vagbhatta of Sindh, who flourished about the
seventh century AD. His treatise called Ashtanga Hridya.

THE BRANCHES OF AYURVEDA

Kaya chikitsa
Shalya tantra
Shalakya tantra
kaumarbhritya
agada tantra
Bhuta vidya

AYURVEDA INDUSTRY IN KERALA

Ayurveda, the 5000 year old holistic system of

healing, has eight specialized branches that correspond roughly to eight
branches of western medicine. Ayurvedic physicians or lvaidyasi who are
equally proficient in all the eight branches are known as 'ashtavaidyas', for
'ashta' means 'eight'. Ayurveda or the science of life is rooted in Nature.
Kerala in South India has traditionally been the source of a rich variety of
medicinal plants and herbs, thanks to its abundant sunshine, rich soil and
generous rainfall. As a result, Kerala has a long history of folk medicine that
was practiced by healers from all levels of society. Between the 6th and 7th
century, it is believed that Vacjbhata, an Ayurvedic physician from Sind
came to Kerala in quest of rare and valuable medicinal plants. His arrival
triggered a new dynamic medical culture, and the traditional healers of
Kerala adopted his work 'Ashtanqahrdayam as the foundation of their system
of medicine. They continued to draw on fecilonal folk and medical practices
too, and with their deep knowledge of the eight branches of Ayurveda as
described in the Ashtandahrdayam, these healers became the Ashtavaidyans
of Kerala. There are very good traditional practitioners of Ayurveda in
Kerala. During olden times, the practitioners were not business minded.
They used to take this profession as a God given gift and never used to
squeeze money from the patients. But in present day world, when everything
is a business, some people have made Ayurveda as their tool for the same.
Now-a-days, one has to be extremely cautious when selecting a treatment
centre

ABHYANGAM- A whole body massage with specific herbal oils to

nourish and revitalize the body tissues and to allow the toxins to be removed
from the cells. Anhyangam has much deeper and more far reaching effects
using mineral oils and lotions. Abhyangam achieves deepest healing effects
.

by naturally harmonizing Body - Mind & Spirit. This massage is performed

by one therapist for one hour and is usually followed by a medicated steam
bath (Swedana). It is one of the most rejuvenating

PIZHICHIL- Pizhichil is a procedure developed in Kerala, which gives

the effects of both Snehana and Swedana. It is considered as one among the
Keraleeya Panchakarma Technique. Medicated oil is poured onto the body in
continuous streams while being gently massaged by two therapists for 45
minutes to 60 minutes. It is extremely soothing and relaxing. It acts as a free
radical scavenger, toning, strengthening and deeply rejuvenating the whole
body. It is given after a course of Abhyangam.

KATIVASTI- In this process specially prepared warm medicated oil is

kept over the lower back with herbal paste boundary. This treatment lasts for
45 minutes to 1 hour.

SHIRO DHARA- Dhara is a method of Kerala special treatment. Many

such distinctive and excellent forms of treatments, not practiced in the other
parts of India are conducted by the Kerala Physicians. A continuous stream
of medicated warm oil/herbal decoctions/medicated milk/buttermilk is
poured onto the forehead for 35 to45 to minutes. This procedure often
induces a mental state similar to a trance, which creates profound relaxation
of the mind and body. It deeply relaxes and revitalizes the central nervous
system. Shirodhara gives the best results when taken after an Abhyangam.
Dhara is good for all ailments. Changing the liquid as per the Dosha
condition, with necessary alterations in the procedure, is useful to alleviate
any Dosha.

HISTORY OF THE ORGANIZATION

The trinity pharmaceuticals (India) private limited is one of the

leading pharmaceutical manufactures in Kerala .This Company was started
in 1941 and it was established by sir, P.K Balakrishna Kurup in 1945. At the
initial

stage,

the

company

manufactured

only

products

Protovine&Aynaecolin .The plant was so small and they were not organized
there were only few numbers of workers and the office was not
computerized .The trinity pharmaceuticals authorized capital is Rs70lakhs.This company manufactures ayurvedic products ensuring high
quality products, reliability and value has added a special dimension to
trinity pharmaceuticals private limited, enabling us to successfully complete
6

decades

in

his

highly

competitive

industry.At

the

trinity

pharmaceutical(India)private limited a range of 20 patent and proprietary

formulations in ayurvedic segment. Their brands are Protovine data,Folifer
-12 are the mainstay of the company and have successfully stood the test of
time .Their marketing operations cover four southern states namely
Kerala,Tamilnadu,and Karnataka and Puduchery

PRESENT STATUS OF THE ORGANIZATION

The trinity pharmaceuticals India pvt Ltd is a Private Company

incorporated on 12 November 1945. It is classified as Indian NonGovernment Company and is registered at Registrar of Companies, ROCErnakulum. Its authorized share capital is Rs. 7,000,000 and its paid up
capital is Rs. 5,921,860.It is involved in Manufacture of other chemical
products. The Trinity Pharmaceuticals India Pvt Ltd's Annual General
Meeting (AGM) was last held on 29 September 2014 and as per records
from Ministry of Corporate Affairs (MCA), its balance sheet was last filed
on 31 March 2014.The trinity pharmaceuticals (India) pvt. Ltd.
Manufactured products in 1945 and 50 employs are working now; their
factory situated at Trichur has recently upgraded and is now a gmp certified
plant. It has built-up area of land .They have facilities for the manufacture of
oral soliods (tablets and capsules), oral liquids and topical. As they have the
best production facilities in Kerala, teach skilled versatile and dedicated
professionals they undertake job-work from ayurvedic companies. In factory
row materials are taken to stock and give to laboratory for testing the quality
of materials .Then the production manager will given the intent to the store
keep. After 1 month it was came to the filling room .when the requirement
came from the office issue the finished goods to the store and from there
supply the products to the stockiest .In the factory company provides
uniform with cap once in a year .So many welfare measures provided to the
staff including tea twice daily

FUTURE SCOPE OF THE ORGANIZATION

Trinity is on right path towards a brighter future. They already

formulated several plants which will help the company forward. The future
is uncertain but planning is done for future efficient planning can achieve a
good future

to enter into new markets

Promote medical plant cultivation and conservation
Computerization of entire business
to introduce a new highly profitable product line
to minimize interest and financial charges by reducing loans
to increase their job work client by using their manufacturing
facilities

REVIEW OF LITERATURE

Weston and Brigham (1972) further extended the second

proposition suggested by Walker by dividing debt into long-term debt and
short-term debt. They suggested that short-term debt should be used in place
of long-term debt whenever their use would lower the average cost of capital
to the firm. They suggested that a business would hold short-term marketable
securities only if there were excess funds after meeting short-term debt
obligations. They further suggested that current assets holding should be
expanded to the point where marginal returns on increase in these assets
would just equal the cost of capital required to finance such increases.
Sagan in his paper (1955) perhaps the first theoretical paper on the theory of
working capital management, emphasized the need for management of
working capital accounts and warned that it could vitally affect the health of
the company. He realized the need to build up a theory of working capital
management. He discussed mainly the role and functions of money manager
inefficient working capital management. Sagan pointed out the money
managers operations were primarily in the area of cash flows generated in
the course of business transactions. However, money manager must be
familiar with what is being done with the control of inventories, receivables
and payables because all these accounts affect cash position. Thus, Sagan
concentrated mainly on cash component of working capital. Sagan indicated
that the task of money manager was to provide funds as and when needed
and to invest temporarily surplus funds as profitably as possible in view of
his particular requirements of safety and liquidity of funds by examining the
risk and return of various investment opportunities. He suggested that money
manager should take his decisions on the basis of cash budget and total
current assets position rather than on the basis of traditional working capital
.

ratios. This is important because efficient money manager can avoid

borrowing from outside even when his net working capital position is low.
The study pointed out that there was a need to
Improve the collection of funds but it remained silent about the method of
doing it. Moreover, this study is descriptive without any empirical support.
Realizing the dearth of pertinent literature on working capital management,
Walker in his study (1964) made a pioneering effort to develop a theory of
working capital management by empirically testing, though partially, three
propositions based on risk-return trade-off of working capital management.
Walker studied the effect of the change in the level of working capital on the
rate of return in nine industries for the year 1961 and found the relationship
between the level of working capital and the rate of return to be negative. On
the basis of this observation, Walker formulated three following
propositions:
Proposition I If the amount of working capital is to fixed capital,
the amount of risk the firm assumes is also varied and the opportunities for
gain or loss are increased.
Walker further stated that if a firm wished to reduce its risk to the minimum,
it should employ only equity capital for financing of working capital;
however by doing so, the firm reduced its opportunities for higher gains on
equity capital as it would not be taking advantage of leverage. In fact, the
problem is not whether to use debt capital but how much debt capital to use,
which would depend on management attitude towards risk and return. On the
basis of this, he developed his second proposition.
Proposition II The type of capital (debt or equity) used to finance
working capital directly affects the amount of risk that a firm assumes as
well as the opportunities for gain or loss. Walker again suggested that not
only the debt-equity ratio, but also the maturity period of debt would affect
the risk-return trade-off. The longer the period of debt, the lower be the risk.
.

