A STUDY ON WORKING CAPITAL MANAGEMENT IN PKR FASHIONS CLOTHES

AT THIRUPUR

CHAPTER I
INTRODUCTION
Finance is the life-blood of business. It is rightly termed as the science of money. Finance
is very essential for the smooth running of the business. Finance controls the policies, activities
and decision of every business. Finance may be said to be the circulatory system of the economic
body, making possible the needed co-operation between the many units of activity.
“Finance is that business activity which is concerned with the organization and
conversation of capital funds in meeting financial needs and overall objectives of a business
enterprise.”
Working capital plays an important role in the day to day activities of a business
enterprise. The working capital management intimately links the functions of every department
in the business concern If working capital is mismanaged it may affect the existence of the
business itself. It is concerned with the management of the current assets as well as the
management of the total working capital. By analyzing the management of the working capital it
can maximize company’s leverage and potential for revenue generation.
Every business needs find for two purposes; for its establishment and to carry out the
day-to-day operations. Working Capital ratters to that part of firm’s capital which is required for
financing the short term assets such as cash, marketable securities, debtors and inventories.
The short term financial strength of the company was analyzed by the ratios like current
ratio, quick ratio, debtor’s turnover ratio, creditor’s turnover ratio, stock turnover ratio, working
capital turnover ratio etc...The working capital of an organization has the implication on both
profitability and liquidity.
The elements of working capital such as inventories, trade debtors, stock-in-trade, cash
and bank balance etc… must be managed effectively for obtaining the desired result. Efficient
management of financial resources and analysis of financial results are prerequisites for success
of an enterprise.
 Here working capital is one of the major areas of financial management. Managing of
working capital implies the management of current assets of the company like cash, inventory,
accounts receivable, loans and advances and current liabilities like sundry creditors, interest
payments and provision.
THEORETICAL FRAMEWORK
Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information. It involves
recording, classifying and summarizing various business transactions. The end products of
accounting are the financial statements comprising primarily the position statement or the
balance sheet and income statement or the profit and loss account.
These statements are outcome of summarizing process of accounting and are therefore
the source of information on the basis of which conclusions are drawn about the profitability and
the financial position of a concern. Financial statements are the basis for decision making by the
management as well as other outsides who are interested in the affairs of the firm such as
investors, creditors, customers, suppliers, financial institutions, employees, potential investors,
government and the general public. The analysis and interpretation of financial statements
depends upon the nature and type of information available in these statements.
EVOLUTION OF THE CONCEPT
Whatever may be the organization, working capital plays an important role, as the
company needs capital for its day to day expenditure. Thousands of companies fail each year due
to poor working capital management practices. Entrepreneurs often don't account for short term
disruptions to cash flow and are forced to close their operations.
In simple terms, working capital is an excess of current assets over the current liabilities.
Good working capital management reveals higher returns of current assets than the current
liabilities to maintain a steady liquidity position of a company. Otherwise, working capital is a
requirement of funds to meet the day to day working expenses. So a proper way of management
of working capital is highly essential to ensure a dynamic stability of the financial position of an
organization.
Working capital management is concerned with the problem that arises in attempting
manage the current asset, the current liabilities and the interrelationship that exist between them.
The goal of working capital management is to manage the firm’s current asset and liabilities in
such a way that a satisfactory level of working capital, it is likely to become insolvent and may
even be forced into bankruptcy.
Working capital refers to the part of capital which is available and used for carrying on
the regular business operations. Simply it refers to capital which is required for the day- to-day
running of the business. The important components of the working capital are current asset and
current liabilities. Current assets are those which can be converted into cash with in an
accounting year. It includes cash, bank, debtors, bills receivable, short term loans and advances,
prepaid expenses and money receivable within twelve months.
Current liabilities are those liabilities they can be trade of within one year. It includes
creditors, bills receivable, bank overdraft, short term borrowings, dividend payable, provident
fund due, outstanding expenses and other payments which are due within one year. The working
capital is needed for the purchase of raw materials, for the payments of wages and salaries, to
meet the day today expenses, to provide credit facilities to the customers etc. so the working
capital plays an important role in the functioning of an enterprise.
Working capital can be regarded as life blood of a business. Its effective provision can do
much to ensure the success of a business while its inefficient management can lead not only to
loss of profits, but also to the ultimate downfall of business.
A study of working capital is of major importance to internal and external analysis,
because of its close relationship with the day to day operations of a business. Working capital is
that portion of the assets of a business, which are used in or related to current operations. It is
defined as the excess of current assets over current liabilities. Every business needs funds for two
purposes for its establishment and to carry out its day to day operations.
 Long term funds
 Short term funds
Long term funds
Long Term Funds are required to create production facilities through purchase of fixed
assets such as plant and machinery, land, building, furniture etc. Investments in these assets
represent that part of firm’s capital which is blocked on a permanent or fixed basis and is called
fixed capital.
Short term funds
Short Term Funds are also needed for short – term purposes for the purchase of wages and
other day –to-day expenses etc. These funds are known as working capital. In simple words,
working capital refers to that part of the firm’s capital which is required for financing short term
or current assets such as cash, marketable securities, debtors and inventories. Funds, thus
invested in current assets keep revolving fast and are being constantly converted into cash and
this cash flows out again in exchange for other current assets. Hence, it is also known as
revolving or circulating capital or short term capital.
 While preparing the statement, it should be noted that
 Increase in current assets result in increase (+) in working capital.
 Decrease in current assets result in decrease (-) in working capital.
 Increase in current liabilities result in decrease (-) in working capital.
 Decrease in current liabilities result in increase (+) in working capital.

