A

Summer Training Internship Project Report

Titled as

‘Study of WORKING CAPITAL

MANAGEMENT ’
for the training undergone at:

The KANGRA CENTRAL CO-OPERATIVE BANK LTD.,

Kasba kotla (H.P)

Submitted To: Submitted by:

Prof. Mona prashar Akhil jaswal

Associate Prof.( MBA) UID: 17MBA1318

MBA 3C

1
 DECelaration
PROJECT IS ORIGINAL WORK

I hereby declare that the project ‘‘Working capital management” Submitted in Partial fulfillment
of requirement for the degree of Masters of Business Administration to Chandigarh University,
Gharuan, is of my Original work and not submitted for the award of any other Degree, Diploma,
Fellowship, or other similar title or prizes.

This project is an original piece of work and not copied or plagiarized from any other source of
literature, review article or published reference in this regard. This is purely my Summer
Internship Report being submitted in partial fulfillment of the degree of Master in Business
Administration from University School of Business, Chandigarh University and has not been
submitted for the reward of any certificate, diploma, degree, fellowship with any college /
university nor educational institute before this.

In case any part of this work is reported as copied from any another source, I shall be solely
responsible for the same and will be answerable for any action taken in this regard

Akhil jaswal

MBA 3C

2
 Acknowledgement

I feel it is proud privilege of mine to express my deep sense of gratitude to all those who were
the guiding personalities behind me in my project.

First of all, I would like to thank the supreme power, the Almighty God, by whose grace I find
myself in the position of putting forth my presentation.

I sincerely thank to Mr. Raj kumar sharma (Manager) who provided me required help related to
my project.

I would also like to express my humble thanks to my mentor Prof. Mona prashar for given
the proper information and encouraging attitude, which made me prepare this report.

Akhil jaswal

3
Certificate

4
Table of content

Chapters Page No.

1. Project objectives 6-7

Research methodology & Literature Review 6-7
2.Profile of The Kangra Central Co-operative bank 9-22
Ltd.

3. Concept of Working Capital Management 23-26

4. Management of Working Capital 27-32
5. Management of Cash 33-44
6. Management of Accounts Receivables 45-49
7. Management of Accounts Payable 50-55
8. Factors Influencing Working Capital Requirements 56-57
9. Working capital assessment in KCC Bank 57-63
10. SCANNING OF WORKING CAPITAL 64-65
FINANCING IN KCCB

11. CONCLUSION & BIBLIOGRAPHY 66-68

5
 CHAPTER - 1

Project objectives

 To learn the effective management of working capital.

 To study how to keep the capital that is tied up in the working capital cycle at a minimum
and maximizing profit.

 To study the different components of working capital and its impact on the performance
of the firm.

 To study how The Kangra Co-Operative Banks finances working capital requirements of
the firms.

Research Methodology

6
  SOURCES OF DATA
PRIMARY DATA

SECONDARY DATA

The data will be collected mainly from-

 Primary data : The primary data is collected from the financial statements of the
bank and its annual reports.

o Annual reports of the bank

 Secondary data: The secondary data for the project report may be collected from the
internet , books and various books of accounts.

a. Internet,

b. To refer text books

TECHNIQUES OF DATA ANALYSIS :

The study is focused on Working Capital Management, which will be presented with the help of
various techniques this include-Analyzing of Balance Sheet,

Literature Review
Working capital management plays an important role in financial management of the
industry. Numbers of researcher has been done the research on different components
of working capital and subjects on. Here, I have included the relevant articles as well
research work on the same topic and subject. And this is a part of my research work on
7
the same title the working capital management of selected textile companies of India.
The main aim of this paper is to identify the gaps in current body of my research work
which gives the direction towards forward attention to be given.

The National council of applied Economic Research (NCEAR) in 1966 first time
formal study was conducted on working capital management in India. The council
published a structure of working capital" which was limited analysis of the creation of
working capital with special attention to the fertilizers, and cement and sugar industries
the main objective of this study was emphasized on come out with findings that working
capital management practices were extremely unplanned and hence need to develop
proper accounting policies like inventory management, debtors management as above.
And the study suggested developing suitable working capital policies required in the
success of business.

Bhatt V. V. (1972):-
He has given concentration on system to appraise working capital management and its
finance specially for the large scale companies. This tools also helpful to other sectors
like agriculture as well retail trade etc. As bank provide short term finance to operation
of business at the same time need to pay attention on repayment of loan and required
finance necessity. If these two areas is to be maintain properly no need to appraise the
working capital management concern

RaoGovinda D. and Rao P. M. (1999) :-

As per the study management of working capital is constant process. So that proper
observation on various components is needed. At the end relationship between different
components are needed. This provides proper direction.

Han Shin an LUC Soemen (1998):-

The study is on the efficiency of the working capital management and business
profitability. There are 58 companies are taken for the research and period for the study
is 1975 to 1994, study found that there is a strong negative relationship if firm having
long Net Trade Cycle and its profitability. In other side short Net Trading cycle created
the risk. It has also found measuring liquidity differently, need to be maintain appropriate
current ratio having positive relation with profitability.

Singh O. N. (1999):-
The research discussed the needs of credit to the farmers or agriculture segment and
another need is having proper system of working capital finance in agriculture segment
in line and commerce finance, with some changes. Research advised a system which is
quite similar useful and fulfill the need of both farmers as well as the bankers. Main aim
of the study is to make farmers strong in terms of capital.

Rao Govinda D. and Rao P. M. (1999):-

8
Study believes that management of working capital is a constant process need of
finance proper observation or monitoring and revising the relationship of all variables
and give conclusion. This is a proper indication to the manager.

Dutta (2000):-
Author Dutta has done study on “Working Capital Management of Horticulture Industry
in Himachal Pradesh” tha twas a case study of Himachal Pradesh Horticulture Produce
Marketing and Processing Corporation for the stage 1991 to 1998. The study was
thrown the light on financing pattern of working capital management. The study exposed
that the working capital of HRMC was going worse gradually during the study period.
Though, huge losses of the firm holding the huge amount of inventory and that was a
main cause of failed trade off among liquidity and profitability. The conclusion of study
like that there was no significant correlation between gross working capital and sales.

Jain P. K. and Yadav Surendra S. (2001):-

That was a study of corporate Working capital management related practices in India,
Singapore and Thailand. This study tried to understand the relationship of working
capital management and current assets and current liabilities. In other hand, authors
have revealed the analysis liquidities ratios like current assets and current liabilities.
Every sample of study have been pertained these ratios for the management of working
capital. In a sum up of the paper the data of samples of three countries confirm that
there were wide inter-industry variations in liquidity ratios. At the end, authors suggest
the serious consideration attention to be given by respective nation as well industry
groups of three companies and should develop corrective measures to take care of
areas concern.

Parvathy (2004):-
Observation of study has shown that in increasing in mode, but net profit has in
decreasing in trend because operating cost is high. The others found out and thrown
light on the importance of cost of production. Other side found that the return on
network and the return to total assets were on the decreasing trend. Researcher has
found that the return on investment is stable and the company invested on profitable
way. Company’s payout ratio was very conservative and that shows growth of the
company. With sum up of the research is that for the long term financial stability and
formed the debt equity ratio. Opposite side of the research interest coverage ratio and
the proprietary ratio were not satisfactory.

Filbeck Greg and Krueger Thomas M. (2005):-

As per the article, need to study internal working capital management and working
capital performance. That article was published in CFO magazines. As per the findings
of this article macro-economic factors,

9
Rao and Rao&Ramachandran (2010):-
Main aim of his study is to evaluate the trends and parameters of effectiveness of
working capital and its utilization in terms of volume of the firms of cotton textiles
industry in India. For that three parameters are taken i.e. different indices first one
performance Index, utilization index and efficiency Index. For the study industry is
divided in three category means small, medium and large. The output of the study is like
that linear growth rate model is used to find out the significance with working capital and
PI,UI and EI are significant in respect of small size companies while in medium size only
UI is significant. On an average we can say that working capital efficiency was not so
satisfied despite having PI in growth mode. The reason behind is that continuous factors
are declining.

