A project report on on the working capital management in karnataka state finance corporation

ON THE WORKING CAPITAL MANAGEMENT IN KARNATAKA STATE
FINANCE CORPORATION

CHAPTER-I

EXCUTIVE SUMMARY

This is finance project specially focused on the working capital management in

Karnataka State Finance Corporation. The objective of the study is to know the

working capital management provided by the Bank. The procedure followed is the

assistance and the help of the Bank & the Manager. Karnataka State Finance

Corporation is well known for its personalized service & has made rapid strides in

the real of customer service in tune with changing banking scenario. The objective of

bank was primarily to extend financial assistance to the local weavers who were

crippled by a crisis in the handloom industry through mobilizing small savings from

the community.

Methodology:

This is an analytical study based on secondary data collected from the published

annual reports (i.e. 2001-02 to 2006-07) of the KSFC. In addition, the primary data

required is collected from the bank officials through personal interaction.

1. The data required for the purpose of this study is of two types:

1) Primary data

2) Secondary data

Data collection:

The data collected for this study is from annual reports i.e.2002-03 to 2006-07.

Babasabpatilfreepptmba.com Page 1

FINANCE CORPORATION

Data presentation:

The data have been presented in Tables as well as Graphs in order to enable as to

understand them in accordance with the objectives of study.

Data analysis:


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The data have analyzed with the help of trend rations 2001-02 is considered be base year

whose value is equal to 100.then. The values for subsequent years i.e.2001-02 to

2006-07 are calculated and compared with the base year value on year to year basis.

The overall increase/decrease in the values of working capital during the study period

has been calculated for each item of deposits by applying the following formula.

2. Scope of the study:

The study brings out the pattern of working capital in Karnataka State Finance

Corporation. This study also covers the working capital management in the

corporation.

3. Objectives of the study:

The following are the objectives set for the present study.

1. To understand the behavior and culture of the organization. and

2. To study the different components of working capital of the corporation.

4. Limitations of the Study:

1. The study focuses on working capital management. and

2. The period covered in the present study is 6 years i.e., from 2001-2002 to 2006-

2007.

CHAPTER-II

ORGANISATIONAL PROFILE


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Origin of State Financial Corporation:

Indian government has passed state financial corporation legislation in 28 th

September 1951. This legislation empowers the state government to set up the state

financial corporations in their respective states. First state financial corporation came to

existence in Panjab in 1953. Now there are 18 state corporations in India.

State financial corporation grant the assistance to medium, small and cottage

industries. The maximum capital allowed for a corporation is Rs. 15 crores. State

government concerned IDBI, commercial banks, insurance companies, co-operative

banks, investment trusts and the general public contribute the capital of state financial

corporation.

Salient features of state financial corporation:

Some of the salient features of the State Financial Corporation Act, 1959

governing the S F C’s are as followed

1. The authorized capital of SFC’s will be fixed by the respective state governments.

However it will not be less than Rs. 50 lakhs or exceed Rs. 50 crores.

2. The authorized capital will be divided into equal number of shares and issued to

the state government. The Reserve Bank, Scheduled Banks, Insurance Companies,

other Financial Institutions and the public. However the issue of the shares to

public will be limited to 25% of the authorized share capital.

3. The General Superintendence, direction and management of the affairs and

business of the corporation is vested in a Board of Directors which is assisted by


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an executive committee day today affairs of the corporation will be looked by the

managing Director.

4. The Director of the Board are nominated by the state government the Reserve

Bank 7 the industrial finance corporation of India.

5. A State Financial Corporation is authorized to,

i. Guarantee Loans raised by industrial concerns which are repayable within a

period not exceeding 20 years.

ii. Under write the issue of stocks, shares, bonds and debentures of industrial

concerns.

iii. Grant Loan or Advance to industrial concerns repayable within a period not

exceeding 20 years.

iv. Subscribe to debentures floated by industrial concerns.

The main objective of KSFC is to bring orderly and balanced growth of industrials

in the state. Towards this end KSFC is giving special attention to the backward districts

to come under the industrial map.

The main function of KSFC is long term lending for small tiny 7 medium

industries and even for expansion and modernization of existing industries.

History of KSFC (Karnataka State Financial Corporation)


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Karnataka State Financial Corporation (KSFC) is one among the 18 state financial

corporations (SFC’s) in India. KSFC was established by Government of Karnataka in

March 1915 under the SFC’s Act 1951 for extending financial assistance for setting up of

tiny, small, medium and large scale industrial units in the state.

KSFC is sanctioned loan to industrial units under different schemes. KSFC is also

providing services like hire purchase, leasing and merchant banking activities. KSFC is

recognized as best merchant banker by SEBI. KSFC is an ISO certified organization and

striving to provide better services to it’s customers through professional management and

team work. The management is taking effective reasons to transform the organization to a

customer centric institution.

KSFC mission is to nurture, develop and service the SME sector through need

based product and services, the small and medium scale sectors in India lacks capital

market and starving for funds. SFC’s are started to provide funds to SME sector and

encouraged first generation entrepreneurs to start business especially in back word areas.

Since the capital is scarce resource it should allocated carefully for the

development of industrial units. KSFC has been acting as Regional Development Bank

by providing assistance to needy entrepreneurs. Before giving loan to any projects the

corporation should check the viability of projects. KSFC appraises projects to test the

viability from the marketing, financial, technical, economic and managerial angels.

Achievements of KSFC:

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KSFC has completed its 39 years of operation. it has contributed Significantly

for the growth of small scale industry and development of backward areas in the

state. It has extended financial assistance to rural, cottage industries, articians,

SC/ST entrepreneurs and other economically weaker sections of the society under

special loan scheme. The proud of achievement of KARANATAKA STATE

FINANCIAL CORPORATION are given below:

1. Sanction of loan aggregating to Rs .4508 crores to 1, 33,735 project.

2. Loan assistance of rs.970.34 crores to 46,252 SSI units proposed in backward district

of the state.

3. Sanction of loan aggregating to Rs .2233.45 crores to 78,835SSI units.

4. Establishment of 7 zonal offices .36 branch offices and 2field offices in the state and

higher delegation of powers to zonal and branch offices to sanction and disburse

loans up to Rs .25 lakh . as a consequences of same, today 95% of loans are

sanctioned at branch offices.

