“A PROJECT RERORT ON WORKING CAPITAL

MANAGEMENT.”

A PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI

FOR PARTIAL COMPLETION OF THE DEGREE

OF BACHELOR IN COMMERCE (ACCOUNTING AND

FINANCE)

UNDER THE FACULTY OF COMMERCE

BY

WAGHMODE RAHUL PRABHAKAR SUNITA

UNDER THE GUIDANCE OF

ASSISTANT PROFESSOR BHAKTI WALKE

KERALEEYA SAMAJAM REGD. DOMBIVLI’S

MODEL COLLEGE
KHAMBALPADA, THAKURLI EAST.

MARCH, 2019
 DECLARATION

I the undersigned MR. WAGHMODE RAHUL PRABHAKAR here by, declare

that the work embodied in this project work entitled “WORKING CAPITAL
MANAGEMENT”, forms my own contribution to the research work carried out
under the guidance of ASSISTANT PROF.BHAKTI WALKE is a result of my own
research work and has not been previously submitted to any other University for any
other Degree/Diploma to this or any other University.

Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.

I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

WAGHMODE RAHUL PRABHAKAR SUNITA

B.COM. (ACCOUNTING AND FINANCE)

Certified by
ASST. PROF. BHAKTI WALKE
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth
us so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University Of Mumbai for giving me chance to
do this project.

I would like to thank my Principal, DR. VINAY BHOLE for providing the
necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator ASSISTANT PROF. GEETA

NAIR, for her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide

ASSISTANT PROF.BHAKTI WALKE whose guidance and care made the project
successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every one who directly and indirectly helped
me in the completion of the project especially My Parents and Peers who supported
me throughout my project.
 INDEX

SR.NO DESCRIPTION PAGE NO

1. CERTIFICATE i.
2. DECLARATION ii.
3. ACKNOWLEDGEMENT iii.
4. CHAPTER I:
INTRODUCTION
5. CHAPTER II:
RESEARCH METHODOLOGY
6. CHAPTER III:
LITERATURE REVIEW
7. CHAPTER IV:
DATA ANALYSIS AND INTERPRETATION
8. CHAPTER V:
CONCLUSION
 CHAPTER NO. 1:

INTRODUCTION

Working capital management is a significant in financial management .due to the fact

that it plays a pivotal role in keeping the wheels of a business enterprise running.
Working capital management is concerned with short-term financial decisions.
Shortage of funds for working capital has caused many businesses to fail and in many
cases has retarded their growth. Lack of efficient and effective utilization of working
capital leads to earn low rate of return on capital employed or even compels to sustain
losses .the need for skilled working capital management had thus become greater in
recent years. A firm invests a part of its permanent capital in fixed assets and keeps a
part of it for working capital i.e., for meeting day-to-day requirements .we will hardly
find a firm which does not require any amount of working capital for its normal
operations. The requirement of working capital varies from firm to firm depending
upon the nature of business, production policy, market conditions, seasonality of
operations, conditions of supply etc.

The basic objective of Working Capital Management is to avoid over investment or

under investment in Current Assets, as both the extremes involve adverse
consequences. Over investment in Current Assets may lead to the reduced
profitability due to cost of funds. Working capital management is considered to be
one of the most important functions of finance, as a very large amount of funds are
blocked in current assets in practical circumstances. Unless working capital is
managed properly, it may lead to the failure of business. The term ‘Working Capital’
may mean Gross Working Capital or Net Working Capital. Gross Working Capital
means Current Assets.Net Working Capital means Current Assets less Current
Liabilities. Unless otherwise specified, Working Capital means Net Working Capital.
As such, Working Capital Management refers to proper management of Current
Assets and Current Liabilities.

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Definition:

According to Guttmann & Doug all-

“Excess of current assets over current liabilities”.

According to Park & Gadson-

“The excess of current assets of a business (i.e. cash, accounts receivables,

inventories) over current items owned to employees and others (such as salaries&
wages payable, accounts payable, taxes owned to government)”.

The assets which can be converted in the form of cash or used during the course of
normal operations within a short span of time say one year, without any reduction in
value are referred as current assets. Current assets change the shape very frequently.
The current assets ensure smooth and fluent business operations and are considered to
be the life-blood of the business. In case of a manufacturing organization, current
assets may be found in the form of stocks, receivables, cash and bank balances and
sundry loans and advances. The term current liabilities refer to those liabilities which
are to be paid off during the course of business, within a short span of time say one
year. They are expected to be paid out of current assets or the earnings of the
business. Current liabilities consist of sundry creditors, bills payable, bank overdraft
or cash credit, outstanding expenses etc. The objective of Working Capital
Management is to ensure Optimum Investment in Current Assets. In other words,
Working Capital Management intends to ensure that the investment in Current Assets
is reduced to the minimum possible extent. However, the normal operations of the
organization should not be affected adversely. If the normal operations of the
organization are affected adversely, reducing the investment in Current Assets is
fruitless. Generally, it will not be possible for any organization to operate without the
working capital. Let us assume that a manufacturing organization commences its
business with a certain amount of cash. This cash will be invested to buy the raw
material. The raw material purchased will be processed with the help of various
infrastructural facilities like labor, machinery etc. to convert the same in the form of
finished products. These finished products will be sold in 3 the market on credit basis

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whereby the receivables get created. And when receivables make the payment to the
organization, cash is generated again. As such, there is a cycle in which cash available
to the organization is converted back in the form of cash. This cycle is referred to as
Working Capital Cycle.

In between each of these stages, there is some time gap involved. The entire
requirement of working capital arises due to this time gap. As this time gap is
unavoidable, requirement of working capital is unavoidable. The finance professional
is interested in reducing this time gap to the minimum possible extent in order to
manage the working capital properly. Business can survive even if profits are not
made but it may not survive without proper liquidity. Hence, in order to retain the
liquidity state, all business firms should manage their working capital appropriately.

Working Capital Management:

Relationship between current assets and current liabilities for a business firm is called
management of working capital. “Working capital management is concerned with the
problems that arise in attempting to manage the current assets and current liabilities
and the inter-relationship that exists between them. There is habitually a distinction
made amid the investment decisions concerning current assets and the financing of
working capital.”

Two major aspects of management of working capital are:

(1) To ascertain the current assets

(2) To conclude the method of financing

Concept of Working Capital Management

Working capital management can be conceptualized under two categories:

 Quantitative
 Qualitative

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These concepts are well known as “gross working capital” concept and “net working
capital” concept. In quantitative working capital concept, current assets are considered
as working capital which is termed as gross working capital too. In qualitative, current
assets and current liabilities are taken into account, working capital is defined as
excess or deficit of current assets over current liabilities. “Variance of current assets
over current liabilities” L.J. Guttmann also described working capital as “the portion
of a firm’s current assets which are financed from long–term funds.”

It becomes essential to know and understand the current assets components and
current liabilities components to understand working capital management.

Current assets –
This is imperative to facilitate “Current assets have a short life span. These types of
assets are connected in current operation of a business and normally used for short–
term operations of the firm. The two important characteristics of these assets are: (I)
short life span, and (ii) swift conversion into other form of assets. Cash balance may
be held idle for few weeks, account receivable may have a period of 30 to 60 days”
Fitzgerald also described current assets, “cash & other assets which are expected to be
converted in to cash in the ordinary course of business within one year or within such
longer period as constitutes the normal operating cycle of a business.”

Current assets are important to businesses because they can be used to fund day-to-
day business operations and to pay for the ongoing operating expenses. Since the term
is reported as a dollar value of all the assets and resources which can be easily
converted to cash in a short period of time, it also represents a company’s liquid
assets.

However, care should be taken to include only the qualifying assets that are capable
of being liquidated at the fair price over the next one year. For instance, there is a high
chance that a lot of commonly used FMCG goods produced by a company can be
easily sold over the next one year which qualifies inventory to be included in the
current assets, but it may be difficult to sell land or heavy machinery easily which are
excluded from the current assets.  Depending on the nature of the business and the

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products it markets, current assets can range from barrels of crude oil, fabricated
goods, work in progress inventory, raw material, or foreign currency.

Key components of current assets:

While cash, cash equivalents and liquid investments in marketable securities (like

interest bearing short term Treasury bills or bonds) remain the obvious inclusion in
current assets, the following are also included in current assets:

1. Accounts receivable : which represents the money due to a company for goods or

services delivered or used but not yet paid for by customers, are considered
current assets as long as they can be expected to be paid within a year. If a
business is making sales by offering longer terms of credit to its customers, a
portion of its accounts receivables may not qualify for inclusion in current assets.
It is also possible that some accounts may never be paid in full. This consideration
is reflected in an allowance for doubtful accounts, which is subtracted from
accounts receivable. If an account is never collected, it is written down as a bad
debt expense, and such entries are not considered for current assets.

2. Inventory : which represents raw materials, components and finished products, is

included as current assets, but the consideration for this item may need some
careful thought? Different accounting methods can be used to inflate inventory,
and at times it may not be as liquid as other current assets depending on the
product and the industry sector. For example, there is little or no guarantee that a
dozen units of a high - cost heavy earth moving equipment may be sold for sure
over the next year, but there is a relatively higher chance of successful sale of a
thousand umbrellas in the coming rainy season. Inventory may not be as liquid as
accounts receivable, and it blocks the working capital. If the demand shifts
unexpectedly, which is more common in some industries than others, inventory
can become backlogged.

3. Prepaid expenses : which represent advance payments made by a company for

goods and services to be received in the future, are considered current assets?

5
 Though they cannot be converted into cash, they are the payments which are
already taken care of. Such components free up the capital for other uses. Prepaid
expenses could include payments to insurance companies or contractors.

On the balance sheet, current assets will normally be displayed in order of liquidity,

that is, the items which have higher chance and convenience of getting converted into
cash will be ranked higher. The typical order in which the constituents of current
assets may appear is cash (including currency, checking accounts, and petty cash),
short term investments (like liquid marketable securities), accounts receivable,
inventory, supplies and prepaid expenses.

Thus, the current assets formulation is a simple summation of all the assets that can be
converted to cash within one year. For instance, looking at a firm's balance sheet we
can add up:

Current Assets = Cash + Cash Equivalents + Inventory + Accounts Receivables +

Marketable Securities + Prepaid Expenses + Other Liquid Assets

Uses of Current Assets:

Current assets figure is of prime importance to the company management with regards
to the daily operations of a business. As payments towards bills and loans become due
at regular frequency (like, at the end of each month), the management must be able to
arrange for the necessary cash in time to pay its obligations. The dollar value
represented by the current assets figure provides a general insight into company’s
cash and liquidity position, and allows the management to remain prepared for the
necessary arrangements to continue business operations.

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Additionally, creditors and investors keep a close eye at the current assets of a
business to assess the value and risk involved in its operations. Many use a variety
of liquidity ratios, which represent a class of financial metrics used to determine a
debtor's ability to pay off current debt obligations without raising external capital.
Such commonly used ratios include current assets, or its components, as a key
ingredient in their calculations.

