Working Capital

Working Capital Management VSK Extrusions Pvt. Ltd.
INDUSTRY PROILE
Global Aluminium Market
Background:
Aluminium is a lightweight, durable and corrosion resistant metal that
can be extruded,
Rolled, formed and painted for use in a wide range of applications.
According to the
International Aluminium Institute, approximately 66% of global
consumption is used
In the construction, transportation and packaging sectors while the
remaining 34% is
Used in consumer, capital goods and electricity transmission.
Aluminium is produced from alumina, which is refined from bauxite, a
mineral found
In various parts of the world. There are several types of bauxite with
alumina content
Ranging from 35% to 60%. Bauxite is refined to produce alumina
predominantly
Through what is known as the Bayer process, although this process
varies depending
On the type and quality of bauxite. Alumina is then converted into
aluminium metal
Using an electrolytic process.
The global aluminium industry has experienced Global demand for
primary
Aluminium has grown consistently at a compounded annual growth
rate of 5.1%
1
Between 1999 and 2004. Global primary aluminium consumption was

approximately
30.3 million Metric tons in 2004 as compared to 27.5 million metric
tons in 2003.
Driven by strong demand in end-use markets, global demand is
expected to rise to
31.7 million Metric tons by 2005, before increasing further to 37.8
million metric tons
in 2009.
Significant consolidation in recent years, including the recent merger of
Pechiney
with Alcan. In 2004, the top five producers accounted for
approximately 42% of
world primary aluminium production, with the largest producer, Alcan,
accounting for
12% of global production. The other large producers are Alcoa, Russian
Aluminium,
Norsk Hydro and BHP Billiton, who together accounted for 30% of
global primary
Aluminium production in 2004.
Increasing Asian Aluminium Consumption:

In the 2004, North America, Western Europe and China together
accounted for
Approximately 66% of global primary aluminium consumption. North
American
demand has been led by the United States, which in 2004 accounted
for 21% of global
2
demand. Asia has shown the largest annual increases in consumption

of primary
Aluminium over the last five years, driven largely by increased demand
from China
And Japan, which have emerged as the second and third largest
aluminium consuming
Nations, accounting for 20% and 8%, respectively, of global primary
aluminium
Demand in 2004.
Increasing Deficit in Asian market:
According to the International Aluminium Institute, primary aluminium
production
has grown at a compounded annual growth rate of 4.7% per annum
between 1999 to
2004. Historically, industrialized nations accounted for a large share of
global
production. However, changing dynamics in energy availability and the
rising cost of
alumina have resulted in a shift in aluminium production to countries
with access to
greater bauxite supplies and affordable sources of power.
One region which is emerging as an attractive destination for
aluminium smelting is
Asia. From 1997 to 2004, the proportion of global primary aluminium
production
carried out in Asia (excluding the Middle East) increased from 13% to
26%, while the
3
proportion of global primary aluminium production carried out in North

America and
Western Europe in aggregate declined from 43% to 33%.
Notwithstanding the rise in
aluminium production and capacities in the region, aluminium supplies
in Asia have
lagged behind demand, resulting in a supply deficit of 4.2 million
metric tons during
2004. During this period, China witnessed a marginal surplus and the
rest of Asia
witnessed a deficit of 4.8 million metric tons. Given expectations of
continued strong
growth in China and other Asian markets, the demand-supply gap is
likely to widen
and is estimated to reach a high of 5.5 million metric tons by
According to Metal Bulletin Research, the global deficit of alumina in

2004
was 338,000 metric tons, which was approximately 0.6% of global
alumina
consumption for the same period. However, the overall deficit was
larger in Asia
primarily due to the demand and supply dynamics in China. While Asia
Accounted for 26% of global metallurgical grade alumina production
during the same
period, according to Metal Bulletin Research. This indicates a sharp rise
in aluminium
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smelting capacity in Asia without a commensurate increase in alumina

refining
capacities. More significantly, alumina imports accounted for
approximately 45% of
total metallurgical grade alumina consumption in China in 2004, with
approximately
56% of the total imports being sourced from Australia. Going forward,
China will
remain the key driver of demand growth in the region with a projected
demand of
approximately 18.0 million metric tons for metallurgical grade alumina
in 2007,
growing at a compounded annual growth rate of 10.9%. Furthermore,
China will
continue to be primary aluminium production in 2004, it accounted for
only 16.5% of
global dependent on imports to meet its domestic alumina
consumption.
Pricing:
Aluminium is traded on the LME. While prices are determined by LME
price
movements, producers also charge a regional premium that generally
reflects the cost
of obtaining the metal from an alternative sourceThe following table
sets forth the
movement in the aluminium price from 1995 to 2004.
5
Alumina, however, is priced on the basis of negotiations, but usually

determined with
reference to the LME price for aluminium. Negotiated agreements
generally take the
form of long-term contracts, but fixed prices can be negotiated for
shorter periods and
a relatively small spot market also exists.
Indian Aluminium Market

Background:
The aluminium industry in India has grown progressively, tracking the
country’s
economy over the years. According to CRU estimates, domestic
primary aluminium
production will increase to a high of 943,000 metric tons in calendar
2005, compared
to 860,000 metric tons in calendar 2004. CRU estimates production to
reach
1,113,000 metric tons by calendar 2006.
According to the Indian Minerals Yearbook 2003, India is home to the
sixth largest
bauxite deposit in the world with a reserve base of 1,400 million metric
tons. Bauxite
deposits are spread across the states of Orissa, Andhra Pradesh,
Jharkhand,
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Chhattisgarh, Gujarat and Maharashtra. Indian bauxite is of superior

Quality and is largely located on a single plateau, thus making bulk
mining possible
and resulting in significant cost advantages.
In the past, Indian producers suffered from high power costs, but with
privatization of
coal mines by the government of India, new avenues have opened up
for securing cost
effective power for Indian producers. Backed by abundant, good quality
bauxite and
coal, as well as lower cost labour, Indian companies have emerged as
low cost
producers of aluminium. The domestic aluminium industry consists of
three primary
producers: Hindalco, National Aluminium Company Limited, or NALCO,
and
Vedanta Resources Plc, which controls Bharat Aluminium Company
Limited, or
BALCO, and Madras Aluminium Company Limited, or MALCO, all of
whom are
integrated producers with a presence ranging from bauxite mining to
aluminium metal
production. In fiscal 2005, Hindalco was the market leader with a 40%
market share
in India, while NALCO and Vedanta Resources Plc accounted for
approximately 23%
and 15%, respectively.
Domestic Demand and Consumption Pattern
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Domestic demand for aluminium has grown at a compounded annual