5. Introduction of loan assistance schemes for getting ISO 9000 certification for export

oriented and units proposing export of their products’

6. Commendation from IDBI as one of the best SFC of the country


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KSFC Main Activities / Function:

1 Long term lending

2 Lease financial assistance or hire purchase assistance for acquisition of

machinery equipment and transport vehicles.

3 Merchant Banking.

4 Fund based activities like bill discounting, investment in schemes and

subscription to non-convertible debentures factor services, etc.,

Mission statement:

`KSFC is committed to nature develop and service the SME sector through need

based product and services.

Quality policy:

Karnataka State Financial Corporations endeavors create satisfied customer

through adequate and timely financial assistance and guidance. This shall be achieved

through professional management and team work.

Quality objectives:

1 To provide good quality of service on continuous basis to the satisfaction of

customers.


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2 To extend effective guidance to the entrepreneurs for successful

accomplishment of their business ventures.

3 To motivate and involve everyone organizational growth through

implementations the documented quality management system.

4 To encourage everyone in the organization to upgrade and enhance their skills

and knowledge with appropriate training for improving quality of service to

entrepreneurs.

5 To ensure customer satisfaction through team work and professional

management and

6 To attend specified levels of performance every year and to ensure compliance

with statutory and regulatory requirements.

Types of assistance:

KSFC offers long and medium term financial assistance in the following forms.

1. Loan and advances, with a liberal repayment period (normally not exceeds 8

years) including moratorium.

2. Loans in collaboration with other financial institution.

3. Subscription to share capital of companies promoted by small entrepreneur

(special capital scheme) by way of soft loan. KSFC gives preference to the

projects which are as follows;

a) Promoted by technician entrepreneur


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b) In the small sector

c) Located in growth centers and developing area of the state

d) Promoted by entrepreneur belonging to schedule cast and schedule tribe,

backward class entrepreneurs and other weaker section of society.

e) Projects which having high employment potent ional

f) Capable of utilization of local resources

g) In tune with the declared national priorities.

Purpose of assistance:

The corporation provides assistance for the acquisition of capital assets in the form

of land, building, plant and machinery only, working capital assistance against raw

materials, stock in trade and semi finished products can by had from the commercial and

industrial co-operative banks.

Assistance available:

KSFC extends term loans to new or existing units up to Rs. 240 lakhs for

corporate bodies and registered co-operative societies. Term loans up to maximum of Rs.

90 lakhs are sanctioned to proprietary, partnership and Joint Hindu Family concerns.

KSFC give Term Loan jointly with K S I I D C and commercial banks for projects up to

Rs. 10 crores.

Area of operation:


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Industrial concerns established or to be established in Karnataka are eligible for

assistance from KSFC. An industrial concern incorporated outside the state is also

eligible provided the place of business is in Karnataka and they agree to shift their

registered office to the state of Karnataka.

Network of KSFC:

KSFC has 7 zonal offices spread over the entire state viz, Bangalore Urban, Bangalore

Rural, Mysore, Mangalore, Dharwad, Belgum and Gulbarga. The head office of KSFC is

located at 1/1 Thimmaiah Road, Bangalore-560052.

There are totally 36 branches of KSFC in the entire state. According to business

availability and seeing there should limits, these branches have been categorized into ‘A’

Grade, ‘B’ Grade and field offices. Accordingly, KSFC has at present 7 Zonal Offices

and 16 ‘A’ Grade branches, 18 ‘B’ Grade branches and 4 Field offices.

Working of KSFC:

KSFC has decentralized the system of working. Term Loan up to Rs. 25 lakhs are

sanctioned at the branch office level 7 Loans over Rs. 25 lakhs are processed and

sanctioned at the head office. In ‘B’ Grade branches, Branch Manager can sanction loans

upto Rs. 5 lakhs where as in ‘A’ Grade branches the Branch Manager can sanction loans

up to Rs. 8 lakhs over and above Rs. 25 lakhs the concerned Deputy General manager (or

Zonal Manager) will sanction the loan.


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Management of KSFC:

The management of the KSFC is carried out by the Board of Directors consisted as

per the SFC act 1951, assisted by a Managing Director and Executive committees. The

Chairman is appointed by the state government is not a full time Director. Where as the

Managing Director appointed by the state government is a full time Director.

Composition of the directors:

The Board has 12 Directors out of them 4 Directors are nominated by the state

Government, 1 by the RBI, 2 by the IDBI and 4 as per the SFCs act 1951. Apart from this

the state government in consultation with IDBI and the board appoints the Managing

Director.

About Bijapur KSFC branch:

It started in 1983. The members of employees were 26 and loan sanctioning up to

Rs. 10,000/- for small scale sectors. In the year 2006 the number of employees have been

decreased to 20 members due to introduction of system of computerization and the loan

sanctioning limit also extended up to Rs. 5,00.000/- to an enterpenurers. At present the

KSFC giving more preference to Term Loan Schemes especially to SSC (Soft Seed

Capital) under National Equity Fund Schemes.

Functional departments of KSFC:


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1. Entrepreneur Guidance Cell: It provides guidelines to the prospective

entrepreneurs in setting up the new projects, issues loan application forms to

entrepreneur’s and conducts screening committee meetings.

2. Credit Department: The main functions of the credit departments are apprising

the projects, disbursement of funds and monitoring progress during the

implementation of the project and to keep check on cost overruns and to ensure

that funds are utilized for the purpose intended.

3. Treasury Department: Treasury department is responsible for procurement of

funds from the various sources as and when the need arise.

4. Internal Audit Department: Auditing of books of accounts, verifying title deeds

of properties offered as securities business adhered to follow up for compliance of

observations / recommendations made in report of statutory authority and IDBI’s

inspection report will be verified by this department.

5. Legal Department: This department attends all legal matters affecting the interest

of the corporation.

6. Recovery Department: Recovery of loans sanctioned by the corporation and all

other related functions like rescheduling of loan, effective changes in management

of assisted companies effective take over of defaulting units and insisting recovery

proceedings are the main functions of recovery departments.