For, management would have enough opportunity to acquire funds from

operations to meet the debt obligations. But at the
Same time, long-term debt is costlier. On the basis of this, he
developed his third proposition:
Proposition III The greater the disparity between the maturities of
a firms debt instruments and its flow of internally generated funds, the
greater the risk and vice-versa.
Thus, Walker tried to build-up a theory of working capital management by
developing three prepositions. However, Walker tested empirically the first
proposition only. Walkers Study would have been more useful had he
attempted to test all the three propositions. Weston and Brigham (1972)
further extended the second proposition suggested by Walker by dividing
debt into long-term debt and short-term debt. They suggested that short-term
debt should be used in place of long-term debt whenever their use would
lower the average cost of capital to the firm. They suggested that a business
would hold short-term marketable securities only if there were excess funds
after meeting short-term debt obligations. They further suggested that current
assets holding should be expanded to the point where marginal returns on
increase in these assets would just equal the cost of capital required to
finance such increases
Vanhorne in his study (1969) recognizing working capital management as
an area largely lacking in theoretical perspective, attempted to develop a
framework in terms of probabilistic cash budget for evaluating decisions
concerning the level of liquid assets and the maturity composition of debt
involving risk-return trade-off. He proposed calculation of different
forecasted liquid asset requirements along with their subjective probabilities
under different possible assumptions of sales, receivables, payables and
other related receipts and disbursements. He suggested preparing a schedule
showing, under each alternative of debt maturity, probability distributions of
.

liquid asset balances for future periods, opportunity cost, maximum

probability of running out of cash and number of future periods in which
there was a chance of cash stock-out. Once the risk and opportunity cost for
different alternatives were estimated, the form could determine the best
alternative by balancing the risk of running out of cash against the cost of
providing a solution to avoid such a possibility depending on managements
risk tolerance limits. Thus, Vanhorne study presented a risk-return trade-off
of working capital management in entirely new perspective by considering
some of the variables probabilistically. However, the usefulness of the
framework suggested by Vanhorne is limited because of the difficulties in
obtaining information about the probability
Distributions of liquid-asset balances, the opportunity cost and the
probability of running out of cash for different alternative of debt maturities.
Welter, in his study (1970) stated that working capital originated because of
the global delay between the moment expenditure for purchase of raw
material was made and the moment when payment were received for the sale
of finished product. Delay centers are located throughout the production and
marketing functions. The study requires specifying the delay centers and
working capital tied up in each delay centre with the help of information
regarding average delay and added value. He recognized that by more rapid
and precise information through computers and improved professional
ability of management, saving through reduction of working capital could be
possible by reducing the length of global delay by rescuing and/or favorable
redistribution of this global delay among the different delay centers.
However, better information and improved staff involve cost. Therefore,
savings through reduction of working capital should be tried till these saving
are greater or equal to the cost of these savings. Thus, this study is concerned
only with return aspect of working capital management ignoring risk.
Enterprises, following this approach, can adversely affect its short-term
liquidity position in an attempt to achieve saving through reduction of
.

working capital. Thus, firms should be conscious of the effect of law current
assets on its ability to pay-off current liabilities. Moreover, this approach
concentrated only on total amount of current assets ignoring the interactions
between current assets and current liabilities. Lambrix and Singhvi
(1979)adopting the working capital cycle approach to the working capital
management, also suggested that investment in working capital could be
optimized and cash flows could be improved by reducing the time frame of
the physical flow from receipt of raw material to shipment of finished goods,
i.e. inventory management, and by improving the terms on which firm sells
goods as well as receipt of cash. However, the further suggested that
working capital investment could be optimized also (1) by improving the
terms on which firms bought goods i.e. creditors and payment of cash, and
(2) by eliminating the administrative delays i.e. the deficiencies of paperwork flow which tended to extend the time-frame of the movement of goods
and cash.
Warren and Shelton (1971) applied financial simulation to simulate future
financial statements of a firm, based on a set of simultaneous equations.
Financial simulation approach makes it possible to incorporate both the
uncertainty of the future and the many interrelationships between current
assets, current liabilities and other balance sheet accounts. The strength of
simulation as a tool of analysis is that it permits the financial manager to
incorporate in his planning both the most likely value of an activity and the
margin of error associated with this estimate. Warren and Shelton presented
a model in which twenty simultaneous equations were used to forecast future
balance sheet of the firm including forecasted current assets and forecasted
current liabilities. Current assets and current liabilities were forecasted in
aggregate by directly relating to firm sales. However, individual working
capital accounts can also be forecasted in a larger simulation system.
Moreover, future financial statements can be simulated over a range of
different assumptions to portray inherent uncertainty of the future.
.

Cohn and Pringle in their study (1973) illustrated the extension of Capital
Asset Pricing Model (CAPM) for working capital management decisions.
They tried to interrelate long-term investment and financing decisions and
working capital management decisions through CAPM. They emphasized
that an active working capital management policy based on CAPM could be
employed to keep the firms shares in a given risk class. By risk, he meant
unsystematic risk, the only risk deemed relevant by CAPM. Owing to the
lumpy nature for long-term financial decisions, the firm is continually
subject to shifts in the risk of its equity. The fluid nature of working capital,
on the other hand, can be exploited so as to offset or moderate such swings.
For example they suggested that a policy using CAPM could be adopted for
the management of marketable securities portfolio such that the appropriate
risk level at any point in time was that which maintains the risk of the
companys common stock at a constant level.
Copeland and Khoury (1980) applied CAPM to develop a theory of credit
expansion. They argued that credit should be extended only if the expected
rate of return on credit is greater than or equal to market determined required
rate of return. They used CAPM to determine the required rate of return for
the firm with its new risk, arising from uncertainty regarding collection due
to the extension of credit. Thus, these studies show how CAPM can be used
for decisions involved in working capital management.
One more approach, used mainly in empirical studies, towards working
capital management has been to apply regression analysis to determine the
factors influencing investment in working capital. Different studies in the
past have considered different explanatory variables to explain the
investment in inventory. A brief review of these studies is important as
regression equation of investment in working capital, in the present study,
would be formulated on the basis of works on investment in inventory.

In inventory investment literature, there is basically one school of thought

according to which firms aim at an optimum or desired stock of inventories
in relation to a given level of output/sales. This is known as acceleration
principle. Pioneering work in this field has been done by Metzler (1941) .
However, his work was mainly on simple acceleration principle which
postulated that firms liked to maintain inventories in proportions to
output/sales and they succeeded in achieving the desired level of inventories
in a unit time-period. That is to say, any discrepancy between the actual level
and desired level of inventories is adjusted within the same time-period.
Needless to say, that such an instantaneous adjustment is not a realistic
assumption to make. Modifications, therefore, have been introduced in the
literature to provide for partial adjustment. Goodwin (1948) assumed that
firms attempted only a partial adjustment of the discrepancy between the
desired stocks as determined by the level of output and the existing stock.
Similarly, Darling and
Lovell (1965) modified Metzlers formulation based on simple acceleration
principle and obtained, the relationship based on flexible accelerator
principle. There are several reasons physical, financial and technical those
motivate partial adjustment. Among the physical factors, mention may be
made of procurement lags between orders and deliveries. The length of such
lags is connected with the source of supply, foreign or domestic availability.
Import licensing procedures on account of foreign exchange scarcity could
cause further delays in adjustment. Among the Financial factors, cost
advantages associated with bulk buying and higher procurement costs for
speedy delivery are also mentioned. Uncertainties in the market for raw
materials and in the demand for final product also play a role in influencing
the speed of
Adjustment. Technically, firms like to make sure that changes in demand are
of a permanent character before making full adjustment. The acceleration
principle has great relevance in inventory analysis than in the analysis of
.

fixed investment, as there are limits to liquidate fixed capital in the face of
declining demand
Abramowitz (1950) and Modigliani (1957) highlighted the impact of
capacity utilization on inventory investment. Existing stock of inventories is
expected to take account of adjustment process to the desired levels. Thus
the variable, existing stock of inventories, is postulated to be negatively
related with the desired stock. The ratio of inventory to sales may affect
inventory investment positively because a high ratio of stocks to sales in the
past suggests the maintenance of high levels of inventories in the past and
thus also calling for high investment in inventories in the current period. The
studies of Metzler (1941) and Hilton (1976) have found this variable,
inventory-sales ratio, to be statistically significant. Fixed investment is
generally expected to affect inventory investment inversely because of
competing demand for the limited funds. However, in case of an expanding
firm, the two components may be complementary. Besides, availability of
funds from retained earnings and external sources, may affect investment
decision by providing funds for financing inventory investment. Therefore,
retained earnings and flow of debt are postulated to have positive
coefficients.

