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Assessment of Working Capital





This is to certify that the Project Report titled “ASSESMENT OF WORKING
carried out by Mr. pursuing MBA in ISLAMIC UNIVERSITY OF SCIENCE
AND TECHNOLOGY for fulfillment of Post Graduation Program in Business
Administration. His work and conduct has remained excellent. The student
has submitted the report on time.

H.O.D Guide
() (Mr. Aijaz-Ul-Haq Dawarki)

Place: Srinagar


First of all I would like to express my gratitude to almighty God, who
bestowed his blessing on me and gave me courage and right type of
environment for completion of my project.
I am deeply indebted to my supervisor/project guide Mr. Aijaz-ul-Haq
Dawarki Associate Executive J&K Bank zonal office Kashmir (central)
having permitted me to carry out this project work. I wish to express my
deep sense of gratitude to him for his guidance and useful suggestions,
which helped me all the time in completing the project work in time.

I would like to thank Mr. Fayaz Ahmed Zargar (Assistant Vice President
Credit) for their great support, guidance, concern and particularly the
hospitability which I enjoyed very much during the whole time I have
been with the J&K Bank.

I am very thankful to and, for their support and providing me this


Words are inadequate in offering my thanks to thank all the members of

J&K Bank, for their encouragement and cooperation in carrying out the
project work

TOPIC Page Number




Cash Flow/ Fund Flow Statements 22-25


I Raja Saheem Hyder declare that I myself worked on the topic
ASSESMENT OF WORKING CAPITAL under J&K Bank zonal office
Kashmir (central).The data and the information is collected by myself
and no third party has helped me in doing so. I myself have conducted all
the surverys and research analysis.

Signature of the Student:

Place: Srinagar



J&K Bank functions as a universal bank in Jammu & Kashmir and as a specialized
bank in the rest of the country. It is also the only private sector bank designated as
RBI’s agent for banking business, and carries out the banking business of the
Central Government, besides collecting central taxes for CBDT.

J&K Bank follows a two-legged business model whereby it seeks to increase

lending in its home state which results in higher margins despite modest volumes,
and at the same time, seeks to capture niche lending opportunities on a pan-India
basis to build volumes and improve margins.

J&K Bank operates on the principle of 'socially empowering banking' and seeks to
deliver innovative financial solutions for household, small and medium enterprises.

The Bank , incorporated in 1938, and is listed on the NSE and the BSE. It has a track
record of uninterrupted profits and dividends for four decades. The J&K Bank is
rated P1+, indicating the highest degree of safety by Standard & Poor and CRISI


“To catalyses economic transformation and capitalize on growth.”

Our vision is to engender and catalyze economic transformation of Jammu and

Kashmir and capitalize from the growth induced financial prosperity thus
engineered. The Bank aspires to make Jammu and Kashmir the most prosperous
state in the country, by helping create a new financial architecture for the J&K
economy, at the center of which will be the J&K Bank.


Our mission is two-fold: To provide the people of J&K international quality financial
service and solutions and to be a super-specialist bank in the rest of the country.
The two together will make us the most profitable Bank in the country.


Traditional money lenders till 1920-30 performed entire banking in the state of
Jammu and Kashmir at exorbitant interest rates. At the same time some banks
functional but at a very limited scale, such as Punjab national bank, grind lays bank
and imperial bank of india.The role of these banks was reduced to the acceptance
of the deposits, as they could not grant loans and advances to the people of the
state owing to the statutory limitations. Under this scenario banks could not
ameliorate the financial and the social position of people of the state. To overcome
this critical situation then the maharaja of this state convinced an idea of setting up
of a state bank in the state. After prolonged exercises and deliberations of the
assignment for establishment of “Jammu and Kashmir Bank Ltd”was given to the
late sir Sorabji N Pochkkanwala, then managing director of the central bank of
India. Mr. S N Pochkkhanwala formulated a scheme on 24:09:1930,suggesting
establishment of a semi state bank with participation in capital by state and public
under the control of state government. Thus the bank was formally incorporated on
1st of October 1938 and commenced business from 4th July 1939 at its registered
office, residency road Srinagar Kashmir.
In its formative years, the bank had to encounter several serious problems,
particularly around the time of independence, when out of it total 10 branches, two
branches of Muzafarabad and mirpure fell to the other side of the line of control (
now Pakistan administrated Kashmir ) along with cash and other assets in
1947.However state government came to its rescue with the assistance Rs 6.00
lacks to meet the claim. The bank steadfastly overcome its difficulties and kept
growing. Following the extensions of central laws to the state of Jammu & Kashmir,
the bank was defined as a government company as per the provisions of the Indian
companies Act 1956. The bank had its first full time chairman in 1971, following the
social control measure in banks. The year in 1971 was the turning point for the
bank on conferment of scheduled bank status and witnessed remarkable progress
in all the vital fields of operations. Reserve Bank of India declared the bank as “A”
class bank in 1976. The forms of security either by way of primary security or
collateral security is given here under:-

1. Hypothecation:
Under hypothecation, the borrower is provided with working capital finance by the
bank against the security of movable property to the bank, generally inventories.
The borrower does not transfer the property to the bank, it remains in the
possession of the borrower, and however, the title of the property is transferred in
the name of bank or lending institutions. Thus hypothecation is a charge against
property for an amount of debt where neither ownership nor possession is passed
to the creditor. Banks generally grant under hypothecation only to first class
customers with highest integrity. Banks do not usually grant hypothecation facility
to new customers.

2. Pledge:
Under this agreement, the borrower is required to transfer the physical possession
of the property offered as security to bank to obtain credit. The bank has the right
of lien and can retain possession of the goods pledged unless payment of the
principle, interest and any other expenses is obtained from the borrower. In case of
default, the bank may either
a) Sue the borrower for the amount due or
b) Sue for the sale of goods pledged.

3. Mortgage:
Mortgage is the transfer of the legal or equitable interest in a specific immovable
property for security against the debt. In case of mortgage, the possession of the
property may remain with the borrower, however, the lender get the full legal title.
The transferor of interest (borrower) is called mortgagor, the transferee is called
the mortgagee and the instrument of the transfer is called the mortgage deed.

4. Banking Facilities:
Financing is the act of providing funds for business activities, making purchases or
investing. Financial institutions and banks are in the business of financing as they
provide capital to business, consumers and investors to help them achieve their
respective goals. There are two ways of providing funds i.e. financing to the
borrowers used by banks or financial institutions as given below.

A.Fundbased Financing:

The fund based financing provided by banks involve immediate outlay of funds,
which must be provided by before hands. This facility includes term loans facilities,
cash credit limit, overdraft etc.

1.Term loans:
A term loan is usually a single loan for a stated period of time or a series of loans on
specified dates. They are used for specific purposes such as acquiring machinery,
renovating a building, refinancing debt, entering into new business and so on and
so forth. Term loans are of maturity of 1 year and above and are repaid on an
amortized basis.
Term loans are mostly given to the borrowers who propose to set uo a unit ( project
) for example a manufacturing unit, or it may be to set up a power plant or
constructions of complexes, buildings, roads etc.
The maturity of term loans called tenor of the loan comprises of following

a. Construction period:
Time taken for completion of construction activity by the unit holder.

B.Moratorium period:
Holiday period given to repay the term loan.

C.Repayment period:
Period in which the term loan is repaid.

2. Cash Credit:
Cash credit facility is the most popular method of bank finance to the borrowers
adopted by the lenders. Under cash credit facility, the borrower is allowed to
withdraw funds from the bank up to the sanctioned credit limit. He is not required to
borrow the entire credit sanctioned once, rather he can withdraw periodically to
the extent of his requirements and repay by depositing surplus funds in his cash
credit account.