7. Business Department and Credit Research Department: This department looks

after the market appraisal of products for which loan applications are received.


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Special report on various industries and products, identification of industries

development, promotional activities, preparation of annual reports, brochures,

leaflets on various scheme and other public materials, advertisements, printing and

publication of bimonthly KSFC news bulletin.

8. Personal Department: This department is in charge of recruiting, promotion, job

rotation, transfers, employee discipline, welfare and industrial relation and

payrolls. In additions the department has a HRD cell, which carries out training

and development activities apart from carrying out performance appraisal and

manpower planning.

9. Hire Purchase and Financial Service Department: This department is in charge

of hire purchase and financial services provided by KSFC.

10. Management Information System Department: This department is solely

responsible for providing up to date information of all the branches, all the

departments etc., required by the management.

11. Information Technology Department: This department was formed to

computerize all the records and documents of KSFC. With large scale

computerization the corporation aims to function as a paperless office.

12. Public Grievance: This department is formed to solve the problems of KSFC

customers. These receives complaints from the customers and effectively sorts out.

Employee grievance redressed committee has also been constituted.


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13. Sick Units Monitoring Department: The department which has been formed for

rehabilitation of potentially viable sick units conducts in-depth study regarding

cases referred and assess the eligibility for rehabilitation assistance

14. Asset Reconstruction Department: The asset Reconstruction department at the

head office is formed to review the chronic Sec. 29 cases, DC cases and suit field

cases. This department verifies all the cases under review and occupies defaulting

units and takes steps to recover the loan by selling the units.

15. Women Entrepreneur Guidelines Cell: This department is started to encourage

women entrepreneurs to establish the industries by providing them necessary

guidelines.

16. Account Department: This department is formed to maintain accounts of the

office

Karnataka State Financial Corporation citizen’s charter:

The Corporation aims at customer satisfaction through Professional Management

and Team Work.

1. The corporation offers:

• Financial assistance for acquiring fixed assets like land, building, plant &

Machinery and other miscellaneous assets.

• Sanction of Term Loans to new Tiny, Small and Medium enterprises and Services

Sector.

• Sanction of Term Loans to existing industrial concerns and services sector units


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For expansion / modernization / diversification.

• Sanction of Working Capital Term Loans to meet working capital requirements of

industrial / service enterprises under special schemes.

• Operating of Foreign Letter of Credit for import of capital goods.

• Rental Discounting and other fee based services.

• Provides insurance coverage for assets and other non life insurance products.

• Accepts Fixed Deposits for a term of one year and above.

2. Financial assistance - limits of accommodation:

I. Proprietary / partnership Rs.200.00 lakh

II. Corporate bodies (both private & public limited), registered

Co-operative societies Rs.500.00 lakh

• In respect of existing units operating successfully, maximum limit can be

Extended upto Rs.800.00 lakh for category (I) and Rs.2000.00 lakh for category

• In respect of category (II) the financial assistance can be sanctioned provided the

Paid up capital and free reserves do not exceed Rs.2000.00 lakh.

• If the requirements of the funds for a project are substantial and cannot be extended by

the Corporation alone, then the requirement of loan of such projects can be met in

consortium with other financial institutions.

• Minimum loan size is Rs.5.00 lakh.

3. Activities financed by the corporation:

1. General Loans for setting up new tiny, small and medium scale enterprises and


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Service sector units.

2. Hotels / Restaurants.

3. Tourism related facilities (Amusement parks, Convention centers, Restaurants,

Travel & Transport, Tourist service agencies, Mobile canteen / catering).

4. Hospitals / Nursing Homes.

5. Acquiring Electro Medical Equipment, setting up of Medical Stores.

6. Transport Loans (SRTOs & acquisition of private vehicles).

7. Industrial Estates, IT Parks, ready built office space, Training Institutions,

Godowns and Warehouses.

8. Group Housing Sector.

9. Construction and purchase of commercial complex.

10. Development / maintenance and construction of roads.

11. Qualified Professionals (Management, Accounting, Medical Professionals,

Architects & Engineers, Veterinary clinics).

12. Rehabilitation of sick units.

4. Area of operation:

The Corporation extends financial assistance for an enterprise in the State of

Karnataka With its network of 29 branches covering all the districts of the State.

5. Application forms for loan:

Loan application forms are issued after the proposal is cleared in the Project

Clearance Committee (PCC) meeting. For loans proposals upto Rs.50.00 lakh Branch


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Offices will issue the application forms. For the loans proposals above Rs.50.00 lakh,

loan applications are issued at Head Office

6. Time frame for processing sanctions:

New loans up to Rs.35.00 lakh 21 days Branch office



New loans up to Rs.500.00 lakh 60 days Head Offices

7. a) Primary security:

The primary security for loan will be the assets financed i.e., land, building &

machinery .If working capital loan is provided, the inventories in the form of raw-

materials, work in process, finished goods besides bills & book debts are to be pledged /

hypothecated.

b) Collateral security:

All loans are to be backed by collaterals in the form of commercial or residential

Properties located in the State of Karnataka or Fixed Deposits or NSC Residential

Properties of third parties as collateral are discouraged. Assets free of encumbrance

charged to the Corporation will be further charged. In case of corporate loan, in the

absence of adequate security in the form of primary assets, collateral security to the

extent of 100% of the loan amount is insisted in respect of existing units assisted by the

Corporation and in respect of other units collateral security will be 150% of the loan


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amount. Note: The primary & collateral are to be by way of simple mortgage at

jurisdictional SRO.

8. Disbursement of loan:

Loans are disbursed after the promoter brings in stipulated equity / contribution

from his side as stipulated in the terms of sanction & after properties are mortgaged /

hypothecated as per terms of loan & guarantee deeds executed. The extent of

disbursement will be in proportion to the investment made on land, building &

machinery. The release towards machinery will be either after issuing a commitment

letter to machinery supplier & after inspecting machinery & factory site of entrepreneur.

Up-front fee is payable at 0.5% of loan + applicable service tax, before disbursement.

9. Loan repayment:

The loans are normally repayable in 5 to 7 years with a moratorium of 1 to 2 years

depending on DSCR. The repayment will be in monthly / quarterly installments.

