working capital management project repot

A PROJECT REPORT ON

“WORKING CAPITAL MANAGEMENT OF THE L & T.”

UNDER SUPERVISION OF:

-------------------SUBMITTED BY NAME

:

ENROLLMENT NO

:

STUDY CENTER CODE

:

REGIONAL CENTER

:

MRS. A.R. RAJALAKSHMI

Submitted in partial fulfillment of the requirements for qualifying Master of Business Administration (FINANCE)

2011

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“WORKING CAPITAL MANAGEMENT OF THE L & T.” Under Supervision of

:

Submitted By:  Name

:

Programme Code

:

Enro Enroll llm ment ent No. No.

:

 Name of the Study Centre

:

Study Centre Code

:

MBA (FINANCE)

2

“WORKING CAPITAL MANAGEMENT OF THE L & T.” Under Supervision of

:

Submitted By:  Name

:

Programme Code

:

Enro Enroll llm ment ent No. No.

:

 Name of the Study Centre

:

Study Centre Code

:

MBA (FINANCE)

2

CERTIFICATE OF ORIGINALITY

“Working Capital Capital Management Management of  This is to certify that the project report entitled “Working the L&T.” submitted to “Indira “Indira Gandhi Gandhi National National Open University” in partial

fulfillment of the requirement for the award of the Degree of  “Master of Business authen enti ticc and and origi rigin nal work carr carrie ied d out out by “ A.R. Administration” is an auth RAJALAKSHMI” with ……………… …….. unde with Enrolm Enrolment ent No. ………… underr the the guid guidan ance ce of  ……………………….

The matter embodied in this project is genuine work done by the student and has not  been submitted whether to this University or to any other University / Institute for the fulfillment of the requirement of any course of study.

……………………….

...…………………….

Signature of the Student:

Signature of the Guide

Date:.………………..

Date:…………………

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ACKNOWLEDGEMENT With With Candor Candor and Pleasu Pleasure re I take take opport opportuni unity ty to express express my sincere sincere thanks thanks and obligation to my esteemed guide……… . It is because of his able and mature guidance and co-operation without which it would not have been possible for me to complete my project.

It is my pleasant duty to thank all the staff member of the computer center who never  hesitated me from time during the project.

Finally Finally,, I gratef gratefull ully y acknow acknowled ledge ge the suppor support, t, encour encourage agemen mentt & patien patience ce of my family, and as always, nothing in my life would be possible without God, Thank You!

(A.R. RAJALAKSHMI)

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DECLARATION

I hereby declare that this project work titled “Working Capital Management of the L&T.” is my original work and no part of it has been submitted for any other degree

 purpose or published in any other from till date.

(A.R. RAJALAKSHMI)

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WORKING CAPITAL MANAGEMENT OF THE L & T.

TABLE OF CONTENTS

S. NO.

CONTENTS

PAGE NO.

1.

Title of the Project………………………….……………….……..7

2.

Introduction ……..…………………………………………....…..8

3.

Review of Literature …..…………………………………..…….35

4.

Objectives of the Study……………………………………….….48

5.

Research Methodology.……………………………………….....49

6.

Data Analysis…………………….. ……………………….….....50

7.

Conclusion and Major Finds….………………….….…….……..82

8.

Recommendation and Limitation ……………………………….84

9.

Bibliography……………………...………………………………85

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CHAPTER – 1 INTRODUCTION

COMPANY PROFILE:

Larsen & Toubro Limited (L&T) is a technology, engineering, construction and manufacturing company. It is one of the largest and most respected companies in India's private sector. Seven decades of a strong, customer-focused approach and the continuous quest for world-class quality have enabled it to attain and sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. A thrust on international business has seen overseas earnings grow significantly. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company's businesses are supported  by a wide marketing and distribution network, and have established a reputation for  strong customer support.

L&T believes that progress must be achieved in harmony

with the environment. A commitment to community welfare and environmental  protection are an integral part of the corporate vision.

M/s Larsen & Toubro Ltd. ECC Division is prestigious organization having business worldwide, its ECC Division undertake engineering contracts of various construction in the field of Electrical, Mechanical & Civil Engineering.

The Company having its headquarter at Chennai, and whole India is distributed in regions having respective regional headquarters, viz. Mumbai, Ahmadabad, Kolkata, Delhi, Hyderabad, Chandigarh etc. which coordinate all activities of sites within their  region.

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Chattisgarh state have rich natural resources, coal is found in abundance thus various thermal power plant are established at various places, Sipat Super Thermal Power  Plant is one of the biggest Thermal Power Plant, wherein our company execute construction of Boiler Erection & Electrical Cabling works and some other misc. works. Our Principal employer is M/s National Thermal Power Corporation Ltd.

The workforces consist of 2500 workmen and Engineers and staff in various cadre, the workforce consist of employees from all over India.

Operating Divisions:

•

•

Engineering & Construction Projects (E&C) Heavy Engineering (HED)

•

Construction

•

Power 

•

Electrical & Electronics (EBG)

•

Machinery & Industrial Products (MIPD)

•

IT & Technology Services

•

Financial Services

•

Railway Project

L&T's Signature of Excellence is evident on: •

Hydrocarbon projects executed in India, the Middle East and South East Asia.

•

Power projects executed in India, the Gulf and Sri Lanka.

•

The world's largest coal gasifier made in India and exported to China

•

The world’s biggest EO reactor for a petrochemical complex in the Gulf 

•

The world’s largest FCC regenerator for a refinery

•

Asia’s highest viaduct

•

The world’s longest limestone conveyor 

•

L&T played a critical role in building India’s first nuclear powered submarine

•

L&T played a major role in India's maiden moon mission

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HISTORY OF CONCERN The evolution of L&T into the country's largest engineering and construction organization is among the most remarkable success stories in Indian industry. L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to developing India's engineering capabilities to meet the demands of industry.

Henning Holck-Larsen (4.7.1907 - 27.7.2003)

Soren Kristian Toubro (27.02.1906 4.3.1982) Beginning with the import of machinery from Europe, L&T rapidly took on engineering and construction assignments of increasing sophistication. Today, the company sets global engineering benchmarks in terms of scale and complexity.

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EARLY DAYS Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark, would

THE JOURNEY

not have dreamt, as they were learning about India in history classes that they would, one day, create history in that land. In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of  1938, collaborations. Inforeign the two friends By decided the comforts of working Europe, and of  1945,totheforgo Company represented British in manufacturers

started their used own to operation in India. All they was a dream.oils, Andbiscuits, the courage equipment manufacture products such had as hydrogenated soapsto and dare. glass. Their first, office Mumbai (Bombay) was small thatTractor only one of the partners In 1945 L&T in signed an agreement with so Caterpillar Company, USA, for  could use the earthmoving office at a time! marketing equipment. At the end of the war, large numbers of warsurplus available at attractive prices, but the finances In the earlyCaterpillar years, theyequipment representedwere Danish manufacturers of dairy equipment for a required wereBut beyond the start capacity the partners. Thisinprompted them were to raise 1939, imports modest retainer. with the of theofSecond World War 1946, Larsen additional equity capital, andstart on 7th February & Toubro Limited restricted, compelling them to a small work-shop to undertake jobs Private and provide

was born. service facilities. Independence andofthe subsequent demand for technology expertise offered L&T Germany's invasion Denmark in 1940 stopped supplies ofand Danish products. This the forced opportunity to consolidate andon expand. were up in Kolkata crisis the partners to stand their Offices own feet andsetinnovate. They (Calcutta), started Chennai (Madras) and New Delhi. In 1948,These fifty-five acres proved of undeveloped marsh and manufacturing dairy equipment indigenously. products to be a success, was acquired in Powai. Powai standswith as high a tribute to the vision of the and jungle L&T came to be recognised as Today, a reliable fabricator standards. men who transformed this uninhabitable swamp into a manufacturing landmark. The war-time need to repair and refit ships offered L&T an opportunity, and led to the formation of a new company, Hilda Ltd., to handle these operations. L&T also started twoPUBLIC repair and fabrication shops - the Company had begun to expand. LIMITED COMPANY: Again, the sudden1950 internment of German engineers (because of the War) who wereoftoRs.2 In December  , L&T became a Public Company with a paid-up capital  putmillion. up a soda ash plant for the in Tatas, L&TRs.10.9 a chance to enter the field of  The sales turnover that gave year was million. installation - anorders area where their by capability becameduring well respected. Prestigious executed the Company this period included the Amul Dairy at Anand and Blast Furnaces at Rourkela Steel Plant. With the successful completion of these jobs, L&T emerged as the largest erection contractor in the country. In 1956, a major part of the company's Bombay office moved to ICI House in Ballard Estate. A decade later this imposing grey-stone building was purchased by L&T, and renamed as L&T House - its Corporate Office. 11

The sixties saw a significant change at L&T - S. K. Toubro retired from active management in 1962. The sixties were also a decade of rapid growth for the company, and witnessed the formation of many new ventures: UTMAL (set up in 1960), Audco India Limited (1961), Eutectic Welding Alloys ( 1962) and TENGL ( 1963).

EXPANDING HORIZONS:

By 1964, L&T had widened its capabilities to include some of the best technologies in the world. In the decade that followed, the company grew rapidly, and by 1973 had  become one of the Top-25 Indian companies. In 1976, Holck-Larsen was awarded the Magsaysay Award for International Understanding in recognition of his contribution to India's industrial development. He retired as Chairman in 1978. In the decades that followed, the company grew into an engineering major under the guidance of leaders like N. M. Desai, S.R. Subramaniam, U. V. Rao, S. D. Kulkarni and A. M. Naik. Today, L&T is one of India's biggest and best known industrial organisations with a reputation for technological excellence, high quality of products and services, and strong customer orientation. It is also taking steps to grow its international presence. For an institution that has grown to legendary proportions, there cannot and must not  be an 'end'. Unlike other stories, the L&T saga continues...

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VISION The L&T vision reflects the collective goal of the company. It was drafted through a large scale interactive process which engaged employees at every level, worldwide.

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AWARDS & RECOGNITIONS:

Major Awards Received by L&T in 2011L&T CMD Ranks among Top News Makers in Indian and Global Media

Mr. A.M. Naik, Chairman & Managing Director, L&T, has emerged as among the most high profile of India’s corporate leaders in the Indian and the global media. A recent survey of press citations saw Mr. Naik’s rankings soar among the country’s news makers. He was ranked Number 10 in the Indian media, having seen a rise of  157 per cent. In the survey of global media, Mr. Naik is ranked 12th.

L&T CMD Honoured with CHEMTECH Hall of Fame Award

In recognition of L&T’s CMD, Mr. A.M. Naik’s stellar contributions to the industry and nation, the Mumbai based CHEMTECH Foundation has conferred on him its  prestigious Hall of Fame - Leadership & Excellence Award 2011. (February 24, 2011)

L&T bags ’India Shining Star Award’ for Outstanding CSR 

L&T bagged the ’India Shining Star CSR Award’, instituted by the Wockhardt Foundation, for Outstanding CSR in the sector for companies engaged in heavy engineering. (February 19, 2011)

L&T wins Award for ’Company with Best CSR & Sustainability Practices-2011’

L&T’s CSR initiatives were again in the limelight as it bagged the award for  ’Company with the Best CSR and Sustainability Practices’ by the Asian Centre for  Corporate Governance and Sustainability. The award was presented at the 11th International Conference of the Centre in Mumbai on February 11, 2011.

L&T wins Top Honours in Businessworld’s ’Most Respected Company - 2011’ Rankings

Leading

business magazine,

Businessworld’s

rankings of ’Most

Respected

Companies’ saw stellar honours for L&T. In the sector-wise survey, L&T was ranked

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’India’s Most Respected Company’ in the Infrastructure category. In the overall rankings, L&T emerged second.

