1.

INTRODUCTION:

Working capital management is a way company manages the relationship between assets and
liabilities in the short term. Simply put, working capital management is how a company
manages its money for day to day operations as well as any immediate debt obligations. When
managing working capital, the company has to manage accounts receivable, accounts payable,
inventory, and cash. The goal of working capital management is to have adequate cash flow
for continued operations and have the most productive usage of resources.

There are a few calculations we have to discuss in regards to working capital management.
Working capital management involves the relationship between a firm’s short-term assets and
its short-term liabilities. The goal of working capital management is to ensure that a firm is able
to continue its operations and that it has sufficient ability to satisfy both maturing short-term
debt and upcoming operational expenses. The management of working capital involves
managing inventories, accounts receivable and payable, and cash.

DEFINITION

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 security, debtors and inventories. Funds thus,
invested in current asset keep revolving fast and are constantly converted into cash and this cash
flow out again in exchange for other current asset. Working capital is also known as revolving
or circulating capital or short term capital.

MEANING

Working capital is a financial matrix which represents operating liquidity to a business.

Working capital management refers to a company’s managerial accounting strategy designed to
monitor and utilize the two components of working capital, current asset and current liabilities,
to ensure the most financially efficient operation of the company.The present research seeks to
study in depth. The working capital management of selected paper companies in India, with
special emphasis on an examination of the management performance in regard to financial
management. In present research for working capital management needs special attention for
the efficient working and the business. The proper management of working capital may bring
about the success of the business. The management of working capital includes the management
of current asset.

IMPORTANCE OF WORKING CAPITAL:

Some important questions to which the research attempts to seek answer as follows

 Whether paper companies have planted their working capital requirement properly.
 Have the paper companies utilized by investment in current asset?
 Have the paper companies controlled and utilized cash resources effectively and
profitability?
 Whether paper companies resolve to hide build up of inventory
 How for have the paper companies been successful in collecting their (different
administration of its various components like as inventory, account receivable, cash and
account payables.

BENEFITS OF WORKING CAPITAL:

With working capital loans easily available for SME’s, achieving your business targets as
become easier. Here a look at the 6 benefits your business stands to gain from working capital
finance.

Fuels short term finance

Eliminates collateral
Makes it easier to get financing
Maintain cash flow
Provides a line of credit facility.
Preserves ownership

CONCEPT OF WORKING CAPITAL

According to quantitative concept, the amount of working capital refers to” total of current
asset”. What we call current asset? SMITH called, ‘circulating capital’. The current assets are
considered to be gross working capital in this concept.

The qualitative concept gives an idea regarding sources of financial capital. According to
qualitative concept the amount of working capital refers to ”excess of current asset over current
liabilities” L.J. GUTMANN defined woking capital as “the position of the firm’s current asset
which are financed form long term funds

CURRENT ASSET:

It is rightly observed that “current have a short life span.

 Short life span, and

 Swift transformation into the form of asset

CURRENT LIABILITIES:

The firm creates a current liability towards creditor (sellers) from whom it has purchased raw
materials on credit. The liability is also known as accounts payable and shown in the balance
sheet till the payment has been made to the creditor

DETERMINATION OF WORKING CAPITAL:

General nature of business

Production cycle

Business cycle fluctuation

Production policy

Credit policy

Growth expenses

Profit level

Level of taxes

Dividend policy

Depreciation policy

Price level changes

Operating efficiency

TYPES OF WORKING CAPITAL

The working capital need in to permanent working capital and temporary working capital

Permanent working capital:

There is always the minimum level of working capital which is continuous required by a firm in
order to maintain its activity like cash, stock and other current assets in order to meet its
business requirements irrespective of the level of operation.

Temporary working capital:

Over and above the permanent working capital, the firm may also required additional working
capital in order to meet the requirements arising out of fluctuations in sales volume. Thus extra
working capital needed to support the increased volume of sales is known as temporary or
fluctuating working capital.

Advantages of Adequate Working Capital

Solvency of the business: Adequate working capital helps in maintaining the solvency of the
business by providing uninterrupted of production.

 Goodwill: Sufficient amount of working capital enables a firm to make prompt payments
and makes and maintain the goodwill.

 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 reduce cost.

 Regular Supply of Raw Materials: Sufficient working capital ensures regular supply of
raw materials and continuous production.

 Regular Payments of Salaries, Wages and other Day To Day Commitments: It leads to
the satisfaction of the employees and raises the morale of its employees, increases
efficiency, reduce wastage and costs and enhances production and profits.

 Exploitation Of Favourable 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: A concern can face the situation during the depression.

 Quick And Regular Return On Investments: Sufficient working capital enables a

concern to pay quick and regular of dividends to its investors and gains confidence of the
investors and can raise more funds in future.

 High Morale:Adequate working capital brings an environment of securities, confidence,

high morale which results in overall sufficiency in a business.

 Excess or Adequate Working Capital:

 Every business concern should have adequate amount of working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate nor
shortages of working capital. Both excess as well as short working capital positions are bad
for any business. However, it is the inadequate working capital which is more dangerous
from the point of view of the firms.

Disadvantages of Redundant or Excessive Working Capital

 Excessive working capital means ideal funds which earn no profit for the firm and
business cannot earn the required rate of return on its investments.
 Redundant working capital leads to unnecessary purchasing and accumulation of
inventories.
 Excessive working capital implies excessive debtors and defective credit policy which
causes higher incidence of bad debts.
 It may reduce the overall efficiency of the business.
 If a firm is having excessive working capital then the relations with banks and other
financial institution may not be maintained.
 Due to lower rate of return in investments, the values of shares may also fall.
 The redundant working capital gives raise to speculative transactions.

Disadvantages of In adequate Working capital :

Every business needs some amounts of working capital. The need for working capital arises due
to the time gap between production and realization of cash from sales. There is an operating
cycle involved in sales and realization of cash. There are time gaps in purchase of raw materials
and production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

 For the purpose of raw material, components and spares.

 To pay wages and salaries
 To incur day to day expenses and overload costs such as office expenses.
 To meet the selling costs as packing, advertising, etc.
 T o provide credit facilities to the customer.
 To maintain the inventories of the raw material, work in progress, stores and spares,
finished stock.

COMPONENTS OF WORKING CAPITAL

The main components of working capital are cash, marketable securities, account
receivable, trade credits and loans from bank, etc.

a) Cash

Cash is one of the most liquid and important components of working capital. It I
necessary for a business firm to maintain a certain amount of cash in hand or at bank
always, even if the other current assets are at a figure. Cash at bank balance have three
important functions namely transaction functions, precautionary functions and speculative
functions. The transaction function requires a firm to hold cash to conduct its business in the
ordinary course.

