A SUMMER INTERNSHIP PROJECT REPORT

ON

“A STUDY ON WORKING CAPITAL MANAGEMENT”

AT

Submitted by

NAME: ARABINDA SAHU

ROLL NO: PC17MBA-022

OF

GANGADHAR MEHER UNIVERSITY, SAMBALPUR

UNDER THE GUIDANCE OF

CA Rohit Choudhury, ASSISTANT MANAGER (FINANCE), MCL

IN PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

Batch 2017-2019
 DECLARATION

I do hereby declare that this project report entitled “A STUDY ON

WORKING CAPITAL MANAGEMENT AT MAHANADI COALFIELDS
LIMITED, BURLA”. Within period of 14.05.2018 to 27.06.2018. The report is
based on the study undertaken by me, to the best of my knowledge and belief it has
not been published earlier elsewhere or presented to any University/Institution for
award of any degree, diploma or other similar title. The information used in the study
report is collected from published financial statement, Annual report, various article
and in house journal of the MAHANADI COALFIELDS LIMITED.

Arabinda Sahu

G.M. University

Sambalpur

[2]
 CERTIFICATE

This to certify that the project work entitled “A STUDY ON WORKING

CAPITAL MANAGEMENT AT MAHANADI COALFIELDS LIMITED,
BURLA” is a bonafide work done by ARABINDA SAHU [ROLL NO:
PC17MBA-022 ] in partial fulfilment of the requirement for the award of Degree of
Master in Business Administration during the academic year 2017-2019.

GUIDE

CA ROHIT CHOUDHURY

ASSISTANT MANAGER (FINANCE)

[3]
 ACKNOWLEDGEMENT

My debts are many and I acknowledge them with much pride and delight. This
project report was undertaken for the fulfillment of MBA programme pursuing at
Gangadhar Meher University. I would like to thank my DEPARTMENT and
MAHANADI COALFIELDS LTD, which has provided me the opportunity for
doing this project work.

I am extremely great full to CA ROHIT CHOUDHURY, ASSISTANT

MANAGER (FINANCE) and DEPARTMENT HEAD for his invaluable help and
guidance throughout my work. He kindly evinces keen interest in my work and
furnished some useful comments, which could enrich the work substantially.

In fact it is very difficult to acknowledge all the name and nature of help and
encouragement provide by them. I would never forget the help and support extended
directly or indirectly to me by all.

ARABINDA SAHU

[4]
 CONTENT

Chapter Particular Page No.

I INTRODUCTION 7-9
1.1 Background of the study
1.2 Scope of the study
1.3 Objectives of the study
1.4 Significance of the study
1.5 Limitation of the study
II COMPANY PROFILE 10 - 21
2.1 India’s energy scenario & coal
2.2 Coal India Limited at a glance
2.3 Mission of Coal India Limited
2.4 Corporate structure and subsidiary companies
2.5 Production and growth
2.6 Mahanadi Coalfields Limited (MCL)
2.7 Vision of MCL
2.8 Mission of MCL
2.9 Formation of company
2.10 Administrative setup of MCL
2.11 Board of Director
2.12 Formation highlights
2.13 Capital structure
2.14 Investment
2.15 Project formulation/capital project
2.16 Technology at MCL
2.17 Coal production and removal
2.18 SWOT analysis

III REVIEW OF LITERATURE 22 - 25

3.1 Review of literature

[5]
IV CONCEPT & THEORY OF STUDY 26 - 40
4.1 Introduction
4.2 Classification of working capita
4.3 Operating cycle concept
4.4 Advantages of adequate working capital
4.5 Disadvantages of Excessive working capital
4.6 Disadvantages of Inadequate working capital
4.7 Factors determining working capital requirements
4.8 Components of working capital
4.9 Need of working capital
4.10 Sources of additional working capital
V RESEARCH DESIGN 41 - 43
5.1 Research Methodology
5.2 Research
5.3 Objective of research
5.4 Research design
5.5 Data collection
5.6 Tools used in the analysis
5.7 Period of study
VI ANALYSIS AND FINDINGS 44 - 57
6.1 Calculation of working capital
6.2 Ratio analysis
6.3 Findings
6.4 Suggestions & Recommendation
VII CONCLUSION 58 - 59
7.1 Conclusion

[6]
CHAPTER – I

INTRODUCTION

[7]
1.1 BACKGROUND OF THE STUDY:

I have been assigned the project work on the study of working capital
management in Mahanadi Coalfields Limited (MCL). Mahanadi Coalfields Limited
(MCL) is one of the major coals producing company of India. It is one of the eight
subsidiaries of coal India Limited. Mahanadi Coalfields Limited was carved out of the
south Eastern Coalfields Limited in 1992 its Headquarter at Sambalpur. It has its coal
mines spread across Odisha. It has total seven open cast mines and three underground.

Decision relating to working capital (current assets-current liabilities) and short

term financing are known as working capital management. It involves the relationship
between a firm’s short-term assets and its short-term liabilities.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the

company’s ability to fund operations, reinvest and meet capital requirements and
payments. Understanding a company’s cash flow health is essential to making
investment decisions. A good way to judge a company’s cash flow prospects is to
look at its working capital management.

The working capital is an important yardstick to measure the company’s

operational and financial efficiency. Any company should have a right amount of cash
and lines of credit for its business needs at all times

1.2 SCOPE OF THE STUDY

This project is vital to me in a significant way. It does have some importance for
the company too. These are as follows:-

 This project will be a learning device for the finance student.

 Through this project I would study the various methods of the working capital
management.
 The project will be a learning of planning and financing working capital.
 The project would also be an effective tool for credit policies of the
companies.
 This will show the liquidity position of the company and also how do they
maintain a particular liquidity position.

[8]
1.3 OBJECTIVES OF THE STUDY
 To study the working capital requirement of a company.
 To know the progress of working capital in a company
 To know the solvency of the company and how the company is managing
working capital.
 The basic objective of the study is to see the liquidity position of the
company.
 To study the efficiency of working capital management of the company.
 To study the efficiency of cash and receivables management of the
company.

1.4 SIGNIFICANCE OF THE STUDY

The study basically aims to find out the financial performance of the Mahanadi
coalfields Limited (MCL).

Knowledge of the current financial position is vital for a company’s future

course of action. It includes familiarizing with the various financial management
policies, standards, accounting system, financial practices, internal control system and
salient features of the company.

1.5 LIMITATION OF THE STUDY

 This study deals with the data made available. Hence the result of this
study cannot judge the business of the firm in general.
 The studies have been influenced by the limitation of the ratio analysis.
 The study extensively uses the data provided is the financial reports of the
firm which may also have their own limited perspective.
 The analysis made on the working capital management is for a particular
period of time the current assets and current liabilities will change for an
analysis made at any other of time.

[9]
 CHAPTER – II

COMPANY PROFILE

[10]
2.1 INDIA’S ENERGY SCENARIO & COAL:

India is currently among the top three fastest growing economies of the world. As
natural corollary India’s energy needs too are fast expanding with its increased
industrialisation and capacity addition in power generation. This is where ‘coal’ steps
in. In India coal is the critical input for major infrastructure industries like power,
steel and cement.

 Coal is the most dominant energy source in India’s energy scenario.

 Coal meets around 52% of primary commercial energy needs in India against
29% the world over.
 Around 66% of India’s power generation is coal based.
 India is the 3rd largest coal producing country in the world after China and
USA.