3. Over draft:
Under the overdraft facility, the borrower is allowed to withdraw funds in excess of
balance in his current account up to a certain specified limit during a stipulated
period. Overdrawn amount is repaid on demand. Over draft generally continue for a
long period by annual renewals of the limits.

B. Non Fund Based Financing:

Non fund based financing are essentially in nature of promises made by banks in
favors of a third party to provide monetary compensation on behalf of their clients if
certain situations emerge. These non-fund based facilities may be in nature of
banks guarantee or letter of credit.

Letter of credit:
Suppliers particularly the foreign suppliers insist that the buyer should ensure that
his bank will make the payment if he fails to honor his obligations. This is ensured
through a letter of credit (L/C) arrangement. A bank opens a L/C in favour of a
customer to facilitate his purchase of goods. If the customer does not pay to the
supplier within the credit period, the bank makes the payment under the L/C
arrangement. Bank charges the customer for opening the L/C. Banks extends such
facility to financially sound customers.

Line Of Credit
The line of credit is the maximum amount that can be borrowed under the term of
loan. The loans are made for the period of one year or less; and they should be used
to finance the seasonal increase in inventory and accounts receivables. When the
inventory is sold, receivables are collected and the funds are used to reduce the
loan. The loans are usually payable on demand by the banks or within ninety days.

The Jammu and Kashmir Bank Limited

Type Private

Traded as NSE: J&KBANK, BSE: 532209

Industry Banking, Financial services

Founded October 1, 1938

Headquarters Srinagar, Jammu and Kashmir, India

Key people Mushtaq Ahmad (Chairman & CEO)

Products Credit cards, banking, corporate, insurance, mortgage, private banking

Revenue 5,169.70 crore (US $ 940.89 million) (2011-12)

Operating 2,172.48 crore (US $ 395.39 million) (2011-12)


Net income 803.25 crore (US $146.19 million)(2011-12)

Total assets 60,269.22 crore (US $10.97 billion) as on March 31, 2012

Employees > 9000

Financial statement of a company consists of (a) a balance sheet disclosing the
financial position as at the end of the financial year, and (b) Profit & loss Account
(or an income and expenditure Account in the case of a company not carrying on
business for profit) disclosing the results of the operations of the results of the
operations of the company for the period covered by the financial year.


The financial year of a company is the period for which Profit & Loss Account of a
company is prepared. Such financial year may be more or less than a calendar year
but it shall not exceed 15 months unless the Registrar grants a special permission
in which case it may extend up to 18 months.

Accrual Basis & Double Entry System of Accounting [sec.209]
Sec.209 as amended by the Companies (Amendment) Act 1988 requires all the
companies to maintain the books of account on accrual basis and according to the
double entry system of accounting.
Profit & Loss Account to balance-sheet [Sec.216]
The profit & Loss Account must be annexed to the balance sheet.
Reports to be attached to Balance Sheet [Sec.216 & Sec.217]
The following two reports must be attached to the Balance sheet.
(a) Auditor’s Report u/s 216
(b) Director’s Report u/s 217.

Balance Sheet of Jammu and Kashmir Bank ------------------- in Rs. Cr. -------------------
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

12 mths 12 mths 12 mths 12 mths 12 mths

Capital and Liabilities:

Total Share Capital 48.49 48.49 48.49 48.49 48.49
Equity Share Capital 48.49 48.49 48.49 48.49 48.49
Share Application Money 0.00 0.00 0.00 0.00 28.10
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 4,044.69 3,430.19 2,961.97 2,574.37 2,232.34
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Net Worth 4,093.18 3,478.68 3,010.46 2,622.86 2,308.93
Deposits 53,346.90 44,675.94 37,237.16 33,004.10 28,593.26
Borrowings 1,240.96 1,104.65 1,100.21 996.63 751.79
Total Debt 54,587.86 45,780.59 38,337.37 34,000.73 29,345.05
Other Liabilities & Provisions 1,588.18 1,248.88 1,198.97 1,069.67 1,102.02
Total Liabilities 60,269.22 50,508.15 42,546.80 37,693.26 32,756.00
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

12 mths 12 mths 12 mths 12 mths 12 mths

Cash & Balances with RBI 2,783.65 2,974.96 2,744.73 2,302.95 3,219.97
Balance with Banks, Money at Call 1,670.21 573.85 1,869.51 2,971.81 1,217.27
Advances 33,077.42 26,193.64 23,057.23 20,930.41 18,882.61
Investments 21,624.32 19,695.77 13,956.25 10,736.33 8,757.66
Gross Block 855.52 788.10 561.35 517.90 471.32
Accumulated Depreciation 440.42 396.47 358.54 321.61 289.10
Net Block 415.10 391.63 202.81 196.29 182.22
Capital Work In Progress 5.18 2.13 1.32 3.13 9.79
Other Assets 693.34 676.17 714.95 552.34 486.47
Total Assets 60,269.22 50,508.15 42,546.80 37,693.26 32,755.99

Contingent Liabilities 11,081.48 18,189.26 8,291.77 6,578.22 7,959.21

Bills for collection 4,904.93 8,790.08 3,799.74 3,502.74 3,933.76
Book Value (Rs) 844.34 717.58 621.00 541.04 470.49

Consolidated Balance Sheet of
------------------- in Rs. Cr. -------------------
Jammu and Kashmir Bank
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
12 mths 12 mths 12 mths 12 mths 12 mths
Capital and Liabilities:
Total Share Capital 48.49 48.49 48.49 48.49 48.49
Equity Share Capital 48.49 48.49 48.49 48.49 48.49
Share Application Money 0.00 0.00 0.00 0.00 28.10
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Init. Contribution Settler 0.00 0.00 0.00 0.00 0.00
Preference Share
0.00 0.00 0.00 0.00 0.00
Application Money
Employee Stock Opiton 0.00 0.00 0.00 0.00 0.00
Reserves 4,044.80 3,430.19 2,962.13 2,574.36 2,232.34
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Net Worth 4,093.29 3,478.68 3,010.62 2,622.85 2,308.93
Deposits 53,341.76 44,675.94 37,231.89 32,999.10 28,593.26
Borrowings 1,240.96 1,104.65 1,100.21 996.63 751.79
Total Debt 54,582.72 45,780.59 38,332.10 33,995.73 29,345.05
Minority Interest 0.00 0.00 0.00 0.00 0.00
Policy Holders Funds 0.00 0.00 0.00 0.00 0.00
Group Share in Joint
0.00 0.00 0.00 0.00 0.00
Other Liabilities &
1,587.77 1,248.88 1,199.06 1,069.68 1,102.02
Total Liabilities 60,263.78 50,508.15 42,541.78 37,688.26 32,756.00
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
12 mths 12 mths 12 mths 12 mths 12 mths
Cash & Balances with RBI 2,783.65 2,974.96 2,744.73 2,302.95 3,219.97
Balance with Banks, Money
1,670.22 573.85 1,869.51 2,971.81 1,217.27
at Call
Advances 33,077.42 26,193.64 23,057.23 20,930.41 18,882.61
Investments 21,619.32 19,695.77 13,951.25 10,731.33 8,757.66
Gross Block 855.52 788.10 561.35 517.90 471.32
Accumulated Depreciation 440.42 396.47 358.54 321.61 289.10
Net Block 415.10 391.63 202.81 196.29 182.22
Capital Work In Progress 5.18 2.13 1.32 3.13 9.79
Other Assets 669.22 654.91 704.03 542.64 480.03
Minority Interest 0.00 0.00 0.00 0.00 0.00
Group Share in Joint
0.00 0.00 0.00 0.00 0.00
Total Assets 60,240.11 50,486.89 42,530.88 37,678.56 32,749.55

Contingent Liabilities 11,081.48 18,189.26 8,291.77 6,587.22 7,959.21

Bills for collection 4,904.93 8,790.08 3,799.74 3,502.74 3,933.76
Book Value (Rs) 844.36 717.58 621.03 541.04 470.49

Ratio Analysis is a very important tool of financial analysis. It is the process of
establishing the significant relationship between the items of financial statements
to provide meaningful understanding of the performance and financial position of a
firm. Ratios are classified as under
(1) Liquidity Ratios
(2) Activity Ratios
(3) Leverage Ratios
(4) Profitability Ratios

Financial ratio analysis is a useful tool for users of financial statement. It has
following advantages:


1. It simplifies the financial statements.

2. It helps in comparing companies of different size with each other.
3. It helps in trend analysis which involves comparing a single company over a
4. 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


Despite usefulness, financial ratio analysis has some disadvantages. Some key
demerits of financial ratio analysis are:
1. 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.
2. 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.
3. Ratio analysis explains relationships between past information while users are
more concerned about current and future information.

