22. optcl-fin-bhw-12.docx

8/11/2019 22. OPTCL-Fin-Bhw-12.docx

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A PROJECT REPORTON

WORKING CAPITAL MANAGEMENT

of Orissa Power Transmission Corporation Limited

Of

A Pr oject Repor t Submitted in par tial fu lf il lment of the requir ements for the awardof the Degree

M aster Of Business Admini stration

Submitted By:

PRADEEP KUMAR SAHOO

Regd No: 23/612/09Roll No: 10MBA653

Under the uidance of

I nternal Guide External Guide

Mr. SAMIR MISHRA Mr. MALAYA RANJAN DASFaculty of NICE, Talcher Deputy Manager (Finance) OPTCL

DDCE, SAMBALPUR UNIVERSITY


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EXAMINERS CERTIFICATE

The project report of Pradeep Kumar Sahoo working capital

management Is approved and is acceptable in quality and form.

Internal Examiner External Examiner


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DECLARATION

I Pradeep Kumar Sahoo a student of DDCE, Sambalpur University do

hereby declare that the project report on the topic

working capital

management is done on true finding and my original own effort. This project

has not been submitted or published in any institution or anywhere for the

award of any degree .

Pradeep Kumar Sahoo


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ACKNOWLEDGEMENT

I am thankful to OPTCL .for giving me an opportunity to conduct work in their

esteemed organization. I am honored to take this opportunity to sincerely thank

Mr. Malaya Ranjan Das finance manager OPTCL, who allowed me to work

under such an esteemed organization. I am also thankful to Mr. Malaya

Ranjan Das for expressing his faith & confidence in me by assigning this

internship to me.

I am also grateful to our guide Mr. Samir Mishra, faculty of NICE, Talcher,

whose continued and valuable guidance can never be forgotten by me and

without whom, this study could not have got present shape. I could also not

forget the expert guidance and encouragement that he has shown to me in spite

of his busy schedule.

Lastly I thank all the respondents whose responses played a major role in

completion of this research work and without whose help I couldnt have

completed the project work.

Pradeep Kumar Sahoo


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CERTIFICATE

This is to certify that Pradeep Kumar Sahoo bearing Regd. No: 23/612/09 and

Roll No. 10MBA653 is a bonafide student of DDCE, Sambalpur University. She

has conducted the project report on Working Capital Management is a

bonafide work done by him as fulfillment of the requirement for the degree of

MBA under DDCE, Sambalpur University. He has worked with all honesty and

sincerity.

I wish him all success in life.

Samir Mishra(Faculty Guide)


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ORISSA POWER TRANSMISSION CORPORATION LIMITED(A Government of Orissa Undertaking)

Regd.Office: Janpath: Bhubaneswar-751022

TTOO WWHHOOMM SSOO EEVVEERR IITT MMAAYY CCOONNCCEERRNN

This is to certify that the project titled Working Capital Management is an

original piece of worked done by Pradeep Kumar Sahoo and is submitted in

the partial fulfillment of MASTER OF BUSINESS ADMINISTRATION. This project

has been carried out under my guidance and supervision.

I am pleased to record here that his performance during the project was

extremely satisfactory.

I wish his all Success in future endeavors.

MALAYA RANJAN DASDeputy Manager(Finance) OPTCL


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CERTIFICATE OF APPROVAL

This is to certify that the Project Report Entitled:

WORKING CAPITAL MANAGEMENT

Submitted by Pradeep Kumar Sahoo (Enr. No 23/612/09), Sambalpur University, Burla towards

partial fulfillment of the requirements for the award of the degree of Master of Business

Administration (MBA) is a bona fide record of the work carried out by him under the able guidance

of Mr. Samir Mishra , Faculty, NICE, Talcher.

(Approval of the center director)Center Director


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CONTENTS

Chapter-1 Introduction

Chapter -2 Objectives Methodology Scope of the study Need Limitations of the study

Chapter-3 Company profile

Chapter-4 Project overview Meaning & concept Working capital level Working capital trend analysis Current assets analysis Current liability analysis Operating cycle Working capital leverage

Chapter-5 Data Analysis and interpretation

Chapter-6 Findings and Suggestion

Chapter-7 Conclusion

Chapter-8 Bibliography


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Research is systemic quest of undiscovered knowledge. Therefore the

discovery and creation of knowledge is the heart of the research. It is a never

ending process: discoveries and creations lead to new discoveries and new

creation.


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CHAPTER-2

Objective of the study :

Study of the working capital management is important because unlessthe working capital is managed effectively, monitored efficiently planed

properly and reviewed periodically at regular intervals to remove bottlenecks ifany the company cannot earn profits and increase its turnover. With this

primary objective of the study, the following further objectives are for a depthanalysis


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1) To study the working capital management of Orissa power transmissioncorporation project limited;

2) To study the optimum level of current assets and current liabilities of thecompany;

3) To study the liquidity position through various working capital relatedratios;

4) To study the working capital components such as receivables accounts,cash management;

5) To study the way and means of working capital finance of the Orissa power transmission corporation project limited;

6) To estimate the working capital requirement of Orissa powertransmission project 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 the working capital is totally based on the trend analysisratio analysis working capital leverage etc. and 5 years annual reports of the

company while other things like competitor analysis, industry analysis arediscussed in the part of company profile.