2.2 COAL INDIA LIMITED AT A GLANCE

Coal India limited (CIL) as an organized state owned coal mining corporate
came into being November 1975 with the government taking over private coal mines.
With a modest production of 79 Million Tonnes (MTs) at the year of its inception CIL
today is the single largest coal producer in the world. Operating through 81 mining
areas CIL is an apex body with 7 wholly owned coal producing subsidiaries and 1
mine planning and Consultancy Company spread over & provincial states of India.
CIL also fully owns a mining company in Mozambique christened as ‘coal India
Africana Limited like workshops, hospitals etc. Further, it also owns 26 technical &
management training institutes and 102 vocational Training institutes canters. India
institute of coal management (IICM) as a state-of-the-art management. ‘Training
canter of Excellence’ the largest corporate Training institute in India-operates under
CIL and conducts multi-disciplinary management development programs.

CIL having fulfilled the financial and other prerequisites was granted the
Maharatna recognition in April 2011. It is a privileged status conferred by
Government of India to select state owned enterprises in order to empower them to
expand their operations and emerge as global giants. So far, the select club has only
five members out of 217 central public sector Enterprises in the country.

[11]
2.3 MISSION OF COAL INDIA LIMITED:

Coal India Limited (CIL) is an Indian state-controlled coal mining company

headquartered in Kolkata, West Bengal, India. It is the largest coal producer company
in the world. It contributes around 82% of the coal production in India.

The mission of coal India is to produce & market planned quantity of coal &
coal products efficiently & economically with due regards to safety, conservation &
quality.

2.4 CORPORATE STRUCTURE & SUBSIDIARY COMPANIES:

Coal India is a holding company with seven wholly owned coal producing
subsidiary companies and one mine planning & Consultancy Company. It
encompasses the whole gamut of identification of coal reserves, detailed exploration
followed by design and implementation and optimizing operations for coal extraction
in its mines. The producing companies are:

1. Eastern coalfields Limited(ECI), Sanctoria West Bengal

2. Bharat coking coal Limited (BCCL) Dhanbad, Jharkhand
3. Central coalfields Limited(CCL) Ranchi, Jharkhand
4. South Eastern coalfields Limited(SECL) Bilaspur, Chhattisgarh
5. Northern Coalfields Limited(NCL)
6. Western coalfields Limited(WCL), Nagpur, Maharashtra
7. Mahanadi coalfields Limited(MCL), Sambalpur, Orissa
8. Coal India Africana Limited, Mozambique
9. The consultancy company is central mine planning and Design institute
Limited (CMPDIL), Ranchi, Jharkhand.

North Eastern coalfields (NEC) a small coal producing unit operating in

Margherita, Assam is under direct operational control of CIL.
Coal India’s major consumers are power and steel sectors. Others include
cement, Fertilizers, Brick kilns and small scale industries.

2.5 PRODUCTION AND GROWTH:

[12]
 During 2016-17, CIL produced 554.14 Million Tonnes (MTs) of coal-an increase
of 15.39 MTs over last year. Coal production has taken a quantum jump of over 100
MTs in the last five year span, from the level of 452.21 MTs in 2012-13 to the current
level. Raw coal off-take financial year ending 31st march 2017 was 543.32MTs, an
increase of 8.82 MTs over the previous year. Coal & coal products despatch to power
utilities was 425.40 MTs. But for the regulated intake of coal by many of the Gencos,
despatch of coal to power sector could have been higher. Consolidating India’s
Energy security it is becoming increasingly evident that domestic coal demand is far
outstripping the indigenous production in India. The gap between demand and supply
is ever expanding. Especially in the wake of increased capacity addition in power
sector which is predominantly coal dependent. CIL has taken it upon itself, in the
interest of meeting the country’s energy requirement, through multi-pronged
approach.

2.6 MAHANADI COALFIELDS LIMITED:

General Information:

 Name: - Mahanadi Coalfields Limited.

 Type:- Public Sector undertaking
 Scale:- Large Scale
 Date of Established:- 3rd April, 1992
 Website:- www.mahanadicoal.in
 Promoters:- Govt. of India
 Head Office:- Sambalpur
 Zonal coalfields:- IB –Velly, Jharsugda, Talcher, Angul, Basundhara,
Sundergarh

Mahanadi coalfields Limited (MCL) is one of the major coal producing

company of India. It is one of the eight subsidiaries of Coal India Limited. Mahanadi
coalfields Limited was carved out of south Eastern coalfields Limited in1992 with its
headquarters at Sambalpur. It has its coal mines spread across Odisha it has total
seven open cast mines and three underground mines under its fold.

[13]
 The organisation of MCL comprises 02 coalfields, consisting of 10 mining
Areas with 06 UG and 16 OC mines,02 central workshops,02 central Hospitals, 02
sales offices at Kolkata and Bhubaneswar and Headquarter at Sambalpur.

A. Talchaer coalfields

 Jagannath Area
 Bharatpur Area
 Hngula Area
 Limgaraj Area
 Kaniha Area
 Talcher Area (UG)

B. IB valley coalfields

 Lakhanpur Area
 IB valley Area
 Basundhara-Garjanbahal Area
 Orient Area

MCL has five subsidiaries and associate companies. The name of these companies are
MJSJ Coal Ltd., MNH Shakti Ltd., Mahanadi Basin power Limited, Neelanchal
power Transmission company private Limited, Mahanadi Coal Railway Limited.

2.7 VISION OF MCL:

To be the leading energy supplier in the country, through best practices from
mine to market.

2.8 MISSION OF MCL:

To produce and market the planned quality of coal and coal products
efficiently and economically with due regard to safety, conservation quality.

[14]
2.9 FORMATION OF COMPANY:

Chronological Sequence Of Restructuring Of Coal India Limited is

shown In the Chart Below:

[15]
2.10 ADMINISTRATIVE SETUP OF MCL:

[16]
2.11 BOARD OF DIRECTORS:

FULL TIME

Shri A. K. Jha
Chairman-cum-Managing Director

Shri J.P.Singh Shri L.N. Shri O.P. Singh Shri K.R.

Director(T/OP) Mishra Director(T/P&P) Vasudevan
Director(P) Director(F)

PART-TIME

Shri Rajesh Kumar Shri S.N. Prasad

Sinha Director (Marketing),CIL
Joint Secretary, MoC

INDEPENDENT DIRECTORS

Dr. Rajib Mall Shri H.S. Pati Ms Seema Sharma

[17]
2.12 PERFORMANCE HIGHLIGHTS:

MCL has achieved highest ever 139.21 Million Tonnes (MTe) of coal
production during the year 2016-17 against previous year’s coal production of 137.90
MTe registering a growth of 0.95%.

MCL has achieved all time high gross sales value of Rs 24291.14 Crore
against the previous year’s Gross sales value of Rs 20597.51 Crore registering a
growth of 17.93%

The profit before Tax (PBT) for the year was Rs 6853.32Crore against
previous year’s PBT of Rs 6283.44 Crore. The profit after Tax (PAT) for the year
under review was Rs 4491.09 Crore against last year’s PAT of Rs 4207.75 Crore.

2.13 CAPITAL STRUCTURE:

The Authorized Share Capital of the Company as on 31.03.2017 continued at

Rs. 500.00 crore, divided into 2958200 Equity Shares of Rs. 1000/- each and
2041800 10% Cumulative Redeemable Preference Shares of Rs. 1000/- each.

The paid up Equity Share Capital of the Company as on 31.03.2017 is

Rs.141.23 crore. The entire Equity Share Capital is held by Coal India Limited (CIL)
and its nominees.