Rahman Mohammad M. (2011):-

Research is based on correlation among working capital and profitability. To analyze the
effectiveness of working capital management of the selected textile
companies.conclusion of the study found that overall good management in working
capital management of selected textile companies and thus most of the companies are
profitable way going on.

Dr Arbab Ahmed and Dr Matarneh Bashar (2011):-

Research carried with registration technique which is very powerful statistical tool to
forecast the working capital. the area of working capital management, that is possible to
make the projection after starting the average relationship in the past. For the purpose
different components are used and to be finalized result. And it is presented in
diagrammatic way as well mathematical way.

Dr Kaddumi Thair A. and Dr Ramadan Imad Z. (2012):-

The evaluation was made in 49 Jordanian companies they are listed in Amman Stock
Exchange, The carried with topic like effect of working capital management on the
profitability in a targeted companies for the period 2005 to 2009. This goal could be
achieved with help of two different measures one is for profitability and another one is
for performance of working capital management i.e. proxy and five proxies use full for
respective goal. For the estimation two regression models fixed effects model and
ordinary least model are used.

CHAPTER-2
Introduction
10
 The Kangra Co-Operative Banks LTD.

History of KCCB

 Came into existence on 17th March 1920 (License No. RPCD.09/2009-10).

 Indora Banking Union was merged and 2nd Branch of the Bank opened at Nurpur in
Jan’1956

 Palampur Banking Union was merged and 3rd Branch of the Bank opened at Palampur in
Jan’1957

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 Nanaon Banking Union was merged and 4th Branch of the Bank opened at Hamirpur in
Oct’1958

 The Bank suffered losses because of the partition in 1947 to the tune of Rs.10.64 Lacs

 In Mar 1962, the bank suffering from the setback of partition was granted Rs.4.09 Lacs
by the Govt.

 Govt also provided Interest Free Relief Loan of Rs.3.98 Lacs and Govt of India Loan of
Rs.4.97 Lacs @ 3.87% in 1962 in 1971-72

 The Bank entered into the deposit mobilization scheme of Pong Dam Area aggressively
and secured maximum share of Deposit Bank Deposits increased from Rs. 256 Lacs in
1971-72 to Rs. 1054 Lacs in 1973-74.

PROFILE
12
The Kangra Central Cooperative Bank Ltd. started in a very humble way as a small Thrift/Credit
Society in March, 1960 by a few friends of Distt. Kangra of Himachal to help out the people of
Himachal residing in Delhi to uplift their economic conditions and tide over the financial
hardships. Dedication, sincerity and honesty of these members/associates brought rich fruits and
this Thrift/Credit Society grew up into a big society within twelve years after its formation and
successful running was converted into a primary urban Cooperative Bank in 1972 by RBI and
was permitted to carry out banking activities including acceptance of deposits from public (non-
members) by opening their Saving, Current and RD A/c’s. Twenty three years there from in June
1995 it was granted a license to carry out the banking business by the Reserve Bank of India.
Thereafter, it was granted license to open branches and consequently six more branches were
added in February, May, December 1996, June 1998 ,October 2008 and the last one in July 2009.
In May 1970 it purchased Paharganj building and reconstructed the same in 1993. In october,
1997 it purchased the present premises at Janakpuri to set up administrative and HO. Central
accounts and Personnel department are functioning from this building. It has a board meeting
room. One branch also function here. The main branch along with its service branch, arbitration
and recovery department is situated in its own three storied building at Paharganj. It purchased
another Building in April 2008 At Jagatpuri where its one of the existing Branches has already
been functioning.

The Kangra Cooperative Bank Ltd. started in a very humble way as a small Thrift/Credit Society
in March, 1960 by a few friends of Distt. Kangra of Himachal to help out the people of Himachal
residing in Delhi to uplift their economic conditions and tide over the financial hardships.
Dedication, sincerity and honesty of these members/associates brought rich fruits and this
Thrift/Credit Society grew up into a big society within twelve years after its formation and
successful running was converted into a primary urban Cooperative Bank in 1972 by RBI and
was permitted to carry out banking activities including acceptance of deposits from public (non-
members) by opening their Saving, Current and RD A/c’s. Twenty three years there from in June
1995 it was granted a license to carry out the banking business by the Reserve Bank of India .
Thereafter, it was granted license to open branches and consequently six more branches were
added in February, May, December 1996, June 1998 ,October 2008 and the last one in July
2009. In may 1970 it purchased Paharganj building and reconstructed the same in 1993. In
october, 1997 it purchased the present premises at Janakpuri to set up administrative and HO.
Central accounts and Personnel department are functioning from this building. It has a board
meeting room. One branch also functions here. The main branch along with its service branch,
arbitration and recovery department is situated in its own three storied building at Paharganj. It
purchased another Building in April 2008 At Jagatpuri where it’s one of the existing Branches
has already been functioning. The latest audited financial position of the bank as on 31st March,
2012 is as follows:-

13
 Membership 36918

Clientele other than members 108543

Share money 21.84 crores

Reserve/Other funds 20.33 crores

Working Capital 479.62 crores

Deposits 401.56 crores

Advances 280.17 crores

Net Profit 12.08 crores

NPA 0.0%

CRAR 15.52%

Based on its financial position of 31st March, 2003 the Bank was classified as Grade-I and
continues to enjoy this grading till date. It also enjoys Grade ‘A’ audit classification since long.
Bank has been awarded Best Cooperative Bank Award by the Government of Delhi in November,
2005.

AGBM and elections, audit etc are held on regular intervals. Bank is giving dividend to its Share-
holders regularly and lastly declared @ 18% the highest declared/paid so far. Bank has also
introduced three schemes of welfare nature for its shareholders. First one is where grant of Rs.
20,000/- is given to the nominee of the deceased members and no interest is charged up to
50000/- liability in case of death of the member, the second one is where scholarship @ Rs.150/-
and Rs.200/- per month is given to the brilliant wards of the members and staff and the the third
one is to give one time incentive to those wards of members / staff who get 90 % marks in Board
examination. Amount of incentive is Rs.3100/- and Rs.5100/- for 10th and 12th class respectively.

All the branches are fully computerized with TBA in place. Further interconnectivity (ABB)
among all its branches along with the implementation of CTS has already been done .Board of
Directors has also prepared a “Vision Document” for 2011-12 to 2013-14 according to which
various targets have been fixed.

14
 Membership has been planned up to 38500

Efforts will be made to maintain the highest percentage of dividend

Clientele 1.15 lacs

Share Money up to 25 crores

Deposits to increase 500 crores from 344 crores

Advances to increase 350 crores from 237 crores.

To increase the Net Worth of the bank to Rs.45 crores

To impart 3-5 days training to each Staff members in next 3 years.

To purchase at least two own buildings for branches on rent.

To get Scheduled Bank status.

To create a befitting set up matching the status of the Bank.

To open 8th Branch, two ext. Counters /BCs/BFs, two on –site-ATMs and cheque
collection centres.

To strengthen and upgrade IT system in the Bank including RTGS, CBS and
computerization of H.O. in all respect.

To make efforts to increase General Loan to Rs. 2lacs.

To take steps to provide quality service to the customers.

To make efforts to bring down gross NPA to 4% and net NPA 0%.

All the branches of the bank remain open for six days a week with full day banking service on
Saturday. For the convenience of its customers it is having agency arrangement with HDFC Bank
which enables the bank to issue Demand Drafts on HDFC branches across the country, to arrange
collection of out-station cheques within a week or ten days. Bank is also maintaining C-SGL A/c
with HDFC and also participates in the non-competitive bids of RBI for the purchased of Govt.