growth rate of
9.8% between fiscal 2002 and fiscal 2005 to reach a high of 897,000
metric tons in
fiscal 2005, which also includes scrap and metal imports of 201,000
metric tons. More
importantly, the last two years have witnessed even stronger growth
with annual
growth rates of 20.6% and 9.5% for in fiscal 2004 and 2005
respectively. The power
sector is the largest user segment of aluminium, accounting for 45% of
domestic
consumption in fiscal 2005. Historically, the power sector has
accounted for a
significant portion of aggregate domestic demand as high voltage
current is usually
transmitted through aluminium cables in India. However, as a result of
the changing
growth dynamics and increasing acceptance of new applications, the
proportion of
aluminium consumed by other user sectors such as transportation,
construction and
packaging has increased in recent years. The transportation sector
accounted for 21%
of domestic demand in fiscal 2005, benefiting from higher volumes and
increased per
vehicle usage of aluminium. The construction and packaging sectors
accounted for
8
8% and 5%, respectively, of domestic demand in fiscal 2005.

Pricing and Tariff:
Domestic aluminium prices track the global price trends as producers
usually price the
metal at a marginal discount to the landed cost of imported metal.
Though valueadded
product prices also track metal price movement, they usually witness
relatively
less volatility and command a premium reflecting the degree of value
addition and
quality, as indicated by the brand. Aluminium imports are subject to a
customs duty of
10% and an additional surcharge on the customs duty at a rate of 2%.
This represents
a significant reduction from the 25% customs duty charged as recently
as fiscal 2001,
bringing India more in line with customs duties charged by other
countries in
Southeast Asia.
Market Outlook:
The domestic aluminium industry is expected to grow in the coming
years, supported
by growth in the Indian economy and increased domestic demand in
end-user markets.
CRU estimates that primary aluminium consumption in India will
increase to
1,209,000 metric tons by 2009.In addition; the government of India is
planning to
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significantly increase power generation capacity in the next few years.

The Ministry
of Power plans to double power capacity to 200,000 MW by 2012. As
part of this plan,
cumulative capacity of the transmission links will be enhanced from
4,800 MW to
30,000 MW by 2012. Coupled with the increased demand resulting
from the
privatization of electricity transmission And distribution and a greater
emphasis on improving the existing electricity
distribution infrastructure in India, especially in rural areas, the power
sector is
expected to boost domestic aluminium demand.
This growth is also likely to be supported by increased use of
aluminium in
automobile and two-wheeler manufacturing as well as a potential
growth in
automotive component exports as major automotive manufacturers
begins to look to
India as a sourcing base for their operations. The construction sector is
also expected
to witness continued growth for the foreseeable future. While the
Housing segment has benefited from improved availability of more
affordable
financing; this sector is likely to get a further boost from the opening
up of the real
estate sectors to foreign direct investment in India. Backed by
increasing acceptance
10
of aluminium as an alternative to wood, demand from this sector is

Poised to grow in the coming years. Moreover, the long term potential
for the
domestic markets is encouraging with the Indian per capita
consumption growing
from approximately 627 grams in fiscal 2002 to 830 grams in fiscal
2005, as
compared to 4,598 grams in China and 21,286 grams in the United
States in calendar
2004.
COMPANY PROFILE
‘VSK’ was started its commercial production in the year 1992 with a
capacity of 20,000 TPA. It has since grown to become the largest
integrated aluminium producer in India.
VSK Industries Limited, the metals flagship company is an industry leader
in aluminium and copper. A metals powerhouse with a consolidated
turnover in excess of US$ 14 billion.
Its Copper smelter is the world's largest custom smelter at a single
location.
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Company's principal products comprise of Aluminium Ingots, Aluminium

Billets,
Aluminium Wire Rods, Sheet Products, Extrusions, Aluminium Foils and
Aluminium
Alloy Wheels. The Company's by products include Gallium Metal,
Vanadium Sludge
and Aluminium Dross Established in 1988, VSK commissioned its
aluminium
facility at Bangalore in Karnataka. in 1992. In 2007, the acquisition of
Novelis Inc. a world leader in aluminium rolling and can recycling marked
a significant milestone in the history of the aluminium industry in India.
VSK, at Bangalore, houses a fully integrated plant, comprising of 2 main
plants i.e.
the Alumina & Plastic Plants. Each plant employs varying Technology.
With integrated facilities, output from various plants is used by next,
along with
varying raw materials. Company has its own captive power plant at
Peenya 2nd stage
with installed capacity of 741.7 MW and 78 MW of Co Generation Plant at
Bangalore itself.
Alumina Plant: It was commissioned with an initial capacity of 40,000
MTPA,
which has now increased, to 700000 MTPA. The plant has been expanded
in phases
using new technology from time to time for energy efficiency and capacity
enhancement. It employs the basic Bayer’s process and the major raw
materials for
the plant are Bauxite, Steam, Caustic Soda and Furnace oil.
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Aluminium Smelter: It has 11 Pot lines with 2067 Pots installed with
annual
production capacity of 3,45,000 MT. The Smelter employs the Hall Heroult
Electrolysis Process for the extraction of Aluminium from Alumina. Basic
raw
materials for the smelter are Alumina, Power, Anodes and Aluminium
Fluoride.
Fabrication Plant: The Fabrication Plant at Renukoot comprises of 4 Main
Sections Remelt Shop, Cast House, Rolling Mills, Extrusion & Conform
which
produce Wire Rod, Sheets, Coils and Extruded Products.
VSK Today
Aluminium has turned out to be the wonder metal of the industrialized
World. No
other single metal can do so many job’s so well, and so Economically also.
Aluminium growth rate is the highest amongst the major basic metals
today. The company’s fully integrated aluminium operations consists of
the Mining of bauxite, conversion of bauxite in to alumina, production of
primary aluminium from alumina by electrolysis and production of
Properzi redraw roads, rolled products, extructions and value added
products like foil wheel at silvasa. VSK integrated operations and
operational efficiency has enabled the company to be one of world’s
lowest cost producers of aluminium. The company’s cost
efficiency has helped it to record an outstanding performance in the face
of adverse
market conditions.
VSK Vision:
“To strengthen our position as a premium aluminium company, sustaining
domestic
13
leadership and global competitiveness through innovation, quality and

value added
growth.”
VSK Mission:
“To pursue the creation of value for our customers, shareholders,
employees and
society at large.”
VSK Values:
Integrity
Honesty in every action
Commitment
On the foundation of integrity, doing whatever it takes to deliver, as
promised.
Passion
Missionary zeal arising out of an emotional engagement with work
Seamlessness
Thinking and working together across functional silos, hierarchy levels,
businesses
and geographies.
Speed
Responding to stakeholders with a sense of urgency
VSK Strategy:
Efficiency focus
To be one of the lowest cost producers globally
Effectiveness focus
To continue to remain the market leader domestically
Growth focus
To pursue value adding growth opportunities in aluminium
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SWOT ANALYSIS OF HINDALCO INDUSTRIES LIMITED