Research methodology:

Types of data collection:

Primary data collection:

The primary is collected first times. Primary data is collected on the basis of

personal interviews, questionnaire etc.

Secondary data collection:

Secondary data are those data which is already collected and stored. Secondarydata can easily get from the annual reports, journals etc. of the company. It willsave the time, money and efforts to collect the data. Secondary data also madeavailable through trade magazines, books, internet etc.

This project has a limited primary data collection based on the interview of thegeneral manager, finance and other concerned member of finance department.


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Reform (Transfer of Undertakings, Assets, Liabilities, Proceedings andPersonnel) Scheme Rules 1996. As per the Scheme, the transmission,distribution activities of the erstwhile OSEB along with the related assets,liabilities, personnel and proceedings were vested on GRIDCO. Simultaneouslythe hydro generation activities of OSEB along with related assets, liabilities,

personnel and proceedings were vested on OHPC. In order to privatize thedistribution functions of electricity in the State, four Distribution Companiesnamely Central Electricity Supply Utility of Orissa Limited (CESU), NorthEastern Electricity Supply Company of Orissa Limited (NESCO), SouthernElectricity Supply Company of Orissa Limited (SOUTHCO) & WesternElectricity Supply Company of Orissa Limited (WESCO) were incorporatedunder the Companies Act, 1956 as separate corporate entities. During

November 1998 the State Govt. issued the "Orissa Electricity Reform (Transferof Assets, Liabilities, Proceedings and Personnel of GRIDCO to DistributionCompanies) Rules 1998" wherein the electricity distribution and retail supplyactivities along with the related assets, liabilities, personnel and proceedingswere transferred from GRIDCO to the four Distribution Companies. Through a

process of Internal Competitive Bidding (ICB), the four Distribution Companieswere privatized during 1990. After separation of Distribution business,GRIDCO left with electricity Transmission and Bulk Supply/Trading activities.GRIDCO was also declared as the State Transmission Utility and wasdischarging the functions of State Load Dispatch Center (SLDC). The Govt. ofIndia enacted the Electricity Act, 2003 which came into effect from 10th June2003. Under the provision of the said Act, trading in electricity has beenrecognized as a distinct licensed activity, which can only be undertaken by alicensee to be granted by the appropriate Commission. The Act specifically

prohibits the STU and Transmission Company in the State from engaging in the business of trading. GRIDCO being a State Transmission Utility was not permitted to engage itself in the trading in electricity and was required tosegregate its activities in a manner within the Tran tonal period allowed underthe Act that, the entity, which will undertake transmission STU, and SLDCfunction would not undertake the activities of Trading and Bulk Supply ofElectricity. Keeping in view the statutory requirement of the Electricity Act forseparation of trading and transmission function in to two separate entities, theState Govt. incorporated Orissa Power Transmission Corporation Limited(OPTCL) to take over the transmission, STU / SLDC functions of GRIDCO. Inexercise of the power conferred under Section 39, 131, 133 and 134 of the


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Electricity Act, 2003, read with Section 23 and 24 of the Orissa ElectricityReform Act,1995, the State Govt. issued the notification "Orissa ElectricityReform (Transfer of Transmission and Related Activities) Scheme 2005" on09.06.2005. The Scheme was made effective from 01.04.2005. By virtue of theTransfer Scheme, 2005, OPTCL now undertaking the functions of transmissionof electricity in the State of Orissa and has been declared as the StateTransmission Utility. OPTCL is also discharging the functions of SLDC

Started commercial operation from 01.04.2005 only as a TransmissionLicensee. (a deemed Transmission Licensee under Section 14 ofElectricity Act, 2003)

Notified as the State Transmission Utility (STU) by the State Govt. anddischarges the State Load Dispatch functions.

Number of employees as on (10.05.2010) : 3145 Executives-759, Non-Executives - 2836

Number of posts vacant as on 01.05.2009: 1782 Executives-845, Non-Executives- 937

Number of Pensioners as on 01.05.2009: 6600

Number of Grid S/S including switching stations 95 Length of EHT lines 10,902.479 Ckt-Kms.

Number of Bays 1597(30th Oct 2010)

ORISSA POWER TRANSMISSION CORPORATION LIMITED(OPTCL), one of the largest Transmission Utility in the country wasincorporated in March 2004 under the Companies Act, 1956 as a companywholly owned by the Government of Orissa to undertake the business oftransmission and wheeling of electricity in the State. The registered office of theCompany is situated at Bhubaneswar, the capital of the State of Orissa. Its

projects and field units are spread all over the State.


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OPTCL became fully operational with effectfrom 9th June 2005 consequent upon issue ofOrissa Electricity Reform (Transfer ofTransmission and Related Activities) Scheme,2005 under the provisions of Electricity Act, 2003and the Orissa Reforms Act, 1995 by the StateGovernment for transfer and vesting oftransmission related activities of GRIDCO with OPTCL. The Company has

been designated as the State Transmission Utility in terms of Section 39 of theElectricity Act, 2003. Presently the Company is carrying on intra statetransmission and wheeling of electricity under a license issued by the OrissaElectricity Regulatory Commission. The Company is also discharging thefunctions of State Load Dispatch Centre. The Company owns Extra HighVoltage Transmission system and operates about 9550.93 ckt kms oftransmission lines at 400 kV, 220 kV, 132 kV levels and 81 nos. of substationswith transformation capacity of MVA. The day-to-day affairs of the Companyare managed by the Managing Director assisted by whole-time FunctionalDirectors as per the advice of the Board of Directors constituted. They are inturn assisted by a team of dedicated and experienced professionals in thevarious fields.