THEORETICAL CONCEPTS

Business organization require adequate capital to establish

business and operate their activites.The total capital of a business can be
classified as fixed capital and working capital. Fixed capital is required for
the purchase of fixed asset like building, land, machinery, furniture etc.fixed
capital is invested for long period, there for it is know as long term capital,
similarly, the capital, which is needed for investing in current asset is called
working capital .working capital Is the amount of capital that a business has
available to meet the day to day cash requirement of its operations. The
capital which is need for the regular operation of business is called working
capital. Working capital is also called circulating capital or revolving of
capital or short-term capital. Working capital is used for regular business
activates like for payment of wages, payament of rent and of other expenses.
Working capital is kept in the form of cash, debtor, row materials, inventory,
stock of finished goods, etc. Capital is what makes or breaks a business, and
no business can run successfully without enough capital to cover both shortand long-term needs. Maintaining sufficient levels of short-term capital is a
constantly ongoing challenge, and in todays turbulent financial markets and
uncertain business climate external financing has become both harder and
more costly to obtain. Companies are therefore increasingly shifting away
from traditional sources of external financing and turning their eyes towards
their own organizations for ways of improving liquidity. One efficient but
often overlooked way of doing so is to reduce the amount of capital tied-up
in operations, that is, to improve the working capital management of the
company. Working capital is a financial metric of operating liquidity which
describes the amount of cash tied up in operations and defines the short term
condition of a company. A positive working capital position is required for
the continuous running of a companys operations, i.e. to pay short term debt
obligations and to cover operational expenses. A company with a negative
.

working capital balance is unable to cover its short-term liabilities with its
current assets.

DEFINITION OF WORKING CAPITAL

The sum of the current asset is the working capital of the businessj.s mill
Working capital means current asset-mead, baker and malott
According to Weston/Brigham-working capital to a firms
investment is short term assets, such as cash amounts, receivables,
inventories, etc.

CONCEPT OF WORKING CAPITAL

MANAGEMENT

There are two concepts of working capital. Quantitative and

qualitative. Some people also define the two concepts as gross concept and
net concept. According to quantitative concept, the amount of working
capital refers to total of current assets. What we call current assets? Smith
called circulating capital. Current assets are considered to be gross working
capital in this concept.
The qualitative concept gives an idea regarding source of financing capital.
According to qualitative concept the amount of working capital refers to
excess of current assets over current liabilities. L.J. Guthmann defined
working capital as the portion of a firms current assets which are financed
from longterm funds.
The excess of current assets over current liabilities is termed
as Net working capital. In this concept Net working capital represents
the amount of current assets which would remain if all current liabilities
were paid. Both the concepts of working capital have their own points of
importance. If the objectives is to measure the size and extent to which
current assets are being used, Gross concept is useful; whereas in
.

evaluating the liquidity position of an undertaking Net concept becomes

pertinent and preferable.
Current assets It is rightly observed that Current assets have a short life
span. These types of assets are engaged in current operation of a business
and normally used for short term operations of the firm during an
accounting period i.e. within

Twelve months. The two important characteristics of such assets are, (I)
short life span, and (ii) swift transformation into other form of assets
Current liabilities The firm creates a Current Liability towards creditors
(sellers) from whom it has purchased raw materials on credit. This liability is
also known as accounts payable and shown in the balance sheet till the
payment has been made to the creditors.

Structure of Working Capital

The study of structure of working capital is another name for the
study of working capital cycle. In other words, it can be said that the study of
structure of working capital is the study of the elements of current assets viz.
inventory, receivable, cash and bank balances and other liquid resources like
short-term or temporary investments. Current liabilities usually comprise
bank borrowings, trade credits, assessed tax and unpaid dividends or any
other such things. The following points mention relating to various elements
of working capital deserves.
Inventory Inventory is major item of current assets. The management of
inventories raw material, goods-in-process and finished goods is an
important factor in the short-run liquidity positions and long-term
profitability of the company.

Raw material inventories Uncertainties about the future demand for

finished goods, together with the cost of adjusting production to change in
demand will cause a financial manager to desire some level of raw material
inventory. In the absence of such inventory, the company could respond to
increased demand for finished goods only by incurring explicit clerical and
other transactions costs of ordinary raw material for processing into finished
goods to meet that demand. If changes in demand are frequent, these order
costs may become relatively large. Moreover, attempts to purchases hastily
the needed raw material may necessitate payment of premium purchases
prices to obtain quick delivery and, thus, raises cost
of production. Finally, unavoidable delays in acquiring raw material may
cause the production process to shut down and then re-start again raising
cost of production. Under these conditions the company cannot respond
promptly to changes in demand without sustaining high costs. Hence, some
level of raw materials inventory has to be held to reduce such costs.
Determining its proper level requires an assessment of costs of buying and
holding inventories and a comparison with the costs of maintaining
insufficient level of inventories.
Work-in-process inventory This inventory is built up due to production
cycle. Production cycle is the time-span between introduction of raw
material into production and emergence of finished product at the
completion of production cycle. Till the production cycle is completed, the
stock of work-in-process has to be maintained
finished goods inventory Finished goods are required for reasons similar
to those causing the company to hold raw materials inventories. Customers
demand for finished goods is uncertain and variable. If a company carries no
finished goods inventory, unanticipated increases in customer demand would
require sudden increases in the rate of production to meet the demand. Such
rapid increase in the rate of production may be very expensive to
accomplish. Rather than loss of sales, because the additional finished goods
are not immediately available or sustain high costs of rapid additional
.

production, it may be cheaper to hold a finished goods inventory. The

flexibility afforded by such an inventory allows a company to meet
unanticipated customer demands at relatively lower costs than if such an
inventory is not held
The different elements or components of current assets and current liabilities
constitute the structure of working capital.

CURRENT LIABILITIES

Bank overdraft
Creditors
Outstanding Expenses
Bills Payable
Short-term Loans
Proposed Dividends
Provision for Taxation, etc.

CURRENT ASSETS

Cash and bank balance

Spare parts
Accounts receivable
Accrued income
Prepaid expenses
Short-term
investments

Circulation of Working Capital

At one given time both the current assets
and current liabilities exist in the business. The current assets and current
liabilities are flowing round in a business like an electric current. However,
The working capital plays the same role in the business as the role of heart
in human body. Working capital funds are generated and these funds are
circulated in the business. As and when this circulation stops, the business
becomes lifeless. It is because of this reason that he working capital is
known as the circulating capital as it circulates in the business just like blood
in the human body. Working Capital Cycle makes it clear that the amount
of cash is obtained mainly from issue of shares, borrowing and operations.
Cash funds are used to purchase fixed assets, raw materials and used to pay
to creditors. The raw materials are processed; wages and overhead expenses
are paid which in result produce finished goods for sale.
EXPENSE
WAGES

FINSHED
GOODS

MATERIALS

CREDITORS FOR
GOODS

DEBTORS
FOR GOODS

CASH

TAX
ISSUE OF

BORROWING

FUND OPREATION
INTEREST

SHARE
DIVIDENTThe

sale of goods may be for cash or credit. In the former case,

cash is directly received while in later case cash is collected from debtors.
Funds are also generated from operation and sale of fixed assets. A portion
of profit is used for payment of interest, tax and dividends while remaining
is retained in the business. This cycle continues throughout the life of the
business firm

Classification of Working Capital

The quantitative concept of Working Capital is known as gross

working capital while that under qualitative concept is known as net working
capital.
Working capital can be classified in various ways.
Conceptual classification There are two concept of working capital.
Quantitative and qualitative. The quantitative concept takes into account as
the current assets while the qualitative concept takes into account the excess
of current assets over current liabilities. Deficit of working capital exists
where the amount of current liabilities exceeds the amount of current assets.

(I) Gross Working Capital = Total Current Assets

(ii) Net Working Capital = Excess of Current Assets over Current
Liabilities
(iii) Working Capital Deficit = Excess of Current Liabilities over
Current Assets.

Classification on the basis of financial reports The information of

working capital can be collected from Balance Sheet or Profit and Loss
Account; as such the working capital may be classified as follows

Cash Working Capital This is calculated from the information

contained in profit and loss account. This concept of working capital
has assumed a great significance in recent years as it shows the
adequacy of cash flow in business.

Balance Sheet Working Capital The data for Balance Sheet

Working Capital is collected from the balance sheet. On this basis the
Working Capital can also be divided in three more types. gross
Working Capital, net Working Capital and Working Capital deficit.

Classification on the Basis of Variability Gross Working Capital can be

divided in two categories. (I) permanent or fixed working capital, and (ii)
Temporary, Seasonal or variable working capital. Such type of classification
is very important for hedging decisions.

Temporary Working Capital

Temporary Working Capital is

also called as fluctuating or seasonal working capital. This represents

additional investment needed during prosperity and favorable
seasons. It increases with the growth of the business. Temporary
working capital is the additional assets required to meet the
variations in sales above the permanent level.

