36750752 a Project Report on Working Capital Management of Arss Infrastructure Limited

7/31/2019 36750752 a Project Report on Working Capital Management of Arss Infrastructure Limited

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Introduction:Working Capital Management:Working Capital is the life blood and nerve centre of a business. Just as circulation of bloodis essential in the human body for maintaining life, working capital is very essential tomaintain the smooth running of a business. No business can run successfully without anadequate amount of working capital.Working capital refers to that part of firms capital which is required for financing short termor current assets such as cash, marketable securities, debtors, and inventories.In other wordsworking capital is the amount of funds necessary to cover the cost of operatingthe firm.

Meaning:Working Capital means the funds (i.e. capital) available and used for day to dayoperation(i.e. working) of an enterprise. It consists broadly of that portion of assets of a business whichare used in or related to its current operations. It refers to funds which are used during anaccounting period to generate a current income of type which is consistent with

majorpurpose of a firm existence.Working Capital Management is concerned with the problems arise in attempting tomanagethe current assets (such as cash, marketable securities, cash receivables and inventory etc.),the current liabilities (such as account payable, bank overdraft, and outstanding expenses etc.)and the interrelation that exist between them. The term current assets refers tothose assetswhich in ordinary course of business can be, or, will be, turned in to cash within oneaccounting year without undergoing a diminution in value and without the disrupt

ing theoperation of the firm.

Objective:As already observed, the objective of the firm is to maximize the shareholders wealth. In itsendeavour to do so, a firm should earn sufficient return from their operations.Earning asteady amount of profit requires successful bid activity but the completed projects cannot berealized instantaneously. So there is a need for working capital in the form ofcurrent assets todeal with the problem arising out of lack of immediate realization of cash again

st the projectdone. Therefore sufficient working capital is necessary to sustain bidding activity.Technically this is called operating cycle.Also ARSS is doing projects alone and joint venture basis. Sometimes ARSS incurred thewhole cost in a project and the payment would due by its joint venture company/companies.So there is need of working capital.The company is diversifying its business from railway and road sector to other s


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ectors likeirrigation, aviation, marine, jetty etc. So for diversifying its business, thereshould be asufficient working capital.

Gross Working Capital and Net Working Capital:There are two concepts of Working Capital

1. Gross Working Capital:


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Gross Working capital refers to the firms investment in current assets.

2. Net Working Capital:Net Working Capital refers to the difference between the current assets and current liabilities.Current Liabilities are those claims of outsiders which are expected to mature for paymentwithin an accounting year. It can be positive or negative. A positive net working capital willarise when current assets exceeds current liabilities. A negative net working capital occurswhen current liabilities are in excess of current assets. The two concept of working capital gross and net- are not exclusive; rather they have equal significance from managementviewpoint.Efficient working capital requires that firm should operate with some amount ofnet workingcapital, the exact amount varying from firm to firm and depending, among other things; onthe nature of industries. Net working capital is necessary because the cash outflows andinflows coincide. The cash outflows are however difficult to predict. The more predictable

the cash inflows are the less net working capital will be required.

Types of working capital:The operating cycle creates the need for current assets (working capital). However the needdoes not come to an end after the cycle is completed. To explain this, the continuing need ofcurrent assets a destination should be drawn between permanent and temporary workingcapital.

1) Permanent Working Capital:The need for current assets arises because of the cash cycle. To carry on busine

ss there isalways minimum level of current assets which is constantly required by a firm tocarry on itsbusiness operations. Permanent or fixed working capital is the minimum level ofcurrentassets. It is permanent in the same way as the firms fixed assets are. Dependingupon thechanges in production and sales, the need of working capital, over and above permanentworking capital, will fluctuate. For example, extra inventory of finished goodswill have to bemaintained to support the peak periods of sales, and investment in debtors (receivable) may

also increase during such period. On the other hand, investment in raw material,work inprogress and finished goods will fail if the market is slack.

Amount ofWorking Tempo

rary or


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Capital Fluctuating


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Figure .......: Permanent and temporary working capital

2) Fluctuating or Variable Working Capital:Any amount over and above the permanent level of working capital is temporary, fluctuatingor variable working capital. It is the extra working capital needed to support the changingproduction and sales activities of the firm.From the above figure, it is shown that permanent working capital is stable overtime, whiletemporary working capital is fluctuating- sometimes increasing and sometimes decreasing.However the permanent working capital line need not be horizontal. For a growingfirm therequirement of working capital is increasing.

AmountTemporary

of

orfluctuatingWorkingCapital

Permanent

Figure......: Permanent and Temporary Working capital

Determinants of Working Capital:

There are no determined factors which influences the working capital requirements. A largeno of factors, each having a different importance influence working capital needs of firms.The importance of factors also changes for a firm over of time. Therefore an analysis ofrelevant factors should be made in order to determine total investment in working capital.The following are the few factors which generally influences the working capitalrequirementof firms.

1. Nature of BusinessWorking capital requirement of a firm are basically influenced by the nature ofits business.Trading and financial firms have a very small amount of fixed assets, but require large summoney to be invested in working capital. In contrast public utility services like railways,infrastructure oriented projects etc there requirement of working capital is less.


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2. Length of production cycle


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In some business like machine tools industry, the time gap between the acquisition of rawmaterial till the end of final production of finished goods itself is quite high. As such amountmay be blocked either in raw material or work in progress or finished goods or even indebtors. Naturally there need of working capital is high.

3. Size and growth of businessIn very small company the working capital requirement is quite high due to highoverhead,higher buying and selling cost etc. but if the business starts growing, the working capitalrequirement may positively affect by the increasing size.

4. Business/ Trade cycleIf the company is operating in the time of boom, the working capital requirementmay bemore as the company may like to buy more raw materials, may increase the production andsales to take the benefits of favorable market, due to increase in the sales, there may more andmore amounts of funds blocked in stock in stock and debtors etc. similarly in the case of

depression also, working capital may be high as the sales terms of value and quantity may bereducing, there may be unnecessary stack without getting sold, the receivable may notrecovered in time etc. this is the case of ARSS Infrastructure Projects Limited.

5. ProfitabilityThe profitability of the business may be vary in each and every individual case,which in turnits depend on numerous factors, but high profitability will positively reduce the strain onworking capital requirement of the company, because the profits to the extent that they

earned in cash may be used to meet the working capital requirements of the company.


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Research Methodology

IntroductionTypes of Research Methodology

Objective of studyScope and limitation of the study


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Introduction:Research is the systematic process of collecting and analyzing information (data) in order toincrease our understanding of the phenomenon about which we are concerned or interested.

Research is systemic quest of undiscovered knowledge. Therefore the discovery and creationof knowledge is the heart of the research. It is a never ending process: discoveries andcreations lead to new discoveries and new creation.

Types of Data Collection:1) Primary Data Collection:

The primary is collected first times. Primary Data is collected on the basis ofpersonalinterviews, questionnaire etc.

2) Secondary Data Collection:Secondary data are those data which is already collected and stored. Secondary data caneasily get from the Annual Reports, Journals etc. of the company. It will save the time,

money and efforts to collect the data. Secondary data also made available through trademagazines, books, Internet etc.

This project has a limited primary data collection based on the interview of theGeneralManger, Finance and other concerned member of finance department. But primary datacollection has certain limitation (confidential data information). Secondary data is gatheredfrom the annual reports, Red Herring Prospectus, and Internet. The aim of data collection isto gain familiarity and to achieve new insights into the Working Capital Managem

entof the company.

