A

Summer Project Report

On
“ADANI PORT AND SPECIAL ECONOMIC ZONE”

Submitted to:-
L. J. Institute of Management Studies

In requirement of partial fulfillment of

Masters of Business Administration (MBA)
2-year full time programmer of Gujarat Technological University

Submitted on:-
July 2013

Submitted By:-

JUGAL BHANUSHALI HITESH PATADIYA

No: No:
Batch: 2012-2014 Batch: 2012-2014

\
 PREFACE

Summer training is an integral part of the MBA programme. The main objective of the summer
training is to work in the organization and gain valuable knowledge of management skills that will be
useful in the future career building.

The purpose is to study how an organisation functions and how to apply our academic knowledge
in the corporate life. As a practical point of view Adani Ports and Special Economic Zone Limited
(APSEZ), which is one of the leading part of India’s leading infrastructure conglomerate the Adani
Group, has provided us such a great opportunity of summer training in their organisation. It helps us to
get better understanding and working of various theories of financial management.

We learned a lot from this training about the corporate life, which will be useful to us in future.
But as there is one limitation that we can’t disclose all the financial and other information about Adani
Ports and Special Economic Zone Limited (APSEZ) as per company policy, we have not shown all
the data in the project report.
 Declaration

It is hereby certified that the work incorporated in the thesis submitted entitled “WORKING
CAPITAL ASSESMENT” submitted by Jugal Bhanushali comprises the result of independent and
original investigation carried out me. The material which obtained and used from other sources has been
duly acknowledged in the thesis.

Date:
Place: Signature of the student

It is certified that the work mentioned above is carried out under my guidance.

Date:
Place: Signature of the faculty guide
Acknowledgement
Executive Summary
INDEX Particular Page No.
Chapter
Chapter-1 Company profile
1.1 Introduction
1.2 Milestones and core
values
1.3 Commodities
1.4 Group companies
1.5 Vision
1.6 Mission
1.7 Production capacity
1.8 Size of the organisation
1.9 Board of directors
1.1 Information technology
systems
1.11 Organisational
Structures
1.12 Competitors
Chapter-2 Literature Review
2.1 Overview of
pharmaceuticals
industry
2.2 SWOT Analysis
Chapter-3 Working Capital
Management
3.1 Introduction
3.2 Types of working
capital
3.3 Factors determining
Working capital
3.4 Principles of working
capital & W.C. cycle
3.5 Definition
3.6 Components of working
capital
3.7 TANDON COMMITTE
Report
3.8 CORE COMMITTE
Report
Chapter-4 Credit Monitoring
 Assessment(CMA)
4.1 What is CMA?
4.2 CMA required
4.3 Form-II(Operating
statement)
Form-III(Analysis of Balance sheet)
Form-IV(Statement of CA & CL)
Form-V(MPBF statement)
Form-VI(Fund flow statement)
Repayment Schedule
Depreciation Schedule
4.4 Comments on financials
4.5 Basis of Assumptions
Bibliography
Chapter 1

Company Profile

1.1 Vision
 The Adani Group is engaged in a continuous endeavour to maximise the
realisation of potential in its employees and market opportunities by synergising the
multiple ventures of the Group; thus creating an optimum business model that benefits
both, stakeholders and society.

CORPORATE COMMANDMENTS:

 To be driven by excellence at all levels

 To approach all aspects of the business innovatively
 To be intensely competitive in all endeavours
 To constantly raise the bar
 To be a globally preferred business associate
 To be committed to the welfare of employees and stakeholders
 To adopt universal best practices in corporate governance
 To be a responsible business entity towards society and the environment

1.2 Mission
 To assimilate knowledge, develop capabilities and manage collective enterprise
to profitably tap global business opportunities for the maximal benefit of everyone
associated with Adani.

