1. • Submit by Syed Shah
Hussain Naqvi
• HND RPL in Quantity
Surveying Batch 12

2. Working Capital
Management

3. Capital
capital is the keynote of economic development. In
this modern age, the level of economic development
is determined by the proportion of capital available.
Capital (economics), A factor of production that is
not wanted for itself but for its ability to help in
producing other goods.

4. Definition of Working
Capital
Working Capital refers to that part of the firm’s
capital, which is required for financing short-term
or current assets such a cash marketable securities,
debtors and inventories. Funds thus, invested in
current assets keep revolving fast and are
constantly converted into cash and this cash flow
out again in exchange for other current assets.
Working Capital is also known as revolving or
circulating capital or short-term

5. KINDS OF WORKING
CAPITAL
WORKING CAPITAL
BASIS OF
CONCEPT
BASIS OF
TIME
Gross
Working
Capital
Net
Working
Capital
Permanent
/ Fixed
WC
Temporary
/ Variable
WC
Regular
WC
Reserve
WC
Special
WC
Seasonal
WC

6. Components of Working
Capital
The working capital cycle is made up of four
core components:
Cash & Cash equivalent.
Creditors/accounts payable.
Inventory/stock in hand.
Debtors/accounts receivables.

7. Significance of Gross WC
• Optimum investment in CA
Investment in CA must be adequate CA investment should not
be inadequate or excessive inadequate WC can disturb
production and can also threaten the solvency of firm , if it fails
to meet its current obligation excessive investment in CA
should be avoided , since it impairs firms profitability
• Financing of CA
Need for WC arises due to increasing level of business activity
& it is to provided quickly some time surplus fund may arises
which should be invested in Short term securities , they should
not be kept idle

8. Significance of Net Working
Capital
• Maintaining Liquidity position
For maintaining liquidity position there is a
need to maintain CA sufficiently in excess of
CL
• Judge Financial Soundness of a
firm
The Net working capital helps creditors and
investors to judge financial soundness of a
firm

9. BALANCE SHEET OF ABC COMPANY AS ON 31-3-2000
Liabilities R’s Assets R’s
Equity Shares 200000 Goodwill 20000
8% Debentures 100000 Land and Building 150000
Reserve & Surplus 50000 Plant and Machinery 100000
Sundry Creditors 150000 Inventories
Bills Payable 30000 Finished Goods 60000
Outstanding Expenses 20000 Work in process 40000
Bank Overdraft 50000 Prepaid Expenses 20000
Provision for Taxation 20000 Marketable Securities 60000
Proposed Dividend 30000 Sundry Debtors 90000
Bills Receivables 20000
Cash & Bank Balance 90000
TOTAL 650000 TOTAL 650000

10. Difference between permanent & temporary
working capital
Amount Variable Working Capital
of
Working
Capital
Permanent Working Capital
Time
Permanent and temporary working capital for Stable firm

11. Variable Working Capital
Amount
of
Working
Capital
Permanent Working Capital
Time
Permanent and temporary working capital for Growing firm

12. • Operating cycle concept
• Maximization of share holder’s wealth of a firm is possible only
when there are sufficient return from the operations
• Successful sales activity is necessary for earning profit sales do
not convert into cash immediately
• There is invisible time lap between the sale of good and receipt
of cash
• The time taken to convert raw material into cash is known as
operating cycle
• Conversion of cash into raw material
• Conversion of raw material into work in progress
• Conversion of Work in progress into finished goods
• Conversion of finished good into Sales ( Debtors and cash )

13. Operating Cycle in
Manufacturing firm
Cash
Raw
Materials
W I P
Finished
Goods
Debtors SALES

14. Operating cycle of Non
Manufacturing Firm
www.bcasqr.com
cash
Receivables
Stock of finished goods

15. Importance of Working
Capital
• It is important we work out the right level of
working capital you will need. If the working
capital is too:
– High - Business has surplus funds which are not earning a return; and
– Low - May indicate that your business is facing financial difficulties.
• To Forecast the optimum working capital
requirement the following formula may be used:
– (Estimated cost of good sold x Operating cycle) + Desired cash balance.
– Operating Cycle, O = R + W + F + D – C
– Where, O = Duration of operating cycle.
R = Raw Material storage period.
W= Work-in-process period.
F = Finished Good Storage period.
D = Debtors collection period.
C = Creditors payment period.

16. Working Capital Financing
• Fund Based:
– Cash Credit
– Overdraft
– Bills Discounting
– Working Capital Demand Loan
• Non Fund Based:
– Letter of Credit
– Bank Guarantee
• Structured Product:
– Factoring
– Commercial Paper
– Securitization of receivables
– Buyers/Supplier credit.

17. Shah Tubes Ltd.
• Among the 3 top manufacturer of the steel tubes, pipes and
hollow sections in India.
• Delhi based with 5 manufacturing location at northern,
southern and western part of the India with installed
capacities ½ Million MTPA.
• Despite a slowdown in the Indian economy Company has
recorded a gross sales growth of 56% over 2010-11,
EBIDTA growth of 26.19% and net profit growth of
13.83%.
• Intends to double production capacity to a million tonnes
per annum by 2015 and generating revenues worth US$1
billion.
• Plan to increase presence in new geographies including Tier
II & Tier III cities.