Project is based on1) Annual Report of 2004-052) Annual Report of 2005-063) Annual Report of 2006-074) Annual Report of 2007-085) Annual Report of 2008-096) Annual Report of 2009-10

Objective of the Study:Study of the working capital management is important because unless the working

capital ismanaged effectively, monitored efficiently planed properly and reviewed periodically atregular intervals to remove bottlenecks if any the company cannot earn profits and increaseits turnover. With this primary objective of the study, the following further objectives areframed for a depth analysis


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1. To study the working capital management of ARSS Infrastructure Projects Limited;

2. To study the optimum level of current assets and current liabilities of the company;

3. To study the liquidity position through various working capital related ratios;

4. To study the working capital components such as receivables accounts, cash management,Inventory position;

5. To study the way and means of working capital finance of the ARSS InfrastructureProjects Limited;

6. To estimate the working capital requirement of ARSS Infrastructure Projects Limited;

7. To study the operating and cash cycle of the company;

Scope of the Study:The scope of the study is identified after and during the study of the project.

The study of theworking capital is totally based on the trend analysis ratio analysis working capital leverageetc. and 5years annual reports of the company while other things like competitoranalysis,Industry analysis are discussed in the part of company profile.

Limitation of the Study:

1. Limited Data:

This project has completed with annual reports of the company; it just constitut

es one part ofdata collection i.e. secondary. There were limitations for primary data collection because ofconfidentiality.

2. Limited Period:This project is totally based on 6 years annual reports. Conclusion and recommendation arebased on such limited data. The trend of last six years may or may not reflect the realworking capital position of the company.

3. Limited Area:

It was difficult to collect all the competitors and their financial information.Recent industryfigures were also difficult to get.

4. Limited Competitors:In this project a few important competitors of the company are discussed, restsare leftbecause of compatibility.


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Working Capital Level and Analysis

Working Capital LevelWorking Capital Trend Analysis

Current Assets AnalysisCurrent Liability Analysis

Changes of Working CapitalOperating Cycle

Working Capital Leverage


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Working Capital Level:The consideration of the level investment in current assets should avoid two

danger pointsexcessive and inadequate investment in current assets. Investment in current

assets should bejust adequate, not more or less, to the need of the business firms. Excessiv

e investment incurrent assets should be avoided because it impairs the firms profitability,

as idle investmentearns nothing. On the other hand inadequate amount of working capital can be

threatenedsolvency of the firms because of its inability to meet its current obligatio

n. It should berealized that the working capital need of the firms may be fluctuating with

changing businessactivity. This may cause excess or shortage of working capital frequently. T

he managementshould be prompt to initiate an action and correct imbalance.

(Amount in Rs)Particulars 2004-05 2005-06 2006-07 2007-08

2008-09 2009-10

A) Current AssetsInventories 58,429,517 104,206,335 73,298,835 622,103,1601,882,704,940 3,701,088,128Sundry Debtors 1,165,300 71,791,868 145,136,306 653,574,370428,533,465 786,122,901

Cash & Bank 19,100,114 50,648,882 116,425,792 373,999,265717,214,943 1,095,090,536

Loans & Advances 48,575,716 81,219,576 205,984,507 506,967,157557,410,278 1,406,480,936

Total of A 127,270,647 307,866,661 540,845,439 2,156,643,9523,585,863,626 6,988,782,501

B) Current Liabilities

Current liabilities 42,632,767 121,648,520 105,763,831 858,935,0861,147,928,616 1,447,454,152Provision 7,535,964 9,823,827 35,261,598 92,135,009172,295,570 258,380,043

Total of B 50,168,731 131,472,347 141,025,428 951,070,0951,320,224,186 1,705,834,194

Net W.C. (A-B) 77,101,916 176,394,314 399,820,011 1,205,573,8572,265,639,440 5,282,948,307

Table........: Size of Working Capital

Working Capital Trend Analysis:

In working capital analysis the direction at changes over a period of time is of crucial

importance. Working capital is one of the important fields of management. Itis therefore very

essential for an analyst to make a study about the trend and direction of working capital over

a period of time. Such analysis enables as to study the upward and downwardtrend in current


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assets and current liabilities and its effect on the working capital position.

"Analysis of working capital" trends provide as base to judge whether the practice and

privilege policy of the management with regard to working capital is good enough or an

important is to be made in managing the working capital funds.


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(Amount in Rs)

Years 2004-05 2005-06 2006-072007-08 2008-09 2009-10

77,101,916 176,394,314 399,820,011 1,205,573,857 2,265,639,440 5,282,948,307Net W. C.

100 229 5191564 2938 6852

*W.C. Indices

Table......: Working Capital Size

* Working Capital Indices base year 2004-2005 taken as 100

Working Capital Indices8000

6852

70006000

W. C. indices

50004000

2938W.C. Indices

3000

Expon. (W.C. Indices)1564

2000 5191000

229100

02004-05 2005-06 2006-07 2007-08 2008-09

2009-10

Years

Figure.....: Working Capital Indice

sObservation:The net working capital of ARSS Infrastructure Projects Limited is continuouslyincreasingfrom 2004-05 as the indices shows in the figure. The working capital indices of2009-10compared to 2004-05 is as 68 times because the current assets are increasing continuouslywhere as the current liabilities are not as increased as current assets.There is sudden increase in current assets of 2007-08 compared to its previous


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year i.e. 2.98times. In 2007-08 the company has taken four projects in road, five projects inrailway, oneproject in irrigation of rupees worth 72686 lacs, 29113 lacs, and 6636 lacs continously. Whilein 2008-09, the company has taken only three projects of rupees worth 18098 lacs. The no ofprojects taken in FY 2009-10 are ....... so the value of current assets increased. However thecurrent liabilities of the company increased only 38.56 crores. In current liability of thecompany two things are included i.e. sundry creditors and the provisions (taxes, fringe benefittax, dividend, tax on proposed dividened). The company is bidding for good projects becauseit has sufficient amount of reserves and surplus as well as inventories that means it is using itslong term securities as well as short term securities for its bidding and execution of theprojects.


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Current Assets:Total assets are basically classified in two parts as fixed assets and cu

rrent assets. Fixedassets are in the nature of long term or life time for the organization.

Current assets convert inthe cash in the period of one year. It means that current assets are liqu

id assets or assetswhich can convert in to cash within a year.

(Amount in Rs)

Particulars 2004-05 2005-06 2006-072007-08 2008-09 2009-10

Current AssetsInventories 58,429,517 104,206,335 73,298,835

622,103,160 1,882,704,940 3,701,088,128Sundry Debtors 1,165,300 71,791,868 145,136,306

653,574,370 428,533,465 786,122,901Cash & bank 19,100,114 50,648,882 116,425,792

373,999,265 717,214,943 1,095,090,536Loans & Advances 48,575,716 81,219,576 205,984,507

506,967,157 557,410,278 1,406,480,936Total C. A. 127,270,647 307,866,661 540,845,439

2,156,643,952 3,585,863,626 6,988,782,501

Table .....: Current Asset size

2004-05 2005-06 2006-072007-08 2008-09 2009-10

Year127,270,647 307,866,661 540,845,43

9 2,156,643,952 3,585,863,626 6,988,782,501C. A.

