PROJECT REPORT ON WORKING CAPITAL MANAGEMENT. PDF

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PROJECT REPORT ON WORKING CAPITAL MANAGEMENT AT KIRLOSKAR PNEUMATICS CO. LTD, HADAPSAR. Submitted By: Rajesh Menon (M.B.A-II) In Partial Fulfillment for Degree of Master of Business Administration during the year 2006-07 VISHWAKARMA INSTITUTE OF MANAGEMENT, PUNE. 1 ACKNOWLEDGEMENT It is a matter of ...

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PROJECT REPORT ON WORKING CAPITAL MANAGEMENT

AT

KIRLOSKAR PNEUMATICS CO. LTD, HADAPSAR.

Submitted By: Rajesh Menon (M.B.A-II) In Partial Fulfillment for Degree of Master of Business Administration during the year 2006-07 VISHWAKARMA INSTITUTE OF MANAGEMENT, PUNE.

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ACKNOWLEDGEMENT It is a matter of great satisfaction and pleasure to present this report on Working Capital Management of KIRLOSKAR PNUEMATIC CO. LTD. (KPCL), Pune

411013. I take this opportunity to owe my thanks to all

those involved in my training.

This project report could not have been completed without the guidance of our director, Dr. SHARAD L. JOSHI & project guide Prof. SMITA SOVANI. Their timely help & encouragement helped me to complete this project successfully.

I thank Mrs. VINEETA KAPOOR (SR. OFFICER

HRD) for giving

me opportunity to work at KPCL, as a FINANCE TRAINEE.

I am thankful to Mr. R.B. SHALIGRAM (SR. FINANCE MANAGER) and MR. R.R. TAVERGIRI (DGM, FINANCE) for their encouragement and able guidance at every stage of my training work.

I express my gratitude towards staff of KPCL, those who have helped me directly or indirectly in completing the training.

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INDEX:No.

Particulars:

Page No:

1

Executive Summary

1

2

Objective & Scope of Project

3

3

Company Profile

4

4

Theoretical Background

7

5

Research Methodology

60

6

Data Analysis

61

7

Findings

92

8

Recommendations

93

9

Bibliography

94

3

EXECUTIVE SUMMARY Company being established as Kirloskar pneumatic company limited in 1958, made an entry with manufacture of air compressor and pneumatic tools & soon diversified by including air conditioning & transmission equipments. At Kirloskar Pneumatic up to date manufacturing facilities, including CNC machines, Stringent quality control procedures and systems, research & development, foundry, heat treatment facilities, screw rotor machines, gear grinding machines, metallurgical laboratories, tool room and integrated computer system, have all been set up with sole idea of achieving the highest standards of quality & performance. My Project is the study of working capital management. The study was conducted at the head office of Kirloskar Pneumatic Co. Ltd. Pune. The project was of 2 months duration. During the project I interviewed the executives & staff to collect the data, & also made use of company records & annual reports. The data collected were then compiled, tabulated and analyzed. Working Capital Management is a very important facet of financial management due to: Investments in current assets represent a substantial portion of total investment. Investment in current assets & the level of current liabilities have to be geared quickly to change sales. Some the points to be studied under this topic are: How much cash should a firm hold? What should be the firms credit policy? How to & when to pay the creditors of the firm? How much to invest in inventories?

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By studying about the company s different areas I came to know certain things like: Acid test ratio is more than one but it does not mean that company has excessive liquidity. Standard current ratio is 2:1 and for industry it is 1.33:1. KPCL s ratios satisfactory. Debtors of the company were high; they were increasing year by year, so more funds were blocked in debtors. But now recovery is becoming faster. Working capital turnover ratio is continuously increasing that shows increasing needs of working capital.

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OBJECTIVES: 1) To identify the financial strengths & weakness of the company. 2) Through the net profit ratio & other profitability ratio, understand the profitability of the company. 3) Evaluating company s performance relating to financial statement analysis. 4) To know the liquidity position of the company with the help of current ratio. 5) To find out the utility of financial ratio in credit analysis & determinig the financial capacity of the firm.

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OVERVIEW OF KPCL Established in 1958, Kirloskar pneumatic company limited started with the manufacture of air compressors and pneumatic tools. Immediately thereafter the company expanded its activated in the field of air-conditioning and refrigeration amchiney. Further diversification in the manufacture of hydraulic power transmission equipment followed.

Kirloskar pneumatic is held in high esteem for process system engineering and turnkey project expertise. The result of its success in this area is reflected in company s association with virtually every project and industry in the country.

At Kirloskar pneumatic, up to date manufacturing facilities, including CNC machine stringent quality control procedures and system, Rand D, foundry, heat treatment facilities, screw rotor machines, gear grinding machines, metallurgical and metrological labs, tool room, and an integrated computer system have all been set up with the sole idea of achieving the highest standards of quality and performance.