10. Public grievance redressal:

To redress the grievances of the entrepreneurs, Public Grievance Readdressal

Committees have been set up under the chairmanship of Executive Directors. All

grievances will be heard in 30 days. Acknowledgments however, will be given within 7

days of receipt of the grievance.

11. Helpline:


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The Corporation has brought out 'Products & Services' brochure. The brochure

gives details of the activities of KSFC, financial services available, various schemes of

the Corporation and procedures for availing the financial assistance. For further

information

12. Welcomes suggestions:

The Corporation welcomes suggestions from the customer / stakeholders / public

and the same can be sent directly to the Managing Director, at email address

Procedure for Availing Loan Assistance from KSFC:

The Entrepreneurs requiring the financial assistance have to the following

procedures.

a. Call on assistance general manager (E.G) cell, KSFC, HOD or the branch

manager and discuss about their project. The entrepreneurs are require to carry

with them a brief project report, details on proposed for the unit extent for term

loan required etc., at the time of visit.

b. The entrepreneurs are required to attend screening committee on advice from

EG department or branch manager at the head office or branch office as the

case may be to get prima-face clearance for their project and to obtain the loan

application forms and check list.


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c. The filled in loan application forms have to be submitted in triplicate along

with enclosures as per checklist and handed over to AGM (EG) at head office

or branch manager as the case may be and to obtain acknowledgement the

entrepreneurs are required to pay loan application processing fee by cash or

D.D. and obtain receipt as per schedule given below.

Application processing fee:

Loan Amount Fee

Up to Rs. 10,000/- Nil
1/4
Between Rs. 40,000 to 2, 00,000/- % of Loan
1
Above Rs. 2, 00,000/- /2% of Loan

Sanction limit of loans


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Limits of Assistance

Category Maximum loan

Proprietary Concerns /Partnership Rs. 200.00 lakh

Firms

Private And Public Limited Companies Rs. 500.00 lakh

And Co-Operative Societies

Debt Equity Ratio

For Loans Up To Rs. 10.00 Lakh 3:1

For Loans Above Rs. 10.00 Lakh 2:1

RSR Scheme Flexible

Modernization Scheme (Overall) 2:1

Promoters’ Contribution

Particulars Minimum percentage on Project Cost

Backward District /Regions 20%

Non- Backward District Regions 22.5%

RSR Flexible

DG Set Loan 10%


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Interest rates on loans

Revised

Interest Rates (%)

Sl No Category of Borrowers/Loans Gross Rebate Net

1 Term loans above Rs.50,000/ and up 15.0 1.5 13.5

to Rs.2,00,000/-
All Term Loans (including WCT
2 15.5 1.5 14.0

L) over Rs.2,00,000/- other than loans

indicated at Sl.No. 3 & 4

3 Commercial Complexes, Construction 15.5 1.0 14.5

activities like Residential Apartments,

Shopping Complexes etc., Corporate

loans, AMARA scheme, Bridge loans ,

Finance to Existing Assets,

Entertainment Industry( including Films)

etc

4 Privileged Entrepreneurs Scheme 14.5 - 14.5


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CHAPTER-III

METHODOLAGY

This study is analytical study, which is primarily based on the secondary data. The

primary data was also used for this study.

1. The data required for the purpose of this study is of two types:

1) Primary data

2) Secondary data

Data collection

Primary data:

The required primary data was collected orally from the concerned officers of

Karnataka State Finance Corporation Bijapur Branch through interaction.

Secondary data:

The secondary data was obtained from the annual reports of the corporation for the

period between 2001-2002 and 2006-2007.

Data presentation:

The data collected have been presented in the form of tables and graphs.

Data analysis and interpretation:

The data collected are used to calculate working capital by applying the following

formula

Working capital = Current Assets – Current Liabilities


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The data have analyzed with the help of trend rations 2001-02 is considered be base year

whose value is equal to 100.then. The values for subsequent years i.e.2001-02 to

2006-07 are calculated and compared with the base year value on year to year basis.

The overall increase/decrease in the values of working capital during the study period

has been calculated for each item of deposits by applying the following formula.

Overall increase/decrease in value = Sixth year value (2006-07) X100
Base year value (2001-02)


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2. Scope of the study:

The study brings out the pattern of working capital in Karnataka State Finance

Corporation. This study also covers the working capital management in the

corporation.

3. Objectives of the study:

The following are the objectives set for the present study.

3. To understand the behavior and culture of the organization.

4. To study the different components of working capital of the corporation. and.

5. To study the working capital management.

4. Limitations of the Study:

3. The study focuses on working capital management.

4. The period covered in the present study is 6 years i.e., from 2001-2002 to 2006-

2007.

5. The suggestions and conclusion made are based on the data collected. And

analyzed.

CHAPTER-IV

THEORETICAL FRAME WORK: AN INTRODUCTION


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The most profitable function of an organization is to make the working capital.

Sanctioning credit to customers and others out of current assets and current liabilities

at its disposal is one of the principal services of an organization.

It is the Current assets and current liabilities, which bring most of the earnings

for an organization and establish valuable ties with the community. An effective

Current assets and Current liabilities policy provides funds to the vital sectors of the

economy in appropriate amounts and appropriate time, and there by promoter

economic development.

Working capital

Meaning:

Working capital management can be defined as that aspect of financial

management which is concerned with the safeguarding and controlling of the firms

current assets, and planning for sufficient funds to pay current bills.

Working capital management is concerned with all decisions and acts that

influence the size and effectiveness of working capital. The goal of working capital

management is to manage each of the firm’s current assets and current liabilities in such a

way that an acceptable level of networking capital is maintained.

The important aspects of working capital are:

a) Determining the requirements of working capital


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b) Financing the requirements and

c) Efficient utilization of requirement of working capital

Working capital management involves taking decisions regarding:

i. The need to invest funds in current assets

ii. The amount of funds to be invested in each type of current assets and their relative

proportion.

iii. The proportion of long term and short term funds to finance the current assets and

iv. To finance these current assets through appropriate sources of funds.

The term working capital management means managing the firm’s current

assets and current liabilities in such a way that, it will help to reach the organizational

goals.