100 241.89 424.961694.96 2871.51 5491.28

C. A. Indices

Table.....: Current AssetsIndices

Current Asset indices7000

60005491.28

5000

C. A. Indices

4000281

7.513000

C. A. indices


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Expon. (C. A. indices)

1694.962000

1000 424.96100 241.89

02004-05 2005-06 2006-07 2007-08 2008-09 200

9-10

Year


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Figure....: CurrentAsset Indices

Composition of Current Assets:Analysis of current assets components enable one to examine in which compon

ents theworking capital fund has locked. A large tie up of funds in inventories aff

ects the profitabilityof the business or the major portion of current assets is made up cash alon

e, the profitabilitywill be ........... because cash is non earning assets.

in %

Year 2004-05 2005-06 2006-072007-08 2008-09 2009-10

Current AssetsInventories 45.90 33.85 13.55

28.85 52.5 52.96Sundry Debtors 0.92 23.32 26.83

30.31 11.95 11.25Cash & bank balances 15.01 16.45 21.52

17.34 20.0 15.67Loans and Advances 38.17 26.38 38.09

23.51 15.54 20.12

Total Current Assets 100 100 100100 100 100

Table ......: Compositionof Current Assets

Current Assets Components

Current Assets Compo. in %

60

50

40

Inventories30

Sundry Debtors

20

Cash & bak balances10

Loans and advances0

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Year


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Figure...: Current Asset Components

Observation:The current assets increases as the sales increase. The excess of current a

ssets is alwayspositive for the company but it is not always good. It may adversely affect

the profitability ofthe firm. There are certain investments for which company pay interest. Fro

m the table ofcomposition of current assets, there is good amount of inventory available

except one year(2006-07). Excess amount of inventory is good for the company because the c

ompany isdiversifying its business into different sectors and there is no certainty

about the projects


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(time of the projects) in certain sectors. The loans and advances of the firmare in zigzag way.The loans and advances should be minimum as the high loans create a greater am

ount ofinterest. The company was doing well from 2006-07 to 2008-09 as the company ha

d takenfour projects in road, five in railway, and one in irrigation. But in 2009-10

it has increasedbecause of the ARSS took good projects. The company is doing better in sundry

debtors inprevious two years. The company had taken its amount from its debtors. Cash an

d bankbalances is good for all the years.

Current Liabilities:Current liabilities mean the liabilities which have to pay in current year. It

includes sundrycreditors means supplier whose payment is due but not paid yet, thus creditors

called ascurrent liabilities. Current liabilities also include short term loan and prov

ision as taxprovision. Current liabilities also includes bank overdraft. For some current

assets like bankoverdrafts and short term loan, company has to pay interest thus the managemen

t of currentliabilities has importance.

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152C. L.

7,535,964 9,823,827 35,261,598 92,135,009 172,295,570 258,380,043Provision

50,168,731 131,472,347 141,025,428 951,070,095 1,320,224,186 1,705,834,194

Total C. L.

Table .......: Current Liabilities Size

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

50,168,731 131,472,347 141,025,428 951,070,095 1,320,224,186 1,705,834,194C. L.Indices 100 262.06 281.1 1895.7 2631.56 3400.2

Table.....: Current Liabilities Indices


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Current Liabilities Indices500045004000

3400.193500

C.L. Indices

30002631.56

25001895.7

current liabilities2000

Expon. (current liabilities)

15001000

281.1262.06

500

10002004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Year

Figure...: Current Liabilities

Observation:

In current liabilities of the company only the sundry creditors and the provision (provision fortaxation, fringe benefit tax, dividend and proposed dividend) are included. Current liabilitiesshow continues growth each year except in 2006-07 and 2009-10 because company createsthe credit in the market by good transaction. To get maximum credit from supplier which isprofitable to the company it reduces the need of working capital of firm. As a current liabilityincreased in the year 2007-08 by 574.39% it also increased the working capital size in thesame year. But company enjoyed over creditors which may include indirect cost of

creditterms in future.

Changes in Working Capital:There are so many reasons for changing the working capital. Also a change of workingcapital depends upon the industry and the sector in which the company is working. Thefollowing are the some factors which can the reasons for changes in Working Capi


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tal ofARSS Infrastructure Projects Limited:

1) Political Factors:................ (PEST Analysis)


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Statement of Changes in Working Capital:(Comparison with previous Year)

Particulars 2008-09 2009-10 Increase DecreaseCurrent Assetsa)Inventories 1,882,704,940 3,701,088,128 1,818,383,188b)Sundry Debtors 428,533,465 786,122,901 357,589,436c)Cash & Bank balances 717,214,943 1,095,090,536 377,875,593d)Loans & Advances 557,410,276 1,406,480,936 849,070,660Total Current Assets 3,585,863,626 6,988,782,501 3,402,918,875Current Liabilitiesa)Current Liabilities 1,147,454,152 1,147,928,616

474,464b)Provision 172,295,670 258,380,04386,084,373Total Current Liabilities 1,320,224,186 1,705,834,194 38,561,008

Net Working Capital 2,265,639,440 5,282,948,306 3,017,308,866

Table....: Changes in Working Capital

Observation:There is a positive working capital which shows the further growth as the c

ompany isexpanding its business into other sectors of the construction. The working

capital increaseddue to the following reasons:1) There is 50% increase in the inventories from previous year because the

company is takingnew projects in new sectors with good worth.2) The current liabilities of the firm is very less.3) The increased total current liabilities is very less compared to the tot

al current assets.

Operating Cycle:The need of working capital arrived because of time gap between production

of goods andtheir actual realization after sale. This time gap is called "Operating Cyc

le" or "WorkingCapital Cycle". The operating cycle of a company is the time duration requi

red to convert

resources into inventories and inventories into cash. The operating cycle is the length of time

between the companys outlay on raw materials, wages and other expanses andinflow of

cash from sales of goods. The continuing flow from cash to suppliers, to inventory, to

accounts receivable and back to cash is what is called the operating cycle.

Operating cycle is an important concept in management of cash and cash working capital.


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The operating cycle reveals the time that elapses between outlays of cash and inflow of cash.

Quicker the operating cycle less amount of investment in working capital isneeded and it


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improves profitability. The duration of the operating cycle depends on nature ofindustriesand efficiency in working capital management.

The operating cycle which is a continuous process has been shown in the following figure.

The Operating Cycle consists of 3 phases:-1. Phase 1

In Phase 1, Cash gets converted into Inventory. This includes purchase of Raw Material,Conversion of Raw Material into Work-in-Progress, Finished Goods and finally thetransferof goods to stock at the end of the manufacturing process.

2. Phase 2

In Phase 2 of the cycle, the Inventory is converted into Receivables as Credit Sales are madeto customers. Firms which do not sell on Credit obviously don't have the Phase 2

of theoperating Cycle.

3. Phase 3

The Last Phase i.e. Phase 3 of the Operating Cycle, represents the stage when Receivables arecollected. This phase completes the operating cycle. Thus, the firm has moved from cash toinventory, to receivables and to cash again.

Calculation of operating cycle

To calculate the operating cycle of the company last five year data has been taken. Operatingcycle of the ARSS Infrastructure Projects Limited vary year to year as changes in policy ofmanagement about credit policy and operating control.


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No. of DaysYear 2005-06 2006-07 2007-08 2008-09 2009-101. Inventory Conversion Period(i) Raw Material 4 2 1 16

21(ii) Work in Progress 31 13 38 52

56(iii) Finished Goods 15 3 1 4

3Total 50 18 40 72

802.Debtors Collection Period 22 58 4631 223.Gross Working Capital Cycle 72 76 86 103

1024. Payment Deferral Period 139 68 113 76

65NET WORKING CAPITAL CYCLE 67 (-) 8 27 (-) 27

37

Table ........: Summary of Operating Cycle

. *All the stores and spares are included in finished goods.** Credit Sales of the company is taken as the sundry debtor of the company.*** The credit purchases are taken as the material purchased during subcontrac

ting chargesof the company.

Observation:The inventory conversion period of the company is almost same in financial yea

rs from 2005to 2009 but in the financial year 2009-10 there is sudden increase (double tim

es) from itsprevious year. Raw Material consumption in 2009-10 decreased from previous yea

rs while

raw material inventory increased. The maximum projects of the company (with joint ventureCompany) finished in the May 2010 as NIRAJ-ARSS joint venture total value of t

he projects26288 lacs. The company is engaged in bidding of big projects so the company k

eeps a betterraw material inventory in FY 2009-10. Also the company has a vision of taking

tenders ofgood projects in next financial year.

ARSS infrastructure Projects Limited is a construction company and its coustomers are theGovernment of different states, Ministry of Railway, Ministry of Infrastructur

e and theGovernment agencies like SAIL, NTPC etc. so there is no any debtors available

among itscoustomers because the Government or their agencies pays the money instantaneo

uslybefore/ during or after the project.The companys debtors are joint venture companies. Sometimes the ARSS and its j

ointventure companies do the project but the company incurres the whole cost. And

there is


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delayed in payment by its joint venture companies. That comes under the debtors collectionperiod. Common sense tells that longer a company has money out, the more risk

it is taking.But there is one positive aspect that will boost the confidence among the comp

anies.