Permanent Working Capital It is a part of total current assets

which is not changed due to variation in sales. There is always a
minimum level of cash, inventories, and accounts receivables which
.

is always maintained in the business even if sales are reduced to a

minimum. Amount of such investment is called as permanent
working capital. Permanent Working Capital is the amount of
working capital that persists over time regardless of fluctuations in
sales. This is also called as regular working capital

Importance of Working Capital Management

For smooth running an enterprise, adequate
amount of working capital is very essential. Efficiency in this area can help,
to utilize fixed assets gainfully, to assure the firms long- term success and to
achieve the overall goal of maximization of the shareholders, fund. Shortage
or bad management of cash may result in loss of cash discount and loss of
reputation due to non-payment of obligation on due dates. Insufficient
inventories may be the main cause of production held up and it may compel
the enterprises to purchase raw materials at unfavorable rates. Like-wise
facility of credit sale is also very essential for sales promotions. It is rightly
observed that many a times business failure takes place due to lack of
working capital. Adequate working capital provides a cushion for bad days,
as a concern can pass its period of depression without much difficulty.
Solvency of the business: Adequate working capital helps in
maintaining the solvency of the business by providing uninterrupted
of production.
Goodwill: Sufficient amount of working capital enables a firm to
make prompt payments and makes and maintain the goodwill.
Easy loans: Adequate working capital leads to high solvency and
credit standing can arrange loans from banks and other on easy and
favorable terms.
Cash discounts: Adequate working capital also enables a concern to
avail cash discounts on the purchases and hence reduces cost.
Regular Supply of Raw Material: Sufficient working capital
ensures regular supply of raw material and continuous production.

 Regular payment of salaries, wages and other day to day

commitments: It leads to the satisfaction of the employees and raises
the morale of its employees, increases their efficiency, reduces
wastage and costs and enhances production and profits.
Exploitation of favorable market conditions: If a firm is having
adequate working capital then it can exploit the favorable market
conditions such as purchasing its requirements in bulk when the
prices are lower and holdings its inventories for higher prices.
Ability to Face Crises: A concern can face the situation during the
depression.
Quick and regular return on investments:

Sufficient working

capital enables a concern to pay quick and regular of dividends to its

investors and gains confidence of the investors and can raise more
funds in future.
High morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall efficiency
in a business.

THE NEED FOR THE WORKING CAPITAL

The need for working capital arises due to the time gap between production
and realization of cash from sales. Working capital is must for every business
for purchasing raw-materials, semi finished goods, stores & spares etc and
the following purposes.
1. To purchase raw materials, spare parts and other component.
A manufacturing firm needs raw-materials and other components
parts for the purpose of converting them in to final products, for this
purpose it requires working capital. Trading concern requires less
working capital.
.

2. To meet over head expenses.

Working capital is required to meet recurring over head expenses
such as cost of fuel, power, office expenses and other manufacturing
expenses.
3. To hold finished and spare parts etc.
Stock represents current asset. A firm that can afford to maintain
stock of required finished goods, work in progress & spares in required
quantities can operate successfully. So for that adequate quantity of
working capital is required.
4. To pay selling & distribution expenses.
Working capital is required to pay selling & distribution expenses.
It includes cost of packing, commission etc.
5. Working capital is required for repairs & maintenance

both

machinery as well as factory buildings.

6. Working capital is required to pay wages, salaries and other charges.
7. It is helpful in maintain uncertainties involved in business field.

Meaning of Working Capital Management

The management of current assets, current

liabilities and inter-relationship between them is termed as working capital
management. Working capital management is concerned with problems that
arise in attempting to manage the current assets, the current liabilities and the
inter-relationship that exist between them. In practice, There is usually a
distinction made between the investment decisions concerning current assets
and the financing of working capital. Working capital is a financial metric
of operating liquidity which describes the amount of cash tied up in
.

operations and defines the short term condition of a company. A positive

working capital position is required for the continuous running of a
companys operations, i.e. to pay short term debt obligations and to cover
operational expenses. A company with a negative working capital balance is
unable to cover its short-term liabilities with its current assets

Two aspects of working capital management

(1) To determine the magnitude of current assets or level of working
capital and
(2) To de termine the mode of financing or hedging decisions.

Significance of Working Capital Management

Funds are needed in every business for carrying
on day-to-day operations. Working capital funds are regarded as the life
blood of a business firm. A firm can exist and survive without making profit
but cannot survive without working capital funds. If a firm is not earning
profit it may be termed as sick, but, not having working capital may cause
its bankruptcy working capital in order to survive. The alternatives are not
pleasant. Bankruptcy is one alternative. Being acquired on unfavorable term
as another. Thus, each firm must decide how to balance the amount of
working capital it holds, against the risk of failure. Working capital has
acquired a great significance and sound position in the recent past for the
twin objects of profitability and liquidity. In period of rising capital costs and
scare funds, the working capital is one of the most important areas requiring
management review. It is rightly observed that, Constant management
review is required to maintain appropriate levels in the various working
capital accounts.Mainly the success of a concern depends upon proper
management of working capital so working capital management has been
looked upon as the driving seat of financial managers. It consumes a great
deal of time to increase profitability as well as to maintain proper liquidity at
minimum risk. There are many aspects of working capital management
which make it an important function of the finance manager. In fact we need
to know when to look for working capital funds, how to use them and how
measure, plan and control them
A study of working capital management is very important
foe internal and external experts. Sales expansion, dividend declaration,
plants expansion, new product line, increase in salaries and wages, rising
price level, etc., put added strain on working capital maintenance. Failure of
any enterprise is undoubtedly due to poor management and absence of
management skill

Importance of working capital management stems from two

reasons (i) A substantial portion of total investment is invested in current
assets, and (ii) level of current assets and current liabilities will change
quickly with the variation in sales. Though fixed assets investment and longterm borrowing will also response to the changes in sales, but its response
will be weak.

Principles of Working Capital Management

Principles of the risk variation Risk here refers to the

inability of firm to maintain sufficient current assets to pay its
obligations. If working capital is varied relative to sales, the
amount of risk that a firm assumes is also varied and the
opportunity for gain or loss is increased. In other words, there is
a definite relationship between the degree of risk and the rate of
return. As a firm assumes more risk, the opportunity for gain or
loss increases. As the level of working capital relative to sales
decreases, the degree of risk increases. When the degree of risk
increases, the opportunity for gain and loss also increases. Thus,
if the level of working capital goes up, amount of risk goes
down, and vice-versa, the opportunity for gain is like-wise
adversely affected.
Principle of equity position According to this principle, the
amount of working capital invested in each component should
be adequately justified by a firms equity position. Every rupee
invested in the working capital should contribute to the net
worth of the firm.
Principle of cost of capital This principle emphasizes that
different sources of finance have different cost of capital. It
should be remembered that the cost of capital moves inversely
with risk. Thus, additional risk capital results in decline in the
cost of capital.
Principle of maturity of payment A company should make
every effort to relate maturity of payments to its flow of
internally generated funds. There should be the least disparity
.

between the maturities of a firms short-term debt instruments

and its flow of internally generated funds, because a greater risk
is generated with greater disparity. A margin of safety should,
however, be provided for any short-term debt payment.

Operating Cycle
The duration of time required to complete the following
sequence of events, in case of manufacturing firm, is called the operating
cycle.
1. Conversion of cash into raw materials.
2. Conversion of raw materials into work-in-progress.
3. Conversion of work in process into finished goods
.
4. Conversion of finished goods into debtors and bills
receivables through sales.
5. Conversion of debtors and bills receivables into cash.

The length of cycle will depend on the nature of business.

Non manufacturing concerns, service concerns and financial concerns will
not have raw material and work-in-process so their cycle will be shorter.
Financial Concerns have a shortest operating cycle.

B IL L S
R E C E IVA
BLE

C
A
S
H

RAW
M ATE R
IA L S

DE
BT
ORS
F IN IS H E
D
GOODS

Duration of the Operating Cycle

The duration of the operating cycle is equal to the sum of the duration of
each of these stages less the credit period allowed by the suppliers of the
firm. In symbols,
O=R+W+F+DC
Where,
O = duration of operating cycle.
R = raw material storage period.
W= work-in-process period.
F= finished goods storage period.
D=debtors collection period, and
C = creditors payment period.

OBJECTIVES OF WORKING CAPITAL

MANAGEMENT
Effective management of working capital is means of accomplishing the
firms goal of adequate liquidity. It is concerned with the administration of
current assets and current liabilities. It has the main following objectives-

To maximize profit of the firm.

To help in timely payment of bills.
To maintain sufficient current assets.
To ensure adequate liquidity of the firms.
.

 It protects the solvency of the firm.

To discharge current liabilities.
To increase the value of the firm.
To minimize the risk of business.

Determinants of Working Capital

There are no set rules or formulas to determine the working capital
requirement of a firm. A number of factors influence the need and quantum
of the working capital of a firm

Nature of industry The composition of an asset is related to the size of a

business and the industry to which it belongs. Small companies have smaller
proportion of cash, requirements and inventory than large corporations. Need
of working capital is thus determined by the nature of an enterprise.
Demand of creditors Creditors are interested in the security of loans. They
want their advances to be sufficiently covered. They want the amount of
security in assets which are greater than liabilities.
Cash requirements Cash is one of the current assets which are essential
for the successful operations of the production cycle. Cash should be
adequate and properly utilized. A minimum level of cash is always needed to
keep the operations going.
General nature of business The general nature of a business is an
important determinant of the level of the working capital. Working capital
requirements depends upon the general nature and its activity on work. They
are relatively low in public utility concerns in which inventories and
receivables are rapidly converted into cash. Manufacturing organizations,
however, face problems of slow turn-over of inventories and receivables, and
invest large amount in working capital.