Financial Ratios Using Current Assets or Their Components:

Owing to different attributes attached to the business operations, different accounting

methods and payment cycles, it often becomes a challenging exercise to correctly
categorize what all components can be termed as assets over a given time horizon.
The following ratios are commonly used to measure a company’s liquidity position
with each one using a different number of asset components against the current
liabilities of a company.

The current ratio measures a company's ability to pay short-term and long-term

obligations and takes into account the current total assets (both liquid and illiquid) of
a company relative to the current liabilities.

The quick ratio measures a company's ability to meet its short-term obligations with

its most liquid assets. It considers cash and equivalents, marketable securities and
accounts receivable (but not the inventory) against the current liabilities.

The cash ratio measures the ability of a company to pay off all of its short-term
liabilities immediately, and is calculated by dividing the cash and cash equivalents
by current liabilities.

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While the cash ratio is the most conservative one as it takes only cash and cash
equivalents into consideration, the current ratio is the most accommodating and
includes a wide variety of components for consideration as assets. These various
measures are used to assess the company’s ability to pay outstanding debts and cover
liabilities and expenses without having to sell fixed assets.

Current Liabilities –

Business generates liability for purchasing raw material and other essential things on
credit, these are called as creditors or account payable. Until remittances towards
creditors are made, it is categorized under liabilities section of balance sheet. Current
liabilities are explained as all obligations that are due in near future for payment.

Current liabilities are a company's debts or obligations that are due within one year or
within a normal operating cycle.  Furthermore, current liabilities are settled by the use
of a current asset, such as cash, or by creating a new current liability.  Current
liabilities appear on a company's balance sheet and include short-term debt, accounts
payable, accrued liabilities, and other similar debts.

Analysts and creditors often use the current ratio (current assets divided by liabilities),
or the quick ratio (current assets minus inventories divided by current liabilities), to
determine whether a company is able to pay off its current liabilities.

On the balance sheet, current liabilities are typically presented as follows: the
principal portion of notes payable due within one year, accounts payable, and then
other current liabilities, such as income taxes payable, interest payable, etc.

8
Example of Current Liabilities:

Accounts payable is typically one of the largest current liability accounts on a

company's financial statements, and it represents unpaid supplier invoices. Current
liability accounts vary per industry or according to various government regulations;
examples include dividends payable, customer deposits, current portion of deferred
revenue, current maturities of long-term debt, and interest payable. Sometimes,
companies use an account called "other current liabilities" as a catch-all line item on
their balance sheets to include all other liabilities due within a year not classified
elsewhere.

Gross and Net Working Capital:

1. Gross Working Capital:

It is also called the circulating capital. It is equal to the total sum of current assets only
and it may represent both owned capital as well as loan capital used for financing the
current assets.

9
The concept of gross capital is a financial concept whereas that of net concept is an
accounting concept. Management is interested more in the amount of current assets
with which it has to operate. If it can balance receipts and disbursements perfectly, the
business would operate with maximum efficiency.

2. Net Working Capital:

It represents the excess of total current assets over total current liabilities. It is a
qualitative concept indicating the soundness of current financial position. It is of
major importance to investors and lenders. On the basis of this concept, the
management will also get an idea about the ease and cost of raising working capital.

Net working capital is measured by the current ratio, viz. Current assets/Current
liabilities. Normally, the current ratio should be 2:1, a larger ratio indicates greater
solvency and vice versa. Of course, excessive current ratio would point out poor
financial planning and it would reduce income.

Net working capital = Current assets – Current liabilities

= (cash+ marketable securities+ accounts receivables + notes and bills receivable +

inventories).

Permanent and Temporary Working Capital:

Considering time as the basis of classification, there are two types of working capital
via, “permanent” and “temporary”.

Permanent working capital:

The magnitude of investment in working capital may increase or decrease over a

period of time according to level of production. But there is a need for minimum level
of working capital to carry its business irrespective of change in level of sales or

10
production. Such minimum level of working capital is called ‘permanent working
capital’ or ‘fixed working capital’. It is the irreducible minimum amount necessary for
maintaining circulation of current assets. The minimum level of investment in current
assets is permanently locked-up in business and it is also referred to as ‘regular
working capital’. It represents the assets required on continuing basis over the entire
year. The permanent component current assets which are required throughout the year
will generally be financed from long-term debt and equity. Tendon committee has
referred to this type of working capital as ‘core current assets’. Core current assets are
those required by the firm to ensure the continuity of operations which represents the
minimum level of various items of current assets via, stock of raw materials, Stock of
work-in-process, stock of finished goods, debtor’s balances, cash and bank etc. This
minimum level of current assets will be financed by the long-term sources and any
fluctuations over the minimum level of current assets will be financed by the short-
term financing.

Temporary working capital:

It is also called as ‘fluctuating working capital’. It depends upon the changes in

production and sales, over and the above the permanent working capital. It is the extra
working capital needed to support the changing business activities. It represents
additional assets required at different items during the operation of the year. A firm
will be finance its seasonal and current fluctuations in business operations through
short-term debt financing. For example, in peak seasons, more raw materials to be
purchased, manufacturing expenses to be incurred, more funds will be locked in
debtor’s balances etc. In such times excess requirement of working capital would be
financed from short-term financing sources.

The management of working capital is concerned with maximising the return to

shareholders within the accepted risk constraints carried by the participants in the
company. Just as excessive long-term debt puts company at risk, so an inordinate
quantity of short-term debt also increases the risk to a company by straining its

11
solvency. The suppliers of permanent working capital look for long-term return on
funds invested whereas the suppliers of temporary working capital will look for
immediate return and the cost of such financing will also be costlier than the cost of
permanent funds used for working capital.

Source of Working Capital:

Source of working capital is very important as it’s important to keep business liquid
as well as stress free from financial burden. Basic current assets requirement must be
met with long term sources and current assets which are required for circulation
should be met with short term sources. It benefits business by keeping cost of capital
low and increases return on investment.

For financing temporary requirement of working capital, the organization can go for
various sources which can be discussed as below:

 Spontaneous sources
 Inter-corporate deposit
 Commercial paper’s
 Banks

The selection of source is very important as it determines the level of liquidity and
flexibility in any business firm.

Spontaneous Sources

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Spontaneous Sources for financing the working capital requirement arise during the
course of normal business operations. During the course of business operations, the
company may be able to buy certain goods or services for which the payment is to be
made after a certain time gap. As such, the company is able to buy goods or services
without making payment for the same. These spontaneous sources are unsecured in
nature and vary with the level of sales. These spontaneous sources do not have any
explicit cost attached to the same.

Following forms of current liabilities may be used as spontaneous sources for

financing the working capital requirement.

Trade Credit:

If the company buys the raw material from the suppliers on credit basis, it gets the
raw material for utilization immediately with the facility to make the payment at a
delayed lime. By accepting the delayed payment, the suppliers of raw material finance
the requirement of working capital. For using this source, certain factors may play an
important role:

 Trends in the industry

 Liquidity position of the company

 Earnings of the company over a period of time
 Record of payment by the company to the suppliers
 Relationship of the company with suppliers.

Outstanding expenses

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All the services enjoyed by the company are not required to be paid for immediately.
They are paid for after a certain time gap. As such, the company is able to get the
benefit of these services without paying for the same immediately, thus getting the
finance for working capital purposes. These are called ‘outstanding expenses’. This
may apply to salaries, wages, telephone expenses, electricity expenses, water charges
etc.

Inter-Corporate Deposits (ICD)

Inter-corporate Deposits indicate the amount of funds borrowed by one company from
another company, usually both the companies being under the same management but
not necessarily so. Point to be noted here is that ICDs are not considered to be
deposits as stated by the provisions of Section 58-A of the Companies Act, 1956 and
in isolation the set of laws pertinent to the public deposits does not affect the ICD’s.
Inter-corporate Deposits as a source for financing the working capital requirement has
the following characteristic features.

 ICD is for a very short period of time, i.e. three months or six months.
 ICD is an unsecured source for raising the funds required for working capital
purposes.
 ICD as a source is not regulated by any law. As such, the rate of interest, period of
ICD etc. can be decided by the company on its own.
 ICD is a relationship based borrowing made by the company.

 Commercial Papers

In the earlier period, Commercial Papers (CPs) have turned one of the most excellent
mode for financing the working capital obligations of the companies. The companies
demanding to raise the funds through issue of Commercial Papers are being regulated

14
by guiding principles for issue of Commercial Papers issued by RBI on 10th October
year 2000. These guiding principles apply to the companies those are making efforts
to increase the funds by issuing the CPs. According to, these guidelines, a company
means a company as described in Section 45-I (as) of Reserve Bank of India Act,
1934. Section 45-1(as) of Reserve Bank Act, 1934 defines a company as the company
as defined in section 3 of the Companies Act, 1956.

Banks

The scenario of India is structured in a way where, banks play exceedingly significant
role in financing the working capital requirement of a business firm. Banks are
considered as a foundation for financing the working capital requirement of the
organizations on the basis of below mentioned points:

 What should be the amount of assistance?

 What should be the form in which working capital assistance is extended?
 What security should be obtained for working capital assistance?
 What are the various applicable regulations to be considered by the banks while
extending the working capital assistance?

Quantum of Assistance:

A business firm is firstly mandated to measure and calculate its requirement of

working capital appropriately in order to acquire the bank credit for financing the
working capital requirements. And for estimating the working capital requirement
optimally, the business firm should primarily estimate the current assets and current
liabilities level, because working capital is the difference between the amount of
current assets and of current liabilities. To calculate the values of optimum working
capital, techniques like ratio analysis, trend analysis etc. could be implemented on
data of the company. The accuracy level of estimating the current assets as well as
current liabilities decide the accuracy of evaluating the requirement of working capital

15
level. Then, the business firm would have to move towards the bank along with the
essential sustaining financial data. On the basis of the anticipated figures submitted by
the concern, the bank decides the quantum of assistance level which is to be
unmitigated. The bank prescribes the margin money required at the time of extending
the working capital assistance. The margin money specification is fixed by the banks
in accordance to make sure the borrowing company’s individual stake in the business
in addition to provide the safeguard against the probable diminution in the value of
security presented to the bank. The fraction of margin money specification might
depend in the lead of credit reputation of the borrowing firm, variations in the price of
the security moreover, the time to time directives of RBI. The common principle
validated will be, “more dicer the nature of security, higher will be the margin money
stipulations.”