2.14 INVESTMENT:
Noncurrent Investment in Equity Share of MHN Shakti limited, MJSJ Coal
Limited, Mahanadi Basin Power Limited and Mahanadi Coal Railway Limited,
subsidiaries of MCL are Rs.59.57 Crore, Rs.57.06 Crore, Rs.5.00 Lakh and Rs.3.20
Lakh respectively.
Non-current Investment in 7.55% secured non-convertible IRFC tax free 2021
series bonds, 8% secured non-convertible IRFC bonds,7.22% secured non-
convertiable IRFC tax free bonds, 7.22% secured redeemable REC tax free bonds
stood on 2017 at Rs.200.00 Crore, Rs.108.75 Crore, Rs.499.95 Crore and Rs.150.00
Crore respectively.

2.15 PROJECT FORMULATION/CAPITAL PROJECTS:

Planning

[18]
MCL had planned to achieve 167.00 million 19one of coal during the financial year
2016-2017. The capital outlay estimated for the year 2016-17 was Rs. 1200.00 crores,
major share of which was to be utilized for land acquisition, development of
infrastructures and procurement of Heavy Earth Moving Machineries (HEMM)

Project Formulation:

During the financial year 2016-17 one project report was prepared by CMPDIL i.e.
Reorganization of Bharatpur OCP Expansion (Normative Capacity 20.0 MTY, Peak
Capacity 26.0 Mty)

Project Implementation:

The total capital expenditure of MCL during 2016-17 was Rs.1813 Crore against the
target of Rs. 1200.00 Crore.

2.16 TECHNOLOGY AT MCL:

I. Higher capacity HEMMs like 10 cum and 20 cum shovels, 100T and 170T
Dumper, 770 HP Dozer ect have been envisaged in the latest sanctioned
project report.
II. Continuous miner is slated to be introduced in different UG project of MCL
.tendering for its introduction in HBI mine is under process.
III. MCL is the trend setter in introducing Blast free technology of winning coal
in opencast mine by surface miner now its envisaged to introduced Ripper
Dozer to remove OB also.
IV. MCL has undertaken geo technical studies for caving characteristic of Talcher
underground mine and Environment impact and impact on ground water of fly
ash filling in Balanda open cast filling excavation.
V. SILO with rapid loading system is going to be introduced in all the major
opencast project of MCL.
VI. Man riding system has already been introduced in 4 underground mines at IB
valley and going to be introduced all other mines in Talcher coalfields.
VII. MCL has planned to construct 4 no of washeries of 10 Mty capacities each
two in Talcher, one in IB valley and another one in Basundhara.

[19]
VIII. Introduction of GPRS system for coal sale/coal movement information
through RFID (Radio frequency identification).This is a machine that fit in
wagons Volvos which give the details data about the coal.

2.17 COAL PRODUCTION AND OB REMOVAL:

Coal production and OB Removal has been given under in a tabular form:

2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015- 2016-
Item
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Coal
Prod. 69.06 80.00 88.01 96.34 104.08 100.28 103.12 107.89 110.439 121.379 137.901 139.21
(M.T)

O.B.
Removal 51.43 55.47 54.56 51.85 66.07 88.70 85.67 90.36 96.028 89.221 98.414 123.34
(M.Cu.M)

Coal production and OB Removal presented on a graphical form:

160

140

120

100

80
Coal Prod. (MT)

60 O.B. Removal (M.Cu.M)

40

20

[20]
2.18 SWOT ANALYSIS:
Strength:
 2nd Largest Coal Producer among subsidiaries of CIL.
 Strong track record of growth in terms of Coal production, productivity &
revenues.
 Good work culture- Skilled, experienced and dedicated Work force.
 Strong Capabilities of exploration & mine planning
 Mining Operations spread across the coal mining region in the states of Odisha
and serving major consumers in the country.
Weakness:
 Loss making UG operations
 Evacuation of coal largely dependent on external agencies & lack of evacuation
infrastructure facilities in growing coalfields.
 Dominance of low grade coal in available resource
Opportunities:
 Huge demand of coal in the country especially for power generation.
 Huge potentiality of coal mining in MCL
 Power Plants located in the northern India are also linked to MCL.
 To formulate a sound marketing strategy& Long term agreement with
Consumers, Railways and Shippers.
 To set up washeries
 Diversification to power
 JV for coal gasification and coal to liquid (oil).
Threat:
 Coal amenable to opencast mining – requirement of more land.
 Land acquisition and consequent social displacement.
 Rehabilitation and resettlement issues.
 Proneness of opencast mining to Environmental pollution.
 Inadequacy of Railways in coal transportation.
 Majority of consumers are far away from coalfields i.e. increase in rail freight
means high landed cost to the consumers.
 The Coastal based TPPs have option to use imported coal.

[21]
 CHAPTER – III

REVIEW OF LITERATURE

[22]
3.1 Review of literature:

Working Capital Management

It deals with all the aspects of working capital of which in depth study has been
carried out as discussed below.
1. Bhatt V. V. (1972) widely touches upon a method of appraising working
capital finance applications of large manufacturing concerns. It states that
similar methods view that banks while providing short-term finance,
concentrate their attention on adequacy of security and repayment capacity.
On being satisfied with these two criteria need to be devised for other sectors
such as agriculture, trade etc. The author is of the they do not generally carry
out any detail appraisal of the working of the concerns.
2. Chakraborthy S. K. (1974) tries to distinguish cash working capital v/s
balance sheet working capital. The analysis is based on the following
dimensions:
a) Working capital in common parlance b) Operating cycle concept

b) Computation of operating cycle period in all the four cases. The purpose of
the analysis is to demonstrate operating cycle concepts based on published
annual reports of the firms
3. Natarajan Sundar (1980) is of the opinion that working capital is important
at both, the national and the corporate level. Control on working capital at the
national level is exercised primarily through credit controls. The Tandon
Study Group has provided a comprehensive operational framework for the
same. In operational terms, efficient working capital consists of determining
the optimum level of working capital, financing it imaginatively and
exercising control over it. He concludes that at the corporate level investment
in working capital is as important as investment in fixed assets. And especially
for a company which is not growing, survival will be possible only so long as
it can match increase in operational cost with improved operational efficiency,
one of the most important aspects of which is management of working capital
4. Kaveri V. S. (1985) has based his writing on the RBI‟s studies on finances of
large public limited companies. This review of working capital finance refers
to two points of time i.e., the accounting years ending in 1979 and 1983 and is

[23]
 based on the data as given in the Reserve Bank of India on studies of these
companies for the respective dates. He observes that the Indian industry has by
and large failed to change its pattern of working capital financing in keeping
with the norms suggested by the Chore Committee. While the position of
working capital management showed some investment between 1975-79 and
1979-83, industries have not succeeded in widening the base of long-term
funds to the desired extent. The author concludes with the observation that
despite giving sufficient time to the industries to readjust the capital structure
so as to shift from the first method to the second method, progress achieved
towards this end fell short of what was desired under the second method of
working capital finance.
5. Fazzari Steven M. and Petersen Bruce C. (1993) throws light on new tests
for finance constraints on investment by emphasising the often neglected role
of working capital as both a use and a source of funds. The authors believe
that working capital is also a source of liquidity that should be used to smooth
fixed investment relative to cash-flow shocks if firms face finance constraints.
They have found that working capital investment is “excessively sensitive” to
cash-flow fluctuations. Besides, when working capital investment is included
in a fixed-investment regression as a use or source of funds, it has a negative
coefficient. They conclude that controlling for the smoothing role of working
capital results in a much larger estimate of the long-run impact of finance
constraints than reported in other studies
6. Prof. Mallick Amit and Sur Debasish (1998) attempt to make an empirical
study of AFT Industries Ltd, a tea producing company in Assam for assessing
the impact of working capital on its profitability during the period 1986-87 to
1995-96. The author has explored the co-relation between ROI and several
ratios relating to working capital management. On the whole, this study of the
co-relation between the selected ratios in the area of working capital
management and profitability of the company revealed both negative and
positive effects. Moreover, the WCL of the company recorded a fluctuating
trend during the period under study.
7. Rao Govinda D. and Rao P. M. (1999) believes that management of working
capital is a continuous process requiring proper monitoring and studying of the