Current assets: It’s refer to those refer to those assets which in the ordinary

course of business can be, converted into cash within one year without undergoing a

diminution in value and without disrupting the operations of the firm. The major

current assets are cash, marketing securities, accounts receivable and inventory.

Current liabilities: These are those which are intended, at their inception to be

paid in the ordinary course of business, within a year, out of the current assets or

earnings of the concern. The basic current liabilities are accounts payable, bills

payable, bank overdraft and outstanding expenses.

The interaction between current assets and current liabilities is the main them

of the working capital management. Because if the firm cannot maintain a satisfactory


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level of working capital, it is likely to because insolvent and may even be forced into

bankruptcy. The current assets should be managed efficiently in order to maintain the

liquidity of the firm.

Concepts of Working Capital Management

1. Gross working capital :

The term gross working capital refers to the firm’s investment in

current assets. This includes cash, short term securities, debtors (accounts

receivable book debts bills receivable and stock (inventory).

2. Net working capital :

The term net working capital refers to the difference between current assets

and current liabilities.

A positive net working capital will arise when assets exceeds current

liabilities and a negative working capital will occurs when liabilities are in excess of

current assets.

Net working capital is a qualitative concept. It indicates the liquidity

position of the firm and suggests the extent to which working capital needs may be

financed by permanent sources of funds.

Need for working capital:


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The need for working capital to run the day to day business activities be over

emphasized.

Every firm should aim at maximizing the wealth of its shareholders. In this

case a firm should earn sufficient return from its operations. Earning a steady amount

of profit requires successful sales do not convert into cash instantaneously.

Working Capital Categorized into:

1. Fixed or permanent working capital:

The need for current assets arises because of the operating cycle. Operating cycle

is a continues process and, therefore the need for current asset is felt constantly. There

is always a minimum level of current asset, which is continuously required by the firm

to carry on its business operations. This minimum level of current asset is referred to

as permanent or fixed working capital.

2. Fluctuating or temporary working capital:

The changes in production and sale, leads change in working capital.

For example: Extra inventory of finished goods will have to be maintained to support

the peak periods. On the hand investment in raw material work in progress and

finished goods will fall if the market is slack.

The extra working capital needed to support the changing production and sales

activities called fluctuating or temporary working capital.


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Permanent and temporary working capitals are necessary to facilitate

production and sale through the operating cycle, but temporary working capital is

created by the firm to meet liquidity requirements.

The permanent working capital line need not be horizontal if the firm’s

requirement for permanent capital is decreasing over a period.

Objectives of working capital management:

i. To ensure adequate liquidity of a firm

ii. To minimize the risk and

iii. The contribution to the maximization of firm’s value.

Principles of working capital management:

i. Principles of risk assumption.

ii. Net worth position.

iii. Maturity of payment and

iv. Cost of capital.

Importance of working capital management

0 Adequate working capital creates certainty, security and confidence in the minds

of the persons in the management as well as in the minds of creditors and workers.

1 It creates a good credit standing for the firm because credit standing depends upon

the ability to pay promptly. A Company with adequate working capital is always able to

meet current liabilities.


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2 It ensures solvency and stability of the enterprises It also ensures continuity in

production and sales. It enables the company to take advantage of cash discount offered

by the suppliers of raw materials or merchandise. It enhances the prestige of the company

and moral of its workers because a company with adequate working capital is always able

to pay wages and salaries promptly and regularly.

3 It enables the company to procure loans from banks on easy and competitive

terms. In times of boom, it enables the company to meet increasing demands for its

products. In times of depression the company to overcome the crisis successfully. It

enables the company to hold carry on its business successfully and active continued

progress and prospective. It enables the company to carry on its business successfully and

active continued progress and prosperity.

Determinants of working capital:

1. Nature of business:

The working capital requirements of an enterprise are basically related to

the conduct of business. Enterprises fall into some broad categories depending on

the nature of their business. Public utilities have two features which have a bearing

on working capital needs are,

i. The cash nature of business i.e. cash sale and

ii. Sale of services rather than commodities.


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In case of trading and financial enterprises, they have to maintain a

sufficient amount of cash, book debts and inventories. They have to invest the large

amount in working capital.

The manufacturing concerns require fairly large amounts of working

capital through it varies from industry to industry depending on their asset structure.

The proportion of current assets to total assets measures the relative requirement of

working capital of various industries the relative requirements of working capital of

various industries.

1. Production cycle:

This is another factor which has a bearing on the quantum of working

capital. The term production or manufacturing cycle refers to the time involved in the

manufacturing of goods. It covers the time span between the procurement of raw

materials and the completion of the manufacturing process leading to the production

of finished goods.

There is some time gap before raw materials become finished goods. To

sustain such activities the need for working capital is obvious.

The longer the time spans (i.e. the production cycle), the larger will be the

tide up funds and, therefore the larger is the working capital needed and vice versa.

2. Business cycle:

The working capital requirements are also determined by the nature of the

business cycle. Business fluctuations lead to cyclical and seasonal changes, which, in


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turn, cause a shift in the working capital position. The variations in business

conditions may be in two directions:

1. Upward phase when boom conditions prevail, and

2. Downswing phase when economic activity is marked by a decline.

3. Production policy:

The quantum of working capital is also determined by production policy. The

demand for products is seasonal, i.e. they are purchased during certain months of the

year. There are two opinions for production policy to enterprises, either they confine

their production only to periods when goods are purchases or they follow a steady

production policy throughout the year and produce goods at a level to meet the peak

demand. During the slack season the firms have to maintain their working force and

physical facilities without adequate production and sale. When the peak period

arrives, the firms have to operate at full capacity to meet the demand.

Thus serious difficulties will be encountered in trying to match production to

the ebb and flow of the seasonal demand pattern. The better alternative is large

accumulation of finished goods (inventories) during the off-season and their abrupt

sale during the peak season. The progressive accumulation of stock naturally requires

an increasing amount of working capital, which remains tied up for some months.

Working capital planning has to incorporate this pattern of requirement of funds

when production and seasonal sales are steady. Production policies have to be


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formulated on the basis of individual setting of each enterprise and the magnitude and

dimension of the working capital problems will accordingly vary.