1.3 Introduction to Adani port

Adani Ports and Special Economic Zone Limited (APSEZ), India's largest
private port and special economic zone, was incorporated as Gujarat Adani Port
Limited (GAPL) in 1998 to develop a private port at Mundra, on the west coast of
India. The company commenced commercial operations in October 2001. Mundra
Special Economic Zone Limited (MSEZL) was incorporated in November 2003, to set
up an SEZ at Mundra. MSEZL was merged with GAPL in April 2006 and the
company was renamed as Mundra Port and Special Economic Zone Limited, to reflect
the nature of business. The board of MPSEZL on Nov 21,2011 has approved a
proposal to change the company's name to Adani Ports and Special Economic Zone
Ltd. and this change in name from MPSEZL to APSEZL has come into effect from
Jan.6,2012.  While earlier, the company had only one operational port at Mundra,
today it also operates ports at Dahej and Hazira in India and at Abbot Point in
Australia. The company is also developing port infrastructure
at Mormugao,Visakhapatnam and Kandla in India, Dudgeon Point in Australia
and Bunyu in Indonesia.
APSEZ is India’s first multi-product port-based special economic zone (SEZ).The
port is located in the Northern Gulf of Kutch, en route major maritime routes and well
connected through rail, road, air & pipelines. This makes it a preferred gateway for
cargo bound westwards. The port has been designed to handle all types of cargo viz.
containers, dry bulk, break bulk, liquid cargo and automobiles.
APSEZ spearheads the group’s logistics business which includes setting up world
class port infrastructure, special economic zones and multi-modal logistics such as
railways. APSEZ currently owns and operates three ports – Mundra and Dahej in
India and Abbot Point in Australia. Mundra Port, which is the largest private port in
India, benefits from deep draft, first-class infrastructure and SEZ status. Adani is also
developing ports at Hazira, Mormugao, Visakhapatnam and Kandla in India

Adani Port & Special Economic Zone Limited was conferred with the Gateway
Awards of Excellence – Ports & Shipping 2012 in the "Private Port of the Year"
category

Port Information

The development of Adani Port & Special Economic Zone Limited was
conceptualised by the entrepreneur Mr. Gautam Adani. The port commenced its
operations with one berth in October 1998. APSEZ today consists of 22 berths with a
total quay length of 6.5 km in addition to 2 single point moorings (SPM) and stands
on the threshold of being the largest commercial port in India.
APSEZ has an effective capacity to handle 185 million tonnes of cargo per
annum – the largest amongst all operational ports in India. APSEZ handled 64 million
tonnes of cargo in the financial year 2011–12. APSEZ was ranked fourth amongst all
commercial ports in India in terms of the total volume of cargo handled in a financial
year.
APSEZ has not only pioneered the concept of deep draft integrated port model,
but also of port based SEZ. The multi-product SEZ consisting Mundra Port and its
surrounding areas is planned to be spread over 135 square kilometres (13,500
hectares). Currently, notified Multi-product SEZ is spread over an area of 6473
Hectare, with an additional 168 Hectares notified as a Free Trade Warehousing Zone.

Port Connectivity

APSEZ offers good inland connectivity via rail track, road network, airport and cross
country pipelines.

Rail

Adani Ports and Special Economic Zone Limited has developed a 117 km railway
network from Mundra to Adipur. The rail infrastructure is capable of handling 130
trains per day including double stack container trains and long-haul trains. The rail
route is time and cost effective and provides a distance advantage to customers
situated in the Northern hinterland. ASPEZ also owns 6 locomotives which are
deployed for internal shunting of trains to ensure optimum utilisation of the developed
infrastructure.

Road

APSEZ is connected to the hinterland in Northern and Western parts of India through
the National Highway 8A Extn. & State Highways 6 & 48. For internal connectivity,
the company plans to build 150 km of arterial and sub-arterial road network within the
SEZ, of which 70 km is already completed. The roads are designed according to IRC
Standards Codes and Safety Norms. The port has also constructed a four-lane Rail-
over-Bridge (ROB) in the proximity of the port to ensure that two modes of
transportation i.e. road & rail, do not impede each other’s movement.

Air

Mundra Airport is a licensed airport in ‘Private Category’ with Air Traffic

Control (ATC) which is operated by the Airport Authority of India (AAI). The nearest
commercial airports are at Bhuj (65 km) and Kandla (60 km). The company plans to
extend the current runway at Mundra to 4500 meters. It has also installed a Precision
Approach Path Indicator (PAPI), and approach and runway lighting for safe night
landings for aircraft. APSEZ plans to upgrade an International Air Cargo Hub with
night landing facility.

Pipelines

APSEZ is connected to the northern hinterland with three cross-country pipelines. One
feeds the IOCL Panipet refinery, second crude oil pipeline feeds Batinda refinery and
third is a white oil line which feeds the national capital region.