KPLC is among the first few companies in India to secure the ISO 9001certification in all its operations.

Companies products are manufactured under the survey of renowned inspection agencies such as Lloyd s, MMD, IRS, NTPC, EIL, PDIL, DGS and D, RITES, And many more. And are well accepted not only in India but also in countries of south east Asia, Africa, gulf, middle east, west Asia, Europe, and U.S. ACD (Air compressor division) consist of two sub divisions o ACD machine shop o ACD assemb

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Product groups

FINANCE DEPARTMENT Major Major customers

competito

Market share

rs

in % 25

Screw

well drilling

Atlas

compressors

operation.

Copco,

diesel driven

Approx.

ELGI.

at 10KG/CM2 Screw

Textile,

Atlas

compressors

granites

copco,

electric motor

industries.

ELGI

Balanced

Power,

CPT,

opposed

Petrochemic

Ingersol

piston

al, Cement,

rand.

compressor

Steel

driven at 3 to

Industries.

10

driven at 7 to 10KG/CM2. 55

9 KG/CM2. Vertical

All small-

reciprocating

scale

water culled.

industries.

IR, ELGI

20

Just started.

Driven at 7 to 9 KG/CM2 Centrifugal

Cement,

Atlas

compressor

Steel, Textile

copco,

Driven by 7

industries.

Demag.

All railways.

ELGI

KG/CM2 & above. Rlwys brake

60

Compressor.

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Organization Chart Mr.Suhas Kolhatkar (Vice President)

Asst. Vice President

General Ledger and Branches

Income and Sales Tax Cash Section & Purchase Bill Section

Cost Accounts Drs. For Sales (Sec.)

Excise, Customs Octroi, Insurance & Internal Audit

Finance and Budgeting (Sec.)

Managers

Asst. Managers

Officers

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INTRODUCTION:

Management is an art of anticipating and preparing for risks, uncertainties and overcoming obstacles. An essential precondition for sound and consistent assets management is establishing the sound and consistent assets management policies covering fixed as well as current assets. In modern financial management, efficient allocation of funds has a great scope, in finance and profit planning, for the most effective utilization of enterprise resources, the fixed and current assets have to be combined in optimum proportions.

Working capital in simple terms means the amount of funds that a company requires for financing its day-to-day operations. Finance manager should develop sound techniques of managing current assets.

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WHAT IS WORKING CAPITAL? Working capital refers to the investment by the company in short terms assets such as cash, marketable securities. Net current assets or net working capital refers to the current assets less current liabilities.

Symbolically, it means, Net Current Assets = Current Assets

Current Liabilities.

DEFINITIONS OF WORKING CAPITAL: The following are the most important definitions of Working capital:

1) Working capital is the difference between the inflow and outflow of funds. In other words it is the net cash inflow .

2) Working capital represents the total of all current assets. In other words it is the Gross working capital , it is also known as Circulating capital or Current capital for current assets are rotating in their nature.

3) Working capital is defined as The excess of current assets over current liabilities and provisions . In other words it is the Net Current Assets or Net Working Capital .

IMPORTANCE OF WORKING CAPITAL Working capital may be regarded as the lifeblood of the business. Without insufficient working capital, any business organization cannot run smoothly or successfully.

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In the business the Working capital is comparable to the blood of the human body. Therefore the study of working capital is of major importance to the internal and external analysis because of its close relationship with the current day to day operations of a business. The inadequacy or mismanagement of working capital is the leading cause of business failures.

To meet the current requirements of a business enterprise such as the purchases of services, raw materials etc. working capital is essential. It is also pointed out that working capital is nothing but one segment of the capital structure of a business.

In short, the cash and credit in the business, is comparable to the blood in the human body like finance s life and strength i.e. profit of solvency to the business enterprise. Financial management is called upon to maintain always the right cash balance so that flow of fund is maintained at a desirable speed not allowing slow down. Thus enterprise can have a balance between liquidity and profitability. Therefore the management of working capital is essential in each and every activity.

WORKING CAPITAL MANAGEMENT INTRODUCTION: Working Capital is the key difference between the long term financial management and short term financial management in terms of the timing of cash. Long term finance involves the cash flow over the extended period of time i.e 5 to 15 years, while short term financial decisions involve cash flow within a year or within operating cycle. Working capital management is a short term financial management.

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Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities & the inter relationship that exists between them. The current assets refer to those assets which can be easily converted into cash in ordinary course of business, without disrupting the operations of the firm.