4. Credit Policy:

The credit policy relating to sales and purchases also affects the working capital.

The credit policy influences the requirement of working capital in two ways,

(i) Through credit terms granted by the firm to its customers/buyers of goods

(ii) Credit terms available to the from its credits.

The credit terms granted to customers have a bearing on the supplies of

goods (trade creditors), the need for working capital is less. The working capital

requirements of the business are affected by the terms of purchase and sale, and the

role given to credit by a company in it’s dealing with creditors and debtors.

If there is a keen competition then there is a wide scope for managerial

discretion in working out a suitable credit policy relevant to each customer based on

the merits of each case. Liberal credit facilities can be extended on the basis of credit

rating. This will avoid the problem of having excess working capital. Adoption of

rationalized credit facilities can be significant factor in determining the working

capital needs of an enterprise. To win and retain customers, it may be forced, among

other things, to offer generics credit terms to them.

The investment in book debits will consequently be of a higher order,

necessitating large working capital. To be able to enjoy consumer patronage on a

continuous basis, a firm will have to offer a variety of products quite unlike a firm


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which has a hold on the market, hence does not need special efforts to satisfy

customer requirements. The consequence of a higher level of inventories would be an

additional need for working capital. The degree of competition is, therefore an

important factor influencing working capital requirements.

5. Growth and expansion:

As a company grows, the amount of working capital requirements also

grows. It is difficult to determine precisely the relationship between the growth in the

volume of business of a company and the increase in its working capital. The

composition of working capital in a growing company also shifts with economic

circumstances and corporate practices other thing being equal, growth industries

require more working capital than those that are static. The need for increased

working capital funds does not follow the growth in business activities but precedes it.

Advance planning of working capital is, therefore a continuing

Necessity for growing concern.

6. Availability of raw material:

The availability of certain raw material on a continues basis without

interruption would sometimes effects the requirements of working capital. There may

be some materials, which cannot be procured easily either because of their sources,

are few or they are irregular. To sustain smooth production, therefore, the firm might

be compaelled.To purchase and stock them for in access of genuine production needs.

This will result in an excusive inventory of such materials. The procurement of some


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essential raw materials is difficult because of their sporadic supply. This happens very

often with raw materials, which are in short supply, and are controlled to ensure

equitable distribution. The element of uncertainly would lead to relatively high level

of working capital. Some raw materials may be available only during certain seasons.

They would have to be necessarily obtained, when available, to provide for a period

when supplies are lean. This will cause seasonal fluctuations in working capital

requirements.

7. Profit level:

The level of profits earned differs from organization to organization. The

nature of the product, hold on the market, quality of management and monopoly

power would by and large determine the profit earned by a firm. It can generalized

that, a firm dealing in a quality product, have a good marketing arrangements and

enjoying monopoly power in the market, is likely to earn high profits and vice versa.

High profit margin would improve the prospects of generating more internal

funds thereby contributing to the working capital pool. The net profit is a source of

working to the extent that is has been earned in cash.

The cash profit can be found by adjusting non-cash such as depreciation,

outstanding expenses and losses written off, in the net profit but in practice the net

cash inflows from operations cannot be considered as cash available for use at the end

of cash cycle. As companies operations in progress, cash is used for augmenting


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stock, book debts and inflows on a day-to-day, basis assume importance because steps

can then be taken to deal with surplus and defect cash.

8. Level of taxes:

The first appropriation out of profits is payment or provision for tax. The

amount of taxes to be paid is determined by the prevailing tax regulations. The

management has in this respect. Very often, taxes have to be paid in advance on the

basis of the preceding year. Tax liability is, in a sense, short-term liability payable in

cash. An adequate provision for tax payment is, therefore an important aspect of

working capital planning. If tax liability increases, it leads to an increase in the

requirement of working capital and vice versa. Management has to discretion in regard

to the payment to taxes; in some cases non-payment may invite penal action there is,

however wide scope to reduce the tax liability through proper tax planning.

The service of tax experts can be availed of to take advantage of the various

concession and incentives through avoidance as opposed to evasion of taxes. Tax

planning can, therefore, be said to be an integral part of working capital planning.

9. Dividend policy:

Appropriation of profits, which has a bearing on working capital, is dividend

payment. The payment of dividend consumes cash resource and thereby, affects

working capital to that extent. In another case if the firm does not pay dividend but

retains the profits working capital increases. So it is important for the firm to decide


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whether profit is to be distributed or retained while calculate or planning for working

capital.

There are wide variations in industry practices as regards the relationship

between working capital requirements and divided payment. In some cases shortage of

working capital has been a powerful reason for reducing or even skipping dividends in

cash. When dividend payments are continued in spite of inadequate earning in a

particular year because of sound liquidity. Sometimes, the dilemma is resolved by the

payment of bonus shares. This enables the payment of dividend without draining away

the cash resources and, thus without reducing working capital. Dividend policy is thus,

a significant element in determining the level of working capital in an organization.

10. Depreciation policy:

Depreciation policy also exerts an influence on the quantum of working capital.

Depreciation changes do not involve any cash outflows. The effect of depreciation

policy on working capital is, therefore indirect. Depreciation affects the tax liability

and retention of depreciation also means lower disposable profits and, therefore, a

smaller dividend payment thus, more profits. Higher depreciation also means lower

disposable profits, and therefore a smaller dividend payment thus cash is preserved. In

the second case the method of depreciation has important financial implications. If

current capital provision is strengthened and there may be no need for short-term

borrowing.


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If the current capital expenditure exceeds the depreciation provision, either

outside borrowing will have to be resorted to or a restriction on dividend payment

coupled with retention of profits will have to be adopted to prevent the working capital

position from being adversely affected. It is in these ways that depreciation policy is

relevant to the planning to working capital.

11. Price level changes:

Changes in the price level also affect the requirements of working capital. Rising

prices necessitate the use of more funds for maintaining an existing level of activity.

For the same level of current assets, higher amount of working capital.

The price rise does not have a uniform effect on all commodities. Some firms

may not be affected at all. The implications of changing price levels on working

capital operations, its operations; it’s standing in the market and other relevant

considerations.