The company is not purchasing on credit from its supplier. So in credit deferral period thecredit purchases taken as a whole sundry creditors. These sundry creditors are

for the bankloans, Advances etc. In all the years from 2005 to 2009 the creditors deferral

period is 360days which is good for the company. The company is enjoying the money of its c

reditors.


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In summary, the operating cycle of the company is good in previous financial years while inFinancial Year 2009-10 the operating cycle is not good because of the company kept a highraw material inventory.

Working Capital Leverage:One of the important objectives of working capital management is by maintainingtheoptimum level of investment in current assets and by reducing the level of investment incurrent liabilities. The company can minimize the investment in the working capital therebyimprovement in return on capital employed is achieved. The term working capitalleveragerefers to the impact of level of working capital on companys profitability. Theworkingcapital management should improve the productivity of investment in current assets andultimately it will increase the return on capital employed. Higher level of investment incurrent assets than is actually required means increase in the cost of Interestcharges on shortterm loans and working capital finance raised from banks etc. and will result i

n lower returnon capital employed and vice versa. Working capital leverage measures the responsiveness ofROCE (Return on Capital Employed) for changes in current assets.

It is measures by applying the following formula,

% Change in ROCEWorking Capital Leverage=

% Change in Current Assets

EBITReturn on capital employed=Total Assets

The working capital leverage reflects the sensitivity of return on capital employed to changesin level of current assets. Working capital leverage would be less in the caseof capitalintensive. Capital employed is same working capital leverage expresses the relation ofefficiency of working capital management with the profitability of the company.

Calculation of Working Capital Leverage (W.C.L.):Particulars 2005-06 2006-07 2007-08 2008-09

2009-10EBIT 42,850,664 139,926,233 378,403,100 705,936,654 1,210,851,636


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Total Assets 299,889,528 667,642,027 1,983,096,5013,731,842,651 7,866,688,808Return on C. E. 0.1428 0.2095 0.1908

0.1891 0.1539% ROCE 14.28 20.95 19.08

18.91 15.39% change C. E. 25.91 31.83 -9.80

-0.89 -22.87% change in C. A. 58.66 43.07 74.92

39.85 48.69W.C.L. 0.44 0.74 -0.13

-0.22 -0.47*C. E. -

Capital Employed**C. A. Cu

rrent AssetsTable.....: Working Capital Leverage

Working Capital leverage1

0.44

0.8

0.6

0.4% Change

0.2Working Capital leverage

0 2006-07 2007-08 2008-09 2009-10-0.2

-0.74 -0.13-0.4

-0.22-0.6

Year

Figure.....: Working Capital Leverage


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% Change in Components of Working CapitalLeverage

80

60% ROCE

40% Change

% Change in ROCE

20% Change i

n Current0 Assets

2005-06 2006-07 2007-08 2008-09 2009-10Working Ca

pital Leverage-20

-40

Year

Observation:The working capital leverage of the company decreased due to decrease in returnon capitalemployed. The change in capital employed went to the negative. The return on capitalemployed basically tells about the return on capital assets employed (excludingthe liabilities)by the company. The decreasing capital employed shows the inefficiency of the managementas the value in total assets is more than the earnings of the company. The inves

tment incurrent assets as well as the fixed assets both is very high. From year 2005 to2009 every yearthe total assets increased more than 50%.


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Working Capital Ratio Analysis

IntroductionRole of ratio analysis

Limitations of ratio analysisClassifications of ratios

Efficiency ratioLiquidity ratio


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Introduction:Ratio analysis is the powerful tool of financial statements analysis. And the financial analysisis a important part of the business planning process such as SWOT analysis (Strength,Weakness, Opportunity, Threats. So no business planning will be successful without thefinancial analysis and financial analysis will not be successful without ratio analysis.

A ratio is define as "the indicated quotient of two mathematical expressions" and as "therelationship between two or more things". The absolute figures reported in the financialstatement do not provide meaningful understanding of the performance and financial positionof the firm. Ratio helps to summaries large quantities of financial data and tomakequalitative judgment of the firms financial performance.

Role of Ratio Analysis:Ratio Analysis provides further insight about the financial strength and weakness of the firm.It helps to appraise the firms in the term of their profitability and efficiency

of performance,either individually or in relation to other firms in same industry. Ratio analysis is one of thebest possible techniques available to management to impart the basic functions like planningand control. As future is closely related to the immediately past, ratio calculated on the basishistorical financial data may be of good assistance to predict the future. E.g.On the basis ofinventory turnover ratio or debtors turnover ratio in the past, the level of inventory anddebtors can be easily ascertained for any given amount of sales. Similarly, theratio analysis

may be able to locate the point out the various arias which need the managementattention inorder to improve the situation. E.g. Current ratio which shows a constant decline trend maybe indicate the need for further introduction of long term finance in order to increase theliquidity position. As the ratio analysis is concerned with all the aspect of the firms financialanalysis liquidity, solvency, activity, profitability and overall performance, it enables theinterested persons to know the financial and operational characteristics of an organization andtake suitable decisions.

Limitation of Ratio Analysis:1) The one of the major and basic limitation of the ratio analysis is that it may difficult to findout a basis for comparison.2) Normally, the ratios are calculated on the basis of historical financial statements. Anorganization for the purpose of decision making may need the hint regarding thefuturehappiness rather than those in the past. The external analyst has to depend upon


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the pastwhich may not necessary to reflect financial position and performance in further.3) The technique of ratio analysis may prove inadequate in some situations if there is differsin opinion regarding the interpretation of certain ratio.4) As the ratio calculates on the basis of financial statements, the basic limitation which isapplicable to the financial statement is equally applicable In case of techniqueof ratioanalysis also i.e. only facts which can be expressed in financial terms are considered by theratio analysis.5) The technique of ratio analysis has certain limitations of use in the sense that it onlyhighlights the strong or problem arias; it does not provide any solution to rectify the problemarias.


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6) For the intra firm comparison, the comparison may be false because different firms use different

accounting policies as some firms use LIFO (Last in First out) method while some use FIFO (First in

First out).

Classification of Ratios:Basically on the basis of working capital management it can be characterized

into followingratios

1) Activity Ratio:Activity ratio is an indicator of how rapidly a firm converts various account

s into cash orsales. The sooner management can convert assets into sales or cash, the more

actively thefirm run. This ratio is also called Asset Management Ratio. As the assets bas

icallycategorized as fixed assets and current assets and again further the current

assets classifiedaccording to individual components of current assets viz. Inventories, Sundry

Debtor, and

receivables etc. The important Activity ratios are as follows(i) Working Capital Turnover Ratio(ii) Inventory Turnover Ratio(iii) Receivable Turnover Ratio(iv)Current Asset Turnover Ratio

1) Working Capital Turnover Ratio:A company uses working capital to fund operations and to purchase inventory.

Theseoperation and inventory are then converted into sales revenue for the company

. The workingcapital turnover ratio is used to analyze the relationship between the cash u

sed to fund

operation and sales generated from these operations. In a general sense, thehigher theworking capital turnover, the better because it means that the company is gen

erating a lot ofsales compared to the cash it uses to fund the sales.

SalesWorking Capital Turnover Ratio=

Net Working Capital

Particulars 2004-05 2005-06 2006-07 2007-08 2008-092009-10

295,777,455 602,467,051 1,338,321,101 3,136,709,419 6,243,752,255 10

,065,504,283Sales

77,101,916 176,394,314 399,820,011 1,205,573,857 2,265,639,443 5,282,948,306Net W.C.