1.7 Board of Director

 Mr. Gautam S. Adani Chairman & Managing Director

Mr. Gautam Adani, the Chairman and Founder of the Adani Group, has
more than 33 years of business experience. Under his leadership, Adani Group has
emerged as a global integrated infrastructure player with interest across Resources,
Logistics and Energy verticals. 
Mr. Adani’s success story is extraordinary in many ways. His journey has been
marked by his ambitious and entrepreneurial vision, coupled with great vigour and
hard work. This has not only enabled the Group to achieve numerous milestones
but also resulted in creation of a robust business model which is contributing
towards building sound infrastructure in India.

 Mr. Rajesh S. Adani Director

Mr. Rajesh Adani has been associated with Adani Group since its inception. He is
in charge of the operations of the Group and has been responsible for developing
its business relationships. His proactive, personalized approach to the business and
competitive spirit has helped towards the growth of the Group and its various
businesses. 

 Dr. Malay Mahadevia Whole Time Director

Dr. Malay Mahadevia is a Whole Time Director (WTD) of Adani Ports &
Special Economic Zone Ltd (APSEZL). He joined Corporate Sector in 1992 and
worked on developing the port from ground zero. The port today handles multiple
commodities. With a promising throughput of 50 million tons, turnover of more
than Rs 1500 crores, Profit of over Rs 700 Crores, Market Capitalization of Rs
35,000 crores & growing at the rate of 30%, Mundra has the potential to become
one of the largest ports in India. Currently the sectors handled by Dr. Malay
Mahadevia are Marine & Ports, Special Economic Zones, Health Care, Water
Supply, Education, Railway Logistics, and Social Infrastructure. He has been
awarded Outstanding Manager of the year award of Gujarat by Ahmedabad
Management Association in the year 2002 & also a Lead India finalist in Gujarat
organized by Times of India group. He is a member of around a dozen professional
societies including Centre for Engineering & Technology, FICCI, Assocham,
Board of advisors for Maritime studies in Gujarat University, Confederation of
Indian Industry (CII), Gujarat Chamber of Commerce & Industry (GCCI) etc. In
the year 2008 was conferred Ph.D. by Gujarat University in the field of "Coastal
Ecology around Mundra area".

 Mr. Rajeeva Sinha Whole Time Director

Mr. Rajeeva Sinha is a Whole-time Director of Adani Ports and Special

Economic Zone Ltd. (APSEZL) He is a former Indian Administrative Service
(IAS) officer with over 35 years of work experience and in-depth knowledge of
shipping and port sectors. He has considerable experience and expertise in port and
shipping management; commercial, legal, labour laws and regulations; project and
financial management and national and international maritime laws.

 Mr. Arun Duggal- Director

Mr. Arun Duggal is an independent director of APSEZL, is an experienced

International banker advising Corporations on financial strategy, mergers and
acquisitions and capital raising areas. He has been an International advisor to a
number of corporations, major financial institutions and private equity firms. He is
a Chairman of Board of Directors of Shriram Transport Finance Company,
Shriram Properties Ltd, Shriram City Union Finance Ltd., Shriram EPC Ltd.,
Shriram Capital Limited and Bellwether Microfinance Fund. He is the Vice
Chairman of International Asset Reconstruction Company. He is a member of the
Investment Committee of Axis Private Equity. Mr. Duggal had a 26 years career
with Bank of America and retired as CEO, India for Bank of America. He is a
visiting Professor at IIM Ahmedabad.
 Mr. Daniel Trevelyn Joseph – Director

Mr. Daniel Trevelyn Joseph, an independent director of APSEZ, is a

former Indian Administrative Service official belonging to the Maharashtra cadre.
He has served the Government of India and the Government of Maharashtra in
various capacities. Mr. D.T. Joseph was elected as President at the International
Maritime Organization's Plenary Conference in February 2004. In June 2007, he
was appointed as the Chairman of Pay Revision Committee for Class I and Class II
officers in Major Port Trusts and Dock Labor Boards of India.

 Mr. Pankaj Kumar- Director

Mr. Pankaj Kumar, IAS, an IAS officer of the 1986 batch is Vice
Chairman and Chief Executive Officer, Gujarat Maritime Board (GMB) is
appointed as GMB nominee on the Board of Directors of APSEZ Ltd. He comes to
steer GMB at an important time, when it is set to play an even more critical role in
Gujarat's and the nation's development through initiatives in shipbuilding,
privatization, creation of maritime institutions and infrastructure.