Time- The level of working capital depends upon the time required to
manufacture goods. If the time is longer, the amount of working capital
.

required is greater. Moreover, the amount of working capital depends upon

inventory turnover and the unit cost of goods that are sold. The greater this
cost, the larger is the amount of working capital.

Volume of sales This is the most important factor affecting the size and
component of working capital. A firm maintains current assets because they
are needed to support the operational activities which results in sales. The
volume of sales and the size of the working capital are directly related to
each other. As the volume of sales increases, there is an increase in the
investment of working capital in the cost of operations, in inventories and in
receivables.
Terms of purchases and sales If the credit terms of purchases are more
favorable and those of sales less liberal, less cash will be invested in
inventory. With more favorable credit terms, working capital requirements
can be reduced as a firm gets time for payment to creditors or suppliers.

Inventory turnover If the inventory turnover is high, the working capital

requirements will be low. With good and efficient inventory control, a firm is
able to reduce its working capital requirements.

Receivables turnover It is necessary to have effective control over

receivables. Prompt collection of receivables and good facilities for setting
payables result into low working capital

Business cycle Business expands during periods of prosperity and decline

during a period of depression uirements. Consequently, more working capital
is required during periods of prosperity and less during the periods of
depression.

Variation in sales A seasonal business requires the maximum amount of

working capital for a relatively short period of time.
.

Production cycle The time taken to convert raw material into finished
products is referred to as the production cycle or operating cycle. The longer
the duration of

Production cycle, the greater is the requirement of working capital. Utmost

care should be taken to shorten the period of the production cycle in order to
minimize working capital requirements.

Liquidity and profitability If a firm desires to take a greater risk for

bigger gains or losses, it reduces the size of its working capital in relation to
its sales. If it is interested in improving its liquidity, it increases the level of
its working capital. However, this policy is likely to result in a reduction of
sales volume and, therefore, of profitability. A firm, therefore, should choose
between liquidity and profitability and decide about its working capital
requirements accordingly.

Profit planning and control The level of working capital is decided by

management in accordance with its policy of profit planning and control.
Adequate profit assists in the generation of cash. It makes it possible for
management.

Market Conditions-The level of competition existing in the market also

influences working capital requirement. When competition is high, the
company should have enough inventories of finished goods to meet a certain
level of demand. Otherwise, customers are highly likely to switch over to
competitors products. It thus has greater working capital needs. When
competition is low, but demand for the product is high, the firm can afford to
.

have a smaller inventory and would consequently require lesser working

capital. But this factor has not applied in these technological and competitive
days

Dividend Policy-Another appropriation of profits which has a bearing on

working capital is dividend payment. Payment of dividend utilizes cash
while retaining profits acts as a source as working capital Thus working
capital gets affected by dividend policies

Growth and Expansion-The growth in volume and growth in working

capital go hand in hand, however, the change may not be proportionate and
the increased need for working capital is felt right from the initial stages of
growth.

Profit Level-Profit level also affects the working capital requirements as a

concern higher profit margin results in higher generation of internal funds
and more contributing to working capital

ANALYSIS METHODS

RATIO ANALYSIS- Ratio simply refers to one number expressed in

terms of another number. It shows numerical relationship between two
figures, it is found by dividing one number by the other number. According
to Wixon, Kell and Bedford, a ratio is an expression of the quantitative
relationship between two numbers.

Ratio analysis is one of the most powerful tools used for

analyzing financial statements. It is done to develop meaningful
relationship between individual items or group of items usually shown in
the periodical financial statements published by the concern.

Ratio analysis is the process of establishing and

interpreting various ratios. Various types of ratios are calculated for ratio
analysis. With the help of these ratios the financial statements can be
analyzed more clearly and financial position of one firm can be
compared with that of other firms. Ratio analysis is a widely used
technique of analyzing financial statements. An analysis of financial
statements with the help of ratios is termed as ratio analysis. Ratio
analysis may be defined as the process of computing and interpreting
relationship between the items of the financial statements for arriving at
conclusions about the financial position and performance of an
enterprise.

ADVANTAGES
It simplifies the financial statements.
It helps in comparing companies of different size with each other.
It helps in trend analysis which involves comparing a single
company over a period.
It highlights important information in simple form quickly. A user
can judge a company by just looking at few numbers instead of
reading the whole financial statements.

LIMITATIONS
Different companies operate in different industries each having
different environmental conditions such as regulation, market
.

structure, etc. Such factors are so significant that a comparison of

two companies from different industries might be misleading.
Financial accounting information is affected by estimates and
assumptions. Accounting standards allow different accounting
policies, which impairs comparability and hence ratio analysis is
less useful in such situations.
Ratio analysis explains relationships between past information
while users are more concerned about current and future
information.

TYPES OF RATIOS

1) Current Ratio:
The current ratio is the ratio of total current assets to total current
liabilities. It is calculated by dividing current assets by current liabilities:

Current assets
Current Ratio = ________________
Current liabilities

The current assets of a firm, as already stated, represent those assets

which can be, in the ordinary course of business, converted into cash within
a short period of time, normally not exceeding one year and include cash and
bank balances, marketable securities, inventory of raw materials, semifinished (work-in-progress) and finished goods, debtors net of provision for
bad and doubtful debts, bills receivable and prepaid expenses. The current
liabilities defined as liabilities which are short-term maturing obligations to
be met, as originally contemplated, within a year, consist of trade creditors,
.

bills payable, bank credit, and provision for taxation, dividends payable and
outstanding expenses.

2) Quick Ratio
The liquidity ratio is a measure of liquidity designed to overcome this
defect of the current ratio. It is often referred to as quick ratio because it is a
measurement of a firms ability to convert its current assets quickly into cash
in order to meet its current liabilities. Thus, it is a measure of quick or acid
liquidity.
The acid-test ratio is the ratio between quick assets and current liabilities
and is calculated by dividing the quick assets by the current liabilities.

Quick assets
Quick Ratio = ____________________
Current liabilities

The term quick assets refers to current assets which can be converted into
cash immediately or at a short notice without diminution of value. Included
in this category of current assets are ( i ) cash an bank balance ; (ii) shortterm marketable securities and (iii) debtors/receivables. Thus, the current
which are included are: prepaid expenses and inventory. The exclusion of
expenses by their very nature are not available to pay off current debts. They
merely reduce the amount of cash required in one period because of payment
in a prior period.

3) Cash Ratio:
.

This ratio is also known as cash position ratio or super quick ratio. It is a
variation of quick ratio. This ratio establishes the relationship absolute liquid
asserts and current liabilities. Absolute liquid assets are cash in hand, bank
balance and readily marketable securities. Both the debtors and bills
receivable are excluded from liquid assets as there is always an uncertainty
with respect to their realization. In other words, liquid assets minus debtors
and bills receivable are absolute liquid assets. In this form of formula:

Cash in hand & at bank + Marketable securities

Cash Ratio = ________________________________________
Current liabilities

Activity ratios;
Activity ratios are concerned with measuring the efficiency in asset
management. These ratios are also called efficiency ratios or asset utilization
ratios. The efficiency with which the assets are used would be reflected in
the speed and rapidity with which assets are converted into sakes. The
greater is the rte of turnover or conversion, the more efficient is the
utilization of asses, other things being equal. For this reason, such ratios are
designed as turnover ratios. Turnover is the primary mode for measuring the
extent of efficient employment of assets by relating the assets to sales. An
activity ratio may, therefore, be defined as a test of the relationship between
sales and the various assets of a firm.

4) Debtors turnover ratio

Debtors turnover ratio indicates the velocity of debt collection of a firm. In
simple words it indicates the number of times average debtors (receivable)
are turned over during a year. The two basic components of the ratio are net

credit annual sales and average trade debtors and formula can be written as
follows.

Net credit sale

Debtors turnover ratio =
______________________________________
Average debtors + average bills
receivables

5) Average collection period:

In order t know the rate at which cash is generated by turnover of
receivables, the debtors turnover ratio is supplemented by another ratio viz.,
average

collection

period.

The

average

collection

period

states

unambiguously the number of days average credit sales tied up in the

amount owed by the buyers. The ratio indicates the extent to which the debts
have been collected in time. In other words, it gives the average collection
period. Prompt collection of book debts will release such funds which may,
then, put to some other use. The ratio may be calculate by

360 days
Average collection period = _____________________
Debtors turnover ratio

6) Creditors turnover
Creditors turnover ratio shows the relationship between net credit purchase
and average creditors including bills payable. this ratio indicates the number
of times the creditors are paid. Creditors turnover ratio is also called
payable turnover ratio. It is computed by the following formula

Net credit purchase

Creditors turnover ratio =
_________________________________
Average creditors + average bill
payable

7) Average payment period

Average payment period is related to with and dependent upon creditors
turnover ratio. Average payment period means the credit period enjoyed by
the firm in paying creditors. In short, it means creditors turnover ratio
expressed in month or days. it is also known as creditors velocity.

360 days/12 months

Average payment period =
_____________________________
Creditors turnover ratio

8) Inventory Turnover Ratio:

This ratio indicates the number of times inventory is replaced during the
year. It measures the relationship between the cost of goods sold and the
inventory level. The ratio can be computed in

Cost of goods sold

Inventory Turnover Ratio = ___________________
.