The firms cash primarily to make payment for purchase, wages operating expenses, taxes,
dividends, etc., the precautionary functions is the need to hold cash to meet any contingencies
in future. It provides a cushion or buffer to withstand some unexpected emergency.The
speculative functions relates to the holding of cash for investing in profit making
opportunities as and when they rise. Often some profitable opportunities come and if they are
not immediately exploited it may not be possible to take advantage of them subsequently. It
may be necessary therefore to maintain a certain amount of cash balance to enable the firm
to exploit opportunities.

b) Inventory

Every enterprise needs inventory for smooth running of its activities. It serves as link
between production and distribution processes. The investment in most of the
undertaking inventory includes the following things.

c) Raw Materials

Raw materials form a major inquired will put to the organization. The quantity of raw
materials required will be determined by the rate of consumption and the time required
for replenishing the suppliers.

d) Work In Progress

The Work in progress is the stage of stock, which is in between raw materials and
finished goods. The raw materials enter the manufacture but they are yet to attain a final shape
of finished goods. The quantum of work in progress depends upon the time in the
manufacturing process.

e) Finished Goods

Finished goods are those completely manufactured products, which are ready for sales the
stock of finished goods will be more when production is undertaken in general without
waiting for specific orders.

f) Book Debt/ Receivables

Receivable constitute a significant portion of current assets of a firm. Receivables

represent amounts owed to the firm as a result of sale of goods or services in the ordinary
course of business. These are claims of the firm against its customers and from part of its
current assets.

Receivable are also known as accounts, receivable, customer receivable or book debts.The
period of credit and extent of receivable depends upon the credit policy followed bythe firm.
The purpose of maintaining or investing in receivables is to meet competition and to
increase the sales and profits. The concern incurs the following cost on maintaining
receivables, cost of finishing receivables, cost of collection and bad debts.

The gross capital working capital focuses on two aspects of current assets management:

a) Optimum investment in current assets: As state earlier, both excessive and inadequate
investment is harmful for the business. This as pectsthus, emphasis on the optimum adequate
level of current assets, working capital depends upon the business activated.

b) It also changes with the change in business activities. This may cause excess or shortage of
working capital frequently. The management should be active and alert to correct the
imbalance.

c) Financing of current assets: This aspect focus on the need of arranging funds to finance
current assets when more working capital is required due to the increase in business activities.
Then the arrangement should be made quickly.

Similarly, when surplus funds arise, then they should be invested in short term
securities.
1.2 INDUSTRY PROFILE

PRIVATE SECURITY SERVICE INDUSTRY

The Mumbai attack of 26/11 brought the Indian private security industry or the manned guarding
industry in the focus. The security guards of Hotel Taj were the first ones to encounter the
terrorists and many experts commented that had the guards been trained and armed to face the
situation, the story would have been less tragic.

The industry wasith a handfulbornof playersin. Accordingthe 60’stoindustry sources,w Private

Security Industry is estimated to be worth INR 22,000 crore and is likely to cross INR 40,000
crores by 2015. The industry growth could be attributed to the key drivers like growing
urbanization and increasing insecurity, mushrooming of shopping malls and self contained
townships, frequent terror attacks, shortage of police personnel and last but not the least security
agency itself being a profitable business. A more economic justification for engaging private
security is that insurance companies particularly fire insurance carriers will give substantial
discount to sites as presence of security reduces odds of incidence

As early as in 2006 it was reported that the industry was paying Rs 10,000 crores to the exchequer
by way of service tax, provident fund, contributions to employees insurance etc. become an
important segment of the economy, by not only contributing to the Government but by generating
employment opportunities for urban and the BPL youth.

The industry’s notable growth most has been in the past 6-7 years, with a CAGR of over 25 %.
The number of companies operational is approximately 15000 including both unorganized and
organized. There are over 5 million private security guards available as compared to 3.2 million
police officers contributing to one of the major factors in boosting the demand in the industry.
Today the industry is perceived to be growing at 40%.

Challenges in the Private Security Industry

1. Compliance concerns

The centre drafted Private Security Agencies (Regulation) (PSAR) Act in 2005 and encouraged
the states to enact & enforce it. All most all states have adopted the Act. The law provided the
much needed regulatory environment but the delay in implementation has lead to a number of
issues. The following issues are most like to get addressed .

The provisions in the Act make it easy to start a security business and if the business is not
registered, the exit is also very easy. Substandard service offering and delivery is a also a common
practice

The supply of manpower to the industry is most often from rural and interior parts of India. They
are barely literate and most often not trained to assume the role of a security guard. However,
considering that the demand to supply mismatch is to the tune of 30 per cent, all of them get
absorbed.

There is a specific need for identifying and classifying or grading the security personnel according
to the trainings undertaken to help them be placed in the jobs they specialize and also help
determine remuneration.

Today, the scope s ofexpanded vastlyguard’sandincludes everythingwork fromha preventing

industrial espionage and conducting electronic surveillance to providing personal security,
conducting investigations and managing facilities. Lack of trained personnel is the bane of the
industry. PSAR Act 2005 makes it mandatory for every guard to undergo at least 160 hours of
training. 100 hours of classroom learning and 60 hours of on-the-job training.

2.Sub optimal use of technology –over dependence on manpower The security industry has
pre-dominantly become manpower intensive. Due to lack of availability of skilled manpower,
most of the agencies hire people to meet the basic demand of guarding entrances and exists.
Baring the larger players, who have their own training facilities, many refrain from use of
technology owing to the higher investment needs for gadgets and training.

Talent retention –Fair employment practices & career progression

A security guard has a very small career progression path. A maximum level that he can attain
with adequate training is that of a ‘supervisor’, that he earns. Besides, he works on an average for
more than 12 hours a day. The agencies therefore have to not only provide good working
conditions but also use fair employment practices to retain talent.
Empowering Private Security Industry in India

India experienced lesser number of deaths due to extremism in the last few years, but still it
remains one of the most terrorism-afflicted nations in the world according to the annual State
Department Country Report on Terrorism for 2011. Also considering limitation like the poor
police citizen ratio and the increasing ratio of private security guards to the police personnel,
the need of the hour is a security model which elegantly clarifies and public private
partnership for security. There is an opportunity to empower the private security in order to
shoulder greater responsibilities along with the police.