MEANING OF WORKING CAPITAL

Working capital means the funds (i.e.; capital) available and used for day to day
operations (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 current operations. It refers to funds which aroused
during an accounting period to generate a current income of a type which is consistent with major
purpose of a firm existence. In Accounting:

WORKING CAPITAL=CURRENT ASSETS - CURRENT LIABILITIES

CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital:

 Balance sheet concept
 Operating cycle or circular flow concept.

A. BALANCE SHEET CONCEPT

There are two interpretations of working under the balance sheet concept:
  Gross Working Capital
 Net Working Capital

Gross working capital:

Gross working capital is the capital invested in total current assets of the enterprise.
Current assets are those assets which in the ordinary course of business can be converted into
cash within a short period of normally one accounting period.
Net working capital:
Net working capital is the excess of current assets over current liabilities or it is the
difference between current assets and current liabilities. It is a quantitative 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 fund.

B. OPERATING CYCLE OR CIRCULAR FLOW CONCEPT:

Funds invested in current assets keep revolving fast and are being constantly converted
into cash and this cash flow out again in exchange for other current assets it is known as
revolving or circulating capital. The circular flow concept of working capital is based up on this
operating or working capital cycle of a firm.
The cycle starts with the purchase of raw materials and other resources and ends with the
realization of cash from the sale of finished goods. It involves the purchase of raw materials and
stores, its conversion into stock of finished goods through the work-in-progress with progressive
investment of labour and service costs, conversion of finished stocks into sales, debtors, and
receivables and ultimately realization of cash and this cycle continuous again from cash to
purchase of raw materials and so on.
The speed/time duration required to complete one cycle determines the requirements of
working capital longer the period of cycle, larger is the requirement of working capital.
Working capital cycle/circular flow concept (fig: 4.1)

CASH

DEBTORS
RAW
MATERIALS

WORK IN
SALES PROGRESS

FINISHED
GOODS
KINDS OF WORKING CAPITAL:

KINDS OF WORKING
CAPITAL

ON THE BASIS
ON THE BASIS OF CONCEPT
OF TIME

PERMANENT TEMPORARY GROSS NET

OR FIXED OR VARIABLE WORKING WORKING
WORKING WORKING CAPITAL CAPITAL
CAPITAL CAPITAL

REGULAR SEASONAL
WORKING WORKING
CAPITAL CAPITAL

RESERVE
SPECIAL
WORKING
WORKING
CAPITAL
CAPITAL
ON THE BASIS OF CONCEPT
 Gross working capital.
 Net working capital.

ON THE BASIS OF TIME

 Permanent working capital.
 Temporary working capital.

PERMANANT WORKING CAPITAL

Permanent working capital is the minimum amount which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. There is always
a minimum level of current assets which is continuously required by the enterprise to carry out
its normal business operations.Eg.every firm has to maintain a minimum level of raw materials,
work-in-progress, finished goods and cash balance.
The minimum level of current assets is called permanent or fixe working capital as this
part of capital is permanently blocked in current assets. It can be further classified as regular
working capital and reserve working capital required ensuring circulation of current assets from
cash to inventories, from inventories to receivables to cash and so on.
Working capital is the excess amount over the requirements for regular working capital
which may be provided for contingencies that may arise at unstated periods such as strikes, rise
in prices etc.
There are two types of Permanent or Fixed Working Capital. They are:
A) Regular Working Capital
It is required to ensure circulation of Current Assets from Cash to Inventories, from Inventories
to Receivables and from Receivables to Cash and so on.
B) Reserve working capital
It is excess of amount over the requirement for regular working capital which may be provided
for contingencies that may arise at unstated periods such as strikes, rise in prices, depression etc.
TEMPORARY OR VARIABLE WORKING CAPITAL
Temporary or variable working capital is the amount of working capital which is required
to meet the seasonal demands and some special exigencies. Variable working capital can be
further classified as seasonal working capital and special working capital. Most of the enterprises
have to provide additional working capital to meet the seasonal and special needs.
There are two types of temporary or variable working capital. They are,
Seasonal Working Capital
It is the capital required to meet the seasonal needs of the enterprise.

Special Working Capital

It is that part working capital which is required to meet special exigencies such as launching of
extensive marketing campaign for conducting research etc.