ICAI Bestows Top Honour on Mr. Y.M. Deosthalee, CFO, L&T

The Institute of Chartered Accountants of India (ICAI) – the country’s apex body of  Chartered Accountants – has bestowed its highest honour, ‘Business Achiever –  Corporate’ for the year 2010 on Mr. Y.M. Deosthalee, CFO, L&T, for his outstanding contribution to business leadership as a finance professional. The institute saluted his role in providing strategic direction to the business of financial services, development  projects and Information Technology of the L&T Group. (January 30, 2011)

Finance Minister Presents Coveted ET Company of the Year Award to Mr. A.M. Naik 

BOARD OF DIRECTORS : Director Name

Designation

A M Naik S N Talwar M M Chitale S Rajgopal Subodh Bhargav J S Bindra

Chairman & Managing Director   Non Executive Director   Non Executive Director   Non Executive Director   Non Executive Director   Non Executive Director   Whole-time Director & Senior Executive Vice

V K Magapu Y M Deosthalee M V Kotwal J P Nayak  K V Rangaswami K Venkataramanan Ravi Uppal  N Mohan Raj A K Jain

President - IT & Technology Services Whole-time Director & CFO Whole-time Director & Senior Executive Vice President - Heavy Engineering Whole-time Director & President - Machiney & Industrial Products Whole Time Director & President Whole-time Director & President - Engineering & Constrution Projects Whole-time Director   Nominee of LIC Nominee 15

Bhagyam Ramani Thomas Mathew T  N Hariharan

Nominee Nominee of LIC Company Secretary

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THEORY OF WORKING CAPITAL

WORKING CAPITAL MANAGEMENT Working Capital is the amount of capital that a business has available to meet the day to day cash requirements of its operations. It is concerned with the problem arise in attempting to manage the current assets, the current liabilities and the inter  relationship that exist between them.

Working Capital is the difference between

resources in cash or readily convertible into cash and organizational commitments for  which cash will soon be required or within one year without undergoing a diminution in value and without disrupting the operation of the firm. It also refers to the amount of current Assets that exceeds current Liabilities.

Working Capital refers to that part of the firm capital, which is required for financing Short-Term or Current Assets such as Cash, Marketable Securities, Debtors and Inventories. Working Capital is also known as Revolving or Circulating Capital or  Short Term Capital.

The goal of working capital management is to manage the firm’s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order  to ensure a reasonable margin of the safety.

Capital required for a business can be classifies under two main categories: •

Fixed Capital

•

Working Capital

Every business needs funds for two purposes for its establishments and to carry out day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land and building, furniture etc. Investments in these assets are representing that part of firm’s capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are

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also needed for short term purposes for the purchasing of raw materials, payments 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.

CONCEPTS OF WORKING CAPITAL: There are two concepts of working capital: •

Balance Sheet concepts

•

Operating Cycle or circular flow concept

BALANCE SHEET CONCEPT: There are two interpretation of working capital under the balance sheet concept: •

•

Gross Working Capital  Net Working Capital

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 enterprises. Current assets are those assets which are converted into cash within short periods of normally one accounting year. Example of current assets is: Constituents of Current Assets:

•

Cash in hand and Bank balance

•

Bills Receivable

•

Sundry Debtors

•

Short term Loans and Advances

•

Inventories of Stock as: 

Raw Materials



Work in Process



Stores and Spaces 18



Finished Goods

•

Temporary Investments of Surplus Funds

•

Prepaid Expenses

•

Accrued Incomes

The term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities or say:

Net Working Capital = Current Assets – Current Liabilities.

NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE: 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 intended to be paid in the ordinary course of business within a short period of normally one accounting year  of the current assets or the income of the business. Examples of current liabilities are:

CONSTITUENTS OF CURRENT LIBILITIES: •

Bills Payable

•

Sundry Creditors or Account Payable

•

Accrued or Outstanding Expenses

•

Short term Loans, Advances and Deposits

•

Dividends Payable

•

Bank Overdraft

•

Provision for Taxation, If does not amount to appropriation of profits.

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital.

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OPERATING CYCLE OR CIRCULATING CASH FORMAT :

Working Capital refers to that part of firm’s capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Funds thus invested in current assets keep revolving fast and being constantly converted into cash and these cash flows out again in exchange for other  current assets. Hence it is also known as revolving or circulating capital. The circular  flow concept of working capital is based upon this operating or working capital cycle of a firm. The cycle starts with the purchase of raw material and other resources

And ends with the realization of cash from the sales of finished goods. It involves  purchase of raw material and stores, its conversion into stocks of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stocks into sales, debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. The speed/ time of duration required to complete one cycle determines the requirements of working capital longer the period of cycle, larger is the requirement of working capital.

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Receivable conversion period storage (RCP)

Raw material conversion period (RMSCP)

Cash received form Debtors and paid to suppliers Of raw materials

Sales of finished Goods

Raw materials introduced into process

Finished Goods Produced Finished goods conversion Period (FGCP)  period

Work in process Conversion (WIPCP)

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The gross operating cycle of a firm is equal to the length of the inventories and receivables conversion periods. Thus,

Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP Where, RMCP = Raw Material Conversion Period WIPCP = Work –in- Process Conversion Period FGCP = Finished Goods Conversion Period RCP = Receivables Conversion Period However, a firm may acquire some resources on credit and thus defer payments for  certain period. In that case, net operating cycle period can be calculated as below:

Net Operating Cycle Period = Gross Operating Cycle Period – Payable Deferral period Further, following formula can be used to determine the conversion periods. 

=

Raw Material Conversion Period

Average Stock of Raw Material. Raw Material Consumption per day



Work in process Conversion Period = Average Stock of Work-in-Progress

Total Cost of Production per day 

Finished Goods Conversion Period =

Average Stock of Finished Goods Total Cost of Goods sold per day



=

Receivables Conversion Period

Average Accounts Receivables  Net Credit Sales per day



=

Payable Deferral Period

Average Payable Net Credit Purchase per day

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CLASSIFICATION OR KIND OF WORKING CAPITAL: Working capital may be classified in two ways: •

On the basis of concept

•

On the basis of time

On the basis of concept, working capital is classified as gross working capital and net working capital. The classification is important from the point of view of the financial manager. On the basis of time, working capital may be classified as: •

Permanent or Fixed working capital

•

Temporary or Variable working capital.

Kinds of Working Capital

On the basis of concept

Gross Working Capital

On the basis of time

Permanent or Fixed Working Capital

Net Working Capital

Temporary or Variable Working Capital

Special Working Capital Regular Working Capital

Reserve Working Capital

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Seasonal Working Capital

1. PERMANENT OR FIXED 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 enterprises to carry out its normal business operations.

2. TEMPRORAY OR VARIABLE WORKING CAPITAL:

Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies.Varibles working capital can be further classified as second working capital and special working capital. The capital required to meet the seasonal needs of the enterprises is called the seasonal working capital.

Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the  business

IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL: Working capital is the life blood and nerve centre of a business. Just a circulation of a  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

•

Goodwill

•

Easy Loans

•

Cash discounts

•

Regular supply of Raw Materials 24

•

Regular payments of salaries, wages & other day to day commitments.

•

Exploitation of favorable market conditions

•

Ability of crisis

•

Quick and regular return on investments

•

High morals

THE NEED OR OBJECTS OF WORKING CAPITAL: The need for working capital cannot be emphasized. Every business needs some amount of working capital. The need of working capital arises due to the time gap  between production and realization of cash from sales. There is an operating cycle involved in the sales and realization of cash. There are time gaps in purchase of raw materials and production, production and sales, And sales, and realization of cash, thus, working capital is needed for the following  purposes: 

For the purchase of raw materials , components and spaces.



To pay wages and salaries.



To incur day to day expenses and overhead costs such as fuel, power and office expenses etc.



To meet the selling costs as packing, advertising etc.



To provide credit facilities to the customers.



To maintain the inventories of raw materials, work –in- progress, stores and spares and finished stock.

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FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT: The working capital requirements of a concern depend upon a large number of factors such as nature and size of the business, the characteristics of their operations, the length of production cycle, the rate of stock turnover and the state of economic situation. However the following are the important factors generally influencing the working capital requirements.

•

NATURE OR CHARACTERSTICS OF A BUSINESS :

The nature and the working capital requirement of enterprises are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprises involve in providing services. The amount required also varies as per the nature, an enterprises involved in production would required more working capital then a service sector enterprise.

•

MANAFACTURE PRODUCTION POLICY:

Each enterprises in the manufacturing sector has its own production policy, some follow follow the policy of uniform production production even if the demand varies from time to time and other may follow the principles of demand based production in which production is based on the demand during the particular phase of time. Accordingly the working capital requirements vary for both of them.

•

OPERATIONS:

The requirement of working capital fluctuates for seasonal business. The working capital needs of such business may increase considerably during the busy.

•

MARKET CONDITION:

If there is a high competition in the chosen project category then one shall need to offer sops like credit, immediate delivery of goods etc for which the working capital requirement will be high. Otherwise if there is no competition or less competition in the market then the working capital requirements will be low.

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•

AVABILITY OF RAW MATERIAL:

If raw material is readily available then one need not maintain a large stock of the same thereby reducing reducing the working working capital investment investment in the raw material stock . On other hand if raw material is not readily available then a large inventory stocks need to  be maintained, there by calling for substantial investment in the same.

•

GROWTH AND EXAPNSION:

Growth Growth and Expansio Expansions ns in the volume volume of busine business ss result result in enhanc enhanceme ement nt of the working capital requirements. As business growth and expands it needs a larger  amount of the working capital. Normally the needs for increased working capital funds processed growth in business activities.

•

PRICE LEVEL CHANGES :

Generally raising price level requires a higher investment in the working capital. With increasing prices, the same levels of current assets needs enhanced investments.

•

MANAFACTURING CYCLE:

The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer   period the need for working capital would be more. At time business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of the working capital requirement is made keeping this factor in view. Each constituents of the working capital retains it form for a certain period and that that holdin holding g period period is determ determine ined d by the factor factorss discus discussed sed above. above. So for correct correct assessment of the working capital requirement the duration at various stages of the work workin ing g capit capital al cycle cycle is estim estimate ated. d. There Thereaf afte terr prop proper er valu valuee is assig assigne ned d to the the respective current assets, depending on its level of completion. The basis for assigning value to each component is given below:

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COMPONENTS OF WORKING CAPITAL

BASIS OF VALUATION

Stock of Raw Material

Purchase of Raw Material

Stock of Wo Work -in- Pr Process

At cost of Ma Market va value which is is lower 

Stock of finished Goods

Cost of Production

Debtors

Cost of Sales or Sales Value

Cash

Working Expenses

Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working working capital, therefore, can affect the day-to-day day-to-day operations operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital capital may cause either under-assessmen under-assessmentt or over-assessment over-assessment of the working working capital and both of them are dangerous.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY: The following are the general principles of a sound working capital management  policy:

PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY

PRINCIPLES OF RISK  VARIATIONS

PRINCIPLES OF COST OF CAPITAL

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PRINCIPLES OF EQUITY PRINCIPLES

PRINCIPLES OF MATURITY OF PAYMENTS

1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY): Risk here refers to the inability of a firm to meet its obligations as and when they  become due for payment. Larger investment in current Assets with less dependence on short term borrowings, increase liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investments in current assets with greater dependence on short term borrowings, reduces liquidity and increase  profitability. In other words there is a definite inverse relationship between the degree of risk and profitability.

In other words, there is a definite inverse relationship

 between the risk and profitability. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management assumes greater risk by reducing working capital. However, the goal of  management should be to establish a suitable tradeoff between profitability and risk.