1. Defining powers of private security personnel: Many a times, the private guards are the
first line of defense available. There is a need to pass legislation regarding private security
personnel’s powers that could clearly define by them in case of exigency.

2. Right to detain At present there is no clause in the Act, which empowers private security
officers with right to detention. In developed economies, the private security officers can detain a
suspect till local authorities take charge of the situation. There is a tremendous opportunity for
Private security industry to become an extended arm of the authorities.

3. Create pool of Specialists Specific legislation allowing municipalities and authorities to

draw from a range of listed tasks related, essentially, to patrol and assistance for security can prove
vital for the industry. Specific legislation empowering specialist officers who are, engaged with
private security remains ‘on call’. The legislation industry and its standards. would be important
owing to the fact that most of the people employed in the industry are not in a position to pay for
their own trainings. On the other hand the security training needs to be made mandatory owing to
the increased threat perceptions and in line with technological advancements the terrorists have
achieved. Government’s initiative up SKSDC should provide the necessary
empowerment.Committee focuses on areas that have a significant bearing on the sector, such
as:

1. Amendments in PSAR Act 2005

The committee has identified the lacunas in the Act which are limiting the industry growth. The
committee is working towards creating consensus in the industry with regard to the proposed
amendment to the PSAR Act. A white paper has been submitted to MHA for consideration

2. Private Security Workers’ categorization as Skilled

State Minimum Wages

Today, the private security sector operates across over 550 districts in the country directly
employing over 50 lakh individuals. Despite discharging highly skilled functions like access
control using baggage x ray machines and metal detection equipment at five star hotels or
guarding industrial complexes through use of CCTV surveillance systems or managing entry / exit
of thousands of workers and vehicles outside IT parks or managing complex functions at private
ports and airports, the private security guard continues

The committee is working towards getting the categorization of the private security industry
workers as skilled and highly skilled.

3. Armed security for cash logistics

The Cash Logistics Industry deals with the physical movement and storage of currency notes and
other valuables on behalf of the banks. This sector employs about 40,000 individuals and caters to
approximately 80,000 ATMs for cash replenishment services. There are about 6,000 cash vans
that operate across the country and carry approximately INR 15,000 crores of cash every day.
This Industry also holds approximately 4,000 crores of cash overnight in their vaults on behalf of
the banks. Currently there are seven companies which account for 95% share of the market in this
Industry.

4. Minimum standards for cash logistics/ Guidelines for Cash Logistics Companies in India

It is pertinent to mention that 6000 –7000 cash vans operate across the country each day to
transport INR 15,000 crores of currency, stores over INR 4,000 crores In private cash vaults,
replenishing ATMs and facilitating door step banking. The need for such services shall only
increase with expected expansion in banking operations in the country. In view of the increased
incidents of attacks on cash vans and private cash vaults in recent months, there is a need for
defined operating standards for cash logistics companies or for banks that outsource cash logistics
operations to private service providers.
5. Private Detective Agency Regulation Act
The committee will take initiative to appear before the Standing committee on Home Affairs and
present its recommendations for their perusal and action.
1.3 COMPANY PROFILE

Introduction

Suraksha Task Force is a Proprietary Concern dealing with Private Security Services.
It is Solely Owned by Air Commodore (Retired) S . Narayanan VM, VSM who is
Double Decorated Officer of the Indian Air Force. After initial service in the
Directorate of Intelligence from 1967 to 1970 , he later Served as Counter Intelligence
Office in the Eastern Sector. Later, he Specialized as an Aerial Imagery Interpreter
and Aerial Imagery Sensor Specialist. He was the First Indian Photo Interpreter to
undergo training at United Kingdom on the Jaguar Aircraft Multi Spectral Imagery
Interpretation in 1979.

Thereafter he served at the Indian Air Force Base located at Ambala as a Jaguar
Aircraft Reconnaissance System Specialist from 1980 to 1985. Later he served as
Chief Instructor at the Air Force Intelligence School from 1986 till 1992. After stints
as Chief Administrative Officer at Air Force Stations located at Cahaba and Tezpur
in the Eastern Sector and New Delhi, and as Command Works Officer at the Central
Air Command , he was promoted to the rank of Air Commodore and served as the
Commanding officer of large logistics depot located at AVADI near Chennai.

Later he opted for Premature Retirement and left the IAF in 1999. Having been
exposed to Intelligence and Security atmospheres for nearly 30 years of his service ,
his experience was utilized by a Private Security Concern at Chennai from 2000 to
2007. Armed with such Enormous Exposure , Suraksha Task Force was set up by this
Ex IAF officer in 2008.

Initial Stage

With an Initial Investment of Rs 1,00,000/- the Company was Registered at Chennai

on 04 Feb 2008 for Operations within Tamil Nadu. This was Later Registered to
Operate in Andhra Pradesh also.
Motto

The Motto of the Company “Sadha Suraksha Bhava” , means “ May There Be Eternal
Protection” !!!

Statutory Registrations

The Company is also Registered with the Department of Goods and Services Tax ,
Employees State Insurance Corporation and the Employees Provident Fund
Office.The Relevant Details are as here under :-

(a) GST………………..
(b) ESI…………………. 51-89244-101
(c) EPFO……………… TN / 66950

Registered Office

The Registered Office of SurakshaTask Force (STF) is at following addtress:

“Vigneshwar” , Door No 287A, Plot Nos 206 & 207, Vettri Nagar, Selai Village ,
Thiruvallur Taluk & District , Tamil Nadu – 631203 .

Office Load Being a Service Sector Company All Tasks Other than the following
are “Off Loaded” to Two Specialist Companies :-

Tasks Handled Directly by STF

(a) Recruitment
(b) Training at Site
(c) Day to Day Operational Tasks
(d) Payment of Government Dues like GST, ESI and EPF through Net Banking
(e) Computerised Cash Book Action
(f) Computerised Wages Calculation
(g) Computerised Service Charge Bill Despatch to Customers
(h) Wages Distribution through NEFT
Tasks Offloaded to Specialist Service Companies

M/s GKS Consultants

Jobs related to Preparations of EChallans with respect to monthly contribution of

subscriptions to ESI and EPF.

Resolving Disputes related to above with Concerned Govt., Departments

M/s Kishore Anand Associates

 Annual Auditing of all accounts of the company and submission of Balance

Sheet.

 Preparation of Income Tax Return and Advising STF on Tax Payment

Requirements

 Claiming Refunds from IT Department.

 Calculation of GST on Monthly basis based on service charge bills and advising
STF on follow up action requirement.