Bench mark of key financial ratios in J&K bank:
Financial ratios are the only tools and not an end in credit appraisal process. They
are maens to an end and the only pass guiding signals. Analysis of a combination of
critical financial ratios can help in proper decision making. They are also practical
constraints in evolving industry wise benchmarks for key financial indicators.
Some important ratios are used during analysis of the financial statement by the
banks to ascertain the credit worthiness of the borrowers are described as under:

These ratios are also called as working capital ratios or short term solvency ratio.
As enterprise must have an adequate working capital to run its day to day
operations. The important liquidity ratios are:

Current Ratio: It is defined as a relationship between current assets and current

liabilities. This ratio is a measure of general liquidity and is most widely used to
make the analysis of short-term financial position or liquidity of a firm. It is
calculated as under.

Current Ratio= Current Assets

Current liabilities

Quick ratio:
This ratio is also called as acid test ratio or liquidity ratio. This ratio is ascertained
by comparing the liquidity assets (i.e. assets which are immediately convertible into
cash without much loss) to CL. It is calculated as under.

Quick Ratio= Quick Assets

Current liabilities

Net working capital (NWC):

The NWC is the measure of owner’s stake or long term liquid funds in the firm. It
has a close relationship with current ratio. When current ratio equals to 1 NWC is
zero. When current ratio is more than 1 NWC is positive and vice versa. Negative
NWC implies that lending bank is running a more than normal financial risk in
respect of borrowers.It is calculated as under.
NWC= current assets – current liabilities
Net working capital is sometimes used as a measure of firm’s liquidity. It is
considered that between two firms, the one having a larger NWC has the greater
ability to meet its current obligations.

Leverage Ratio:
A firm should have both strong short term as well as long term financial positions.
To judge the long term financial position of the firm, financial leverage ratios are
Following ratios are commonly used to analyze leverage.

Debt Equity Ratio:

Debt Equity ratio is calculated to measure the relative claims of outsiders and the
owners (i.e. shareholders) against the firm’s assets. This ratio indicates the
relationship between the external equities or the outsider’s funds and the internal
equities or the shareholders funds. It is calculated as

Debt Equity ratio= Long term Debts

Shareholders’ Funds

It is relaxed upon 3:1 in case of SME and large industries sector up to 4:1 in case
infrastructure projects.

This is also called gearing ratio. This ratio indicates leverage to the owned funds of
the firm. Higher gearing ratio indicates that the firm is more leveraged to the
external sources of funds and in turn will expose it to high debt cost.

Interest Coverage Ratio:
It is used to test the firm’s debt servicing capacity. A high interest coverage ratio
means that the firm can easily meet its interest if earnings before interest and taxes
suffer considerable decline. It is calculated as

Interest coverage ratio= EBIT


Debt Service Coverage Ratio (DSCR):

DSCR is the ratio of cash available for debt servicing to interest, principle loan
payment. It is a popular benchmark used in the measurement of equity’s ability to
produce enough cash to cover its debt payments. The higher the ratio, the easier is
to repay the loan.

DSCR= EBIT+principal repayment on existing & proposed loans

Principal repayment+ Interest payments
Typically most commercial banks require the ratio of 1.15-1.35 times (net operating
income/annual debt service) to ensure cash flows insufficient to cover loan
payments on an outgoing basis. In J&K bank the acceptable levels in base case
scenario are prescribed as 1.30:1 (minimum) and 1.60:1 (average). However under
the scenarios of decrease in sales price by 5% increase in critical inputs by 5%,
increase in project cost by 5% and decrease in operational expenditure by 5%
DSCR at minimum of 1.15:1 and average of 1.40:1 is prescribed to be accepted.

Profitability Ratios:
Profitability is the indication of the efficiency with which the operations of the
business are carried on. Bankers, financial institutions and other creditors look at
profitability ratios as an indicator whether or not the sustainability more than it
pays interest for the use of borrowed funds and whether the ultimate repayment of
their debt appears reasonably certain. Owners are interested to know the
profitability as it indicates the return, which they can get on their investment. The
following are the profitability ratios:

Gross profit ratio:
Gross profit margin reflects the efficiency with which the management produces
each unit of product. It shows the percentage of the gross profit to sales.It is
calculated as under:

Gross Profit ratio= Gross profit * 100

Net sales

More the gross profit margin more is the efficient production & better is the
operating performance.

Net profit ratio:

Net profit is obtained when operating expenses, interest and taxes are subtracted
from gross profit. It is calculated as under.

Net profit Ratio= Net profit * 100

Net sales

Net profit margin shows the percentage of net profit to sales. The ratio reflects the
efficiency of manufacturing, administration, and selling the products.

Overall profitability ratios:

It is also called “return on investment” or return on capital employed. It indicates
the percentages of the total capital employed in the business. It is calculated as

ROI= Net profit before Interest and tax * 100

Capital employed
The ROI invested is a concept that measure the profit, which a firm earns or
investing a unit of capital. The return on capital employ also shows whether the
company’s borrowing policy was economically and whether the capital had been
employed fruitfully.

Earning per share Ratio:
In order avoid the confusion on account of the varied meaning of the term capital
employed, the overall profitability can also be judged by calculating earnings per
share with the help of the following formula:

EPS= PAT & preferences dividend

No. of equity shares
EPS helps in determining the market price of the equity shares of the company. It
also helps in estimating the company’s capacity to its equity shareholders.

Price earnings ratio:

This ratio indicated the number of times the earnings per share is covered by its
market price. Thos is calculated according to the following formula:

PER = Market price per equity share

Earnings per share

It hels the investor in deciding whether to buy or not shares of company at a

particular market price.

Cash Flow Statements

in financial accounting, a cash flow statement, also known as statement of cash

flows,[1] is a financial statement that shows how changes inbalance sheet accounts
and income affect cash and cash equivalents, and breaks the analysis down to
operating, investing, and financing activities. Essentially, the cash flow statement is
concerned with the flow of cash in and out of the business. The statement captures
both the current operating results and the accompanying changes in the balance
sheet.[1] As an analytical tool, the statement of cash flows is useful in determining
the short-term viability of a company, particularly its ability to pay bills.
International Accounting Standard 7 (IAS 7), is the Standard that deals with cash
flow statements.
People and groups interested in cash flow statements include:

 Accounting personnel, who need to know whether the organization will be able
to cover payroll and other immediate expenses
 Potential lenders or creditors, who want a clear picture of a company's ability to
 Potential investors, who need to judge whether the company is financially sound
 Potential employees or contractors, who need to know whether the company will
be able to afford compensation

Fund Flow statement

Definition of Fund

Fund means working capital. If current assets of company is more than current
liability of business, it is called working capital and working capital’s other name is

Fund = Working capital = Current assets – Current liability

Definition of Flow of Fund

Flow of fund means movement of fund. I take the example of air; we can feel its
movement or flow of air. Same thing is happen with fund, due to the activity of
business fund is transfer from one asset to another assets. If fixed assets are
converted into current asset or fixed liability is converted into current liabilities,
these are the flow of fund. But if current assets are changed with current assets or
current assets are changed into current liabilities, then, there is no flow of fund
because there is no change working capital. Suppose, we get the money from
debtor, this is not flow of fund because, working capital is not changed. Both items
of current assets and when current assets change into current assets, there will
not be change in working capital.