15
Securities.

For its employees bank has introduced several good schemes like cover of mediclaim insurance,
covering expenses up to 2.00 lacs requiring hospitalization of the employee, his or her spouse &
up to two children’s. Facility of housing loan up to ten lacs is also available for the staff.

It has in place well defined service rules which ensure career growth to its employees. It also
celebrates annual day in which awards for best branch, workers etc. are also given.

Bank has also introduced welfare schemes for its employees which includes grant of Rs.1 lacs on
death and on permanent disability on duty. Additional reimbursement is also given in case of
serious deceases like heart, kidney transplantations, cancer, T.B. etc.

In order to improve the knowledge of the staff guest lectures are also arranged on important topics
related to the banking activities from time to time.

Product/Services

16
Deposits

Saving Product Interest Type Payable Frequency

Saving Bank Account Compounded Quarterly

Fixed Deposit Simple Monthly/Quarterly/Half Yearly/On Maturity

Term Deposit Compounded Monthly/Quarterly/Half Yearly/On Maturity

Recurring Deposit Compounded Monthly

In case of Fixed Deposit Schemes, the customer has the option to withdraw the Interest Amount
as per the agreed frequency. In case of Term Deposit & Recurring Deposit Schemes the Total
Matured Amount will be payable on maturity only with a option to discontinue the Deposit
subject to penal clauses.

(i) Interest Rates on Deposits w.e.f. 02.09.2018

Deposit Scheme Public(%) Societies(%) Sr.Citizen(%)

Saving Bank Account 3.50 3.50 3.50

Term/Fixed Deposits

17
Deposit Scheme Public(%) Societies(%) Sr.Citizen(%)

7 days to 14 days 4.75 4.75 4.75

15 days to 45 days 5.25 5.25 5.25

46 days to 90 days 6.25 6.25 6.25

91 days to 364 days 6.75 6.75 6.75

1 year to less than 2 years(365 days to 729 days) 6.75 7.25 7.25

2 year to less than 3 years(730 days to 1094 days) 6.70 7.20 7.20

3 year to less than 5 years(1095 days to 1824 days) 6.25 7.25 6.75

5 year to less than 10 years(1825 days to 3650 days) 6.25 7.25 6.75

Recurring Deposit

1 year to less than 2 years 6.75 7.25 7.25

2 year to less than 3 years 6.70 7.20 7.20

3 year to less than 5 years 6.25 7.25 6.75

5 year to less than 10 years 6.25 7.25 6.75

18
Exemptions/ Clarifications
The collection of instruments and issuance of drafts of Educational, welfare services, charitable
and religious institutions are allowed at par provided they bank with us.

Collection of subsidy cheques and/or cheques by Govt department for credit to Govt department
accounts which our Bank is accredited bank,be collected at par.

Collection of cheques and issuance of demand draft etc. to be allowed at par to defense personnel
in active services, societies for PDS purpose only provided that they bank with us.

Cheques/ drafts favoring P.M/ C.M/ relief fund be collected/ issued at par.

No charges for no due certificate in case of Govt. sponsored schemes loan cases.

No discretionary power at Branch level. Any laxity will be viewed seriously and be recovered
from Officer/ Official found guilty.

Relaxation in service charges are to be permitted at H.O. level in the high value and
prestigiousaccounts for business consideration.

Any arrangement approved for relaxation of service charges should not be for more than
Twelvemonths period or up to 31st March every year, which ever is earlier.

The relaxation in service charges shall be subject to review/ revision at Bank's discretion at
anytime.

The inspecting authorities of the Bank i.e. Zonal manager concerned ism to ensure that
Brancheskeep the record of relaxation given to the customers, if any.

Service tax will be recovered and has to be deposited with the authorized Banker's.

Postal charges as mentioned Sr. No 18 will be charged in every case.

Exemption of service charges be allowed to staff members/ retired employees of the bankthrough
saving bank account for their personal requirement.Locker rent of employees will be 50%.

Corporate Tie-up

"Sometime we have to reach out in new directions in order to change and grow"

19
National Insurance Company Limited

The Bank has signed a MOU with "National Insurance Company Limited" for Corporate Agency
Arrangement to provide non-life Insurance Services to Customers and General public along with
the Banking Services at a single window through various branches of the Bank.
Kotak Mahindra, Old Mutual Life Insurance Limited

We are pleased to inform you that Bank has entered into a Referral Agreement with Kotak
Mahindra, Old Mutual Life Insurance Limited. Under the agreement, the Bank will refer its
customers and prospective customers through its branches to the insurance company for
distribution and providing its life insurance products viz. Sukhi Jeewan and Eternal Life.
Hero Honda

We are pleased to inform you that Bank has entered into an MOU with Hero Honda Motors for
financing Motor Cycles
Tata Motors

We are pleased to inform you that Bank has entered into an MOU with Tata Motors for financing
Tata Vehicles
AXIS, HDFC and ICICI Bank

The Bank has also corporate tie-up with AXIS, HDFC and ICICI Bank for remittance and
collection purposes

Organization Structure

Managing Director
Kamal Kant Saroch (HAS)
Email : md@kccb.in
Contact Numbers : +91 1892 224969
Managing Director
The Kangra Central Cooperative Bank Limited
Dharamshala, H.P
20
Educational Qualification
M.Sc, M.Phil Chemistry
Schooling - G.S.S.S. Nadaun,
College - Govt. College, Hamirpur,
University - H.P. University Shimla.

Professional Carrier
2008-2010 Addl. District Magistrate Kangra at Dharamshala
2007-2008 SDM, Rohru & Paonta Sahib
2003-2007 SDM, Baijnath
2002-2003 A.C. to D.C. Kangra
2001-2002 SDM, Pangi
1998-2000 Asstt. Commissioner (Development) at Jubbal Kotkhai
1997 Selected in HPAS
1995-1997 School Lecturer

Board of Directors

Sr.
Name Designation Address Contact No.
No.
Shri Rasil
+ 91 94180
1. Singh Chairman V.P.O. Kale Amb, Tehsil & Distt. Hamirpur (H.P.)
76361
Mankotia
Shri
Vice VPO Sanghol, Tehsil Jaisinghpur Distt. Kangra + 91 94181
2 Bhagwan
Chairman (H.P.) 87839
Dass
Shri Desh Village Dah, P.O. Dah Kulara Tehsil Indora, Distt. + 91 98162
3 Director
Raj MLA Kangra (H.P.) 85008
Shri Ajit
+ 91 94184
4 Paul Director VPO Dohab, Tehsil Shahpur Distt. Kangra (H.P.)
89605
Mahajan
5 Shri Director Village Harmittan P.O. Nehran Pukhar Tehsil + 91 98162
21
 Gurcharan
Singh Dehra, Distt. Kangra (H.P.) 58935
Thakur
Shri
Joginder + 91 94180
6 Director VPO Dehra, Tehsil Dehra Distt. Kangra (H.P.)
Singh 85733
Guleria
Smt. Prem
+ 91 98160
7 Lata Director VPO Bhutti Colony, Tehsil & Distt. Kullu (H.P.)
02221
Thakur
Shri
Karnail Village Kandi, P.O. Bhugnara Tehsil Nurpur,Distt. + 91 94181
8 Director
Singh Kangra (H.P.) 22286
Rana
Shri Jaid
Village Hatli, P.O.Galore, Tehsil Nadaun, Distt. + 91 94180
9 Nath Director
Hamirpur (H.P.) 90816
Sharma
Shri
Ramesh Village Amtrar,P.O. Suneher Tehsil & Distt. + 91 98162
10 Director
Chand Kangra (H.P.) 50324
Bhatia
Shri
Ranjeet Village Bhilla,P.O. Bachhwai Tehsil Palampur, + 91 98163
11 Director
Singh Distt. Kangra (H.P.) 40135
Rana
Shri Amrit
+ 91 98160
12 Lal Director Village & P.O. Dehlan, Tehsil & Distt. Una (H.P.)
31863
Bhardwaj
Shri
+ 91 98166
13 Davinder Director VPO Charara, Tehsil Bangana, Distt. Una (H.P.)
44040
Kumar
Shri Karan
Village Bain Attarian P.O. Kandrori, Tehsil Indora + 91 98053
14 Singh Director
Distt. Kangra (H.P.) 66394
Pathania
15 Shri Director Village Tharass,P.O. Hurla Tehsil & Distt. Kullu + 91 94180