Current Wages

The Company pays it’s staff at rates well above those prescribed by the Minimum
Wages Act Amended from time to time. The Gross Wages Drawn by Various
categories of personnel is given below :-
Security Officer Rs………………………… Plus Free Meals on Duty

Security Guard Rs………………………… Plus Free Meals on Duty

Employees Provident Fund Though the Company Employs only Ex Servicemen,

all of them are members of EPF. The monthly contributions from Employee and
Employer are remitted online to EPF before the 15th Day of every Month.
1.4 NEED AND IMPORTANCE OF THE STUDY:

 This project is helpful in knowing the company’s position of funds

maintenance and setting the standards for working capital inventory levels,
current ratio level, quick ratio, current assets turnover level & size of current
liability etc.
 This project is helpful to the managements for expanding the dualism & the
project viability & present availability of funds.
 This project is also useful as it combines the present year data with the
previous year and thereby it shows the trend analysis, i.e. increasing fund or
decreasing fund.
 The project is done as a whole entirely. It will give overall view of the
organization and it is useful in further expansion decision to be taken by
management.
1.5 OBJECTIVES OF THE STUDY:

Primary Objective:
 To study the working capital management of Sureksha Task Force

Secondary Objectives:
 To assess whether the investment of Sureksha Task Force In current assets is
sufficient, compared to the position of current liabilities
 To study the existing system of working capital management comprising of cash
management, break even analysis and leverages separately

 To study the profitability ratios and find out the changes in profit due to changes
in credit standards, credit period, and cash discount.

 To determine the safety, liquidity and profitability of the company with the help
of ratios related to working capital management and analyses them with
suggestions.
.

1.6 SCOPE OF THE STUDY:

The management of working capital helps us to maintain the working capital at a

satisfactory level by managing the current assets and current liabilities. It also helps to
maintain proper balance between solvency risk and liquidity of the business
significantly.

By managing the working capital, current liabilities are paid in time. If the firm
makes payment to it creditors for raw material in time ,it can have the availability of
raw material regularly, which does not cause any obstacles in production process.
The goodwill of the firm is also adversely affected due to the inability to pay current
liabilities in time.

Hence, the management of working capital helps to manage all the factors affecting
the working capital I n the most profitability manner.

2.1 LITERATURE REVIEW:

Working capital management is the key area of financial management and plays an
important role in any industry. A number of researchers have conducted research on
the subject and its various components. This Chapter is an overview of the research
that has been carried out on the subject. Some of the most relevant articles have been
reviewed here as a part of my research work.
As the title of the thesis broadly deals with working capital management of the
selected pharmaceutical units of Gujarat, the need arises to carry out literature review
under two major headings:

 Working Capital Management

 Components of Working Capital

1 Working Capital Management

It deals with all the aspects of working capital of which in depth study has been
carried out as discussed below.

1. Bhatt V. V. (1972) widely touches upon a method of appraising working capital

finance applications of large manufacturing concerns. It states that similar methods
need to be devised for other sectors such as agriculture, trade etc. The author is of the
view that banks while providing short-term finance, concentrate their attention on
adequacy of security and repayment capacity. On being satisfied with these two
criteria they do not generally carry out any detail appraisal of the working of the
concerns.

2. Smith Keith V. (1973) believes that Research which concerns shorter range or
working capital decision making would appear to have been less productive. The
inability of financial managers to plan and control properly the current assets and
current liabilities of their respective firms has been the probable cause of business
failure in recent years. Current assets collectively represent the single largest
investment for many firms, while current liabilities account for a major part of total
financing in many instances. This paper covers eight distinct approaches to working
capital management. The first three - aggregate guidelines, constraints set and cost
balancing are partial models; two other approaches - probability models and portfolio
theory, emphasize future.

3. Chakraborthy S. K. (1974) tries to distinguish cash working capital v/s balance

sheet working capital. The analysis is based on the following dimensions:

a) Working capital in common parlance b) Operating cycle concept

b) Computation of operating cycle period in all the four cases. The purpose of the
analysis is to demonstrate operating cycle concepts based on published annual reports
of the firms.

4. Natarajan Sundar (1980) is of the opinion that working capital is important at both,
the national and the corporate level. Control on working capital at the national level is
exercised primarily through credit controls. The Tandon Study Group has provided a
comprehensive operational framework for the same. In operational terms, efficient
working capital consists of determining the optimum level of working capital,
financing it imaginatively and exercising control over it. He concludes that at the
corporate level investment in working capital is as important as investment in fixed
assets. And especially for a company which is not growing, survival will be possible
only so long as it can match increase in operational cost with improved operational
efficiency, one of the most important aspects of which is management of working
capital.

5. Kaveri V. S. (1985) has based his writing on the RBI‟s studies on finances of large
public limited companies. This review of working capital finance refers to two points
of time i.e., the accounting years ending in 1979 and 1983 and is based on the data as
given in the Reserve Bank of India on studies of these companies for the respective
dates. He observes that the Indian industry has by and large failed to change its
pattern of working capital financing in keeping with the norms suggested by the
Chore Committee.
6. Bhattacharyya Hrishikes (1987) tries to develop a comprehensive theory and tool of
working capital management from the system‟s point of view. According to this
study, capital is often used to refer to capital goods consisting of a great variety of
things, namely, machines of various kinds, plants, houses, tools, raw materials and
goods-in-process. A finance manager of a firm looks for these things on the assets
side of the balance sheet. For capital he turns his attention to the other side of the
balance sheet and never commits a mistake. His purpose is to balance the two sides in
such a way that net worth of the firm increases
Bhattacharyya Hrishikes (1987) tries to develop a comprehensive theory and tool of
working capital management from the system‟s point of view. According to this
study, capital is often used to refer to capital goods consisting of a great variety of
things, namely, machines of various kinds, plants, houses, tools, raw materials and
goods-in-process. A finance manager of a firm looks for these things on the assets
side of the balance sheet. For capital he turns his attention to the other side of the
balance sheet and never commits a mistake. His purpose is to balance the two sides in
such a way that net worth of the firm increases without increasing the riskiness of the
business. This balancing is financing, i.e., financing the assets of the firm by
generating streams of liabilities continuously to match with the dynamism of the
former. The study is an improvement of the concept of Park and Gladson who were
not able to capture the entire techno-financial operating structure of a firm.