IMPORTANCE OR ADVANTAGES OF WORKING CAPITAL:

Working capital is the life blood and nerve centre of a business. Working capital is very essential
to maintain the smooth running of a business. No business can run successfully without an
adequate working capital. The main advantages of maintaining adequate working capital are as
follows:
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.
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 materials:
Sufficient working capital ensures regular supply of raw materials and continuous production
Exploitation of favorable market conditions:
If a firm is having adequate working capital then it can exploit the favourable market conditions
such as purchasing its requirements in bulk when the prices are lower and holdings its
inventories for higher prices.
Ability to face crisis:
Adequate working capital enables a concern to face business crisis in emergencies such as
depression because during such period, generally there is much pressure on working capital.
High morale:
Adequate working capital brings an environment of securities, confidence, high morale
which results in overall efficiency in a business.
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
Regular payment of salaries, wages and other day to day commitments:
An ample amount of working capital can make regular payment of salaries, wages and other day
to day commitments which raise the morale of employees. Increase their efficiency, reduces
wastage and cost and enhance production and profits.

EXCESS OR INADEQUATE OF WORKING CAPITAL:

 Every business concern should have adequate working capital to run its business
operations.
 It should have neither redundant or excess working capital nor inadequate nor shortage
of working capital.
 Both excess as well as short working capital positions are bad for any business.
 However out of the two, it is the inadequacy of the working capital which is more
dangerous from the point of view of the firm.
DISADVANTAGES OF REDUNDANT OE EXCESSIVE WORKING CAPITAL:
 Excessive working capital means idle funds which earn no profits for the business and
hence the business cannot earn proper rate of return on its investments.
 When there is a redundant working capital it may lead to unnecessary purchasing and
accumulation of inventories causing more chances of theft, waste and losses.
 Excessive working capital implies excessive debtors and defective credit policy which
may cause higher incidence of bad debts.
 It may result into overall inefficiency in the organization.
 Where there is excessive working capital, relations with bank and other financial
institutions may not be maintained.
 Due to low rate of return on investment, the value of shares may also form.
 The redundant working capital gives rise to speculative transactions

DISADVANTAGES OR DANGERS OF INADEQUATE WORKING CAPITAL

 A concern which has inadequate working capital cannot pay its short term liabilities in
time
 It cannot buy its requirements in bulk and cannot avail of discounts, etc.
 It becomes difficult for the firm to exploit favorable market conditions and undertake
profitable projects due to lack of working capital.
 The firm cannot pay day to day expenses of its operations and it creates inefficiencies,
increases cost and reduces the profit of the business.
 It becomes impossible to utilize efficiently the fixed assets due to non availability of
liquid funds.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENT:

Requirements Of working capital depend upon various factors such as nature of business, size of
business, the flow of business activities. However, small organization relatively needs lesser
working capital than the big business organization. Following are the factors which affect the
working capital of a firm:
Nature of Business:
 The requirement of working capital depends on the nature of business. The nature of
business is usually of two types: Manufacturing Business and Trading Business.
 In the case of manufacturing business it takes a lot of time in converting raw material
into finished goods.
 Therefore, capital remains invested for a long time in raw material, semi-finished goods
and the stocking of the finished goods.
 Consequently, more working capital is required. On the contrary, in case of trading
business the goods are sold immediately after purchasing or sometimes the sale is
affected even before the purchase itself.
 Therefore, very little working capital is required. Moreover, in case of service
businesses, the working capital is almost nil since there is nothing in stock.
Scale of Operations:
 There is a direct link between the working capital and the scale of operations. I
 In other words, more working capital is required in case of big organizations while less
working capital is needed in case of small organizations.
Business Cycle:
 The need for the working capital is affected by various stages of the business cycle.
 During the boom period, the demand of a product increases and sales also increase.
Therefore, more working capital is needed.
 On the contrary, during the period of depression, the demand declines and it affects both
the production and sales of goods.
 Therefore, in such a situation less working capital is required.
Seasonal Factors:
 Some goods are demanded throughout the year while others have seasonal demand.
 Goods which have uniform demand the whole year their production and sale are
continuous. Consequently, such enterprises need little working capital.
 On the other hand, some goods have seasonal demand but the same are produced almost
the whole year so that their supply is available readily when demanded.
 Such enterprises have to maintain large stocks of raw material and finished products and
so they need large amount of working capital for this purpose.
  Woolen mills are a good example of it.
Production Cycle:
 Production cycle means the time involved in converting raw material into finished
product.
 The longer this period, the more will be the time for which the capital remains blocked in
raw material and semi-manufactured products.
 Thus, more working capital will be needed.
 On the contrary, where period of production cycle is little, less working capital will be
needed.
Credit Allowed:
 Those enterprises which sell goods on cash payment basis need little working capital but
those who provide credit facilities to the customers need more working capital.
Credit Availed:
 If raw material and other inputs are easily available on credit, less working capital is
needed.
 On the contrary, if these things are not available on credit then to make cash payment
quickly large amount of working capital will be needed.
Operating Efficiency:
 Operating efficiency means efficiently completing the various business operations.
Operating efficiency of every organization happens to be different.
 Some such examples are: (i) converting raw material into finished goods at the earliest,
(ii) selling the finished goods quickly, and (iii) quickly getting payments from the
debtors. A company which has a better operating efficiency has to invest less in stock and
the debtors.
 Therefore, it requires less working capital, while the case is different in respect of
companies with less operating efficiency.
Availability of Raw Material:
 Availability of raw material also influences the amount of working capital.
 If the enterprise makes use of such raw material which is available easily throughout the
year, then less working capital will be required, because there will be no need to stock it
in large quantity.
  On the contrary, if the enterprise makes use of such raw material which is available only
in some particular months of the year whereas for continuous production it is needed all
the year round, then large quantity of it will be stocked.
 Under the circumstances, more working capital will be required.
Growth Prospects:
 Growth means the development of the scale of business operations (production, sales,
etc.).
 The organizations which have sufficient possibilities of growth require more working
capital, while the case is different in respect of companies with less growth prospects.
Level of Competition:
 High level of competition increases the need for more working capital.
 In order to face competition, more stock is required for quick delivery and credit facility
for a long period has to be made available.
Inflation:
 Inflation means rise in prices.
 In such a situation more capital is required than before in order to maintain the previous
scale of production and sales.
 Therefore, with the increasing rate of inflation, there is a corresponding increase in the
working capital.