 Prof. G. Raghuram – Director

Prof. G. Raghuram is professor in the Indian Institute of Management,

Ahmedabad. His specialization is in infrastructure and transportation systems, and
supply chain and logistics management. His research, consultancy, case studies
and publications focus includes railways, ports and shipping, air and road sector,
service organizations and issues in logistics and supply chain management. He has
also taught at Northwestern University and Tulane University, USA. He has been
visiting faculty at universities in USA, Canada, Yugoslavia, Tanzania, UAE,
Singapore and several institutions in India. He has co-authored four books. He was
the President of Operational Research Society of India (1999-2000) and is a
member of boards and government committees related to infrastructure and
logistics. He is a Fellow of the Operational Research Society of India and Charted
Institute of Logistics and Transport.

 Mr. G.K. Pillai – Director

Mr. G K Pillai is a retired IAS officer. He joined Indian Administrative

Service in the year 1972 and belongs to Kerala Cadre. He has done his M.Sc. at
IIT, Chennai. He started his career as Sub-Collector, Quilon and worked in diverse
fields of Revenue Administration. He was District Collector, Quilon; Deputy
Secretary, Labour; Special Officer for Cashew Industry; Special Secretary,
Industries etc. He was Secretary, Health and Family Welfare during 1993-96 and
Principal Secretary to the Chief Minister of Kerala during the period 2001-04.

In the Government of India, he held positions of Under Secretary / Deputy

Secretary in Ministry of Defence and Director / Joint Secretary in the Department
of Surface Transport. Later he served in the Ministry of Home Affairs as Joint
Secretary (North East) from 1996 to 2001. In 2004 he joined Ministry of
Commerce and Industry as Additional Secretary, Department of Commerce and
later served as Secretary, Department of Commerce during 2006-2009. During this
period he actively participated in negotiations for comprehensive economic
cooperation agreements with Singapore, ASEAN, Japan, South Korea. He played a
key role in the enactment of the SEZ Act 2005 and was Chairman of the Board of
approvals for SEZ during 2005 to 2009. He represented State and Central
Government delegations to USA, EU, Argentina, Japan, Canada etc.

He was appointed as Union Home Secretary in June 2009 and retired from
Government service in June 2011.

 Mr. Sanjay S. Lalbhai - Director

Mr. Sanjay S. Lalbhai is a Science Graduate with a Master's degree in

Business Management and is the Chairman and Managing Director of Arvind Ltd,
a USD 900 Million Indian conglomerate. He was responsible for acquiring India’s
 first denim brand – Flying Machine – in 1981 and for guiding the process of
building Arvind’s current impressive apparel brand portfolio. He serves on the
board of several premier corporates, educational and research institutes. He is the
President of Ahmedabad Education Society and Ahmedabad University, and is a
member of the Board of Governors of Indian Institute of Management,
Ahmedabad. He is also chairman of Ahmedabad Textile Industry’s Research
Association and a member of the Council of Management of the Physical Research
Laboratory. He is also Chairman of CEPT University. Mr. Lalbhai is a member on
the Governing Body of Adani Institute of Infrastructure Management.

1.2 Milestone and Values

Adani port has achieved the following Achievement:-

 1994 January – Gujarat Maritime Board (GMB) approved to set up captive

jetty at Mundra

 1998 October – Mundra Port commences commercial operations with one berth

 2002 October – Agreements signed with Indian Oil Corporation (IOC) for

setting up Single point mooring (SPM) facility and crude oil handling at Mundra

 2003 – First container terminal at APSEZ, Mundra International Container

Terminal commences operations (quay length 633 metres)
 2005 – First Single point facility at Mundra Port commences operations

 2006 April – Notification issued for Special Economic Zone (SEZ) at Mundra

 2007
 Offer Initial Public Offer (IPO) for 40,250,000 equity shares of Rs. 10
each of Mundra Port and Special Economic zone Ltd. to public and employees
with price band Rs. 400 – Rs. 440
 Terminal Two consisting of 4 solid cargo berths commences operations
 Second container terminal at APSEZ, Adani Mundra Container
Terminal commences operations (quay length 632 metres)