[24]
 relationship of all variables with constant, and drawing inferences. This
provides proper direction to the managers.
8. Jain P. K. and Yadav Surendra S. (2001) study the corporate practices
related to management of working capital in India, Singapore and Thailand. In
this paper the authors have tried to understand the working capital
management and current assets and current liabilities, and their inter-
relationship. Further the authors have shown an aggregative analysis of current
assets and current liabilities in terms of major liquidity ratios. It also states
working capital position in terms of these ratios pertaining to various
industries. From the paper one can infer that the available data in respect of
the sample companies from the three countries confirm the wide inter-industry
variations in liquidity ratios. Towards the end, the authors suggest that serious
consideration needs to be given by the respective governments as well as
industry groups in these three countries in order to take corrective measures to
take care of and rectify the areas of concern.
9. A study by the Sustainable Energy and Economy Network (SEEN 1996),
Institute of policy Studies, USA, shows that Orissa’s industries and coal-fired
power plants will be emitting the equivalent of 164 Mt of carbon dioxide
annually by the year 2005, or the equivalent of about 3 percent of the
projected growth in manmade greenhouse gases anticipated globally over the
next decade.
10. A recent study by Chaulya (2004) shows that in the Ib valley coalfield area of
Orissa the annual average Total Suspended Particulate (tsp) concentration
exceeded the respective standards set in the National Ambient Air Quality
Atandard (NAAQS) protocol at most residential and industrial areas. Thus,
environmental problems in case of Orissa are severe and coal is the most
important contributor.

SUMMERY AND GAPS IN LITERATURE REVIEW

Working capital management entails the management of the most liquid resources of
a firm with a view to maintain the firm’s liquidity, enhance profitability and promote
business growth. Working capital management concentrates on the management of
inventories, cash and cash equivalents and accounts receivable. The proper
management of these items is critical to the success of an organization.

[25]
 CHAPTER – IV
CONCEPT AND THEORYOF STUDY

[26]
4.1 INTRODUCTION:
The uses of funds of a concern can be divided into two parts namely long-term
funds and short-term funds. The long-term investment may be terms s ‘fixed
investment’. A major part of the long-term funds is invested in the fixed assets. These
fixed assets are retained in the business to earn profits during the life of the fixed
assets. To run the business operations short-term assets are also required.

The term working capital is commonly used for the capital require d for day-to-
day working in a business concern. Such as for purchasing raw material, for meeting
day-to-day expenditure on salaries, wages, rents rates, advertising etc. But there are
much disagreement among various financial authorities (Financiers, accountants,
businessmen and economists) as to the exact meaning of the term working capital.

DEFINITION:

Working capital is a measure of firm’s efficiency and its current financial health.
Managing the operational capital is called as working capital management.

According to Weston & Brigham,” Working capital refers to a form’s

investment in short-term assets, such as cash amount receivables, inventories etc.”

According to J.S. Mill, “The sum of the current assets is the working capital of
the business.”

CONSTITUENTS OF CURRENT ASSETS:

 Cash in hand and Bank balances

 Bill Receivables
 Sundry Debtors
 Short-term loans and advances
 Inventories of stocks, as
a) Raw materials
b) Work-in-process
c) Stores and spares
d) Finished goods.

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  Temporary Investments of surplus funds
 Prepaid Expenses
 Accrued Incomes

CONSTITUENTS OF CURRENT LIABILITIES:

 Bills payable
 Sundry creditors or accounts payable
 Accrued or outstanding expenses
 Short-term loans, advances and deposits
 Dividend payable
 Bank overdraft
 Provision for taxation

4.2 CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways:

A. On the basis of concept

B. On the basis of time
A. ON THE BASIS OF CONCEPT:
On the basis of concept, working capital is classified as
 Gross working capital concept
 Net working capital concept

GROSS WORKING CAPITAL CONCEPT:

Gross working capital refers to firm’s investment in current assets. Current

assets are the assets which can be converted into cash within an accounting year and
include cash, short-term securities, Debtors, Bill receivables and stock.

According to this concept, Working capital means Gross working capital

which is the total of all current assets of a business. It can be represented by the
following equation:

Gross working capital = Total current assets

[28]
NET WORKING CAPITAL CONCEPT:

In a narrow sense, the term working capital refers to the net working capital.
Net working capital refers to the difference between currents assets and currents
liabilities. Net working capital may be positive or negative. A positive net working
capital will arise when current assets exceed current liabilities. A negative net
working capital occurs when current liabilities are in excess of current assets.

Net working capital = Current assets – current liabilities

The gross concept is sometime preferred to the concept of working

capital for the following reasons-
 It enables the enterprise to provide correct amount of working capital at
correct time.
 Every management is more interested in total current assets with which it has
to operate then the sources from where it is made available.
 It takes into consideration of the fact every increase in the funds of the
enterprise would increase its working capital.
 The concept is also useful in determining the rate of return on investments in
working capital.
The net working capital concept, however, is also important for the following
reasons:-
 It indicates the margin of protection available to short term creditors.
 It is an indicator of financial soundness of enterprise.
 It suggests the need of financing a part of working capital requirement
out of the permanent sources of funds.

B. ON THE BASIS OF TIME:

On the basis of time, working capital may be classified as:

 Permanent or fixed working capital

 Temporary or variable working capital

PERMANENT WORKING CAPITAL:

[29]
 The need for working capital fluctuates from time to time. However to carry on
day-to-day operations of the business without any obstacles, a certain minimum level
of raw materials, work-in-progress, finished goods and cash must be maintained on a
continuous basis. The amount needed to maintain current assets on this minimum
level is called permanent or regular working capital. As the business grow the
requirement of working capital also increase due to increase in current assets. The
permanent working capital can further be classified as regular working capital and
reserve working capital.

REGULAR WORKING CAPITAL:

This is the amount of working capital required for the continuous operations of
an enterprise. It refers to the excess of the current assets over current liabilities.

RESERVE WORKING CAPITAL:

It is the excess amount over the requirement for regular working capital which
may be provided for contingencies that may arise at unstated period such as strikes, rise
in prices, depression etc.

TEMPORARY WORKING CAPITAL:

Depending upon the changes in production and sales, the need for working
capital, over and above the permanent level of working capital is called temporary or
variable working capital. Temporary working capital differs from permanent working
capital in the sense that is required for short periods and can’t be permanent employed
gainfully in the business. Variable working capital can further be classified as
seasonal working capital and special working capital.

SEASONAL WORKING CAPITAL:

The capital required to meet the seasonal needs of the enterprise is called seasonal
working capital. Such as, a textile dealer would require large amount of funds a few
months before Diwali.

SPECIAL WORKING CAPITAL:

[30]
 Special working capital is that part of working capital which is required to meet
special exigencies such as launching of extensive marketing for conducting research
etc.

SEMI VARIABLE WORKING CAPITAL:

Current amount of Working Capital is in the field level up to a certain stage and
after that it will increase depending upon the change of sales or time.