Mission

Transmission of power in large quantity with affordable price as per theexpectation of customers, Government of Orissa and OERC

Increase transmission network need based, to meet the demand of thestate in 2025

Develop a portfolio of Intra-State and someInter-State transmission assets in nationalmarket including business expansion forevacuation of power outside the state incollaboration with PGCIL and others.

Adoption of best construction and O&M practices supported by system driven processesenabled by cutting edge IT solution

Diversion of business by providing consultations in the areas ofconstruction and maintenance services and also in Telecommunication
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and other emerging areas so as to achieve optimum utilization of assetsfor generation of additional revenue

Develop skilled and satisfied human resources, fostering a service-oriented attitude to its customers/stake holders and becoming empowered

to meet customer need in the changing scenarios. Building Research and Development wing for adoption of newtechnology Discharge the social responsibility with commitment onEnvironment protection, Health, Safety, Energy conservation andcommunity Development.

Achieve excellence in project implementationPractice higher standard of corporate governance and be financially

sound company.

Objectives To effectively operate Transmission lines and Sub-Stations in the State

for evacuation of power from the state generating stations and centralsector so as to feed power to state distribution companies, wheeling ofexcess power to needy states, maintenance of the existing lines and sub-stations to undertake power system improvement by renovation upgradation and modernization of the transmission network.

Main objects of OPTCL is to carry on the business of transmission and

wheeling of electrical energy in the State and elsewhere for which purpose to acquire, establish, construct, erect, lay, operate, run, manage,maintain, enlarge, alter, renovate, modernize extra high voltage, highvoltage, low voltage electrical transmission lines and associated sub-stations, cables, wires, accumulators plants, motors, meters, apparatus,computers and materials connected with transmission,telecommunication and telemeter equipments.

To undertake, for and on behalf of others, erection, operation,maintenance, management of extra high voltage, high voltage low

voltage lines and associated sub-stations, equipments apparatus, cableand wires. As per provisions under Section 39(1) of the Electricity Act 2003, the

functions of OPTCL being a State Transmission Utility (STU) shall be: To undertake transmission of electricity through intra-state Transmission

System. To discharge all functions of planning and co-ordination relating to intra-

State transmission system with Central Transmission Utility, StateGovernments, Generating Companies, Regional Power Committees,

Authority, Transmission and Distribution Licensees and any other personnotified by the State Government in this behalf.


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To ensure development of an efficient co-coordinated and economicalsystem of intra-state transmission lines for smooth flow of electricityfrom a generating station of load centers.

To provide non-discriminatory open access to its transmission system for

use by any licensee or generating company or any consumer on paymentof transmission charges-surcharge as may be specified by the StateCommission.To restore power at earliest possible time through deployment of

Emergency Restoration System in event any natural disasters like cyclone,flood etc.

Vision

OPTCL ranks one among the leading Transmission utilities in India.Transmitting quality, reliable and secured power with minimum transmissionloss at a competitive price.


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Chapter-4

Working capital management:

Working capital is the life blood and nerve centre of a business. Just as

circulation of blood is essential in the human body for maintaining life, working


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capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital.

Working capital refers to that part of firms capital which is required for

financing short term or current assets such as cash, marketable securities,debtors, and inventories. In other words working capital is the amount of fundsnecessary to cover the cost of operating the firm.

Meaning:

Working capital means the funds (i.e. capital) available and used for dayto day operation (i.e. working) of an enterprise. it consists broadly of that

portion of assets of a business which are used in or related to its currentoperations. it refers to funds which are used during an accounting period togenerate a current income of type which is consistent with major purpose of afirm existence.

Working capital management is concerned with the problems arise inattempting to manage the 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 to those assets which inordinary course of business can be, or, will be, turned in to cash within oneaccounting year without undergoing a diminution in value and without thedisrupting the operation of the firm.

Objective of working capital :

As already observed, the objective of the firm is to maximize theshareholders wealth. in its Endeavour to do so, a firm should earn sufficientreturn from their operations. Earning a steady amount of profit requiressuccessful bid activity but the completed projects cannot be realizedinstantaneously. So there is a need for working capital in the form of currentassets to deal with the problem arising out of lack of immediate realization ofcash against the project done. Therefore sufficient working capital is necessaryto sustain bidding activity. Technically this is called operating cycle.

Gross working capital and net working capital:

There are two concepts of working capital


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1. Gross working capital:

Gross working capital refers to the firm s investment in current assets.

2. Net working capital:

Net working capital refers to the difference between the current assetsand current liabilities. current liabilities are those claims of outsiders which areexpected to mature for payment within an accounting year. It can be positive ornegative.

Types of working capital:

The operating cycle creates the need for current assets (working capital).However the need does not come to an end after the cycle is completed. Toexplain this, the continuing need of current assets a destination should be drawn

between permanent and temporary working capital.