STRENGTHS:
Strong brand recognition
Internet sales
Growing international presence
Superior research and development department
Strong financial returns
Strong sense of culture in the working environment
Successful experience being competitive
Effective Leadership
Cost leadership
Prestigious Client Base
Customer Loyalty
Diversified Business
Product innovation capabilities
Technological excel.
Good corporate image
WEAKNESSES:
• Complexity of operation
• Lengthy processing chain
OPPORTUNITIES:
• Growth of core sector industries
• Rapid integration with global economy
• Booming construction business in Asia
• Growing e-commerce’s business.
• Increasing urbanization
15
THREATS:
• Entry of global players
• Take over possibilities
• Political threats
• The impact of foreign currency fluctuation and interest rates.
• Loss of sales to substitutes
16
ORGANISATION STRUCTURE
Chairman
Chairman
Managing
Managing
Director
Director
Financial
Financial director
director Production
Production Technical
Technical Projects
Projects Coal
Coal &logistics
&logistics HR
HR
Director
Director Director
Director Director
Director Director
Director Director
Director
Information
Information Systems
Systems Chief
Chief of
of Vigilance
Vigilance &
&
Security
Security
FA
FA &
& CCA
CCA (Accounts)
(Accounts) FA
FA &
& CCA
CCA (Resources)
(Resources)
C.E
C.E (Civil
(Civil // Hydro)
Hydro) Dy.CCA
Dy.CCA (Audit)
(Audit)
Chief
Chief Engineer
Engineer C.E
C.E (Civil
(Civil // Environment)
Environment)
(Commercial)
(Commercial)
G.M
G.M (Training)
(Training)
C.E
C.E (Projects)
(Projects) S.E
S.E (O
(O &
&MM // NSHES)
NSHES)
C.E
C.E (O
(O &
& M)
M) C.E
C.E (O
(O &
& M)
M)
C.E
C.E C.E
C.E (Generation)
(Generation)
Training
Training Inst
Inst (VTPS)
(VTPS)
C.E C.E
C.E (O
(O &
&MM // RTPP)
RTPP)
C.E (TPC)
(TPC)
C.E
C.E (O
(O &
&MM // KTPS)
KTPS) C.E
C.E (R
(R &
&MM // KTPS)
KTPS)
C.E
C.E (O
(O &
&MM // KTPS-V)
KTPS-V) S.E
S.E (O
(O &
&MM // RTS-B)
RTS-B)
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INTRODUCTION
Finance is one of the basic foundations of all kinds of economic activities. It is the
master key, which provides access to all the sources for being employed in
manufacturing. Hence it is rightly said that finance is lifeblood of any enterprise, besides
being the scarcest elements, it is also the most indispensable requirement. Without
finance neither any business can be started nor successfully run. Provision of sufficient
funds at the required time is the key to success of concern. As matter of fact finance may
be said to be the circulatory system of economic body, making possible the needed co-
operation among many units of the activity.
FINANCIAL MANAGEMENT:
Financial management emerged as a distinct field of study at the turn of this

Century. Many eminent persons defined it in the following ways.
DEFINITIONS:
According to GUTHMANN AND DOUGHAL: “Business finance can broadly
be defined as the activity concerned with planning, rising, controlling and administering
of funds used in the business.”
According to BONNEVILE AND DEWEY: “Financing consists in the rising,

providing and managing of all the money, capital or funds of any kind to be used in
connection with the business.”
According to EZRA SOLOMAN: “Financial management is concerned with the

efficient use of any important economic resource, namely capital funds.”
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FINANCIAL FUNCTIONS:
The finance functions of raising funds, investing them in assets and distributing
returns earned from assets to shareholders are respectively known as financing,
investment and dividend decisions. While performing these functions, a firm attempts to
balance cash inflows and outflows. This is called as liquidity decision.
The finance functions can be divided into three broad categories.
 Investment or long-term asset mix decision
 Financing or capital mix decision
 Dividend or profit allocation decision
 Liquidity or short-term asset mix decision
INVESTMENT DECISION:
Investment or capital budgeting involves the decisions of allocation of cash or

commitment of funds to long-term assets, which would yield benefits in future. It
involves measurement of future profitability, which involves risk, because of uncertain
future. Investment proposal should therefore be evaluated in terms of both expected
return and risk. Other major aspect of investment decision is the measurement of standard
or hurdle rate against which the expected return of new investment can be compared.
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FINANCING DECISIONS:
Financing decision is the second important function to be performed by the fir.

Broadly, he must decide when, where, and how to acquire funds to meet the firms
investment needs. He has to determine the proportion of debt and equity. This mix of debt
and equity is known as the firms ‘capital structure’. The financial manager must strive to
obtain the least financing mix or the ‘optimum capital structure’ where the market value
of share is maximized.
DIVIDEND DECISIONS:
It is the third major financial decision. The financial manager decides whether the
firm should distribute all profits, or return them, or distribute a portion and return the
balance. The optimum dividend policy should be determined where is maximizes the
markets value of the share.
LIQUIDITY DECISIONS:
Current assets management, which affects firm’s liquidity, is yet another finance
function in addition to the management of long-term assets. Current assets should be
managed effectively safeguarding the firm against the dangers of liquidity and
insolvency.
Investment in current assets affects the profitability, liquidity, and risk. A conflict
exists between profitability and liquidity while managing current assets. If the firm
doesn’t invest sufficient funds in current assets it may. Become illiquid. But it could loose
profitability, as idle CA would not earn anything. Thus a proper takeoff must be achieved
20
between profitability and liquidity. In order to ensure that neither insufficient nor
unnecessary funds are invested in current assets.
WORKING CAPITAL MANAGEMENT
One of the most important areas in the day-to-day management of the firm is the
management of working capital. Working capital management is the functional area of
the finance that covers all the current accounts of the firm. It is concerned with
management of the level of individual current assets as well as the management of total
working capital. Financial management means procurement of funds and effective
utilization of these procured funds. Procurement of funds is firstly concerned for
financing working capital requirement of the firm and secondary for financing fixed
assets.
CONCEPTS OF WORKING CAPITAL
The term working capital can be used in two different ways they are
1. Gross Working Capital
The gross working capital refers to investment in all the current assets taken
together. The total of investments in all current assets is known as gross working capital
2. Net Working Capital
The term net working capital refers excess of total current assets over total current
liabilities. It may be noted that the current assets refers to these liabilities which are
payable with in a period of one year.
Types of working capital
The operating cycle creates the need for current assets (working capital).
However the need does not come to an end after cycle is completed to explain this
continuing need of current assets a destination should be drawn between permanent and
temporary working capital.
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1. Permanent working capital
It is also refers to the hard core working capital. it is the minimum level of
investment in the current assets that is carried by the business at all times to carries our
minimum level of its activities.
2. Temporary working capital
It refers to the part of total working capital which is required by a business over
and about permanent working capital. It is also called variable working capital. Since the
volume of the temporary working capital keeps on fluctuating from time to time
according to the business activities it may be financed from short term resources.
Permanent working capital can be further divided into:
A. Regular Working Capital