SEMI VARIABLE
WORKING CAPITAL
AMOUNT
OF
WORKING
TIME
CAPITAL
Fig. Semi Variable Working Capital

4.3 OPERATING CYCLE CONCEPT:

The duration or time required to complete the sequence of events right from the
purchase of raw materials for cash to the realization of sales in cash is called
operating cycle or working capital cycle. The operating cycle consists of three
phases:-
 Phase 1:-Cash gets converted into inventory. This would include purchase of
raw materials, conversion of raw materials into work-in-progress, finished

[31]
 goods & terminate in the transfers of the goods to stock at the end of
manufacturing process. In the case of trading organization, this phase would
be shorter as there would be no manufacturing activity & cash will be
converted into inventory directly. This phase will, of course, be totally absent
in case of service organizations.
 Phase 2:-The inventory is converted into receivables as credit sales are made
to customers. Firm’s which do not sell on credit will obviously not have phase
2 of the operating cycle.

 Phase 3:- In this phase represents, the stage when receivables are collected.
This phase complete the cycle. Thus, the firm’s has moved from cash to
inventory, to receivables & to cash again.

4.4 IMPORTANCE OR ADVANTANGES OF ADEQUATE

WORKING CAPITAL:

1. Solvancy Of The Business:

Adequate working capital helps in maintaining solvency of the business by
providing uninterrupted flow of production.
2. Goodwill:

[32]
 Sufficient working capital enables a business concern to make prompt
payments and hence helps in creating and maintaining goodwill.
3. Easy Loans:
Banks do not hesitate to advance even the unsecured loan to a firm which has
the sufficient working capital. This is because the excess of current assets over
current liabilities itself is a good security.
4. Cash Discount:
A firm having the adequate working capital can avail the cash discount by
purchasing the goods for cash or by making the payment before the due date.
5. Regular Supply Of Raw Materials:
Adequacy of working capital makes it possible for a firm to pay the suppliers
of raw materials on time. As a result it will continue to receive regular
suppliers of raw materials and thus there will be no disruption in production
process.
6. Exploitation Of Favourable Market Condition:
Whenever there are chances of increase in prices of raw materials, the firm can
purchase sufficient quantity if it has adequate of working capital. Similarly, if
a firm receives a bulk order for the supply of goods it can take advantage of
such opportunity if it has sufficient working capital
7. Ability To Face Crisis:
Adequate working capital enables a concern to face business crisis in
emergencies such as depression. Because during such periods, generally there
is much pressure on working capital.
8. Quick And Regular Return On Investments:
Every investor wants a quick and regular return on his 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. This gains the confidence of its investors and creates a favourable
market to raise additional funds in the future.
9. Excess Or Inadequate Working Capital:
Every business concern should have adequate working capital to run its
business operations. It should have neither redundant or excess working
capital nor inadequate nor shortage of working capital. Both excess as well as
short working capital position are bad for any business. However, out of the

[33]
 two it is the inadequacy of working capital which is more dangerous from the
point of view of the firm.

4.5 DISADVANTAGE OF EXCESSIVE WORKING CAPITAL:

1. Excessive Inventory:
Excessive working capital will results in unnecessary accumulation of large
inventory. It increases the chances of misuse, waste, theft etc.
2. Excessive Debtors:
Excessive working capital will results in liberal credit policy which, in turn,
will results in higher amount tied up in debtors and higher incidence of bad
debts.
3. Adverse Effect On Profitability:
Excessive working capital means idle funds in the business which adds to the
cost of capital but earns no profits for the firm. Hence it has a bad effect on
profitability of the firm.
4. Inefficiency Of Management:
Management becomes careless due to excessive resources at their command. It
results in laxity of control on expenses and cash resources.

4.6 DISADVANTAGE OF INADEQUATE WORKING CAPITAL:

i. Difficulty In Availability Of Raw Material:

Adequacy of working capital results in non-payment of creditors on time. As a
result the credit purchase of goods on favourable terms becomes increasingly
difficult. Also, the firm cannot avail the cash discount.
ii. Full Utilization Of Fixed Assets Not Possible:
Due to the frequent interruption in the supply of raw materials and paucity

of stock, the firm cannot make full utilization of its machines etc.
iii. Decrease In Credit Rating:
Because of inadequacy of working capital, firm is unable to pay its short-term
obligations on time. It decays the firm’s relations with its bankers and it
becomes difficult for the firm to borrow in case of need.

[34]
iv. Decrease In Sales:
Due to the shortage of working capital, the firm cannot keep sufficient stock of
finished goods. It results in the decrease in sales. Also, the firm will be forced
to restrict its credit sales. This will further reduce the sales.
v. Difficulty In The Distribution Of Dividends:
Because of paucity of cash resources, firm will not be able to pay the dividend
to its shareholders.
vi. Decrease In Efficiency Of Management:
It will become increasingly difficult for the management to pay its creditors on
time and pay its day-to-day expenses. It will also be difficult to pay the wages
regularly which will have an adverse effect on the moral of managers.

4.7 FACTORS DETERMINING WORKING CAPITAL

REQUIREMENTS:

i. Nature Of Business:
Working capital of the business concerns largely depend upon the nature of
the business. If the business concerns follow rigid credit policy and sell goods
only for cash, they can maintain lesser amount of working capital. A transport
company maintains lesser amount of working capital while a construction
company maintains larger amount of working capital.
ii. Size Of The Business:
The working capital requirements of a concern are directly influenced by the
size of its business which may be measured in terms of scale of operations.
Greater larger will be the requirements of working capital.
iii. Production Cycle:
Amount of working capital depends upon the length of the production cycle. If
the production cycle length is small, they need to maintain lesser amount of
working capital. If it is not, they have to maintain large amount of working
capital.
iv. Production Policy:
It is also one of the factors which affect the working capital requirement of the
business concern. If the company maintains the continues production policy,

[35]
 there is a need of regular working capital. If the production policy of the
company depends upon the situation or conditions, working capital
requirement will depend upon the conditions laid down by the company.
v. Business Cycle:
Business fluctuations lead to cyclical and seasonal changes in the business
condition and it will affect the requirements of the working capital. In the
booming conditions, the working capital requirement is larger and in the
depression conditions, requirement of working capital will reduce. Better
business results lead to increase the working capital requirements.
vi. Credit Policy:
Credit policy of sales and purchase also affect the working capital
requirements of the business concern. If the company maintains liberal credit
policy to collect the payments from its customers, they have to maintain more
working capital. If the company pays the dues on the last date it will create the
cash maintenance in hand and bank.
vii. Growth And Expansion:
During the growth and expansion of the business concern, working capital
requirements are higher, because it needs some additional working capital and
incurs some extra expenses at the initial stages.
viii. Earning Capacity:
If the business concern consists of high level of earning capacity, they can
generate more working capital, with the help of cash from operation. Earning
capacity is also one of the factors which determine the working capital
requirements of the business concern.
ix. Working Capital Cycle:
In a manufacturing concern, the working capital cycle starts with the purchase
of raw material and ends with the realisation of cash from the sale of finished
products. The speed with which the working cycle completes one cycle
determines the requirements of working capital. Longer the cycle larger is the
requirement of working capital.
x. Rate Of Stock Turnover:
There is a high degree of inverse co-relationship between the quantum of
working capital and the velocity or speed with which the sales are affected. A

[36]
 firm having a high rate of stock turnover will need lower amount of working
capital as compared to a firm having a low rate of turnover.
xi. Price Level Changes:
a. Changes in the price level also affect the working capital requirements.
Generally, the rising prices will requires the firm to maintain larger
amount of working capital as more funds will be required to maintain
the same current assets.
b. Working capital management refers to the management of current
assets, namely cash, inventories, receivables and administration of
current liabilities.
c. Guided by the above criteria, management will use a combination of
policies and techniques for the management of working capital. These
policies aim at managing the current assets (Generally cash and cash
equivalents, inventories and debtors) and the short term financing, such
that cash flows and returns are acceptable.