2. PRINCIPLES OF COST OF CAPITAL: The various source of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher and risk however the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two.

3. PRINCIPLE OF EQUITY POSITION: The principle is concerned with planning the total investments in current assets. According to this principle, the amount of working capital invested in each component should be adequately justified by a firm’s equity position. Every rupee invested in current assets should contribute to the net worth of the firm. The level of current assets may be measured with the help of two ratios: 1. Current assets as a percentage of total assets and 2. Current assets as a percentage of total sales

While deciding about the composition of current assets, the financial manager may consider the relevant industrial averages.

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4. PRINCIPLES OF MATURITY OF PAYMENT: The principle is concerned with planning the source of finance for working capital. According to the principles, a firm should make every effort to relate maturities of   payment to its flow of internally generated funds. Maturity pattern of various current obligations is an important factor in risk assumptions and risk assessments. Generally shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater the inability to meet its obligations in time .

CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL: 

Growth may be stunted. It may become difficult for the enterprises to undertake  profitable projects due to non availability of working capital.



Implementations of operating plans may brome difficult and consequently the  profit goals may not be achieved.

 

Cash crisis may emerge due to paucity of working funds. Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital.

The business may fail to honour its commitment in time thereby adversely affecting its creditability. This situation may lead to business closure. The business may be compelled to by raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchase and reducing selling price by offering discounts. Both the situation would affect profitable adversely.

 Now avaibility of stocks due to non availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on  business overassesments of working capital also has its own dangerous.

30

CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL: 

Excess of working capital may result in un necessary accumulation of  inventories.



It may lead to offer too liberal credit terms to buyers and very poor recovery system & cash management.



It may make management complacent leading to its inefficiency.



Over investment in working capital makes capital less productive and may reduce return on investment.

Working Capital is very essential for success of business & therefore needs efficient management and control. Each of the components of working capital needs proper  management to optimize profit.

INVENTORY MANAGEMNT: Inventory includes all type of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously stock out costs should be minimized. Business therefore should fix the minimum safety stock  level reorder level of ordering quantity so that the inventory costs is reduced and outs management become efficient.

Inventor y Managemen t

31

RECEIVABLE MANAGEMENT: Given a choice, every business would prefer selling its produce on cash basis. However, due to factors like trade policies, prevailing market conditions etc. Business are compelled to sells their goods on credit. In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating current assets in the form of debtors or account receivables. Investment in the type of current assets needs proper and effective management as, it gives rise to costs such as: 

Cost of carrying receivables



Cost of bad debts losses

Thus the objective of any management policy pertaining to accounts receivables would be to ensure the benefits arising due to the receivables are more than the costs incurred for the receivables and the gap between benefit and costs increased resulting in increase profits. An effective control of receivables help a great deal in properly managing it. Each business should therefore try to find out coverage credit extends to its clients using the below given formula:

Average Credit =

Total amount of receivable

(Extend in days)

Average credit sale per day

Each business should project expected sales and expected investments in receivable  based on various factor, which influence the working capital requirement. From this it would be possible to find out the average credit days using the above given formula. A  business should continuously try to monitor the credit days and see that the average. Credit offer to clients is not crossing the budgeted period otherwise the requirement of  investment in the working capital would increase and as a result, activities may get squeezed. This may lead to cash crisis.

32

CASH BUDGET: Cash budget basically incorporates estimates of future inflow and outflows of cash cover a projected short period of time which may usually be a year, a half or a quarter  year. Effective cash management is facilities if the cash budget is further broken down into months, weeks or even a daily basis. There are two components of cash budget are: 1. Cash inflows 2. Cash outflows The main sources for these flows are given here under: 1. Cash Sales 2. Cash received from debtors 3. Cash received from Loans, deposits etc. 4. Cash receipts other revenue income 5. Cash received from sale of investment or assets.

CASH OUTFLOWS: 1. Cash Purchase 2. Cash payments to Creditors 3. Cash payment for other revenue expenditure 4. Cash payment for assets creation 5. Cash payments for withdrawals, taxes. 6. Repayments of Loan etc. A suggestive for, at for cash budget is given below:

PARTICULARS Estimated cash inflows ……………………………… …………………………………. I. Total cash inflows Estimated cash outflows …………………………….. ………………………….. II. Total cash outflows III. Opening cash balances IV. Add/deduct surplus/deflictduring the month ( III) V. Closing cash balances (III -IV) VI. Minimum level of cash balance VII. Estimated excess or short fall of cash (V-VI)

33

MONTHS JANUARY

FERBUARY

MARCH

CHAPTER – 2 REVIEW OF LITERATURE Every business needs funds for two purposes basically; they are for establishment and to carry day-to-day operations. Long term funds are required for establishment of the organization, it is required for production facility through purchase of fixed assets and it needs fixed capital and the funds which are needed for short term  purposes for the purchase of raw materials, payment of wages, payment of day to day expenses etc, the funds required for these are known as WORKING CAPITAL.

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. Funds, thus, invested in current assets keep revolving fast and are  being constantly converted into cash and this cash flow out in exchange for other  current assets. Hence it is also known as CIRCULATING CAPITAL or  REVOLVING CAPITAL or SHORT TERM CAPITAL.

According to GENESTENBERG:-

"Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables into cash."

 Need for working capital cannot be over emphasized. Every business needs some amount of working capital. The need of working capital arises due to the time gap  between production and realization of cash from sales. Thus, the working capital is needed for the following purposes:a) For the purchase of raw materials, components and spares.  b) To pay wages and salaries. c) To incur day-to-day expenses and overhead costs such as fuel, power and office expenses etc. d) To met the selling costs as packing, advertising etc. 34

e) To provide credit facility to customers. f) To maintain the inventories of raw material, work-in-progress, stores and spares and finished stock.

For studying the need of working capital in a business, one has to study the business under varying circumstances such as a new concern, as a going concern and as one which has attained maturity.

Many researchers have studied working capital from different views and in different environments. The following ones were very interesting and useful for our research

According to Eljelly, in 2004:-

Elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of  inability to meet due short-term obligations and avoids excessive investment in these assets. The relation between profitability and liquidity was examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock  companies in Saudi Arabia using correlation and regression analysis. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability. The size variable was found to have significant effect on profitability at the industry level. The results were stable and had important implications for liquidity management in various Saudi companies. First, it was clear that there was a negative relationship between profitability and liquidity indicators such as current ratio and cash gap in the Saudi sample examined.

Second, the study also revealed that there was great variation among industries with respect to the significant measure of liquidity. According to Deloof, in 2003:-

Discussed that most firms had a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on profitability of those firms. Using correlation and regression tests he found a significant negative relationship between gross operating income and the number of days accounts receivable, inventories and accounts payable of Belgian 35

firms. On basis of these results he suggested that managers could create value for their  shareholders by reducing the number of days accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and  profitability is consistent with the view that less profitable firms wait longer to pay their bills. According to Ghosh and Maji, in 2003:-

In this paper made an attempt to examine the efficiency of working capital management of the Indian cement companies during 1992 – 1993 to 2001 – 2002. For  measuring the efficiency of working capital management, performance, utilization, and overall efficiency indices were calculated instead of using some common working capital management ratios. Setting industry norms as target-efficiency levels of the individual firms, this paper also tested the speed of achieving that target level of  efficiency by an individual firm during the period of study. Findings of the study indicated that the Indian Cement Industry as a whole did not perform remarkably well during this period. According to Shin and Soenen, in 1998:-

highlighted that efficient Working Capital Management (WCM) was very important for creating value for the shareholders. The way working capital was managed had a significant impact on both profitability and liquidity. The relationship between the lengths of Net Trading Cycle, corporate profitability and risk adjusted stock return was examined using correlation and regression analysis, by industry and capital intensity. They found a strong negative relationship between lengths of the firm’s net trading Cycle and its profitability. In addition, shorter net trade cycles were associated with higher risk adjusted stock returns.

The Effect of Working Capital Management on Firm Profitability: Evidence from Turkey

F. Samiloglu and K. Demirgunes (2008)

The aim of this study is to analyze the effect of working capital management on firm

36

 profitability. In accordance with this aim, to consider statistically significant relationships  between firm profitability and the components of cash conversion cycle at length, a sample consisting of Istanbul Stock Exchange (ISE) listed manufacturing firms for the  period of 1998-2007 has been analyzed under a multiple regression model. Empirical findings of the study show that accounts receivables period, inventory period and leverage affect firm profitability negatively, while growth (in sales) affects firm  profitability positively.

All the above studies provide us a solid base and give us idea regarding working capital management and its components. They also give us the results and conclusions of  those researches already conducted on the same area for different countries and environment from different aspects. On basis of these researches done in different countries, we have developed our own methodology for research.

According to Smith and Begemann 1997:-

Emphasized that those who promoted working capital theory shared that profitability and liquidity comprised the salient goals of working capital management. The  problem arose because the maximization of the firm's returns could seriously threaten its liquidity, and the pursuit of liquidity had a tendency to dilute returns. This article evaluated the association between traditional and alternative working capital measures and return on investment (ROI), specifically in industrial firms listed on the Johannesburg Stock Exchange (JSE). The problem under investigation was to establish whether the more recently developed alternative working capital concepts showed improved association with return on investment to that of traditional working capital ratios or not. Results indicated that there were no significant differences amongst the years with respect to the independent variables. The results of their  stepwise regression corroborated that total current liabilities divided by funds flow accounted for most of the variability in Return on Investment (ROI). The statistical test results showed that a traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the greatest associations with return on investment. Wellknown liquidity concepts such as the current and quick ratios registered

37

insignificant associations whilst only one of the newer working capital concepts, the comprehensive liquidity index, indicated significant associations with return on investment. All the above studies provide us a solid base and give us idea regarding working capital management and its components. They also give us the results and conclusions of those researches already conducted on the same area for different countries and environment from different aspects. On basis of these researches done in different countries, we have developed our own methodology for research. According to Marc Deloof 25th April 2003:-

The relation between working capital management and corporate profitablity is investigated for a sample of 1,009 large Belgian non-financial firms for the 1992-1996  period. Trade credit policy and inventory policy are measured by number of days accounts receivable, accounts payable and inventories, and the cash conversion cycle is used as a comprehensice measure of working capital management. The results suggest that managers can increase corporate profitablity by reducing the number of  days accounts receivable and inventories. Less profitable firms wait longer to pay their bills.

M. A., Zariyawati a, M. N., Annuar b and A.S., Abdul Rahim c a ,b & c Univeristi Putra Malaysia, Malaysia.

Working capital management is important part in firm financial management decision. An optimal working capital management is expected to contribute positively to the creation of firm value. To reach optimal working capital management firm manager  should control the trade off between profitability and liquidity accurately. The purpose of this study is to investigate the relationship between working capital management and firm profitability. Cash conversion cycle is used as measure of working capital management. This study is used panel data of 1628 firm-year for the period of 19962006 that consist of six different economic sectors which are listed in Bursa Malaysia. The coefficient results of Pooled OLS regression analysis provide a strong negative significant relationship between

38

Amber Collins University of Phoenix:-

Working Capital Management Concepts Worksheet Concept Application of Concept in the Simulation Reference to Concept in Reading Describe the firm's cash conversion cycle: Cash inflow "Most firms keep track of the average time it takes customers to pay their bills. From this they can forecast what proportion of a quarter's sales is likely to be converted into cash in that quarter and what proportion is likely to  be carried over to the next quarter as accounts receivable" (Allen, Brealey, & Myers 2005).