B. Reserve Working Capital
A. Regular Working Capital
It is the minimum amount of liquid capital needed to keep up the circulation of

the capital from cash to inventories to receivables and again to cash. This would include
sufficient minimum bank balance to discount all bills, maintain adequate supply of raw
materials etc...
B. Reserve Working Capital
It is the excess over the needs or regular working capital that should be kept in
reserve for contingencies that may arise at any time these contingencies include rising
prices, business depression, strikes and special operations such as experiments with new
products.
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Composition of Working Capital
1.Current Assets:
a. Inventories Raw Materials
Work in progress
Finished goods
Stores and spares
Miscellaneous Goods
b. Receivables Trade debtors
Loans and advances
Other debtor balances

c. Marketable securities Government securities
Semi-Government securities
Shares, Debenture, etc.,

d. Cash and bank balance Cash in Hand
Cash At Bank
Cash in Transit
2.Current Liabilities:
a. Sundry creditors Interest accused on loan
Advances received from customs
Short term loans from banks
Trade dues and other liabilities
Deposits from public, etc.,
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Sources of Working Capital
Working Capital Sources
Short-term sources
Long – term sources
Internal External
Sale of shares
Sale of Debentures
Depreciation funds Trade credit
Sale of idle fixed assets
Provision of Credit papers
Long-term loans Taxation
Accrued Expenses Bank credit
Customers credit
Public Deposits
Loans from directors
Security of employee
Factoring
The working capital needs of a firm are determined & influenced by various
factors. A wide variety of considerations may affect the quantum of working capital
required & these considerations may vary from time to time. The working capital needed
at one point of time may not be good enough for some other situation. The determination
of working capital requirements is a continuous process & must be undertaken on a
regular basis in the light of the changing situations. Following are some of the factors
which are relevant in determining the working capital need of the firms.
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1. Production policy
2. Nature of the business
3. Credit policy
4. Inventory policy
5. Abnormal factors
6. Market conditions
7. Conditions of supply
8. Business cycle
9. Growth and expansion
10. Level of taxes
11. Dividend policy
12. Price level changes
13. Operating efficiency
1. Production Policy
The production schedule i.e., the plan for production, has great influence on the
level of the inventories. In some cases raw materials can be produced only in a particular
season and have to be stocked for the production of the whole year. In many others the
production cycle is limited to a part of the year and raw materials have to be accumulated
throughout the year. Thus, need for working capital will vary according to the production
plans.
2. Nature of the Business
The size of business also has an important impact on its working capital needs.
Size may be measured in terms of the scale of operations. A firm with large scale of
operation will need working capital than small term. The working capital requirements of
a firm are basically influenced by the nature of the business trading and financial firm has
a very less investment in fixed assets, but require a large sum of money to be invested in
working capital.
3. Credit Policy
A company, which allows liberal credit to its customers, may have higher sales but
consequently will have large amount of funds tied up in sundry debtors. Credit terms,
Debt collection system also influences the level of working capita
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4. Inventory policy
Large amount of funds is normally locked up in inventory. An efficient firm may

stock raw material for a smaller period and may therefore require lesser amount of
working capital.
5. Abnormal factors
Abnormal factors like strikes, lockouts also require additional working capital.
Recessionary conditions necessitate a higher amount of stock of finished goods.
6. Market conditions
Market conditions like competition large inventory are essential as delivery has to
be off the self or credit has to be extended on liberal terms when market competition is
fierce.
7. Conditions of supply
If prompt and adequate supply of raw materials requires small investment in

inventory. If supply is scant, seasonal canalized, it is essential to keep longer stocks
increasing working capital requirements.
8. Business cycle
Business fluctuations lead to cyclical and seasonal changes in production, sales

and effect the working capital requirements.
9. Growth and expansion
The working capital needs of firm increases in growth in terms sales of fixed
assets. If is difficult to precisely determine the relationship between volume of sales and
the working capital needs. The critical fact however that is the need for increased
working capital funds does not fallow growth in business activities but precedes it.
10. Level of taxes
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Taxation is a short term liability payable in cash. Advance payment of cash may
have to be paid on the basis of anticipated profits. Tax is first appropriation out of profits.
Higher the tax, greater is the stain on the working capital of the company. Working
capital varies with tax rate and advanced tax provisions.
11. Dividend policy
Payment of dividend utilizes cash while retaining profits acts as a source of

working capital.
12. Price Level changes
Inflationary trends in the economy necessitate more working capital maintain the
same level of activity.
13. Operating efficiency
The operating efficiency of the firm relates to the optimum utilization of resources at
minimum costs. The firm will be effectively contributing in keeping the working capital
investment at a lower level if it is efficient to controlling operating costs and utilizing
current assets. The use of working capital is improved and pace of a cash conversion
cycle is accelerated with operating efficiency.
Advantages of good working capital management
 The main advantages of sound working capital are as follows:

 Solvency of the business: adequate working capital helps in maintaining solvency
of the business by providing uninterrupted flow of production
 Goodwill: sufficient working capital enables a business concern to make prompt
payments and hence helps in crating and maintaining goodwill.
 Easy loans: a concern having adequate working capital, high solvency and good
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 Credit standing can arrange loans from banks on easy and favorable terms.
 Cash discount: adequate working capital also enables a concern to avail cash
discounts on the purchases and maintaining goodwill.
 Regular supply of raw materials: sufficient working capital ensures regular supply
of raw materials and continuous production.
 Regular payment of salaries, wages and other day-to-day commitments: a
company which has ample working capital can make regular payment towards it
day-today commitments which would raise the morale of its employees, increase
their efficiency, reduce wastage cost and enhance production and profits.
 Exploitation of favorable market conditions: only concerns with adequate working
capital exploit favorable market conditions such as purchasing its requirements in
bulk when the prices are lower and holding its inventories for higher prices.
 Crisis handling ability: adequate working capital enables a concern to face
business crisis, such as depression, inflation successfully.
 Quick and regular return on investments: sufficiency of working capital enables a
concern to pay quick and regular dividends to its investors, as there may not be
much pressure to plough back profits.
 High morale: adequacy of working capital creates an environment of security,
confidence and high morale and improves the overall efficiency of a business.
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Disadvantages of Inadequate Working Capital:
 A concern which has inadequate working capital cannot pay its short-term
liabilities in time. Thus, it will lose its reputation and shall not be able to obtain
good credit facilities.
 It cannot buy its requirements in bulk and cannot avail discounts.
 It becomes difficult for the firm exploits favorable market conditions and under
take profitable projects.
 The firm cannot pay its day-to-day expenses, which would increase cost and
reduce the profit of the business.
 It becomes impossible to utilize efficiently the fixed assets due to the non-
availability of liquid funds.
 The rate of return on investments will also fall with the shortage of working
capital.
Working capital cycle (the operating cycle)
The working capital cycle refers to the length of time between the firm’s paying
cash for materials, etc., entering in to the production process/ stock and the inflow of cash
from debtors. Suppose a company has a certain amount of cash it will need raw materials.
Some raw materials will be available on credit but, cash will be paid out for the other part
immediately.
Then it has to pay labor cost and incurs factory overheads. These three
combined together will constitute work-in-progress. After the production cycle is
complete, work-in-progress will get converted into sundry debtors. Sundry debtors will
be realized in cash after the expiry of credit period. this cash can again be used for
financing of raw materials, work-in-progress, etc. thus there is a complete cycle from
cash to cash where in cash gets converted into raw materials, work-in-progress, finished
goods, debtors and finally into cash again. Short term funds are required to meet the
requirements of funds during this period. This time period is dependent upon the length
of time within which the original cash gets converted into cash again. This cycle is also
known as operating cycle or cash cycle.
29
OPERATING CYCLE
Cash
cccccc
cccccc
Bills ccCC Raw
Receivable CSccc Materials
s cccas
Or
Debtors
hCash
Working
Credit Sales in progress
Finished goods
Working capital cycle indicates the length of time between companies paying for
materials, entering into stock and receiving the cash from sales of finished goods. It can
be determined by adding the number of days required for each stage in the cycle.
For e.g., a company holds raw materials on an average for 60 days, it gets credit
from the supplier for 15 days, production process needs 15 days, finished goods are held
for 30 days and 30 days credit is extended to debtors. The total of all these 120 days, i.e.,
60-15+15+30+30 days is the total working capital cycle.
The determination of working capital cycle helps in the forecast, control and
management of working capital. It indicates the total time lag and the relative
significance of its constituting parts. The duration of working capital cycle may vary
depending on the nature of the business.
METHODS FOR ESTIMATING WORKING CAPITAL REQUIRMENTS
30
Three widely used methods for determining working capital requirements of a

firm are:
 Percentage of sales method
 Regression analysis method
 Operating cycle method
1. PERCENTAGE OF SALES METHOD:-
In this method, level of working capital requirements is decided on the basis of
past experience. The past relationship between sales and working capital is taken as a
base for determining the size of working capital requirements for future. It is, however,
presumed that the relationship between sales and working capital that has existed in the
past has been stable. This may be explained with the help of the following illustration.
Percentage of sales method is a simple and easily understood method and
practically used for ascertaining short-term changes in working capital in future.
However this method lacks reliability inasmuch as its basic assumption of linear
relationship between sales and working capital does not hold true in all the cases. As
such, this method cannot be recommended for universal application.
2. REGRESSION ANALYSIS METHOD:-
31
This is a statistical method of determining working capital requirements by
establishing the average relationship between sales and working capital and its various
components in the past years. In this regard the method of least squares is employed and
the relationship between sales and working capital is expressed by the equation:
Y=a+bx
The values of ‘a’ and ‘b’ is obtained by the solution of simultaneous linear equations
given as under:
Where a=fixed component
b=variable component
x=sales
y=inventory
n=number of observation
TANDON COMMITTEE REPORT
Reserve Bank of India set up a committee under the chairmanship of shri P.L.
Tandon in July 1974. The terms of reference of the committee were:
 To suggest guidelines for commercial banks to follow up and supervise credit
from the point of view of ensuring proper end use of funds and keeping a watch on the
safety of advances.
 To suggest the type of operational data and other information that may be
obtained by banks periodically from the borrowers and by the reserve bank of India from
the leading banks.
32
 To make suggestions for prescribing inventory norms for the different
industries, both in the private and public sectors and indicate the broad criteria for
deviating from these norms.
 To make recommendations regarding resources for financing the minimum
working capital requirements.
 To suggest criteria regarding satisfactory capital structure and sound financial
basis in relation to borrowings.
 To make recommendations as to whether the existing pattern of financing
working capital requirements by cash credit/overdraft system etc., requires to be
modified, if so, to suggest suitable modifications.
FINANCIAL RATIO ANALYSIS
Financial analysis is the process of identifying the finance strengths and weakness
of the firm by properly establishing relationships between the items of balance sheet and
the profit and loss account. Financial analysis can under take by management of the firm
or by parties out side the firm, owners, creditors, investors and others.
The different types of ratios are using in estimating the financial position of the
firm’s are as follows.
CURRENT RATIO:
The Current ratio is calculated by dividing current assets with current liabilities. It
is also calculated as working capital ratio.
33
The current assets of a firm represent those assets which can be converted into
cash with in a short period of time, normally not exceeding one year and include cash and
bank balances, marketable securities, inventory of raw materials, semi-finished and
finished goods, debtors, bills receivables and prepaid expenses.
Current liabilities include creditors, bills payable, accrued expenses short-term
bank loan, income tax liability and long term debt maturing in the current year.
The current ratio should be 2:1.
Current ratio= [current assets/current liabilities]
QUICK RATIO:
Quick ratio establishes a relation ship between quick or liquid assets and current
liabilities. An asset is liquid it can be converted into cash immediately or reasonable
soon with out loss of value. Cash is the most liquid assets. Other assets that are
considered to be relatively liquid and included in quick assets are debtors and bill
receivable and marketable securities. Inventories are considered to be less liquid as they
normally requires some time for realizing into cash and their value also as has a tendency
to fluctuate. The quick ratio is calculated by dividing quick assets by current liabilities.
Quick ratio= [Quick assets/current liabilities]
CASH RATIO:
34
Cash is the most liquid assets. Cash ratio is the ratio of cash and its equivalent to
current liabilities. Trade investment or marketable securities are equivalent of cash.
There fore, they may be included in the computation of cash ratio.
Cash ratio= [absolute liquid assets/current liabilities]
INVENTORY TURNOVER RATIO:-
Inventory Turnover Ratio indicates the efficiency or the firm in producing and
selling its product. It is calculated by dividing the cost of goods sold with the average
inventory. It measures how fast the inventory is moving through the firm and generating
sales.
Inventory turn over ratio= [cost of goods sold/average inventory]
NET WORKING CAPITAL RATIO:
The difference between Current Assets and Current Liabilities excluding short
term bank borrowings is called Net Working Capital. It is sometimes used as a measure of
a firm’s liquidity. It is considered that, between two firms, the one having the larger Net
Working Capital has the greater ability to meet its current obligations. This is no
necessary so; the measure of liquidity is a relationship, rather than the difference between
Current Assets and Current Liability.
Net working capital ratio= [net working capital/net assets]
DEBTORS TURNOVER RATIO:-
35
Debtors Turnover Ratio found by dividing credit sales by average debtors. Debtors
Turnover Ratio indicates the number of times debtors turnover in each year. Generally the
higher the value of debtor’s turnover, the more efficient is the management of credit.
Debtors turn over ratio= [credit sales/debtors]
DEBTORS COLLECTION PERIOD
The average number of days for which debtors remain outstanding is called
average collection period.
Average collection period= [debtors/sales]*360
NEED FOR THE STUDY
36
The need for Working Capital to run the day-to-day business activities cannot be
overemphasized. We will hardly find a business firm which does not require any
amount of working capital. Indeed, firms differ in their working capital
requirements. Management of working capital is an important function of finance
department in any corporate organization. While managing current assets, two
important factors that are considered as liquidity and profitability. The excess
working capital results in determination in profits and inadequate working capital
results in liquidity risk.
SCOPE OF THE STUDY
37
The scope of the study is confined to focus more current assets and current
liabilities and their effects to the financial performance of the firm. Decision
regarding working capital management is operating in nature and is not one time
decision, so the scope of the study is to identify the areas of the control to have
better over various components of working capital.
An attempt is made to identify the optimum working capital requirements for