1) Permanent Working Capital:

The need for current assets arises because of the operating cycle. To carryon business there is always minimum level of current assets which is constantly

required by a firm to carry on its business operations. Permanent or fixedworking capital is the minimum level of current assets. It is permanent in thesame way as the firms fixed assets are. Depending upon the changes 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 be maintained to support the peak periods of sales, and investmentin debtors (receivable) may also increase during such period. On the other hand,investment in raw material, work in progress and finished goods will fail if the

market is slack.

Amount Temporary of or

Working Fluctuating Capital


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Permanent

Figure 4.1: Permanent and temporary working capital

2) Fluctuating or Variable Working Capital:

Any amount over and above the permanent level of working capital istemporary, fluctuating or variable working capital. It is the extra working capitalneeded to support the changing production and sales activities of the firm.

From the above figure, it is shown that permanent working capital is stable overtime, while temporary working capital is fluctuating- sometimes increasing andsometimes decreasing. However the permanent working capital line need not behorizontal. For a growing firm like ARSS the requirement of working capital isincreasing.

Temporary

Amount or

of FluctuatingWorking

Capital

Permanent

Figure 4.2: Permanent and Temporary Working capital

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.


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5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the net working. Networking capital is the excess of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets

exceeds the current liabilities are more than the current assets. Current liabilities

are those liabilities, which are intended to be paid in the ordinary course of

business within a short period of normally one accounting year out of thecurrent assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES:

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation, if it does not amt. to app. Of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept

whereas net working capital is an accounting concept of working capital. Both

the concepts have their own merits. The gross concept is sometimes preferred to

the concept of working capital for the following reasons:


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1. It enables the enterprise to provide correct amount of working capital at

correct time.

2. Every management is more interested in total current assets with which

it has to operate then the source from where it is made available.

3. It take into consideration of the fact every increase in the funds of the

enterprise would increase its working capital.

4. This concept is also useful in determining the rate of return on

investments in working capital. The net working capital concept,

however, is also important for following reasons:

It is qualitative concept, which indicates the firms ability tomeet to its operating expenses and short-term liabilities.

IT indicates the margin of protection available to the short term

creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital

requirement out of the permanent sources of funds.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL:

SOLVENCY OF THE BUSINESS: Adequate working capital helps in

maintaining the solvency of the business by providing uninterrupted of

production.

Goodwill: Sufficient amount of working capital enables a firm to make

prompt payments and makes and maintain the goodwill .


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Easy loans: Adequate working capital leads to high solvency and

credit standing can arrange loans from banks and other on easy and

favorable terms.

Cash Discounts: Adequate working capital also enables a concern to

avail cash discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures

regular supply of raw material and continuous production.

Regular Payment Of Salaries, Wages And Other Day TO Day

Commitments: It leads to the satisfaction of the employees and raises

the morale of its employees, increases their efficiency, reduces wastage

and costs and enhances production and profits.

Exploitation Of Favorable Market Conditions: If a firm is having

adequate working capital then it can exploit the favorable market

conditions such as purchasing its requirements in bulk when the prices

are lower and holdings its inventories for higher prices.

Ability To Face Crises: A concern can face the situation during the

depression.

Quick And Regular Return On Investments: Sufficient working

capital enables a concern to pay quick and regular of dividends to its

investors and gains confidence of the investors and can raise more funds

in future.

High Morale: Adequate working capital brings an environment of

securities, confidence, high morale which results in overall efficiency in a

business.

EXCESS OR INADEQUATE WORKING CAPITAL:

Every business concern should have adequate amount of working capital

to run its business operations. It should have neither redundant or excess

working capital nor inadequate nor shortages of working capital. Both excess


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as well as short working capital positions are bad for any business. However,

it is the inadequate working capital which is more dangerous from the point

of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING

CAPITAL:

1. Excessive working capital means ideal funds which earn no profit for

the firm and business cannot earn the required rate of return on its

investments.

2. Redundant working capital leads to unnecessary purchasing and

accumulation of inventories.

3. Excessive working capital implies excessive debtors and defective

credit policy which causes higher incidence of bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the relations with

banks and other financial institution may not be maintained.

6. Due to lower rate of return n investments, the values of shares mayalso fall.

7. The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL:

Every business needs some amounts of working capital. The need for

working capital arises due to the time gap between production and realization of

cash from sales. There is an operating cycle involved in sales and realization ofcash. There are time gaps in purchase of raw material and production;

production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares. To pay wages and salaries


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To incur day-to-day expenses and overload costs such as office

expenses.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customer. To maintain the inventories of the raw material, work-in-

progress, stores and spares and finished stock.

For studying the need of working capital in a business, one has to study

the business under varying circumstances such as a new concern requires a

lot of funds to meet its initial requirements such as promotion and formation

etc. These expenses are called preliminary expenses and are capitalized. The

amount needed for working capital depends upon the size of the company

and ambitions of its promoters. Greater the size of the business unit,

generally larger will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the

growth and expensing of the business till it gains maturity. At maturity the

amount of working capital required is called normal working capital.There are others factors also influence the need of working capital in a

business.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS:

1. NATURE OF BUSINESS: The requirements of working is very

limited in public utility undertakings such as electricity, water supply

and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On

the other hand the trading and financial firms requires less investment

in fixed assets but have to invest large amt. of working capital along

with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the business,

greater is the requirement of working capital.