Lawrence having a positive cash balance would have help in the event of 

emergencies as well as unplanned outflow of money. Cash flow comes from collections on accounts receivable (Allen, Brealey, & Myers 2005). Examine the effects of credit policy on cash conversion cycle and revenue: Commitment Lawrence had a commitment to the bank, Mayo, Murray, and Gartner. According to Carole Howorth and Paul Westhead March 2003:-

Working capital management routines of a large random sample of small companies in the UK are examined. Considerable variability in the take-up of 11 working capital management routines was detected. Principal components analysis and cluster analysis confirm the identification of four distinct ‘types’ of companies with regard to patterns of working capital management. The first three ‘types’ of companies focused upon cash management, stock or debtors routines respectively, whilst the fourth ‘type’ were less likely to take-up any working capital management routines. Influences on the amount and focus of working capital management are discussed. Multinomial logistic regression analysis suggests that the selected independent variables successfully discriminated between the four ‘types’ of companies. The results suggest that small companies focus only on areas of working capital management where they expect to improve marginal returns. The difficulties of establishing causality are highlighted and implications for academics, policy-makers and practitioners are reported. According to Maynard E. Rafuse, (1996):-

Argues that attempts to improve working capital by delaying payment to creditors is counter-productive to individuals and to the economy as a whole. Claims that altering debtor and creditor levels for individual tiers within a value system will rarely produce any net benefit. Proposes that stock reduction generates system-wide financial 39

improvements and other important benefits. Urges those organizations seeking concentrated working capital reduction strategies to focus on stock management strategies based on “lean supply-chain” techniques.

According to James A. Gentry, Dileep R. Mehta:-

Working capital literature is rather limited and the process of managing shortterm resources is not understood well by academicians. In contrast, corporate managers are continuously involved in the working capital decision-making process, but their   perspective is limited to the practices within their firm. In order to fill this gap in the working capital literature, a study of management perceptions of the working capital  process was undertaken. A survey was used to collect information from a sample of  marketing, production, and financial executives in large corporations in Belgium, France, India, and the United States. The study interprets management ranking of  working capital objectives and indicates the need to improve financial planning models to include explicitly short-run objectives; further, predictability of cash inflows and outflows is examined and the potential factors affecting predictability are evaluated. Finally, this study examines management perceptions of long-range objectives in order to provide a proper perspective to the shortrun financial planning.

According to M.K. Kolay:-

The article analyses the “pros” and “cons” of different strategies to be adopted to manage and avoid working capital crisis situations in any organisation. The working capital position depends on many organisational parameters which are interrelated and interdependent, and also vary over time. In such a situation, the use of a system dynamics approach has been advocated to reflect the relevant dynamic cause-andeffect relationships for the development of appropriate long-term and short-term strategies.

According to Wang Zhuquan et al 2007:-

Working capital management is the main contents of corporate finance, so the study in this field should gain much attention. Compared with the rapidly development of the  practice, the development of the theory has been lagged obviously since 1990's.We 40

suggest that the study should begin from the reclassification of working capital, and then, the new framework of the theory should be set up, which is based on the supplychain management, the channel management and the customer relationship management. Meanwhile, we should launch on the survey of working capital management of Chinese companies and promulgate the results, which can offer the data for the study and evaluation of working capital management.

According to James A. Gentry, Paul Newbold, David T. Whitford, (1984)

The objectives of this study are to offer cash based funds flow components as an alternative to financial ratios for classifying the financial performance of companies; to test empirically the ability of funds flow components to distinguish between failed and no failed companies with special emphasis on working capital components; to analyze the empirical results and make recommendations for future study.

According to Jeffrey Ashe 2000:-

Working Capital is the United States' largest peer-group lending program. This article reviews what Working Capital has learned about the market, its customers, program impact, and service delivery over its ten year history. It presents a model for  understanding how participating in peer lending groups develops “social and economic capital” in poor communities. The article then discusses how participants  judge the group model as they identify the characteristics of successful groups and the impact of the group on their businesses, on themselves personally, and on the larger  community. The rest of the article discusses how Working Capital evolved from a start-up operation in a single town into a multistate program and explores the advantages and limitations of rapid expansion. A checklist for choosing affiliate  partners is presented, along with a list of the lessons learned about delivering services though affiliates. According to Alan P. Hamlin, David F. Heathfield 2000:-

Working capital is a 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

41

explored, with particular stress placed on the competitive advantage gained by firms that retain flexibility in the time structure of their production.

According to VELLANKI S.S. KUMAR, AWAD S. HANNA, TERESA ADAMS, (2000):-

The systematic assessment of working capital requirement in construction projects deals with the analysis of various quantitative and qualitative factors in which information is subjective and based on uncertainty. There exists an inherent difficulty in the classical approach to evaluate the impact of qualitative factors for the assessment of working capital requirement. This paper presents a methodology to incorporate linguistic variables into workable mathematical propositions for the assessment of working capital using fuzzy set theory. This article takes into consideration the uncertainty associated with many of the project resource variables and these are reflected satisfactorily in the working capital computations. A case study illustrates the application of the fuzzy set approach. The results of the case study demonstrate the superiority of the fuzzy set approach to classical methods in the assessment of realistic working capital requirements for construction projects. According to Richard Petty, James Guthrie, (2000):-

The rise of the “new economy”, one principally driven by information and knowledge, is attributed to the increased prominence of intellectual capital (IC) as a business and research topic. Intellectual capital is implicated in recent economic, managerial, technological, and sociological developments in a manner previously unknown and largely unforeseen. Whether these developments are viewed through the filter of the information society, the knowledge-based economy, the network society, or  innovation, there is much to support the assertion that IC is instrumental in the determination of enterprise value and national economic performance. First, we seek  to review some of the most significant extant literature on intellectual capital and its developed path. The emphasis is on important theoretical and empirical contributions relating to the measurement and reporting of intellectual capital. The second part of  this paper identifies possible future research issues into the nature, impact and value of  intellectual management and reporting.

42

According to Sushma Vishnani, FCA, and Finance Faculty:-

It is felt that there is the need to study the role of working capital management policies on profitability of a company. Conventionally, it has been seen that if a company desires to take a greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, therefore of profitability. Hence, a company should strike a balance between liquidity and profitability. In this paper an effort has been made to make an empirical study of Indian Consumer Electronics Industry for  assessing the impact of working capital policies & practices on profitability during the  period 1994–95 to 2004–05. The impact of working capital policies on profitability has been examined by computing coefficient of correlation and regression analysis  between profitability ratio and some key working capital policy indicator ratios.

According to Charles O. Egbu, (2004):-

Innovation is viewed as a major source of competitive advantage and is perceived to  be a pre-requisite for organizational success and survival. The ability to innovate depends largely on the way in which an organisation uses and exploits the resources available to it. The paper explores the importance of knowledge management (KM) and intellectual capital (IC) in organisations. It also considers the critical factors that lead to successful innovations and the role of KM and IC in this regard. The paper  argues that effective management of knowledge assets involves a holistic approach to a host of factors. It is also suggested that there are a host of factors that combine in different ways to produce successful organizational innovations. It recommends that more is needed on the education and training of construction personnel and that these education and training programmes should reflect the nature of innovation and KM dimensions as very complex social processes. According to Kenneth A. Froot and Jeremy C. Stein in 1998:-

We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions. Our model incorporates two key features: (i) value-maximizing banks have a well-founded concern with risk management; and (ii)

43

not all the risks they face can be frictionlessly hedged in the capital market. This approach allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be easily hedged. We examine several applications, including: the evaluation of proprietary trading operations, and the  pricing of unhedgeable derivatives positions. We also compare our approach to the RAROC methodology that has been adopted by a number of banks. According to Pradeep Singh (2008):-

Empirically analysed that a firm’s working capital consists of its

investments in

current assets, which includes short-term assets—cash and bank balance, inventories, receivable and marketable securities. Therefore, the working capital management refers to the management of the levels of all these individual current assets. On the other hand, inventory, which is one of the important elements of current assets, reflects the investment of a firm’s fund. Hence, it is necessary to efficiently manage inventories in order to avoid unnecessary investments. A firm, which neglects the management of inventories, will have to face serious problems relating to long-term  profitability and may fail to survive. With the help of better inventory management, a firm can reduce the levels of inventories to a considerable degree. ‘This paper tries to evaluate the effect of the size of inventory and the impact on working capital through inventory ratios, working capital ratios, trends, computation of inventory and working capital, and liquidity ranking. Finally, it was found that the size of inventory directly affects working capital and it's management. Size of the inventory and working capital of Indian Farmers Fertilizer Cooperative Limited (IFFCO) is properly managed and controlled compared to National Fertilizer Ltd. (NFL).

According to Pedro Juan Garcı´a-Teruel and Pedro Martı´nez-Solano (2007):-

Conducted research for the object of the research presented in this paper is to provide empirical evidence on the effects of working capital management on the profitability of a sample of small and medium-sized Spanish firms. The results, which are robust to the presence of endogeneity, demonstrate 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.

44

The aim is to ensure that the relationships found in the analysis carried out are due to the effects of the cash conversion cycle on corporate profitability and not vice versa.

According to Naila Iqbal (2001):-

Examined that for increasing shareholder's wealth a firm has to analyze the effect of  fixed assets and current assets on its return and risk. Working Capital Management is related with the Management of current assets. The Management of current assets is different from fixed assets on the basis of the following points i.e Current assets are for short period while fixed assets are for more than one Year.The large holdings of  current assets, especially cash, strengthens Liquidity position but also reduces overall  profitability, and to maintain an optimum level of liquidity and profitability, risk  return trade off is involved holding Current assets.Only Current Assets can be adjusted with sales fluctuating in the short run. Thus, the firm has greater degree of  flexibility in managing current Assets. The management of Current Assets helps affirm in building a good market reputation regarding its business and economic condition.

According to Vellanki S. Kumar, Awad S.Hanna, Teresa Adams (2000):-

Conducted research and examined that the systematic assessment of working capital requirement in construction projects deals with the analysis of various quantitative and qualitative factors in which information is subjective and based on uncertainty. There exists an inherent difficulty in the classical approach to evaluate the impact of  qualitative factors for the assessment of working capital requirement. This paper   presents a methodology to incorporate linguistic variables i nto workable mathematical  propositions for the assessment of working capital using fuzzy set theory. This article takes into consideration the uncertainty associated with many of the project resource variables and these are reflected satisfactorily in the working capital computations. A case study illustrates the application of the fuzzy set approach. The results of the case study demonstrate the superiority of the fuzzy set approach to classical methods in the assessment of realistic working capital requirements for construction projects.

45

According to Maynard E. Rafuse (1996):-

Argues that attempts to improve working capital by delaying payment to creditors is counter-productive to individuals and to the economy as a whole. Claims that altering debtor and creditor levels for individual tiers within a value system will rarely produce any net benefit. Proposes that stock reduction generates system wide financial improvements and other important benefits. Urges those organizations seeking concentrated working capital reduction strategies to focus on stock management strategies based on “lean supply-chain” techniques.

46

CHAPTER – 3 OBJECTIVES OF THE STUDY

Fixing the objective is like identifying the star. The objective decides where we want to go, what we want to achieve and what is our goal or destination.

Every study is carried out for the achievement of certain objectives.

i.

To analyze the various components of working capital of L&T.

ii.

To study the financing of working capital of L&T

iii.

To study and analyze the operating cycle of L&T.

47

.

CHAPTER – 4 RESEARCH METHODOLOGY

DATA COLLECTION METHODS: The data will be collected using both by primary data collection methods as well as secondary sources.

•

PRIMARY DATA : Most of the information will be gathered through primary

sources. The methods that will be used to collect primary data are:

a) Questionnaire  b) Interview

•

SECONDARY DATA: Secondary data that will be used are web sites and

 published materials related to working capital management as well as any relevant information on capital of the company at Heston Kuwait.