3.836 3.415 3.347 2.602 2.7561.905

W.C.TOR

Table.........: Working Capital Turnover Ratio


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W.C.Turnover Ratio4.5

3.8364

3.415 3.3473.5

2.7563

W.C. TOR

2.6022.5

1.9052

W.C.TOR1.5

Expon. (W.C.TOR)

10.5

0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Year

Observation:The working capital turnover ratio of ARSS declined from 2004-05 to 2009-10, however itincreased in 2008-09. The reciprocal of the ratio is 0.26, 0.29, 0.30, 0.38, 0.36, and 0.52

continuously. It means that for one rupee of sales, the company needs Rs 0.26, 0.29, 0.30,0.38, 0.36, and 0.52. In previous years the company incurred less money for sales while inthese years specially in 2009-10 it is unable to take projects in that amount. The company isincreasing its sales by increasing in the net working capital.

2) Inventory Turnover Ratio:Inventory turnover ratio indicates the efficiency of the firm in producing and selling itsproducts. It is calculated by dividing the cost of goods sold by average inventory:

Cost of Goods SoldInventory Turnover ratio =

Average Inventory

Particulars 2005-06 2006-07 2007-082008-09 2009-10


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467,324,486 1,119,159,494 2,051,226,3444,228,198,523 6,644,038,328

Cost of goods sold81,317,926 88,752,585 347,700,998

1,252,404,050 2,791,896,534Avg. InventoryI. T.OR 5.75 12.61 5.90

3.38 2.38

Table ....: Inventory Turnover Ratio


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Inventory Turnover Ratio14 12.611210

I. T. OR

85.9

5.756

3.38I.T. OR

4 2.3820

2005-06 2006-07 2007-08 2008-09 2009-10

Year

Figure ......: Inventory Turnover Ratio

Observation:Inventory turnover ratio basically tells about the efficiency of the firm in taking the projectand to accomplish that. The inventory turnover shows how rapidly the inventory is turninginto receivables through sales. A high inventory turnover ratio is good becausethe no of daysconverting the inventories into the sales will become less. As in 2006-07 the inventoryturnover ratio is 12.61 times so the inventory holding days is only 29 days while from 2007-

08 to 2009-10 the inventory turnover ratio decreasing means the no of days in inventoryconverting is increasing. This can bad for the organization as this creates unnecessary tie-upof funds, reduced profit, and increased costs.

3) Debtors Turnover Ratio:A firm sells goods and/ or services for cash and credit. When the firm extends credits to itscoustomers, debtors (Accounts Receivables) are created in the firms accounts. The liquidityposition of the firm depends on the quality of debtors to great extent.

Gross SalesDebtors Turnover Ratio =

Average Debtors

For an Infrastructure Company like ARSS the gross sales considers as the contract revenue.The scrap values are not included in Gross Sales because it further comes into sales withother income. Average Debtors calculated by opening plus closing balance divide


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by 2.Increasing volume of receivables without a matching increase in sales is reflected by a lowreceivable turnover ratio. It is indication of slowing down of the collection system or anextend line of credit being allowed by the customer organization. The latter maybe due to thefact that the firm is losing out to competition. A credit manager engage in thetask of grantingcredit or monitoring receivable should take the hint from a falling receivable turnover ratiouse his market intelligence to find out the reason behind such failing trend.


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Debtor turnover indicates the number of times debtors turnover each year. Generally the

higher the value of debtors turnover, the more is the management of credit.

*in days

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Gross sales 295,777,455 602,467,051 1,338,321,101 3,136,709,419 6,243,752,255 10,065,504,283Avg. Debtors 1,632,619 36,478,584 216,928,175 399,355,338 541,053,918 607,328,183D.T.R 181.2 16.52 6.17 7.85 11.54 16.57A. C. P.* 2 22

58 46 31 22

Table.....: Debtor Turnover Ratio and Average Collection Period

DebtorsTurnoverRati

o 16.5218

16.57Debtors Turn Over Ratio

1614

11.54

12107.85

86.17

6DTR

420

2005-06 2006-07 2007-08 2008-09 2009-10

Year

Figure....: DebtorsTurnover ratio

Observation:Debtors Turnover ratio indicates the no of times debtors turnover each y

ear. Higher the value


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of debtors turnover, the more efficient is the management of credit because the collection

period of the debtors will low. Maximum debtors turnover ratio in all five years is 16.57 in

2009-10. It increases from 2006-07 also there is sudden jump in collecting the amount of

debtors in 2008-09 and in 2009-10. The increased Debtors Turnover Ratioshows the better

management in debtors collection (from its joint venture companies).

Current Asset Turnover Ratio:Current assets turnover ratio is calculate to know the firms efficiency

of utilizing the currentassets .current assets includes the assets like inventories, sundry debt

ors, bills receivable, cash


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in hand or bank, marketable securities, prepaid expenses and short termloans 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 indicateto 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.

SalesCurrent Asset Turnover Ratio=

Current Assets

Particulars 2004-05 2005-06 2006-072007-08 2008-09 2009-10

295,777,455 602,467,051 1,338,321,101 3,136,709,419 6,243,752,255 10,065,504,283Sales

127,270,647 307,866,661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501C. A.C. A. TOR 2.32 1.96 2.47

1.45 1.74 1.44

Table .........: Current Assets TurnoverRatio

Current Asset Turnover Ratio3

2.472.32

2.5

1.962C. A. TOR

1.74

1.451.44

1.5

1C. A. TOR

0.5

02004-05 2005-06 2006-07 2007-08

2008-09 2009-10

Years


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Figure ...: Current Asset Turnover Ratio

Observation:This ratio is very significant as it shows how fast the current assets t

urns into sales. Thecurrent asset turnover ratio is in haphazard way but comparing to 2006-0

7 the ratio is low inrecent years. In previous years the ratio was good. The current asset ch

anges in sales in 155days, 184 days, and 146 days continuously in 2004-05, 2005-06, and 2006-

07. While in2007-08, 2008-09, 2009-10 the days are 248 days, 207 days, and 250 days

continuously. The


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increasing no of days of current asset turnover ratio because company can maintain high level

of inventory for upcoming its projects.

Liquidity Ratio:Current Ratio:The current ratio is a crude and quick measure of the firms liquidity. The

current iscalculated by dividing current assets by current liabilities:

Current AssetsCurrent Ratio =

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 withina 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.

This ratio is important as the value of the current assets may decrease orincrease but thevalue of the current liabilities is always constant. That has to be paid.

Particulars 2004-05 2005-06 2006-072007-08 2008-09 2009-10

127,270,647 307,866,661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501Current Assets

42,632,767 121,648,520 105,763,831858,935,086 1,147,928,616 1,447,454,152

Current LiabilitiesCurrent Ratio 2.99 2.53 5.11

2.51 3.12 4.83

Table ......: Current Ratio

Current ratio6

5.11

4.835

Current Ratio

43.12

2.992.53 2.51

3


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Current ratio

2

1

02004-05 2005-06 2006-07 2007-08

2008-09 2009-10

Year


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Figure....: Current Ratio

Observation:As a conventional rule, a current ratio of 2 to 1 or more is considered satis

factory. In all theyears the current ratio of ARSS is more than 2. It means the company has its

short termsecurities (cash & bank balances, Inventories, Inventories, loans and advance

s) to fulfill itsshort term liabilities (sundry creditors, provision for taxation). Also the c

urrent ratio showsthe margin of safety for its creditors. Higher the ratio greater will be the

margin of safety.

Quick Ratio:Quick ratios establish the relationship between quick or liquid assets and li

abilities. An assetis liquid if it can be converting in to cash immediately or reasonably soon w

ithout a loss ofvalue. Cash is the most liquid asset other assets which are consider to be re

latively liquid andinclude in quick assets are debtors, bills receivable and marketable securiti

es. Inventories areconsidered as less liquid. Inventory normally required some time for realizing into cash.

Their value also is tendency to fluctuate. The quick ratio is found out by dividing quick assets

by current liabilities:

Current Assets - InventoriesQuick Ratio =

Current Liabilities

Particular 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

127,270,647 307,866,661 540,845,439 2,156,643,952 3,585,863,626 6,988,782,501C. A.

