INTRODUCTION
Working capital management is concerned with the problems of that arises in attempting to manage the current assets, the current liabilities and the inter relationship that exists between them. The goal of Working capital management is to manage the firm‟s current assets and current liabilities in such a way that a satisfactory level of Working capital is maintained. This is so because, if a firm maintained satisfactory level of Working capital, it is likely to become insolvent and may even be formed bankrupt. The current assets should be large enough to coverts liabilities in order to ensure a reasonable margin of safety.
Each of the current assets must be managed efficiently in order to maintained liquidity of the firm a while keeping too high level of any one of them. Each of the short-term so ever of financing must be continuously managed to ensure that they are obtained and used in the best possible way. The interaction between current assets and current liabilities is, therefore, the main theme sources of the theory of Working capital management.
OBJECTIVES OF THE STUDY:
1. The specific objectives of study are2. To study the Working capital position in CRANE BETEL NUT POWDER WORKS 3. To observe the liquidity position of the organization
4. To analyze the profitability of the company
NEED OF THE STUDY
The need of working capital to run day to day business activities cannot be over emphasized. We will hardly find a business firm which does not require any amount profit working capital in dead firms differ in the requiremt of the working capital.
In order to earn sufficient profits, a firm as to depend on its sales activies a part from others. we known that sales are not always converted in to immediately, i.e.,. there fore is time-log between sales of the product and the realization of cash. So an adequate amount of working capital is required by a firm in the form of different current assets, for its activities to continue uninterrupted and to tackle the problems that may arise because of the time-log.
Partially, this happened simply owing to the ”OPENING CYCLE” or “operating cycle” involves the following steps:
Conversion of cash into inventory
Conversion of inventory into receivables; and Conversion of receivables into cash.
SCOPE OF THE STUDY:
This study represents Working capital management in the CRANE BETEL NUT POWDER PVT.LTD.
The study period covered in from the financial year 2005-2006 to 2009-2010. It help to the know the current ratio of the company
It know about profits &loss of the company
How to use of the raw materials in products and know the how prepare a product we have to know.
How the Management is manage the departments in the company and salary of the workes should known
LIMITATIONS OF THE STUDY:
Duration for the project study only 2 months which is not sufficient for a detail study of topic analysis of Working capital position management. Hence time is limited factor.
The available information is taken to annual report only.
RESEARCH METHODOLOGY
Finance is regarded as the King-Pin of the business enterprise. In the present economy, finance is primary input of economic of mankind. Analysis and interpretation of financial statements as taken an important place and finance department of every organization.
The analysis of interpretation of financial statements is an attempt to determine the significance and meaning of financial statements. So that the forecasts may be mode of the prospects for the future earnings ability to pay interest and debt maturities and profitability, dividend policy. This will help the management in making decisions for better survival of organizations.
Primary data:
Primary data is obtained through the interpretation with various departmental heads and personal.
Secondary data:
Secondary data is collected from the annual reports and holders of CRANE BETEL NUT POWDER PVT.LTD. And also from the journals and books relating to CRANE BETEL NUT POWDER PVT.LTD.
INDUSTRY PROFILE
Betel Nut Powder Industry is synonym with South Indian culture over the decades. It is every where there is an occasion or as function. The usage of betel nut powder dates back to ethics Ramayana and Mahasasthra. It is South Indian tradition to be art in all occasions for all reasons.
The main raw material used in betel nut powder is Areca nut, with other material like clove, nutmeg and other spicy items. Areca nut estimated to be 2.4 lack hectares yielding about 2.8 lack tones of processed nut. Karnataka is other major producer of Areca nut with 40% of total production. India largest consumer of areca nuts.
SWOT ANALYSIS ABOUT THE BUSINESS ENVIRONMENT OF NUT POWDER INDUSTRY
So that analysis is not just a set of four lists, because in strategic way some strength may be of less importance than others may or some opportunities may be sensible to pursue than others. This sort of technique can be of use in helping, to screen options, so an option which maximized strength, would preferable to one which did not.
To assess the current situation and scrutinize the various factors relating to the advantages and disadvantages of nut powder industry let us have an analysis.
STRENGTHS OF NUT POWDER INDUSTRY WELL ESTABLISHED PRODUCT:
Nut powder is a well- established product. No body is unknown of this product. So, if any body wants to enter but powder business, he has not any necessary to spend even a rupee on product introduction. If he has to spend on brand introduction, that is a different matter.
LOW CAPITAL:
Much capital is not required for manufacturing nut powder. Machines are not much expensive and plant does require any places. There is no necessity for a large number of technically qualified people. So, no need to fight against the problem of scarcity of technically qualified labor, which is a serious problem. I.e. problem of whole Indian industry at present.
There is no chance of bureaucratic red Taoism, no licensing problem and no problem of foreign exchanges, as there is no need foe any imports at any stage of production or at other stage.
SMALL SIZE SEGMENTED MARKET:
As the market is not vast, it is not difficult to capture a considerable market share in the market, after introduce the product. Advertisement the brand of the product is not difficult. Even personal selling can be done and can achieve the objective with low promotional costs; with effective distribution even the brand loyalty to other brands can be dominated.
LOW BREAK-EVEN POINT:
The manufacturer can reach the point at where the level of cost and revenue is at equilibrium with in a short period of time. He can start earning profits with in a short period and after that, there is no problem, even if he withdraws himself from the business.
In 1980 it covered all the South Indian concentrated areas. Now the CBNP WORKS turn over is above 38 crore.CBNP WORKS industry first introduced plain nut powder only. After wards it different flavors like PT. SWEET SUPARI, GOLD POUCH – mixing with PT and sweet supari. EXTRA SPECAIL- it is quality nut and mixed with more species.