22
 Rajinder
(H.P.) 60287
Singh
Shri
Rigizen VPO Kawaring, Tehsil Keylong Distt. Lauhal & + 91 94185
16 Director
Samphel Spiti (H.P.) 50400
Hayerpa
Shri
+ 91 98166
17 Pawan Director VPO Ambota, Tehsil Amb, Distt. Una (H.P.)
13905
Kumar
Shri
VPO Samirpur, Tehsil Bhoranj Distt. Hamirpur + 91 94184
18 Rakesh Director
(H.P.) 76833
Thakur
Shri S.K. + 91 94181
19 Director (RCS Nominee) Dy. RCS, Dharmshala (H.P.)
Rangra 34914
Shri
Ramesh
20 Director VPO Bharolian-Kalan Distt. Una (H.P.) + 91
Chander
Sharma
Shri.
Kamal
Managing + 91 94180
21 kant
Director 94470
Saroch,
HAS

23
 CHAPTER-3

Working Capital Management

Concept of working capital

There are two concepts of working capital:

1. Gross working capital

It refers to the firm’s investment in total current assets or circulating assets.

2. Net working capital (defined in two ways)

(i) It is the excess of current assets over current liabilities.

(ii) It is that portion of a firm’s current assets which is financed by long-term funds.

NEED FOR WORKING CAPITAL:-

The basic objective of financial management is to maximize shareholders wealth. This is

possible only when the company earns sufficient profit. The amount of such profit largely
depends upon the magnitude of sales.

However, sales do not convert into cash instantaneously. There is always time gap between the
sale of goods and receipt of cash.

Working capital is required for this period in order to sustain the sales activity.

Types of working capital:-

Can be divided into two categories on the basis of time: -

1. Permanent working capital

2. Temporary or Variable working capital

24
1. PERMANENT WORKING CAPITAL:-

This refers to that minimum amount of investment in all current assets which is required at all
times to carry out minimum level of business activities. It represents the current assets required
on a continuing basis over the entire year.

Tandon committee has referred to this type of working capital as “core current assets”.

The following are the characteristics of this type of working capital:-

Amount of permanent working capital remains in the business in one form or another. This is
particularly important from the point of view of financing. The suppliers of such working capital
should not expect its return during the lifetime of the firm.

It also grows with the size of the business.

Permanent working capital is permanently needed for the business and therefore it should be
financed out of long-term funds.

This is the reason why the current ratio has to be substantially more than ‘1’.

2. TEMPORARY OR VARIABLE WORKING CAPITAL:-

The amount of such working capital keeps on fluctuating from time to time on the basis of
business activities.

In other words, it represents additional current assets required at different times during the
operating year.

REASONS FOR ADEQUATE WORKING CAPITAL: -

A firm must have adequate working capital, i.e., as much as needed by the firm.

It should neither have excessive nor inadequate. Both situations are dangerous. Excessive
working capital means the firm has idle funds, which earn no profit for the firm. Inadequate

25
working capital means the firm does not have sufficient funds for running its operations, which
ultimately results in production interruptions, and lowering down the profitability.

It will be interesting to understand the relation between working capital, risk and return. In a
manufacturing concern, it is generally accepted that higher levels of working capital decrease the
risk and decrease the profitability too.

While lower levels of working capital increase the risk but have the potentiality of increasing the
profitability also.

This principle is based on the following assumptions: -

(i) There is direct relationship between risk and profitability --- higher is the risk, higher is the
profitability, while lower is the risk, lower is the profitability.

(ii) Current assets are less profitable than fixed assets.

(iii) Short-term funds are less expensive than long-term funds.

26
 CHAPTER-4

MANAGEMENT
OF
WORKING CAPITAL

Working capital refers to all aspects of the administration of both current assets and current
liabilities.

In other words, working capital management is concerned with the problems that arise in
attempting to manage the current assets, the current liabilities and the interrelationships
that exist between them.

Moreover, different components of working capital are to be properly balanced in such a way
that during one complete production or trade cycle the cash should be available for purchase of
fresh material and for running the business including operating expenses, after realization of sale
proceeds of earlier cycle without any hurdles.

In the absence of such situation, the financial position in respect of the firm’s liquidity may not
be satisfactory in spite of satisfactory liquidity ratio.

Working capital management policies have a great effect on firm’s profitability, liquidity and its
structural health.

A finance manager should therefore, chalk out appropriate working capital management policies
in respect of each of the components of working capital so as to ensure higher profitability,
proper liquidity and sound structural health of the organization.

In order to achieve this objective the finance manager has to perform basically following two
functions:

27
-1.Estimating the amount of working capital.

2.Sources from which these funds have to be raised.

ESTIMATING WORKING CAPITAL REQUIREMENTS:

-

In order to determine the amount of working capital needed by a firm, a number of factors
viz. production policies, nature of business, length of manufacturing process, rapidity of
turnover, seasonal fluctuations, etc. are to be considered by the finance manager.

TECHNIQUES FOR ASSESSMENT OF WORKING CAPITAL

REQUIREMENTS: -

1. ESTIMATION OF COMPONENTS OF WORKING CAPITAL

METHOD: -
Since working capital is the excess of current assets over current liabilities, an assessment of the
working capital requirements can be made by estimating the amounts of different constituents of
working capital e.g., inventories, accounts receivable, cash, accounts payable, etc.

2. PERCENT OF SALES APPROACH:-

This is a traditional and simple method of estimating working capital requirements.

According to this method, on the basis of past experience between sales and working capital
requirements, a ratio can be determined for estimating the working capital requirements in
future.

3. OPERATING CYCLE APPROACH: -

According to this approach, the requirements of working capital depend upon the operating cycle
of the business.

28
The operating cycle begins with the acquisition of raw materials and ends with the collection of
receivables

It may be broadly classified into the following four stages viz.

 Raw materials and stores storage stage.

 Work-in-progress stage.

 Finished goods inventory stage.

 Receivables collection stage.

The duration of the operating cycle for the purpose of estimating working capital requirements is
equivalent to the sum of the durations of each of these stages less the credit period allowed by
the suppliers of the firm.

Symbolically the duration of the working capital cycle can be put as follows: -

O=R+W+F+D-C

Where,

O=Duration of operating cycle;

R=Raw materials and stores storage period;

W=Work-in-progress period;

F=Finished stock storage period;

D=Debtors collection period;

C=Creditors payment period.

29
Each of the components of the operating cycle can be calculated as follows:-

R= Average stock of raw materials and stores

Average raw materials and stores consumptions per day

W=Average work-in-progress inventory

Average cost of production per day

D=Average book debts

Average credit sales per day

C=Average trade creditors

Average credit purchases per day

After computing the period of one operating cycle, the total number of operating cycles that can
be computed during a year can be computed by dividing 365 days with number of operating days
in a cycle. The total expenditure in the year when year when divided by the number of operating
cycles in a year will give the average amount of the working capital requirement.

SOURCES OF WORKING CAPITAL:-

The working capital requirements should be met both from short-term as well long-term sources
of funds. It will be appropriate to meet at least 2/3rd (if not the whole) of the permanent working
capital requirements from long-term sources and only for the period needed.

30
 The financing of working capital through short-term sources of funds has the benefits of lower
cost and establishing close relationship with the banks.

Financing of working capital from long-term resources provides the following benefits:

It reduces risk, since the need to repay loans at frequent intervals is eliminated.