58,429,517 104,206,335 73,298,835 622,103,160 1,882,704,940 3,701,088,128Inventories

68,841,130 203,660,326 467,546,604 1,534,540,792 1,703,158,686 3,287,694,373Quick C. A.

42,632,767 121,648,520 105,763,831 858,935,086 1,147,928,616 1,447,454,152C. L.Quick 1.61 1.67 4.42 1.79

1.48 2.27Ratio

Table .......: Quick Ratio


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Quick Ratio4.42

54.5

4Quick Ratio

3.53 2.2

72.5 1.79

1.671.61 1.48

2Quick Ratio

1.51

0.50

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Year

Observation:The quick ratio of 1 to 1 is considered as satisfactory financial condition. Thecompany hasnot a very high ratio throughout except one year 2006-07. In 2006-07 the companyhad highvalue of cash & bank balances, sundry debtors etc. whereas the sundry creditorsandprovision were low. High quick ratio will benefit to the company in its bidding

activities.


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WORKING MANAGEMENT CAPITALCOMPONENTS

Receivables ManagementInventory ManagementCash Management


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Receivable Management:Introduction:Receivables or debtors are the one of the most important parts of the current assets which iscreated if the company sells the finished goods to the customer but not receivethe cash forthe same immediately. Trade credit arises when firm sells its products and services on creditand dose not receive cash immediately. It is essential marketing tool, acting asbridge for themovement of goods through production and distribution stages to customers. Tradecreditcreates receivables or book debts which the firm is expected to collect in the near future. Thereceivables include three characteristics:

1) It involve element of risk which should be carefully analysis.

2) It is based on economic value. To the buyer, the economic value in goods or servicespasses immediately at the time of sale, while seller expects an equivalent valueto be receivedlater on.

3) It implies futurity. The cash payment for goods or serves received by the buyer will bemade by him in a future period.

Objective of Receivable Management:The sales of goods on credit basis are an essential part of the modern competitive economicsystem. The credit sales are generally made up on account in the sense that there are formalacknowledgements of debt obligation through a financial instrument. As a marketing tool,they are intended to promote sales and there by profit. However extension of credit involves

risk and cost, management should weigh the benefit as well as cost to determinethe goal ofreceivable management. Thus the objective of receivable management is to promotesales andprofit until that point is reached where the return on investment in further funding ofreceivables is less than the cost of funds raised to finance that additional credit.

Particulars 2005-06 2006-07 2007-08 2008-092009-10

71,791,868 145,136,306 653,574,370 428,533,465

786,122,901Sundry DebtorIndices 100 202 910 597

1095

Table ..........: Size of Receivable


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Receivables Indices1200

1095

1000Receivables Indices

910800

597

600

Indices

400202

200100

02005-06 2006-07 2007-08

2008-09 2009-10

Year

Average Collection Period:The average collection period measures the quality of debtors since it ind

icate the speed oftheir collection. The shorter the average collection period, the better th

e quality of the debtorssince a short collection period implies the prompt payment by debtors. The

average collection

period should be compared against the firms credit terms and policy judgesits credit andcollection efficiency. The collection period ratio thus helps an analyst i

n two respects:

1. In determining the collectability of debtors and thus, the efficiency of collection efforts.

2. In ascertaining the firms comparative strength and advantages related to its credit policy

and performance.

The debtors turnover ratio can be transformed in to the number of days of

holding ofdebtors:

*in days

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Gross sales 295,777,455 602,467,051 1,338,321,101 3,136,709,419 6,243,752,255 10,065,504,283Avg. Debtors 1,632,619 36,478,584 216,928,175 399,35


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5,338 541,053,918 607,328,183D.T.R 181.2 16.52 6.177.85 11.54 16.57*A. C.P. 2 22 58

46 31 22

Table........: Average Collection Period


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Average Collection Period(in days)70

58Average Collection Period

6046

50

40

3130

2222 Acp

20

102

02004-05 2005-06 2006-07 2007-

08 2008-09 2009-10

Year

Observation:The average collection period increased from 2004-05 to 2006-07 and then it decreases from2006-07 to 2009-10. The increasing average collection period shows the inefficiency of themanagement in collecting the debtors money while the decreasing average collection periodshows the efficient management and better credit policy. The reason behind avera

gecollection period is high due to debtors turnover ratio is low. In 2006-07 the company hadtaken a no of projects but the company did projects alone. So there is no chanceof debting in2006-07. While in 2007-08 the company had taken 10 projects on the joint venturebasis.Companys share is 100% in those projects. In 2008-09 and 2009-10 the company hastaken 3and 5 projects on the joint venture basis so there is case of debting.

Inventory Management:In financial view, inventory defined as the sum of the value of raw material and

supplies,including spares, semi-processed material or work in progress and finished goods. The natureof inventory is largely depending upon the type of operation carried on. A firmneglecting themanagement of inventories will be jeopardizing its long term profitability and may failultimately. It is possible to reduce the inventory to a certain level without affectingproduction and sales, by using simple inventory planning and controlling techniq


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ue. Thereduction in "excessive" inventories carries a favourable impact on the companysprofitability. Maintaining inventories involves tying up of the companys funds andincurrence of storage and handling cost. There are three components: Raw material, Work inprogress; and finished goods involved in inventory management.

Objective of Inventory Management:


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In the case of Inventory Management, the firm is faced with the problem of meeting twoconflicting needs:

1) To maintain a large amount of inventory for efficient and smooth production;

2) To maintain a minimum amount of inventory for increasing the profitability;

But the firms avoid both the cases. In the first case, the firms avoid overinvestment becauseof (a) unnecessary tie-up of the firms funds and loss of profits (b) excess carrying cost (c)risk of liquidity. Another danger of holding excess inventories is deteriorationof theinventories. Maintaining a minimum level of inventories is also dangerous. The consequencesof under-investment in inventories are: (a) production hold-ups (b) failure to delivercommitments. So the aim of inventory management is:

(1) To ensure a continuous supply of raw material to facilitate uninterrupted production;

(2) To maintain a sufficient stock of the raw material in period of short supply

andoverprices;

(3) To maintain sufficient finished goods inventory for smooth sales operation,and efficientcustomer service;

(4) To maintain the carrying cost and time;

(5) To control investment in inventories and keep at optimum level;

Particulars 2005-06 2006-07 2007-08 2008-09

2009-10Inventories1,803,094 1,517,210 10,008,237 255,489,

710 464,589,560Raw Materials

69,724,520 57,300,640 560,122,560 1,512,045,660 2,523,687,458W.I.P.

32,678,721 14,480,985 40,523,740 81,715,450 651,456,230Finished Goods

0 0 11,448,623 33,454,120 61,354,880

Stores and SparesTotal 104,206,335 73,298,835 622,103,160 1,882,704,

940 3,701,088,128Indices 100 70.34 597.0 1806.70

3551.70

Table .....: Size of Inventories

*Year 2005-06 is taken as base year for comparison of indices.


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Inventories Indices45004000 3551.

7Inventory Indics

350030002500

1806.72000

Indices

1500

Expon. (Indices)1000 597500 100 70.34

02005-06 2006-07 2007-08 2008-09 2009-

10

Year

Figure ....: Inventory Indices

Inventory Components:The firms inventory consist following components(i) Raw material(ii) Work- in-progress(iii) Finished goods

To analyze the level of raw material inventory and work in progress inventory held by the

firm on an average it is necessary to examine the efficiency with which the firmconverts rawmaterial inventory and work in progress into finished goods.