18. APL Apollo Tubes Ltd.
• Among the 3 top manufacturer of the steel tubes, pipes and hollow
sections in India.
• Delhi based with 5 manufacturing location at northern, southern
and western part of the India with installed capacities ½ Million
MTPA.
• Despite a slowdown in the Indian economy Company has recorded
a gross sales growth of 56% over 2010-11, EBIDTA growth of 26.19%
and net profit growth of 13.83%.
• Intends to double production capacity to a million tonnes per
annum by 2015 and generating revenues worth US$1 billion.
• Plan to increase presence in new geographies including Tier II & Tier
III cities.

19. Working Capital Cycle
Shah Tubes Ltd
Tubes Industry
30 Days
44 Days
60 Days 60 Days
30 Days
30 Days
40 Days
34 Days

20. Working Capital Cycle
APL Apollo Tubes Ltd
Tubes Industry
30 Days
44 Days
60 Days 60 Days
30 Days
30 Days
40 Days
34 Days

21. Operating Cycle in number
of days
Working Capital Cycle : No. of days F-2012 F-2011
Inventory
Raw Material 14 22
Finished Goods 16 35
Debtors 44 46
Total 74 103
Creditors 34 36
Net Working Capital 40 68

22. Current Ratio - Analysis
3.60
4.45
2.78
3.87
3.00
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

23. As per Tondon Committee
Current Assets : Mar '12 Mar '11
Inventories 93.00 97.22
Sundry Debtors 139.89 80.68
Cash and Bank Balance 3.15 1.20
Total 236.04 179.10
Current Liabilities 65.52 40.22
Net Current Assets 170.52 138.88
75% on current assets 177.03 134.33
Less: Current Liabilities 65.52 40.22
MPBF 111.51 94.11

24. Analysis of Peer Companies
KEY RATIOS SHAH Man
Ind
Mah
Seam
OPBDIT (% of Total operating Income) 6.7% 12.7% 20.5%
OPBIT (% of Sales) 6.1% 10.4% 19.6%
PBT (% of Sales) 4.0% 8.8% 19.4%
PAT (% of Sales) 2.7% 6.0% 13.6%

25. Analysis of Peer Companies’
Particulars SHAH Man Ind Mah Seam
Sources Of Funds
Total Share Capital 21.3 27.6 35.3
Equity Share Capital 21.3 27.6 35.3
Share Application Money 8.3 - -
Reserves 236.9 617.3 2,724.6
Networth 266.5 644.9 2,759.8
Secured Loans 192.5 230.2 1.6
Unsecured Loans - - 29.3
Total Debt 192.5 230.2 30.9
Total Liabilities 459.0 875.2 2,790.7
Application Of Funds
Gross Block 140.8 589.8 1,502.2
Less: Accum. Depreciation 16.7 241.8 179.5
Net Block 124.1 348.0 1,322.7
Capital Work in Progress 33.9 0.9 9.9
Investments 76.8 302.5 473.6
Inventories 93.0 160.2 717.2
Sundry Debtors 139.9 298.5 362.2
Cash and Bank Balance 3.2 107.8 20.1
Total Current Assets 236.0 566.5 1,099.6
Loans and Advances 85.0 284.5 261.1
Total CA, Loans & Advances 321.1 851.0 1,360.6
Current Liabilities 87.4 557.5 366.7
Provisions 9.6 69.7 9.4
Total CL & Provisions 96.9 627.2 376.1
Net Current Assets 224.1 223.8 984.6
Total Assets 459.0 875.2 2,790.7
KEY RATIOS SHAH Man
Ind
Mah
Seam
Current Ratio 3.6 1.4 3.4
Holding Days
Inventory
Raw Material 14.0 18.6 94.0
Finished Goods 16.0 13.8 24.6
Sundry Debtors 44.0 63.2 54.5
Sundry Creditors 34.0 132.9 31.1

26. Recommendation
• The company should increase its creditors cycle to 60 days as per
the industry benchmark.
• The company can also look for channel financing through
contractual arrangement with its present lender.
• The company has recently shown tremendous growth towards
trading goods. The company should reduce its inventory through
efficient supply chain management .
• The company should also explore the possibilities of factoring
keeping in mind the factoring cost ( both recourse and non-
recourse) vis a vis collection cost and bad debt as a percentage of
sale.
• The company has improved its rating from LBBB+ to A- ( long term)
as per recent ICRA rating. The company can also go for financing its
working capital through commercial paper, if accessible which is
available at a lower cost.

27. Short term Borrowings v/s
Credit Period
• The Company has obtained short term obligations at
around 13.6 % .
• It is very important to understand that as per the credit
policy of the company it offers around 2%( 0 days) cash
discount to its debtors for payment upfront.
• The company needs to make an effective credit policy
to ensure that the credit period offered is not at the
cost of its earnings.
• The company also needs to ensure that the implicit
cost imbedded in the credit period does not exceed
market rate of competitive goods.

28. Recommendations
• The company has exports of 273million in the recent
years. The same has reduced from 334 million in
previous years.
• The company can search for innovative products such
as forfeiting or pre shipment or post shipment finance
• Advantages:
(1) Improved liquidity.
(2) Convert credit sales into cash sales.
(3) Credit limit does not get blocked

29. Pros Cons
• Signifies efficient working
capital management.
• Saving in interest expenses.
• Less risk of Bad-debt
• For eg. Automobile Industry
• Risk of failure to meet
short-term obligation.
• May result in lower credit
rating because of
failure/delay in payments.
• Bank may charge higher
interest rate.
• For eg. Steel Industry
Negative Working Capital