It increases liquidity since the firm has not to worry about the payment of these funds in the near
future.

APPROACHES FOR DETERMINING THE FINANCING MIX:-

There are three basic approaches for determining the working capital financing mix.

(i) THE HEDGING APPRAOCH:-

According to this approach, the maturity of source of funds should match the nature of assets to
be financed.

The approach is, therefore, termed as “Matching approach”.

It divides requirements of total working capital funds into two categories.

Permanent working capital, i.e., funds required for purchase of core current assets. Such funds do
not vary over time.

Temporary or seasonal working capital, i.e., funds which fluctuate over time.

The permanent working capital requirements should be financed by long-term funds while the
seasonal working capital requirements should be financed out of short-term funds.

(ii) THE CONSERVATIVE APPROACH: -

According to this approach all requirements of funds should be met from long-term sources.

The short-term sources should be used only for emergency requirements.

The conservative approach is less risky, but more costly as compared to the hedging approach.

31
In other words conservative approach is “low profit-low risk” (or high cost, high net working
capital) while hedging approach results in high profit-high risk (or low cost, low net working
capital).

(iii) TRADE-OFF BETWEEN HEDGING AND CONSERVATIVE APPROACH: -

The hedging and conservative approaches are both on two extremes.

Neither of them can therefore help in efficient working capital management. A trade-off between
these two can give satisfactory results. The level of such trade-off will differ from case to case
depending upon perception of the risk by the persons involved in financial decision-making.
However, one way of determining the level of trade-off is by finding the average of the minimum
and the maximum requirements of working capital during a period. The average working capital
so obtained may be financed by long-term funds and the balance by short-term fund.
Management of different components of working capital

Working capital management involves management of different components of working capital

such as cash, accounts receivable, creditors, etc

CHAPTER-5

CASH
MANAGEMENT
It is the duty of the finance manager to provide adequate cash to all segments of the organization.
He also has to ensure that no funds are blocked in idle cash since this will involve cost in terms
32
of interest to the business. A sound cash management scheme, therefore, maintains the balance
between the twin objectives of liquidity and cost.

Meaning of cash

The term “cash” with reference to cash management is used in two senses. In a narrower sense it
includes coins, currency notes, cheques, bank drafts held by a firm with it and the demand
deposits held by it in banks.

In a broader sense it also includes “near-cash assets” such as, marketable securities and time
deposits with banks. Such securities or deposits can immediately be sold or converted into cash
if the circumstances require. The term cash management is generally used for management of
both cash and near-cash assets.

Motives for holding cash

A distinguishing feature of cash as an asset, irrespective of the firm in which it is held, is that it
does not earn any substantial return for the business. In spite of this fact cash is held by the firm
with following motives.

1. Transaction motive

A firm enters into a variety of business transactions resulting in both inflows and outflows. In
order to meet the business obligation in such a situation, it is necessary to maintain adequate cash
balance. Thus, cash balance is kept by the firms with the motive of meeting routine business
payments.

2.Precautionary motive

A firm keeps cash balance to meet unexpected cash needs arising out of unexpected
contingencies such as floods, strikes, presentment of bills for payment earlier than the expected
date, unexpected slowing down of collection of accounts receivable, sharp in prices of raw
materials, etc. The more is the possibility of such contingencies more is the cash kept by the firm
for meeting them.

3.Speculative motive

A firm also keeps cash balance to take advantage of unexpected opportunities, typically outside
the normal course of the business. Such motive is, therefore, of purely a speculative nature.

33
For example,

A firm may like to take advantage of an opportunity of purchasing raw materials at the
reduced price on payment of immediate cash or delay purchase of raw materials in
anticipation of decline in prices.

4. Compensation motive

Banks provide certain services to their clients free of charge. They, therefore, usually require
clients to keep minimum cash balance with them, which help them to earn interest and thus
compensate them for the free services so provided.

Business firms normally do not enter into speculative activities and, therefore, out of the four
motives of holding cash balances, the two most important motives are the compensation motive.

Objectives of cash management

There are two basic objectives of cash management:

To meet the cash disbursement needs as per the payment schedule;

To minimize the amount locked up as cash balances.

1. Meeting cash disbursements

The first basic objective of cash management is to meet the payments Schedule. In other words,
the firm should have sufficient cash to meet the various requirements of the firm at different
periods of times. The business has to make payment for purchase of raw materials, wages, taxes,
purchases of plant, etc. The business activity may come to a grinding halt if the payment
schedule is not maintained. Cash has, therefore, been aptly described as the “oil to lubricate the
ever-turning wheels of the business, without it the process grinds to a stop.”

2. Minimizing funds locked up as cash balances:The second basic objective of cash

management is to minimize the amount locked up as cash balances. In the process of minimizing
the cash balances, the finance manager is confronted with two conflicting aspects. A higher cash
balance ensures proper payment with all its advantages. But this will result in a large balance of

34
cash remaining idle. Low level of cash balance may result in failure of the firm to meet the
payment schedule.

The finance manager should, therefore, try to have an optimum amount of cash balance keeping
the above facts in view.

Cash management - - - - - basic problems

 Cash management involves the following four basic problems:

 Controlling levels of cash;

 Controlling inflows of cash;

 Controlling outflows of cash;

 Optimum investment of surplus cash.

1. Controlling levels of cash

One of the basic objectives of cash management is to minimize the level of cash balance with the
firm. This objective is sought to be achieved by means of the following: -

(i) Preparing cash budget:

Cash budget or cash forecasting is the most significant device for planning and controlling the
use of cash. It involves a projection of future cash receipts and cash disbursements of the firm
over various intervals of time. It reveals to the finance manager the timings and amount of
expected cash inflows and outflows over a period studied. With this information, he is better able
to determine the future cash needs of the firm, plan for the financing of these needs and exercise
control over the cash and liquidity of the firm.

Thus in case a cash budget is properly prepared it correctly reveals the timings and size of net
cash flows as well as the periods during which the excess cash may be available for temporary
investment. In a small company, the preparation of cash budget or a cash forecast does not
35
involve much of complications and, therefore, relatively a minor job. However, in case of big
companies, it is almost a full time job handled by a senior person, namely, the budget controller
or the treasurer.

(ii) Providing for unpredictable discrepancies:

Cash budget predicts discrepancies between cash inflows and outflows on the basis of normal
business activities. It does not take into account discrepancies between cash inflows and cash
outflows on account of unforeseen circumstances such as strikes, short-term recession, floods,
etc. a certain minimum amount of cash balance has, therefore, to be kept for meeting such
unforeseen contingencies. Such amount is fixed on the basis of past experience and some
intuition regarding the future.

(iii) Consideration of short costs:

The term short cost refers to the cost incurred as a result of shortage of cash. Such costs may take
any of the following forms:

The failure of the firm to meet its obligations in time may result in legal action by the firm’s
creditors against the firm. This cost is in terms of fall in the firm’s reputation besides financial
costs incurred in defending the suit;

Borrowing may have to be resorted to at high rate of interest. The firm may also be required to
pay penalties, etc., to banks for not meeting the obligations in time.

(iv) Availability of other sources of funds:

A firm can avoid holding unnecessary large balance of cash for contingencies in case it has
adequate arrangements with its bankers for borrowing money in times of emergencies. For such
arrangements the firm has to pay a slightly higher rate of interest than that on a long-term debt.
But considerable saving in interest costs will be effected because such interest will have to be
paid only for shorter period.

2. Controlling inflows of cash

36
Having prepared the cash budget, the finance manager should also ensure that there is no
significant deviation between the projected cash inflows and the projected cash outflows. This
requires controlling of both inflows as well as outflows of cash.

Speedier collection of cash can be made possible by adoption of the following techniques, which
have been found to be quite useful and effective.