7. Rao K.V. and Rao Chinta (1991) observe the strong and weak points of
conventional techniques of working capital analysis. The result has been obviously
mixed while some of the conventional techniques which could comprehend the
working capital behavior well; others failed in doing the job properly. The authors
have attempted to evaluate the efficiency of working capital management with the
help of conventional techniques i.e., ratio analysis. The article concludes prodding
future scholars to search for a comprehensive and decisive yardstick in evaluating the
working capital efficiency.

8. Hamlin Alan P. and Heath field David F. (1991) opine that working capital is
necessary input to the production process and yet is ignored in most economic models
of production. The implications of modeling the time dimension of production, and
hence, the working capital requirements of firms are explored, with the particular
stress placed on the competitive advantage gained by firms that retained flexibility in
the time structure of their production. In this article they have attempted to explore
only this most basic role of time in the production process and so focus is on the
implications of explicitly recognizing the need for working capital.

9. Zaman M. (1991) studies the working capital management practices of Public

Sector Jute Enterprises in Bangladesh which have been found to be seriously affected.
This has been attributed to several factors like low demand for jute goods and serious
competition in the international market, insufficient inventory management policy,
poor collection policy and inefficient cash policy. The author has formulated a long
term flexible and operational working capital management model. In conclusion he
has suggested the model which would certainly help improve the working capital
management practices of the jute industry in particular and other public enterprises as
well in Bangladesh
.
10. Fazzari Steven M. and Petersen Bruce C. (1993) throws light on new tests for
finance constraints on investment by emphasising the often neglected role of working
capital as both a use and a source of funds. The authors believe that working capital is
also a source of liquidity that should be used to smooth fixed investment relative to
cash-flow shocks if firms face finance constraints. They have found that working
capital investment is “excessively sensitive” to cash-flow fluctuations. Besides, when
working capital investment is included in a fixed-investment regression as a use or
source of funds, it has a negative coefficient. They conclude that controlling for the
smoothing role of working

capital results in a much larger estimate of the long-run impact of finance constraints
than reported in other studies.

11.Hossain Saiyed Zabid and Akon Md. Habibur Rahman (1997) emphasise the basic
objective of working capital management i.e., to arrange the needed working capital
funds at the right time, at right cost and from right source with a view to achieving a
trade-off between liquidity and profitability. The analysis reveals that BTMC had
followed an aggressive working capital financing policy taking the risk of liquidity.
There was uninterrupted increasing trend in negative net working capital throughout
the period of the study which suggested that BTMC had exploited the entire short-
term sources available to it without considering the actual needs.
12.Ahmed Habib (1998) points out that when the interest rate is included; money
loses its predictive power on output. The study explicates this finding by using a
rational expectations model where production decisions of firm required debt finance
working capital. Working capital is an important factor and its cost, the rate of
interest, affects the supply of goods by firms. Monetary policy shocks, thus, affect the
interest rate and the supply side, and as a result price and output produced by firms.
The model indicates that this can cause the predictive power of monetary shocks on
output to diminish when the interest rate is used in empirical analysis. The model also
alludes to the effects of monetary policy on the price level through the supply side
(cost push) factors.

13. Prof. Mallick Amit and Sur Debasish (1998) attempt to make an empirical study
of AFT Industries Ltd, a tea producing company in Assam for assessing the impact of
working capital on its profitability during the period 1986-87 to 1995-96. The author
has explored the co-relation between ROI and several ratios relating to working
capital management. On the whole, this study of the co-relation between the selected
ratios in the area of working capital management and profitability of the company
revealed both negative and positive effects. Moreover, the WCL of the company
recorded a fluctuating trend during the period under study.

14. Hossain, Syed Zabid (1999) throws light on the various aspects of working capital
position. He has evaluated working capital and its components through the use of ratio
analysis. For each aspect of analysis certain ratios are computed and then results are
compared with the standard ratio or industry average.

15. Singaravel, P. (1999) focuses on the interdependency among working capital,

liquidity and profitability, of which sufficiency of liquidity comes in the first
preference followed by sufficiency of working capital and profitability. The article is
an in-depth analysis of liquidity and its interrelationship with working capital and
profitability. As the working capital, liquidity and profitability are in triangular
position, none is dispensable at the satisfaction of the other. Excess of stock-in-trade
over bank over-draft and excess of liquid assets over current liabilities other than bank
over-draft generate working capital for the business. Alternatively working capital
requirements are made for long-term funds which affect the profitability.

16. Chalam G. V. and Manohar Babu B. V. (1999) observe that liquidity performance
is very low as compared to the ideal norms. It is suggested that for managing working
capital effectively the operating and other required budgets should be prepared by the
respective levels of the management on short-term as well as long-term basis. It is
further suggested that these are the people concerned who can really influence the
process of production activity to such an extent that there should be optimum
utilization of the investment in working capital.
17. Jain P. K. and Yadav Surendra S. (2001) study the corporate practices related to
management of working capital in India, Singapore and Thailand. In this paper the
authors have tried to understand the working capital management and current assets
and current liabilities, and their inter-relationship. Further the authors have shown an
aggregative analysis of current assets and current liabilities in terms of major liquidity
ratios. It also states working capital position in terms of these ratios pertaining to
various industries. From the paper one can infer that the available data in respect of
the sample companies from the three countries confirm the wide inter-industry
variations in liquidity ratios. Towards the end, the authors suggest that serious
consideration needs to be given by the respective governments as well as industry
groups in these three countries in order to take corrective measures to take care of and
rectify the areas of concern.

18. Deloof Marc. (2003) presents a picture of how working capital management
affects the profitability of Belgium firms. The writer has made use of empirical
analysis for the sample firms. It was observed that most of the firms have a large
amount of cash invested in working capital. It can, therefore, be deduced that the way
in which working capital is managed will have a significant impact on the profitability
of the firms.
19. Howorth Carole and Westhead Paul (2003) have tried to find out the working
capital management routines of a large random sample of small companies in the UK.
Considerable variability in the take-up of eleven working capital management
routines was detected. Principal components analysis and cluster analysis confirmed
the identification of four distinct “types” of companies with regard to the patents of
working capital management. While the first three types‟ of companies focused upon
cash management, stock or debtors routines respectively, the fourth „type‟ was less
likely to take-up any working capital management routines. The objective of the study
is to encourage additional research rather than to provide an exhaustive overview of
all the factors associated with the take-up of working capital management routines by
small companies. The results suggest that small companies focus only on areas of
working capital management where they expect to improve marginal returns.
20. Sarawat B. P. and Agrawal R. S. (2004) have tried to evaluate working capital
position of Nepal cement industry. The study has the following major objectives:
The study attributes the losses or low level of profits of the public enterprises in Nepal
to ineffective and inefficient utilization of working capital. The failure of an
enterprise is due to shortage of working capital.