* in%Particulars 2005-06 2006-07 2007-08 2008-09

2009-10Components of Inventory

1.73 2.06 1.60 13.5712.55

Raw Material66.91 78.17 90.03 80.31

68.18

W.I.P.31.36 19.75 6.51 4.34

17.60Finished Goods

0 0 1.84 1.781.66

Stores & spares100 100 100 100

100Total as %


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Table .....: Components of Inventory


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Inventory Components10090

Inventory Components

807060

Raw Material

5040

W.I.P.30

Finished Goods20

Stores And Spares

100

2005-06 2006-07 2007-08 2008-09 2009-10

Year

Figure ....: Inventory Components

Observation:As the ARSS Infrastructure Projects Limited is a construction company. And it takes projectof different segment in construction sector like road, railway, irrigation, aviation, marine,jetty etc. The companys inventory work in progress is very high in terms of cashas well asin terms of % and it increases year by year. The company is taking a no of projects which

completes in more than one year because of season factor.The company did not concern about the stores and spares in the period of 2005 and 2006. Butas the stores and spares plays a important role in the construction industry examples forequipments. So from 2007 onwards the company made a certain account in the inventories. In2008-09 the recession was happening. The company was unable to good projects because ofthe downturn in the industry. As mentioned earlier the company had taken only three projectsin the railway segment in 2008-09. So the raw material remained high and the finished goods

remained low.

Inventory Holding Period:The reciprocal of inventory turnover gives average inventory holding in percentage term.When the no of days in a year (said as 360) are divided by inventory turnover, days ofinventory holding (DIH) can obtain

360DIH =


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Inventory Turnover

To examine the efficiency of the firm (how the firm converts raw material into work inprocess and work-in-process into finished goods), raw material inventory and work in processinventory should be known. The raw material inventory should be related to materialsconsumed, and work-in-process to the cost of production.


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Materialconsumed

Raw Material Inventory Turnover =Avg. Raw Mat

erial Inventory

Cost of Production

Work-in-Process Inventory Turnover =Avg. work-

in-process inventory

Particulars 2005-06 2006-072007-08 2008-09 2009-10

I. T. R. 5.75 12.615.90 3.38 2.38

D.I.H. 63 2961 107 151

Material consumed 318,633,733 557,143,4222,712,158,285 5,189,605,087 8,173,704,857

Avg. Raw Material 901,547 3,320,304

5,762,724 132,748,974 360,039,635R. M. I. TOR 353.42 167.80470.63 39.09 22.70

R. M. I.H. 1 21 9 16

Cost of production 500,003,207 1,100,961,7582,077,269,099 4,269,390,233 7,213,779,108

Avg. WIP Inventory 64,077,019 63,512,580308,711,600 1,036,084,110 2,017,866,569

W.I.P. TOR 7.80 17.336.73 4.12 3.57

WIP I. H. 46 2154 87 101

Table .....: Raw Material Holding Period and Work in Progress Inventory

holding Period

Inventory Turnover Ratio14

12.61Inventory Turnover Ratio

12

10

85.9

5.756


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3.38 ITR

4

2.382

02005-06 2006-07 2007-0

8 2008-09 2009-10

Year

Figure .....: Inventory Turnover Ratio


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Inventory Holding Period:

Holding Periods (in Days)151

107101

87

63 Daysof Inventory Holding

6154

46 Raw Material Holding Period

29WIP H

oldingPeriod21 16

92

1 1

2005-06 2006-07 2007-08 2008-09 2009-10

Year

Observation:From 2006-07 the no of inventory holding days are increasing. Days of inventoryholdingmeans the no of days taken to change raw material into work in progress and workinprogress to finished goods. The inventory holding days are increasing from 2006to 2009

because Raw Material holding Period as well as the Work in progress holding period isincreasing. The company is engaged in different segment of the construction industry anddays for each project in different segment are not same. Also the other factorslike seasonfactor, availability of the projects etc. also influence days of inventory holding. In 2006-07the no of days of inventory holding, raw material holding period, WIP holding period are lowdue to there are many small projects completed.

Cash Management:

Cash is common purchasing power or medium of exchange. As such, it forms the mostimportant component of working capital. The term cash with reference to cash managementis used in two senses, in narrow sense it is used broadly to cover cash and generally acceptedequivalent of cash such as cheques, draft and demand deposits in banks. The broader view ofcash includes near cash items, such as marketable securities or bank time deposits. The basic


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characteristic of near-cash assets is that they can readily be converted into cash. They alsoprovide short term investment outlet for excess and are also useful for meetingplannedoutflow of funds. Irrespective of the form in which it is held, a distinguishingfeature of cashas assets is that it has no earning power. Company have to always maintain the cash balanceto fulfill the dally requirement of expenses. There are four primary motives formaintain thecash as follow:

Cash management is concerned with the managing of:


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(i) Cash flows into and out of the firm,(ii) Cash flows within the firm, and(iii) Cash balances held by the firm at a point of the time by financing deficitor investingsurplus cash.

Motives for Holding Cash:The firms need to hold cash may be attributed to the following three motives:

Transaction Motive:The transactions motive requires a firm to hold cash to conduct its business inthe ordinarycourse. The firm needs cash primarily to make payments, for purchases, wages andsalaries,operating expenses, taxes, dividends etc. There should be a proper channel between the cashinflow and cash outflow in the firm. For periods when cash payments exceed cashreceipts,the firm should maintain some cash balance to be able to make required payments.Usuallythe firm maintains such accounts to meet anticipated payments whose timings is not perfectlymatched with cash receipts.

The Precautionary Motive:The precautionary motive is the need to hold cash to meet contingencies in the future. It helpsin the future. The precautionary amount of cash depends upon the predictabilityof cashflows. If cash flows are predicted with accuracy, less cash will be maintained for emergency.If the firm is able to borrow at short notice there will less need for precautionary balance.Generally the precautionary balance held in marketable securities and relativelyless in cash.

The speculative Motive:

The speculative motive relates to the holding of cash for investing in profit makingopportunities as and when they arise. As the firm can postpone materials purchasing whenthe price of materials is high. And make purchase in future when the price of materials falls.

The primary motives to hold cash and marketable securities are: the transactionsand theprecautionary motives.

Advantage of Cash Management:

Cash does not enter in to the profit and loss account of an enterprise, hence cash is neitherprofit nor losses but without cash, profit remains meaningless for an enterpriseowner.

1. A sufficient of cash can keep an unsuccessful firm going despite losses;

2. An efficient cash management through a relevant and timely cash budget may enable afirm to obtain optimum working capital and ease the strains of cash shortage, fa


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scinatingtemporary investment of cash and providing funds normal growth;


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3. Cash management involves balance sheet changes and other cash flow thatdo not appear

in the profit and loss account such as capital expenditure;

Particulars 2004-05 2005-062006-07 2007-08 2008-09 2009-10

19,100,114 50,648,882 116,425,792 373,999,265 717,214,943 1,095,090,536Cash & bank balancesIndices 100 265.17 609.55 1958.09 3755.02 5733.42

Table ...... : Cash and Bank Balances Indices

Cash & Bank balances Indices

Cash & Bank Balances indices

7000

5733.426000500040003000

indices

1958.092000

Expon. (indices)

609.551000 265.17100

02005-06 2006-07 2007-08

2008-09 2009-10

Year

Table ....... : Size and Indices of Cash

Observation:The cash and bank balances of ARSS was continuously increasing from 2005-06

to 2009-10.The reason of increasing cash and bank balances was the increasing no of pr

ojects with theirvalue. The company entered into new areas and earned increasing profits. Th

ere was a sharpincrease in cash and bank balances in 2007-08 from its previous year (i.e.

212.23%


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increase). There was increase due to 10 projects of railway, road, irrigation taken.

Cash Cycle:One of the distinguishing features of the fund employed as working capital

is that constantlychanges its form to drive ,,business wheel. It is also known as ,,circulati

ng capital whichmeans current assets of the company, which are changed in ordinary course o

f business fromone form to another, as for example, from cash to inventories, inventories

to receivables andreceivables to cash.