Assistance structure:

The bank will be able to disburse the amount in one of the subsequent forms, after
deciding the amount of total assistance that can be extended for the business firm:

 Non-Fund Based Lending

Considering Non-Fund Based Lending, the lending bank does not entrust any
substantial outflow of funds. Therefore, the funds arrangement of the lending bank
remains integral. The Non- Fund Based Lending could be done by the banks through
these two ways:

 Bank Guarantees:

The bank guarantees mechanism is described below:

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 Suppose Company A is the selling company and Company B is the purchasing
company. Company A does not know Company B and as such is concerned whether
Company B will make the payment or not. In such circumstances, D who is the Bank
of Company B, opens the Bank Guarantee in favour of Company A in which it
undertakes to make the payment to Company A, if Company B fails to honour its
commitment to make the payment in future. As such, interests of Company A are
protected as it is assured to get the payment, either from Company B or from its Bank
D. As such, Bank Guarantee is the mode which will be found typically in the seller’s
market. As far as Banks is concerned, while issuing the guarantee in favour of
Company a, it does not 26 commit any outflow of funds. As such, it is a Non-Fund
Based Lending for Bank D. If on due date, Bank D is required to make the payment to
Company A due to failure on account of Company B to make the payment, this
NonFund Based Lending becomes the Fund based Lending for Bank D which can be
recovered by Bank D from Company B. For issuing the Bank Guarantee, Bank D
charges the Bank Guarantee Commission to Company B which gets decided on the
basis of two factors i.e. what is the amount of Bank Guarantee and what the period of
validity of Bank Guarantee is. In case of this conventional form of Bank Guarantee,
both Company A as well as Company B gets benefited. Company A is benefited as it
is assured to get the payment. Company B is benefited, as it is able to make the credit
purchases from Company A without knowing Company A. As such, Bank Guarantee
transactions will be applicable in case of credit transactions.

In some cases, interests of purchasing company are also to be protected. Suppose that
Company A which manufactures capital goods takes some advance from the
purchasing Company B. If Company A fails to fulfil its part of the contract to supply
the capital goods to Company B, there needs to be some protection available to
Company B. In such circumstances, Bank C which is the banker of Company A opens
a Bank Guarantee in favour of Company B in which it undertakes that if Company A
fails to fulfil its part of the contract; it will reimburse any losses incurred by Company
B due to this non-fulfilment of contractual obligations. Such Bank Guarantee is
technically referred to as Performance Bank Guarantee and is ideally found in the
buyer’s market.

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Letter of Credit:

The non-fund based lending by the way of Letter of Credit (LC) is incredibly found in
the international business regularly. Under this, the exporter and importer are
anonymous with each other. Due to this reason, the exporter 27 remains in dilemma
about getting the disbursement from the importer at the same time, the importer gets
worried about whether he will get a hold of goods or not. In order to solve this
problem, the importer applies to his bank in his own country to release a letter of
credit in name of the exporter whereby, the importer’s bank assures to pay the
exporter or allow the bills or drafts drawn by the exporter on the exporter gratifying
the provisions and stipulations specified in the letter of credit.

Fund based lending

In the matter of Fund Based Lending, the lending bank supports the substantial
outflow of funds. The funds position of the lending bank gets pretentious because of
this reason. The Fund Based Lending is done by the banks using the following
methods:

 Loan:

Disbursement of the total amount of assistance is made at one time simply under this
case, either in cash or through transfer in company’s account. It is a solitary proceed.
The loan might be reimbursed in instalments, and the interest would be charged on
outstanding amount.

 Overdraft:

18
In this scenario, the firm is permitted to withdraw in surfeit of the balance remaining
in its Bank account. Though, a fixed limit is specified by the Bank ahead of which the
firm is not able to overdraw from the account. Conceding of the assistance by the way
of overdraft presupposes the opening of a prescribed current bank account. Officially,
overdraft is an on demand assistance granted by the bank that means the bank can ask
over the settlement at any moment of time. Overdraft is facilitated by the bank for a
very short duration of time, at the end of which the business firm is thought to pay
back the amount. Interest gets due on the actual amount drawn and is estimated on
daily product basis.

 Cash credit:

Actually, the proceedings in cash credit facility are same as in those of bank overdraft
facility other than the fact that the firm does not require to open a formal current
account. In this case as well a fixed perimeter is stipulated beyond which the firm
cannot withdraw the amount. Legally, cash credit is too a demand facility, but in real,
it is on incessant basis. Under cash credit also, the interest is allocated on the actual
amount drawn and is deliberated on daily product basis.

 Bills Purchased/Discounted:

This form of assistance is comparatively of recent origin. This facility enables the
company to get the immediate payment against the credit bills/invoices raised by the
company. The bank holds the bills as a security till the payment is made by the
customer. The entire amount of bill is not paid to the company. The company gets
only the present worth of the amount of the bill, the difference between the face value
of the bill and the amount of assistance being in the form of discount charges.
However, on maturity, the bank collects the full amount of bill from the customer.
While granting this facility to the company, the bank inevitably satisfies itself about
the credit worthiness of the customer and the genuineness of the bill. A fixed

19
perimeter is specified in case of the company, further than which the bills are not
purchased or discounted by the bank.

 Working Capital Term Loans:

In accordance to match up the working capital requirement of the business firm, banks
possibly will grant the working capital term loans for a time period of 3 years to 7
years, payable both in yearly instalments or half yearly instalments.

 Packing Credit:

This kind of assistance can be granted by the bank on the way to take concern of
particular requirement of the company at the time it avails any export order. To
facilitate the company in buying or manufacturing the goods to be exported, packing
credit facility is given by the bank. In case the company holds a confirmed export
order given by the international buyer 29 or an irretrievable letter of credit in the
favour of company, the company can approach the bank to avail packing credit
assistance.

Security for Assistance:

The bank may possibly be able to give the assistance in either of the modes as
mentioned above. However, no assistance would be accessible until the company
presents any kind of security out of these:

20
 Hypothecation:

Under this mode of security, the bank extends the assistance to the company against
the security of movable property, usually inventories. Under this mode of security
neither the property not the possession of the goods hypothecated is transferred to the
bank. But the bank has the right to sell the goods hypothecated to realize the
outstanding amount of assistance granted by it to the company.

 Pledge:

Under this mode of security, the bank extends the assistance to the company against
the security of movable property, usually inventories. But unlike in case of
hypothecation, possession of the goods is with the Bank and the goods pledged are in
the custody of the bank. As such, it is the duty of the bank to take care of the goods in
its custody. In case of default on the part of company to repay the amount of
assistance, the bank has the right to sell the goods to realize the outstanding amount of
assistance.

 Lien:

Under this mode of security, the bank has a right to retain the goods belonging to the
company until the debt due to the bank is paid.

Mortgage:

This mode of security pertains to immovable properties like land and buildings. It
indicates transfer of legal interest in a specific immovable property as security for the
payment of debt. Under this mode, the possession of the property remains with the
borrower while the bank gets full legal title there, subject to borrower’s right, to repay
the debt. The party who transfers 30 the interest (i.e. the company) is called mortgager

21
and the party in whose favour the interest is so transferred (i.e. the bank) is called
mortgagee.

Importance of working capital management:

Management of working capital is very much important for the success of the
business. It has been emphasized that a business should maintain sound working
capital position and also that there should not be an excessive level of investment in
the working capital components. As pointed out by Ralph Kennedy and Stewart MC
Muller, “the inadequacy or mis-management of working capital is one of a few
leading causes of business failure.

DETERMINANTS OF WORKING CAPITAL

There is no specific method to determine working capital requirement for a business.

There are a number of factors affecting the working capital requirement. These factors
have different importance in different businesses and at different times. So a thorough
analysis of all these factors should be made before trying to estimate the amount of
working capital needed. Some of the different factors are mentioned here below:-

 General Nature of Business

The working capital requirements of an enterprise are basically related to the conduct
of the business. Enterprises fall into some broad categories depending on the nature of
their business. For instance, public utilities have certain features, which have a
bearing on their working capital needs. The two relevant features are:

a) Cash Nature of business, i.e, cash sale

b) Sale of services rather than commodities

22
In view of these features they do not maintain big inventories and have, therefore,
probably the latest requirement of working capital. At the other extreme are the
trading and financial enterprises. The nature of their business is such that they have to
maintain a sufficient amount of cash, inventories and book debts. They have
necessarily to invest proportionately large amounts in working capital.

 Production Cycle

Another factor, which has a bearing on the quantum of working capital, is the
production cycle. The term ‘production’ or ‘manufacturing cycle’ refers to the time
involved in the manufacturing of goods. It covers the time span between the
procurement of the raw materials and the completion of the manufacturing process
leading to the production of finished goods. Funds will have to be necessarily tied-up
during the process of manufacture, necessitating enhanced working capital. In other
words, there is some gap before raw materials become finished goods. To sustain such
activities the need for working capital is obvious. The longer the time span (i.e., the
production cycle), the larger will be the funds tied-up and, therefore, the larger the
working capital needed and vice-versa. There are enterprises, which due to the nature
of business will have a shorter operating cycle. A distillery, which has an aging
process, has relatively to make a heavy investment in inventory. The bakery provides
the other extremes. The bakeries sell their products at short intervals and have a very
high inventory turnover. The investment in inventory and, consequently, working
capital is not large.

 Business Cycle

The working capital requirements are also determined by the nature of the business
cycle. Business fluctuations lead to cyclical and seasonal changes, which, in turn,
cause a shift in the working capital position, particularly for temporary working
capital requirements. The variations in business conditions may be in two directions:

23
a) Upward phase when boom conditions prevail.
b) Downswing phase when economic activities are marked by a decline.

During the upswing of business activity the need for working capital is likely to grow
to cover the lag between increased sales and receipt of cash as well as to finance
purchase of additional material to cater to the expansion of the level of the activity.
Additional funds may be required to invest in the plant and machinery to meet the
increased demand. The downswing phase of the business cycle will have exactly and
opposite effect on the level of working capital requirement. The decline in the
economy is associated with a fall in the volume of sales which, in turn, will lead to
fall in the level of inventories and book debts. The need for working capital in the
recessionary conditions is bound to decline. In brief, business fluctuations influence
the size of working capital mainly through the effect on inventories. The response of
inventory to business cycles is mild or violent according to the mild or violent nature
of the business cycle.

 Credit Policy

The level of working capital is also determined by credit policy, which relates to sales
and purchases. The credit policy influences the requirement of the working capital in
two ways:

a) Through credit terms granted by the firm to its customers/buyers of goods.

b) Credit terms available to the firm from its creditors.

The credit terms granted to the customers have a bearing on the magnitude of the
working capital by determining the level of book debts. The credit sales will result in
higher book debts (receivables). Higher book debts will mean more working capital.
On the other hand, if liberal credit terms are available from the suppliers of the goods
(trade creditors), the need for working capital will be less. The working capital
requirements of a business are, thus, affected by the terms of purchase and sale and
the role given to credit by a company in its dealings with the creditors and the debtors.