21. Filbeck Greg and Krueger Thomas M. (2005) base their study on the ratings of
working capital management published in CFO magazines. The findings of the study
provides insight into working capital performance and working capital management,
which is explained by macro economic factors, interest rates, competition, etc., and
their impact on working capital management. The article further studies the impact of
working capital management on stock prices.

22. Meszek Wieslaw and Polewski Marcin (2006) examine the profiles of selected
construction companies from the viewpoint of working capital formation and their
management strategies applied to working capital. The analysis is based on the
financial ratios. The authors conclude with the observation that complex working
capital management requires controlling methodology to be developed. A specific
character of the construction industry, including operational factors and market
requirements make working capital management a task exceeding the financial
sphere, as it embraces the issues of organization of investment processes, the
organization of production processes and logistics.

23. Chowdhury Anup and Amin Md. Muntasir (2007) examine the working capital
management practice in pharmaceutical companies listed in Dhaka Stock Exchange.
Among all the problems of financial management, the problems of working capital
management have been recognized as the most crucial one. It is because of the fact
that working capital always helps a business concern to gain vitality and life strength.
The objective of the study is to critically evaluate the working capital management
practices in the selected firms of the pharmaceutical industry. To achieve this goal,
the study also examines the policies and practices of cash management and evaluates
the principles, procedures and techniques of inventory management, receivables
management and payable management. From the analysis, the authors conclude that
the pharmaceutical firms operatedin Bangladesh efficiently deal with their liquidity
preferences and investment criteria. And this is due to the competitive nature of this
industry.

24. Jain P. K. and Yadav Surendra S. (2007) study the differe different facets of
working capital management. The issues addressed include relationship between CAs
and CLs, the financing of working capital, and ways of dealing with excess or
shortage of working capital. The study is based on an analysis of a thirteen year
period data from 1991 to 2003 covering 137 public sector enterprises. In a nutshell, it
is reasonable to contend that the sample PSEs (Public Sector Enterprises) are faced
with long duration of net working capital cycle (time necessary to complete the
following three events:

1. Conversion of cash into inventory

2. Conversion of inventory into debtors and

3. Conversion of debtors into cash less credit available from creditors) necessitating
substantial working capital to be carried by them eventually affecting their
profitability in adverse manner.

25. Ganesan Vedavinayagam (2007) studies the impact of working capital

management on profitability through ANOVA test where the financial statements of
349 telecom units or enterprises are analyzed. The relationship between working
capital management efficiency and profitability and the impact of working capital
management on the same has been tested. At the end of the study the author has
minutely observed that the working capital management efficiency in
telecommunication industry is poor. And he suggests that the telecommunication
industry should improve working capital management efficiency.

26. Appuhami Ranjith B. A. (2008) investigates the impact of firms‟ capital

expenditure on their working capital management. The data used in this article was
collected from listed companies in the Thailand Stock Exchange. In this work the
writer has used Shulman and Cox‟s (1985) net liquidity balance and working capital
requirement as a proxy for working capital measurement and developed multiple
regression models. At the end it is derived that the firms‟ capital expenditure has a
significant impact on working capital management, and that the firms operating cash
flow which was recognized as a control variable, has a significant relationship with
working capital management.

27. Jain P. K. and Yadav Surendra S. (2001) study the corporate practices related to
management of working capital in India, Singapore and Thailand. In this paper the
authors have tried to understand the working capital management and current assets
and current liabilities, and their inter-relationship. Further the authors have shown an
aggregative analysis of current assets and current liabilities in terms of major liquidity
ratios. It also states working capital position in terms of these ratios pertaining to
various industries. From the paper one can infer that the available data in respect of
the sample companies from the three countries confirm the wide inter-industry
variations in liquidity ratios. Towards the end, the authors suggest that serious
consideration needs to be given by the respective governments as well as industry
groups in these three countries in order to take corrective measures to take care of and
rectify the areas of concern.

28. Deloof Marc. (2003) presents a picture of how working capital management
affects the profitability of Belgium firms. The writer has made use of empirical
analysis for the sample firms. It was observed that most of the firms have a large
amount of cash invested in working capital. It can, therefore, be deduced that the way
in which working capital is managed will have a significant impact on the profitability
of the firms.
29. Howorth Carole and Westhead Paul (2003) have tried to find out the working
capital management routines of a large random sample of small companies in the UK.
Considerable variability in the take-up of eleven working capital management
routines was detected. Principal components analysis and cluster analysis confirmed
the identification of four distinct “types” of companies with regard to the patents of
working capital management. While the first three types‟ of companies focused upon
cash management, stock or debtors routines respectively, the fourth „type‟ was less
likely to take-up any working capital management routines. The objective of the study
is to encourage additional research rather than to provide an exhaustive overview of
all the factors associated with the take-up of working capital management routines by
small companies. The results suggest that small companies focus only on areas of
working capital management where they expect to improve marginal returns.
30. Sarawat B. P. and Agrawal R. S. (2004) have tried to evaluate working capital
position of Nepal cement industry. The study has the following major objectives:

The study attributes the losses or low level of profits of the public enterprises in Nepal
to ineffective and inefficient utilization of working capital. The failure of an
enterprise is due to shortage of working capital.

31. Filbeck Greg and Krueger Thomas M. (2005) base their study on the ratings of
working capital management published in CFO magazines. The findings of the study
provides insight into working capital performance and working capital management,
which is explained by macro economic factors, interest rates, competition, etc., and
their impact on working capital management. The article further studies the impact of
working capital management on stock prices.

32. Meszek Wieslaw and Polewski Marcin (2006) examine the profiles of selected
construction companies from the viewpoint of working capital formation and their
management strategies applied to working capital. The analysis is based on the
financial ratios. The authors conclude with the observation that complex working
capital management requires controlling methodology to be developed. A specific
character of the construction industry, including operational factors and market
requirements make working capital management a task exceeding the financial
sphere, as it embraces the issues of organization of investment processes, the
organization of production processes and logistics.