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Figure ......: Cash Trading Cycle

Basically cash management strategies are essentially related to the cash cycle together withthe cash turnover. The cash cycle refers to the process by which cash is used topurchase therow material from which are produced goods, which are then send to the customer,who laterpay bills. The cash turnover means the number of time firms cash is used duringeach year.

*in days

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

63 29 61107 151I. H. P.A. R. P. 22 58 4631 22Less A. P. P.Cash Cycle

Observation:

Investopedia explains Cash Conversion Cycle - CCCUsually a company acquires inventory on credit, which results in accounts payable. A company canalso sell products on credit, which results in accounts receivable. Cash, therefore, is not involved untilthe company pays the accounts payable and collects accounts receivable. So the cashconversion cycle measures the time between outlay of cash and cash recovery.

This cycle is extremely important for retailers and similar businesses. This measure illustrates how

quickly a company can convert its products into cash through sales. The shorterthe cycle, the lesstime capital is tied up in the business process, and thus the better for the company's bottom line.


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Working Capital Finance and Estimation

IntroductionSources of Capital Finance

Working Capital loan and InterestEstimation of Working Capital


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Introduction:Funds available for period of one year or less is called short term finance. InIndia short termfinance are used as working capital finance. Two most significant short term sources offinance for working capital are trade credit and bank borrowing. Trade credit ratio of currentassets is about 40%, it is indicated by Reserve Bank of India data that trade credit has grownfaster than the growth in sales. Bank borrowing is the next source of working capital finance.The relative importance of this varies from time to time depending on the prevailingenvironment. In India the primary source of working capital financing are tradecredit andshort term bank credit. After determine the level of working capital, a firm hasto considerhow it will finance. Following are sources of working capital finance.

Sources of Working Capital Finance: 1551) Trade credit2) Bank Finance

1) Trade credit:

Trade credit refers to the credit that a customer gets from suppliers of goods in the normalcourse of business. The deferral of payment in short term financing is called trade credit. It ismajor source of financing for firm. Particularly small firms are heavily dependon trade creditas a source of finance since they find it difficult to raised funds from banks or other sourcesin the capital market. Trade credit is mostly an informal arrangement, and it granted on anopen account basis.For ARSS infrastructure Projects Limited the sundry creditors are the trade credit finance

which is shown in the balance sheet of the firm.

2) Bank finance:Banks are main institutional source of working capital finance in India. After trade credit,bank credit is the most important source of financing working capital in India.A banksconsiders firms contract revenue and services and desirable levels of current assets indetermining its working capital requirements. The amount approved by bank for the firmsworking capital is called credit limit. Credit limit is the maximum funds whicha firm can

obtain from the banking system. In practice banks do not lend 100% credit limit;they deductmargin money.

There are two types of loans involved as bank finance in ARSS Infrastructure ProjectsLimited.

1) Secured loans in which the term loan, working capital loan; and loan from NBFCs. The


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working capital loan is secured by way of mortgages of land and building and hypothecationof plant and machinery, stock and book debts.

2) Unsecured loans in which the loans from banks and from others are included.


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*Amount in Crores

Particular 2005-06 2006-07 2007-082008-09 2009-10

W. C. loan 14.34 23.04 48.33139.06 288.54

Interest 1.64 2.89 7.3423.99 46.39

Table ..... : Working capital loan and Interest

W. C. Loan (in crore)350

288.54Working Capital Loan

300250200

139.06150

W. C. Loan100

Expon. (W. C. Loan)

48.3314.34 23.04

500

2005-06 2006-07 2007-08 2008-09 2009-10

Year

Figure ...: Working Capital loan

Interest (in Crores)60

4

6.3950

40Interest

30 23.99


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Observation:ARSS Infrastructure Projects Limited has taken huge working capital loan to fulfill therequirement of working capital, thus company had paid huge amount of interest onworkingcapital loan. As the working capital loan increases, the interest amount also increases.However the increase of interest is not in the same proportion as the working capital loan.

Estimation of Working Capital Loan:After considering the various factors affecting the working capital needs, it isnecessary toforecast the working capital requirements. For this purpose, first of all estimate of all currentassets should be made, these should be followed by the estimation of all currentliabilities.Difference between the estimated current assets and estimated current liabilities willrepresent the working capital requirements.The estimation of working capital requirement of ARSS Infrastructure Projects ltd is basedon few assumptions which are discussed as follows:

1) Inventory holding Periods will decrease and become 60 days instead of present151 days.2) Debtor collection Period remains same as 22 days because it will boost the confidencewith its joint venture companies.3) Cash & Bank balance of the company is in better position. There is not necessity to furtherincrease because cash and bank balance is a nonearning asset.4) Loans and Advances of the company should increase because the companys biddingprocess depends on this. However more loan and advances affects to the company in the formof interest. As it will increase by 50% (estimated).

5) Current Liabilities and provision will increase by 40%.

Particular 2010-11 (estimated)Current AssetsInventories (Holding Period 60 days) 40% 5,181,523,379Sundry Debtor (collection period 22 days) 30% 1,021,959,771Cash & bank Balances 10% 1,204,599,590Loans & Advances 2,109,721,404Total Current Assets 9,517,804,144

Current Liabilities & ProvisionsCurrent Liabilities 40% 2,026,435,813

Provision 40% 3,617,320,602Total Current Liabilities 2,388,167,873

Net Working Capital (estimated) 7,129,636,271

Observation:ARSS infrastructure Company Projects Limited is an emerging company in the constructionindustry. It has a reputed name in the field of construction. The company is diversifying its


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business into new arena of industry like irrigation, jetty, aviation, marine etc.


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The construction projects are awarded through competitive bidding process to bidders withcertain eligibility requirement and financial strength of the company. The company bid forprojects both as a standalone basis as well as through major specific joint ventures. So thecompany requires a sufficient amount of working capital to bid for the projects.The companyhas large amount of inventories available which will definitely benefit for thecompany infuture. Companys debtor collection period is 22 days (approximately) which showstheefficient management of the company. The borrowings are continuously increasingwhich canharm the company.


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CONCLUSION AND RECOMMENDATION

RecommendationConclusionBibliography


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Conclusion:Working capital management is important aspect of financial management. The study ofworking capital management of ARSS Infrastructure Projects ltd. has revealed that thecurrent ratio was as per the standard industrial practice but the liquidity position of thecompany showed an increasing trend. The study has been conducted on working capital ratioanalysis, working capital leverage, working capital components which helped thecompany tomanage its working capital efficiently and effectively.

Working capital of the company was increasing and showing positive working capital

per year. It shows good liquidity position. Positive working capital indicates that

company has the ability of payments of short terms liabilities.

Current assets are more than current liabilities indicate that company used long term

funds for short term requirement, where long term funds are most costly then short

term funds.

The company has very high amount of inventories as 370.10 crore in the year 2010. It

means that companys efficiency in bidding is very less.

The inventory holding period of the company is continuously increasing because of

the increase in the work in progress conversion period. The company takesthree

month in changing raw materials into finished goods.

The working capital leverage is in negative from previous three years ofthe company

which shows the inefficiency of the management as the return on capital employed isvery less compared to its total asset employed.

The liquidity ratio of the company is in excellent position as the current assets and the

quick current assets both are very high. The company can pay its currentliabilities

and quick current liabilities.

The current asset turnover ratio of the years 2007-08, 2008-09, 2009-10 are low. It

means that companys ability to put its current assets into sales are very

low.

Recommendation:Recommendation can be use by the firm for the betterment increased of the firm after studyand analysis of project report on study and analysis of working capital. I wouldlike torecommend;

Company should maintain its current assets for meeting its short term obl


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igation.

Suggestions:


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The following suggestions are only for the beneficiary of the company. These aretotallybased according to my point of view after examine the project;

Company should reduce the inventory holding period with use of zero inventory

concepts.


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36750752 a Project Report on Working Capital Management of Arss Infrastructure Limited

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Transcript of 36750752 a Project Report on Working Capital Management of Arss Infrastructure Limited