(i) Concentration Banking:

Concentration banking is a system of decentralizing collections of accounts receivables in case

of large firms having their business spread over a large area. According to this system, a large
number of collection centers are established by the firm in different areas selected on
geographical basis. The firm opens its bank accounts in local banks of different areas where it
has its collection centers. The collection centers are required to collect cheques from their
customers and deposits them in the local bank account. Instructions are given to the local
collection centers to transfer funds over a certain limit daily telegraphically to the bank at the
head office. This facilitates fast movements of funds.

The company’s treasurer on the basis of the daily report received from the head office bank about
the collected funds can use them for disbursement according to needs.

This system of concentration banking results in the following advantages:

The mailing time is reduced since the collection centers themselves collect cheques from the
customers and immediately deposit them in local bank accounts. Moreover, when the local
collection centers are also used to prepare and send bills to the customers in their areas, the
mailing time in sending bills to the customer is also reduced;

The time required to collect cheques is also reduced since the cheques deposited in the local bank
accounts are usually drawn on banks in that area.

This helps in quicker collection of cash.

(ii) Lock-box system:

Lock-box system is a further step in speeding up collection of cash. In case of concentration

banking cheques are received by collection centers who, after processing, deposit them in the
local bank accounts. Thus, there is time gap between actual receipt of cheques by a collection
centre and its actual depositing in the local bank account.

37
Lock-box system has been devised to eliminate delay on account of this time gap.

According to this system, the firm hires a post-office box and instructs its customers to mail their
remittances to the box. The firm’s local bank is given the authority to pick the remittances
directly from the post-office box. The bank picks up the mail several times a day and deposits the
cheques in the firm’s account. Standing instructions are given to the local bank to transfer funds
to the head office bank when they exceed a particular limit.

The Lock-Box system offers the following advantages:

All remittances are handled by the banks even prior to their de3posits with them at a very low
cost;

The cheques are deposited immediately upon receipt of remittances and the collecting process
starts much earlier than that under the system of concentration banking.

3. Control over cash flows

An effective control over cash outflows or disbursements also helps a firm in conserving cash
and reducing financial requirements. However, there is a basic difference between the underlying
objective of exercising control over cash inflows and cash outflows. In case of the former,
the objective is the maximum acceleration of collections while in the case of latter, it is to slow
down the disbursements as much as possible. The combination of fast collections and slow
disbursements will result in maximum availability of funds.

A firm can advantageously control outflows of cash if the following considerations are kept in
view:

Centralized system of disbursement should be followed as compared to decentralized system in

case of collections. All payments should be made from a single control account. This will result
in delay in presentment of cheques for payment by parties who are away from the place of
control account.

Payments should be made on the due dates, neither before nor after. The firm should neither lose
cash discount nor its prestige on account of delay in payments. In other words, the firm should
pay within the terms offered by the suppliers.

The firm may use the technique of “playing float” for maximizing the availability of funds. The
term float refers to the period taken from one stage to another in the cash collection process.

It can be of the following types: -

38
 (i) Billing float:

It refers to the time interval between the making of a formal invoice by the seller for the goods
sold and mailing the invoice to the purchaser

(ii) Capital float:

It refers to the time, which elapses between receiving of the cheque by the post office
or other messenger from the buyer till it is actually delivered to the seller.

(iii) Cheque processing float:

It refers to the time required for the seller to sort, record and deposit the cheque after it
has been received by him.

(iv) Bank processing float:

This refers to the time period which elapses between deposit of the cheque with the
banker and final credit of funds by the banker to the seller’s account.

4. Investing surplus cash

(i) Determination of the amount of surplus cash;(ii) Determination of the channels of

investments.

(i) Determining of surplus cash

Surplus cash is the cash in excess of the firm’s normal cash requirements. While determining the
amount of surplus cash, the finance manager has to take into account the minimum cash balance
that the firm must keep to avoid risk or cost of running out of funds. Such minimum level may be
termed a “safety level of cash”.

Determining safety level for cash

39
The finance manager determines the safety level of cash separately both for normal periods and
peak periods.

In both the cases, he has to decide about the following two basic factors:

Desired days of cash:

It means the number of days for which cash balance should be sufficient to cover payments.

(b) Average daily cash outflows:

This means the average amount of disbursements, which will have to be made daily.

The “desired days of cash” and “ average daily cash outflows” are separately determined for
normal and peak periods. Having determined them, safety level of cash can be calculated as
follows:

During normal periods:

Safety level of cash = Desired days of cash x average daily cash outflows

During peak periods:

Safety level of cash = Desired days of cash at the busiest period x

Average of highest daily cash outflows.

(ii) Determining of channels of investments

The finance manager can determine the amount of surplus cash, by comparing the actual amount
of cash available with the safety or minimum level of cash. Such surplus may be either of a
temporary or a permanent nature.

40
Temporary cash surplus consists of funds, which are available for investment on a short-term
basis (maximum 6 months), since they are required to meet regular obligations such as those of
taxes, dividends, etc.

Permanent cash surplus consists of funds, which are kept by the firm to avail of some unforeseen
profitable opportunity of expansion or acquisition of some asset. Such funds are, therefore,
available for investment for a period ranging from six months to a year.

Criteria for investment

In most of the companies there are usually no written instructions for investing the surplus cash.
It is left to the discretion and judgment; he usually takes into consideration the following factors:

(i) Security:

This can be ensured by investing money in securities whose price remain more or less
stable.

(ii) Liquidity:

This can be ensured by investing money in short-term securities including short-term

fixed deposits with bank.

(iii) Yield:Most corporate managers give less emphasis to yield as compared to security and
liquidity of investment. They, therefore, prefer short-term government securities for investing
surplus cash. However, some corporate managers follow aggressive investment policies, which
maximize the yield on their investments.

(iv) Maturity:

Surplus cash is available not for an indefinite period. Hence, it will be advisable to select
securities according to their maturities keeping in view the period for which surplus cash is
available. If such selection is done carefully, the finance manager can maximize the yield as well
as maintain the liquidity of investments.

Cash management models

41
Several types of cash management models have been recently designed to help in determining
optimum cash balance. These models are interesting and are beginning to be used in practice.

Two of such models are given below:

1. Baumol model: -

This model was suggested by William J Baumol. It is similar to one used for determination of
economic order quantity.

According to this model, optimum cash level is that level of cash where the carrying costs and
transactions costs are the minimum.

Carrying costs

This refers to the cost of holding cash, namely, the interest foregone on marketable securities.
They may also be termed as opportunity cost of keeping cash balance.

Transaction costs

This refers to the cost involved in getting the marketable securities converted into cash. This
happens when the firm falls short of cash and to sell the securities resulting in clerical,
brokerage, registration and other costs.

There is an inverse relationship between the two costs. When one increases, the other decreases,
the other decreases. Hence, optimum cash level will be at that point where these two costs are
equal.

The formula for determining optimum cash balance can be put as

follows:

C= 2U x P

Where,
42
 C = Optimum cash balance

U = Annual (or monthly) cash disbursements

P = Fixed costs per transaction

S = Opportunity cost of one rupee p.a. (p.m)

2. Miller-Orr Model

Baumol model is not suitable in those circumstances when the demand for cash is not steady and
cannot be known in advance.

Miller-Orr model helps in determining the optimum level of cash in such circumstances. It deals
with cash management problem under the assumption of stochastic or random cash flows by
laying down control limits for cash balances. These limits consist of an upper limit (h), lower
limit (o) and return point (z). When cash balance reaches the upper limit, a transfer of cash equal
to “h-z” is affected to marketable securities. When it touches the lower limit, a transfer equal to
“z-o” from marketable securities to cash is made. No transaction between cash to marketable
securities and marketable securities to cash is made during the period when the cash balance
stays between the high and low limits.