 2009 – Ro-Ro Terminal for export & import of automobiles commences

operations

 2010
 Constructed a four lane 1.5 km. long dedicated RoB at a cost of
Rs.500 million. This is the first private four-lane RoB within port area in India
capable of withstanding a load of 100 MT to smoothen and speed up cargo
movement
 World’s largest fully mechanised coal import terminal with 60 MMTPA
capacity was put into operation

 2011
 Second Single Point Facility at APSEZ commences operations for
catering to HMEL Batinda requirements
 Terminal Three commences operations

 2012
 Name changed to Adani Ports and Special Economic Zone Limited
[required]
  Doubling of the rail connectivity between Mundra and Adipur
completed. APSEZ now has a private rail network of 117 km.
 Third container terminal at APSEZ, Adani International Container
Terminal commences operations (quay length 810 metres)

1.3 Commodities

Adani Ports & Special Economic Zone Limited handles a multitude of commodities
including

 Steam coal,

 Coking coal,

 Fertilizers like urea, DAP, MOP, etc.,

 Agriculture commodities like yellow peas, DOC, wheat, etc.,

 Liquid cargo including crude oil, POL, chemicals, edible oil, etc.,

 Containers,

 Automobiles,

 Steel cargo,

 Project cargo and

 Minerals.

1.4 Operations

The operations at APSEZ are carried out in a detailed manner, providing necessary
information like schedules, tariffs, trade notices, weather and tidal details amongst
others. For effective and time-saving operations, it also possesses robust IT support
with the aid of top-of-the-line software applications. For the protection of storage, it
has installed state-of-the-art safety and security measures and infrastructure.

From having only one operational port at Mundra in Gujarat, APSEZ now operates
ports at multiple locations. The port projects the company operates in India and
overseas is as follows:
 Mundra Port: Designing, engineering, financing, construction, development,
management and operation of multi user and multi-cargo port at Mundra on build,
own, operate and transfer (BOOT) basis situated at Mundra in the District of
Kutch, Gujarat under a concession granted by the Government of Gujarat (GOG).

 Adani Petro net (Dahej) Port Pvt. Ltd.: Operates a port in Dahej in Gujarat
state under sub-concession with Petro net LNG Ltd for handling dry bulk and
break bulk cargoes in pursuance to the Concession granted by Government of
Gujarat.

 Adani Hazira Port Private Ltd.: Engaged in designing, engineering,

financing, construction, development, management and operation of a multi-cargo
port in Hazira in Gujarat State under Sub-Concession route with Shell B.V. for
non-LNG cargoes like coal, containers, automobile and chemicals. There is a plan
to build 13 berths at Hazira port for handling general cargo, Container and
Liquids.

 Adani Murmugoa Coal Terminal Pvt. Ltd.: Licensee for development and

operations of coal import terminals in Major Port of Goa under Concession from
Murmugoa Port Trust.

 Adani Vizag Coal Terminal Pvt. Ltd.: Licensee for development and

operations of coal import terminals in Major Port of Visakhapatnam under
Concession from Visakhapatnam Port Trust.

 Adani Abbot Point Terminal Pty Ltd.: Recently acquired Abbot Point Coal
Terminal in Queensland, Australia on 99 years lease in June 2011.Adani Ports
plans to invest INR12 billion in this project, which will be operational by 2014 and
will have an annual capacity to handle 20 million tons of cargo.

 Adani Kandla Bulk Terminal Pvt. Ltd.: Signed a concession agreement with

the Kandla Port Trust, to set up a dry bulk terminal at the Kandla Port on build,
 operate and transfer basis. With this agreement, it is the only private sector
operator having a presence at six ports in India.