Flow of Fund = Fixed asset changes into current asset or current asset changes
into fixed assets

Fixed liability changes into current liability or current liability changes into fixed

Definition of fund flow statement

Fund flow statement is a statement which shows the inflow and out flow of funds
between two dates of balance sheet. So, it is known as the statement of changes in
financial position. We all know that balance sheet shows our financial position and
inflow and outflow of fund affects it. So, in company level business, it is very
necessary to prepare fund flow statement to know what the sources are and what
are applications of fund between two dates of balance sheet. Generally, it is
prepare after getting two year balance sheet.

According to Prof. Anthony, “The funds flow statement describes the sources from
which additional funds were derived and the use of which these funds were put.”

Fund flow statements are known with different names

Statement of source and uses of funds

or summary of financial operations

Movement of working capital statement


Fund received and distributed statement


Fund generated and expended statement.

Main differences between Cash flow and Fund flow statement is given below:

1. Fund flow statement reflects the change in the working capital of a company
while cash flow statement shows the change in the cash position of the company
between two balance sheet dates.

2. Funds flow statement deals with all the components of working capital while cash
flow statement deals with cash and cash equivalents.

3. Cash flow statement there is classified into operating activities, investment

activities and financing activities, but funds flow statement there is no such

4. As cash flow statement is easily understood by any person but funds flow
statement is little bit complex.

Concept of Working Capital

There are two concepts of working capital viz. 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’. 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 firm’s current assets which are financed from long–term 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.
It is necessary to understand the meaning of current assets and current liabilities
for learning the meaning of working capital, which is explained below.

Current assets – It is rightly observed that “Current assets have a short life span.
These type 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. Cash balance may be
held idle for a week or two, account receivable may have a life span of 30 to 60
days, and inventories may be held for 30 to 100 days.”
Fitzgerald defined current assets as, “cash and other assets which are expected to
be converted in to cash in the ordinary course of business within one year or within
such longer period as constitutes the normal operating cycle of a business.”

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.
The claims or obligations which are normally expected to mature for payment
within an accounting cycle are known as current liabilities. These can be defined as
“those liabilities where liquidation is reasonably expected to require the use of
existing resources properly classifiable as current assets, or the creation of other
current assets, or the creation of other current liabilities.”

Circulating capital – working capital is also known as ‘circulating capital or current

capital.’ “The use of the term circulating capital instead of working capital indicates
that its flow is circular in nature.”

Structure of Working Capital

The different elements or components of current assets and current liabilities

constitute the structure of working capital which can be illustrated in the shape of a
chart as follows:

Structure of Current Assets and Current Liabilities

Current Liabilities Current Assets

Bank Overdraft Cash and Bank Balance
Creditors Inventories: Raw-
Finished Goods
Outstanding Expenses Spare Parts
Bills Payable Accounts Receivables
Short-term Loans Bills Receivables
Proposed Dividends Accrued Income
Provision for Taxation, etc. 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 the working capital
is known as the circulating capital as it circulates in the business just like blood in
the human body.”
Figure No.1 depicting ‘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.

The 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. The important classifications are
as given below:

Conceptual classification

There are two concept of working capital viz., 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. The above can be summarized as follows:
(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:

i. 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.
It is based on ‘Operating Cycle Concept’s which is explained later. 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, viz., 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 viz., (i) permanent or fixed
working capital, and (ii) Temporary, Seasonal or variable working capital. Such
type of classification is very important for hedging decisions.

i. 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.” This can be
calculated as follows:

Temporary Working Capital = Total Current Assets – permanent Current Assets

ii. 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.

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.”
From the above, the following two aspects of working capital management

1) To determine the magnitude of current assets or “level of working capital” and

(2) To determine the mode of financing or “hedging decisions



The objectives of project on Management of working capital are as follows-:

(1) To determine policy regarding profitability, liquidity and risk by
Company s objectives.
(2) To determine the quantum and structure of current assets.
(3) Determining the relationship between the current assets and current
liabilities and
Hence liquidity is determined.
(4) Optimization of the amount of sales and investment in receivables.
(5) Analysis of Financial Statement

The management of working capital helps us to maintain the working capital at a
satisfactory level by managing the current assets and current liabilities. It also
helps to maintain proper balance between profitability, risk and liquidity of the
business significantly. By managing the working capital, current liabilities are paid
in time. If the firm makes payment to it creditors for raw material in time, it can have
the availability of raw material regularly, which doesn’t t cause any obstacles in
production process. Adequate working capital increases paying capacity of the
business but the excess working capital causes more inventory, increases the
possibility of delay in realization of debts. On the other hand, absence of adequate
working capital leads to decrease in return on investment. The goodwill of the firm
is also adversely affected due to the inability to pay current liabilities in time.
Hence, the management of working capital helps to manage all the factors affecting
the working capital in the most profitable manner.

What is Working Capital?
For any activity whether trading or industrial, two types of assets are required-
Fixed assets and current assets.
Fixed assets i.e. land, building, plant and machinery etc. constitute the
infrastructure for industrial activity. These assets remain more or less permanently
in the business and are not meant for sale. Hence, the funds utilized for acquiring
these assets remain permanently locked up and are known as Fixed ( or sunk )
capital. These long term funds come from the owner’s contributions/banks
/directors /relatives and friends / general public.
Current assets i.e. stock in trade, receivables, debtors etc,are the means of
production activity. They go through the production cycle and
are meant for eventual sale. ‘Production cycle’ refers to the
period in which raw materials are processed into finished goods.
Funds required for financing the production cycle and other
current assets are called ‘working capital’. Its main sources are
bank borrowing and sundry creditors.
Workig capital cycle represents the time span within which, the
cash utilized or procuring raw materials, payment of wages and
incurring overheads is reconverted into cash through sales
realization. A schematic diagram of the ‘working capital cycle’ is
given below:


Receivable Raw Materials

Sales Stock-in-progress

Finished Goods


‘Gross working capital’ refers to the funds required for financing the total current
assets. ‘Net working capital’ refers to the difference between current assets and
current liabilities. Current liabilities include liabilities payable or expected to be
turned over within one year from the date of the balance sheet. Current assets are
those assets which are reasonably expected to be realized in cash or sold,
consumed or turned over during the operating cycle of the business, usually not
exceeding one year.
Desirably, net working capital should be positive i.e. current assets should exceed
current liabilities or Current ratio (current assets / current liabilities) should be
higher than 1:1. This would signify liquidity and availability of adequate working
funds. For a banker, it would connote a ‘cushion’ of safety for the funds lent.
Positive net working capital is same as liquid surplus i.e. the difference between
long term sources (liabilities) and long term assets (uses). This means long term
sources should be sufficient to finance not only fixed and non-current assets but
also a part of current assets. In current assets, there is always a hard core i.e. a
certain irreducible minimum level which would have to be maintained more or less
permanently for smooth operations of the production cycle. It is but logical that this
portion of current assets should be financed from long term sources.
This can be pictorially depicted as under:

term Long term Lia.
&Net Funds Worth
NWC (NWC / Margin)
Inthe diagram

Other current
B.B liabilities


it may be seen that working capital required for financing current assets is
generated from three sources, namely bank borrowings long term funds and other
current liabilities. The net working capital is positive and signifies margin
contribution of long term funds to finance current assets. It may also be possible for
a unit to work with negative working capital, where short-term liabilities including
bank borrowings are used to finance part of long term assets. This may signify
diversion of bank funds for other unapproved uses. It may also not be in the interest
of a unit to have very large NWC or liquid surplus which may indicate a position of
idle funds or lower turnover in working capital. The assessment of working capital
will, therefore, involve the following two aspects.
(a) The level of current assets required to be held by any unit including the
composition of current assets for efficient functioning.
(b)The mode of financing these assets.