The main competitor for Crane was the Rajashri, Lakshmi, Raja and Roja. But in the market the Crane was the market leader occupied 80%. Betel nut powder market share in Andhra Pradesh, in Tamilnadu and Karnataka its market share is 65% and 60% respectively. In Kerala only 10 to 15% market share. In other states it is playing a competitors role.
LOCATION OF INDUSTRY:
CBNP WORKS establishing its plan in Sampath Nagar, Guntur. It is the head quarter of Guntur District and it is also major export venture of cotton, tobacco, and chilies in A.P.
PRODUCTION CAPACITY:
CBNP WORKS is having excellent capacity in marketing nut powder. It is having above 70 machines of production and packaging machines. Now the production capacity is
1500 tone per annum. Actual capacity of the plant is 1800 tones per annum. According to the demand, sales the machines are operated.
CONCLUSIONS FROM SWOT ANALYSIS ABOUT THE NUT POWDER INDUSTRY
Nut markets are be created for the existence of the industry. Local competition is very intensive in nut powder industry. Retaining customers is difficulty
Continuous advertising and quality maintenance are required.
Packing has very much importance. It extorts much influence on consumer, while he takes a buying decision.
Omni presence is the most vital character that helps the producer.
A separate market study is required for every small market. Market must be segmented into small sections. Promotion strategy must be suitable for achieving those objectives. Promotion strategy must be based on the strength and the popularity of local competitor.
A brand of convenience product can achieve the loyalty of consumers, only when it touches the hearts of customers. So, promotion strategy must be very dynamic and powerful.
In rural areas, where advertising media shows very little effect, so personal spellings the suitable method.
GUTKA:
People who are accustomed to nut powder consumption remain as the nut powder consumers. But people, especially people below 30 years started using “Gutka Brands”. Unfortunately the generation may also follow the same path. The “Gutka” products can be considered as a slow poison. The government was asked to prohibit this product. But
consumption is an addict. So, its consumers cannot be shifted to nut powder. But nut powder consumers can be shifted to “Gutka”. It is an embracing fact to the nut powder manufacturers.
Those people like “panparag” and other Gutka” brands are giving tough competition to an industry (nut powder) which is well established and a part of public‟s habit. There by efforts “panparag” could bring cultural change.
In the same way, nut powder also can create market and can bring cultural change; it can make good effort in the fields of advertising and distribution in North Indian State.
THREATS TO NUT POWDER INDUSTRY
1. CULTURAL CHANGES:
Now the new generation is not so much interested as its previous generation in nut powder consumption. The belief that nut powder consumption is helpful foe digestion is loosing its ground gradually. People of new generation started using chewing gum. This chewing gum using habit terribly effects nut powder industry. The people do no t feel the necessary of nut powder. It is very difficult to persuade a person to use a product, when the person feels that the product is not necessary.
2. STAVDARD LIVING:
Because of industrialization economy gets strengthened, standards of living are improved. This gives and opportunity to expand and convenience product industry. For instance, larger quantities of nut powder packages can be offered to make the market size bigger.
3. TECHNOLOGICAL DEVELOPMENT:
Today revolutionary changes, which are especially in communication section, take place. Promotion is the life blood for marketing a convenience product. Can be done more effectively. This can create new markets.
Nut powder consumption is habit of South Indian. Only people of the South Indian States use nut powder. The remaining part of the country is outside of the nut powder market. Here we have to remember.
5. Some time ago. Panparag was introduced into the market. At the inception public did
not pay much attention to this product. But the manufacturer‟s efforts in advertising and distribution made it enable to create customers.
6. Convenience product‟s manufacturers can not set their own retail store. Because it is
every expensive and is not lucrative. So, they have to depend upon outside retailers for the marketing of their product brands. So, if the competitor offers better consumption, the retailer may not keep his promise. He shows window display partially ad introduces the product brand to his regular customer. Here it is need not to say that the brand which offers the retailer better commission, will be introduced to his regular customer. Retailer makes their regular customers persuade and bought the goods. So in convenience product brands selection, retailers decide the rate of brand and its manufacturers.
OPPORTUNITIES FOR NUT POWDER INDUSTRY 1. GROWING POPULATION:
Through this population growth hardly effect the economic development of the country. It increases the demand for convenience products. Because these are not expensive goods in the consideration of consumers. As far as demand increases production is to be increased and this necessity gives chance for the entrance of new produce qualitative product.
2. CONSUMER’S PERSONAL FEELING:
When the product is introduced under a brand, a few people use that the product to other consumers who want to use that product. Because of the market‟s small size, they can make the brand a mere failure. According to the psychology of customers, they take a product under a brand into consideration when they feel that the brand is good. After that, they may use. But, if they were told that around is not good, then they don‟t use the product, through were told later that the brand is good.
3. MANUFACTURER’S REPUTATION:
As the market id segmented and small in size, the manufacturer‟s reputation influences the consumers. Through a new brand of same product with equal or some times with better quality is offer at same price or some times at lower price, the consumer does not prefer the new brand. Because the manufacturers of that new brand is unknown to the consumers
4. CONVENIENT PRODUCT:
We known that convenience product are a product are a product which consumers buy and use frequently with least possible time and effort. So, persuading the consumer to beyond use product is not big problem. The manufacturer or the distributor needs not to face hardships at considerable level.
5. SOCIALLY ACCEPTED PRODUCT:
There is a strong protest against the product like gutka, cigarette alcoholic drink etc., from some classes of society, Government also imposed restriction on this type of products and it troubles the manufacturers. But nut powder is a product that is accepted by the society.It is an advantage to the manufacturer of nut powder, which the socially unaccepted product producers have not.
6. NO NEED FOR TECHNOLOGICAL; KNOW-HOW:
Unlike the other big industries, which cannot bring out their financial product without help of technical know-how, nut powder manufacturing can be easily started. And there would be no problem from the side of Government relating to the technical know-how.