The model is illustrated in the form of the following chart:

upper control limit

Cash balance

z Return point

43
 lower control limit

Time

(D#4 source: Dr.S.N.Maheshwari, Financial management)

The above chart shows that when cash balances reaches the upper limit, an account equal to “h-
z” is invested in the marketable securities and cash balance comes down to “z” level. When cash
balance touches the lower limit marketable securities of the value of “z-o” are sold and the cash
balance again goes up to ‘z’ level.

The upper limit and lower limit are set on the basis of opportunity cost of holding cash; degree of
likely fluctuation in cash balances and the fixed costs associated with securities transactions.

CHAPTER-6

MANAGEMENT
OF
ACCOUNTS RECEIVABLES

Accounts receivables (also properly termed as receivables) constitute a significant portion of the
total currents assets of the business next after inventories. They are direct consequences of “trade
credit” which has become an essential marketing tool in modern business.

When a firm sells goods for cash, payments are received immediately and, therefore, no
receivables are credited. However, when a firm sells goods or services on credit, the payments

44
are postponed to future dates and receivables are created. Usually, the credit sales are made on
open account, which means that, no, formal acknowledgements of debt obligations are taken
from the buyers. The only documents evidencing the same are a purchase order, shipping
invoice or even a billing statement. The policy of open account sales facilities business
transactions and reduces to a great extent the paper work required in connection with credit sales.

Meaning of Receivables
Receivables are assets accounts representing amounts owed to the firm as a result of sale of
goods / services in the ordinary course of business.

They, therefore, represent the claims of a firm against its customers and are carried to the “assets
side” of the balance sheet under titles such as accounts receivables, customer receivables or book
debts. They are, as stated earlier, the result of extension of credit facility to then customers a
reasonable period of time in which they can pay for the goods purchased by them.

Purpose of Receivables
Accounts receivables are created because of credited sales. Hence the purpose of receivables is
directly connected with the objectives of making credited sales.

The objectives of credited sales are as follows:

(i) Achieving growth in sales:

If a firm sells goods on credit, it will generally be in a position to sell more goods than if it
insisted on immediate cash payments. This is because many customers are either not prepared or
not in a position to pay cash when they purchase the goods. The firm can sell goods to such
customers, in case it resorts to credit sales.

(ii) Increasing profits:

Increase in sales results in higher profits for the firm not only because of increase in the volume
of sales but also because of the firm charging a higher margin of profit on credit sales as
compared to cash sales.

45
(iii) Meeting competition:

A firm may have to resort to granting of credit facilities to its customers because of similar
facilities being granted by the competing firms to avoid the loss of sales from customers who
would buy elsewhere if they did not receive the expected output.

The overall objective of committing funds to accounts receivables is to generate a large flow of
operating revenue and hence profit than what would be achieved in the absence of no such
commitment.

Costs of maintaining receivables

The costs with respect to maintenance of receivables can be identified as follows:

1. Capital costs:

Maintenance of accounts receivables results in blocking of the firm’s financial resources in them.
This is because there is a time lag between the sale of goods to customers and the payments by
them. The firm has, therefore, to arrange for additional funds top meet its own obligations, such
as payment to employees, suppliers of raw materials, etc., while awaiting for payments from its
customers. Additional funds may either be raised from outside or out of profits retained in the
business. In both the cases, the firm incurs a cost. In the former case, the firm has to pay interest
to the outsider while in the latter case, there is an opportunity cost to the firm, i.e., the money
which the firm could have earned otherwise by investing the funds elsewhere.

2. Administrative costs:

The firm has to incur additional administrative costs for maintaining accounts receivable in the
form of salaries to the staff kept for maintaining accounting records relating to customers, cost of
conducting investigation regarding potential credit customers to determine their creditworthiness,
etc.

3. Collection costs:

The firm has to incur costs for collecting the payments from its credit customers. Sometimes,
additional steps may have to be taken to recover money from defaulting customers.

4. Defaulting costs:

Sometimes after making all serious efforts to collect money from defaulting customers, the firm
may not be able to recover the overdues because of the of the inability of the customers. Such
debts are treated as bad debts and have to be written off since they cannot be realized.

46
Factors affecting the size of receivables

The size of the receivable is determined by a number of factors.

Some of the important factors are as follows:

(1) Level of sales:

This is the most important factor in determining the size of accounts receivable. Generally in the
same industry, a firm having a large volume of sales will be having a larger level of receivables
as compared to a firm with a small volume of sales.

(2) Credited policies:

The term credit policy refers to those decision variables that influence the amount of trade credit,
i.e., the investment in receivables. These variables include the quantity of trade accounts to be
accepted, the length of the credit period to be extended, the cash discount to be given and any
special terms to be offered depending upon particular circumstances of the firm and the
customer. A firm’s credit policy, as a matter of fact, determines the amount of risk the firm is
willing to undertake in its sales activities. If a firm has a lenient or a relatively liberal credit
policy, it will experience a higher level of receivables as compared to a firm with a more rigid or
stringent credit policy.

This is because of two reasons:

A lenient credit policy encourages even the financially strong customers to make delays in
payments resulting in increasing the size of the accounts receivables;

Lenient credit policy will result in greater defaults in payments by financially weak customers
thus resulting in increasing the size of receivables.

(3) Terms of trade:

The size of the receivables is also affected by terms of trade (or credit terms) offered by the firm.

The two important components of the credit terms are:

Credit period;

47
Cash discount.

(i) Credit period:

The term credit period refers to the time duration for which credit is extended to the customers. It
is generally expressed in terms of “net days”.

For example,

If a firm’s credit terms are “net 15”, it means the customers are expected to pay within 15 days
from the date of credit sale.

(ii) Cash discount:

Most firms offer cash discount to their customers for encouraging them to pay their dues before
the expiry of the credit period. The terms of the cash discounts indicate the rate of discount as
well as the period for which the discount has been offered.

CHAPTER-7
MANAGEMENT
OF
ACCOUNTS PAYABLE

Management of accounts payable is as much important as management of accounts receivable.

There is a basic difference between the approach to be adopted by the finance manager in the two
cases. Whereas the underlying objective in case of accounts receivable is to maximize the
acceleration of the collection process, the objective in case of accounts payable is to slow down
the payments process as much as possible. But it should be noted that the delay in payment of
accounts payable may result in saving of some interest costs but it can prove very costly to the
firm in the form of loss credit in the market.

48
The finance manager has, therefore, to ensure that the payments after obtaining the best credit
terms possible.

Overtrading and Under trading

The concepts of overtrading and under trading are intimately connected with the net working
capable position of the business. To be more precise they are connected with the cash position of
the business.

OVERTRADING:

Overtrading means an attempt to maintain or expand scale of operations of the business with
insufficient cash resources. Normally, concerns having overtrading have a high turnover ratio
and a low current ratio. In a situation like this, the company is not in a position to maintain
proper stocks of materials, finished goods, etc., and has to depend on the mercy of the suppliers
to supply them goods at the right time. It may also not be able to extend credit to its customers,
besides making delay in payment to the creditors. Overtrading has been amply described as
“overflowing the balloon”. This may, therefore, prove to be dangerous to the business since
disproportionate increase in the operations of the business without adequate resources may bring
its sudden collapse.

Causes of overtrading
The following may be the causes of over-trading:

(i) Depletion of working capital:

Depletion of working capital ultimately results in depletion of cash resources. Cash resources of
the company may get depleted by premature repayment of long-term loans, excessive drawings,
dividend payments, purchase of fixed assets and excessive net trading losses, etc.

(ii) Faulty financial policy:

Faulty financial policy can result in shortage of cash and overtrading in several ways:

Using working capital for purchase of fixed assets.

Attempting to expand the volume of the business without raising the necessary resources, etc.
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(iii) Over-expansion:

In national emergencies like war, natural calamities, etc., a firm may be required to produce
goods on a larger scale. Government may pressurize the manufacturers to increase the volume of
production without providing for adequate finances. Such pressure results in over-expansion of
the business ignoring the elementary rules of sound finance.