Average Inventory

9) Inventory Holding Period

This period measures the average time taken for clearing the stocks. It
indicates that how many days inventories take to convert from raw material
to finished goods. Inventory management involves a retailer seeking to
acquire and maintain a proper merchandise assortment while ordering,
shipping, handling, and related cost are kept in cheek. System and processes
that identify inventory requirements, set targets, provide replenishment
techniques and report actual and projected inventory.

Inventory Holding Period =

360 days/12 months

Inventory turnover ratio

10) Working Capital Turnover Ratio:

This ratio, should the number of times the working capital results in sales.
In other words, this ratio indicates the efficiency or otherwise in the
utilization of short tern funds in making sales. Working capital means the
excess of current over the current liabilities. In fact, in the short run, it is the
current liabilities which play a major role. A careful handling of the short
term assets and funds will mean a reduction in the amount of capital
employed, thereby improving turnover. The following formula is used to
measure this ratio:
.

Sales
Working capital turnover ratio = _____________________
Net Working Capital

Schedule of changes in working capital

Before preparing fund flow, it is better to prepare first

the schedule of changes in working capital. The schedule of changes in
working capital shows the changes in individual items of current assets and
current liabilities between two years, and their effect on working capital. In
this statement, first names of current assets are written. Then amounts of
previous year are recorded against each current asset. In next the column
amounts of current year are recorded. After this, figures of previous year are
compared with those of current year and increase or decrease in each of the
current asset is noted. The increase in current asset means increase in
working capital. Hence, it is recorded in the Increase column. Decrease in
current assets means decrease in working capital. Hence, it is recorded in the
decrease column. Then the total of the current assets of the previous year and
that of current year taken. In the same manner, current liabilities are
recorded. The information relating to the changes in current natured accounts
between two periods of time presented in the form of a statement is what we
call the schedule/statement of changes in working capital. The term "Flow of
Funds" refers to changes or movement of funds or changes in working
capital in the normal course of business transactions. The changes in
working capital may be in the form of inflow of working capital or outflow
of working capital. In other words, any increase or decrease in working
.

capital when the transactions take place is called as "Flow of Funds." If the
components of working capital results in increase of the fund, it is known as
Inflow of Fund or Sources of Fund. Similarly, if the components of working
capital effects in decreasing the financial position it is treated as Outflow of
Fund.

Trend analysis

Trend simply means the general tendency. Analysis of these general

tendencies is called trend analysis. In the contest of financial analysis means

the analyzing general tendencies in the each item in the financial statement
on the basis of the data of the current year. In short, comparing the past data
over a period of time with a base year is called trend analysis. Under this
technique, information for a number of years is taken up and one year is
taken as base year. Each item of this year is taken as 100 and that basis the
percentages for other years are calculated. The trend percentages are
generally computed for major items in the statement. In business, trend
analysis is typically used in two ways, Revenue and cost analysis. Revenue
and cost information from a company's income statements can be arranged
on a trend line for multiple reporting periods and examined for trends and
inconsistencies. For example, a sudden spike in expense in one period
followed by a sharp decline in the next period can indicate that an expense
was booked twice in the first month. Thus, trend analysis is quite useful for
examining preliminary financial statements for inaccuracies, to see if
.

adjustments should be made before the statements are released for general
use. Investment analysis an investor can create a trend line of historical share
prices, and use this information to predict future changes in the price of a
stock. The trend line can be associated with other information for which a
cause-and-effect relationship may exist, to see if the causal relationship can
be used as a predictor of future stock prices. Trend analysis can also be used
for the entire stock market, to detect signs of an impending change from a
bull to a bear market, or the reverse.

RESEARCH METHODOLOGY

Research Methodology is the systematic, theoretical analysis of the methods

applied to a field of study. It comprises the theoretical analysis of the body of
methods and principles associated with a branch of knowledge. The process
used to collect information and data for the purpose of making business
decisions.

the

methodology

may

include

publication

research,interviews,surveys and other research techniques ,and could include

both

present

and

historical

information

Research can be also be defined as search for knowledge, systematic and

scientific search for getting relevant answers on any taken up specific topic,
scientific enquiry in to a subject, research is a movement from the unknown
to the known, it is the voyage of discovery.accourding to bulmer,research is
primarily committed to establishing systematic,reliableand valid knowledge
about the social world. Research in common parlance refers to a search for
knowledge. Once can also define research as a scientific and systematic
search for pertinent information on a specific topic. In fact, research is an art
of scientific investigation.resarch methods and techniques are useful for the
conversion of symbolic behavior of the individuals in to scientific data. They
are helpful for classification and organization of the unorganized mass of the
data. They help for giving the data a scientific shape and organization on
scientific .through research methods and techniques, changes that have taken
place during a particular period can be understood. Research methods help to
study trends of those changes also .so research methods is a technique for
describing trends in communication.

RESEARCH PROCESS
Therefore research requires proper planning .planning of research means
deciding the question to be studied, setting the objective of the study and
determining the means of achieving those objectives. Research process
consists of series of actions or steps necessary to effectively carry out
research and the desired sequencing of these steps.

The steps are,

Formulating the research problem
Formulating the research problem and hypothesis acts as a major
step or phase in the research methodology. In research, the foremost step
that comes into play is that of defining the research problem and it
becomes almost a necessity to have the basic knowledge and
understanding of most of its elements as this would help a lot in making
a correct decision. The research problem can be said to be complete only
if it is able to specify about the unit of analysis, time and space
boundaries, features that are under study, specific environmental
conditions that are present in addition to prerequisite of the research
process.
Extensive Literature Review

A literature review is a text of a scholarly paper, which includes the current

knowledge including substantive findings, as well as theoretical and
methodological contributions to a particular topic. Literature reviews
use secondary source, and do not report new or original experimental work.

The process of reading, analyzing, evaluating, and summarizing scholarly

materials about a specific topic.
The results of a literature review may be compiled in a report or they may
serve as part of a research article, thesis, or grant proposal

Development of Working Hypothesis

After an extensive literature survey, a researcher should state in
clear terms the working hypothesis or hypotheses. Working hypothesis is
tentative assumption made in order to draw out and test its logical or
empirical consequences. As such the manner in which research
hypotheses are developed is particularly important since they provide the
focal point for research. They also affect the manner in which tests must
be conducted in the analysis of data and indirectly the quality of data
which is required for the analysis. In most types of research, the
development of working hypothesis plays an important role. Hypothesis
should be very specific and limited to the piece of research in hand
because it has to be tested. The role of the hypothesis is to guide the
researcher by delimiting the area of research and to keep him on the right
track. It sharpens his thinking and focuses attention on the more
important facets of the problem. It also indicates the type of data
required and the type of methods of data analysis to be used.
Preparing the Research Design
Once the research problem has been identified, the next task
for the researcher is preparing the research design. According to Russell
Ackoff, research design is the process of making decisions before a
situation arises in which the decision has to be carried out. It is the
conceptual framework within which the research would be carried out. It is a
.

key aspect as it binds the research project together. Its aim is to provide for
the collection of relevant information with minimal expenditure of effort,
time and money. But, whether this can be achieved depends upon a large
extent on the research purpose, which is classified into four categories: (i)
Exploratory; (ii) Description; (iii) Diagnosis; and (iv) Experimentation. For
an exploratory research studY

Determining Sample Design

A sample design is the framework, or road map, that serves as the
basis for the selection of a survey sample and affects many other
important aspects of a survey as well. In a broad context, survey
researchers are interested in obtaining some type of information through
a survey for some population, or universe, of interest. One must define a
sampling frame that represents the population of interest, from which a
sample is to be drawn. The sampling frame may be identical to the
population, or it may be only part of it and is therefore subject to some
under coverage, or it may have an indirect relationship to the population.
The sample design provides the basic plan and methodology for
selecting the sample. A sample design can be simple or complex
Collecting the Data
There are two sources of data. Primary data collection uses
surveys, experiments or direct observations. Secondary data collection
may be conducted by collecting information from a diverse source of
documents or electronically stored information. U.S. census and market
studies are examples of common sources of secondary data. This is also
referred to as "data mining
Key Data Collection Techniques
o Survey
o Questionnaires
.

o Interviews
o Panel questionnaire designs
Execution of the Project
After the researcher has collected the data, the next step in the
research process is the execution of the project (i.e., implementation
phase of the project). This step is very important in the research process
as it ensures that the research is being executed systematically and in
time. If the execution of the research proceeds on correct lines, then the
collected data would be adequate and dependable. If structured
questionnaires are to be used for the survey, then data, i.e., both
questions and the possible answers, may be machine-coded for easy and
convenient usage. If interviewers are to collect data, then they should be
accordingly selected, and proper training should be given to them. The
researcher should ensure that the survey is under statistical control, i.e.,
the collected information is in agreement with the pre-defined standard
of accuracy.
Analysis of Data
Analysis
transforming,

of

and

data is

process

modeling data with

of
the

inspecting,
goal

of

cleaning,

discovering

useful information suggesting conclusions, and supporting decisionmaking. For the purpose of analysis of data, a number of operations are
to be done. It includes establishment of categories, the application of
these categories to raw data through coding, tabulation and making
inferences. Researcher should classify the raw data into some purposeful
and usable categories. Coding operation is done at this stage through
which the categories of data are transferred into symbols that may be
tabulated and counted. The next process is tabulation. Large volume of
data collected is condensed to few groups and tables for further analysis.
Computers can be used for this purpose.