SOURCES OF WORKING CAPITAL FINANCE:

The working capital requirements of a concern can be classified into Permanent or fixed working
capital requirement and Temporary or variable working capital requirement. Following are the
short term and long term sources of working capital.

Financing of Permanent/Fixed or Long-term Working Capital

 Shares and Debentures
 Public deposits
 Ploughing back of profits
 Loans from financial institutions
Financing of Temporary, Variable or Short-term Working Capital
 Indigenous bankers
 Trade credit
 Installment credit
 Advances
 Account Receivable Credit or Factoring
 Accrued Expenses
 Deferred Incomes
 Commercial Paper
 Commercial Banks
In any concern, a part of the working capital investments are permanent investments in fixed
assets. This is so because there is always a minimum level of current assets which are
continuously required by the enterprise to carry out its day-to-day business operations and this
minimum cannot be expected to reduce at any time. This minimum level of current assets gives
rise to permanent or fixed working capital as this part of working capital is permanently blocked
in current assets.
The main Source of finance is Short term finance and Long term finance. The Source of short
term finance are Unsecured Accrued wages and taxes Trade off Bank credit Commercial paper,
Secured Account receivable loans, Inventory loans, Unsecured Shares, Unsecured debenture,
Public deposits, Retain earnings, Secured Financial institutions loans and Secured debenture.
MANAGEMENT OF WORKING CAPITAL:
Working capital management policies of a firm have a great effect on its profitability, liquidity
and structural health of organization.
Principles of working capital management policy
Principle of risk variation
Risk here refers to the inability of the firm to meet its obligation as and when they become due
for payment. Larger investment in current assets with less dependence on short term borrowings
reduces risk and thereby decreases the opportunity for gain or loss. In other words, there is a
definite inverse relationship between the degree of risk and profitability.
Principle of cost of capital
Various sources of raising working capital finance have different cost of capital and the degree
of risk involved. Generally, higher risk lower is the cost and lowers the risk, higher is the cost. A
sound working capital management should always try to achieve a proper balance between these
two.
Principle of equity position
This principle is concerned with planning the total investment in current assets. According to this
principle, the amount of working capital invested in each component should be adequate justified
by firm’s equity position. Every rupee invested in the current assets should be contributed to the
net worth of the firm.
Principle of maturity payment
This principle is concerned with planning the sources of finance for working, capital. According to this
principle, a firm should make every effort to relate maturities of payment to its flow of internally generated
funds. Maturity patterns of various current obligations are important factors in risk assumptions and risk
assessments. Generally, shorter the maturity schedule of current liabilities in relation to expected cash
Inflow, the greater the inability to meet its obligation in time.

COMPONENTS OF WORKING CAPITAL MANAGEMENT:

Cash management:
The treasury department of the company makes short term forecasts of cash position, finding
avenues for financing during periods when cash deficit are anticipated; and arranging for
repayment/investment during the periods when cash surpluses arc anticipated with a view to
minimizing idle cash as far as possible. To facilitate this, short term forecasts of cash receipts
and payments are made in the structured form of cash budgets and information is monitored at
appropriate intervals for the purpose of control by taking suitable measures as warranted by
situation.
Inventory Management:
Inventory management involves the control of asset being produced for the purpose of sale in a
normal course of a company’s operations. Inventories include raw material inventory, medicines
inventory etc. The goal of effective inventory management is to minimize cost i.e. the direct and
indirect cost that is associated with holding inventories. However the importance of inventory
management for the company depends upon the extend investment in the inventory. It is industry
specific.
Raw material inventory is maintained to avoid payment of higher prices for ordering small
quantity and its availability. Similarly the firm holds inventories of finished goods to avoid the
risk of running out of product and losing a sale because it cannot fill an order. Money tied up in
inventories does not earn interest; storage and insurance must be paid for and often there is a
spoilage and deterioration. Therefore a firm tries to optimize its inventory holding volumes.
Receivables Management:
To manage the debtors by striking the right balance between increased credit sales leading to
increase in profit and the cost of having large amount of cash lock up in the form of receivables
and the loss due to the incidence of bad debts.
Creditors Management:
Creditors management is the process used to maximize the time period after which the company
should pay to its vendors, at the lowest possible extra cost. This would ensure reduction in the
working capital and thus increase in the frequency of working capital rotation. Creditors are vital
part of cash management and should be managed carefully to enhance the cash position.
Purchasing initiates cash outflows and overzealous purchasing function can creates liquidity
problems. Management of creditors and suppliers is just as important as the management of
yours debtors. It is important to look after the creditors - slow payment may create ill feeling and
can signal that the company is inefficient.