•

SAMPLE SIZE : 50-75

48

[

CHAPTER – 5 DATA ANALYSIS

Balance Sheet of  Larsen and Toubro

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

Mar '06

Mar '07

Mar '08

Mar '09 Mar '10

12 mths

12 mths

12 mths

12 mths 12 mths

Total Share Capital

27.48

56.65

58.47

117.14

120.44

Equity Share Capital

27.48

56.65

58.47

117.14

120.44

0.00

0.00

0.00

0.00

25.09

0.00 4,583.3 2 29.37 4,640.1 7 465.79

0.00

0.00

0.00

5,683.85

9,470.71

12,317.96

27.93

25.90

24.59

5,768.43

9,555.08

12,459.69

245.40

308.53

1,102.38

0.00 18,142.8 2 23.29 18,311.6 4 955.73

987.78 1,453.5 7 6,093.7 4 Mar '06

1,832.35

3,275.46

5,453.65 5,845.10

2,077.75

3,583.99

6,556.03 6,800.83

7,846.18

13,139.07

Mar '07

Mar '08

25,112.4 7 Mar '09 Mar '10

12 mths

12 mths

12 mths

12 mths 12 mths

2,876.30

4,188.91

5,575.00 7,235.78

1,122.83

1,242.47

1,421.39 1,727.68

1,753.47

2,946.44

4,153.61 5,508.10

471.22

699.00

3,104.44

6,922.26

3,001.14

4,305.91

Sources Of Funds

Share Application Money Preference Share Capital Reserves Revaluation Reserves  Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

19,015.72

Application Of Funds Gross Block  Less: Accum. Depreciation  Net Block  Capital Work in Progress Investments Inventories

2,300.6 8 982.22 1,318.4 6 286.06 1,919.5 2 2,210.2 7 49

1,040.99

857.66 13,705.3 8,263.72 5 5,805.05 1,415.37

Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions  Net Current Assets Miscellaneous Expenses Total Assets

4,814.1 6 398.71 7,423.1 4 2,061.5 0 184.49 9,669.1 3 0.00 6,106.0 4 1,015.3 7 7,121.4 1 2,547.7 2 21.98 6,093.7 4

5,504.64

7,365.01

10,055.52

993.68

779.86

693.13

9,499.46

12,450.78

16,553.70

2,449.14

3,861.10

7,198.85

100.75

184.60

82.16

12,049.35

16,496.48

23,834.71

0.00

0.00

0.00

8,362.01

11,892.75

15,211.04

1,180.13

2,035.42

9,542.14

13,928.17

2,507.21

2,568.31

9.84

3.06

7,846.18

13,139.07

Contingent Liabilities

305.59

270.22

1,013.51

Book Value (Rs)

335.61

202.65

325.98

3,066.53 2,188.36 18,277.57

0.26

0.00 25,112.4 19,015.72 7 1,371.86 1,719.39 212.32

Larsen and Toubro ------------------- in Rs. Cr. -------------------

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

12 mths

12 mths

12 mths

12 mths

12 mths

Income

Sales Turnover Excise Duty  Net Sales Other Income Stock Adjustments Total Income

15,030.81 17,983.37 25,280.49 34,249.85 37,187.50 253.86

338.08

334.38

393.31

317.31

14,776.95 17,645.29 24,946.11 33,856.54 36,870.19 527.52

459.80

616.69

1,612.58

2,321.67

-103.24

121.76

746.17

105.11

-422.99

15,201.23 18,226.85 26,308.97 35,574.23 38,768.87

Expenditure

Raw Materials

4,510.78

5,320.98 50

8,256.46

9,316.38

21,632.1 3

5,557.14 5,041.36

PROFIT AND LOSS ACCOUNTS:

Profit & Loss account

11,163.7 0 1,104.89 13,683.9 6 12,662.5 5 326.98 26,673.4 9 0.00 19,443.7 7

9,593.53

303.28

Power & Fuel Cost

221.50

308.13

365.25

456.39

334.08

Employee Cost

890.03

1,258.21

1,535.44

1,998.02

2,379.14

Other Manufacturing Expenses

6,647.70

7,451.07 10,632.83 15,659.17 16,913.31

Selling and Admin Expenses

996.59

1,222.80

1,393.80

1,844.83

1,854.23

Miscellaneous Expenses

125.00

166.15

280.69

569.32

325.58

-1.89

-3.30

-11.42

-24.48

-36.25

Preoperative Exp Capitalised Total Expenses

13,389.71 15,724.04 22,453.05 29,819.63 31,363.62 Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

12 mths

12 mths

12 mths

12 mths

12 mths

Operating Profit

1,284.00

2,043.01

3,239.23

4,142.02

5,083.58

PBDIT

1,811.52

2,502.81

3,855.92

5,754.60

7,405.25

Interest

321.34

331.46

501.83

770.00

995.37

1,490.18

2,171.35

3,354.09

4,984.60

6,409.88

107.12

160.13

195.94

284.83

383.65

Other Written Off

0.00

0.00

15.66

21.16

30.95

Profit Before Tax

1,383.06

2,011.22

3,142.49

4,678.61

5,995.28

-1.85

-5.34

12.21

-21.09

-45.13

1,381.21

2,005.88

3,154.70

4,657.52

5,950.15

366.12

601.87

982.05

1,176.19

1,577.02

Reported Net Profit

1,012.14

1,403.02

2,173.42

3,481.66

4,375.52

Total Value Addition

8,878.93 10,403.06 14,196.59 20,503.25 21,770.09

PBDT Depreciation

Extra-ordinary items PBT (Post Extra-ord Items) Tax

Preference Dividend Equity Dividend Corporate Dividend Tax

0.00

0.00

0.00

0.00

0.00

302.25

368.25

495.32

614.97

752.75

42.39

53.34

76.26

101.83

110.25

1,373.86

2,832.71

2,923.27

5,856.88

6,021.95

73.67

49.53

74.35

59.45

72.66

1,100.00

650.00

850.00

525.00

625.00

335.61

202.65

325.98

212.32

303.28

Per share data (annualised)

Shares in issue (lakhs) Earnings Per Share (Rs)

Equity Dividend (%) Book Value (Rs)

51

CASH FLOW:

Larsen and Toubro Cash Flow

------------------- in Rs. Cr. ------------------Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

12 mths

12 mths

12 mths

12 mths

12 mths

Net Profit Before Tax

1383.40

2004.89

3155.47

3940.41

5880.67

 Net Cash From Operating Activities

1369.25

2130.45

1945.24

1478.57

5482.75

 Net Cash (used in)/from Investing Activities

-1326.30

-1588.17

-5241.89

-3308.53

-6071.73

 Net Cash (used in)/from Financing Activities

-287.77

-31.05

3166.68

1640.79

1245.56

Net (decrease)/increase In Cash and Cash Equivalents

-244.82

511.23

-129.97

-189.17

656.58

Opening Cash & Cash Equivalents

828.02

583.20

1094.43

964.46

775.29

Closing Cash & Cash Equivalents

583.20

1094.43

964.46

775.29

1431.87

QUARTERLY RESULTS: Larsen and Toubro Quarterly Results

------------------- in Rs. Cr. ------------------Mar '10

Sales Turnover

Other Income

Jun '10

Sep '10

Dec '10

Mar '11

13,585.10 7,885.31 9,330.76 11,413.08 15,384.21

329.84

226.76

382.19

247.18

369.82

Total Income

13,914.94 8,112.07 9,712.95 11,660.26 15,754.03

Total Expenses

11,534.34 6,878.26 8,325.08 10,175.19 13,042.35

Operating Profit

2,050.76 1,007.05 1,005.68

1,237.89

2,341.86

Profit On Sale Of Assets

--

--

--

--

--

Profit On Sale Of  Investments

--

--

--

--

--

Gain/Loss On Foreign Exchange

--

--

--

--

--

VRS Adjustment

--

--

--

--

--

Other Extraordinary Income/Expenses

--

--

--

--

--

52

Total Extraordinary Income/Expenses

100.69

--

70.84

35.30

225.77

Tax On Extraordinary Items

--

--

--

--

--

 Net Extra Ordinary Income/Expenses

--

--

--

--

--

2,380.60 1,233.81 1,387.87

1,485.07

2,711.68

193.15

175.71

136.17

2,345.73 1,091.47 1,265.56

1,344.66

2,801.28

Gross Profit

Interest PBDT Depreciation Depreciation On Revaluation Of Assets PBT Tax

135.56

142.34

116.22

114.15

121.21

128.09

235.77

--

--

--

--

--

977.32 1,144.35

1,216.57

2,565.51

2,229.51 791.41

311.15

379.37

376.04

879.30

1,438.10

666.17

764.98

840.53

1,686.21

Prior Years Income/Expenses

--

--

--

--

--

Depreciation for Previous Years Written Back/ Provided

--

--

--

--

--

Dividend

--

--

--

--

--

Dividend Tax

--

--

--

--

--

Dividend (%)

--

--

--

--

--

23.88

11.04

12.65

13.83

27.69

--

--

--

--

--

120.44

120.63

120.99

121.56

121.77

--

--

--

--

--

2.00

2.00

2.00

2.00

2.00

Net Profit

Earnings Per Share

Book Value Equity Reserves Face Value

53

HALF YEARLY RESULTS: Larsen and Toubro Half Yearly Results

Sales Turnover

Other Income

------------------- in Rs. Cr. ------------------Sep '08

Sep '09

Mar '10

Sep '10

Mar '11

6 mths

6 mths

6 mths

6 mths

6 mths

14,591.24 15,327.13 21,707.67 17,212.22 26,797.29

336.57

440.34

469.91

597.29

617.00

Total Income

14,927.81 15,767.47 22,177.58 17,809.51 27,414.29

Total Expenses

13,235.88 13,658.01 18,561.24 15,187.83 23,217.54

Operating Profit

1,355.36

1,669.12

3,146.43

2,024.39

3,579.75

Profit On Sale Of Assets

--

--

--

--

--

Profit On Sale Of  Investments

--

--

--

--

--

Gain/Loss On Foreign Exchange

--

--

--

--

--

VRS Adjustment

--

--

--

--

--

Other Extraordinary Income/Expenses

--

--

--

--

--

Total Extraordinary Income/Expenses

--

1,047.26

163.24

70.84

261.07

Tax On Extraordinary Items

--

--

--

--

--

 Net Extra Ordinary Income/Expenses

--

--

--

--

--

1,691.93

2,109.46

3,616.34

2,621.68

4,196.75

107.24

240.55

264.76

335.49

311.88

1584.69

2916.17

3514.82

2357.03

4145.94

138.93

193.86

220.74

235.36

363.86

--

--

--

--

--

PBT

1445.76

2722.31

3294.08

2121.67

3782.08

Tax

483.06

543.71

1,097.16

690.52

1,255.34

Net Profit

962.70

2,178.60

2,196.92

1,431.15

2,526.74

Prior Year Income/Expenses

--

--

--

--

--

Depreciation for Previous Years Written Back/ Provided

--

--

--

--

--

Dividend

--

--

--

--

--

Dividend Tax

--

--

--

--

--

Dividend (%)

--

--

--

--

--

32.90

37.07

36.48

23.66

41.50

Gross Profit

Interest PBDT Depreciation Depreciation On Revaluation Of Assets

Earnings Per Share(Rs)

54

Book Value(Rs) Equity

--

--

--

--

--

58.52

117.53

120.44

120.99

121.77

Reserves

--

Face Value(Rs)