4.8 COMPONENETS OF WORKING CAPITAL:

CASH MANAGEMENT:
Cash is one of the current assets of a business. It is needs at all times to keep the
business going. A business concern should always keep sufficient cash for meeting its
obligations. Cash is the most unproductive of all the aseets.
Cash management is process of collecting, managing and utilizing the cash
inflow to optimize the short term financial stability. The key component in
accomplishing this task is solvency successful cash management is useful when any
unexpected demand for cash occurs out the blue.

REVEIVABLES MANAGEMENT:
Receivables management is another key area of working capital management
apart from cash and inventory. Receivables constitution a substantial portion of
current assets of a firm. As substantial amounts are involved, proper management of
receivables is very important.

[37]
MEANING OF REVEIVABLES:
The term ‘receivables’ refers to debt owed to the firm by the customer resulting
from sale of goods or services in the ordinary course of business. These are the funds
blocked due to credit sales. Receivables, account receivables, book debt, sundry
debtor and bills receivables etc. Management of receivables is also known as
management of trade credit. Receivable management is the process of making
decision relating to investment in trade debtors.
The objective of receivables management is to promote sales and profit until
that point is reached where the return on investment in future funding of receivables is
less than the cost of funds raised to finance the additional credit.

INVENTORY MANAGEMENT:
Inventories constitute the most significant part of current assets of the business
concern. It is also essential for smooth running of the business activities.
A proper planning of purchasing of raw material, handling, storing and
recording is to be considered as a part of inventory management. Inventory
management means, management of raw materials and related items. Inventory
management considers what to purchase, how to purchase, how much to purchase,
from where to purchase, where to store and when to use for production etc.

MEANING OF INVENTORY:
The dictionary meaning of the inventory is stock of goods or a list of goods. In
accounting language, inventory means stock of finished goods. In a manufacturing
point of view, inventory includes raw materials, work-in-process, stores etc.
The main objectives of inventory management are operational and
financial. The operational objectives mean that the materials and spares should be
available in sufficient quantity so that work is not disrupted for want of inventory The
financial objective means that investments in inventories should not remain idle and
minimum working capital should be locked in it.

PRODUCTION HIGHLIGHTS:
Production performance of MCL for last five year (incl. 2016-17)

[38]
 Total Coal Production of MCL
Financial year Target Achievement Growth over last % age
year achievement
against target
Absolute
%age
112.00 107.895 4.78 4.63 96.3
2012-13
120.00 110.440 2.55 2.36 92.0
2013-14
127.00 121.380 10.94 9.90 95.6
2014-15
150.00 137.901 16.52 13.61 91.9
2015-16
167.00 139.21 1.31 0.95 83.4
2016-17

180
160
140
120
100
80
60
40
20
0
FIANANCIAL 2012-13 2013-14 2014-15 2015-16 2016-17
YEAR

4.9 NEEDS OF WORKING CAPITAL

Working Capital is an essential part of the business concern. Every business
concern must maintain certain amount of Working Capital for their day-to-day
requirements and meet the short-term obligations.
Working Capital is needed for the following purposes.
1. Purchase of raw materials and spares: The basic part of manufacturing process is
raw materials. It should purchase frequently according to the needs of the business
concern. Hence, every business concern maintains certain amount as Working Capital
to purchase raw materials, components, spares, etc.
2. Payment of wages and salary:

[39]
The next part of Working Capital is payment of wages and salaries to labour and
employees. Periodical payment facilities make employees perfect in their work. So a
business concern maintains adequate the amount of working capital to make the
payment of wages and salaries.
3. Day-to-day expenses:
A business concern has to meet various expenditures regarding the operations at daily
basis like fuel, power, office expenses, etc.
4 .Provide credit obligations: A business concern responsible to provide credit
facilities to the customer and meet the short-term obligation. So the concern must
provide adequate Working Capital.

4.10 SOURCES OF ADDITIONAL WORKING CAPITAL:

Sources of additional working capital include the following-
1. Existing cash reserves
2. Profits (when you secure it as cash)
3. Payables (credit from suppliers)
4. New equity or loans from shareholders
5. Bank overdrafts line of credit
6. Long term loans
If we have insufficient working capital and try to increase sales, we can easily over
stretch the financial resources of the business. This is called overtrading. Early
warning signs include:
 Pressure on existing cash
 Exceptional cash generating activities. Offering high discounts for clear cash
payment
 Bank overdraft exceeds authorized limit
 Seeking greater overdrafts or lines of credit
 Part paying suppliers or there creditor.
 Management pre occupation with surviving rather than managing.

[40]
 CHAPTER – V

RESEARCH DESIGN

[41]
5.1 RESEARCH METHODOLOGY:

Research methodology is a way to systematically solve the research problem.

It may be understood as a science of studying now research is done systematically. In
that various steps, those are generally adopted by a researcher in studying his problem
along with the logic behind them. The procedure by which researchers go about their
work of describing, explaining, and predicting phenomenon are called methodology.

 This project requires a detailed understanding of the concept “working capital

management”. Therefore, firstly we need to have a clear idea of what is
working capital, how it is managed in MCL, what are the different ways in
which the financing of working capital is done in the company.
 The management of working capital involves managing inventories, accounts
receivable and payable and cash. Therefore one also needs to have a sound
knowledge about cash management, inventory and receivables management.
 Then comes the financing of working capital requirement i.e. how the working
capital is financed, what are the various sources through which it is done.
 And, in the end, suggestions and recommendations on ways for better
management and control of working capital provided.

5.2 RESEARCH:
Research is a careful investigation or inquiry specifically through search for
new facts in any branch of knowledge. It is an original contribution to the existing
stock of knowledge making for its advancement.
Research can simply be defined a task of searching from available data to
modify a certain result or theory.

5.3 OBJECTIVE OF RESEARCH:

The purpose of research is to discover answers to questions through the
application of scientific procedures. The main aim of research is to find out the truth
which is hidden and which has not been discovered as yet. Though each research
study has its own specific purpose, we may think of research objectives as falling into
a number of following broad groupings:

1. To gain familiarity or achieve a new insight towards a certain topic.

[42]
 2. To verify and test important facts.
3. To analyse an event, process or phenomenon.
4. To identify the cause and effect relationship.
5. To find solutions to scientific, non-scientific and social problems.
6. To determine the frequency at which something occurs.

5.4 RESEARCH DESIGN:

The research design used in this project is Analytical in nature the procedure using,
which researcher has to use facts or information already available, and analyze these to make
a critical evaluation of the performance.

5.5 DATA COLLECTION:

 Primary Sources
1. Data are collected through personal interviews and discussion with Finance
Executive.
2. Data are collected through personal interviews and discussion with Material
Planning- Deputy Manager.

 Secondary Sources
1. From the annual reports maintained by the company.
2. Data are collected from the company’s website.
3. Books and journals pertaining to the topic.
4. Some more information collected from internet.

5.6 TOOLS USED IN THE ANALYSIS:

 Working capital
 Ratio analysis.

5.7 PERIOD OF STUDY:

The present study has taken into account 5 years viz., 2012-2013,2013-
2014,2014-2015,2015-2016 & 2016-2017.