CHALLENGES OF WORKING CAPITAL:

The main issues related to Working Capital are financing Current Assets: Short-Term and Long-
term Mix Combining Liability Structure and Current Asset Decisions.
Following are the parameters for judging the efficiency of working capital management:
 Timely payment of bill
 Availability of adequate cash
 Inventory management and control
 Credit management
STATEMENT OF THE PROBLEM
 A business is an economic activity which needs funds not only for long term expansion
but also for meeting its day to day expenses.
 Funds are invested in current asset for meeting day to day needs is called working capital
or short term capital.
 The need for working capital arises because of the time gap between the production and
realization of cash from sales.
 Management of working capital is concerned with the problem that arises in attempting
to manage current assets, current liabilities and their relationship.
 Working Capital management has a vital importance in every business towards the
profitability, liquidity, structural strength; smooth working of the business enterprise etc.
 If a business need to run smoothly it need sufficient amount of working capital.
 Thus the study concentrates on the examining of the working capital position to satisfy its
short term objectives and also to study how effectively firm manages its working capital.

OBJECTIVE OF THE STUDY:

The primary objective of the study is to analyze the of working capital utilization of the company
for the last 5 years.
The other objectives include:
 To analyze the liquidity position of the company.
 To find out the efficiency of the company.
 To suggest suitable solutions for the findings of the study.
SCOPE OF THE STUDY:
The scope of the study is to analyze how efficiently the working capital the working
capital of the company is utilized and to know the financial position of the company for the past
five years (2012-2013 to 2016-2017) and to suggest feasible solutions to improve company’s
profitability in future years.
 CHAPTER II
REVIEW OF LITERATURE
REVIEW OF LITERATURE
STUDIES ON WORKING CAPITAL MANAGEMENT:
The purpose of this chapter is to present a review of literature relating to the working capital
management. Although working capital is an important ingredient in the smooth working of
business entities, it has not attracted much attention of scholars. Whatever studies have
conducted, those have exercised profound influence on the understanding of working capital
management good number of these studies which pioneered work in this area have been
conducted abroad, following which, Indian scholars have also conducted research studies
exploring various aspects of working capital. Special studies have been undertaken, mostly
economists, to study the dynamics of inventory investment which often represented largest
component of total working capital. As such the previous studies may be grouped into three
broad classes─ (1) studies conducted abroad, (2) studies conducted in India, and (3) studies
relating to determine of inventory investment.
Studies adopting a new approach towards working capital management are reviewed here:
Studies on Working Capital Management Conducted Abroad
 Sagan in his paper (1955),1 perhaps the first theoretical paper on the theory of
working capital management, emphasized the need for management of working
capital accounts and warned that it could vitally affect the health of the company.
He realized the need to build up a theory of working capital management. He
discussed mainly the role and functions of money manager inefficient working
capital management. Sagan pointed out the money manager’s operations were
primarily in the area of cash flows generated in the course of business transactions.
However, money manager must be familiar with what is being done with the
control of inventories, receivables and payables because all these accounts affect
cash position.
 Realizing the dearth of pertinent literature on working capital management, Walker
in his study (1964) made a pioneering effort to develop a theory of working capital
management by empirically testing, though partially, three propositions based on
risk-return trade-off of working capital management. Walker studied the effect of
 the change in the level of working capital on the rate of return in nine industries for
the year 1961 and found the relationship between the level of working capital and
the rate of return to be negative. Walker further stated that if a firm wished to
reduce its risk to the minimum, it should employ only equity capital for financing of
working capital; however by doing so, the firm reduced its opportunities for higher
gains on equity capital as it would not be taking advantage of leverage. In fact, the
problem is not whether to use debt capital but how much debt capital to use, which
would depend on management attitude towards risk and return. On the basis of this,
he developed his second proposition.
 Weston and Brigham (1972) further extended the second proposition suggested by
Walker by dividing debt into long-term debt and short-term debt. They suggested
that short-term debt should be used in place of long-term debt whenever their use
would lower the average cost of capital to the firm. They suggested that a business
would hold short-term marketable securities only if there were excess funds after
meeting short-term debt obligations. They further suggested that current assets
holding should be expanded to the point where marginal returns on increase in these
assets would just equal the cost of capital required to finance such increases.
 Van Horne in his study (1969), recognizing working capital management as an
area largely lacking in theoretical perspective, attempted to develop a framework in
terms of probabilistic cash budget for evaluating decisions concerning the level of
liquid assets and the maturity composition of debt involving risk-return trade-off.
He proposed calculation of different forecasted liquid asset requirements along with
their subjective probabilities under different possible assumptions of sales,
receivables, payables and other related receipts and disbursements.
 Welter, in his study (1970), stated that working capital originated because of the
global delay between the moment expenditure for purchase of raw material was
made and the moment when payment were received for the sale of finished product.