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3. PRODUCTION POLICY: If the policy is to keep production

steady by accumulating inventories it will require higher working

capital.

4. LENTH OF PRDUCTION CYCLE: The longer the

manufacturing time the raw material and other supplies have to be

carried for a longer in the process with progressive increment of labor

and service costs before the final product is obtained. So working

capital is directly proportional to the length of the manufacturing

process.

5. SEASONALS VARIATIONS: Generally, during the busy

season, a firm requires larger working capital than in slack season.

6. WORKING CAPITAL CYCLE: The speed with which the

working cycle completes one cycle determines the requirements of

working capital. Longer the cycle larger is the requirement of working

capital.

DEBTORS

CASH FINISHED GOODS


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RAW MATERIAL WORK IN PROGRESS

7. RATE OF STOCK TURNOVER: There is an inverse co-relationship

between the question of working capital and the velocity or speed with

which the sales are affected. A firm having a high rate of stock turnover will

needs lower amt. of working capital as compared to a firm having a low rate

of turnover .

8. CREDIT POLICY: A concern that purchases its requirements on

credit and sales its product / services on cash requires lesser amt. of

working capital and vice-versa.

9. BUSINESS CYCLE: In period of boom, when the business is

prosperous, there is need for larger amt. of working capital due to rise

in sales, rise in prices, optimistic expansion of business, etc. On the

contrary in time of depression, the business contracts, sales decline,

difficulties are faced in collection from debtor and the firm may have a

large amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we

shall require large amt. of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have

more earning capacity than other due to quality of their products,

monopoly conditions, etc. Such firms may generate cash profits fromoperations and contribute to their working capital. The dividend policy

also affects the requirement of working capital. A firm maintaining a

steady high rate of cash dividend irrespective of its profits needs

working capital than the firm that retains larger part of its profits and

does not pay so high rate of cash dividend .


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12. PRICE LEVEL CHANGES: Changes in the price level also affect the

working capital requirements. Generally rise in prices leads to increase

in working capital.

Others FACTORS: These are:

Operating efficiency. Management ability. Irregularities of supply. Import policy. Asset structure.

Importance of labor. Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL:

Management of working capital is concerned with the problem that arises

in attempting to manage the current assets, current liabilities. The basic goal of

working capital management is to manage the current assets and current

liabilities of a firm in such a way that a satisfactory level of working capital is

maintained, i.e. it is neither adequate nor excessive as both the situations are bad

for any firm. There should be no shortage of funds and also no working capital

should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm

has a great on its probability, liquidity and structural health of the organization.

So working capital management is three dimensional in nature as

1. It concerned with the formulation of policies with regard to

profitability, liquidity and risk.

2. It is concerned with the decision about the composition and level of

current assets.

3. It is concerned with the decision about the composition and level ofcurrent liabilities.


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WORKING CAPITAL ANALYSIS:

As we know working capital is the life blood and the centre of a business.

Adequate amount of working capital is very much essential for the smoothrunning of the business. And the most important part is the efficient

management of working capital in right time. The liquidity position of the firm

is totally effected by the management of working capital. So, a study of changes

in the uses and sources of working capital is necessary to evaluate the efficiency

with which the working capital is employed in a business. This involves the

need of working capital analysis.

The analysis of working capital can be conducted through a number of

devices, such as:

1. Ratio analysis.

2. Fund flow analysis.

3. Budgeting.

Working Capital Leverage:

One of the important objectives of working capital management is by

maintaining the optimum level of investment in current assets and by reducing

the level of investment in current liabilities. The company can minimize the

investment in the working capital thereby improvement in return on capital

employed is achieved. The term working capital leverage refers to the impact of


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level of working capital on companys profitability. The wo rking capital

management should improve the productivity of investment in current assets

and ultimately it will increase the return on capital employed. Higher level of

investment in current assets than is actually required means increase in the cost

of Interest charges on short term loans and working capital finance raised from

banks etc. and will result in lower return on capital employed and vice versa.

Working capital leverage measures the responsiveness of ROCE (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

EBIT

Return on capital employed= Total Assets

The working capital leverage reflects the sensitivity of return on capitalemployed to changes in level of current assets. Working capital leverage would

be less in the case of capital intensive. Capital employed is same workingcapital leverage expresses the relation of efficiency of working capitalmanagement with the profitability of the company .

Introduction:

Ratio analysis is the powerful tool of financial statements analysis. Andthe financial analysis is an important part of the business planning process suchas SWOT analysis (Strength, Weakness, Opportunity, Threats). So no business

planning will be successful without the financial analysis and financial analysis

will not be successful without ratio analysis.


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A ratio is define as the indicated quotient of two mathematicalexpressions and as the relationship between two or more things. Theabsolute figures reported in the financial statement do not provide meaningfulunderstanding of the performance and financial position of the firm. Ratio helpsto summaries large quantities of financial data and to make qualitative judgmentof the firms financial perfo rmance.