 Hypothesis Testing
A process by which an analyst tests a statistical hypothesis. The
methodology employed by the analyst depends on the nature of the data
used, and the goals of the analysis. The goal is to either accept or reject
the null hypothesis after analyzing data; the next job of the researcher is
to test the hypothesis which is formulated by the researcher earlier. The
researcher wants to see whether the analyzed data supports hypothesis or
not. There are various tests which can be applied for testing hypothesis.
They are chi-square test, F test, T test, etc. The technique to be chosen
depends upon the convenience, availability of data, exposure of various
methods, etc.
Generalizations and Interpretations
Interpretation refers to the task of drawing inferences from the
collected facts after an analytical and or experimental study. In fact, it is
a search for broader meaning of research findings. The task of
interpretation has two major aspects viz., the effort to establish
continuity in research through linking the results of a given study with
those of another and the establishment of some explaflat concepts. A
generalization is taking one or a few facts and making a broader, more
universal statement. If all the girls you know play with dolls, you might
make the generalization that all girls play with dolls. Scientists try to
make generalizations based on research the more data they have, the
more accurate the generalization.
Preparation of the Report or Thesis
The last step of the research is to state the results of research or
write the conclusions derived from the study. The researcher prepares a
report and it indicates what he has done to study the concerned problem.

RESEARCH DESIGN
Research design is a map it help to lead the direction of research
activity. Identifying the right design. it can be consider as a master plan.
It is important this master specifies the methods and procedures for
colleting and amassing for needed and colleting and analysising for
needed and required information data .so it achieving as a guide for the
research. In fact the research design is the conceptual structure with the
research

is

conducted .it

constitutes

the blue print

for the

collection,measurement,and analysis of data.reserach must continue a

clear statement of the research problems , prooceduures,and technique to
be used for gathering information ,the population to be and methods to
be used in processing and analyzing data

There are three types of research design.

o Exploratory research design
o Descriptive research design
o Causal research design

EXPLORATORY RESEARCH DESIGN

It is the simplest and most loosely structed

designs. The basic objective of the study .is to explore and obtain clarity
about the problem situation. It is flexible in it is approach and mostly
involves a qualitative investigation .the sample size is not strictly
reparative and at times it might only involve unstructured interviews
with a couple of subject experts. an exploratory design is the one where a
.

preliminary study of an unfamiliar problem more precisely ,clarifying

concepts gathering explanation and formulating the hypothesis.

DESCRIPTIVE RESEARCH DESIGN

Descriptive research is used for conducting research
in more detailed manner. It includes survey and fact finding enquiries of
different kinds. The main purpose of descriptive research is the
description of the state of affairs as it exists at present. The main
characteristic of this type of research is that the researcher has no control
over the variables. He can report what has happened or what is
happening.
The descriptive research begins with the study of the
past. The main objective of descriptive study is to acquire knowledge.
Descriptive research design is used as it contains detailed study. It also
has a in-depth study structure. It is a plan to support descriptive research.
Researchers are also done by using statistical tools.
The main objective of descriptive studies is to depict accurately the
distinctiveness of a particular group or situation .it is a fact finding
investigation with adequate interpretation this is mainly guided by
theoretical hypothesis
The researcher has selected exploratory research design

CAUSAL RESEARCH DESIGN

This study is mainly focused with the identification of the variable
associated with the problem in hand, measuring their influence and devising
means/modes to control such influence. This study demands much precision
and provision to control bias and errors. This study aimed at reprieving
complete and accurate information about the problem situation.
Exploratory design helps to explore new ideas or knows ledge. It is helpful
to explore un explore areas .it can be fixbale.accourding to changing

situations, it is also helpful to explore and obtain clearly about that problem
situation so exploratory design is the most effective design.

DATA COLLECTION METHODS

Primary data and secondary data are used for collecting data that are
necessary for the project.

Primary dataPrimary data is the data that is collected by the researcher for the first time.
The primary data is collected through personal interview and question and
through observation.

Sources of primary data; the researcher has collected the primary data for the
project through personal interview with opticians and through observation

Secondary data
Secondary data are those data that are collected through secondary sources
ie, magazines, newspapers, published documents, internet, etc

Sources of secondary data; the researcher has collected secondary data from
internet reference texts, magazines and audited financial statements etc

VA RIABLES UNDER STUDY

In any research problem under study deals with relation between

variables. it researcher want to study .how far the changes in one variables
has effects on other variables

DEPENDENT VARIABLE
Dependent variables are those variables, which depends on other factors.
Dependent variables are not controlled or manipulated in any way, but
instead are simply measured or registered. These vary in relation to the
independent variables, and while results can be predicted, the data is always
measured. The dependent variable is the response that is measured.
The dependent variable intentionally left alone. It can vary at unknown rate.
The dependent variable is based on the presumed effect
Dependent variable

: Working capital Management

INDEPENDENT VARIABLE
Independent variables are those that are not depending upon other factors.
The independent variable is the variable that is varied or manipulated by the
researcher. Variable the experimenter manipulates. assumed to have a
direct effect on the dependent variable. An independent variable is the
presumed cause. These variables are ones that are more or less controlled.
Scientists manipulate these variables as they see fit. They still vary, but the
variation is relatively known or taken into account. Often there are many
independent variables in a given study
Dividend policy
.

 Nature of the business

Size of the business
Price level changes
Profit level
Inventory turnover
Raw materials
Current assts
Seasonal variations
Business cycle fluctuations
Growth & expansion of business
Turnover of circulating capital
Terms at purchase & sale
Profit margin
Growth opportunities
Over investment
Under investment
Perfect capital market
Optimum capital structure
Trade off theory

PERIOD OF STUDY
The duration of the study is five year balance sheet (2010-2104)

LIMIATIONS OF THE STUDY

This study is conducted to only the five years data of TRINITY

PHARMACEUTICAL PVT LTD
Many facts and data such that they are not to be disclosed because of
the confidential nature of the same
Since the financial matters are sensitive in nature the same could not
acquired easily.

 CURRENT RATIO
Current Ratio = Current Assets/ Current Liabilities

YEAR
2010
2011
2012
2013
2014

CURRENT
ASSETS
7371622
8006486
6319333
6793207
7327445

CURRENT
LIABILITIES
3987537
4759773
7361848
7853156
8672639

CURREN
T RATIO
1.84
1.68
0.85
0.86
0.84

2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0

2010

INTERPRETATION

2011

2012

2013

2014

The ideal current ratio is 2:1.the current ratio of the company is got
satisfactory because every year it shows the decrease trend. Decrease in
current ratio indicates that of the company needs improvement in liquidity
position

2) LIQUID RATIO
Liquid Ratio = Liquid Asset / Current Liability
YEAR
2010
2011
2012
2013
2014

LIQUID
ASSET
3690320
4397844
3923729
4027179
4807521

CURRENT
LIABILITY
3987537
4759773
7361848
7853156
8672639

LIQUID RATIO
0.92
0.92
0.53
0.51
0.55

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2010

INTERPRETATION
.

2011

2012

2013

2014

The ideal liquid ratio is 1:1. it is consider as the company can easily meet its
current liabilities. But the company liquid ratio is not satisfactory. In the year
2010, 2011 is almost equal to the ideal ratio. But 2012 onwards it become
continuously falling and last year it shows increase

o ABSOLUTE LIQUID RATIO

Absolute liquid ratio =absolute liquid asset/ Current Liability
YEAR

2010
2011
2012
2013
2014

Cash In
Hand And
Bank
/Marketable
Securities
1974942
1809580
358715
301571
367431

CURRENT
LIABILITY

ABSOLUTE
LIQUID
RATIO

3987537
4759773
7361848
7853156
8672639

0.49
0.38
0.048
0.038
0.042

absolute liquid ratio

0.6
0.5
0.4
0.3
0.2
0.1
0
2010

2011

2012

2013

2014

INTERPRETATION
The ideal absolute liquid ratio 1:2.This test is more vigorous measure of a
firms liquidity position .absolute liquid ratio of this company is not
satisfactory in the whole year
.

o WORKING CAPITAL TURNOVER RATIO

Working Capital Turnover Ratio= Net sales / Working Capital

YEAR

2010
2011
2012
2013
2014

NET SALES

15374290
17631404
21254284
21257236
21597890

WORKING
CAPITAL

3384085
3246713
1042515
1059949
1345194

WORKING
CAPITAL
TURNOVER
RATIO
4.54
5.43
20.38
20.05
16.05

25

20

15

10

0
2010

2011

2012

2013

2014

INTERPRETATION
The working capital turnover ratio indicates the number of times the
utilization of working capital in the process of doing business. The working
capital of the company is not effect in the years 2012-2013

o Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of goods sold/ Average Inventory
YEAR