Delay centres are located throughout the production and marketing functions. The
study requires specifying the delay centres and working capital tied up in each delay
centre with the help of information regarding average delay and added value. He
recognized that by more rapid and precise information through computers and
 improved professional ability of management, saving through reduction of working
capital could be possible by reducing the length of global delay by rescuing and/or
favourable redistribution of this global delay among the different delay centres.
However, better information and improved staff involve cost. Therefore, savings
through reduction of working capital should be tried till these saving are greater or
equal to the cost of these savings. Thus, this study is concerned only with return
aspect of working capital management ignoring risk. Enterprises, following this
approach, can adversely affect its short-term liquidity position in an attempt to
achieve saving through reduction of working capital. Thus, firms should be
conscious of the effect of law current assets on its ability to pay-off current
liabilities. Moreover, this approach concentrated only on total amount of current
assets ignoring the interactions between current assets and current liabilities.
 Lambrix and Singhvi(1979) adopting the working capital cycle approach to the
working capital management, also suggested that investment in working capital
could be optimized and cash flows could be improved by reducing the time frame
of the physical flow from receipt of raw material to shipment of finished goods, i.e.
inventory management, and by improving the terms on which firm sells goods as
well as receipt of cash. However, the further suggested that working capital
investment could be optimized also (1) by improving the terms on which firms
bought goods i.e. creditors and payment of cash, and (2) by eliminating the
administrative delays i.e. the deficiencies of paper-work flow which tended to
extend the time-frame of the movement of goods and cash.
 Warren and Shelton (1971) applied financial simulation8 to simulate future
financial statements of a firm, based on a set of simultaneous equations. Financial
simulation approach makes it possible to incorporate both the uncertainty of the
future and the many interrelationships between current assets, current liabilities and
other balance sheet accounts. The strength of simulation as a tool of analysis is that
it permits the financial manager to incorporate in his planning both the most likely
value of an activity and the margin of error associated with this estimate. Warren
and Shelton presented a model in which twenty simultaneous equations were used
to forecast future balance sheet of the firm including forecasted current assets and
 forecasted current liabilities. Current assets and current liabilities were forecasted in
aggregate by directly relating to firm sales. However, individual working capital
accounts can also be forecasted in a larger simulation system. Moreover, future
financial statements can be simulated over a range of different assumptions to
portray inherent uncertainty of the future.
 Cohn and Pringle in their study (1973) illustrated the extension of Capital Asset
Pricing Model (CAPM) for working capital management decisions. They tried to
interrelate long-term investment and financing decisions and working capital
management decisions through CAPM. They emphasized that an active working
capital management policy based on CAPM could be employed to keep the firm’s
shares in a given risk class. By risk, he meant unsystematic risk, the only risk
deemed relevant by CAPM. Owing to the lumpy nature for long-term financial
decisions, the firm is continually subject to shifts in the risk of its equity. The fluid
nature of working capital, on the other hand, can be exploited so as to offset or
moderate such swings. For example they suggested that a policy using CAPM could
be adopted for the management of marketable securities portfolio such that the
appropriate risk level at any point in time was that which maintains the risk of the
company’s common stock at a constant level. Similarly,
 Copeland and Khoury (1980) applied CAPM to develop a theory of credit
expansion. They argued that credit should be extended only if the expected rate of
return on credit is greater than or equal to market determined required rate of return.
They used CAPM to determine the required rate of return for the firm with its new
risk, arising from uncertainty regarding collection due to the extension of credit.
Thus, these studies show how CAPM can be used for decisions involved in working
capital management.
 Pioneering work in this field has been done by Metzler (1941) However, his
work was mainly on simple acceleration principle which postulated that firms liked
to maintain inventories in proportions to output/sales and they succeeded in
achieving the desired level of inventories in a unit time- period. That is to say, any
discrepancy between the actual level and desired level of inventories is adjusted
within the same time-period. Needless to say, that such an instantaneous adjustment
 is not a realistic assumption to make. Modifications, therefore, have been
introduced in the literature to provide for partial adjustment.
 Goodwin (1948) assumed that firms attempted only a partial adjustment of the
discrepancy between the desired stocks as determined by the level of output and the
existing stock.
 Darling and Lovell (1965) modified Metzler’s formulation based on simple
acceleration principle and obtained, the relationship based on flexible accelerator
principle. There are several reasons physical, financial and technical those motivate
partial adjustment. Among the physical factors, mention may be made of
procurement lags between orders and deliveries. The length of such lags is
connected with the source of supply, foreign or domestic availability. Import
licensing procedures on account of foreign exchange scarcity could cause further
delays in adjustment. Among the financial factors, cost advantages associated with
bulk buying and higher procurement costs for speedy delivery are also mentioned.
Uncertainties in the market for raw materials and in the demand for final product
also play a role in influencing the speed of adjustment. Technically, firms like to
make sure that changes in demand are of a permanent character before making full