7. A PRODUCT WITH CLOSE SUBSTITUTE:
If a brand of nut powder is not available, majority of the consumers immediately shifts to other nut powder Brands, which are close substitutes. Consumer does not wait and does not try knowing the reasons behind the non-availability of his brand.
He immediately buys the other brand without any hesitation. If there is any
distribution or even in promotion, then the other brand can win the consumers. It is the main advantage and disadvantage to convenience product manufacturers.
8. PRICE AND QUALITY ARE NOT COMPARED:
While buying a brand of nut powder, generally the consumer doesn‟t compare quality with its price. It is an advantage to the manufacturer in setting the price. The price of a product needs not to be based on quality. Ironically some tomes consumers assess the product‟s quality based upon its price. So a serious and deep analysis or survey is not required to fix the price. The can be fixed equal or above or below the competitors price.
WEAKNESS OF NUT POWDER INDUSTRY
1. A little that makes the consumers feel uncomforted or unprofitable may loss of market. So, each aspect of price, promotion and distribution are to be checked at very point and at every possible time. Because in convenience product market, at every possible time retaining the market is more difficult than creation. So, we have to run as fast as we can to say where we are.
2. EXPENSIVE ADVERTISEMENT:
As convenience products face serve competition and this competition are intensify day by day, the producer has to advertise heavily and continuously and it is very expensive. Here, selling costs increase incredibly, so to persuade consumer to buy a particular brand among many brands, which are closely substitutes, the only way is crating brand image, which is invincible to the competitor brands. So, advertising budget must be based on competitor‟s advertising budget. So, it becomes difficult for a smaller company to compete with the company, which is in a strong
COMPANY PROFILE
M/S Crane Betel Nut Powder Works (CBNPW) is basically a small scale industry, manufacturing scented supari in different packages. This company was prompted by Sri Grandhi Subbarao during 1963.
This was started as a family organization with an annual turnover of Rs.40000/-. By establishing standard quality it won the public confidence. Gradually it has been explained and introduced men, machine and spread the product to the nearly districts. Because of the quality, the product get loyalty and its brand “crane” become the No.1 brand in nut powder industry in AP not all companies are born equal. Some are born with a dream. Some, however, are, not so lucky Crane, obviously, falls in the first category. Since its inception in 1957, the company has served the finest nut powder to connoisseur the world over, as one of South India Largest betel nut powder producer; it believes that its responsibility goes beyond its corporate goals.
HISTORY OF THE “CRANE BETEL NUT POWDER WORKS”
“CRANE BETEL NUT POWDER WORKS” was established in the year 1957. “Mr. GRNDHI SUBBARAO” founded it with an initial capital of Rs. 100/- with 2 to 3 workers. It is sale proprietor organization and it was established in Sampath nagar, Guntur.
The main objective of the organization is to manufacture Betel Nut Powder. Mr. Grandhi Subba Rao felt that it is the only business to start with lowest investment. So, he started the marketing of nut powder and sold with a brand name of “NO-1 VANI” and did this up to 7 years. The business through out the state, after wards in 1963 he established and registered the name of “CRANE BETEL NUT POWDER WORKS”.
At that time the product was sold in the towns and rural areas of Guntur (DT) only and has turn over of Rs.6000/-
In 1963 he established sales men in different areas in A.P. In 1968 organization reached good position.
In 1976 the CBNP WORKS extended his business to Chennai and slowly in 1978 it extended to Karnataka.
For the last 40 years, Crane has seen only the future that‟s why it is continuously experimenting and innovating. Tried to break away from conventional methods. Its journey starts way back in 1957. Sri, G. Subba Rao started CBNP in Guntur (A>P) in 1957 with a mission to serve people through quality and taste.
It is a sole proprietary concern to start with; it is a family organization with an annual turnover of 40,000. By establishing standard quality in their product the firm gained popularity and confidence of the consumers with in a short span of time.
PREPARING FOR TOMORROW:
With the growing demands on the export and domestic fronts, the Crane group has experimented with forms of packing to make Betel nut powder more widely available and more easily accessible the reason is why it has gone into sachets and foil packaging.
ABOUT THE PROPRIETOR:
CBNP WORKS is a sole proprietary organization. Proprietor of the CBNP works is Mr. Grandhi Subbarao 45 years back he is a very poor man. At this time he is working for Rs.15/- per day. He runs the bedded bunk for two or three years. On that time he starts a business with a lowest investment. He sold the nut powder directly to the customer. He worked very hardly to improve the business. Now the organization turnover is above 30 crore. In the mean time they developed so many organizations like Virat creane, vilas finance, Durga dairy, etc., In all those companies, he is having promoters quota. Now the group is above Rs 100 crore proups.
WIDTH:
It refers to the extent of different product lines in the product mix offered CBNO WORKS.
CONSISTENCY:
CBNP WORKS describes the relatedness of the various product lines.
DESIGN:
CBNO WORKS manufacturer‟s different products in different design:
MODELS:
Crane Sweet Supari (SS). Crane God Pouch (GP). Crane Extra Special (EX). Ongole Special.
Five models have “different styles, appearances and size of packaging”.
CRANE ORANIZATION STRUCTURE PRODUCT PROFILE:
The buyer purchases the product only because it serves the customer by satisfying his needs and desire and therefore, he pays for it. Thus a product is a bundle of potential utility, because customer is most interested in the product characteristic in a physical sense.
PRODUCT MIX AND PRODUCT LINE:
The CBNP WORKS has manufacture different types of flavors in the betel nut powder with a brand of Crane.
LENTGH:
These products are “Crane Betel Nut Powder (PT)”. “Crane Sweet Supari(SS)”, “Crane Gold Pouch (GP)”, and “ Crane Extra Special (EX) & Ongole Special.