[43]
 CHAPTER – VI

ANALYSIS AND FINDINGS

[44]
 6.1 CALCULATION OF WORKING CAPITAL:
Calculation of net working capital:-
As at 31st
As at 31st As at 31st As at 31st As at 31st
march
march march march march
Particulars 2017 (Rs.
2013 (Rs. 2014 (Rs. 2015 (Rs. 2016 (Rs.
In
In Crores) In Crores) In Crores) In Crores)
Crores)

CURRENT
ASSETS:-

Current Investment 58.71 675.71 247.70 1345.00 202.00

Inventories 572.53 522.52 476.41 430.50 322.13

Trade Receivables 430.91 298.39 447.30 1123.16 1066.49

Cash & Cash

13083.00 10367.57 10882.37 11555.16 14662.95
equivalents

Short term loans &

3125.30 2174.55 3055.49 2347.71 2078.50
advances

Other Current Assets 829.09 666.36 825.74 635.93 1024.43

TOTAL CA 18098.54 14705.10 15935.01 17437.46 19356.43

CURRENT
LIABILITIES:-

Short term borrowings - - - - 2200.00

Trade payables 257.42 280.29 275.26 304.18 420.52

Other current
2386.70 2647.23 3166.33 3183.98 4123.32
liabilities

Short term provisions 1458.71 318.12 372.35 572.19 1030.27

TOTAL CL 4102.83 3245.64 3813.94 4060.35 7774.11

Net Working Capital

13995.71 11459.46 12121.07 13377.11 11582.32
(Total CA–Total CL)

[45]
NET WORKING CAPITAL:

Net working capital is defined as the difference between the current assets and
current liabilities of a business. It is that part of the current asset which is left after
paying off all the current liabilities. Positive net working capital represents the ability
of the business to pay off its liabilities. On the other hand, negative net working
capital is a concern.

Formula for net working capital as follows:

Net working capital = Current Assets – Current Liabilities

Year Current Assets Current Liabilities Net Working

(Rs. In Lakhs) (Rs. In Lakhs) Capital

2012-13 18098.54 4102.83 13995.71

2013-14 14705.10 3245.64 11459.46
2014-15 15935.01 3813.94 12121.07
2015-16 17437.46 4060.35 13377.11
2016-17 19356.43 7774.11 11582.32

Net Working Capital

16000

14000

12000

10000

8000
Net Working Capital
6000

4000

2000

0
2013 2014 2015 2016 2017

[46]
INTERPRETATION:

This ratio establishes difference between the current assets and current
liabilities.

MCL has net working capital in the year 2012-13 was recorded 13995.71 cr.
After in 2013-14 it was in decreasing trend.

Calculation of percentage change in Net Working Capital:-

Net working % change in Net working

Year
Capital capital
2013 13995.71 -
2014 11459.46 -18.121
2015 12121.07 5.773
2016 13377.11 10.362
2017 11582.32 -13.416

Formula used for calculating increase in working capital:

A−B
increase in working capital = X 100
B
Where,
A = Current year working capital
B = Previous year working capital

6.2 RATIO ANALYSIS:

Ratio Analysis is a powerful tool of financial analysis. A Ratio is defined as

“the indicated quotient of two mathematical expressions” and as “the relationship
between two or more things”. In financial analysis, a ratio is used as a benchmark for
evaluating the financial position and performance of a firm.

Ratio helps to summarize large quantities of financial data and to make

qualitative judgment about the firm’s financial performance. Following are some of
the important ratio to analyze the data better.

[47]
 The study is conducted in MCL to measure the working capital management of
the company. The working capital management is the most important tool of measure
the liquidity position of the company. This study is undertaken to observe the
management of working capital through ratio analysis technique, because ratio
analysis is the important tool to measure the working capital management. So i had
taken the five years annual reports to measure the working capital management.
The present study ascertained with the help of following ratios:
1. Current Ratio
2. Quick Ratio
3. Inventory turnover Ratio
4. Debtors turnover Ratio
5. Working capital turnover Ratio
6. Current assets turnover Ratio

1. CURRENT RATIO:
The current ratio is also called the working capital ratio, as working capital is the
difference between current assets and current liabilities. This ratio measures the
ability of a company to pay its current obligations using current assets. The current
ratio is calculated by dividing current assets by current liabilities.

Current Ratio = Current Assets

Current Liabilities

Current Current
Current
Year Assets (Rs. In Liabilities (Rs. In
Ratio
Lakhs) Lakhs)

2012-13 18098.08 4102.83 4.41

2013-14 14705.10 3245.64 4.53

2014-15 15372.28 3947.94 3.89

2015-16 17310.49 4121.34 4.20

2016-17 19356.43 8116.13 2.38

[48]
 Current Ratio
5
4.5
4
3.5
3
2.5
Current Ratio
2
1.5
1
0.5
0
2012-13 2013-14 2014-15 2015-16 2016-17

INTERPRETATION:
The current ratio calculated by dividing Current Assets with Current Liabilities.
It is a measure of firm’s short-term solvency. As conventional rules a current ratio of
2:1 is satisfactory.
MCL has current ratio in the year 2012-13 was recorded 4.41 and in the year
2013-14 was 4.53. After 2014-15 it was in decreasing trend but during in the ratio is
2.38 which are above the standard ratio.

2. QUICK RATIO:

The quick ratio, also known as the Acid test or Liquidity ratio, measures the
Ability of a business to pay its short-term liabilities by having assets that is readily
convertible into cash. These assets are, namely, cash, marketable securities and
accounts receivable. The Quick ratio is the ratio between quick current assets and
current liabilities.

Quick Ratio = Quick Assets

Current Liabilities
Quick Assets = Current Assets – Inventory

[49]
 Quick Assets Current
Year (Rs. In Liabilities (Rs. Quick Ratio
Lakhs) In Lakhs)
2012-13 17527.01 4102.83 4.27
2013-14 14182.58 3245.64 4.37
2014-15 14900.78 3947.94 3.77
2015-16 16884.9 4121.34 4.10
2016-17 19034.3 8116.13 2.34

Quick Ratio
5
4.5
4
3.5
3
2.5
Quick Ratio
2
1.5
1
0.5
0
2012-13 2013-14 2014-15 2015-16 2016-17

INTERPRETATION:

This ratio establishes relation between the quick assets and current
liabilities. As assets are liquid if it can be converted into cash immediately or
reasonably soon without loss of value the accepted standard is 1:1.

The quick ratio of MCL was favourable in the years of 2012-13 & 2013-14
as 4.27 & 4.37, where as in the years 2014-15, it was in decrease to 3.77 and in the
year of 2015-16, it was increase. At last the company’s overall liquidity position is not
in good.

3. INVENTORY TURNOVER RATIO:

[50]
 The inventory turnover ratio is an efficiency ratio that shows how effectively
inventory is managed by comparing cost of goods sold with average inventory for a
period. This measures how many times average inventory is “turned” or sold during a
period. In other words, it measures how many times a company sold its total average
inventory dollar amount during the year. This ratio establishes relationship between
cost of goods sold during a given period of time and average amount of inventory
held during that period.

It can be ascertained by following formula:

Inventory Turnover Ratio = Cost of goods sold

Average Inventory

Cost of goods sold = Sales – Gross profit

Cost of goods Average

Inventory
Year sold (Rs. In Inventory (Rs.
turnover ratio
Lakhs) In Lakhs)
2012-13 43278.53 5617.82 7.70
2013-14 45872.48 5568.07 8.24
2014-15 50423.38 6183.82 8.15
2015-16 54034.53 7595.34 7.11
2016-17 60764.92 8945.27 6.79

Inventory turnover ratio

9
8
7
6
5
4 Inventory turnover ratio

3
2
1
0
2012-13 2013-14 2014-15 2015-16 2016-17

[51]
INTERPRETATION:

The ratio indicates the efficiency of the firm in selling its product it is
calculated by dividing the cost of goods sold with average inventory.