ccs and how can they utililize the inventories, cash and receivables in better way.
38
OBJECTIVES OF THE STUDY
 To find out the liquidity position of the company.
 To analyze the changes of working capital statement.
 To analyze the financial performance of the company with reference to
working capital.
39
RESEARCH METHODOLOGY
The data have been collected from both the primary and secondary sources.
The data was collected from the officials of the organization.
The data collected related to the study was from the two sources.
 Primary data
 Secondary data
Primary data
For the study most of the data were collected from the primary data i.e.
Income statements, financial reports etc. Consulting financial manager and
accounting assistance gathered income statements of the company.
Secondary data
The information collected to the company profile from the company past
records and websites are secondary data.
However, the entire study was based on the primary data and secondary,
which are collected from the books, records, journal, newspaper, survey by
WEBSITES and profiles of the organization.
40
LIMITATIONS OF THE STUDY:
Through sincere attempt has been during the study, certain limitations cannot be
avoided. They are
1. Working capital is a widely used technique to evaluate the financial position and
performance of a business but these is certain problem in using ratios. The analyst
should be aware of this problem.
2. The major constraint for the study was the timing of the study the vastness of the
financial statement was another factor of limitation. The study is based on the data
given by the official and report of the company the confidentially of some facts and
figures are also limitation.
3. Financial statement analysis is based on balance sheet, profit and loss account
prepared as per accounting practice. This practice is some cases may lead window-
dressing to cover up bad financial position.
4. Financial statement analysis is inherent weakness of accounting practices such
as their nature matching principle etc.
5. This study is based on only 5 years
41
DATA ANALASYS AND INTERPRETATION

I. Analysis of Short-Term Financial Position
Current Ratio:
Current assets
Current ratio = -----------------------
Current liabilities
CURRENT CURRENT CURRENT

YEARS
ASSETS LIABILITIES RATIO
2006 2,47,639.25 1,18,776.14 2.08:1
2007 2,72,451.78 1,15,710.51 2.35:1
2008 2,60,668.92 1,50,181.58 1.73:1
2009 2,89,357.15 2,02,529.67 1.42:1
2010 339041.01 2,74,725.41 1.23:1
In Graphical Representation
Inference: From the above observation the companies maintain proper inventory
management. And the debtors, bills receivables are collected within the period. The
current assets are increased from 247639.25 to 339041.01 lakes.
42
Quick Ratio:
Quick Assets
Quick Ratio = --------------------------
Current Liabilities
CURRENT QUICK
YEARS QUICK ASSETS
LIABILITIES RATIO
2006 2,24,807.56 1,18,776.14 1.89:1
2007 2,43,566.3 1,15,710.51 2.10:1
2008 2,34,429.47 1,50,181.58 1.56:1
2009 2,49,968.66 2,02,529.67 1.23:1
2010 2,95,946.66 2,74,725.41 1.07:1
Inference
From the above observation in the year 2006 the quick ratio is 1.89:1 and this is
decreased in the year 2010 the ratio is 1.07:1. Quick assets are increased from 224807.56
to 295946.66.
DEBTORS TURN OVER RATIO
43
TOTAL SALES
DEBTORS TURN OVER RATIO: ---------------------------------------------------------
AVERAGE DEBTORS
TABLE: SHOW THE DEBTORS TURN OVER RATIO OF APGENCO
(RUPEES IN LAKHS)
YEAR SALES AVG DEBTORS RATIO
2006 388868.06 200553.01 1.93
2007 419999.51 181805.14 2.31
2008 461730.22 157291.83 2.93
2009 622998.96 159372.48 3.90
2010 643421.85 213843.71 3.008
GRAPH: SHOW THE CAPITAL EMPLOYEED TURN OVER RATIO OF APGENCO
INTERPRETATION:
The debtor’s turnover ratio is increased year by year the company is maintaining
satisfactory level of debtors.
WORKING CAPITAL TURN OVER RATIO:
SALES
44
WORKING CAPITAL TURN OVER RATIO: -----------------------------------------

WORKING CAPITAL
TABLE: SHOWS THE WORKING CAPITAL TURNS OVER RATIO OF APGENCO

(RUPEES IN LAKHS)
YEAR SALES WORKINGCAPITAL RATIO
2006 388868.06 156741.27 2.48
2007 419999.51 110487.34 3.80
2008 461730.22 86827.48 5.32
2009 622998.96 64315.60 9.69
2010 643421.85 107830.90 5.97
GRAPH: SHOWS THE WORKING CAPITAL TURN OVER RATIO OF APGENCO
INTERPRETATION:
The working capital turnover ratio highly increased in 2009 i.e. 9.69 and again decreased
in the year 2010 i.e. 5.97
INVENTORY TURN OVER RATIO:
COST OF GOODS SOLD