COST OF GOODS
SOLD

AVERAGE STOCK

14239282
16846978
21442383
22742871
20588433

3648775
3644972
3002123
2580816
2642976

2010
2011
2012
2013
2014

INVENTORY
TURNOVER
RATIO
3.9
4.6
7.14
8.8
7.7

10
9
8
7
6
5
4
3
2
1
0
2010

2011

2012

2013

2014

INTERPRETATION
Year 2013 showed the longest stock turnover due to increased sales. high
inventory turnover ratio indicates effect management of inventory because
when sales are frequent lesser amount of money required for financing the
inventory

o Inventory Holding Period

Inventory Holding Period =365 days or12 months/ Inventory
turnover ratio
YEAR

2010
2011
2012
2013
2014

365 DAYS
OR 12
MONTHS
365
365
365
365
365

INVENTORY
TURNOVER
RATIO
3.9
4.6
7.14
8.8
7.7

INVENTORY
HOLDING
PERIOD
31
80
52
42
48

90
80
70
60
50
40
30
20
10
0
2010

2011

2012

2013

2014

INTERPRETATION
The year 2010 shows the short cost turnover period due to high inventory
turnover and high frequency of conversion of stock to sales. Year 21011

shows longer conversion period due to low inventory turnover ratio and
comparatively lower conversion of stock to sales

o Debtors Turnover Ratio

Debtors turnover ratio= Net credit sale/ Average debtors
YEAR

NET CREDIT
SALES

2010
2011
2012
2013
2014

15374270
17631404
21254284
21236257
21597890

DEBTORS
TURNOVER
RATIO

AVERAGE
DEBTORS
1656852
1900674
2982890
3517775
4007805

9.2
9.3
7.1
6.04
5.3

10
9
8
7
6
5
4
3
2
1
0
2010

2011

2012

2013

2014

INTERPRETATION
Debtors turnover ratio shows quickly debtors are converted into cash.
Generally a turnover ratio higher turnover ratio shoes the efficiency in
collection form debtors. from the above graph it shows that the debtors
turnover ratio is decrease every year .

o Average collection period

Average collection period =365 days/ Debtors turnover ratio

YEAR
2010
2011
2012
2013
2014

365DAYS
365
365
365
365
365

DEBTORS
TURNOVER RATIO

9.2
9.3
7.1
6.04
5.3

AVERAGE
COLLECTION
PERIOD

40
39
52
61
69

70
60
50
40
30
20
10
0
2010

2011

2012

2013

INTERPRETATION
The figures shows the average number of days that elapsed between the
receipt of the actual payment of invoice .the table shows the debtors
collection period is increased every year receipt in 2011
.

2014

STATEMENT SHOWING CHANGES IN WORKING CAPITAL FOR

THE
YEAR 2010-2011
2010

2011

Changes in working
capital

Particulars

increase

decrease

CURRENT ASSETS
Inventories

3681302

3608642

Sundry debtors

1462382

2338966

Other C.A

252995

244297

Cash & Bank

118079

Loans

1856863

876584

72660

3698
66147

5193
2

1743433

113430

Total of current asset

7371621

8006485

3982807

4738029

755222

4730

21744

17014

3987537

4759773

3384084

3246712 137372

CURRENT LIABILITIES

Other current liabilities

Provision for income tax
Total current liability

Working capital (A - B)
Increase in working capital
TOTAL

137372
3384084

INTERPRETATION
.

3384084

1013956

1013456

The current assets of the company increased from 7371621to8006485 during

2010-2011.it also show increase in the current liability from 3987537to
4759773.in this decreased due to poor management of current liabilities
STATEMENT SHOWING CHANGES IN WORKING CAPITAL FOR
THE YEAR 2011-2012
2011

2012

Particulars

Changes in working
capital
increase

decrease

CURRENT ASSETS
Inventories
Sundry debtors

3608642

2395604

1213038

2338966

3395454

1056488

Other C.A

249297

169557

13772

Cash & Bank

66147

Loans

1743433

7973
8

79919
278716

1464638

Total of current asset

8006485

6319333

4738028

6025237

1287208

21744

21744

17014

4759773

7361848

3246712

(1042515)

CURRENT LIABILITIES

Other current liabilities

Provision for income tax
Total current liability

Working capital (A - B)
Increase in working capital
TOTAL

2952616
3246712

3246712

2952616
4044620

4044620

INTERPRETATION
The current assets of the company is decreased from 8008485 to
6319333during 2011-2012.it also show increase in the current liability from
4759733 to 7361848 .the liability capital is decreased due to increase in
current liability and decreased in other current assets and loans and advances

STATEMENT SHOWING CHANGES IN WORKING CAPITAL FOR

THE
YEAR 2012-2013
2012

2013

Changes in working
capital

Particulars

increase

decrease

CURRENT ASSETS
Inventories

2766076

370472

3395454

3640077

244623

Other C.A

169559

85511

Cash & Bank

79919

Sundry debtors

2395604

84048

60352

19567

Loans

278796

241219

37577

Total of current asset

8006485

6319333

6025237

6212454

187217

133664

164072

30408

7361848

7853156

(1042515)

(1059949)

CURRENT LIABILITIES

Current Liabilities
Other C.L
Total current liability

Working capital (A - B)

17434 17434

Increase in working capital

TOTAL

INTERPRETATION

1042515

1042515

632000

632000

The working capital decreased as the current liability increased from

(1042515) in the year 2012 to (1059949) in the year 2013.due to the related
in the other current asset .cash, and loans and advance
STATEMENT SHOWING CHANGES IN WORKING CAPITAL FOR
THE
YEAR 2013-2014
2013

2014

Particulars

Changes in working
capital
increase

decrease

CURRENT ASSETS
Inventories
Sundry debtors
Other C.A
Cash & Bank

2766028

2519924

3640077

4375494

8554

64575

60352

72032

Loans

241219

295399

Total of current asset

6793207

7327445

248104
735417
20936
11680
54172

CURRENT LIABILITIES
Provision

62000

62000
1078502

Current Liabilities

6212454

7290956

Other C.L

1640702

1319682 321020

Total current liability

7853155

8672639

(1059945)

(1345200)

Working capital (A - B)

285252 285252

Increase in working capital

TOTAL
.

1059949

1059949

1407542

1407542

INTERPRETATION
There working capital had decreased from (1059948) in the year 2013 to
(1345200). In the year 2014 it shows decreased in current assets and increase
in current liability. The working capital position of the company is not
satisfactory

TREND ANALYSIS

YEAR

CURRENT
ASSET

CURRENT
LIABILITY

TREND OF
CURRENT
ASSET

TREND OF
CURRENT
LIABILITY

2010

7371621

3987537

100%

100 %

2011

8006485

4759773

92%

83%

2012

6319332

7361847

116%

54%

2013

6793207

7853155

108%

50%

2014

7327436

8671838

100%

45%

140%
120%
100%
80%
60%
40%
20%
0%
2010

2011

2012

2013

2014

INTERPRETATION
The trend analysis reveals that there is an overall increased in
both the current assets .as current assets of the organization
increases the current liabilities of the organization decrease. But
the difference between current asset and current liability is
.

increasing. Increases in working capital may also lead to increase

in the production of the organization.

FINDINGS
Current ratio of the company is not satisfactory in all the years. It
means the firms have difficulty in in paying of debts.
Liquid ratio is less than the ideal ratio 1:1, those liquid assets not
sufficient to pay of short term obligations.
Stock turnover ratio is increasing year after year. That means
inventory management of the company is excellent.
Debtors turnover ratio shows decreasing trend. It means the
company is not efficiently collecting amount from debtors.
The debtors collection period shows an increasing trend in all five
years. The companys debt collection period is comparatively long.
The schedule of changes in working capital of the company reveals
the decreasing trend in all the years. And it indicates the company is
running insufficient working capital to cover all the requirements of
the company.
In trend Analysis Companys current assets fluctuating every year.
The current liabilities shows decreasing trend in every year.
Company tries to increase current assets and decrease current
liabilities.

SUGGESSIONS
The net working capital of the firm is decreasing every year. So the
firm has to take sufficient efforts to maintain normal working capital
by increasing sales.
Since the current ratio for the years is not meeting the ideal ratio. The
firm has to take right action to improve its current ratio either by
increasing its current asset or by decreasing current liabilities.
The company should try to maintain an optimum level of cash in the
business in order to maintain proper liquidity in the business.
Management should try to make the proper use of inventory control
techniques like fixation of minimum, maximum and ordering level
all the items for less blockage of money.

CONCLUSION
The study on working capital management done in Trinity
Pharmaceuticals Pvt.Ltd. The financial statements were used for data
collection. Ratio analysis and schedule of changes in working capital and
various other ratios were analyzed to find out the efficiency of the firm as
well as management of working capital. The data was analyzed and
interpreted.
From the study on working capital management of Trinity
Pharmaceuticals Pvt. Ltd, the researcher came to conclusion that the firm not
efficient in maintaining its sales and inventory level. The management of
working capital of the company was not found to be effective to meet
companys obligation.