Role of Ratio Analysis:

Ratio Analysis provides further insight about the financial strength andweakness 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 the best possibletechniques available to management to impart the basic functions like planningand control. As future is closely related to the immediately past, ratio calculatedon the basis historical financial data may be of good assistance to predict thefuture. E.g. On the basis of inventory turnover ratio or debtors turnover ratio inthe past, the level of inventory and debtors can be easily ascertained for anygiven amount of sales. Similarly, the ratio analysis may be able to locate the

point out the various arias which need the management attention in order to

improve the situation. E.g. Current ratio which shows a constant decline trendmay be indicate the need for further introduction of long term finance in orderto increase the liquidity position. As the ratio analysis is concerned with all theaspect of the firms financial analysis liquidity, solvency, activity, profitabilityand overall performance, it enables the interested persons to know the financialand operational characteristics of an organization and take suitable decisions.

Limitation of Ratio Analysis:

1) The one of the major and basic limitation of the ratio analysis is that it maydifficult to find out a basis for comparison.

2) Normally, the ratios are calculated on the basis of historical financialstatements. An organization for the purpose of decision making may need thehint regarding the future happiness rather than those in the past. The external


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analyst has to depend upon the past which 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 differs in opinion regarding the interpretation of certain ratio.4) As the ratio calculates on the basis of financial statements, the basiclimitation which is applicable to the financial statement is equally applicable Incase of technique of ratio analysis also i.e. only facts which can be expressed infinancial terms are considered by the ratio analysis.

5) The technique of ratio analysis has certain limitations of use in the sense thatit only highlights the strong or problem arias; it does not provide any solution to

rectify the problem arias.

6) For the intra firm comparison, the comparison may be false because differentfirms use different accounting policies as some firms use LIFO (Last in Firstout) 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 following ratios

1) Activity Ratio:

Activity ratio is an indicator of how rapidly a firm converts variousaccounts into cash or sales. The sooner management can convert assets intosales or cash, the more actively the firm run. This ratio is also called Asset

Management Ratio. As the assets basically categorized as fixed assets andcurrent assets and again further the current assets classified according toindividual components of current assets viz. Inventories, Sundry Debtor, andreceivables 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


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Receivable Management:

Introduction:

Receivables or debtors are the one of the most important parts of thecurrent assets which is created if the company sells the finished goods to thecustomer but not receive the cash for the same immediately. Trade credit ariseswhen firm sells its products and services on credit and does not receive cashimmediately. It is essential marketing tool, acting as bridge for the movement ofgoods through production and distribution stages to customers. Trade creditcreates receivables or book debts which the firm is expected to collect in the

near future. The receivables include three characteristics:

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

2) It is based on economic value. To the buyer, the economic value in goods orservices passes immediately at the time of sale, while seller expects anequivalent value to be received later on.

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

Objective of Receivable Management :

The sales of goods on credit basis are an essential part of the moderncompetitive economic system. The credit sales are generally made up onaccount in the sense that there are formal acknowledgements 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 andcost, management should weigh the benefit as well as cost to determine the goalof receivable management. Thus the objective of receivable management is to

promote sales and profit. In further funding of receivables is less than the costof funds raised to finance that additional credit.

Inventory Management:


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In financial view, inventory is defined as the sum of the value of rawmaterial and supplies, including spares, semi-processed material or work in

progress and finished goods. The nature of inventory is largely depending uponthe type of operation carried on. A firm neglecting the management ofinventories will be jeopardizing its long term profitability and may failultimately. It is possible to reduce the inventory to a certain level withoutaffecting production and sales, by using simple inventory planning andcontrolling technique. The reduction in excessive inventories carries afavourable impact on the companys profitability. Maintaining inventoriesinvolves tying up of the companys funds and incurrence of storage andhandling cost. There are three components: Raw material, Work in progress;and finished goods involved in inventory management.

Objective of Inventory Management :

In the case of Inventory Management, the firm is faced with the problemof meeting two conflicting 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 because of (a) unnecessary tie- up of the firms funds and loss of profits (b) excess carrying cost (c) risk of liquidity. Another danger of holdingexcess inventories is deterioration of the inventories. Maintaining a minimumlevel of inventories is also dangerous. The consequences of under-investment ininventories are: (a) production hold-ups (b) failure to deliver commitments. Sothe aim of inventory management is:

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

(2) To maintain a sufficient stock of the raw material in period of short supplyand overprices;

(3) To maintain sufficient finished goods inventory for maintaining the projectsand for completing, and efficient customer service;

(4) To maintain the carrying cost and time;


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

Cash Management:

Cash is common purchasing power or medium of exchange. As such, itforms the most important component of working capital. The term cash withreference to cash management is used in two senses, in narrow sense it is used

broadly to cover cash and generally accepted equivalent of cash such ascheques, draft and demand deposits in banks. The broader view of cash includesnear cash items, such as marketable securities or bank time deposits. The basiccharacteristic of near-cash assets is that they can readily be converted into cash.They also provide short term investment outlet for excess and are also useful for

meeting planned outflow of funds. Irrespective of the form in which it is held, adistinguishing feature of cash as assets is that it has no earning power. Companyhave to always maintain the cash balance to fulfill the dally requirement ofexpenses. There are four primary motives for maintain the cash as follow:

Cash management is concerned with the managing of:

(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 deficit orinvesting surplus cash.