Information/Data required for assessment of working capital:

In order to assess the requirements of working capital on the basis of production

needs, it is necessary to get the data from the borrowers regarding their
past/projected production, sales, cost of production, cost of sales, operating profit,
etc. in order to ascertain the financial position of the borrowers & the amount of
working capital needs to be financed by banks, it is necessary to call for the data
from the borrowers regarding their net worth, long term liabilities, current
liabilities, fixed assets, current assets, etc.

The Reserve Bank prescribed the forms in 1975 to submit the necessary details
regarding the assessment of working capital under its credit authorization scheme.
The scheme of credit authorization was changed into credit monitoring
arrangement in 1988. The forms used under the credit authorization scheme for
submitting necessary information have also been simplified in 1991 for reporting
the credit sanctioned by banks above the cut-off point to reserve bank under its
scheme of credit monitoring arrangement.

As the traders and merchant exporters who do not have manufacturing activities

are not required to submit the data regarding raw materials, consumable stores,
goods in- process, power and fuel, etc., a separate set of forms has been designed
for traders and merchant exporters.
In view of the peculiar nature of leasing and the hire purchase concerns, a separate
set of forms has also designed for them.

In addition to the information/data in the prescribed forms, bank may also call for
additional information required by them depending on the nature of the borrowers’
activities & their financial position. The data is collected from the borrowers in the
following six forms:

1) Particulars of the existing/proposed limits from the banking system

(Form I):

Particulars of the existing credit from the entire banking system as also the term

loan facilities availed of from the term lending institutions/banks are furnished in
this form. Maximum & minimum utilization of the limits during the last 12 months
outstanding balances as on a recent date are also given so that a comparison can
be made with the limits now requested & the limits actually utilized during the last
12 months.

1. Operating Statement (Form II)

The data relating to last sales, net sales, cost of raw material, power & fuel, direct
labour, depreciation, selling, general expenses, interest, etc. are furnished in this
form. It also covers information on operating profit & net profit after deducting
total expenditure from total sale proceeds.

2. Analysis of Balance Sheet (Form III)

A complete analysis various items of last year’s balance sheet, current year’s

estimate & following year’s projections is given, in this form. The details of
current liabilities, term liabilities, net worth, current assets, other non-current
assets, etc. are given in this form as per the classification accepted by banks
3. Comparative statement of current assets & current liabilities (Form IV)
This form gives the details of various items of current assets and current
liabilities as per classification accepted by banks. The figures given in this form
should tally with the figures given in the form III where details of all the liabilities
& assets are given. In case of inventory, receivables and sundry creditors; the
holding/levels are given not only in absolute amount but also in terms of number
of month so that a comparative study may be done with prescribed norms/past
trends. They are indicated in terms of numbers of months in bracket below their

Computation of Maximum Permissible Bank Finance (Form V)

On the basis of details of current assets & liabilities given in form IV, Maximum
Permissible Bank Finance is calculated in this form to find out credit limits to be
allowed to the borrowers.

4. Fund Flow Statement (Form VI)

In this form, fund flow of long term sources & uses is given to indicate whether

long term funds are sufficient for meeting the long term requirements. In addition
to long term sources and uses, increase/decrease in current assets is also
indicated in this form.

Check list for verification of the information/data:

Bank should verify not only the arithmetical accuracy of the data furnished by the

borrowers but also the logic behind various assumptions based on which the
projections have been made. For this purpose, bank officials should hold
discussions with the borrowers on projected sales, level of operations, level of

inventory, receivables, etc. if necessary, a visit to the factory may also be made to
have a clear idea of products and processes.

Calculation of Working Capital

The calculation of working capital requirement during the entire project was done
as per the following three methods:
o Operating Cycle Method
o Net Working Capital Method
o On the basis of Sales.

As per the Operating cycle method the working capital requirement is calculated as

Debtor days XX
Inventory days XX
Less creditors days XX

Operating days XX

Operating cycle = 365 = XX

Operating Days

Working capital requirement = Sales = XXX = XX

O/cycle XX

As per the Net Working Capital method the working capital requirement is
calculated as under:

Net Working Capital = [Capital + Unsecured Loan + Term Loans –

F/Assets –Investments – Loans & Advances]

Permissible amount is 3 times the net working capital as per above formula.

Which implies?

Working capital Requirement = [Capital + Unsecured Loan + Term Loans –

F/Assets – Investments – Loans & Advances] x 3


Bank can allow a max CC limit of 25% of sales to a manufacturing unit and 15% of
sales to a trading unit.

J&K Bank mostly allows 20% of sales as CC limit to manufacturing units.

So, 20% of sales = 20/100 * Sales


So the as per bank policy allowable amount as CC is XXX .

The working capital finance by banks is meant to assist the borrower in meeting a
portion of requirement of funds needed for day to day operations. Hence, it is
obvious that working capital finance should be made only after ascertaining the
genuine needs of the borrower. The following considerations may be kept in this
Financial Statements (Balance Sheet & profit & loss A/c Should be obtained for the
last 3 years as well as estimates for current year and projections for next year.
2. The sales figure is the focal point for consideration since the requirement of
working capital will depend on the level of sales the borrower expects to achieve, in
the next year.
To make a realistic assessment of sales projected for the next year; the trend in
sales during previous years, the potential for growth, the production capacity,
demand for product, expertise of entrepreneur in locating markets, export
potential, type of product, quality of product etc. Will have to be taken into account.
But, ultimately it is the judgment of the credit appraiser which is vital for making a
reasonable estimate of sales.
3. Once the projected figure is assessed, the next step is to find out the
requirement of W.C., that is to ascertain as to what should be the optimum level of
holding current assets so that the projected sales are achieved.
The levels of holding of inventory (Raw material, semi Finished Goods and Finished
Foods) and receivables will depend on the period of holding inventory and
receivables. Hence thorough appraisal will have to be made to find out as to what
should be the reasonable period of holding of inventory and receivables.
Once the period of holdings is scientifically ascertained, the investment in CA. (i.e
W.C) can be calculated on the basis of the following:
a) R.M holding –calculated on the basis of so many months of R.M consumed.
b) SFG holding –calculated on the basis of so many months of cost of sales,
c) F.G holding –calculated on the basis of so many months of cost of sales,
d) Receivables holding- calculated on the basis of so many months of sales.
4. Once the total requirement of C.A. is assessed, the next step is to explore the
alternate sources available, other than bank finance,
In fact, the sources of financing C.A. are three:

a) Sources like sundry creditors, advance payments from customers etc.

b) Bank finance, and

c) NWC, which is the contribution from long term sources.

In principle bank finance can be calculated as follows.

Total Current assets …….Rs.
Less sources like
and adv.payment …….Rs.
Difference (Working capital gap) …….Rs.

Of the gap, Bank Finance will be 75% to 80% depending upon margin requirements
which will have to come from long term sources (in the form of NWC).