adjustment. The acceleration principle has great relevance in inventory analysis
than in the analysis of fixed investment, as there are limits to liquidate fixed capital
in the face of declining demand.
 It has been found significant in the studies of Hilton (1976) and Irwin
(1981)1Time-trend is expected to be important because inventories generally
accumulate with the expansion of economic activities of the company. Anticipated
price changes, measured by changes in wholesale price index of inventories, are
taken as an explanatory variable to capture speculative element in inventory. This
suggests a positive relationship between price changes and inventory. An increase
in sales is expected to increase the demand for stocks to meet orders regularly. An
increase in capacity utilization is also expected to increase the demand for stock by
increasing the demand for raw materials and increasing the inventories of finished
goods. Thus, the variable, capacity utilization, is postulated to have a positive
coefficient in the equation.
 Abramovitz (1950) and Modigliani (1957) highlighted the impact of capacity
utilization on inventory investment. Existing stock of inventories is expected to take
account of adjustment process to the desired levels. Thus the variable, existing
stock of inventories, is postulated to be negatively related with the desired stock.
The ratio of inventory to sales may affect inventory investment positively because a
high ratio of stocks to sales in the past suggests the maintenance of high levels of
inventories in the past and thus also calling for high investment in inventories in the
current period.
 Metzler (1941) and Hilton (1976) have found this variable, inventory-sales ratio,
to be statistically significant. Fixed investment is generally expected to affect
inventory investment inversely because of competing demand for the limited funds.
However, in case of an expanding firm, the two components may be
complementary. Besides, availability of funds from retained earnings and external
sources, may affect investment decision by providing funds for financing inventory
investment. Therefore, retained earnings and flow of debt are postulated to have
positive coefficients.
 Appavadhanulu (1971) recognizing the lack of attention being given to
investment in working capital, analysed working capital management by examining
the impact of method of production on investment in working capital. He
emphasized that different production techniques require different amount of
working capital by affecting goods-in- process because different techniques have
differences in the length of production period, the rate of output flow per unit of
time and time pattern of value addition. Different techniques would also affect the
stock of raw materials and finished goods, by affecting lead-time, optimum lot size
and marketing lag of output disposals. He, therefore, hypothesised that choice of
production technique could reduce the working capital needs. He estimated the ratio
of work-in-progress and working capital to gross output and net output in textile
weaving done during 1960, on the basis of detailed discussions with the producers
and not on the basis of balance sheets which might include speculative figures. His
study could not show significant relationship between choice of technique and
working capital. However, he pointed out that the idea could be tested in some other
 industries like machine tools, ship building etc. by taking more appropriate ratios
representing production technique correctly.
 Chakraborty (1973) approached working capital as a segment of capital
employed rather than a mere cover for creditors. He emphasized that working
capital is the fund to pay all the operating expenses of running a business. He
pointed out that return on capital employed, an aggregate measure of overall
efficiency in running a business, would be adversely affected by excessive working
capital. Similarly, too little working capital might reduce the earning capacity of the
fixed capital employed over the succeeding periods. For knowing the
appropriateness of working capital amount, he applied Operating Cycle (OC)
Concept. Cash working capital requirements of Dunlop and Madura Mills were
more than average balance sheet working capital for all years efficient employment
of resources. For Union Carbide Ltd., cash working capital requirements were more
in beginning years and then started reducing in the later years as compared to
conventional working capital indicating the attempts to better manage the working
capital. Chakraborty emphasized the usefulness of OC concept in the determination
of future cash requirements on the basis of estimated sales and costs by internal
staff of the firm. OC concept can also be successfully employed by banks to assess
the working capital needs of the borrowers.
 Misra(1975) studied the problems of working capital with special reference to six
selected public sector undertakings in India over the period 1960-61 to 1967-68.
Analysis of financial ratios and responses to a questionnaire revealed somewhat the
same results as those of NCAER study with respect to composition and utilization
of working capital. In all the selected enterprises, inventory constituted the more
important element of working capital. The study further revealed the overstocking
of inventory in regard to its each component, very low receivables turnover and
more cash than warranted by operational requirements and thus total
mismanagement of working capital in public sector undertakings.
 Agarwal (1983) also studied working capital management on the basis of sample of
34 large manufacturing and trading public limited companies in ten industries in
private sector for the period 1966-67 to 1976-77. Applying the same techniques of
 ratio analysis, responses to questionnaire and interview, the study concluded the
although the working capital per rupee of sales showed a declining trend over the
years but still there appeared a sufficient scope for reduction in investment in
almost all the segments of working capital. An upward trend in cash to current
assets ratio and a downward trend in cash turnover showed the accumulation of idle
cash in these industries. Almost all the industries had overstocking of raw materials
shown by increase in the share of raw material to total inventory while share of