EXCISE DEPARTMENT FUNCTIONS:
The head of the excise department controls all the transactions of the excise department. The Government charges 16% tax on the nut powder. The main duty of Excise department is to prepare oriole records if tee Working of the machines and the production of the nut powder daily. It is also the main duty of the head of the department and that the records are promptly maintained or not to submit the daily report to excise department, daily how many machines are working is payable as excise duty to know the taxes would be paid by the organization or not.
The main duty of the cahier is to control all the cash transaction of the organization. He keeps money to the creditors and for expenses according to instruction of the top management and he collects money from the debtors. He keeps all the records to cash payments and receipts and is collects the vouchers from the creditors and giving vouchers to the debtors relating to the cash transitions.
TYPIST:
The duty of the typist is to the letters and documents relating to the orders to the organization.
BANK CLERK:
Bank clerk controls all the banking transactions. The bank clerk is responsible for bank transactions to the manager as well as proprietor. He maintains proper records of banking transactions. His duty is to deposit the cash or withdraws the cash from the bank; it is also the duty of bank clerk to deposit the cheque with the bank sends the cheques and DD‟s to the customers and parties on behalf of the organization.
To control all the accounts. To control all the transactions.
ACOUNT EXECUTIVE:
Account executive controls all transactions of the accounting department. The account executive responsible for the manager and the proprietor. The main duty of the accounts executive is to check the accounts are properly recorded or not, to check whether it is correct or not. He kept all the accounts books under his control and he is responsible for all the accounting transactions.
ACCOUNTANT:
Accountant controls the accounting transactions with the help of account assistants. The main duty of the accountant is to prepare the accounts as the information given by the accounts assistant, to check whether the accounts assistants record the transactions properly or not. He is the responsible for the accounts executive.
Accounts assistant is responsible for accountant for its work. The main duty of the assistant is to enter the daily transaction into journals and ledgers.
To control the finance department and excise department
To control the production departments, raw material, packing departments etc., To control all the transaction of the marketing.
He controls all the departments like finance, accounts, production, raw materials etc., through general manager and manager.
GENERAL MANAGER:
In CBNP works the finance, excise, and raw materials departments is under the control of General Manager. The functions of the three departments are mentioned below.
FINANCE DEPARTMENT FUNCTIONS: To control all the financial transactions.
To control all the receipts and payments of cash. To make proper care in receipts and payments of cash. To check is there any misappropriations in cash dealings. To check that all financial transactions are properly regarded or not.
Upon the taste and fashion of the area. When compare the sales of the last year and this year the Crane increases the sales in every month. And this year sell the product more in the other states over this entire company gets good brand image in the India market. It has given more importance to the devotional activities. It spends lot of money to construct the temple refreshment arrangements to devotees. At present 300 employees are working in the organization. Big industry buildings, office, go down are in one campus, they are their own.
DETAIL OF FUNCTIONAL DEPARTMENT OF THE ORGANIZATION PROPRIETOR:
He is the only person to control all the activities in the organization because it is proprietary concern. He controls all the activities like production, packaging, accounts, finance etc., the following are the activities of the proprietor.
To control all the transactions of the business To control all of the payments of the business To maintain proper records of the business To appoint auditor for the organization.
The Crane group gained popularity and confidence of the people of Andhra Pradesh and other South India States with their strong presence in the below areas.
The group has 7 projects under its collar, they are:
1. CRANE BETEL NUT POWDER WORKS2. IRAT CRANE INDUSTRIES LIMITED
3. VILAS FINANCE & INVESTMENT LIMITED 4. DURGA DAIRY LIMITED
5. APEX SOLUTIONS LIMITED
6. VIRAT CRANE BOTTLING LIMITED 7. VIRAT CRANE AGRITECH IMITED
PRESENT STATUS OF THE ORGANISATION:
At present Crane Betel Nut Powder Works is in a peak state. It is a leader in marketing the Nut powder. This company in A.P. it occupies 70% above share in the sales f the nut powder. This company first year sale is 6000 and in 2000 year it is above 38 crore. Year to year it increases the sales of the nut powder.
It manufacturers four types of the nut powder. In that some demand in one area and other demand in the other area they prepare the nut powder depends is providing Gratuity to its workers after competing 5 years as a worker in
CBNP WORKS has got award for the best quality and taste of the product from Dr. C. RANGA RAJAN, The Governor of A.P. this award is given by CITD. Industrial promotion Independence Gourav Award-1997.
LOCATION:
CBNP Works plant is located at Guntur in A.P.it is the head quarters of Guntur district. This is key and important place in Andhra Pradesh. It is rich in cotton, chilly and tobacco.
CRANE GROUP OF INDUSTRIES:
The Crane group is on e of the growing business conglomerates in Andhra Pradesh. The group which started with a modest investment in 1957 has today an asset of above 100 crore. The group has a significant presence in the areas of Software, Agritech, Betel nut powder and other related products.
AIMS OF ORGANIZATION:
CBNP WORKS having it‟s own objectives. Now its business is limited to some areas only. But it is planning to extend its business to all over India with in a short period. I.e. before 2007. It is planning to introduce new flavors of nut powder according to the taste of customers. The main objective of the organization is “giving more quality to the customer with a minimum cost”.
PERSONNEL IN CRANE:
There are above 300 employees working in CBNP WORKS skilled, unskilled and semiskilled and senior management staff.
CBNP WORKS balanced term of technical; managerial, personnel of technical and managerial, personnel levels. The dedicated efforts of all the employees of the company have helped the plant to achieve the highest rates of capacity utilization in the first five year of operation itself. Steps are being taken to include all employees in the process of corporate planning and human resource
CBNP WORKS provide more facilities to US workers. They are provident fund, future fund, bonus, local privileges, vehicle maintenance etc. CBNP WORKS offers Rs.1000 to Rs.6000 as salary according to dthe post. It is contributing 12% 167 PF and 1% to E.S.I.