 Profit Level

24
The level of profits earned differs from to enterprise to enterprise. In general, the
nature of the products, hold on the market, quality of management and monopoly
power would by and large determine the profit earned by the firm. A priori, it can be
generalised that a firm dealing in a high quality product, having a good marketing
arrangement and enjoying monopoly power in the market is likely to earn high profits
and vice-versa. Higher profit margin would improve the prospects of generating more
internal funds thereby contributing to the working capital pool. The net profit is a
source of working capital to the extent that it has been earned in cash. The cash profit
can be found by adjusting non-cash items such as depreciation, outstanding expenses
and losses written off, in the net profit. But, in practice, the net cash inflows from
operations cannot be considered as cash available for use at the end of the cash cycle.
Even as company’s operations are in progress, cash is used for augmenting stock,
book debts and fixed assets. It must, therefore, be seen that cash generation has been
used for furthering the use of enterprise. It is in this context that elaborate planning
and projections of expected activities and the resulting cash inflows on a day to day,
week to week and month to month basis assume importance because steps can then be
taken to deal with surplus and deficit cash. The availability of internal funds for
working capital requirements is determined not merely by the profit margin but also
on the manner of appropriating profits. The availability of such funds would depend
upon the profit appropriations for taxation, dividend, reserves and depreciation. No
person was ever honoured for what he received. Honour has been the reward for what
he gave.”

NEED FOR WORKING CAPITAL

The need for working capital (gross) or current assets cannot be over emphasized. As
the objective of financial decision making is to maximize the shareholder’s wealth, it
is necessary to generate sufficient profits. The extent to which profits can be earned
will naturally depend upon the magnitude of the sales, among other things. A
successful sales program is, in other words, necessary for earning profits by any
business enterprise. However, sales do not convert into cash instantly; there is
invariably a time lag between the sale of goods and the receipt of cash. There is,

25
therefore, a need for working capital in the form of current assets to deal with the
problem arising out of the lack of immediate realisation of cash against goods sold.
Therefore, sufficient working capital is necessary to sustain sales activity.

Technically, this is referred to as the operating or cash-cycle. The operating cycle can
be said to be at the heart of the need for working capital. The continuing flow from
cash to suppliers, to inventory, to accounts receivable and back into cash. The cycle
refers to the length of time necessary to complete the following cycle of events:

 Conversion of cash into inventory.

 Conversion of raw materials into work in progress
 Conversion of work in progress into finished goods
 Conversion of finished goods into account receivable
 Conversion of account receivable into cash

If it were possible to complete the sequences instantaneously, there would be no need

for current assets (working capital). But since it is not possible, the firm is forced to
have current assets. Since cash inflows and cash inflows do not match, firms have to
necessarily keep cash or invest in short-term liquid securities so that they will be in
position to meet obligations when they become due. Similarly, firm must have
adequate inventory to guard against the possibility of not being able to meet a demand
for their products. Adequate inventory, therefore, provides a cushion against being out
of stock. If firms have to be competitive, they must sell goods to their customers on
credit, which necessitates the holding of accounts receivable. It is in these ways that
an adequate level of working capital is absolutely necessary for smooth sales activity
which, in turn, enhances the owner’s wealth.

26
27
28
 CHAPTER NO .2:

RESEARCH AND
METHODOLOGY

Research is a diligent enquiry and careful search for new knowledge through
systematic scientific and analytical approach in any branch of knowledge. Constant
search and research are the guiding factor of research which helps to discover new
facts. Research methodology plays an important role in the conduct of a research and
in empirical findings. Without methodology the entire research structure will be
incomplete for this research.

The developing economies are generally faced with the problems of inefficient
utilization of resources available to them. Capital is the scare productive resource in
such economies and proper utilization of resource promotes the rate of growth, cuts
down the cost of production, and above all beefs up the efficiency of the productive
system. Hence, the purposeful harnessing of capital is of paramount importance in any
development policy of economies.

The total capital of a company comprises of fixed capital and working capital. The
emphasis has ever been on the growth and efficiency of fixed capital. The
management of working capital has often been neglected, resulting in sub-optimal
utilization of not only working capital but also fixed capital. Management of working
capital in a given enterprise has profitability and liquidity implications. Working
capital represented by current assets, constitutes a dominant and controllable segment
of investment, particularly in manufacturing enterprises, and efforts to prune it or
optimize its size must promptly enhance the profitability. These efforts would
simultaneously activate the flow of funds through the enterprise by focusing on

29
dormant inventories and overdue outstanding and by curbing the long established
tendency of funds to stagnate at different stages in the enterprise operations.

Thus working capital offers a common front for profitability and liquidity
management. Importance of working capital can further be judged from the fact that
many a time the main cause of the failure of a business enterprise has been found to
be the shortage of current assets and their mishandling. Inadequate working capital is
a serious handicap in the business. Whereas fixed capital investment generates
production capacity, working capital makes the utilization of that capacity possible.
Competent administration of current assets solves the problem of underutilization of
capacities.

Objectives of the study:

 The main objective of the study is to have an insight into the current practices of
the company with regards to management of various elements of working capital.
 Apart from the above more specifically the present study is conducted to find out
the following.
 To what extent the management of working capital in Airtel, which is one of the
leading concern in the fastener industry contribute to the overall objective of the
firm i.e. Wealth examination.
 To study management policies regarding inventory management, whether the
management have applied various inventory control techniques for proper
utilization of resources.
 To analysis the nature, effectiveness and style of functioning of various process of
payments.
 To make aware the different methods of payments that are available for the
foreign transaction, and
 To suggest the best and appropriate method of payment of foreign transaction, and
 Also to keep in mind the other aspects of the methods this can affect the
organization.

30
Period of the study:

The period of the study is undertaken by me for the period of (5) accounting years
from 2009-10 to 2013-2014. I had selected the base year 2009-10 because this year is
normal for present research of analysis and evaluation. And it is easy to find the
secondary data of last years.

Method of data collection:

The main source of data used for the study is secondary drown from the annual profit
and loss account and balance sheet figures as found in annual reports of the
companies. The selected data complemented through company’s web site and capital
software and magazines newspapers.

Scope of the study:

As we were seen as a liability towards the organization since there was no

contribution from our side towards, nobody actually paid any attention towards
Working Capital. It was very difficult to actually take out relevant information from
the Comparative Study with Vodafone were very hesitant to let us meet the company.

Limitation of the study:

Non-monetary aspects are not considered making the results unreliable. Different
accounting procedures may make results misleading. In spite of precautions taken
there are certain procedural and technical limitations. Accounting concepts and

31
conventions cause serious limitation to financial analysis. Lack of sufficient time to
exhaust the detail study of the above topic became a hindering factor in my research.

CHAPTER NO. 3:
REVIEW OF
LITERATURE

32
“A literature review is an essay or is part of the introduction to an essay, research
report, or thesis. It provides an overview and critical analysis of relevant
published scholarly articles, research reports, books, theses etc. on the topic or
issue to be investigated. A detailed guide to the literature is available on the language
and learning services websites. Literature search: “A systematic and exhaustive search
for published material on a specific topic.”

It discusses published information in a particular subject area, and sometimes

information in a particular subject area within a certain time period. It is a
summary of research that has been  published about a particular subject. It
provides the reader with an idea about the current situation in terms of what has been
done, and what we know. Sometimes it includes suggestions about what needs to be
done to increase the knowledge and understanding of a particular problem.

Working capital refers to the firm’s policies regarding 1) target levels for each
category of current operating assets & liabilities, and 2) how current assets will be
financed. Generally good working capital policy (i.e. under condition of certainty) is
considered to be one in which holding of cash, securities, inventories, fixed assets,
and accounts payables are minimized.

It deals with all the aspects of working capital of which in depth study has been
carried out as discussed below.

 Bhatt V. V. (1972) widely touches upon a method of appraising working capital

finance applications of large manufacturing concerns. It states that similar
methods need to be devised for other sectors such as agriculture, trade etc. The
author is of the 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 they do not generally carry out any detail appraisal of the
working of the concerns.

33
 Smith Keith V. (1973) believes that Research which concerns shorter range or
working capital decision making would appear to have been less productive. The
inability of financial managers to plan and control properly the current assets and
current liabilities of their respective firms has been the probable cause of business
failure in recent years. Current assets collectively represent the single largest
investment for many firms, while current liabilities account for a major part of
total financing in many instances. This paper covers eight distinct approaches to
working capital management. The first three - aggregate guidelines, constraints set
and cost balancing are partial models; two other approaches - probability models
and portfolio theory, emphasize future 94 uncertainty and interdepencies while the
remaining three approaches - mathematical programming, multiple goals and
financial simulation have a wider systematic focus.

 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.

 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

34
 operational cost with improved operational efficiency, one of the most important
aspects of which is management of working capital.

 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 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.
 

 Bhattacharyya Hrishikesh (1987) tries to develop a comprehensive theory and

tool of working capital management from the system’s point of view. According
to this study, capital is often used to refer to capital goods consisting of a great
variety of things, namely, machines of various kinds, plants, houses, tools, raw
materials and goods-in-process. A finance manager of a firm looks for these
things on the assets side of the balance sheet. For capital he turns his attention to
the other side of the balance sheet and never commits a mistake. His purpose is to
balance the two sides in such a way that net worth of the firm increases without
increasing the riskiness of the business. This balancing is financing, i.e., financing
the assets of the firm by generating streams of liabilities continuously to match
with the dynamism of the former. The study is an improvement of the concept of
Park and Gladson who were not able to capture the entire techno financial
operating structure of a firm.

35
 Rao K.V. and Rao Chinta (1991) observe the strong and weak points of
conventional techniques of working capital analysis. The result has been
obviously mixed while some of the conventional techniques which could
comprehend the working capital behavior well; others failed in doing the job
properly. The authors have attempted to evaluate the efficiency of working capital
management with the help of conventional techniques i.e., ratio analysis. The
article concludes prodding future scholars to search for a comprehensive and
decisive yardstick in evaluating the working capital efficiency.

 Hamlin Alan P. and Heath field David F. (1991) opine that working capital is
necessary input to the production process and yet is ignored in most economic
models of production. The implications of modeling the time dimension of
production, and hence, the working capital requirements of firms are explored,
with the particular stress placed on the competitive advantage gained by firms that
retained flexibility in the time structure of their production. In this article they
have attempted to explore only this most basic role of time in the production
process and so focus is on the implications of explicitly recognizing the need for
working capital.

 Zaman M. (1991) studies the working capital management practices of Public

Sector Jute Enterprises in Bangladesh which have been found to be seriously
affected. This has been attributed to several factors like low demand for jute goods
and serious competition in the international market, insufficient inventory 96
management policies, poor collection policy and inefficient cash policy. The
author has formulated a long term flexible and operational working capital
management model. In conclusion he has suggested the model which would
certainly help improve the working capital management practices of the jute
industry in particular and other public enterprises as well in Bangladesh.

36
 Fazzari Steven M. and Petersen Bruce C. (1993) throws light on new tests for
finance constraints on investment by emphasizing 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.