INVENTORY TURN OVER RATIO: -----------------------------------------------------
AVERAGE INVENTORY
45
TABLE: SHOWS THE PROPRIETARY RATIO OF APGENCO

(RUPEES IN LAKHS)
COST OF AVERAGE
YEAR RATIO
GOODS SOLD INVENTORY
2006 205641.48 25858.59 7.95
2007 220216.54 27562.47 7.98
2008 249104.81 32813.97 7.59
2009 373091.07 41241.42 9.04
2010 372079.99 56405.8 6.59
GRAPH: SHOWS THE INVENTORY TURN OVER RATIO OF APGENCO
Inference
The inventory turnover ratio is increased year by year except in 2005-06, 2007-08 and
2009-10 it indicates the company maintained satisfactory level of inventory.
46
Absolute Liquid Ratio
Absolute Liquid Assets

Absolute Liquid Ratio = --------------------------------
Currents Liabilities
ABSOLUTE
ABSOLUTE CURRENT LIQUID
YEARS
LIQUID ASSETS LIABILITIES
RATIO
2006 1,68,145 1,18,776.14 0.01:1
2007 7,072.47 1,15,710.51 0.06:1
2008 3,708.39 1,50,181.58 0.02:1
2009 3,982.42 2,02,529.67 0.01:1
2010 6,974.45 2,74,725.41 0.03:1
In Graphical Representation:
Inference
In the year 2006 absolute liquid ratio is 0.01:1 and in the year 2010 the absolute
liquid ratio is 0.03:1. So the absolute liquid ratio is increased. In the year 2009 the ratio is
too less 0.01:1.
47
Fixed Assets Ratio:
Net Fixed Assets

Fixed Assets Ratio = -------------------------------
Total Long-Term Funds
NET FIXED TOTAL LONG- FIXED ASSETS

YEARS
ASSETS TERM FUNDS RATIO
2006 8,87,118.82 5,69,000.13 1.56:1
2007 8,19,643.4 5,69,000.13 1.44:1
2008 7,60,265.67 5,76,322.92 1.32:1
2009 8,80,552.18 6,09,030.40 1.45:1
2010 8,37,562.26 5,46,967.82 1.53:1
Inference:
From the above observation the fixed assets ratio is equal in the years 2006 and
2010. In the year 2008 the fixed asset ratio is very less that is 1.32:1. Net fixed assets are
constantly decreased from 2006 to 2010.
Ratio of Current Assets to Proprietary Funds
48
Current Assets
Ratio of Current Assets to proprietary Funds = ----------------------------
Shareholders’ Funds
CURRENT SHAREHOLDERS PROPRIETARY

YEARS
ASSETS FUNDS FUNDS RATIO
2006 2,47,639.25 1,90,294.30 1.30:1
2007 2,72,451.78 1,90,294.30 1.43:1
2008 2,60,668.92 1,90,294.30 1.36:1
2009 2,89,357.15 2,90,661.16 1:1
2010 3,39,041.01 2,49,898.32 1.35:1
Inference
From the above observation the current assets are increased from the year 2006 to
2010. In the year 2006 the current assets are 247639.25 and in the year 2010 the current
assets are increased to249898.32 lacks. Current assets to proprietary ratio also increased.
SCHEDULE OF CHANGES IN WORKING CAPITAL

AS ON 31’St MARCH 2006
(Rs. In lakhs)
49
Particulars 2005 2006 Increase Decrease

Current assets:
Inventories 28791.65 22831.69 -- 5959.96
Sundry debtors 186198.50 203161.62 16963.12 --
Sundry receivables 12467.18 10242.06 -- 2225.12
Cash and bank balance 6202.27 1681.45 -- 4520.82
Loans and advances 12739.87 9722.43 -- 3017.44
Total current assets (A) 246399.47 247639.25
Current liabilities:
Sundry creditors 86965.65 49046.67 37918.98 --
Deposits and retentions 17163.62 17691.49 -- 527.87
Provision for taxation 592.31 650.56 -- 58.25
Interest accrued but not due 6112.18 8289.46 -- 2177.28
Other current liabilities 25337.85 43097.96 -- 17760.11

Total current liabilities (B) 136171.60 118776.14
Working capital (A-B) 110227.87 128863.11
Net decrease in W.C 18635.24 18635.24

Total net W.C 128863.11 128863.11 54882.10 54882.10
Inference:
Current assets like inventory, cash & bank balance, loans and advances has increased
in 2006 than 2005. Current liabilities are increased in 2006 than 2005. So, it is assets to
the company. Debtors have increased in 2006 than in 2005. The overall performance of
the company is progressive in 2006 than in 2005. The working capital of 2006 has also
increased to the extent of Rs.128863.11 than in 2006.

(Rs. In lakhs)
50

Current assets:
Inventories 22831.69 28885.48 6053.79 --
Sundry debtors 203161.62 197944.41 -- 5217.21
Sundry receivables 10242.06 29846.01 19603.95 --
Cash and bank balance 1681.45 7072.47 5391.02 --
Total current Assets (A) 247639.25 272451.78
Total current liabilities (B) 118776.14 115710.57
Total net W.C 156741.27 156741.27 40100.96 40100.96
Inference:
Current assets like inventory, cash & bank balance, loans and advances has increased
in 2007 than 2006. Current liabilities are increased in 2007 than 2006. So, it is assets to
the company. Debtors have increased in 2006 than in 2005. The overall performance of
the company is progressive in 2007 than in 2006. The working capital of 2006 has also
increased to the extent of Rs.156741.27 than in 2006.

51
(Rs. In lakhs)
Current assets:
Inventories 28885.48 26239.45 -- 2646.03
Sundry debtors 197944.41 165665.88 -- 32278.53
Loans and advances 8703.41 15655.14 6951.73 --
Sundry creditors 39994.47 62687.38 -- 22692.91
Other current liabilities 45820.78 44691.99 1128.79 --
Total current Liabilities(B) 115710.51 150181.58
Total net W.C 156741.27 156741.27 73888.50 73888.50
Inference:
Current assets like inventory, cash & bank balance, loans and advances has
decreased in 2008 than 2007. Current liabilities are decreased in 2008 than 2007. So, it is
assets to the company. Debtors have increased in 2008 than in 2007. The overall
performance of the company is progressive in 2008 than in 2007. The working capital of
2006 has also increased to the extent of Rs.156741.27 than in 2007.