1. Sales and period of holding of inventory and receivables are the areas where
slight misjudgment will result in unrealistic assessment. Hence, these two are
the most important areas requiring closer analysis and scrutiny.
2. The MPBF reflects the maximum limit up to which the bank can finance but is
not an entitlement to borrow. If the NWC available is more than the stipulated
margin, the limit of bank finance will be corresponding reduced.

List of recommendations of various Committees on Working Capital:
Tendon Committee:
1) These recommendations are applicable to all industrial units having working
capital limits of Rs.10 lakhs and above from the banking system.
2) Term Loans for acquisition of capital assets, B/Gs, etc. are not included while
computing cut off point at Rs 10 lakhs.
3) Inventory and receivable norms (I/R norms) are prescribed for 15 specified
industries. For others, banks have to be guided by the own judgment and the
past trends.
4) These inventory/receivables norms represent maximum holding, not
entitlements and are not interchangeable.
5) Deviations in these I/R norms are allowed under exceptional situations.
6) Three methods of lending are prescribed to calculate Maximum permissible
Bank Finance (MPBF). But, RBI had not accepted the third method or lending.
7) First method envisages borrower’s margin contribution to the extent or
minimum 25% of working capital gap and second method enhances his
contribution to the extent of minimum 25% of total current assets.
8) Borrowers should gradually be brought from first method of lending to second
method of lending.
9) Annual review or all such accounts should be conducted.
10) Bill culture should be encouraged and receivables should increasingly be
financed by way of bills rather than by cash credits against book debts.
11) Cash credit should be bifurcated into demand loan for
core-portion and fluctuating cash credit component
with interest differentiation.

1) The borrowers enjoying working capital limits of over Rs.50 lakhs should be
placed directly under second method of lending.
2) Bifurcation of cash credit should not be done but instead peak level and non-
peak level limits should be introduced.
3) Compulsory periodical review of cash credit accounts should be done and
quarterly information system should be introduced to monitor quarterly
4) Bill finance should be greatly encouraged and system of drawee bill scheme
should be made a compulsory segment of cash credit limits.
1) Working capital finance to SSI units and more particularly to smaller SSIs are
on a very limited scale and should be encouraged.
2) SSI units falling under first method of lending should be financed for working
capital on the basis of annual projected sales turnover and should not be
subjected to assessment under first method at lending.
3) Gross working capital requirement of such SSI units should be arrived at on
the basis of minimum 25% of their projected sales turnover. Minimum 20%
should be financed by bank & minimum 5% may be taken as margin.
4) In highly exceptional situations bank finance of less than 20% of annual
projected sales turnover may be given provided it is justified and genuine
requirements of the borrower are fully met. This may however not be made as
The aforesaid recommendations are amended from time to time. The latest
guidelines of RBI of India on working capital advances are given separately.

Different methods of working capital assessment:
1) Simple method: It may be followed in small cases (viz.limit upto Rs.25,000/-)

Total working capital required w= A*B

A = Monthly expenses
B = Numbers of days in working capital cycle.
A will include monthly expenses like raw materials, wages, rent, depreciation
owners sustenance allowance etc.
B is the period in number of days within which investments made are recycled after
realization. Margin may however be taken if applicable and deducted from W to
compute banks contribution to working capital.

(%)and (MPBF)
(Months/days) Required value
(1) (2) (3) (4) (5)

a) Raw material less credit available on


b) Semi finished Goods

c) Finished Goods

d) One month’s manufacturing and

1) One month’s manufacturing and administration expenses are taken for
cushion purposes and may not necessarily be added.
2) If liquid surplus (CA-CL) is more than margin as calculated above, then higher
figure is to be reckoned for margin purposes.
3) Holding periods for semi-finished goods, finished goods and receivables are
calculated on the basis of consumption, cost of production, cost of sales and
sales respectively.
4) In case of trading units the working capital will be assessed on the basis of
stock holding and receivables (credit given to buyers).
5) Credit available on purchases is deducted from inventory to calculate bank
finance against paid stock.

2) Tendon Committee | and ∏ methods of lending

| ∏
Total Current assets – current
Total Current assets – Current
liabilities ( other than Bank
Liabilities ( Other than Bank

Working capital gap

Working capital gap
-25% of TCA or NWC whichever is
-25% of WCG or NWC whichever is


1) In the first method, margin is in terms of working capital gap whereas margin
is calculated on total current assets in the case of second method.
2) MPBF is the maximum bank finance and not an entitlement.
3) Current Assets/ Current liabilities are to be classified as per RBI guidelines.
4) All borrowers with fund based working capital from banking system of Rs.2
crore and above will be subjected to ∏ method of lending with a few
exceptions where the first method will apply. Those below Rs.2 crore will be
subjected to Nayak Committee recommendations.


Gross working capital requirements will be assessed on the basis of minimum 25%
of annual projected sales turnover. Minimum 20% will be bank finance and minimum
5% will be taken as margin from the borrowers.

1) Less than 20% may be given by bank provided justified and genuine
requirements are met.
2) Margin of 5% will be maintained proportionate to the total working
requirements and will increase or decrease depending on the quantum of
working capital. Exception may be allowed only in cases where lesser margin
is stipulated under specific schemes.
3) Sundry Creditors, advance from customers etc.will not be treated as margin
4) The recommendations hold valid in case of all borrowers where fund based
working capital limits are less than Rs.2 crore.



