CHAPTER-I

INTRODUCTION

INTRODUCTION
Working capital of a firm may be defined as the amount by which its current assets exceed its current liabilities. Working capital management is concerned with the problems that arise in attempting to manage current assets and current liabilities and the interrelationship that exists between them. Current assets refer to the assets which in the ordinary course of business can be or will be turned into cash within one year without disrupting the operations of the firm. The major current assets are-cash marketable securities, accounts receivables and inventory. Current liabilities are those liabilities which arc intended to be paid in the ordinary course of business within one year out of the current assets or earnings of the concern. The basic current liabilities are bills receivables, bank overdraft and outstanding expenses. Working capital management involves the relationship between a firm's current assets and its current liabilities. Current Assets are resources, which are in cash or will soon be converted into cash in the ordinary course of business. Current Liabilities are commitments which will soon require cash settlement in the ordinary course of business. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash to pay current liabilities as they fall due. This implies a clearly designed risk policy to determine the required liquidity level.

OBJECTIVES OF WORKING CAPITAL:

The following are the objective of working capital as fallows: 1. For the purpose of raw materials, components and spares. 2. To pay wages and salaries. 3. To incur day-to-day expenses and overhead costs. 4. To meet the selling costs as packing and advertising. 5. To provide credit facilities to the customers.

6. To maintain the inventory of raw material, work in progress, store and spares and finished stock.

CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital: (i) Gross Working Capital. (ii) Net Working Capital. In the broad sense, the term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Current assets are those assets, which in the ordinary course of business can be converted into cash within a short period of normally one accounting year. In a narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities. Formula: Working capital = current assets-current liabilities Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intend to be paid in the ordinary course of business within a short period or normally one accounting year out of the current assets or the income of the business. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. These two concepts of working capital are not exclusive, rather both have their own merits. Gross concept is very suitable to the company form of organization where there is divorce between ownership, management and control. The net concept of working capital may be suitable only for proprietary form of organizations such as sole-trader or partnership firms. However, it may be made clear that as per the general practice net working capital is referred to simply as working capital.

TYPES OF WORKING CAPITAL:

Working Capital may be classified in two ways: (a) On the basis of concept. (b) On the basis of time. (a) On the basis of concept, working capital 1. Gross working capital. 2. Net working capital. (b) On the basis of time, working capital can be further classified into 1. Permanent or fixed working capital. 2. Temporary or variable working capital. Permanent working capital: Permanent or fixed working capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum Level of current assets, which is continuously required by the enterprise to carry out its normal business operations. For example, every firm has to maintain a minimum level of raw materials, work-in-process, finished goods and cash balance. This minimum level of current assets is called fixed working capital. Temporary working capital: Any amount over and above the permanent level of working capital is temporary, fluctuating or variable working capital. This portion of the required working capital is needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes. Working Capital Cycle: Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to

generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables arising from credit terms extended to customers and as reflected in day sales outstanding (DSO - DSO provides a rough guide to the number of days that a company takes to collect payment after making a sale). The main sources of cash are Payables arising from trade terms adopted in supply chain management (your creditors) and Equity and Loans.

IMPORTANCE OF WORKING CAPITAL:

Working capital is the lifeblood and nerve centre of business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows: 1. Solvency of the business: Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

2.

Goodwill: sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill.

3.

Easy loans: A concern hacking adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favorable terms.

4.

Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs.

5. Regular payment of salaries: Wages and other day-to-day commitments company

which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which raises the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits. 6. Regular supply of raw materials: Sufficient working capital ensures regular supply of raw materials and continuous production.

7. Ability to face Crisis: Adequate working capital enables a concern to face business

crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital.

8. Quick and Regular return on Investments: Every Investor wants a quick and regular return on investments. Sufficient of working capital enables a concern to pay quick and regular dividends to its investors, as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates a favorable market to raise additional funds in the future.

CHAPTER-II RESEARCH METHODOLOGY

RESEARCH METHODOLOGY OF THE STUDY

OBJECTIVES OF THE STUDY:

The following are the objectives of the study 1. To present the conceptual framework relating to management of working capital.
2. To examine the size of investment and turnover of working capital in an overall

manner including financing of current assets.

3. To know the inventory management practices of Tecumseh India Products Private Ltd

with a view to determine the extent of blocking up of money in inventory.

4. To offer suitable suggestions for the efficient management of working capital in

Tecumseh India Products Private Ltd, keeping in view the inadequacies highlighted by the study. 5. To know the liquidity position of Tecumseh India Products Private Ltd. 6. Suggesting a better way to improve management working capital.

SCOPE OF THE STUDY:

1. The present study is related to study working capital management of Tecumseh India Products Private Ltd. 2. The study mainly focuses on working capital management only. 3. The present study consists of calculating working capital aspects about cash, credit, stock financing, receivables, letter of credit & bank guarantee. 4. The study is confined to the past 5 years only.
5.

The information obtained from the primary and secondary sources was limited Tecumseh India Products Private Ltd.

to

FRAME WORK OF THE STUDY

In the project report entitled financial performance of Tecumseh Products India Private Limited, Balanagar Hyderabad, is organized in five chapters The first chapter contains the introduction about working capital management and its importance, concepts of working capital, types of working capital. The second chapter contains a brief description about the Objectives of the study, scope, limitations, data collection methods, and frame work of the study. The third chapter provides the company profile i.e., Tecumseh India Products Private Ltd. The fourth chapter carries the analysis of data provided by the company by using working capital statements and interpretation. The fifth chapter carries the findings after analysing the annual reports of the company and suggestions.

LIMITATIONS OF THE STUDY

The study has been conducted in a systematic and comprehensive way so as to make the project work available one. However, the topic under my study may not be free from limitations due to the following factors 1. The major limitation of the project under study was time. Since it was to be completed within a short period of time, which is not sufficient to undertake a comprehensive study. 2. Since the financial matters are sensitive in nature the same could not acquired easily.
3.

This analysis was confined to Tecumseh India Products Private Ltd, Balanagar,

Hyderabad unit only. 4. The study was only limited period to 45 days.
5. The study is confined to only five years of data.