 Hossain Saiyed Zabid and Akon Md. Habibur Rahman (1997) emphasize the
basic objective of working capital management i.e., to arrange the needed working
capital funds at the right time, at right cost and from right source with a view to
achieving a trade-off between liquidity and profitability. The analysis reveals that
BTMC had followed an aggressive working capital financing policy taking the
risk of liquidity. There was uninterrupted increasing trend in negative net working
capital throughout the period of the study which suggested that BTMC had
exploited the entire short-term sources available to it without considering the
actual needs

 Ahmed Habib (1998) points out that when the interest rate is included; money
loses its predictive power on output. The study explicates this finding by using a
rational expectations model where production decisions of firm required debt
finance working capital. Working capital is an important factor and its cost, the
rate of interest, affects the supply of goods by firms. Monetary policy shocks,
thus, affect the interest rate and the supply side, and as a result price and output
produced by firms. The model indicates that this can cause the predictive power of
monetary shocks on output to diminish when the interest rate is used in 97
empirical analysis .The model also alludes to the effects of monetary policy on the
price level through the supply side (cost push) factors.

37
 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
correlation 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.

 Hossain, Syed Zabid (1999) throws light on the various aspects of working
capital position. He has evaluated working capital and its components through the
use of ratio analysis. For each aspect of analysis certain ratios are computed and
then results are compared with the standard ratio or industry average.

 Singaravel, P. (1999) focuses on the interdependency among working capital,

liquidity and profitability, of which sufficiency of liquidity comes in the first
preference followed by sufficiency of working capital and profitability. The article
is an in-depth analysis of liquidity and its interrelationship with working capital
and profitability. As the working capital, liquidity and profitability are in
triangular position, none is dispensable at the satisfaction of the other. Excess of
stock-in-trade over bank over-draft and excess of liquid assets over current
liabilities other than bank over-draft generate working capital for the business.
Alternatively working capital requirements are made for long-term funds which
affect the profitability.
 Garg Pawan Kumar (1999) focuses on the study of working capital trend and
liquidity analysis in the selected public sector enterprises of Haryana. The study
suggests forecasting of working capital requirement confined mainly to various
components of working capital. After considering the facts the author realized the
need for proper assessment and forecasting of working capital in the public sector

38
 undertaking. For this purpose, he has suggested the analysis of production
schedule, sales trend, labour cost etc., should be taken into consideration. He
further suggested the need for better management of components of working
capital.

 Batra G. S. and Sharma A. K. (1999) analyze the working capital position of

Goetze (I) Ltd. with the help of various ratios. They are of the view that the
working capital position in the company is quite satisfactory although they have
suggested a few measures for further improvement in management of working
capital, like necessity of greater attention in the inventory control; active sales
department, speedy dispatch of orders and reduction of dependency on trade
creditors.

 Batra Gurdeep Singh (1999) gives an overview of working capital and its
determinants. According to the author working capital management involves
deciding upon the amount and composition of current assets and how to finance
them. He emphasizes on the hedging approach to finance current assets. He also
adds that a management can use ratio analysis of working capital as a means of
checking upon the efficiency with which working capital is being used in the
enterprises.

 Bansal S. P. (1999) observes that due to the conservative policy of the

corporation i ) Short-term creditors position regarding their claim is threatened
due to lack of funds, ii ) The company was not following uniform policy regarding
the collection of debtors, and iii ) Inefficiency on the part of the management
causes over investment in inventories. As a result a serious situation arose due to
shortage of working capital. The author warns the corporation that if it did not
plan its cash needs properly, it would be lead to bankruptcy.

 Bansal S. P. (1999) opines that working capital management refers to the

management of current assets and current liabilities for maintaining the optimum

39
 levels of various components and increasing the profitability of an enterprise. The
author has insisted on application of various techniques for management of
working capital and its three main components cash, receivables and inventories.

 Pathania Kulwant Singh (1999) advocates for the bank to concentrate to maximize
profitability and make optimum utilization of cash resources available, while at the same time
taking care to economize cash holding without impairing the overall liquidity requirements of
the bank. For strengthening the financial base of the bank, permanent working capital should
be financed by equity capital or other long-term sources, whereas temporary working capital
99 should generally be financed by short-term sources. The author is satisfied with the
working capital management of the bank, but sees scope for further improvement.

 Chalam G. V. and Manohar Babu B. V. (1999) observes that liquidity

performance is very low as compared to the ideal norms. It is suggested that for
managing working capital effectively the operating and other required budgets
should be prepared by the respective levels of the management on short-term as
well as long-term basis. It is further suggested that these are the people concerned
who can really influence the process of production activity to such an extent that
there should be optimum utilization of the investment in working capital.

 Rao Govinda D. (1999) believes that changes in quantum of working capital are
ascertained and analyzed. The author has attempted to find out the causes of the
changes in the size of working capital in the sample companies during the period
under study. He found several causes of changes in working capital, mainly (a)
sources of funds and (b) applications of funds. In the end, the changes in working
capital are analyzed with the help of the changes in working capital and funds
flow statement. He believes that management of working capital is a continuous
process requiring proper monitoring and studying of the relationship of all
variables with constant and drawing inferences. This provides proper direction to
the managers.

40
 Singh O. N. (1999) discusses the credit needs of farmers / agriculture sector and
then emphasizes on the need for having a system of working capital finance in
agriculture on the lines of the industry and commerce finance, of course with
some changes. He advocates a system which is equally equipped and appropriate
to meet the needs of both the farmers as well as the bankers. His basic purpose is
to strengthen the capital base of the farmers.

 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
relationship of all variables with constant, and drawing inferences. This provides
proper direction to the managers.

 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.

 Deloof Marc. (2003) presents a picture of how working capital management

affects the profitability of Belgium firms. The writer has made use of empirical
analysis for the sample firms. It was observed that most of the firms have a large
amount of cash invested in working capital. It can, therefore, be deduced that the
way in which working capital is managed will have a significant impact on the
profitability of the firms.

41
 Howorth Carole and Westhead Paul (2003) have tried to find out the working
capital management routines of a large random sample of small companies in the
UK. Considerable variability in the take-up of eleven working capital
management routines was detected. Principal components analysis and cluster
analysis confirmed the identification of four distinct “types” of companies with
regard to the patents of working capital management. While the first three „types‟
of companies focused upon cash management, stock or debtor’s routines
respectively, the fourth „type‟ was less likely to take-up any working capital
management routines. The objective of the study is to encourage additional
research rather than to provide an exhaustive overview of all the factors associated
with the take-up of working capital management routines by small companies.
The results suggest that small companies focus only on areas of working capital
management where they expect to improve marginal returns.

 Ganesan Vedavinayagam (2007) studies the impact of working capital

management on profitability through ANOVA test where the financial statements
of 349 telecom units or enterprises are analyzed. The relationship between
working capital management efficiency and profitability and the impact of
working capital management on the same has been tested. At the end of the study
the author has minutely observed that the working capital management efficiency
in telecommunication industry is poor. And he suggests that the
telecommunication industry should improve working capital management
efficiency.

 Song Zhen, Liu Duan and Chen Shou (2012) study the two aspects - turnover
capacity and liquidity, and have analyzed the effects of working capital on
engineering product market completion performance in the manufacture industry.
The study discovers that enterprise working capital turnover ability has positive
effect on product market competition performance while enterprise working

42
 capital liquidity has a negative relationship with market competition performance.
But according to regression equation to predict the competition effects of working
capital, exists larger error because the actual impact of working capital on
competition performance may be non-linear so the authors have used B P Neural
Network Model to predict the competition performance and the results show that
the overall prediction effect is good.

 Lee and Kang (2008) developed a model for inventory management for multiple
periods, considering not only the usual parameters, but also price/ quantity
discounts, and storage and batch size constraints. The model is formulated as a
mixed binary integer programming problem minimizing the total cost of materials
in the system, and the optimal solution determines an appropriate inventory level
for each period and the optimal purchase amount in each period.

 Garcia-Teruel and Martinez-Solano (2007) studied the effects of working

capital management on the profitability of a sample of small and medium-sized
Spanish firms. They found that managers can create value by reducing their
inventories and the number of days for which their accounts are outstanding.
Moreover, shortening the cash conversion cycle also improves the firm's
profitability.

 Rafuse (1996) argued that attempts to improve working capital by delaying

payment to creditors are counterproductive, and that altering debtor and creditor
levels for individual tiers within a value system will rarely produce any net
benefit. He proposed that stock reduction generates system-wide financial
improvements and other important benefits, and suggested that, to achieve this,
companies should focus on stock management strategies based on ―lean supply-
chain techniques.
 Rifai (1996) discussed the limitations of linear programming in decision-making,
and suggested the use of goal to handle problems with multiple objectives. He

43
 advocated caution in using the goal programming, since an improper structure of a
goal programming model can induce misleading results.

 Cote and Latham (1999) explored the limitations of the traditional measures of
working capital management and presented alternative measures based on earlier
work in the finance literature. They also proposed a new ratio, the
―merchandising ratio, which measured the net effect of a firm's working capital
management strategy.

 Agarwal, J.D. (1988) formulated the working capital decision as a goal

programming problem, giving primary importance to liquidity, by targeting the
current ratio and quick ratio. The model included three liquidity goals/constraints,
two profitability goals/constraints, and, at a lower priority level, four current asset
sub-goals and a current liability sub-goal (for each component of working capital).
In particular, the profitability constraints were designed to capture the opportunity
cost of excess liquidity (in terms of reduced profitability).

 Coskun et al (2008) studied integrative methods for improving business

processes. Their approach involved determining and analyzing the weak points
and reducing the weakness degrees. They suggested a four-phase business process
improvement framework: start-up, self-analysis, defining improvement strategy
for making changes, feedback, and continuous improvement. They found that
decision problems in process improvement could be structured to provide input
data suitable for multi-criteria decision making techniques.

 Garcia-Teruel and Martinez-Solano (2007) studied the effects of working

capital management on the profitability of a sample of small and medium-sized
Spanish firms. They found that managers can create value by reducing their
inventories and the number of days for which their accounts are outstanding.

44
 Moreover, shortening the cash conversion cycle also improves the firm's
profitability.

 Reddy Viswanatha C. (2012) attempts to study the association between liquidity,

profitability and risk factor. A study of liquidity, profitability and their association
with risk, assessing the financial position (financial distress / bankruptcy) is very
much necessary to evaluate the financial strength of a company. A firm in
financial distress may face bankruptcy or liquidation leading to delay in meeting
its liabilities. The results indicate that the liquidity and solvency position of the
company have been satisfactory. Further the analysis reveals that the company
was not suffering from financial distress and there are indications of turnaround
activities already undertaken by the company.

 Sharma M R (1999) emphasizes on the application of certain inventory control

techniques for optimizing investment in inventories without adversely affecting
the smooth functioning of production and sales. In conclusion he stresses upon the
need for further improvement in inventory management systems in the enterprises.
This would lead to the industry becoming profit making.

 Aravanan S. (1999) focuses on the methods and techniques of inventory

management and control. On the basis of the analysis, he has observed that
inventory is that component of working capital that is not at all properly managed.
He opines that compared to general inventory control techniques, selective
inventory control methods have a better role to play. He has keenly observed that
of all the selective inventory control techniques, ABC analysis with its several
advantages is the most widely used.