1.5 Group Companies

As on March 31, 2012, your Company had eighteen subsidiary companies under its
belt. These group companies broadly operate and focus in India and Outside India.
1. Adani Hazira Port Pvt. Ltd.
2. Adani International Container Terminal Pvt. Ltd.
3. Adani Kandla Bulk Terminal Pvt. Ltd.
4. Adani Logistics Ltd.
5. Adani Murmugoa Port Terminal Pvt. Ltd.
6. Adani Petro net (Dahej) Port Pvt. Ltd.
7. Adani Vizag Coal Terminal Pvt. Ltd.
8. Hazira Infrastructure Pvt. Ltd.
9. Hazira Road Infrastructure Pvt. Ltd.
10. Karnavati Aviation Pvt. Ltd.
11. Rajasthan SEZ Pvt. Ltd.
12. MPSEZ Utilities Pvt. Ltd.
13. Mundra International Airport Pvt. Ltd.
14. Mundra SEZ Textile and Apparel Park Pvt. Ltd.
15. Adani Abbot Point Terminal Holdings Pty Ltd, Australia
16. Adani Abbot Point Terminal Pty Ltd, Australia
17. Mundra Port Holdings Pty Ltd, Australia
18. Mundra Port Pty Ltd, Australia
In order to create more business opportunities and to make strategic
investment, Adani Warehousing Services Pvt. Ltd. was incorporated as wholly owned
subsidiary as on April 19, 2012.The statement pursuant to section 212(1)(e) of the
Companies Act, 1956, containing details of subsidiaries of the Company forms part of
the Annual Report.
On restructuring, Mundra Port Holdings Pty Ltd. had become step down
subsidiary of the Company i.e. March 6, 2012 and Adani Abbot Terminal Holdings
Pty Ltd had become wholly owned subsidiary of the Company i.e. March 15, 2012. In
terms of General Circular issued by Ministry of Corporate Affairs, Government of
India, the Balance Sheet, Profit and Loss Account and other documents of the
subsidiary companies are not being attached with Balance Sheet of the Company.
However, as directed by the Ministry of Corporate Affairs, some key information has
been disclosed in a brief abstract forming part of this Annual Report. Accordingly, the
Annual Report of the Company contains the consolidated audited financial statements
prepared pursuant to clause 41 of the listing agreement as prescribed by SEBI and
prepared in accordance with the accounting standards prescribed by the Institute of
Chartered Accountants of India (ICAI).
The annual accounts of the subsidiary companies and related detailed
information shall be made available to the shareholders of the holding and subsidiary
companies seeking such information on all working days during business hours. The
annual accounts of the subsidiary companies shall also be kept for inspection by any
shareholder/s during working hours at the Company's registered office and that of the
respective subsidiary companies concerned.

1.8 Information technology

Innovative IT Solutions have been the driver for best in class port operations at
APSEZL. With deployment of the best in class applications and systems, the IT
initiatives have consistently been used to streamline enterprise business processes,
improve operating efficiencies and reduce costs. APSEZL aims at seamless
integration of its business operations and an IT platform to provide real time
information and help in improving decision making process and in turn leads to
efficient port operations.

We have ensured that our port has the most updated Systems and Processes in the
entire country
 SAP & Lotus Domino
 Optical Fibber Cable Network
 India’s First CISCO Wi-Fi Network
 Enterprise class Siemens Hi-Path 8000 telecom infrastructure
 High availability server and storage architecture
 Integrated Port Management System
 Network security at gateway and desktop levels
 Smart card based labour / worker access / monitoring system
 Video Surveillance systems to monitor activities of the port premises

1.9 Organisation structure

Chapter 2
Literature Review

2.1 Overview of Adani Port

Adani Group is a business behemoth based in India having a global footprint

with interests in Infrastructure, Power, Global Trading, Logistics, Energy, Port &
SEZ, Mining, Oil & Gas, Agri Business, FMCG products, Real Estate Development,
Bunkering, et al. It is a name well established among the distinguished corporate
entities of India, with a young and highly motivated taskforce of professionals who are
a prized asset of the organisation.

Founded in 1988 with a capital of INR 500,000, Adani Enterprises

Ltd. (formerly known as Adani Exports Ltd.) is today the flagship company of the
Adani conglomerate which posted INR 260 billion revenue in the previous financial
year.
The Adani Group has many distinctions to its merit:

 Operator of the largest private port in India

 Developer of the largest multiproduct SEZ in India
 Owns the largest edible oil refining capacity in India
 One of the largest trading houses in India
 Largest Integrated Coal Management Firm in India
 Promoter of India’s first supercritical technology based power plant
 Operator of the world’s largest automated import Coal Terminal having 60
Mint capacity

2.2 SWOT analysis of pharmaceutical industry

SWOT stands for:
S -Strengths
W -Weakness
O -pportunity
T -Threat
Chapter 3
3.1 Introduction
Working capital, also known as net working capital, is a financial metric
which represents operating liquidity available to business. Along with fixed assets
such as plants and equipment, working capital is considered as a part of operating
capital. It is calculated as current assets less current liabilities
The diagram below illustrated the working capital cycle:-

The upper part of the diagram above shows in a simplified form the chain of
events in a manufacturing firm. Each of the boxes in upper part of the diagram can be
seen as a tank through which funds flow. These banks, which are concerned with day-
2-day activities, have funds constantly flowing into and out of them.
 The chain starts with the firm buying raw material on credit.