2. LOW CAPITAL:
Much capital is not required for manufacturing nut powder. In case of machines, men and materials. They are also not so expensive labor intensive industry. Highly technical qualified people need not necessary.
3. CONVINIENCE PRODUCT:
We know that convenience product is product which consumers buy and use frequently with least possible time and effort. So, persuading the consumer to buy and use the product is not a big problem. The manufacture or the distributors need not face hardship at considerable level.
4. SOCIALLY ACCEPTED PRODUCT:
There is a strong protest against the product which is socially not accepted like Gutka etc. Nut powder is socially accepted product.
The main raw materials of Betel Nut Powder are Areca nut. Karnataka accounts for 40% of the total Areca nut production and Kerala and Assam represent 25% respectively.
RAW MATERIALS USED IN CBNP WORKS: TYPES OF SPICES:
The various spices that are used in manufacturing Crane Betel Nut Powder.
ARECANUT NUTMUGE MACE CLOVE GREEN CAMPHOR MENTHOL SALVO FREEZER CUCUMBOR HUSKED GINS DALDA
CHCKRINE
SOPE MIXED MASALA ELACHI
BORNEOL VERY SWEET CLOVE OIL
GROUND NUT OIL GINGIL OIL GINGIL OIL
THEORITICAL FRAMEWORK
Meaning of Working Capital
Capital required for a business can be classified under two main categories visa (1) Fixed capital.
(2) Working capital
Every business needs fund for two purposes – for its establishment and to carry out its day to day operations. Long term funds are required to created production facilities through purchase of fixed assets such as plant and machinery, land and buildings, furniture etc. investments in these assets represent that part of firm‟s capital which is blocked on a permanent basis and is called fixed capital. Funds are also needed for short term purposes for the purchases of raw materials, payment of wages and other day to day expenses, etc. these funds are known as working capital. In simple words, working capital refers to that part of the firm‟s capital which is required for financing short term or current assets such as cash,
marketable securities, debtors and inventories.
It is a wrong notation that the working capital is not important. But it should be clearly understood that work capital is as important as fixed capital. In fact working capital feeds the fixed assets. Fixed capital, which is considered as a guarantee of long term success of a business, would prove a fiasco if short term survival is not ensured by the adequate supply of working capital. Shortage of working capital has caused many businesses to fail.
Working capital is one of the most vital ingredients of a business. It‟s important in a business is the same as that of blood in human body. In order to assure a good health of a business, it is essential that working capital management is carried out effectively and efficiently.
NEED OF WORKING CAPITAL:
The need of Working capital to run the day to day business activities cannot be over emphasized. We will hardly find a business firm which does not require any amount pf Working capital. In dead firms differ in their requirement of the Working capital.
In order to earn sufficient profits, a firm as to depend on its sales activities a part from others. We known that sales are not always converted into immediately, i.e., therefore is time-log between sale of product and the realization of cash. So an adequate amount of Working capital is required by a firm in the form of different current assets, for its activities to continue uninterrupted and to tackle the problems that may arise because of the time-log.
Practically, this happened simply owing to the “OPENING CYCLE” or “operating cycle” involves the following steps:
1. Conversion of Cash into Raw Materials
2. Conversion of Raw Materials into Work-in-Progress 3. Conversion of Work-in-Progress into Finished Goods 4. Conversion of Finished Goods into Accounts Receivable 5. Conversion of Accounts Receivable into Cash
DETERMINANTS OF WORKING CAPITAL:
The needs of Working capital are not always the same. It varies from the year to year or even month to month depending upon a number of factors. There is no set or rules or formulate to determine the Working capital needs of the firm.
Each factor has its own importance of the factor changes for a firm overtime. In order to determine the proper amount of Working capital of concern, the following factors should be considered carefully:
Nature of business Size of business unit Seasonal variations
Time consumed in manufacture Turnover of circulating capital Terms of purchasing and sales Growth and expansion and business Business cycle fluctuations
Profit margin and profit appropriation Price level changes
During policy
1.2. Concepts of Working Capital: Working Capital may be classified in two ways:
On the basis of concept.
On the basis of time.
1. On the basis of concept, working capital is classified into
Gross working capital.
Net working capital.
2. Based on time, working capital is further classified into
Permanent or Fixed working capital.
Temporary or Variable 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. Thus, the gross working capital is the capital invested in total current assets of the enterprise.
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.
Net working capital refers to the difference between current assets and current liabilities. Current liabilities those claims of outsiders which are expected to mature for payment within an accounting year. Net working capital can be positive or negative. A positive net working capital will arise when the current assets exceed current liabilities. A negative working capital will arise when the current liabilities are in excess of current assets.
Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital need may be
financed by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations within the ordinary operating cycle of a business. In order to protect their interests, short term creditors always like a company to maintain current assets at a higher level than current liabilities. It is a conventional rule to maintain the level of current assets twice the level of current liabilities.
A liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means negative liquidity, and may be prove to be harmful for the company‟s reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore, prompt and timely action should be taken by management to improve and correct the imbalances in the liquidity position of the firm.
MANAGEMENT OF WORKING CAPITAL:
Working capital, in general practice, refers to the excess of current asserts over current liabilities. Managements of working capital therefore, is concerned with the problem that arise in attempting to manage the current assets, the current liabilities and the inter –
COMPONENTS OF CURRENTASSETS COMPONENTS OF CURRENT LIABILITIES
Cash in Hand and Cash at Bank Bills Payable
Bills Receivables Sundry Creditors or Accounts Payable
Sundry Debtors Accrued or Outstanding Expenses
Short term loans and Advances Bank Overdraft
Inventories of Stock
(a) raw materials (b) work in progress (c) stores and spare parts (d) finished goods
Dividends Payable
Temporary Investments Provision for Taxation, if it does not amount to
appropriation of profits
Prepaid Expenses
relationship that exist between them. In other words, it refers to all aspects of administration of both current assets and current liabilities.