semi-finished and finished goods came down. It also revealed that long-term funds
as a percentage of total working capital registered an upward trend, which was
mainly due to restricted flow of bank credit to the industries.
 Kamta Prasad Singh, Anil Kumar Sinha and Subas Chandra Singh (1986)
examined various aspects of working capital management in fertilizer industry in
India during the period 1978-79 to 1982-93. Sample included public sector unit,
Fertilizer Corporation of India Ltd. (FCI) and its daughter units namely Hindustan
Fertilizers Corporation Ltd., the National Fertilizer Ltd., Rashtriya Chemicals and
Fertilizers Ltd. and Fertilizer (Projects and Development) India Ltd. and comparing
their working capital management results with Gujarat State Fertilizer Company
Limited in joint sector. On the basis of ratio-analysis and responses to a
questionnaire, study revealed that inefficient management of working capital was to
a great extent responsible for the losses incurred by the FCI and its daughter units,
as turnover of its current assets had been low. FCI and its daughter units had high
overstocking of inventory in respect of each of its components particularly stores
and spares. Similarly, quantum of receivables had been excessive and their turnover
very low. However, cash and liquid resources held by FCI and its daughter units
had been much lower in relation to operation requirements. So far as financing of
working capital was concerned, long-term funds had been financing a low
proportion of current assets due to rapid increase of current liabilities. The
profitability providing an internal base for financing of working capital had been
very low in these undertakings.
 Verma(1989) evaluated working capital management in iron and steel industry by
taking a sample of selected units in both private and public sectors over the period
 1978-79 to 1985-86. Sample included Tata Iron and Steel Company Ltd. (TISCO)
in private sector and Steel Authority of India Ltd. (SAIL) and Indian Iron and Steel
Company, a wholly owned subsidiary of SAIL, in public sector. By using the
techniques of ratio analysis, growth rates and simple linear regression analysis, the
study revealed that private sector had certainly an edge over public sector in respect
of working capital management. Simple regression results revealed that working
capital and sales were functionally related concepts. The study further showed that
all the firms in the industry had made excessive use of bank borrowings to meet
their working capital requirement vis-à-vis the norms suggested by Tandon
Committee.
 Vijaykumar and Venkatachalam (1995) studied the impact of working capital on
profitability in sugar industry in Tamil Nadu by selecting a sample of 13
companies; 6 companies in co-operative sector and 7 companies in private sector
over the period 1982-83 to 1991-92. They applied simple correlation and multiple
regression analysis on working capital and profitability ratios. They concluded
through correlation and regression analysis that liquid ratio inventory turnover ratio,
receivables turnover ratio and cash turnover ratio influenced the profitability of
sugar industry in Tamil Nadu. They also estimated the demand functions of
working capital and its components i.e. cash, receivables, inventory, gross working
capital and net working capital, by applying regression analysis. They showed the
impact of sales and interest rate on working capital and its components. When only
sales was taken as independent variable, coefficient of sales was more than unity in
all the equations of working capital and its components showing more than unity
sales elasticity and diseconomies of scale. When sales and interest rate were taken
as independent variable, sales elasticity was again more than unity in demand
functions of working capital and its components except cash. So far as capital costs
were concerned, these had negative signs in all the equations but significant only in
inventory, gross working capital and net working capital showing negative impact
of interest rates on investment in working capital and its components. Thus study
showed that demand for working capital and its components was a function of both
sales and carrying costs.
 CHAPTER III
RESEARCH METHODOLOGY:
RESEARCH METHODOLOGY:
Here I use descriptive and analytical research for analysis on working capital
management in PKR FASHIONS CLOTHES AT THIRUPUR. Descriptive analysis mainly
used for explain the theoretical background of working capital management and about the
company. For the easiness of analyze the working capital management and derived the objective,
analytical method are mostly adopted.
SOURCES OF DATA COLLECTION
The study was analytical in nature and used primary and secondary data.
PRIMARY DATA COLLECTION METHOD:
These data are first hand information collected through interviews with the officials and staffs in
the Finance department of the company.
SECONDARY DATA COLLECTION METHOD:
These data are collected from Annual reports from 2012-2013 to 2016-2017 and other published
documents of the company.
Mainly data are in two primary data and secondary data. Here used both primary and secondary
data. They are from the staffs of the company and from the published sources such as five years
financial statement of the company, company journals and magazines, annual report, working
capital management books etc.
DATA ANALYSIS:
Tools used for data analysis are:
 Ratio Analysis
 Working capital statement analysis
 Trend analysis
Profit and loss account reveals the income and expenditure of the company. Balance Sheet
reveals the financial position of the organization. Those two statements are prepared by the
highly qualified and experts with the help of available information or data.

LIMITATIONS OF THE STUDY:

 The project was bound for a short period, thus time is a limiting factor.
 Study is based on secondary data, so errors are possible.
 The study covers only the accounting period of 5 years.
 The analysis is made only on the basis of the available data of annual reports of PKR
FASHIONS CLOTHES AT THIRUPUR.
 Certain confidential information regarding study was not available and the analysis and
interpretations are subject to limitations.
 The information provided by the people in the organization may not be complete.
 There was a considerable amount of inhibition on part of staff for providing information.