3.2 TYPES OF WORKING CAPITAL

 In due course this stock will be used in production, work will be carried out on the
stock, and it will become part of the firm’s work in progress(WIP)

 Work will continue on the WIP until it eventually emerges as the finished products.

 As production progresses, labour costs and overheads will need to meet.

 Of course at some stage trade creditors will need to be paid

 When the finished goods are sold on credit, Debtors are increased

 They will eventually pay, so that cash will be injected in the firm.

Each of these areas-stocks (raw materials, WIP and finished goods), Trade debtors and
trade creditors-Can be viewed as tanks into and from which funds flow.
Working capital is clearly not only aspect of a business that affects the amount of
cash.
Which are working capital Sources?
 Own funds

 Bank borrowings

 Sundry creditors

 Advances from customers

 Deposits due in a year

 Other current liabilities

3.4 PRINCIPLES OF WORKING CAPITAL MANAGEMENT

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o       On the basis of concept.

o        On the basis of time.

On the basis of concept working capital can be classified as gross working

capital and net working capital. On the basis of time, working capital may be
classified as:

     Permanent or fixed working capital.

     Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of current
assets. Every firm has to maintain a minimum level of raw material, work- in-process,
finished goods and cash balance. This minimum level of current assts is called
permanent or fixed working capital as this part of working is permanently blocked in
current assets. As the business grow the requirements of working capital also
increases due to increase in current assets.

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 further be classified as seasonal working capital and special working
capital. The capital required to meet the seasonal need of the enterprise is called
seasonal working capital. Special working capital is that part of working capital which
is required to meet special exigencies such as launching of extensive marketing for
conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is
required for short periods and cannot be permanently employed gainfully in the
business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

    SOLVENCY OF THE BUSINESS: Adequate working capital helps in

maintaining the solvency of the business by providing uninterrupted of
production.

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

prompt payments and makes and maintain the goodwill.

     Easy loans: Adequate working capital leads to high solvency and credit

standing can arrange loans from banks and other on easy and favorable terms.

     Cash Discounts: Adequate working capital also enables a concern to avail

cash discounts on the purchases and hence reduces cost.
     Regular Supply of Raw Material: Sufficient working capital ensures regular
supply of raw material and continuous production.

     Regular Payment Of Salaries, Wages And Other Day TO Day

Commitments: It leads to the satisfaction of the employees and raises the
morale of its employees, increases their efficiency, reduces wastage and costs
and enhances production and profits.

     Exploitation Of 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 Crises: A concern can face the situation during the
depression.

     Quick And Regular Return On Investments:  Sufficient working capital

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

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

confidence, high morale which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

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

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL

 1.     Excessive working capital means ideal funds which earn no profit for the
firm and business cannot earn the required rate of return on its investments.

2.     Redundant working capital leads to unnecessary purchasing and

accumulation of inventories.

3.     Excessive working capital implies excessive debtors and defective credit

policy which causes higher incidence of bad debts.

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

5.     If a firm is having excessive working capital then the relations with banks
and other financial institution may not be maintained.

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

7.     The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

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

Thus working capital is needed for the following purposes:

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

       To pay wages and salaries

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

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

       To provide credit facilities to the customer.

       To maintain the inventories of the raw material, work-in-progress, stores

and spares and finished stock.

For studying the need of working capital in a business, one has to study the
business under varying circumstances such as a new concern requires a lot of
funds to meet its initial requirements such as promotion and formation etc. These
expenses are called preliminary expenses and are capitalized. The amount needed
for working capital depends upon the size of the company and ambitions of its
promoters. Greater the size of the business unit, generally larger will be the
requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and
expensing of the business till it gains maturity. At maturity the amount of working
capital required is called normal working capital.