-- 18,142.82

2.00

2.00

2.00

-- 21,702.36 2.00

2.00

NINE MONTHLY RESULT: Larsen and Toubro Nine Months

------------------- in Rs. Cr. ------------------Dec '06

Sales Turnover

Other Income

Dec '07

Dec '08

Dec '09

Dec '10

11,330.60 16,387.83 23,208.03 23,448.28 28,617.53

258.15

335.67

639.99

661.07

840.53

Total Income

11,588.75 16,723.50 23,848.02 24,109.35 29,458.06

Total Expenses

10,393.90 14,688.18 21,069.06 20,764.15 25,351.31

Operating Profit

936.70

1,699.65

2,138.97

2,684.13

3,266.22

Profit On Sale Of Assets

--

--

--

--

--

Profit On Sale Of  Investments

--

--

--

--

--

Gain/Loss On Foreign Exchange

--

--

--

--

--

VRS Adjustment

--

--

--

--

--

Other Extraordinary Income/Expenses

--

--

--

--

--

Total Extraordinary Income/Expenses

--

--

916.33

1,109.81

106.14

Tax On Extraordinary Items

--

--

--

--

--

 Net Extra Ordinary Income/Expenses

--

--

--

--

--

1,194.85

2,035.32

2,778.96

3,345.20

4,106.75

27.60

72.80

204.77

369.75

511.20

1,167.25

1,962.52

3,490.52

4,085.26

3,701.69

100.20

143.43

217.05

298.38

363.45

--

--

--

--

--

1,067.05

1,819.09

3,273.47

3,786.88

3,338.24

Tax

364.80

612.43

790.33

849.46

1,066.56

Net Profit

702.25

1,206.66

2,483.14

2,937.42

2,271.68

Prior Years Income/Expenses

--

--

--

--

--

Depreciation for Previous

--

--

--

--

--

Gross Profit

Interest PBDT Depreciation Depreciation On Revaluation Of Assets PBT

55

Years Written Back/ Provided Dividend

--

--

--

--

--

Dividend Tax

--

--

--

--

--

Dividend (%)

--

--

--

--

--

25.03

41.35

42.42

48.94

37.38

--

--

--

--

--

56.11

58.37

117.07

120.05

121.56

--

--

--

--

--

2.00

2.00

2.00

2.00

2.00

Earnings Per Share

Book Value Equity Reserves Face Value

YEARLY RESULTS: Larsen and Toubro Yearly Results

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

Mar '07 Sales Turnover

Other Income

Mar '08

Mar '09

Mar '10

Mar '11

17,578.84 24,854.70 33,926.37 37,034.80 43,904.91

462.29

587.87

739.78

910.25

1,194.85

Total Income

18,041.13 25,442.57 34,666.15 37,945.05 45,099.76

Total Expenses

15,832.30 22,040.07 30,069.53 32,219.25 38,282.33

Operating Profit

1,746.54

2,814.63

3,856.84

4,815.55

5,622.58

Profit On Sale Of Assets

--

--

--

--

--

Profit On Sale Of  Investments

--

--

--

--

--

Gain/Loss On Foreign Exchange

--

--

--

--

--

VRS Adjustment

--

--

--

--

--

Other Extraordinary Income/Expenses

--

--

--

--

--

Total Extraordinary Income/Expenses

--

87.23

772.46

1,210.50

332.91

Tax On Extraordinary Items

--

--

--

--

--

 Net Extra Ordinary Income/Expenses

--

--

--

--

--

2,208.83

3,402.50

4,596.62

5,725.80

6,817.43

33.93

122.66

350.22

505.31

647.37

2,174.90

3,367.07

5,018.86

6,430.99

6,502.97

Gross Profit

Interest PBDT

56

Depreciation

170.01

211.60

305.99

414.60

599.22

--

--

--

--

--

2,004.89

3,155.47

4,712.87

6,016.39

5,903.75

601.87

982.05

1,231.21

1,640.87

1,945.86

1,403.02

2,173.42

3,481.66

4,375.52

3,957.89

Prior Years Income/Expenses

--

--

--

--

--

Depreciation for Previous Years Written Back/ Provided

--

--

--

--

--

Dividend

--

--

--

--

--

Dividend Tax

--

--

--

--

--

Dividend (%)

--

--

--

--

--

49.53

74.34

59.44

72.66

65.01

--

--

--

--

--

56.65

58.47

117.14

120.44

121.77

Depreciation On Revaluation Of Assets PBT Tax Net Profit

Earnings Per Share

Book Value Equity Reserves

5,683.85

Face Value

9,470.71 12,317.96 18,142.82 21,702.36

2.00

2.00

2.00

2.00

2.00

CAPITAL STRUCTURE: Larsen and Toubro Capital Structure Period

Instrument

From To

--- CAPITAL (Rs. cr) --Authorised

-PAIDUP-

Issued Shares (nos) Face Value Capital

2009 2010 Equity Share

214.75

120.44

602195408

2 120.44

2008 2009 Equity Share

214.75

117.14

585687862

2 117.14

2007 2008 Equity Share

214.75

58.47

292327390

2

57

58.47

2006 2007 Equity Share

214.75

56.65

283270748

2

56.65

2005 2006 Equity Share

214.75

27.48

137385777

2

27.48

2004 2005 Equity Share

214.75

25.98

129924182

2

25.98

2003 2004 Equity Share

214.75

24.88

124401796

2

24.88

2002 2003 Equity Share

214.75

214.75

248668756

10 214.75

2001 2002 Equity Share

214.75

214.75

248660346

10 214.75

2000 2001 Equity Share

214.75

214.75

248650346

10 214.75

1999 2000 Equity Share

214.75

214.75

248545098

10 214.75

1998 1999 Equity Share

214.75

214.75

248516393

10 214.75

1997 1998 Equity Share

214.75

214.75

248502885

10 214.75

1996 1997 Equity Share

214.75

214.75

248488155

10 214.75

1995 1996 Equity Share

214.75

214.75

248472703

10 214.75

1994 1995 Equity Share

214.75

214.75

228798916

10 214.75

1993 1994 Equity Share

214.75

213.24

211481630

10 211.48

1992 1993 Equity Share

214.75

213.24

209943247

10 209.94

1991 1992 Equity Share

214.75

129.61

129613652

10 129.61

1990 1991 Equity Share

115

75.42

75419968

10

75.42

1989 1990 Equity Share

80

68.08

68084408

10

68.08

1987 1989 Equity Share

74.98

60.75

60748844

10

60.75

1986 1987 Equity Share

74.98

51.99

51993354

10

51.99

1985 1986 Equity Share

74.98

51.99

51993354

10

51.99

1984 1985 Equity Share

38.83

32.5

27079675

10

27.08

1982 1984 Equity Share

38.83

24.02

24019714

10

24.02

1981 1982 Equity Share

28.83

23.07

23065344

10

23.07

1979 1981 Equity Share

18.83

14.42

14415840

10

14.42

1978 1979 Equity Share

13.83

11.53

11532672

10

11.53

1975 1978 Equity Share

8.5

7.45

7453395

10

7.45

1973 1975 Equity Share

8.5

5.96

5962716

10

5.96

1972 1973 Equity Share

8.5

4.52

4517209

10

4.52

1969 1972 Equity Share

4.8

3.99

3993000

10

3.99

1967 1969 Equity Share

4.8

3.63

3630000

10

3.63

1964 1967 Equity Share

2.8

2.64

2640000

10

2.64

1962 1964 Equity Share

1.8

1.65

1650000

10

1.65

1960 1962 Equity Share

1.8

1.1

1100000

10

1.1

1959 1960 Equity Share

1.8

0.8

800000

10

0.8

1958 1959 Equity Share

0.8

0.6

600000

10

0.6

1957 1958 Equity Share

0.8

0.5

500000

10

0.5

1956 1957 Equity Share

0.8

0.55

450000

10

0.45

1955 1956 Equity Share

0.8

0.4

400000

10

0.4

1954 1955 Equity Share

0.8

0.35

350000

10

0.35

1950 1954 Equity Share

0.8

0.32

320000

10

0.32

58

1946 1950 Equity Share

0.8

0.19

185000

10

0.19

FINANCIAL RATIOS: Larsen and Toubro Key Financial Ratios

------------------- in Rs. Cr. ------------------Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

2.00

2.00

2.00

2.00

2.00

Dividend Per Share

22.00

13.00

17.00

10.50

12.50

Operating Profit Per Share (Rs)

92.92

71.77

110.81

70.72

84.42

1,075.58

622.91

853.36

578.06

612.26

324.46

197.15

319.09

205.21

294.74

12.40

55.44

53.71

76.77

74.67

Operating Profit Margin(%)

8.63

11.52

12.98

12.23

13.78

Profit Before Interest And Tax Margin(%)

7.73

10.34

11.97

11.14

12.41

Gross Profit Margin(%)

9.82

13.24

12.19

11.39

12.74

Cash Profit Margin(%)

7.40

8.63

8.78

8.50

9.21

Adjusted Cash Margin(%)

6.14

8.60

8.78

8.50

9.21

 Net Profit Margin(%)

6.69

7.74

8.54

10.06

11.56

Adjusted Net Profit Margin(%)

5.43

7.72

8.54

10.06

11.56

Return On Capital Employed(%)

24.88

29.82

26.72

24.14

22.49

Return On Net Worth(%)

21.95

24.44

22.81

27.99

23.95

Adjusted Return on Net Worth(%)

17.90

24.39

21.21

21.21

16.81

Return on Assets Excluding Revaluations

7.66

202.30

325.87

212.31

303.28

Return on Assets Including Revaluations

7.68

203.29

326.76

212.73

303.66

26.15

32.59

28.73

25.62

23.19

Current Ratio

1.28

1.16

1.09

1.22

1.19

Quick Ratio

1.03

0.93

0.86

0.97

1.15

Debt Equity Ratio

0.32

0.36

0.38

0.53

0.37

Investment Valuation Ratios

Face Value

 Net Operating Profit Per  Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios

Return on Long Term Funds(%) Liquidity And Solvency Ratios

59

Long Term Debt Equity Ratio

0.25

0.25

0.28

0.44

0.33

11.56

25.07

28.57

13.09

11.17

Total Debt to Owners Fund

0.32

0.36

0.38

0.53

0.37

Financial Charges Coverage Ratio

5.03

7.52

7.41

6.35

6.09

Financial Charges Coverage Ratio Post Tax

4.48

5.72

5.75

5.92

5.81

Inventory Turnover Ratio

6.84

6.03

6.00

6.01

28.73

Debtors Turnover Ratio

3.37

3.42

3.88

3.89

3.48

Investments Turnover Ratio

6.95

6.11

6.00

6.01

28.73

Fixed Assets Turnover Ratio

11.45

9.52

6.09

6.23

5.20

Total Assets Turnover Ratio

2.45

2.27

1.92

1.80

1.48

Asset Turnover Ratio

6.50

6.21

6.09

6.23

5.20

Average Raw Material Holding

33.67

34.05

34.14

38.11

32.32

4.93

5.56

5.21

4.02

3.54

62.07

51.15

37.06

59.09

49.22

Material Cost Composition

30.52

30.15

33.09

27.51

26.01

Imported Composition of  Raw Materials Consumed

45.81

49.28

39.78

44.34

54.43

Selling Distribution Cost Composition

1.06

1.13

1.28

0.92

0.83

21.50

21.36

22.67

21.70

18.62

Dividend Payout Ratio Net Profit

34.05

30.04

26.29

20.58

19.72

Dividend Payout Ratio Cash Profit

30.79

26.97

23.96

18.92

18.01

Earning Retention Ratio

58.05

69.85

71.72

72.84

71.91

Cash Earning Retention Ratio

62.89

72.95

74.40

75.66

75.25

1.57

1.33

1.61

2.23

1.95

Mar '06

Mar '07

Mar '08

Mar '09

Mar '10

73.67

49.53

74.35

59.45

72.66

Debt Coverage Ratios

Interest Cover

Management Efficiency Ratios

Average Finished Goods Held  Number of Days In Working Capital Profit & Loss Account Ratios