 Shrotriya Vikas (2008) discusses some aspects of effective inventory

management. Organizations maintain inventories to achieve effectiveness in

45
 business operations. Though the quantum of inventories depends on the nature of
business, these engage sizable portion of the organization’s total current assets.
These two reasons compel the organization to manage inventories effectively and
efficiently.

 Jain P. K. and Yadav Surendra S. (2007) study the different facets of working
capital management. The issues addressed include relationship between CAs and
CLs, the financing of working capital, and ways of dealing with excess or
shortage of working capital. The study is based on an analysis of a thirteen year
period data from 1991 to 2003 covering 137 public sector enterprises. In a
nutshell, it is reasonable to contend that the sample PSEs (Public Sector
Enterprises) are faced with long duration of net working capital cycle (time
necessary to complete the following three events:

1. Conversion of cash into inventory

2. Conversion of inventory into debtors and
3. Conversion of debtors into cash less credit available from creditors) necessitating
substantial working capital to be carried by them, eventually affecting their
profitability in adverse manner.

 Misra (1975):- Here, in this analysis try to identify the problems of working capital
in six public enterprises for the period of 1960.Importance and findings are here
under: selected samples of companies were not able to utilize working capital
efficiently. As well excess inventory level which shows inappropriate management of inventory. In
order delay exchange was made to foreign exchange and issue of import license.
Furthermore account receivable ratio is very law because liberal credit policy and
inappropriate collection policy. In most of the selected firms were having huge cash
amount on account and improper management and control on cash. 

 Natarajan Sundar (1980) Has been given views on working capital is having
immense important at both, the national as well business level. To keep control on
working capital at the national level by controlling credit controls. In practice

46
 efficient working capital includes to determine the best suitable level of working
capital, financing it and control over it. If we talked about corporate level investment
is important in both case short term investment and fixed assets. And that can be possible
many company not surviving as well not incurring profit because of not efficiently manage the
working capital. Thus, cost management with improved operational efficiency, and
that aspect working capital is very important to be manage in proper way.

 Swami (1997):- Swami was done research with 19 key agricultural area in the
contour of Dakshina Kannada district in Karnataka. The research exposed that
maintenance of liquidity and profitability is a major problem in the targeted are. To be
safe in side of working capital management were found to be suffered and low
profitability due to the interest burden. The effects of this firms raised the fund for
working capital requirement by borrowing fund from depositors. This study has been
given stressed on proper management of working capital so the future of business
would be bright.

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

 Rao and Rao Ramachandran (2010):- Main aim of his study is to evaluate the
trends and parameters of effectiveness of working capital and its utilization in terms
of volume of the firms of cotton textiles industry in India. For that three parameters
are taken i.e. Different indices first one performance Index, utilization index and efficiency Index.
For the study industry is divided in three category means small, medium and large. The
output of the study is like that linear growth rate model is used to find out the
significance with working capital and PI,UI and EI are significant in respect of small size companies

47
while in medium size only UI is significant. On an average we can say that working capital efficiency
was not so satisfied despite having PI in growth mode. The reason behind is that continuous factors
are declining .

48
 CHAPTER NO.4

DATA ANALYSIS
&INTERPRETATI
ON

Bharti Airtel Limited was incorporated on July 7, 1995 for promoting investments in
telecommunications services. Its subsidiaries operate telecom services across India.
Bharti Airtel is India's leading private sector provider of telecommunications services
based on a strong customer base consisting of 50 million total customers, which
constitute, 44.6 million mobile and 5.4 million fixed line customers, as of March 31,
2011.

Airtel comes to us from Bharti Airtel Limited - a part of the biggest private integrated
telecom conglomerate, Bharti Enterprises. Bharti provides a range of telecom
services, which include Cellular, Basic, Internet and recently introduced National
Long Distance. Bharti also manufactures and exports telephone terminals and cordless
phones. Apart from being the largest manufacturer of telephone instruments in India,
it is also the first company to export its products to the USA. Bharti has also put its
footsteps into Insurance and Retail segment in collaboration with Multi- National
giants. Bharti is the leading cellular service provider, with a footprint in 23 states
covering all four metros and more than 50 million satisfied customers.

Bharti Airtel is one of India's leading private sector providers of telecommunications

services based on an aggregate of 42,685,530 customers as on May 31, 2009,

49
consisting of 40,743,725 GSM mobile and 1,941,805 broadband & telephone
customers.

The businesses at Bharti Airtel have been structured into three individual strategic
business units (SBU’s) - mobile services, broadband & telephone services (B&T) &
enterprise services. The mobile services group provides GSM mobile services across
India in 23 telecom circles, while the B&T business group provides broadband &
telephone services in 94 cities. The enterprise services group has two sub-units -
carriers (long distance services) and services to corporates. All these services are
provided under the Airtel brand.

Company shares are listed on The Stock Exchange, Mumbai (BSE) and The National
Stock Exchange of India Limited (NSE).

Airtel comes to you from Bharti Airtel Limited, one of Asia’s leading integrated
telecom services providers with operations in 19 countries across Asia and Africa.

Bharti Airtel since its inception, has been at the forefront of technology and has
pioneered several innovations in the telecom sector. The company is structured into
four strategic business units - Mobile, Telemedia, Enterprise and Digital TV. The
mobile business offers services in India, Sri Lanka and Bangladesh. The Telemedia
business provides broadband, IPTV and telephone services in 89 Indian cities. The
Digital TV business provides Direct-to-Home TV services across India. The
Enterprise business provides end-to-end telecom solutions to corporate customers and
national and international long distance services to telcos.

Services

Mobile Services

Airtel is the name of the company's mobile services brand. It operates in 19 countries
and the Channel Islands. It is the 5th largest mobile operator in the world in terms of

50
subscriber base. Airtel's network consists of 3G and 2G services depending on the
country of operation.

In India, the company's mobile service is branded as Airtel. It has nationwide

presence and is the market leader with a market share of 30.07% (as of May 2011).
On 19 October 2004, Airtel announced the launch of a Black Berry Wireless Solution
in India. The launch is a result of a tie-up between Bharti Tele-Ventures Limited and
Research In Motion (RIM). The Apple iPhone 3G was rolled out in India on 22
August 2009 by Airtel & Vodafone. Both the cellular service providers rolled out
their Apple iPhone 3GS in the first quarter of 2011. However, high prices and contract
bonds discouraged consumers and it was not as successful for both the service
providers as much as the iPhone is successful in other markets of the world. On May
18, 2011, 3G spectrum auction was completed and Airtel will have to pay the Indian
government Rs. 12,295 crores for spectrum in 13 circles, the most amount spent by an
operator in this auction. Airtel won 3G licences in 13 telecom circles of India: Delhi,
Mumbai, Andhra Pradesh, Karnataka, Tamil Nadu, Uttar Pradesh (West), Rajasthan,
West Bengal, Himachal Pradesh, Bihar, Assam, North East, Jammu & Kashmir.
Bharti is expecting to launch its 3G service by December 2011. On 20 September
2011, Bharti Airtel said that it has given contracts to Ericsson India, Nokia Siemens
Networks (NSN) and Huawei Technologies to set up infrastructure for providing 3G
services in the country. These vendors will plan, design, deploy and maintain 3G-
HSPA (third generation, high speed packet access) networks in 13 telecom circles
where the company has won 3G licences. While Bharti Airtel has awarded network
contracts for seven 3G circles to Ericsson India, NSN would manage networks in
three circles. Chinese telecom equipment vendor Huawei Technologies has been
introduced as the third partner for three circles.

The Airtel subscriber base according to Cellular Operators Association of India

(COAI) as of August 2011 was:

Metros

 Chennai - 2,877,029

51
 Delhi - 6,950,079
 Mumbai - 3,201,916
 Kolkata - 2,947,042

"A" Circle

 Andhra Pradesh - 14,240,429

 Gujarat - 5,980,024
 Karnataka - 13,434,418
 Maharashtra - 7,209,072
 Tamil Nadu - 8,744,937

"B" Circle

 Haryana - 1,580,398
 Kerala - 3,332,095
 Madhya Pradesh - 7,496,236
 Punjab - 5,171,278
 Rajasthan - 11,004,105
 Uttar Pradesh (East) - 8,534,334
 Uttar Pradesh (West) - 4,923,409
 West Bengal - 6,644,688

"C" Circle

 Assam - 2,683,243
 Bihar - 12,600,521
 Himachal Pradesh - 1,452,709
 Jammu and Kashmir - 1,751,239
 North Eastern States - 1,612,005
 Orissa - 4,840,243

52
Airtel is the market leader in India with about 31.18% market share of 481 million
GSM mobile connections as of August 2011.

CIRCULATION SYSTEM OF WORKING CAPITAL

In the beginning the funds are obtained from the issue of shares, often supplemented
by long term borrowings. Much of these collected funds are used in purchasing fixed
assets and remaining funds are used for day to day operation as pay for raw material,
wages overhead expenses. After this finished goods are ready for sale and by selling
the finished goods either account receivable are created and cash is received. In this
process profit is earned. This account of profit is used for paying taxes, dividend and
the balance is ploughed in the business.

Working capital is considered to efficiently circulate when it turns over quickly. As

circulation increases, the investment in current assets will decrease. Total Assets is the
sum of all assets, current and fixed. The asset turnover ratio measures the ability of a
company to use its assets to efficiently generate sales. The higher the ratio indicates
that the company is utilizing all its assets efficiently to generate sales. Companies
with low profit margins tend to have high asset turnover.

BHARTI AIRTEL LTD.

Ratio useful to analyze working capital management.

53
 (A) Efficiency Ratio 2011-12 2012-13
1.Working Capital Turnover (Times) 4.84 10.23
2.Current Assets Turnover (Times) 1.78 2.98
3.Inventory Turnover (Times) 9.49 9.20
(B)Liquidity Ratio and Solvency Ratio
1.Current Ratio 1.02 0.65
2.Quick Ratio 1.37 0.75
3.Debt Equity Ratio 0.29 0.24

The Company generates healthy operational cash flows and maintains sufficient cash
and financing arrangements to meet its strategic objectives. It deploys a robust cash
management system to ensure timely servicing of its liquidity obligations. The
Company has also been able to arrange for adequate liquidity at an optimized cost to
meet its business requirements and has minimized the amount of funds tied-up in the
current assets.

As of March 31, 2012, the Company has cash and cash equivalents of Rs. 20,300
millions and short term investments of Rs. 18,132 millions. During the year ended
March 31, 2012, the Company generated operating free cash flow of Rs. 101,319
million. The net debt - EBITDA ratio as on March 31, 2012 was at 2.56 and the net
debt - equity ratio was at 1.29. The net debt in USD terms decreased from USD
13,427 million as on March 31, 2011 to USD 12,714 million as on March 31, 2012.

On further analysis, inventory constitutes a major proportion of total current assets.

Among its various components, raw materials, stocks, spared and finished goods in
particular need further analysis as here stand out to the problem areas.