The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e. it is neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital position is bad for any business. Inadequacy of working capital may lead the firm to insolvency and excessive working capital implies idle funds which earn no profits for the business. Working capital management policies of a firm have great effect on its profitability, liquidity and structural health of the organisation. Therefore, working capital management is three dimensional in nature:
Dimension I is concerned with the formulation of policies with regard to profitability, risk and liquidity.
Dimension II is concerned with the decision about the composition and level of current assets.
Dimension III is concerned with the decisions about the composition and level of current liabilities.
Working capital management includes a number of aspects that make it especially important for the financial health of the firm. The goal of current assets and current liabilities is to utilise the current funds most efficiently. Because working capital is nerve centre for any business organisation especially manufacturing unit. The current assets should be large enough to cover its current liabilities in order to ensure that they are obtained and used in the best possible way. The interaction between the current assets and current liabilities is the main theme of the working capital management.
The important elements of working capital management include inventory management, cash management, credit and collection policy and short-term borrowings. Whereas long term financial analysis is primarily concerned with strategic planning, working capital management is primarily concerned with day to day operations making sure that the production lines do not stop as firm‟s run out of the raw materials and thus preventing the slowing down of the process. Obviously, without good working capital management, no firm can be efficient and profitable.
The current assets, current liabilities and the inter-relationships that exist between the., The current assets refers to those assets which in the ordinary course of business can be, or will be turned into cash within one year without distributing the operations of the firm. The major current assets are cash; marketable securities, accounts receivables and inventory current liabilities are those liabilities, which are intended at their inception to be paid in the ordinary course of business, within a year, out of current assets or earning of the concern. The basic current liabilities are accounts payable, bill payable, bank overdraft and outstanding expenses.
1.3 Need for Working Capital:
The need for working capital (gross) or current assets cannot be overemphasized. Given the objective of financial decision making to maximize the shareholders‟ wealth, it is necessary to generate sufficient profits. The extent to which profits can be earned will naturally depend, among other things, upon the magnitude of the sales. A successful sales programme 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, therefore, a need for working capital in the form of current assets to deal with the problem arising out of the lack of immediate realization 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 term operating cycle refers to the length of time necessary to complete the following cycle of events:
Conversion of cash into inventory;
Conversion of inventory into receivables; Conversion of receivables into cash.
The operating cycle, this is a continuous process. The operating cycle consists of three phases. In phase 1, cash gets converted into inventory. This includes purchase of raw materials, conversion of raw materials into work-in-progress, finished goods and finally the transfer of goods to stock at the end of the manufacturing process.
In the case of trading organizations, this phase is shorter as there would be no manufacturing activity and cash is directly converted into inventory.
In phase II of the cycle, the inventory is converted into receivables as credit sales are made to customers. Firms which don‟t sell on credit obviously not have phase II of the operating cycle.
The last phase, phase III represents the stage when receivables are collected. This phase completes the operating cycle. Thus, the firm has moved from cash to inventory, to receivables and to cash again.
Changes in Working Capital:
The changes in the level of working capital occur for the following three basic reasons: 1. Changes in the level of sales and/or operating expenses,
2. Policy changes, and 3. Changes in technology.
1. Changes in Sales and Operating Expenses:
The first factor causing a change in the working capital requirement is a change in the sales and operating expenses. The changes in this factor may be due to three reasons: First, there may be a long-run trend of change. For instance, the price of a raw material, say oil, may constantly rise, necessitating the holding of a large inventory. The secular trends would mainly affect the need for permanent current assets in the second place, cyclical changes in the economic leading to ups and downs in business activity influence the level of working capital, both permanent and temporary. The third source of change is seasonality in sales
activity. Seasonality-peaks and troughs-can be said to be the main source of variation in the level of temporary working capital.
The change in sales and operating expenses may be either in the form of an increase or decrease. An increase in the value of sales is bound to be accompanied by higher levels of cash, inventory and receivables. The decline in sales has exactly the opposite effect-a decline in the need for working capital. A change in the operating expenses-rise or fall-has a similar effect on the levels of working capital
2. Policy Changes:
The second major cause of changes in the level of working capital is because of policy changes initiated by the management. There is a wide choice in the matter of current assets policy. The term current asset policy may be defined as the relationship between current assets and sales value. A firm following a conservative policy in this respect having a very high level of current assets in relation to sales may deliberately opt for a less conservative policy and vice-versa. These conscious managerial decisions certainly have an impact on the level of working capital.
3. Technological Changes:
Finally, Technological changes can cause significant changes in the level of working capital. If a new process emerges as a result of technological developments, which shortens the operating cycle, it reduces the need for working capital and vice-versa.
Nature of Working Capital:
Working capital management is concerned with the problems arise in attempting to manage the current assets, current liabilities and the interrelationship that exist between them. The term current assets refers to those assets which in the ordinary course of business can be,
or will be, converted into cash within year without undergoing a diminution in values and without disrupting the operations of the firm.
The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities are those liabilities which are intended at their inception, to be paid in the ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are accounts payable, bills payable, bank overdraft, and outstanding expenses.
The goal of working capital management is to manage the firm‟s current assets and liabilities in such a way that a satisfactory level of working capital is maintained. This is so because if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy.
The interaction between current assets and current liabilities is, therefore, the main theme of the theory of working capital management. The basic ingredients of the theory of working capital management may be said to include its definition, need, optimum level of current assets, the trade-off between profitability and risk which is associated with the level of current assets and liabilities, financing-mix strategies and so on.