(iv) Inflation and rising prices:

Inflation and rising prices make renewals and replacements of assets costlier. The wages and
material costs also rise. The manufacturer, therefore, needs more money even to maintain the
existing level of activity.

(v) Excessive taxation:

Heavy taxes result in depletion of cash resources at a scale higher than what is justified.

The cash position is further strained on account of efforts of the company to maintain reasonable
dividend rates for their shareholders.

Consequences of overtrading

The consequences of over-trading can be summarized as follows:

(i) Difficulty in paying wages and taxes:

This is one of the most dangerous consequences of overtrading. Non-payments of wages in time
create a feeling of uncertainty, insecurity and dissatisfaction in all ranks of the labour. Non-
payments of taxes in time may result in bringing down the reputation of the company
considerably in the business and government circles.

(ii) Costly purchases:

The company has to pay more for its purchases on account of its inability to have proper
bargaining, bulk buying and selecting proper source of supplying quality materials.

(iii) Reduction in sales:

The company may have to suffer in terms of sales because the pressure for cash requirements
may force it to offer liberal cash discounts to debtors for prompt payments, as well as selling
goods at throwaway prices.

(iv) Difficulties in making payments:

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The shortage of cash will force the company to persuade its creditors to extend credit facilities to
it. Worry, anxiety and fear will be the management’s constant companions.

(v) Obsolete plant and machinery:

Shortage of cash will force the company to delay even the necessary repairs and renewals.
Inefficient working, unavoidable breakdowns will have an adverse effect both on volume of
production and rate of profit.

Symptoms and remedies for overtrading

The situation of overtrading should be remedied at the earliest possible opportunity, i.e., as soon
as its first symptoms are visible.

The symptoms can be put as follows:

 A higher increase in the amount of creditors as compared to debtors. This is because of

firms inability to pay its creditors in time and exercising of undue pressure on debtors for
payments;

 Increased bank borrowing with corresponding increase in inventories;

 Purchase of fixed assets out of short-term funds;

 A fall in the working capital turnover (working capital/sales) ratio.

 A low current ratio and high turnover ratio.

The cure for overtrading is easier to prescribe but difficult to follow. The cure is simple-reduce
the business or increase finance. Both are difficult. However, arrangement of more finance is
better. If this is not possible, the only advisable course left will be to sell the business as a going
concern.

UNDERTRADING:

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It is the reverse of overtrading. It means improper and underutilization of funds lying at the
disposal of the undertaking. In such a situation the level of trading is low as compared to the
capital employed in the business. It results in increase in the size of inventories, book debts and
cash balances. Under trading is a matter of fact an aspect of overcapitalization. The basic cause
of under trading is, therefore, underutilization of the firm’s resources. Such underutilization may
be due any one or more of the following causes:

Conservative policies followed by the management;

Non-availability or shortage of basic facilities necessary for production such as, raw materials,
power, labour, etc;

General depression in the market resulting in fall in the demand of company’s products;

The symptoms of under trading are the following:

 A very high current ratio;

 Low turnover ratios;

 An increase in working capital turnover (working capital/ sales) ratio.

Consequences of under trading

The following are the consequences of under trading:

(i) The profits of the firm show a declining trend resulting in a lower return on capital employed
(ROI) in the business.

(ii) The value of the shares of the company on the stock exchange starts falling on account of
lower profitability;

(iii) There is loss to the reputation of the firm on account of lower profitability and creation of
impression in the minds of investors that the management is inefficient.

Remedies for under trading

The condition of under trading is set in because of underutilization of the firm’s resources. The
situation can, therefore, be remedied by the management by adopting a more dynamic and result-

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oriented approach. The firm may go for diversification and undertaking new profitable jobs,
projects, etc., resulting in a better and efficient utilization of the firm’s resources.

CHAPTER-8

FACTORS INFLUENCING WORKING CAPITAL

REQUIREMENTS

The working capital needs of affirm are influenced by numerous factors.

The important ones are:

 Nature of business

 The working capital requirement of a firm is closely related to the nature of its business.
A service firm, like an electricity undertaking which has a short operating cycle, which
sells predominantly on cash basis, has a modest working capital requirement. On the
other hand, a manufacturing concern like a machine tools unit, which has a long
operating cycle and which sells largely on credit, has a very substantial working capital
requirement.

 Seasonality of operations

 Firms which have marked seasonality in their operations usually have highly fluctuating
working capital requirements. To illustrate, consider a firm manufacturing ceiling fans.

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 The sale of ceiling fans reaches a peak during the summer months and drops sharply
during the winter period.

 Production policy

 A firm marked by pronounced seasonal fluctuation in its sales pursues a production

policy, which may reduce the sharp variations in working capital requirements.

 Market conditions

 The degree of competition prevailing in the market place has an important bearing on
working capital needs. When competition is keen, a larger inventory of finished goods is
required to promptly serve customers who may not be inclined to wait because other
manufacturers are ready to meet there needs.

 Conditions of supply

 The inventory of raw materials, spares, and stores depends on the conditions of supply. If
the supply is prompt and adequate, the firm can manage with small inventory.

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 CHAPTER-9

Working capital assessment in Kangra central

cooperative bank-

2009-10 2010-11 2011-12

Membership 35442 35974 36918
Clientele other than
membership 97932 102886 108543

(Figures In lacs)
Share Money 1657 1844 2184
Reserves/ Other funds 1534 1746 2033
Deposits 29927 34393 40156
Loans/Advances 19165 23675 28017
Working Capital 36563 41916 47962
Net Profit 547 835 1208

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OTHERS
Net NPA (-) 0.84% 0.32% 0.00%
CRAR 19.16% 15.10% 15.52%

COMPARISION OF NET WORKING CAPITAL

Working Capital ( In Lacs)

56
Deposits (In Lacs)

Loans/Advances ( In Lacs)

57
Balance sheet of KCC bank 2015-2016

58
Balance sheet of KCC bank 2016-2017

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 CHAPTER- 10
SCANNING OF WORKING CAPITAL FINANCING
in KCC bank

 There is still scope for more efficient working capital financing in the bank.

 Recommendations after Scanning of working capital financing kcc bank.

 While assessing the project, the profit element should be considered with the risk element
collectively.

 Financing of working capital should be avoided to a long loss making firm, even though
regular customer.

 Some times the clients business looks promising and real to his words then certain
relaxation should be provided as far as policies are considered.

 Sectoral analysis should be considered before providing the working capital finance to
any firm, trends should be considered.

 Statement of financial transactions should be review at regular interval to minimize losses

due to irregular payments and defaulters.

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 CHAPTER-11

CONCLUSIONS
Any change in the working capital will have an effect on a business’s cash flow. A positive
change in working capital indicates that the business has paid out cash, for example in
purchasing or converting inventory, paying creditors etc. Hence, an increase in working capital
will have a negative impact on the business. However, a negative change in the working capital
indicates low funds to pay off short term liabilities (current liabilities), which may have a bad
repercussions to the future of the company.

Therefore we can say that working capital plays a very important role in corporate banking:

 Without working capital any business cannot run.

 The profit ratio of the bank is increasing year by year.

 The Bank is able to pay off its short-term liabilities.

 A positive change in working capital.

 Business is in position to paid out cash..

 When there is excessive working capital, Credit worthiness suffers.

 Current ratio is too high.

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BIBLIOGRAPHY

 Author: Dr. S N Maheshwari

 Name of the book: Financial Management

 Edition 2011

 Publisher name: SULTAN CHAND &SONS

 Pages no.: D.290 onwards

o Author: I .M. Pandey

o Name of the book: Financial Management

o 8th Edition 2004

o Publisher name: VIKAS PUBLISHING HOUSE PVT. LTD

o Page no.: 820

 Author: Madhavi K (2014)

 Name of the book: Working capital management 3

 Edition: 2014

 Page no. 63-72

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Thank you…

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