Business Results

Particulars 31.03.2011 31.03.2012 31.o3.2013 31.03.2014

Audited Audited Projected Projected

Receipts 226.55 778.72 1200.00 1380.00

Sales growth %age 243.73 54.10 15.00

Purchases 134.31 438.55 480.00 552.00

Net Profit 10.15 43.56 79.56 83.52

Net Profit to sales% 4.48 5.59 6.63 6.05

Balance sheet Spread

Particulars 31.03.2011 31.03.2012 31.03.2013 31.03.2014

Audited Audited Projected Projected


Capital 172.57 206.90 303.02 421.22

R&S 0.00 0.00 0.00 0.00

Net worth 172.57 206.90 303.02 421.22

Term Liabilities
Term Loan 0.00 0.00 3.25 2.38

Unsecured loans 0.00 0.00 50.00 50.00

Total Term Liabilities 0.00 0.00 53.25 52.38

Current Liabilities
Working Capital from J&K Bank 43.70 68.33 300.00 300.00

Sundry Creditors 4.98 8.23 110.00 134.00

Provision for taxes 0.00 0.00 0.00 0.00

Expenses payable 0.00 0.00 0.00 0.00

Other current liabilities 0.00 0.00 0.00 0.00

Total current liabilities 48.68 76.56 410.00 434.00

Total Liabilities 221.25 283.46 766.27 907.60


Net Block 67.59 71.61 58.98 53.08

Current assets
Cash & Bank Balance 14.16 6.60 7.29 23.52

Deposits 19.75 42.18 90.00 115.00

FDR 34.40 57.49 60.00 70.00

Work in process 43.03 37.55 60.00 95.00

Debtors 6.55 49.37 357.00 385.34

Advances 0.00 0.00 35.00 48.00

OCA/TDS 35.18 16.56 38.00 50.76

Total Current Assets 153.07 209.75 647.29 787.62

Security deposits 0.59 2.10 60.00 66.90

Total Assets 221.25 283.46 766.27 907.60

0.00 0.00 0.00 0.00
Financial indicators

Particulars 31.12.2011 31.12.2012 31.12.2013 31.12.2014

Audited Audited Projected Projected

Current assets 153.07 209.75 647.29 787.62

Current Liabilities 48.68 76.56 410.00 434.00

Net Worth 172.57 206.90 303.02 421.22

NWC 104.39 133.19 237.29 353.62

Current ratio 3.14 2.74 1.58 1.81

Debtors Period (in days) 10 23 107 101

Stocking period (in days) 115 31 45 62

Creditors Period (in days) 13 7 83 87


Sales projected for the FY2012-13 1200.00

Purchases projected for FY2012-13 480.00

Accepted sales for FY2012-13 973.40

Accepted purchases for FY2012-13 480.00
Holding levels
Stocking period 45

Debtor period 84

Creditor period 83

Build up of current assets/ current liabilities

Stock holding ( Amount in Rs of lacs) 60

Debtor period (Amount in Rs of lacs) 227

Advances 35

Cash in hand 7.29

OCA 38

Total Current Assets 367.4

Sundry creditors 110.00

OCL/ Expenses payable i.e 10% of deposits 15

Total current liabilities 125.6

WCG 241.6

NWC Projected (as on 31.03.12 ) 133.19

Margin requirement 25% of CA 91.8

MPBF (1) 108

MPBF (2) 150

SAY: Whichever is lower 108


Particulars 31.03.2011 31.03.2012 31.03.2013

Audited Audited Projected

Sales 126.96 144.23 153.80

Sales growth %age 13.60 6.64

Purchases 125.28 135.15 142.00

Net Profit 3.80 4.20 4.50

Net profit to sales% 2.99 2.91 2.93

Balance Sheet Spread

Particulars 31.03.2011 31.03.2012 31.03.2013

Audited Audited Projected


Capital 13.05 14.75 16.25

R&S 0.00 0.00 0.00

Net worth 13.05 14.75 16.25

Term liabilities
Unsecured Loans 0.00 0.00 0.00

Total term Liabilities 0.00 0.00 0.00

Current Liabilities
Working Capital from J&K bank 15.63 10.86 19.00
Sundry Creditors 4.22 6.60 7.60

Unpresented Cheques 4.75 7.17 0.00

Expenses payable 0.00 1.50 0.00

Total current liabilities 24.60 26.13 26.60

Total Liabilities 37.65 40.88 42.85

Gross block 0.20 0.17 0.14

Depreciation 0.03 0.03 0.03

Net block 0.17 0.14 0.11

Investment 0.00 0.00 0.00

Current Assets
Cash and bank balance 0.35 0.09 0.42

Stock-in-trade 30.38 33.80 35.00

Debtors 6.75 6.85 7.32

OCA 0.00 0.00 0.00

Total Current Assets 37.48 40.74 42.74

Total Assets 37.65 40.88 42.85

Financial Indicators

Particulars 31.03.2011 31.03.2012 31.03.2013

Audited Audited Projected

Current Assets 37.48 40.74 42.74

Current Liabilities 24.60 26.13 26.60

Net worth 13.05 14.75 16.25

NWC 12.88 14.61 16.14

Current Ratio 1.52 1.56 1.61

Debtors period ( in days) 19 17 17

Stocking period ( in days ) 87 90 89

Creditors period ( in days ) 12 18 19


Sales Projected for the FY2012-13 153.80

Purchases Projected for the FY2012-13 142.00

Accepted sales for FY2012-13 144.23

Accepted Purchases for FY2012-13 135.15

Holding Levels ( in days )

Stocking Period 89

Debtors Period 17

Creditors Period 19

Build up of Current assets / Current liabilities

Stock holding (Amount in Rs of lacs ) 35.10

Debtor Period ( Amount in Rs of lacs ) 7.26

Cash in Hand 0.42

Total Current Assets 42.78

Sundry Creditors 7.49

OCL / Expenses payable ------

Total Current Liabilities 7.49

WCG 36.29

NWC actual ( 31.03.2012 ) 16.14

Margin requirement 25% of C.A 10.62

MPBF ( 1 ) 24.60

MPBF ( 2 ) 20.00

SAY whichever is lower 20.00

A balance sheet is a financial statement showing what a business organization
owns and what it owes as on given date. In simple words we can say that Balance
sheet is a statement of Assets and liabilities showing the financial position of an
All things, which business organizations owns are called assets and the various
amounts of money it owes to the other are called liabilities.
The items of liabilities on the left hand side of the balance sheet shows the various
sources of money available to the company. On the right hand side the item of
assets represent how this money has been employed or used.
Besides borrowings from banks and other sources, a business organization obtains
some money from the owners of the organization and the money so provided to the
organization by its owners is called capital. While maintaining accounts a business
organization and its owners are treated as two different entities. The capital of an
organization represents the amount owned by it to the owners. Capital is,
therefore, part of the organization’s liabilities. Under the head “share capital” on
the liabilities side in this balance sheet of a Limited Liability Company the
information regarding ‘Authorized Capital’ Issued Capital, Subscribed Capital and
paid up capital is given.
Authorized Capital is the maximum capital the company is legally authorized to
issue. The portion out of authorized capital offered to public for subscription/apply
is known as Issued Capital. Out of Issued Capital, the portion for which people
apply is known as Subscribed Capital. Out of the Subscribed Capital, the amount
actually received by the company is known as “Paid-up Capital”.

Different items of Balance Sheet

Liabilities Assets

Share capital Land

Authorized capital Building

Issued capital Construction in progress

Subscribed capital Plant & Machinery

Paid-up capital Vehicle

Reserves & Surplus Furniture & Fittings

Capital reserves Goodwill

Patent & Trade mark

Revenue reserves

Balance of profit & loss Investment in Govt.Loans

Redeemable Preference share Debtors

Long Term Mortgage Loan

Debenture Term Loan


Bank Overdraft a) Raw Material

Other Current Liabilities b)Stock in process

Deposits from bank c)Finished Goods

Sundry from banks d)Consumable Stores & spares

Sundry Creditors Cash in Hand

Provisions for Taxation Cash at Bank

Accrued Expenses Advances Payment of Tax

Installment of term loans/ Preliminary Expenses

Deferred payment credit/ Development expenses

Debentures Advances / deposits

Contingent liabilities Investment in Subsidiary Companies.


Along with the balance sheet the business organization also produces another
statement showing what they have spent and what they have earned during a given
period and also what could be earned by selling the closing stock. An organization
spends some amount on buying goods and earn by selling goods. The difference of
these two is termed as ‘‘Gross Profit”. A Profit & Loss statement is divided into two

Net owned Fund:-
Owned fund (Paid up capital, free reserve, Balance in share premium account and
capital reserve representing surplus arising out of sale process of assets) minus
accumulated losses and book value of intangible assets.
Net Worth :- (Owner’s Equity)
Sum of share capital, reserve and surplus. The net worth of the bank increased by
Rs.237 crores to Rs.937 crores from Rs.700 crores of previous years thereby
registering an impressive growth of 34% which is as under:-

Year 2009 Year 2010 Year 2011

Paid up capital 48.10 48.10 48.16

Reserve & surplus 480.15 651.40 888.91

Grand Total 528.16 699.50 937.07

Capital Reserve:-
Reserves that are not available for distribution among share holders e,g valuation
reserve, Depreciation reserve, Share premium reserve and capital subsidy
Revenue Reserve:-
Reserves which are created out of profit and are available for distribution among
share holders.
Free Reserve:-
These are surplus and part of revenue reserve.
CRR: - (SEC.42 (.) RBI Act 1934)

Every banking company is required to maintain an average daily balance equal to at
least 3% of its DTL (Demand and time liabilities )n with RBI. Presently J&K bank is
maintaining CRR of 4.75%.
Bank Rate:-
Rate for any loans/Advances against specified securities provided to schedule
commercial Banks by rediscounting or purchase of eligible bills.
Rate prescribed by RBI at which reserve bank of India accommodates
banks/Financial institutions to meet statutory/ short-term obligations.
Prime lending rate:-
Rate at which banks lend to their most valued (Prime) customers. The PLR of J& K
bank is presently is 11.50%
SLR (SEC.24 BR ACT) (Statutory Liquidity Ratio):-
Every banking company has to maintain in India, at the close of business on any day
in cash, Gold or unencumbered approved securities, an amount being not less than
25% of its total DTL.
CAR (Capital Adequacy Ratio):-
Ration of capital to risk weighted assets. Capital adequacy ratio of J&K bank