CASH FLOW OF BHARTI AIRTEL

PARTICULARS ---------------in Rs. Cr.------------

Mar’13 Mar’12 Mar’11
12 months 12 months 12 months
Net Profit Before Tax 6454.80 6956.20 8725.80
Net Cash From Operating Activities 13884.70 11437.80 13293.20
Net Cash (Used in) From Investing -10725.90 -12611.80 -19102.10
Activities
Net Cash (Used in) From Financing -3185.70 1400.80 5594.80
Activities
Net (decrease) Increase In Cash -26.90 226.80 -214.10
And Cash Equivalents

54
 Opening Cash And Cash Equivalents 354.80 128.00 342.10
Closing Cash And Cash Equivalents 327.90 354.80 128.00

Interpretation:

 In the year 2012-13 cash from operation is more from previous years. The
company should take appropriate steps in order to continue the trend.
 ¾ In the 2012-13 company has major spending in terms of spending in form of
Acquisition/subscription/investment in subsidiaries.
 ¾ Out of total cash flow from operating activities there has been increase in trade
and other payables.

SCHEDULE OF CHANGES IN WORKING CAPITAL

Particulars Amount
Assets 31 March 2013 31 March 2012
Gross Block 71911.80 63885.40
(-) Acc. Depreciation 28729.20 23444.60
Net Block 43182.60 40440.80
Capital Work in Progress 1030.80 4466.50
Investments 28199.10 12337.80
Sundry Debtors 2246.80 2134.50
Cash and Bank 362.70 481.20
Loans and Advances 12859.70 20430.80
Total Current Assets 15470.70 23078.60

Current Liabilities 20061.70 16067.20

Provisions 695.50 697.50
Total Current Liabilities 20757.20 16764.70

Working Capital (CA-CL)

WORKING CAPITAL (5286.50) 6313.90

In the beginning the funds are obtained from the issue of shares, often supplemented
by long term borrowings. Much of these collected funds are used in purchasing fixed
assets and remaining funds are used for day to day operation as pay for raw material,
wages overhead expenses. After this finished goods are ready for sale and by selling
the finished goods either account receivable are created and cash is received. In this
process profit is earned. This account of profit is used for paying taxes, dividend and

55
the balance is ploughed in the business. Working capital is considered to efficiently
circulate when it turns over quickly. As circulation increases, the investment in
current assets will decrease. Current assets turnover ratio speaks about the efficiency
of Airtel in the utilization of current assets.

Fast turnover current assets results in a better rate on investment.

Table Showing Current Assets Turnover Ratio:

Year Ratio (in times)

2011-12 1.38
2012-13 0.74

Management Efficiency Ratios

Ratio/Year 2012-13 2013-14
Debtors Turnover Ratio 20.70 23.14
Fixed Assets Turnover Ratio 0.82 0.84
Total Assets Turnover Ratio 0.90 0.84
Assets Turnover Ratio 0.69 0.71
Number of Days In Working Capital -53.47 43.95

Interpretation (Ratio Analysis)

 As shown by current assets turnover ratio, the utilisation of current assets in terms
of sales has shown a decreasing trend which shows that current assets has been
effectively used to achieve sales.

56
 Again if we look at the efficiency with which individual elements of working
capital have been utilised, the picture of inventory turnover is not very bright and
moved on a same trend.
 ¾ Receivables turnover also shows a declining trend. ¾ As we look at the extent
of liquidity of working capital, we notice that the ration shows a increasing trend.
 ¾ If we analyse the structural health of working capital, the proportion of current
assets to total assets has been appropriate during this period.

Our analysis above indicates the areas of concern to management in making best
possible use of resources. Decreasing efficiency in the use of current assets hints of
the possibility of problems in working capital management. On further analysis,
inventory constitutes a major proportion of total current assets. Among its various
components, raw materials, stocks, spared and finished goods in particular need
further analysis as here stand out to the problem areas.

COMPARISON OF OPERATING CYCLE OF BHARTI AIRTEL SERVICES

LTD WITH VODAFONE ESSAR MOBILE SERVICES LTD.

Operating cycle

A direct result of our interest in both liquidity and activity ratios in the concept of a
firm’s operating cycle. A firm’s operating cycle is the length of time from the
commitment of cash for purchases until the collection of receivables resulting from
the sale of goods or services. It is as if we start a stop watch when the purchase raw
material and stop the watch only when we receive cash after the finished goods have
been sold. The time appearing on our watch (usually in days) is the firm’s operating
cycle.

OPERATING CYCLE OF BHARTI AIRTEL LTD.

57
C
a
e
DrR
shM
w
ilp
to
b
F
G W
-
k
g
d
n

 Raw material converted into work-in-progress within 10 days.

 Work-in-progress converted into finished goods within 6 days.

 Finished goods to debtors 14 days.

 Debtors to cash 17 days.

(TOTAL 47 DAYS).

58
OPERATING CYCLE OF VODAFONE ESSAR MOBILE SERVICES LTD.

CrR
sh
a
e
DiF
M
w
to
blW
g
p
-n
k
d
G

 Raw material converted into working-in-progress within 11.71 days.

 Work-in-progress converted into finished goods within 5.46 days.

 Finished goods to debtors within 14.62 days.

 Debtors to cash within 14.10 days.

(TOTAL 45 DAYS APPROX.)

Our Analysis clearly indicates that Bharti Airtel has improved its operating cycle from
the year 2011. It needs to improve its operating cycle in coming years to achieve
profitability.

59
CASH MANAGEMENT

Cash is the important current asset for the operations of the business. Cash is the basic
input needed to keep the business running on a continuous basis It is also the ultimate
output expected to be realized by selling the service or product manufactured by the
firm. The firm should keep sufficient cash, neither more nor less. Cash shortage will
disrupt the firm’s operations while excessive cash will simply remain idle, without
contributing anything towards the firm’s profitability. Thus a major function of the
Financial Manager is to maintain a sound cash position.

Cash is the money which a firm can disburse immediately without any restriction. The
term cash includes currency and cheques held by the firm and balances in its bank
accounts. Sometimes near cash items, such as marketable securities or bank time
deposits are also included in cash. The basic characteristics of near cash assets are that
they can readily be converted into cash. Cash management is concerned with
managing of:

 Cash flows in and out of the firm

 Cash flows within the firm

 Cash balances held by the firm at a point of time by financing deficit or inverting
surplus cash.

Sales generate cash which has to be disbursed out. The surplus cash has to be invested
while deficit cash has to be borrowed. Cash management seeks to accomplish this
cycle at a minimum cost. At the same time it also seeks to achieve liquidity and
control. Therefore the aim of Cash Management is to maintain adequate control over
cash position to keep firm sufficiently liquid and to use excess cash in some profitable
way.

60
The Cash Management is also important because it is difficult to predict cash flows
accurately. Particularly the inflows and that there is no perfect coincidence between
the inflows and outflows of the cash. During some periods cash outflows will exceed
cash inflows because payments for taxes, dividends or seasonal inventory build up
etc. On the other hand cash inflows will be more than cash payment because there
may be large cash sales and more debtors’ realization at any point of time. Cash
Management is also important because cash constitutes the smallest portion of the
current assets, yet management’s considerable time is devoted in managing it. An
obvious aim of the firm now-a-days is to manage its cash affairs in such a way as to
keep cash balance at a minimum level and to invest the surplus cash funds in
profitable opportunities. In order to resolve the uncertainty about cash flow prediction
and lack of synchronization between cash receipts and payments, the firm should
develop appropriate strategies regarding the following four facets of cash
management.

 Cash Planning: - Cash inflows and cash outflows should be planned to project
cash surplus or deficit for each period of the planning period. Cash budget should
prepared for this purpose.

 Managing the cash flows: - The flow of cash should be properly managed. The
cash inflows should be accelerated while, as far as possible decelerating the cash
outflows.

 Optimum cash level: - The firm should decide about the appropriate level of cash
balances. The cost of excess cash and danger of cash deficiency should be
matched to determine the optimum level of cash balances.

 Investing surplus cash: - The surplus cash balance should be properly invested to
earn profits. The firm should decide about the division of such cash balance
between bank deposits, marketable securities and inter corporate lending.

61
The ideal Cash Management system will depend on the firm’s products, organization
structure, competition, culture and options available. The task is complex and decision
taken can affect important areas of the firm.

FUNCTIONS OF CASH MANAGEMENT:

Cash Management functions are intimately, interrelated and intertwined Linkage
among different Cash Management functions have led to the adoption of the
following methods for efficient Cash Management:

 Use of techniques of cash mobilization to reduce operating requirement of cash.

 Major efforts to increase the precision and reliability of cash forecasting.
 Maximum effort to define and quantify the liquidity reserve needs of the firm.
 Development of explicit alternative sources of liquidity.
 Aggressive search for relatively more productive uses for surplus money assets.

The above approaches involve the following actions which a finance manager has to
perform.

 To forecast cash inflows and outflows

 To plan cash requirements
 To determine the safety level for cash.
 To monitor safety level for cash
 To locate the needed funds
 To regulate cash inflows
 To regulate cash outflows
 To determine criteria for investment of excess cash
 To avail banking facilities and maintain good relations with bankers

Motives for holding cash: There are four primary motives for maintaining cash
balances:

 Transaction motive

62
 Precautionary motive
 Speculative motive
 Compensating motive

Transaction motive: -

The transaction motive refers to the holding of cash to meet anticipated obligations
whose timing is not perfectly synchronized with cash receipts. If the receipts of cash
and its disbursements could exactly coincide in the normal course of operations, a
firm would not need cash for transaction purposes. Although a major part of
transaction balances are held in cash, a part may also be in such marketable securities
whose maturity conforms to the timing of the anticipated payments.

Precautionary motive: -

Precautionary motive of holding cash implies the need to hold cash to meet
unpredictable obligations and the cash balance held in reserve for such random and
unforeseen fluctuations in cash flows are called as precautionary balances. Thus,
precautionary cash balance serves to provide a cushion to meet unexpected
contingencies. The unexpected cash needs at short notice may be the result of various
reasons as: unexpected slowdown in collection of accounts receivable, cancellations
of some purchase orders, sharp increase in cost of raw materials etc. The more
unpredictable the cash flows, the larger the need for such balances. Another factor
which has a bearing on the level of precautionary balances is the availability of short
term credit. Precautionary cash balances are usually held in the form of marketable
securities so that they earn a return.

Speculative motive: - It refers to the desire of a firm to take advantage of

opportunities which present themselves at unexpected movements and which are
typically outside the normal course of business. The speculative motive represents a
positive and aggressive approach. Firms aim to exploit profitable opportunities and
keep cash in reserve to do so. The speculative motive helps to take advantage of: In
opportunity to purchase raw materials at a reduced price on payment of immediate
cash; a chance to speculate on interest rate movements by buying securities when

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interest rates are expected to decline; delay purchases of raw materials on the
anticipation of decline in prices; etc.