33. Chowdhury Anup and Amin Md. Muntasir (2007) examine the working capital
management practice in pharmaceutical companies listed in Dhaka Stock Exchange.
Among all the problems of financial management, the problems of working capital
management have been recognized as the most crucial one. It is because of the fact
that working capital always helps a business concern to gain vitality and life strength.
The objective of the study is to critically evaluate the working capital management
practices in the selected firms of the pharmaceutical industry. To achieve this goal,
the study also examines the policies and practices of cash management and evaluates
the principles, procedures and techniques of inventory management, receivables
management and payable management. From the analysis, the authors conclude that
the pharmaceutical firms operatedin Bangladesh efficiently deal with their liquidity
preferences and investment criteria. And this is due to the competitive nature of this
industry.

34. Jain P. K. and Yadav Surendra S. (2007) study the different facets of working
capital management. The issues addressed include relationship between CAs and CLs,
the financing of working capital, and ways of dealing with excess or shortage of
working capital. The study is based on an analysis of a thirteen year period data from
1991 to 2003 covering 137 public sector enterprises. In a nutshell, it is reasonable to
contend that the sample PSEs (Public Sector Enterprises) are faced with long duration
of net working capital cycle (time necessary to complete the following three events:

1. Conversion of cash into inventory .

2. Conversion of inventory into debtors and

3. Conversion of debtors into cash less credit available from creditors) necessitating
substantial working capital to be carried by them eventually affecting their
profitability in adverse manner

35. Thappa Sankar (2007) focuses on the importance of proper working capital
management of Sun Pharmaceutical Company. The paper throws light on the concepts
of working capital, working capital policy, components of working capital and factors
affecting working capital in the Sun Pharma Industries Ltd during the last five years,
and identifies certain factors which are responsible for the improvement of working
capital of the company. The article concludes with a warning to the Company that if
satisfactory level of working capital is not maintained, the company would become
bankrupt.

36. Ganesan Vedavinayagam (2007) studies the impact of working capital

management on profitability through ANOVA test where the financial statements of
349 telecom units or enterprises are analyzed. The relationship between working
capital management efficiency and profitability and the impact of working capital
management on the same has been tested. At the end of the study the author has
minutely observed that the working capital management efficiency in
telecommunication industry is poor. And he suggests that the telecommunication
industry should improve working capital management efficiency.
37. Appuhami Ranjith B. A. (2008) investigates the impact of firms‟ capital
expenditure on their working capital management. The data used in this article was
collected from listed companies in the Thailand Stock Exchange. In this work the
writer has used Shulman and Cox‟s (1985) net liquidity balance and working capital
requirement as a proxy for working capital measurement and developed multiple
regression models. At the end it is derived that the firms‟ capital expenditure has a
significant impact on working capital management, and that the firms operating cash
flow which was recognized as a control variable, has a significant relationship with
working capital management. negatively, while growth (in sales) affects firm‟s
profitability

positively.

39. Virani Varsha (2008) has conducted a comparative analysis of CADILA

healthcare with the following objectives:

1. To evaluate the financial performance 38. Samiloglu F. and Demirgunes K. (2008)

intend to analyse the effect of working capital management on firm‟s profitability. To
consider statistically significant relationship between the firm‟s profitability and the
components of cash conversion cycle at length, a sample consisting of Istanbul Stock
Exchange (ISE) listed manufacturing firms for the period from 1989 to 2007 has been
analysed under a multiple regression model. Empirical findings of the study show that
accounts receivable period, inventory period and leverage affect firm‟s profitability

2. To examine the profitability trend

3. To ascertain the assets utilization pattern and evaluate liquidity position of the
company.
The author has used two sophisticated analytical tools for the analysis i.e. ratio
analysis and correlation analysis. The correlation between various ratios is depicted in
the study. It is observed that in most of the cases, correlation coefficient is near to 1.
Hence, it can be said that there is a high degree of positive and negative correlation
between most of the ratios.

40. Ramudu Janaki P. and Rao Durga S. (2008) attempt to analyze both concept and
research based studies. Working capital may be regarded as the lifeblood of any
business unit. Its effective management can do much more to the success of the
business while its ineffective management will undoubtedly lead to failure of the
business. It is in this context that the management of working capital assumes
paramount importance. In the present scenario of competition, the business does not
have any other option than reducing the cost of its operations in order to survive and
continue to be financially healthy. It is in this connection effective management of
working capital forms an absolute part of cost reduction. As it is quite vivid and
evident in many researches in any manufacturing unit, barring knowledge industry,
the proportion of raw material in total cost of the product will be the highest and
hence, if the organization wants to minimize the cost of production it has to tackle the
cost of raw material first. So the authors have tried to analyze both the concept and
research based studies on working capital management in a business unit.

41. Dinesh M. (2008) explicates the concepts of working capital, the different
challenges being faced by the business firms in managing working capital and the
strategies to be adopted for its prudent management. The author concludes with the
view that most of the businesses failed not for want of profit but for lack of cash. The
fast growth in production and sales may cause the business to utilize all of the
financial resources seeking growth and making assets such as inventories, accounts
receivable and other assets as more illiquid.

42. Narender Vunyale, Menon Shrijit and Shwetha V. (2008) examine the
determinants of working capital management in cement industry in India. In this
article, net liquid balance and working capital requirements were used by the authors
as measures of investing working capital management of the industry. The factors like
size, business indicator, firm performance, growth of the firm, debt-equity ratio and
operating cash flow are taken into consideration. Overall, the paper concludes with
the observation that only size of firm affects both net liquid balance and working
capital ratio in a company‟s working capital management. The results suggest that
there is a lack of consistent evidence of the factors influencing working capital
management in the cement industry.

43. Dr.Khatik S. K. and Jain Rashmi (2009) state that the management of working
capital is one of the most important and key resources of an organization for its day-
to-day operations. Working capital can be taken as funding resources for routine
activities of business. It is the most vital and important part of fund management and
profitability for business. The writer has analyzed the working capital position of
MPSEB (Madhya Pradesh State Electricity Board) by ratio analysis technique and it
was found that the position of current ratio, quick ratio, acid-test ratio, working capital
ratio, inventory turnover ratio are not up to the standard .

Narender Vunyale, Menon Shrijit and Shwetha V. (2008) examine the determinants of
working capital management in cement industry in India. In this article, net liquid
balance and working capital requirements were used by the authors as measures of
investing working capital management of the industry. The factors like size, business
indicator, firm performance, growth of the firm, debt-equity ratio and operating cash
flow are taken into consideration. Overall, the paper concludes with the observation
that only size of firm affects both net liquid balance and working capital ratio in a
company‟s working capital management. The results suggest that there is a lack of
consistent evidence of the factors influencing working capital management in the
cement industry.