For MCL, the efficiency is decreasing. In the year of 2013-14 it is 8.24 which
is highest recorded. After that it went on decreasing to lowest of 6.79 in 2016-17. It
shows that no proper control over the inventory by the management.

4. INVENTORY CONVERSION PERIOD:

Inventory period is the time lag between the purchase of raw materials &
sale of finished goods.

It includes

 Raw materials conversion period

 Work-in-process conversion period
 Finished goods conversion period
The inventory conversion period can be ascertained by following formula:

Inventory conversion period = No of days in a year

Inventory turnover ratio

No. Of days in a year = 365 days

Inventory
No of days in a Inventory
Year turnover
year conversion period
ratio
2012-13 365 7.70 47
2013-14 365 8.24 44
2014-15 365 8.15 45
2015-16 365 7.11 51
2016-17 365 6.79 54

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 Inventory conversion period

Inventory conversion
period

2012-13 2013-14 2014-15 2015-16 2016-17

INTERPRETATION:

This ratio indicates the speed with which the stock or inventory gets
converted into cash i.e. sales the lower the period, the better liquidity of the inventory.

5. WORKING CAPITAL TURNOVER RATIO:

Working capital turnover ratio is used to determine the relationship between net
sales and working capital of a business. It shows the number of net sales generated for
every single unit of working capital employed in the business.

Companies may perform different types of analysis such as trend analysis,

cross-sectional analysis etc to find out effective utilization of its resources, in this case
working capital. Working capital is calculated by subtracting current liabilities from
current assets.

It is calculated by following formula:

Working capital turnover ratio = Cost of goods sold

Net working capital

Cost of goods sold = sales – Gross profit

Net working capital = Current assets – Current Liabilities

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 Net working
Cost of goods sold
Year capital (Rs. In Ratio
(Rs. In Lakhs)
Lakhs)
2012-13 43278.53 13995.25 3.10
2013-14 45872.48 11459.46 4.00
2014-15 50423.38 11424.34 4.41
2015-16 54034.53 13189.15 4.10
2016-17 60764.92 11240.3 5.40

Working capital turnover ratio

6

3 Working capital turnover

ratio
2

0
2012-13 2013-14 2014-15 2015-16 2016-17

INTERPRETATION:

This ratio established relation between the cost of goods sold and net
working capital.

Working capital turnover ratio is decreasing trend. In the year 2013-14 &
2014-15 the ratio is high i.e. 4.00 & 4.41. It shows the MCL is properly utilized the
working capital for making the sales. But in the year 2015-16 the working capital
turnover ratio is low i.e. 4.10. But in the year 2016-17 again increased i.e. 5.40.

6. CURRENT ASSETS TURNOVER RATIO:

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 This ratio reveals the relationship between cost of goods sold and current
assets. The higher ratio, the better is the condition of a firm in utilizing its current
assets.

The higher the ratio the better is the firm in utilizing its current assets. The
lower the ratio indicates that in current assets has not brought commensurate gain to
the firm.

It is calculated by following formula:

Current assets turnover ratio = Total sales

Current assets

Total sales
Current assets
Year (Rs. In Ratio
(Rs. In Lakhs)
Lakhs)
2012-13 12068.60 18098.08 0.67
2013-14 13190.42 14705.10 0.90
2014-15 13165.61 15372.28 0.85
2015-16 14989.05 17310.49 0.86

2016-17 19829.58 19356.43 1.02

Current assets turnover ratio

1.2

0.8

0.6 Current assets turnover

ratio
0.4

0.2

0
2012-13 2013-14 2014-15 2015-16 2016-17

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INTERPRETATION:

The current assets turnover ratio is calculated by dividing total sales with
current assets. It shows that how the MCL is utilized its current assets.

In the year 2012-13 to 2013-14 the ratio is increasing 0.67 to 0.90. It indicates
that MCL is utilizing its current assets more efficiently. But in the year 2014-15 the
ratio is decrease 0.90 to 0.85. But in the year 2016-17 the ratio is increases 0.86 to
01.02. It reflects the good current assets management.

6.3 FINDINGS
By the study of the whole data I find some facts which are as follows:

 As it is a steel industry its production process time is long in which it manages

the current ratio over 1:1 which is satisfied.
 In spite of increase in Working Capital there is decreasing working capital
turnover ratio which is largely due to increase in fixed deposit of surplus fund
generated out of operations and as a matter of policy, the company has to go
for this mode of investment only.
 The current assets and liabilities are increasing year by year. A further analysis
of component wise current assets shows a considerable increase of bank
balance over the period of time. It means that the company as well as the coal
industry is enjoying absolute monopoly in the market and it has increased its
production every year as per the market demand.
 The company had increased their consumption by this year and they are trying
to decrease holding periods which will increase their profitability.
 Since the company is a large organization its working capital requirement is
more. And that’s why it maintains huge amount of working capital.

6.4 SUGGESTION AND RECOMMENDATIONS

The management of working capital plays a vital role in running of a successful

business. So, things should go with a proper understanding for managing cash,
receivables and inventory.

Mahanadi Coalfields Limited is managing its working capital in e good manner,

but still there is some scope for improvement in its management. This can help the

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company in raising its profit level by making less investment in accounts receivables
and stocks etc. This will ultimately improve efficiency of its operations. Following are
few recommendations given to the company in achieving its desire objectives:

 The business runs successfully with adequate amount of the working capital
but the company should see to it that the cash should not be tied up in
excessive amount of working capital.
 Through the present collection system is near perfect, the company as due to
the increasing sales should adopt more effective measures so as to counter the
threat of bad debts.
 The over purchasing function should be avoided as it could lead to liquidity
problems.
 The investment of cash in marketable securities should be increased, as it is
very profitable for the company.
 Holding of excessive and insufficient stock must be avoided as it creates a
burden on the cash resources of a business and results in lost sales, delays for
customers etc respectively.

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CHAPTER – VII

CONCLUSION

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7.1 CONCLUSION
 The working capital position of the company is sound and the various sources
through which it is funded are optimal.
 The company has used its purchasing, financing and investment decisions to
good effect can be seen from the inferences made earlier in the project.
 The various ratios calculated are an indicator as to the fact that the profitability
of the firm and sales are on a rise and also deletion of the inefficiencies in the
working capital management.
 The firm has not compromised on profitability despite the high liquidity is
commendable.
 Mahanadi Coalfields Limited has reached a position where the default costs
are as low as negligible and where they can readily factor their accounts
receivables for availing finance is noteworthy.

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BIBLIOGRAPHY

BOOKS:

 Maheshwari, S.N. (2006) Financial Management, New Delhi, Sultan Chand &
Sons.
 Gupta, Shashi K. & Sharma, R.K. (2013) Management Accounting, New
Delhi, Kalyani Publishers.
 Khan, M.Y. & Jain, P.K. (1998) Financial Management, New Delhi, Tata
McGraw-Hill Publishing Company Limited.

REPORT AND JOURNAL:

 Annual report of MCL

 Accounting Review

WEBSITE:

 www.mahanadicoal.in
 www.icmai.com
 www.wikipedia.com
 www.investopedia.com
 www.scribd.com

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