Expenses as Composition of  Total Sales Cash Flow Indicator Ratios

AdjustedCash Flow Times

Earnings Per Share

60

Book Value

335.61

202.65

61

325.98

212.32

303.28

MARKET CAPITALISATION: Company Name Larsen BHEL Suzlon Energy BGR Energy AIA Engineering Alfa Laval BEML Praj Industries Tecpro Systems Elecon Eng CMI FPE Shriram EPC Sanghvi Movers Walchandnagar TIL TRF Action Const Disa India Gujarat Apollo Kabra Extrusion GMM Pfaudler Eimco Elecon UB Engineering Kilburn Eng Windsor Int Combustion Josts Engineers Skyline Millars ATV Projects Cranex Sterling Strips

Last Price

1,722.00 1,933.20 52.75 493.05 368.55 1,487.95 599.40 74.00 264.10 69.85 1,286.80 136.00 118.50 122.90 434.45 388.75 46.05 1,511.70 133.90 54.40 106.80 237.00 80.05 65.05 52.80 252.80 455.00 6.03 3.80 11.09 7.60

% Chg

1.27 0.91 1.05 2.28 0.97 2.26 -0.21 -0.20 -1.29 0.58 -0.25 0.22 0.04 0.33 -0.16 -0.47 -0.22 0.11 -0.52 -1.27 6.80 2.16 0.00 3.25 -0.09 -0.30 4.78 3.79 0.00 -3.40 0.00

62

52 wk  High 2,212.00 2,695.00 66.30 871.00 479.90 1,806.00 1,238.00 88.90 454.25 103.70 1,632.00 313.80 210.05 248.40 750.05 970.00 75.20 1,980.00 246.95 103.25 129.90 398.00 239.40 89.50 107.35 421.00 517.95 12.50 11.90 12.10 14.98

52 wk  Market Cap (Rs. cr) Low 1,475.00 104,664.02 1,890.10 94,634.01 42.80 9,375.52 402.10 3,556.58 305.00 3,476.18 1,114.00 2,702.19 565.00 2,496.17 61.45 1,367.36 225.10 1,333.01 59.30 648.64 1,275.00 635.40 123.00 601.97 103.65 512.96 103.00 467.88 424.00 435.76 382.00 427.80 37.35 427.74 1,270.00 228.30 124.00 221.94 54.15 173.55 86.00 156.11 213.00 136.71 73.50 136.62 58.20 86.23 46.00 68.83 212.50 60.43 295.00 34.79 4.26 24.26 3.30 20.18 3.41 6.65 5.95 3.11

NET SALES: Company Name Larsen BHEL Suzlon Energy BGR Energy BEML Tecpro Systems Shriram EPC Elecon Eng Alfa Laval TIL AIA Engineering TRF Praj Industries UB Engineering Action Const CMI FPE Sanghvi Movers Windsor Gujarat Apollo Kabra Extrusion Eimco Elecon GMM Pfaudler Disa India Int Combustion Kilburn Eng Josts Engineers ATV Projects Skyline Millars Cranex Sterling Strips

Last Price

Change

1,722.00 1,933.20 52.75 493.05 599.40 264.10 136.00 69.85 1,487.95 434.45 368.55 388.75 74.00 80.05 46.05 1,286.80 118.50 52.80 133.90 54.40 237.00 106.80 1,511.70 252.80 65.05 455.00 3.80 6.03 11.09 7.60

21.55 17.45 0.55 11.00 -1.25 -3.45 0.30 0.40 32.90 -0.70 3.55 -1.85 -0.15 0.00 -0.10 -3.20 0.05 -0.05 -0.70 -0.70 5.00 6.80 1.70 -0.75 2.05 20.75 0.00 0.22 -0.39 0.00

63

% Change

1.27 0.91 1.05 2.28 -0.21 -1.29 0.22 0.58 2.26 -0.16 0.97 -0.47 -0.20 0.00 -0.22 -0.25 0.04 -0.09 -0.52 -1.27 2.16 6.80 0.11 -0.30 3.25 4.78 0.00 3.79 -3.40 0.00

Net Sales (Rs. cr)

36,870.19 33,226.25 3,504.34 3,069.25 2,855.84 1,454.93 1,114.57 1,045.10 837.55 832.71 803.98 649.95 602.28 526.80 429.64 387.90 331.53 209.15 201.69 194.81 162.31 154.48 107.87 96.99 88.36 77.79 24.50 22.66 18.52 7.25

NET PROFIT: Company Name

Last Price

Change

1,722.00 1,933.20 599.40 493.05 368.55 74.00 264.10 1,487.95 118.50 69.85 388.75 434.45 136.00 80.05 1,286.80 133.90 46.05 54.40 1,511.70 52.80 237.00 252.80 106.80 3.80 455.00 65.05 6.03 7.60 11.09 52.75

Larsen BHEL BEML BGR Energy AIA Engineering Praj Industries Tecpro Systems Alfa Laval Sanghvi Movers Elecon Eng TRF TIL Shriram EPC UB Engineering CMI FPE Gujarat Apollo Action Const Kabra Extrusion Disa India Windsor Eimco Elecon Int Combustion GMM Pfaudler ATV Projects Josts Engineers Kilburn Eng Skyline Millars Sterling Strips Cranex Suzlon Energy

21.55 17.45 -1.25 11.00 3.55 -0.15 -3.45 32.90 0.05 0.40 -1.85 -0.70 0.30 0.00 -3.20 -0.70 -0.10 -0.70 1.70 -0.05 5.00 -0.75 6.80 0.00 20.75 2.05 0.22 0.00 -0.39 0.55

% Change

1.27 0.91 -0.21 2.28 0.97 -0.20 -1.29 2.26 0.04 0.58 -0.47 -0.16 0.22 0.00 -0.25 -0.52 -0.22 -1.27 0.11 -0.09 2.16 -0.30 6.80 0.00 4.78 3.25 3.79 0.00 -3.40 1.05

Net Profit (Rs. cr)

4,375.52 4,310.64 222.85 201.02 122.56 113.89 110.07 108.12 90.42 66.18 47.18 46.86 44.66 30.68 27.29 26.93 24.44 21.46 15.10 13.16 12.80 11.96 11.06 4.74 4.40 4.31 4.24 0.72 -0.29 -1,414.09

TOTAL ASSETS: Company Name Larsen BHEL Suzlon Energy BEML BGR Energy Shriram EPC Sanghvi Movers Elecon Eng AIA Engineering

Last Price

1,722.00 1,933.20 52.75 599.40 493.05 136.00 118.50 69.85 368.55

% Chg

1.27 0.91 1.05 -0.21 2.28 0.22 0.04 0.58 0.97 64

Gross Net Total CWIP Block  Block  Assets 7,235.78 5,508.10 857.66 25,112.47 6,579.70 2,414.96 1,550.49 16,045.11 1,355.74 917.16 10.38 13,072.14 798.71 273.87 32.21 2,939.66 170.43 139.09 10.36 1,633.02 163.28 141.70 0.01 1,052.32 1,186.09 879.69 1.61 944.09 509.42 344.34 17.88 847.68 278.86 204.91 10.27 745.45

Tecpro Systems Praj Industries Alfa Laval TRF TIL ATV Projects Action Const Gujarat Apollo UB Engineering Eimco Elecon CMI FPE Kilburn Eng Kabra Extrusion GMM Pfaudler Int Combustion Disa India Skyline Millars Cranex Josts Engineers Sterling Strips Windsor

264.10 74.00 1,487.95 388.75 434.45 3.80 46.05 133.90 80.05 237.00 1,286.80 65.05 54.40 106.80 252.80 1,511.70 6.03 11.09 455.00 7.60 52.80

-1.29 -0.20 2.26 -0.47 -0.16 0.00 -0.22 -0.52 0.00 2.16 -0.25 3.25 -1.27 6.80 -0.30 0.11 3.79 -3.40 4.78 0.00 -0.09

65

136.73 173.71 189.38 55.80 191.29 397.07 88.53 62.97 48.18 93.70 73.92 20.53 62.13 61.92 47.73 35.00 3.70 3.01 10.17 3.93 71.14

113.63 137.42 96.49 27.47 109.01 228.54 72.09 51.09 48.18 30.50 28.23 16.31 39.29 28.05 19.08 12.17 1.90 1.26 1.76 1.41 13.11

11.01 47.90 11.65 1.74 19.54 0.00 1.95 7.78 1.80 0.26 0.09 2.97 8.49 0.77 0.13 1.01 0.00 0.00 0.00 2.03 0.00

633.26 531.88 422.23 315.69 295.54 240.69 201.09 181.49 163.48 140.30 107.81 107.30 95.53 91.95 74.19 55.59 34.36 13.61 9.48 4.00 -15.85

NET WORKING CAPITAL SIZE

Net Working Capital Size

(Rs. In cr.)

Years

2005-06

2006-07

2007-08

2008-09

2009-10

Current Assets

9,484.64

11,948.60

16,311.88

23,752.55

26,346.51

6,106.04 3378.6

8,362.01 3586.59

11,892.75 4419.13

15,211.04 8541.51

19,443.77 6902.74

Current Liabilities Net working capital

Observations:It was observed that major source of liquidity problem is not the mismatch between current payments and current receipts from the Comparison of funds flow statements of AIL for five years. This company net working capital is continue increase and to the present level is good. The growth in working capital is a clear indication that the company does not utilizing its short term resources with efficiency. In year 2005-06 66

the company net working capital was 3378.6 and after 3 years it increasing and 200910 the company net working capital was 6902.74

CURRENT ASSETS Total assets are basically classified in two parts as fixed assets and current assets. Fixed assets are in the nature of long term or life time for the organization. Current assets convert in the cash in the period of one year. It means that current assets are liquid assets or assets which can convert in to cash within a year.

Current Assets Size Particulars Inventories

2005-06

(Rs. In Cr.) 2006-07

2007-08

2008-09

2009-10

2,210.27

3,001.14

4,305.91

5,805.05

1,415.37

4,814.16

5,504.64

7,365.01

10,055.52

11,163.70

398.71

993.68

779.86

693.13

1,104.89

2,061.50

2,449.14

3,861.10

7,198.85

12,662.55

Sundry Debtors Cash and Bank  Balance Loans and Advances Total C.A. Indices

9,484.64

11,948.60

16,311.88

23,752.55

26,346.51

100

110

130

150

170

67

TOTAL CURRENT ASSETS:

Observations:It was observed that the size of current assets is increasing with increases in the sales. The excess of current assets is showing positive liquidity position of the firm but it is not always good because excess current assets then required, it may adversely affects 68

on profitability. Current assets include some funds investments for which company  pay interest.

CURRENT LIABILITIES Current liabilities mean the liabilities which have to pay in current year. It includes sundry creditor’s means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and  provision as tax provision. Current liabilities also includes bank overdraft. For some current assets like bank overdrafts and short term loan, company has to pay interest thus the management of current liabilities has importance

Net Current Liabilities Size

Particulars Current Liabilities Provisions Total of B Indices of C.L.

(Rs. In Cr.)

2005-06

2006-07

2007-08

2008-09

2009-10

6,106.04

8,362.01

11,892.75

15,211.04

19,443.77

1,015.37 7,121.41 100

1,180.13 9,542.14 110

2,035.42 13,928.17 125

3,066.53 18,277.57 138

2,188.36 21,632.13 145.5

69

70

Observations:Current liabilities show continues growth each year because company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm. As a current liability increase in the year 2009-10 by 21,632.13. It increases the working capital size in the same year. And company enjoyed over creditors which may include indirect cost of credit terms.