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

186,925,346 648,276,812 490,881,183 907,019,750

Indices 100 346.81 262.60 485.23


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Motives for Holding Cash:

The firms need to hold cash may be attributed to the following twomotives:

Transaction Motive:

The transactions motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments, for purchases, wages and salaries, operating expenses, taxes,dividends etc. There should be a proper channel between the cash inflow andcash outflow in the firm. For periods when cash payments exceed cash receipts,

the firm should maintain some cash balance to be able to make required payments. Usually the firm maintains such accounts to meet anticipated payments whose timings is not perfectly matched with cash receipts.

The Precautionary Motive:

The precautionary motive is the need to hold cash to meet contingenciesin the future. It helps in the future. The precautionary amount of cash dependsupon the predictability of cash flows. If cash flows are predicted with accuracy,

less cash will be maintained for emergency. If the firm is able to borrow at short

0

100

200

300

400

500

600

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

Cash and Bank Balances Indices

Cash and Bank Balances Indices


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notice there will less need for precautionary balance. Generally the precautionary balance held in marketable securities and relatively less in cash.

Advantage of Cash Management:

Cash does not enter in to the profit and loss account of an enterprise,hence cash is neither profit nor losses but without cash, profit remainsmeaningless for an enterprise owner.

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 mayenable a firm to obtain optimum working capital and ease the strains of cash

shortage, fascinating temporary investment of cash and providing funds normalgrowth;

3. Cash management involves balance sheet changes and other cash flow that donot appear in the profit and loss account such as capital expenditure;

Cash Cycle:

One of the distinguishing features of the fund employed as working

capital is that constantly changes its form to drive business wheel. It is alsoknown as circulating capital which means current assets of the company,which are changed in ordinary course of business from one form to another, asfor example, from cash to inventories, inventories to receivables and receivablesto cash. The cash conversion cycle is also known as the net operating cycle

Figure : Cash Cycle:


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Basically cash management strategies are essentially related to the cash cycletogether with the cash turnover. The cash cycle refers to the process by whichcash is used to purchase the row material from which are produced goods,which are then send to the customer, who later pay bills. The cash turnovermeans the number of time firms cash is used during each year.

Operating Cycle:

The need of working capital arrived because of time gap between production of goods and their actual realization after sale. This time gap iscalled Operating Cycle or Working Capital Cycle. The operating Cycle of acompany is the time duration required to convert resources into inventories and

inventories into cash. The operating cycle is the length of time between thecompanys outlay on raw materials, wages and other expanses and inflow ofcash from sales of goods.

Operating cycle is an important concept in management of cash and workingcapital. The operating cycle reveals the time that elapses between outlays ofcash and inflow of cash. Quicker the operating cycle less amount of investment

in working capital is needed and it improves profitability. The duration of theoperating cycle depends on nature of industries and efficiency in workingcapital management.

The operating cycle which is a continuous process has been shown in thefollowing figure;

Figure 6.1: Cash Conversion Cycle


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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, FinishedGoods and finally the transfer of 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 made to customers. Firms which do not sell on Credit obviouslydon't have the Phase 2 of the operating Cycle .

3. Phase 3: The Last Phase i.e. Phase 3 of the Operating Cycle, represents the stage

when Receivables are collected. This phase completes the operating cycle.Thus, the firm has moved from cash to inventory, to receivables and to cashagain.


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Chapter-4


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Current assets:-

It means the assets that are either in the form of cash or cash equivalents or can beconverted into cash or cash equivalent in a short time.

particulars 2005-06 2006-07 2007-08 2008-09Current assets 3,393,430 3,215,026,429 3,106,119,303 6,306,313,319Indices 100 94,742.67 91,533.32 185,838.90

Current liability:-

It means liabilities repayable in the short time .

Particular 2005-06 2006-07 2007-08 2008-09Current liability 2,475,281,762 2,508,012,516 3,359,686,508 7,304,056,872indices 100 101.32 135.72 295.07

0

50000

100000

150000

200000

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

Current assets

Current assets

0

50

100

150

200

250

300350

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

Current liability

Current liability


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Current ratio:-

Current ratio is a relationship of current assets to current liabilities. the ratio computed toassess the short-term financial position of the enterprise. It means current ratio is an indicatorof the enterprises ability to meet its short-term obligations.

current assetsCurrent ratio= --------------------------

current liabilitiesParticular 2005-06 2006-07 2007-08 2008-09Current assets 3,393,430,595 3,215,026,429 3,106,119,303 6,306,313,319Current liability 2,475,281,762 2,508,012,516 3,359,686,508 7,304,056,872Current ratio 1.370 1.281 0.924 0.863

Debt-equi ty ratio:

The debt-equity ratio is computed to ascertain soundness of the long-termfinancial policies of the firm. This ratio expresses a relationship between debt(external equities) and the equity (internal equities).debt means long-term loans,i.e., debenture, loans long-term) from financial institutions. Equity meansshareholders funds, i.e., preference share capital, equity share capital, reservesless losses and fictitious assets like preliminary expenses. The ratio isascertained as follows:

debt (long-term loans) Debt-equity ratio = (shareholders funds)-----------------

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

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

Current ratio

Current ratio


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equity particulars 2005-06 2006-07 2007-08 2008-09debt 15,647,026,352 15,249,418,023 14,152,916,008 13,116,597,207equity 5,370,170,319 5,743,878,990 5,969,062,657 6,362,931,826Debt-equity ratio 2.913 2.654 2.371 2.061