Importance of Working Capital:
Investment in fixed assets only is not sufficient to run the business. Working capital or investment in current assets however so small it is a must for the purchase of raw materials and for meeting the day-to-day expenditure on salaries wages, rents, advertising etc. and for maintaining the fixed assets. “The fate of large scale investment in fixed capital is often determined by a relatively small amount of current asset”. Working capital is just like a heart of industry if it is weak, the business cannot prosper and survive although there is a large body of fixed assets.
Moreover not only the existence of working capital is a must for the firm but it must be adequate also. Adequacy of working capital is the life blood and controlling nerve centre of a business. Inadequate as well as redundant working capital is a criminal waste both situations are not warranted in a sound organization. The advantages of working capital are adequate.
Approaches to Working Capital Management:
The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities. Working capital management takes place on two levels:
Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management.
The individual components of working capital can be effectively managed by using various techniques and strategies.
When considering these techniques and strategies, departments need to recognize that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For example, some departments have significant inventory levels; others have little if any inventory. Furthermore, working capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient working capital management must be considered in relation to other aspects of the department's financial and non-financial performance.
1.4 Determinants of Working Capital:
1. Nature of Business:
The amount of working capital is basically related to the nature and volume of the business. In concerns, where the cost of raw materials to be used in the manufacture of a product is very large in proportion to its total cost of manufacture the requirements of working capital will be very large. For instance, a cotton or sugar mill requires a large amount of working capital. On the contrary, concerns having large investments in fixed assets require less amount of working capital.
2. Size of Business Unit:
Size of the business unit is also a determining factor in estimating the total amount of working capital. The general principal in the regard is that the bigger the size the larger will be the amount of working capital required as because the larger business units are required to maintain big inventories
for the flow of the business.
3. Seasonal Variations:
Strong seasonal movements create special problems of working capital in controlling the internal financial swings. A great many companies have to carry on seasonal business such as sugar mills, oil mills or woollen mills etc. and therefore they require large amount of working capital in the season to purchase the raw materials in large quantities and utilize them throughout the year.
4. Manufacturing Process or Length of Production Cycle:
In manufacturing business, their requirements of working capital increase in direct proportion to length of manufacturing process. Longer the process period of manufacture, larger is the amount of working capital required.
5. Credit Policy
Terms of purchase and sales also affect the amount of working capital. If a company purchase all goods in cash and sells its finished product on credit naturally it will require large amount of working capital. On contrary a concern that purchases its requirements on credit and sells its products or services on cash requires lesser amount of working capital.
6. Working Capital Cycle:
In a manufacturing concern, the working capital cycle starts with the purchase of raw materials and ends with the realisation of cash from the sale of finished goods. This cycle involves purchase of raw materials and stores, its conversion into stocks of finished goods through work in progress. The speed with which capital completes one cycle determines the requirements of working capital. Longer the period of the cycle, larger is the requirement of working capital.
7. Labour Intensive Vs Capital Intensive Industries:
In labour Intensive industries, large working capital is required because regular payment of heavy wage-bills and more time taken in completing the manufacturing process. whereas the capital-intensive industries require lesser amount of working capital because of the heavy investment in fixed and shorter period in manufacturing process.
The financial manager should also anticipate the effect of price of level changes on working capital requirements of the firm. Generally, rising price levels will require a higher amount of working capital because to maintain the same levels of current assets will require higher investment. The effect of rising price levels will be different for different firms depending upon their price policies, nature of the product etc. an important bearing in deciding the adequate amount of working capital. The greater the cash requirement the higher will be the need of working capital but if a company has ample stock of liquid current assets will require lesser amount of working capital because the company can convert such assets in to cash immediately in the open market.
9. Growth and Expansion of Business:
Growing concerns require more working capital than those that are static. It is logical to expect larger amount of working capital in growing concern to meet its growing needs of funds for its expansion programmes through it varies with economic conditions and corporate practices.
10. Dividend Policy:
The dividend policy of a concern also influences the requirements of its working capital. A firm that maintains a steady high rate of cash dividend irrespective of its generation of profits needs more working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend.
11. Other Factors:
In addition to the above consideration there are number of other factors which affect the requirements of working capital, some of them are:-
Close co-ordination between production and distribution policies will reduce the demand of working capital.
An absence of specialization in the distribution of products will require more working capital as such concern will have to maintain is own marketing organization.
If the means of transportation and communication are less developed more working capital will be required in such areas to store the materials and finished goods.
of working capital
1.5 Sources of Working Capital
These are these sources of working capital
Equity
Working capital loans
Bank borrowing in form of cash credit
Overdraft
Short term debt
Accounts payable and Accruals also finance a portion of working capital needed
Sources of Working Capital
Permanent or fixed Temporary or variable
1. Issue of Shares 1. Commercial Banks
2. Issue of Debentures 2. Indigenous Banks
3. Retained Profits 3. Trade Creditors
4. Public Deposits 4. Instalment Credit
5. Loans form Financial Institutions 5. Advances
6. Accrued Expenses
1.6 Permanent and 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 or Variable 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. Permanent Temporary A m ou nt of Wo rki ng C ap it al Time
Operating Cycle of Working Capital:
The operating cycle, also known as working capital cycle, refers to the average time that elapses between purchase of raw materials and final cash realisation from sale of goods. Cash is used to purchase raw materials. Theses raw materials are issued to production for which wages and other expenses are incurred to produces finished good. These finished are sold to customers on cash or credit. Cash received from sales or accounts receivables completes the operating cycle of working capital.
Longer the operating cycle, the larger will be the working capital requirements. The efficiency of management is reflected in the number of operating cycle completed during a particular year.
The management should aim to reduce the length of operating cycle and increase the number of operating cycles completed in a year. This will help to decrease the amount of working capital requirement. It can be achieved by the efficiency and coordination of various departments like purchase department, production department market ting department and credit and collection department, etc. Cash Raw Material Work in Progress Finished Goods Accounts Receivables
1.7 Advantages of Adequate 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:
Solvency of the Business: Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.