Composition of working capital Major Current Assets 1) Cash 2) Accounts Receivables 3) Inventory 4) Marketable Securities

Major Current Liabilities 1) Bank Overdraft 2) Outstanding Expenses 3) Accounts Payable 4) Bills Payable

The Goal of Capital Management is to manage the firm s current assets & liabilities, so that the satisfactory level of working capital is maintained. If the firm can not maintain the satisfactory level of working capital, it is likely to become insolvent & may be forced into bankruptcy. To maintain the margin of safety current asset should be large enough to cover its current assets. Main theme of the theory of working capital management is interaction between the current assets & current liabilities.

CONCEPT OF WORKING CAPITAL: There are 2 concepts: Gross Working Capital Net Working Capital

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Gross working capital: - It is referred as total current assets. Focuses on, Optimum investment in current assets: Excessive investments impairs firm s profitability, as idle investment earns nothing. Inadequate working capital can threaten solvency of the firm because of its inability to meet its current obligations. Therefore there should be adequate investment in current assets. Financing of current assets: Whenever the need for working capital funds arises, agreement should be made quickly. If surplus funds are available they should be invested in short term securities. Net working capital (NWC)

defined by 2 ways,

Difference between current assets and current liabilities Net working capital is that portion of current assets which is financed with long term funds. NET WORKING CAPITAL = CURRENT ASSETS

CURRENT

LIABILITIES

If the working capital is efficiently managed then liquidity and profitability both will improve. They are not components of working capital but outcome of working capital. Working capital is basically related with the question of profitability versus liquidity & related aspects of risk.

Implications of Net Working Capital: Net working capital is necessary because the cash outflows and inflows do not coincide. In general the cash outflows resulting from payments of current liability are relatively predictable. The cash inflows are however difficult to predict. More predictable the cash inflows are, the less NWC will be required. But where the cash inflows are uncertain, it will be necessary to maintain current assets at level adequate to cover current liabilities that are there must be NWC.

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For evaluating NWC position, an important consideration is trade off between probability and risk.

The term profitability is measured by profits after expenses. The term risk is defined as the profitability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment. The risk of becoming technically insolvent is measured by NWC.

If the firm wants to increase profitability, the risk will definitely increase. If firm wants to reduce the risk, the profitability will decrease.

PLANNING OF WORKING CAPITAL: Working capital is required to run day to day business operations. Firms differ in their requirement of working capital (WC). Firm s aim is to maximize the wealth of share holders and to earn sufficient return from its operations.

WCM is a significant facet of financial management. Its importance stems from two reasons: Investment in current asset represents a substantial portion of total investment. Investment in current assets and level of current liability has to be geared quickly to change in sales. Business undertaking required funds for two purposes: To create productive capacity through purchase of fixed assets. To finance current assets required for running of the business. The importance of WCM is reflected in the fact that financial managers spend a great deal of time in managing current assets and current liabilities.

The extent to which profit can be earned is dependent upon the magnitude of sales. Sales are necessary for earning profits. However, sales do not

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convert into cash instantly; there is invariably a time lag between sale of goods and the receipt of cash. WC management affect the profitability and liquidity of the firm which are inversely proportional to each other, hence proper balance should be maintained between two. To convert the sale of goods into cash, there is need for WC in the form of current asset to deal with the problem arising out of immediate realization of cash against good sold. Sufficient WC is necessary to sustain sales activity. This is referred to as the operating or cash cycle.

WORKING CAPITAL CYCLE:

A firm requires many years to recover initial investment in fixed assets. On contrary the investment in current asset is turned over many times a year. Investment in such current assets is realized during the operating cycle of the firm.

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Each component of working capital (namely inventory, receivables and payables) has two dimensions ... TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect dues from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales. It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing down a plughole, they remove liquidity from the business

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If you ... Collect receivables (debtors) faster. Collect receivables (debtors) slower. Get better credit (in terms of duration or

Then ... You release cash from the cycle. Your receivables soak up cash. You increase your cash resources.

amount) from suppliers. Shift inventory (stocks)

You free up cash.

faster. Move inventory (stocks) slower.

You consume more cash.

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Operating cycle: The working capital cycle refers to the length of time between the firms paying the cash for materials, etc., entering into production process/stock & the inflow of cash from debtors (sales), suppose a company has certain amount of cash it will need raw materials. Some raw materials will be available on credit but, cash will be paid out for the other part immediately. Then it has to pay labour costs & incurs factory overheads. These three combined together will constitute work in progress. After the production cycle is complete, work in progress will get converted into sundry debtors. Sundry debtors will be realized in cash after the expiry of the credit period. This cash can be again used for financing raw material, work in progress etc. thus there is complete cycle from cash to cash wherein cash gets converted into raw material, work in progress, finished goods and finally into cash again. Short term funds are required to meet the requirements of funds during this time period. This time period is dependent upon the length of time within which the original cash gets converted into cash again. The cycle is also known as operating cycle or cash cycle.

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