12. Operating efficiency:

The operating efficiency of the management is also an important determine of

the level working capital position through operating efficiency. Management cannot

control the rise in prices; it can ensure the efficient utilization of resources by

eliminating waste, improving coordination and a fuller utilization of existing

resources. Efficiency of operations and a fuller utilization existing resources. By

eliminating waste, improving co-ordination of resources the pace of cash cycle and


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improve s the working capital turnover. It releases the pressure on working capital by

improving profitability and improving the internal generation of funds.

The level of working capital is determined by a wide variety of factors which are

partly internal to the firm and party external (environmental) to it. Effective working

capital management requires effective planning and a constant review of the needs for

an appropriate working capital strategy.

Estimation of working capital requirements:

1. Expenses on raw materials, labors and overhead.

2. Length of time the raw materials to be held in stock.

3. Length of time the raw materials remain in manufacturing process in semi

finished form.

4. Length of time, finished goods are held in go down waiting sales.

5. Credit period granted to the sundry debtors.

6. Credit period granted by the sundry creditors and

7. Time gap in the payment of wages, salaries and other operating expenses.

Operating cycle:

Operating cycle is time duration required to convert sales, after the conversion of

resources into inventories into cash. Investment in current assets such as inventories

and debtors is realized during the firm’s operating cycle which is usually less than a

year.

Figure-1


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Operating cycle of manufacturing company

Sale of product Finished goods

Sundry debtors working in progress

Bills received

Cash Raw materials

Figure-2

Operating cycle of non-manufacturing company

Cash

Sundry debtors Stock of finished goods

Bills receivable


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Sales

Balanced working capital:

The firm should maintain a sound working capital position. It should have

adequate working capital to run its operations. Both excessive as well as inadequate

working capital positions are dangerous for the firm. Excessive working capital means

idle funds which earn no profits for firm.

Inadequate working capital not only impairs the firm’s profitability but also

results in production interruptions and infancies.

Formula of Working Capital:

Working Capital = Current Assets – Current Liabilities

CHAPTER –V

ANALYSIS AND INTERPRETATION

This chapter analyses the working capital which is the part of financial analysis.

The working capital is calculated for a period of six years i.e., 2001-02 to 2006-07. They

are presented in the form of tables and graphs. This is divided into three sections.

Section-I presents the analysis and interpretation of over all current assets and current

liabilities. Section-II presents the analysis interpretation of individual items of current

assets while section-III presents the analysis and interpretation on of individual items of

current liabilities.


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The following current assets and current liabilities:

A. Current Assets:

1. Seed Capital Assistance

2. Deposits With Banks

3. Subsidy Bonds Sinking Fund Deposits

4. Advances to Staff

5. Deposits and Other Advances

6. Other Assets

7. Advances to Suppliers

8. Hire Purchase Installment Due

9. Assets Acquired in satisfaction of Loans and

10. Dividend Deficit Account.

B. Current Liabilities

1. Amount Receivable from Gok

2. Earnest Money Deposits

3. Sundry Deposits

4. Dividend Subvention from Gok

5. Seed Capital Assistance

6. Other Liabilities

7. Sundry Liabilities and

8. Margin Money Assistance.


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Section-I

1. Current assets and current liabilities 2001-02, the following information is relating

to different current assets and current liabilities during the year 2001-02 presented in

table-1

Table-1
Current Assets 2001-02
(Rs,in lakhs)
Sl. No Particulars Amount Percentage
1 Seed capital assistance 4649.2 25.09
2 Deposits with banks 1000 5.40
3 Subsidy bonds sinking fund deposit 7141.82 38.54
4 Advances to staff 2878.89 15.54
5 Deposits and other advances 445.38 2.40


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6 Other assets 5.73 0.03
7 Advances to suppliers 1004.12 5.42
8 Hire purchase installment due 779.69 4.21
9 Assets acquired in satisfaction of loans 0 0.00
10 Dividend deficit account 624.1 3.37
Total 18528.93 100.00

Table -1 A
Current Liabilities 2001-02
(Rs, in lakh)
Sl. No Particulars Amount Percentage
1 Unclaimed dividends 0.36 0.00
2 Earnest money deposit 5.31 0.03
3 Sundry deposits 1643.44 9.05
4 Dividend subvention from GoK 958.88 5.28
6 Other liabilities 284.52 1.57
7 Sundry liabilities 9016.35 49.63
8 Margin money assistance 1586.19 8.73
Total 18167.44 100.00

Working Capital = Current assets – Current liabilities
= Rs. 18528.93- Rs. 18167.44
= Rs 316.49 lakhs
Information relating to various current assets and current liabilities included in the year

2001-02

Graph-1


Seed capital as sistance

0.00 3.37 Depossits w ith banks

5.42 4.21 25.09 Susidy bonds sinking f und depos it
0.03
A dv ances to s taf f
2.40
Deposits and other adv aces
15.54
Other ass ets
5.40
A dv ances to s uppliers

Hire purchas e ins tallment due

A ss ets ac quired in satis f action of
38.54 loans
Dividend def icit acc ount


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Graph 1A
Current liabilities 2001-02
0.00

0.03 unclaimed dividends
8.73 9.05
Earnest money deposit
5.28
Sundry deposits

dividend subvention f rom gok

Seed capital assistance

49.63 Other liabilities
25.72
Sundry liabilities

1.57 Margin money assistance

Table-1 reveals that in the overall composition of current assets, subsidy bonds

sinking fund deposits are the highest (38.54%) where as the other assets are the least

(0.03%).

Table 1 A show that in the overall current liabilities the sundry liabilities are the

highest (49.63) where as the earnest money deposits are the least (0.03%)

table-2
Table-2
Current Assets -2002-03
(Rs,in lakh)
Sl.no Particulars Amount Percentage
2 Deposits with banks 310.01 2.29
3 Subsidy bonds sinking fund deposit 2778 20.48
8 Hire purchase installment due 853.12 6.29
9 Assets acquired in satisfaction of loans 2.76 0.02


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Total 13565.66 100.00

Table-2A
Current liabilities-2002-03
(Rs, in lakh)
4 Dividend subvention from gok 1596.88 9.81
Total 16276.92 100.00


= Rs. 13565.66- Rs. 16276.92

= Rs - 2711.26. lakhs.