Goodwill: sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill.
Easy Loans: A concern hacking adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favourable terms.
Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs.
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 wastage‟s and costs and enhances production and profits.
Regular Supply of Raw Materials: Sufficient working capital ensures regular supply of raw materials and continuous production.
Ability to Face Crisis: Adequate working capital enables a concern to face business crisis in emergencies such as 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.
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 favourable market to raise additional funds in the future.
High Morale: Adequacy of working capital creates an environment of security, confidence, and high morale and creates overall efficiency in a business.
1.8 Disadvantages of Excessive Working Capital:
Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excessive working capital nor inadequate nor shortage of working capital. Both excessive as well as short working capital positions are bad for any business.
Excessive working capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments.
When there is redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, waste and losses.
Excessive working capital implies excessive debtors and defective credit Policy, which may cause higher incidence of bad debts.
It may result into overall inefficiency in the organization.
When there is an excessive working capital, relations with the banks and other financial institutions may not be maintained.
Due to low rate of return on investments the value of shares may also fall.
1.9 FORECAST/ESTIMATE OF WORKING CAPITAL REQUIREMENTS:
“Working capital is the life blood and controlling nerve centre of a business” no business can be successfully run without an adequate amount of working capital to avoid the shortage of working capital at once, an estimate of working capital requirements should be made in advance so that arrangements can be made to procure adequate working capital. But estimation of working capital requirements is not an easy task and a large number of factors have to be considered before staring this exercise. For manufacturing organisation, the following factors have to be taken into consideration while making an estimation of working capital requirements:
Total costs incurred on material, wages and overheads
The length of time for which raw materials are to remain in stores before they are issued for production.
The length of the production cycle i.e. the time taken for conversion of raw materials into finished goods.
The average period of credit allowed to customers.
The amount required to pay day to day expenses of the business.
The average amount of cash required to make advance payments, if any.
The average credit period expected to be allowed by suppliers.
Time – lag in the payment of wages and other expenses.
1.10 Management of cash:
Cash management is one of the key areas of working capital management. Cash, the most liquid asset is of vital importance to the daily operations of business firms. Firms need cash to meet the needs of daily transactions, to take advantage of unexpected investment opportunities. While cash serves these functions, it is an idle resource with an opportunity cost. The liquidity provided by the holding cash is at the expense of profits that could from alternative investment opportunities. Hence the firm should plan and control cash carefully. Cash management deals with the following
Cash Inflows and Out flows
Cash flows within the firm
Cash balances held by a firm at a point of time
Cash management need strategies to deal with following various facets of cash
Cash planning-cash inflows and outflows should be planned to project cash surplus or deficit for each period of the planning period. Cash budget should be prepared for this purpose.
Managing of cash flows-the flow of cash should be properly managed. The cash inflows should be accelerated while, as far as possible, the cash outflows should be decelerated.
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 funds-the surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between alternative short term investments.
1. Motives for holding cash:
The finance profession recognizes the three primary reasons offered by economist John Maynard Keynes to explain why firms hold cash. The three reasons are for the purpose of speculation, for the purpose of precaution, and for the purpose of making transactions. All three of these reasons
stem from the need for companies to possess liquidity.
(a) Speculation:
Economist Keynes described this reason for holding cash as creating the ability for a firm to take advantage of special opportunities that if acted upon quickly will favour the firm. An example of this would be purchasing extra inventory at a discount that is greater than the carrying costs of holding the inventory.
(b)Precaution:
Holding cash as a precaution serves as an emergency fund for a firm. If expected cash inflows are not received as expected cash held on a precautionary basis could be used to satisfy short-term obligations that the cash inflow may have been bench marked for.
(c) Transaction;
Firms are in existence to create products or provide services. Providing of services and creating of products results in the need for cash inflows and outflows. Firms hold cash in order to satisfy the cash inflow and cash outflow needs that they have.
2. Cash budgeting:
Cash budgeting or short term cash forecasting is the principal tool of cash management. Cash budgets, routinely prepared by business firms, are helpful in estimating cash requirements.
3. Investment of Surplus Funds
There are sometimes, surplus funds with the companies, which are required after sometime. These funds can be employed in liquid and risk free securities to earn some income. There are number of avenues where these funds can be invested.
1.11 Management of Accounts Receivable:
Accounts receivables represent an extension of credit to customers, allowing them a reasonable period of time in which to pay for the goods / services which they have received. The receivables represent an important component of the current assets of a firm. Firms grant trade credit to customers, because they expect the investment in the receivables to be profitable, either by expanding sales volume or by retaining sales that otherwise would be lost to competitors. A planned credit policy can assist in increasing corporate profitability when considering relaxing credit terms;
management must weigh up the profits of increased sales with the cost of additional investment credit.
1. Objective:
The objective of receivables management is to promote sales and profit until that point is reached where the return on investment in further finding of receivables is less than the cost of funds raised to finance that additional credit.
2. Costs:
The major categories of cost associated with the extension of credit and accounts receivables are:-
(a) Collection cost
These costs are administration cost incurred in collecting from receivables the customers to whom credit sales have been made.
(b) Capital cost
The increased level of accounts receivable is an investment in assets. They have to be financed here by involving a cost. The cost on the use of additional capital to support credit sales, which apparently could be profitably employed elsewhere, is therefore a part of the cost of extending credit or receivables.
(c) Delinquency cost
This is the cost which arises out of failure of customers to meet their obligations when payment on credit sales becomes due after the expiry of period of credit.
(d) Default cost
Sometimes the firm may not be in position to recover the dues because of the inability of customers, such debts are treated as bad debts and are written off as they cannot be realized, such cost are known as Default costs associated with credit sales and account receivables.
2. Credit terms:
The second decision area in account receivables management is the credit terms. After the credit standards have been established and the credit-worthiness of the customers has been assessed,