Propr ietary r atio: -

The objective of computing the proprietary ratio is to establish therelationship between proprietors funds and total assets. Proprietors fund meansshare capital plus reserves and surplus, both of capital and revenue nature. Lossif any is deducted. Amounts payable to others are not added. This ratio showsthe extent to which the shareholders own the business. The difference betweenthis ratio and 100 represents the ratio of total liabilities to total assets. It iscomputed as follows:

Proprietors funds or shareholders fundsProprietary ratio = _________________________________

Total assets

particulars 2005-06 2006-07 2007-08 2008-09Proprietors

fund5,370,170,319 5,743,878,990 5,969,062,657 6,362,931,826

Totalassets

14,361,184,836

14,638,350,549

15,491,380,321

19,021,381,346

Proprietar y ratio

0.373 0.392 0.385 0.334

0

0.5

1

1.5

2

2.5

3

3.5

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

Debt & Equity ratio

Debt & Equity ratio


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Working capital turnover ratio:-

This ratio indicates the number of times a unit invested in working capital produces sale. in other words, this ratio indicates whether the working capitalhas been effectively utilized or not in making sales. Working capital iscomputed by deducting current liabilities from the current assets. in fact, in theshort run, it is the current assets and current liabilities which play a major role.A careful handling of the short term assets and funds will mean a reduction inthe amount of capital employed thereby improving turnover. The ratio is

calculated as follows:

Net SalesWorking capital turnover ratio = -------------------------

Working capital

particulars 2005-06 2006-07 2007-08 2008-09 Net sales 3,620,758,281 3,553,494,401 3,997,558,798 6,789,295,427Working

capital

918,148,833 707,013,913 (253,567,205) (997,743,553)

Workingcapital turnsover ratio.

3.943 5.026 (15.765) (6.804)

0.3

0.32

0.34

0.36

0.38

0.4

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

Proprietary ratio

Proprietary ratio


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Gross profit ratio:-

This ratio establishes relationship of gross profit on sales to net sales of a firm, which iscalculated in percentage. Gross profit is what is revealed by the trading account. it resultsfrom the difference between net sales and cost of goods sold without taking into accountexpenses charged to the profit and loss account.

Gross profitGross profit ratio = --------------------- 100

net sales particulars 2005-06 2006-07 2007-08 2008-09Gross profit 3,823,634,150 3,722,105,951 4,279,661,969 7,157,742,510

Net sales 3,620,758,281 3,553,494,401 3,997,558,798 6,789,295,427Gross profitratio

105.60 100 107.05 105.42

-20

-15

-10

-5

05

10

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

Working capital turn over ratio

Working capital turn over ratio

96

98

100

102

104

106

108

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

Gross profit ratio

Gross profit ratio


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Net profit ratio:-

Net profit ratio shows the percentage of net profit earned on the sales.net profit is computed by deducting all direct costs, i.e., cost of goods sold and indirect costs, i.e., administrative andmarketing expenses, finance charges and making adjustments for non-operating expensesfrom net sales and adding non-operating incomes.

Net profitNet profit ratio = -------------------------- 100

net sales particulars 2005-06 2006-07 2007-08 2008-09 Net profit 2,949,500,504 2,409,575,518 3,485,474,327 6,375,907,985 Net sales 3,620,758,281 3,553,494,401 3,997,558,798 6,789,295,427 Net profit ratio 81.46 67.80 87.19 93.91

0

10

20

30

40

50

60

70

80

90

100

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

Net profit ratio

Net profit ratio


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Conclusion:

Working capital management is important aspect of financial

management. The study of working capital management of optcl ltd. has

revealed that the current ratio was as per the standard industrial practice but the

liquidity position of the company showed an increasing trend. The study has

been conducted on working capital ratio analysis working capital components

which helped the company to manage its working capital efficiently and

effectively.

1-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 payments of short terms

liabilities.

2-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 current

liabilities and quick current liabilities and quick current liabilities and quick

current liabilities.3-gross profit ratio and net profit ratio shows the company earns much more

profit and its finical position is good.1-Shashi k gupta and R .k Sharma management accounting, kalyani

publishers, New Delhi.2-chandra, prasanna ,(1984),financial management, Tata McGraw hill

publishing company, new Delhi.

3-lal, iawahar and srivastava, seema ,(2003),financial accounting,s.chand and

company ltd,new Delhi.

4-rustagi,r.p,(2008), finical management of Indian financial institution:,

Himalaya publishing house, new Delhi.

5-jain,s.p and K.L narang, ,(2003),corporate accounting,kalyani publishers,

new Delhi.

6-sharma and gupta,(1991),management accounting, kalyani publishers. New

Delhi.


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BIBLIOGRAPHY

References

Web sites

Www.optcl.com

Www.google.com

Www, investopedia.com

Www.wekipedia.com

Www.oerc.com
http://www.optcl.com/http://www.google.com/http://www.wekipedia.com/http://www.wekipedia.com/http://www.google.com/http://www.optcl.com/

22. optcl-fin-bhw-12.docx

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