2002-03
Graph-2
Current Assets-2002-03
0.02
Depossits w ith banks
6.29 5.70
Susidy bonds sinking f und deposit
6.83 41.75
0.06 A dv anc es to staf f

3.82 Deposits and other advaces

Other ass ets

12.77 A dv anc es to suppliers

Hire purchase installment due

2.29 A ss ets acquired in satisf action of
20.48
loans
Dividend def icit account

Graph-2A


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unclaimed dividends
0 .03
8 .92 0 .00 8.0 1

9 .81 Sundry deposits


37.3 9

3 4.12 Other liabilities

Sundry liabilities
1.71
Margin money assistance

Table-2 inferred that in the composition of overall current assets, seed capital

assistance are the highest (41.47%) wheras the assets acquired in satisfaction of loans are

the least (0.02%).

Table-2A shows that in the composition of overall current liabilities, sundry

liabilities are the highest (37.39%) wheras the earnest money deposits are the least

(0.03%).

3 .Current assets and current liabilities 2003-04, the following information is relating


table-3

Table-3
(Rs in lakh)
Sl no Particulars Amount Percentage
6 Advances to suppliers 365 2.83


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9 Amount receivable from gok 109.71 0.85
Total 12889.5 100.00

Table-3A
(Rs in lakh)
Total 11039.51 100.00


= Rs 12889.50- Rs 11039.51.

= Rs 1849.99 lakhs

2003-04
Graph-3
0.01

2.83 Depossits w ith banks
6.00
0.09 0.85 A dvances to staf f

1.89 Deposits and other adv aces

Other ass ets

50.24 A dvances to suppliers
26.84
A ssets acquired in satis f action
of loans
Dividend def icit acc ount

11.25 A mount receivablr f rom gok


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Graph-3A


unclaimed dividends
0.00
12. 30 0.05

8.18 Sundry deposits
7. 64
div idend subvention f rom gok
14. 47

2.78
Other liabilities

Sundry liabilities

54. 59 Margin money assistance

Table-3 shows that in the composition of overall current assets, seed capital

assistance are the highest (50.247%) wheras the assets acquired in satisfaction of loans

are the least (0.01%).

Table-3A shows that in the composition of overall current liabilities, seed capital

assistance are the highest (54.59%) wheras the earnest money deposits are the least

(0.05%).



table-4

Table-4

(Rs in lakh)
Sl.No Particulars Amount Percentage


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Total 11107.74 100.00

Table-4A

(Rs in lakh)
2 Earnest money deposit 5 0.03
Total 18416.15 100.00


= Rs 11107.74-Rs 18416.15

= Rs -7308.41 lakhs.

2004-05
Graph-4
Current assets 2004-05


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0.01 6.96 1 .06
1
Depossits w ith banks
0.18

0.10
Advances to staf f
1.56 Deposits and other
advaces
10.03 Other assets

Advances to suppliers
8.55
61.54 Assets acquired in
satisf action of loans
Dividend def icit account

Amount receivablr f rom
gok

Graph-4A


0.03 unclaimed dividends
7.00 0.00
6.75 Earnest money deposit

0.81 Sundry deposits
39.95


Other liabilities
36.81 Sundry liabilities

8.67 Margin money assistance

Table-4 reveals that in the composition of overall current assets, seed capital

assistance are the highest (61.54%) wheras the advances to suppliers are the least

(0.01%). Table-4A shows that in the composition of overall current liabilities, sundry

deposits are the highest (39.95%) wheras the earnest money deposits are the least

(0.03%).



table-5

Table-5


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(Rs, in lakh)
4 Deposits and other advances 243 1.06
Total 22970.15 100.00

Table-5A
(Rs, in lakh)
Total 12140.31 100.00


= Rs 22970.15- Rs 12140.31

= Rs 10829.84 lakhs.


2005-06.

Graph-5


FINANCE CORPORATION

Current Assets-2005-06

0.08 0.00 4.30 Seed capit al assist ance
1.08
0.02 Depossit s wit h banks
0.15 7.92
Advances t o st aff
1 .06
Deposit s and ot her advaces
13.55
Ot her asset s

Advances t o suppliers

Asset s acquired in
sat isfact ion of loans
Amount receivable from gok

Asset s acquired in
71.83
sat isfact ion of loans
Dividen d deficit account

Graph-5A

Current Liabilities-2005-06

0.10
16.80 0.04
Sundry deposit s
1.24
dividend subvent ion from gok
13.15
Ot her liabilit ies

Sundry liabilit ies
68.67

Margin money assist ance

Table-5, shows that in the composition of overall current assets, deposits with

banks are the highest (71.83%) wheras the other assets are the least (0.02%).


deposits are the highest (68.67%) wheras the earnest money deposits are the least

(0.03%).

6. Current assets and current liabilities 2006-07: the following information is relating


table-6


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Table-6

(Rs, in lakh)
2 Deposits with banks 9435.2 64.14
Total 14711.07 100.00


Sl.No Particulars Amount Percentage
Total 6374.19 100.00


= Rs 14711.07- Rs 6374.19

= Rs 8336.88 lakhs.

2006-07.
Graph-6

FINANCE CORPORATION

0.13 6.72
0.05 6.50 Depossits w ith banks

1.95 Advances to staf f
0.57
Deposits and other
advaces
19.94 Other assets

Assets acquired in
Am ount receivable f rom
64.14 gok
Assets acquired in

Graph-6A
unclaimed dividends
0.01
0.21
0.08 Earnest money deposit
38.45
Sundry deposits
36.20
dividend subvention f rom
gok
Other liabilities

4.41 Sundry liabilities
25.05
Margin money assistance

Table-6, revels that in the composition of overall current assets, deposits with

banks are the highest (64.14%) wheras the other assets are the least (0.05%).


deposits are the highest (38.45%) wheras the unclaimed dividend are the least (0.01%).

Section-II


A project report on on the working capital management in karnataka state finance corporation

A project report on on the working capital management in karnataka state finance corporation

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