43. Dr.Khatik S. K. and Jain Rashmi (2009) state that the management of working
capital is one of the most important and key resources of an organization for its day-
to-day operations. Working capital can be taken as funding resources for routine
activities of business. It is the most vital and important part of fund management and
profitability for business. The writer has analyzed the working capital position of
MPSEB (Madhya Pradesh State Electricity Board) by ratio analysis technique and it
was found that the position of current ratio, quick ratio, acid-test ratio, working capital
ratio, inventory turnover ratio are not up to the standard.
44.Sen Mehmet and Oruc Eda (2009) want to determine the relationship between
efficiency level of firms being traded in Istanbul Stock Exchange (ISE) in working
capital management and their return on total assets. In this article they have made an
attempt to explain the relationship between different indicators relating to efficiency
in working capital management and their return on total assets through two models.
The study concludes with the observation that according to the results in termsof both,
all the firms involved in the study and sectors, there is a significant negative
relationship between cash conversion cycle, net working capital level, current ratio,
accounts receivable period, inventory period and returns on total assets.
45. Ramachandran Azhagaiah and Janakiraman Muralidharan (2009) have attempted
to analyze the relationship between working capital management efficiency (WCME)
and earnings before interest and taxes (EBIT) of the paper industry in India during
1997-98 to 2005-06. To measure the working capital management efficiency three
index values i.e., performance index, utilization index and efficiency index, and EBIT
have been used for all the firms over the period of the study. At the end of the study it
was noted that Indian paper firms performed remarkably well during the period.
Industry overall efficiency index was >1 in 3 out of 9 years for the study period.
Though some of the sample units had successfully improved efficiency during the
three years, the existence of a very high degree of inconsistency in this matter clearly
points out the need for adopting sound WCM (working capital management) policy in
these firm.

46. Baig Viqar Ali (2009) aims at reporting comparative findings of a survey of
working capital management practices of selected agribusiness firms from diary co-
operatives, private and MNC diary firms as a part of the research thesis completed in
July 2008. Besides, an attempt has been made to know the effect of the ownership,
government regulations, managerial empowerment and cultural factor on the working
capital decision making.

3.RESEARCH METHODOLOGY

Research methodology is a purely and simply the framework or a plans

for the study that guides the collection and analysis of data. Research is the
scientific way to solve the problems and it’s increasingly used to improve
market potential. This involves exploring the possible methods, one by one, and
arriving at the best solution, considering the resources at the disposal of
research.

3.1Research Design

“A Research design is the arrangement of conditions for collection and analysis of

data in a manner that aims to combine relevance to the research purpose with
economy in procedure” The research design followed to study the working capital
management in Avtar Steel Industries is Descriptive and Analytical Research Design.

Analytical research:

The research design used in this project is analytical in nature the procedure using,
which researcher has to use facts or information already available, and analyze there
to make a critical evaluation of the performance.

3.2 Sources of Data:

Primary source:

The primary information so collected was in the form of formal discussion with
respective departmental heads and staff of the company.

Secondary source:

The secondary source of data is the internal records like manuals, brouchers, sales
record, annual reports, and financial records

Sample unit - financial statement.

3.3 Same size - last five year financial statement.

3.4Tools for Analysis

1. Ratio Analysis
 2. Comparative Balance Sheet

3. Common Size Balance Sheet

4. Components of Working Capital

RATIOS ANALYSIS

1. FINANCIAL RATIOS

OVERALL SOLVENCY RATIO:

It is a ratio which relates the total tangible assets with the total borrowed funds. In this
ratio, total debt includes short term and long term borrowings. It shows the proportion
of assets needed to repay the debts. A higher ratio indicates greater risk and lower
safety to the owners. A higher ratio also makes the firm vulnerable to business cycles
and its solvency becomes suspect. Further borrowings become difficult for firms with
a high total debt ratio. Such firm is called ‘HIGHLY GEARED’.

Total debt

Solvency ratio =
Total tangible asset
CURRENT RATIO
This ratio of current assets to current liabilities is called current ratio. In order to
measure the short term liquidity or solvency of a concern, comparison of current
assets and current liabilities is inevitable. Current ratio indicates the ability of a
concern to meet its current obligations as and when they are due to payment.
Internationally accepted current ratio is 2:1 i.e., current assets shall be 2 times to
current liabilities.

Current asset

Current ratio =
Current liability
LIQUID RATIO

This ratio is also called quick or acid test ratio. Quick or liquid assets refer to assets
which are quickly convertible into cash. Current assets other than stock and prepaid
expenses are considered as quick assets. The ideal liquid ratio or the generally
accepted norm for liquid ratio is 1:1 comparison of quick ratio with current ratio
indicates the inventory hold ups.

Liquid asset

Liquid ratio =

Current liability

2. TURNOVER RATIO

INVENTORY TURNOVER RATIO

This ratio is also called stock velocity ratio. It is calculated to ascertain the efficiency
of inventory management in terms of capital investment. It shows the relationship
between the cost of goods sold and the amount of average inventory. Stock turnover
ratio is obtained by dividing the cost of sales by average stock the rationale behind
establishing the relationship between cost of sales and average stock is that stock is at
the cost price. This ratio is helpful in evaluating and review of inventory policy.

Cost of goods sold

Inventory turnover ratio =

Average inventory

WORKING CAPITAL TURNOVER RATIO

Working capital ratio measures the effective utilization of working capital. It also
measures the smooth running of business or otherwise. The ratio establishes
relationship between cost of sales and working capital. Higher sales in comparison to
working capital indicate overtrading and lower sales in comparison to working capital
indicate under trading. A higher ratio is the indication of lower investment of working
capital and more profit.
 Cost of sales

Working capital turnover ratio =

Net working capital

FIXED ASSET TURNOVER RATIO

The ratio determines efficiency of utilization of fixed assets and profitability of a

business concern. Higher the ratio more is the efficiency in utilization of fixed assets.
A lower ratio is the indication of underutilization of fixed assets. The former formula
which related the fixed assets to the cost of sales is more popular and preferable.

Cost of sales

Fixed asset turnover ratio =

Net fixed assets

GROSS PROFIT RATIO

This ratio is also known as gross margin or trading margin ratio. Gross profit ratio
indicates the difference between sales or direct cost. Gross profit ratio explains the
relationship between gross profit and net sales. A higher ratio is preferable, indicating
higher profitability. The gross profit ratio is expected to be adequate to cover
operating expenses, and interest charges, dividends and transfer to reserves.

Gross profit

Gross profit ratio = _________________* 100

Net sales