52
(Rs. In lakhs)
Current assets:
Inventories 26239.45 39388.49 13149.04 --
Sundry debtors 165665.88 148917.78 -- 16748.10
Cash and bank balance 3708.39 3982.41 274.02 --
Interest accrued but not due 9853.22 7107.69 2745.53 --
Total current Liabilities (B) 150181.58 202529.67
Total net W.C 110487.34 110487.34 85015.27 85015.27
Inference:
53

(Rs. In lakhs)
Current assets:
Inventories 28885.48 26239.45 -- 2646.03
Sundry debtors 197944.41 165665.88 -- 32278.53
Loans and advances 8703.41 15655.14 6951.73 --
Sundry creditors 39994.47 62687.38 -- 22692.91
Other current liabilities 45820.78 44691.99 1128.79 --
Total current Liabilities (B) 115710.51 150181.58

Total net W.C 156741.27 156741.27 73888.50 73888.50
Inference
54
FINDINGS
 The efficiency of management at financial position of VSK is good in 2007-08 and
2008-09.
 The average inventory holding period of the VSK is more during 2007-08
compare with the previous year. It means funds were blocked up in inventory
which leads to interest on capital blocked up inventory.
 From the observation it is clear that the return on capital employed of VSK
occurred during 2002-03 was for every Re.1 invested on assets, return on equity is
0.53
 From the observation it is clear that equity share capital is fixed for years. There is
preference share capital in VSK and debt capital is increased in the year 2007-08.
 From the analysis the net profit ratio was increased year by year.
 The Earning per share also increased year by year.
 From the analysis it is clear that the current ratio is decreased from the year 2005-
06. The ideal current ratio between current assets and current liabilities should be
2:1.
 The VSK has to maintain a good liquid balance to meet its obligations because the
absolute liquid ratio is decreasing year by year.
 From the analysis we understood that inventory turnover ratio is decreased from
the year 2004-05.
55
SUGGESTIONS
 From the above Observation it is suggested that the company has to implement
SAP (Finance) among all the stations in VSK increase the financial
performance of the organization.
 It is suggested that implementing the techniques of costs of control and cost of

reduction.
 The overall liquidity position of VSK is satisfactory assets liquidity has

declined from 41.14% in 2005-06 to11.24% in 2009-2010.
 The average holding period of VSK is more during 2009-2010.So necessary

steps are to be taken to reduce the inventory levels of VSK.
 Inter –form comparison may lead the concern to the determination of

appropriate source of funds, appropriate policies as regards management and
suitable production policy.
 The operating expenses should be in control by using proper techniques to get

be better profits by controlling the operating expenses.
 The use debt capital in the total capital is more than equity capital in one way it
is good but the company has to face uncertain situations.
 The company may increase its production capacity its reduces fixed charges
and improves profitability.
 The company should reduce the debt capital in order to minimize interest
burden.
 Operating expenses should be reduced to minimize the operating risk.
56
CONCLUSION
The working capital management system followed by VSK shows a satisfactory

position. Proper working capital management is used to establish a cause and effect,
relationship between variables to help the management in making effective strategic
planning to forecast the future and take necessary steps to reach the organizational goals.
Various crucial areas that need attention were identified and practical suggestions were
given to improve performance.
57
BIBLIOGRAPHY
 Prasanna Chandra, FINANCIAL MANAGEMENT, 5 th Edition, 2002, TATA-

McGraw HILL, New Delhi.
 S.P. Jain, K.L. Narang, ADVANCED ACCOUNTANCY, 10 th Edition, 2003,

Kalyani Publisher, Ludhiana.
 I.M. Pandey, FINANCIAL MANAGEMENT, 8 th Edition, 2002, Vikas Publishing

House Private Limited, New Delhi.
Journals
 The ICFAI Journal of Applied Finance.
 Finance India (India Institute of Finance).
58

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Working Capital Management VSK Extrusions Pvt. Ltd.

Between 1999 and 2004. Global primary aluminium consumption was

Increasing Asian Aluminium Consumption:

demand. Asia has shown the largest annual increases in consumption

proportion of global primary aluminium production carried out in North

According to Metal Bulletin Research, the global deficit of alumina in

smelting capacity in Asia without a commensurate increase in alumina

Alumina, however, is priced on the basis of negotiations, but usually

Indian Aluminium Market

Chhattisgarh, Gujarat and Maharashtra. Indian bauxite is of superior

Domestic demand for aluminium has grown at a compounded annual

8% and 5%, respectively, of domestic demand in fiscal 2005.

significantly increase power generation capacity in the next few years.

of aluminium as an alternative to wood, demand from this sector is

Company's principal products comprise of Aluminium Ingots, Aluminium

leadership and global competitiveness through innovation, quality and

SWOT ANALYSIS OF HINDALCO INDUSTRIES LIMITED

Financial management emerged as a distinct field of study at the turn of this

According to BONNEVILE AND DEWEY: “Financing consists in the rising,

According to EZRA SOLOMAN: “Financial management is concerned with the

The finance functions can be divided into three broad categories.

 Investment or long-term asset mix decision

 Financing or capital mix decision

 Dividend or profit allocation decision

 Liquidity or short-term asset mix decision

Investment or capital budgeting involves the decisions of allocation of cash or

Financing decision is the second important function to be performed by the fir.

WORKING CAPITAL MANAGEMENT

CONCEPTS OF WORKING CAPITAL

1. Gross Working Capital

2. Net Working Capital

Types of working capital

1. Permanent working capital

2. Temporary working capital

Permanent working capital can be further divided into:

A. Regular Working Capital

It is the minimum amount of liquid capital needed to keep up the circulation of

B. Reserve Working Capital

Composition of Working Capital

Stores and spares

Loans and advances

Other debtor balances

Shares, Debenture, etc.,

Advances received from customs

Short term loans from banks

Trade dues and other liabilities

Deposits from public, etc.,

Sources of Working Capital

Working Capital Sources

2. Nature of the Business

Large amount of funds is normally locked up in inventory. An efficient firm may

If prompt and adequate supply of raw materials requires small investment in

Business fluctuations lead to cyclical and seasonal changes in production, sales

9. Growth and expansion

10. Level of taxes

11. Dividend policy

Payment of dividend utilizes cash while retaining profits acts as a source of

12. Price Level changes

13. Operating efficiency

Advantages of good working capital management

 The main advantages of sound working capital are as follows:

Disadvantages of Inadequate Working Capital:

Working capital cycle (the operating cycle)

Three widely used methods for determining working capital requirements of a