CHANGES IN WORKING CAPITAL There are so many reasons to changes in working capital as follow

1. Changes in sales and operating expanses

The changes in sales and operating expenses may be due to three reasons

•

There may be long run trend of change e.g. The price of row material say oil may constantly raise necessity the holding of large inventory.

•

Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary.

•

Changes in seasonality in sales activities

2. Policy changes

The second major case of changes in the level of working capital is because of policy changes initiated by management. The term current assets policy may be defined as the relationship between current assets and sales volume.

1. Technology changes

71

The third major point if changes in working our business more working capital is required A change in operating expenses rise or full will have similar effects on the levels of working following working capital statement is prepared capital are changes in technology because changes in technology to install that technology in on the base of balance sheet of last two year 

Changes in Working Capital

(Rs. In Cr.)

Statement of Changes in Working Capital Particular

2008-09

2009-10

A)Current Assets

Changes in W.C

Increase

Decrease

Inventories 5,805.05

1,415.37

4,389.68

10,055.52

11,163.70

1,108.18

693.13

1,104.89

411.76

7,198.85 23,752.55

12,662.55 26,346.51

5,463.70

Sundry Debtors Cash and Bank Balance Loans and Advances Total A B)Current Liabilities Current Liabilities 15,211.04

19,443.77

3,066.53

2,188.36

18,277.57

21,632.13

5,474.98

4,714.38 5,948.52

4,232.73

Provisions 878.17

Total of B W.C (A-B) Net increase in W.C Total

5,948.52 11,216.37

72

11,216.37

WORKING CAPITAL TURNOVER RATIO It signifies that for an amount of sales, a relative amount of working capital is needed. If any increase in sales contemplated working capital should be adequate and thus this ratio helps management to maintain the adequate level of working capital. The ratio measures the efficiency with which the working capital is being used by a firm. It may thus computer net working capital turnover by dividing sales by working capital.

Working Capital Turnover Ratio=

____Sales___  Net Working Capital

Working Capital Turnover

Particular Sales Net working capital W.C Turnover Ratio

(Rs. In cr.)

2005-06 14776.95 3378.6

2006-07 17645.29 3586.59

2007-08 24946.11 4419.13

2008-09 33856.54 8541.51

2009-10 36870.19 6902.74

4.3736902

4.9197956

5.6450274

3.9637651

5.3484725

73

Observations:High working capital ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in working capital. Company working capital ratio shows mostly more than 3, except for the year 2006-07 In the year 200910 the ratio was around 5.34, it indicates that the capability of the company to achieve maximum sales with the minimum investment in working capital .

CURRENT ASSETS TURNOVER RATIO Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current assets .current assets includes the assets like inventories, sundry debtors, bills receivable, cash in hand or bank, marketable securities, prepaid expenses and short term loans and advances. This ratio includes the efficiency with which current assets turn into sales. A higher ratio implies a more efficient use of funds thus high turnover  ratio indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm.

Current Assets Turnover Ratio= ____Sales_____  Current Assets

Calculation of Current Assets Turnover Ratio (Rs. In Cr.) Particular

2005-06

2006-07

2007-08

2008-09

2009-10

Sales

14776.95

17645.29

24946.11

33856.54

36870.19

Current Assets

9,484.64

11,948.60

16,311.88

23,752.55

26,346.51

Current Assets Turnover Ratio

1.557987441

1.476766316

1.52932157 4

1.42538548 5

1.399433549

74

Current Assets Turnover Ratio

Observations It was observed that current assets turnover ratio does not indicate any trend over the  period of time. Turnover ratio was 1.55 in the year 2000-06 and decrease to 1.4767 in the year 2006-07. Company increased its sales with increased investment in current assets, thus current assets turnover ratio not increased.

75

CURRENT RATIO The current is calculated by dividing current assets by current liabilities:

Current Ratio = ___Current assets__  Current liabilities

Current Ratio = Current Assets / Current Liabilities Or  Current Assets : Current Liabilities

Current assets include cash and those assets which can be converted in to cash within a year, such marketable securities, debtors and inventories. All obligations within a year are include in current liabilities. Current liabilities include creditors, bills payable accrued expenses, short term bank loan income tax liabilities and long term debt maturing in the current year. Current ratio indicates the availability of current assets in rupees for every rupee of current liability.

Current Ratio ( Rs. In Cr.)

Particular

2005-06

2006-07

2007-08

2008-09

2009-10

Current Assets

9,484.64

11,948.60

16,311.88

23,752.55

26,346.51

6,106.04 1.5

8,362.01 1.42

11,892.75 1.37

15,211.04 1.56

Current Liabilities Current Ratio

76

19,443.77 1.355

Observations: The current ratio indicates the availability of funds to payment of current liabilities in the form of current assets. A higher ratio indicates that there were sufficient assets available with the organization which can be converted in cash, without any reduction in the value.

It is very high 1.56 in 2008-09, but regularly decreases. In 2009-10 it comes at 1.355.

77

QUICK RATIO Quick ratio is also known as acid test ratio or liquid ratios it is more rigorous test of liquidity than the current ratio. It establishes relationship between liquid assets & current liabilities. An asset is said to be liquid if it can be converted into cash within a shorter period without loss of value.

Quick ratio

=

Quick assets current liabilities ( Rs. In Cr.)

Particular

Quick Assets Current Liabilities Quick Ratio

2005-06

2006-07

2007-08

2008-09

2009-10

5,212.87

6,498.32

8,144.87

10,748.65

12,268.59

6,106.04 0.85

8,362.01 0.77

11,892.75 0.68

15,211.04 0.7

78

19,443.77 0.63

Observations:Quick ratio indicates that the company has sufficient liquid balance for the payment of  current liabilities. The liquid ratio of 1:1 is suppose to be standard or ideal but here ratio is more than 1:1 over the period of time, it indicates that the firm maintains the over liquid assets than actual requirement of such assets. [

DEBT EQUITY RATIO Definition: The Debt to Equity Ratio measures how much money a company should

safely be able to borrow over long periods of time. It does this by comparing the company's total debt (including short term and long term obligations) and dividing it  by the amount of owner's equity .For now; you only need to know that the number can  be found at the bottom of the balance sheet. Actually calculate the debt to equity ratio in segment two when we look at real balance sheets.)

Debt Equity Ratio

=

DEBT EQUITY

( Rs. In Cr.) Particular

Debt Equity

Debt Equity Ratio

2005-06

2006-07

2007-08

2008-09

2009-10

1,453.57

2,077.75

3,583.99

6,556.03

6,800.83

27.48 52.89

56.65 36.67

58.47 61.29

117.14 55.96

120.44 56.46

79

Observations:The debt-equity ratio is normally defined as the long term debt divided by shareholders' equity, which is the sum of the equity capital, any preference capital issued, and free reserves and surplus with the company. A debt-equity ratio is also important for bond investors, since a highly leveraged company could face problems making interest payments.

80

CHAPTER – 6 CONCLUSION AND MAJOR FINDS

Conclusion Working capital management is important aspect of financial management. The study of working capital management of L&T has revealed that the Net Working Capital was improving regularly from 3378.6 in 2005-06 and 6902.74 in 2009-10 which is as  per standard industrial practice. The current Assets of the company showed an increasing Rs. 3524.14 Cr. in year 2005-06 from 2009-10, but in 2009-10 it stable at Rs.6902.74 cr. The study has been conducted on working capital ratio analysis, current ratio, and Change the working capital components which helped the company to manage its working capital efficiency and affectively.

1. Working capital of the company was increasing from year 207.99 cr. From

2005-06 to 2006-07, Rs.4122.38 cr. increases form 2007-08 to 2008-09. Rs. 6902.74 cr. in

2009-10 it comes down to Rs. 1638.77 cr. All

calculation is showing positive working capital per year. It shows good liquidity position. 2. Positive working capital indicates that company has the ability of   payments of short terms liabilities. 3. Working capital increased because of increment in the current assets. Company’s current assets were always more than requirement it affect on  profitability of the company.

81

4. In the year 2008-09 and 2009-10 working capital decreased because

increased of expenses as manufacturing expenses and increase the price of  raw material. 5. The size of the cash in the current assets of the company indicates the miss

cash management of the company. The cash balance in the year 2009-10 was extremely increased. Company failed to proper investment of available cash.

Major Findings

Statement Showing Difference from Previous year:-

Particular

2006-07

2007-08

2008-09

2009-10

Investments

1,919.52

3,104.44

6,922.26

8,263.72

Inventories

2,210.27

3,001.14

4,305.91

5,805.05

Sundry Debtors

4,814.16

5,504.64

7,365.01

10,055.52

398.71

993.68

779.86

693.13

Current Liabilities

6,106.04

8,362.01

11,892.75

15,211.04

Reserve

4,583.32

5,683.85

9,470.71

12,317.96

Cash & Bank Balance

82

83

CHAPTER – 7 RECOMMENDATION AND LIMITATION

Limitations:[

Even though every effort will be taken to minimize the variation and present a factual picture with the help of statistical methods, but still there are some limitations, which are as follows:

•

The preparation and interpretation of data may not be 100% free from errors and may be affected by the Respondents based mindset to some extent.

•

Sampling size of the targeted employees of L&T is small, because nonreachable due to their busy schedule.

•

The study will be based on the balance sheet of the company and depends directly on balance sheet and annual reports of the company.

Recommendation:Recommendation can be use by the firm for the betterment increased of the firm after  study and analysis of project report on study and analysis of working capital. I would like to recommend.

1. Company should increase the inventory holding period. It is the major part

of working capital of company. 2. Company has to take control on cash balance because cash is non earning assets and increase cost of funds. 3. Company should raise it fund through short term sources for short term requirement of funds.

84

BIBLIOGRAPHY

[1] Afza, T. and M. S. Nazir, (2007). Working Capital Management Policies of  Firms: Empirical Evidence from Pakistan. Conference Proceedings of 9th South Asian Management Forum (SAMF) on February 24-25, North South University, Dhaka, Bangladesh. [2] Afza, T. and M. S. Nazir, (2008). Working Capital Approaches and Firm’s Returns. Pakistan Journal of Commerce and Social Sciences. 1(1), 25-36. [3] Baltagi, B. H. (2001). Econometric Analysis of Panel Data. 2nd Edition, John Wiley & Sons. Chichester. [4] Blinder, A. S. and L. Macinni, (1991). Taking Stock: A critical Assessment of Recent Research on Inventories. Journal of Economic Perspectives. 5(1), 7396. [5] Czyzewski, A.B., and D.W. Hicks, (1992). Hold Onto Your Cash.  Management Accounting . 27-30. [6] Deloof, M. (2003). Does Working Capital Management Affects profitability of Belgian Firms?  Journal of Business Finance & Accounting . 30(3) & (4), 0306-686X. [7] Economic Survey of Pakistan, (2006-07). Finance Division, Government of  Pakistan. [8] Eljelly, M.A. (2004). Liquidity – Profitability Tradeoff: An empirical investigation in an emerging market.  International Journal of Commerce &  Management . 14(2). [9] Filbeck, G. and T. M. Krueger, (2005). An Analysis of Working Capital Management results across Industries.  American Journal of Business. 20(2), 11-18. [10] Garcia-Teruel, P.J. and Martinez-Solano, P. (2007). Effects of Working Capital Management on SME Profitability.  International Journal of   Managerial Finance. 3(2), 164-177. International Research Journal of Finance and Economics - Issue 47 (2010) 162 [11] Gitman, L.J. (1991). Principles of Managerial Finance. Collins Publishers Inc. Harper. New York. [12] Hausman, J.A. (1978),  Econometrica. 46, 1251-71.

Specification

85

Tests

in

Econometrics.