Compensation motive: -

Yet another motive to hold cash balances is to compensate banks for providing certain
services and loans. Banks provide a variety of services to business firms, such as
clearances of cheques, supply of credit information, transfer of funds, etc. While for
some of the services banks charge a commission of fee for others they seek indirect
compensation. Usually clients are required to maintain a minimum balance of cash at
the bank. Since this balance can not be utilized by the firms for transaction purposes,
the bank themselves can use the amount for services rendered. To be compensated for
their services indirectly in this form, they require the clients to always keep a bank
balance sufficient to earn a return equal to the cost of services. Such balances are
compensating balances. Compensating balances are also required by some loan
agreements between a bank and its customer.

CASH MANAGEMENT: OBJECTIVES

The Basic objective of cash management are Two fold :

(a) To meet the cash disbursement needs (payment schedule); and

(b) To minimize funds committed to cash balances.

These are conflicting and mutually contradictory and the task of cash management is
to reconcile them.

Meeting the payments schedule: -

A basic objective of the cash management is to meet the payment schedule, i.e. to
have sufficient cash to meet the cash disbursement needs of the firm. The importance
of sufficient cash to meet the payment schedule can hardly be over emphasized. The
advantages of adequate cash are : (i) it prevents insolvency or bankruptcy arising out
of the inability of the firm to meet its obligations; (ii) the relationship with the bank is

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not strained; (iii) it helps in fostering good relations with trade creditors and suppliers
of raw materials, as prompt payment may also help their cash management; (v) it
leads to a strong credit rating which enables the firm to purchase goods on favorable
terms and to maintain its line of credit with banks and other sources of credit; (vi) to
take advantage of favorable business opportunities that may be available periodically;
and (vi) finally the firm can meet unanticipated cash expenditure with a minimum of
strain during emergencies, such as strikes , fires or a new marketing campaign by
competitors.

Minimizing funds committed to cash balances: -

The second objective of cash management is to minimize cash balances. In

minimizing cash balances two conflicting aspects have to be reconciled. A high level
of cash balance will, ensure prompt payment together with all the advantages, but it
also implies that large funds will remain idle ultimately results less to the expected. A
low level of cash balances, on the other hand, may mean failure to meet the payment
schedule that aim of cash management should be to have an optimal amount of cash
balances.

CASH MANAGEMENT TECHNIQUES AND PROCESS

The following are the basic cash management techniques and process which are
helpful in better cash management:-

Speedy cash collection: -

In managing cash efficiently the cash inflow process can be accelerated through
systematic planning and refined techniques. These are two broad approaches to do
this which are narrated as under:

Prompt payment by customer: -

One way to ensure prompt payment by customer is prompt billing with clearly
defined credit policy. Another and more important technique to encourage prompt
payment the by customer is the practice of offering trade discount/cash discount.

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Early conversion of payment into cash: -

Once the customer has makes the payment by writing its cheques in favor of the firm,
the collection can be expedited by prompt encashment of the cheque. It will be
recalled that there is a lack between the time and cheque is prepared and mailed by the
customer and the time funds are included in the cash reservoir of the firm.

Concentration Banking: -

In this system of decentralized collection of accounts receivable, large firms which

have a large no. of branches at different places, select some of these which are
strategically located as collection centers for receiving payment for customers. Instead
of all the payments being collected at the head office of the firm, the cheques for a
certain geographical areas are collected at a specified local collection centers. Under
this arrangement the customers are required to send their payments at local collection
center covering the area in which they live and these are deposited in the local
account of concerned collection, after meeting local expenses, if any. Funds beyond a
predetermined minimum are transferred daily to a central or disbursing or
concentration bank or account. A concentration banking is one with which the firm
has a major account usually a disbursement account. Hence this arrangement is
referred to as concentration banking.

Lock-Box System: -

The concentration banking arrangement is instrumental in reducing the time involved

in mailing and collection. But with this system of collection of accounts receivable,
processing for purposes of internal accounting is involved i.e. sometime in elapses
before a cheque is deposited by the local collection center in its account. The lock-box
system takes care of this kind of problem, apart from effecting economy in mailing
and clearance times. Under this arrangement, firms hire a post office box at important
collection centers. The customers are required to remit payments to lock-box. The
local banks of the firm, at respective places, are authorized to open the box and pick
up the remittance received from the customers. Usually the authorized banks pick up
the cheques several time a day and deposit them in the firm’s account. After crediting

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the account of the firm the banks send a deposit 4epo slip along with the list of
payments and other enclosures, if any, to the firm by way of proof and record of the
collection.

Slowing disbursements: -

A basic strategy of cash management is to delay payments as long as possible

without impairing the credit rating/standing of the firm. In fact, slow disbursement
represents a source of funds requiring no interest payments. There are several
techniques to delay payment of accounts payable namely (1) avoidance of early
payments; (2) centralized disbursements; (3) floats; (4) accruals.

Avoidance of early payments:-

One way to delay payments is to avoid early payments. According to the terms of
credit, a firm is required to make a payment within a stipulated period. It entitles a
firm to cash discounts. If however payments are delayed beyond the due date, the
credit standing may be adversely affected so that the firms would find it difficult to
secure trade credit later. But if the firm pays its accounts payable before the due date
it has no special advantage. Thus a firm would be well advised not to make payments
early i.e. before the due date.

Centralized disbursements:-

Another method to slow down disbursements is to have centralized disbursements. All

the payments should be made by the head office from a centralized disbursement
account. Such an arrangement would enable a firm to delay payments and conserve
cash for several reasons. Firstly it involves increase in the transit time. The
remittances from the head office to the customers in distant places would involve
more mailing time than a decentralized payment by a local branch. The second reason
for reduction in operating cash requirement is that since the firm has a centralized
bank account, a relatively smaller total cash balance will be needed. In the case of a
decentralized arrangement, a minimum cash balance will have to be maintained at

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each branch which will add to a large operating cash balance. Finally, schedules can
be tightly controlled and disbursements made exactly on the right day.

Float: -

A very important technique of slow disbursements is float. The term float refers to
amount of money tied up in the cheques that have been written, but have yet to be
collected and enchased. Alternatively, float represents the difference between the
bank balance and book balance of cash of a firm. The difference between the balance
as shown in the firm’s record and the actual bank balance is due to transit and
processing delays. There is time lag between the issue of a cheque by the firm and its
presentation to its bank by the customer’s bank for payment. The implication is that
although a cheque has been issued cash would be required later when the cheque
resented for encashment. Therefore, a firm can send remittance although it does not
have cash in its bank at the time of issuance of cheque. Meanwhile, funds can be
arranged to make payments when the cheque is presented for collection after a few
days. Float used in this sense is called cheque kitting.

Accruals: -

Finally, a potential tool for stretching accounts payable is accruals which are defined
as current liabilities that represent a service or goods received by a firm but not yet
paid for instance, payroll, i.e. remuneration to employees, who render services in
advance and receive payment later. In a way they extend credit to the firm for a period
at the end of which they are paid, say, a week or month. The longer the period after
which payment is made, the greater the amount of free financing and the smaller the
amount of cash balances required. Thus, less frequent payrolls, i.e. monthly as
compared to weekly, are important sources of accruals. They can be manipulated to
slow down disbursements.

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DETERMINING THE OPTIMUM LEVEL OF CASH BALANCE:-

Cash balance is maintained for the transaction purposes and additional amount may be
maintained as a buffer or safety stock.

The Finance manager should determine the appropriate amount of cash balance. Such
a decision is influenced by trade-off between risk and return. If the firm maintains
small cash balance, its liquidity position becomes week and suffers from a paucity of
cash to make payments. But a higher profitability can be attained by investing
released funds in some profitable opportunities. When the firm runs out of cash it may
have to sell its marketable securities, if available, or borrow. This involves transaction
cost.

On the other hand if the firm maintains a higher level of cash balance, it will have a
sound liquidity position but forego the opportunities to earn interests. The potential
interest lost on holding large cash balance involves opportunities cost to the firm.
Thus the firm should maintain an optimum cash balance, neither a large nor a small
cash balance.

To find out the optimum cash balance the transaction cost and risk of too small
balance should be matched with opportunity costs of too large a balance should be
matched with opportunity cost of too large a balance. Figure shows this trade-off
graphically. If the firm maintains larger cash balances its transaction cost would
decline, but the opportunity cost would increase. At point X the sum of two costs is
minimum. This is the point of optimum cash balance. Receipts and disbursement of
cash are hardly in perfect synchronization. Despite the absence of synchronization it
is not difficult to determine the optimum level of cash balance.

If cash flows are predictable it is simply a problem of minimizing the total costs - the
transaction cost and the opportunity cost.

The determination of optimum working cash balance under certainty can thus be
viewed as an inventory problem in which we balance the cost of too little cash
(transaction cost) against the cost of too much cash( opportunity cash)

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Cash flows, in practice, are not completely predictable. At times they may be
completely random. Under such a situation, a different model based on the technique
of control theory is needed to solve the problem of appropriate level of working cash
balance.

With unpredictable variability of cash flows, we need information on transaction

costs, opportunity costs and degree of variability of net cash flows to determine the
appropriate cash balance. Given such data the minimum and maximum of cash
balances should be set. Greater the degree of variability, higher the minimum cash
balance. Whenever the cash balance reaches a maximum level, the differences
between maximum and minimum levels should be invested in marketable securities.
When balance is falls to zero, marketable securities should be sold and proceed should
be transferred to the working cash balances.

Evaluation of cash management performances

To assess the cash management performance this phase is divided as follows:

 Size of Cash
 Liquidity and Adequacy of cash
 Control of cash

(A)Size of cash:-

The quantum of cash held by Bharti Airtel during the study period is presented in the
table. The trend percentage also calculated and shown in the table:

Size of cash and bank balance (Rs.in Crores)

Year Cash
1 January 2013 36.27
1 January 2012 48.12

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 CASH
60

50

40

30

20

10

0
31-Mar 31-Mar

Column2

(B) Operating Profit & OPM

Operating Profit gives an indication of the current operational profitability of the

business and allows a comparison of profitability between different companies after
removing out expenses that can obscure how the company is really performing.

Interest cost depends on the management's choice of financing, tax can vary widely
depending on acquisitions and losses in prior years, and depreciation and amortization
policies may differ from company to company.

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(C) EBITDA, PBT & PAT:
EBITDA is an acronym for Earnings before Interest, Taxes, Depreciation, and
Amortization. PBT stands for Profit before Tax, and PAT stands for Profit After Tax.

The graph visually shows how the net profit of the company stand reduced due to the
impact of Interest, Depreciation, and Tax.

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(D) Total Assets & Asset Turnover Ratio:

Total Assets is the sum of all assets, current and fixed. The asset turnover ratio
measures the ability of a company to use its assets to efficiently generate sales. The
higher the ratio indicates that the company is utilizing all its assets efficiently to
generate sales. Companies with low profit margins tend to have high asset turnover.

(E) Net Sales:-

Sales is the total amount of products or services sold by the company

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(F) Return on Capital Employed %:-
Capital Employed is defined as total assets less current liabilities. Return on Capital
Employed is a ratio that shows the efficiency and profitability of a company's capital
investments. The ROCE should always be higher than the rate at which the company
borrows money.

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