Credit Deposit ratio:-

Ratio of loans/advances to deposits.CDR of our bank being 49.75 as on 31.03.11
Deposits, Advances & Investments:-
Total deposits, advances 7 investments of the bank being to the tune of
Rs.1291111.17, 642388.51 & 575254.44 lacs for the tear 2011.
Total Income, Expenses & Net Profit:-

Total income & expenses of the bank were to the tune of Rs.161086.33 & 114962.14
lacs for the year 2012 as compared to previous year of Rs.115727.80 & 8848.29
respectively, Whereas the net profit increased by a record 55% at Rs.260 crores as
on 31.03.2012 against Rs.168 crores as on 31.03.2012 & the total income recorded
a phenomenal growth of 39%.
N.P.A (NON Performing Assets)
The net NPA of the bank reduced to (Rs.120.49 cores) 1.88% from Rs.116.88 corers
(2.45% of the previous year. Gross NPA of the bank being 3.92% (252.19 cores) for
the quarters ended sept. & Dec 02, net not available as the provisioning is done on
yearly basis.
Other Highlights of J&K bank
A listed company with 53% equity of J&K state.
Bankers to the Govt. of J&K state.
Four decades of un-interrupted profitability & Dividends. Dividends 50% fir the year
2012 as compared to 40% of previous year.
Business as on march 2012 crossed Rs.1935 cores registering an increase of 21%
Credit take off recorded a remarkable growth of 35% as against national growth of
Fastest growing bank in India with a network of 451 branches spread across the
ATM facility available at 217 branches as on 05.02.2012.
Telebanking facility available at 40 branches (Kashmir (17), Jammu ( 10 ) & outside
Swift facility available at almost all the forex branches.
Co-branded J&K bank Amex credit cards available.
Providing depository services accredit with ISO 9002 certification & a depository
participant of NSDL.

Entered into alliance with Bajaj Allianz to distribute their non life insurance
products on terms & conditions of 17.5% (15% commission & 2.5% service charges
Launched MetLife insurance operations in joint venture with MetLife international
(USA) in the country in respect of %age as under:-
MetLife Int’l Inc.Holding 26%
Jammu & Kashmir Bank Ltd. 25%
M.Pallonji & co 31%
Other small investors 18%

One of the leading credit rating agency re-affirmed “P1+” rating to the bank’s
certificate of Deposit program indicating the highest degree of safety for timely
payment of principle & Interest.
Launching JK Bank Global Access Debit Card shortly, which shall be cirrus &
Maestro enabled. Agreement signed with MasterCard International.

__________IRAC & Provisioning_________

Income Recognition Asset Classification

(Relates to earned income) Relates to health of the A/C

Std S/std D/F Loss

Std: Where the A/C is running in order without showing any irregularity.
(0.25% provisioning)
S/Std: Here both principal & Intt.are in arrears for 180 days or 2 Qtrs.
D/F: When the A/C remains in S/std for 1.6 years.
(20% 1 year, 30% 2 year 50% 3 year & 100% of shortfall if any.)
Loss: Where there is no or less than 10% security
(100% provisioning)
***We can vouch only the income which has been debited in the A/c and received by
the bank.
***In case of NPA’s the recovery if any is to be credited to the Intt.portion first.

***In future the prudential norms to declare an A/C NPA are only 90 days w.e.f.
2004. To this norm provisioning @ 3% yearly is being provided from the last one
year by J&K bank thereby leaving a shortfall of 4% only.\

Classification (Sectorial)

(Priority sector) (Non Priority)

***RBI Norms
** 40% of total lending in priority sector, out of which (18% in agriculture in which
maximum 4.5% as indirect & remaining 13.5% as direct.)
*** 10% weaker sections, 1% DRI of last year net banking credit & remaining 11% in
others. In case of shortfall amount to be invested with NABARD at a very low rate of
Eligibility for qualifying in priority sector.
*** Agriculture (Direct) Short term loan, crop loan, fruit advanced, land
development, plantation/Horticulture, Goober gas plant, NRY, PMYR, SJSRY, Etc.
Indirect:- Argo services,fertilizers,SC/Strops & others.
Transport :-With fleet Upto10 vehicles (Trucks,Buses,Taki etc.
Small Business (up to limit of Rs.20.00lacs)
Retail trade (Limit Up to 10.00 lacs)
Professional and self Employed Persons
Medical practioners/Doctors up to 15.00 lac & others ( Engineers, Lawyers,
architects etc ) up to 10.00 lacs

Small scale industry (up to rs 1.00 crore in plant & machinery )

Trade (Retail/Whole sale Rs.10.00 lacs 7above)
Transport (with fleet of above 10 vehicles)
Medium and large scale industries ( with initial investment in plant & machinery
above Rs.3.00 crores if sanctioned before 29.12.99 & above Rs.1.00 crore if
sanctioned after 29.12.99 ( in private and public sector )
Small Business with credit limit above Rs.20.00 lacs (Tourism, Hotel Travel agency)
Professional & self employed ( Medical fractioned above 15.00 lacs & others (
Engineers, Lawyers, Arcetects etc above 10.00 lacs )
Durable Consumer goods loans, personnel loans, Bills purchased & discounted &
loans to staff for purchase of shares.

J&K Bank functions as a universal bank in Jammu & Kashmir and as a specialised
bank in the rest of the country. It is also the only private sector bank designated as
RBI’s agent for banking business, and carries out the banking business of the
Central Government, besides collecting central taxes for CBDT.

J&K Bank follows a two-legged business model whereby it seeks to increase

lending in its home state which results in higher margins despite modest volumes,
and at the same time, seeks to capture niche lending opportunities on a pan-India
basis to build volumes and improve margins.

J&K Bank operates on the principle of 'socially empowering banking' and seeks to
deliver innovative financial solutions for household, small and medium enterprises.

The Bank , incorporated in 1938, and is listed on the NSE and the BSE. It has a track
record of uninterrupted profits and dividends for four decades. The J&K Bank is
rated P1+, indicating the highest degree of safety by Standard & Poor and CRISIL.


o The requirement of working capital finance is ever increasing.

o In most of the cases, hypothecation and/or mortgage are used to create
securities for the banks.
o Bank has their own internal credit rating procedure to rate the clients
o After doing the assessment of the financial indicators it is up to the judgment
of the top management of the bank to sanction such loan. The very decision
could be against the assessment result.

o If the company is with bank from inception stage then they are given
preference, as credible and loyal party over their financial indicators.
o There is a stiff competition to the nationalized banks from the foreign
investors as their lending rates are much lower than nationalized banks.
o Today the foreign investors are very big threat to business and its existence.


o Closely monitoring and inspecting the activities and stocks of the borrowers
from time to time can avoid the misuse of working capital
o While working out the working capital limits, banks must exclude the loans
and advances from the current assets. The assessment should be done mainly
stock and the inventory level of borrower.
o Bank must extend working capital finance through non-fund based facilities.
o Another ideal method would be to use LC as the primary source of extending,
working capital clubbed with bill discounting. This would ensure that the
credit is put to the right use by the borrower and repayment is guaranteed to
the bank.
o The bank must further secure themselves by holding a second charge on all
the fixed assets of the borrower.
The time period taken by the banks to sanction the limits should be significantly
reduced to allow the borrowers to make use of the credit when the need is most