There are others factors also influence the need of working capital in a business.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

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

public utility undertakings such as electricity, water supply and railways
because they offer cash sale only and supply services not products, and no
funds are tied up in inventories and receivables. On the other hand the
trading and financial firms requires less investment in fixed assets but have
to invest large amt. of working capital along with fixed investments.

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

requirement of working capital.

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

accumulating inventories it will require higher working capital.
4.  LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the
raw material and other supplies have to be carried for a longer in the
process with progressive increment of labor and service costs before the
final product is obtained. So working capital is directly proportional to the
length of the manufacturing process.

5.  SEASONALS VARIATIONS: Generally, during the busy season, a firm

requires larger working capital than in slack season.

6.  WORKING CAPITAL CYCLE: The speed with which the working cycle

completes one cycle determines the requirements of working capital.
Longer the cycle larger is the requirement of working capital.

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

between the question of working capital and the velocity or speed with
which the sales are affected. A firm having a high rate of stock turnover
will needs lower amount of working capital as compared to a firm having a
low rate of turnover.

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

and sales its product / services on cash requires lesser amt. of working
capital and vice-versa.

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

there is need for larger amt. of working capital due to rise in sales, rise in
prices, optimistic expansion of business, etc. On the contrary in time of
depression, the business contracts, sales decline, difficulties are faced in
collection from debtor and the firm may have a large amt. of working
capital.

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

require large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have
more earning capacity than other due to quality of their products, monopoly
conditions, etc. Such firms may generate cash profits from operations and
contribute to their working capital. The dividend policy also affects the
requirement of working capital. A firm maintaining a steady high rate of
cash dividend irrespective of its profits needs working capital than the firm
that retains larger part of its profits and does not pay so high rate of cash
dividend.

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

working capital requirements. Generally rise in prices leads to increase in
working capital.

Others FACTORS: These are:

     Operating efficiency.

     Management ability.

     Irregularities of supply.

     Import policy.

     Asset structure.

     Importance of labour.

     Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL

 Management of working capital is concerned with the problem that
arises in attempting to manage the current assets, current liabilities. The basic
goal of working capital management is to manage the current assets and current
liabilities of a firm in such a way that a satisfactory level of working capital is
maintained, i.e. it is neither adequate nor excessive as both the situations are
bad for any firm. There should be no shortage of funds and also no working
capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of
a firm has a great on its probability, liquidity and structural health of the
organization. So working capital management is three dimensional in nature as

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

liquidity and risk.

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

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

  WORKING CAPITAL ANALYSIS

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

business. Adequate amount of working capital is very much essential for the
smooth running of the business. And the most important part is the efficient
management of working capital in right time. The liquidity position of the firm
is totally effected by the management of working capital. So, a study of
changes in the uses and sources of working capital is necessary to evaluate the
efficiency with which the working capital is employed in a business. This
involves the need of working capital analysis.

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

such as:
1.     Ratio analysis.

2.     Fund flow analysis.

3.     Budgeting.

1.    RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The

technique of ratio analysis can be employed for measuring short-term liquidity
or working capital position of a firm. The following ratios can be calculated for
these purposes:

1. Current ratio.

2. Quick ratio

3.  Absolute liquid ratio

4.  Inventory turnover.

5.  Receivables turnover.

6.  Payable turnover ratio.

7.  Working capital turnover ratio.

8.  Working capital leverage

9.  Ratio of current liabilities to tangible net worth.

2.    FUND FLOW ANALYSIS

 Fund flow analysis is a technical device designated to the study the source
from which additional funds were derived and the use to which these sources
were put. The fund flow analysis consists of:

a.      Preparing schedule of changes of working capital

b.     Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position

(working capital) business enterprise between beginning and ending of the
financial dates.

3.    WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans

and polices to be pursued in the future period time. Working capital budget as a
part of the total budge ting process of a business is prepared estimating future
long term and short term working capital needs and sources to finance them,
and then comparing the budgeted figures with actual performance for
calculating the variances, if any, so that corrective actions may be taken in
future. He objective working capital budget is to ensure availability of funds as
and needed, and to ensure effective utilization of these resources. The
successful implementation of working capital budget involves the preparing of
separate budget for each element of working capital, such as, cash, inventories
and receivables etc.  

 
ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF
LIQUIDITY

The short –term creditors of a company such as suppliers of goods of

credit and commercial banks short-term loans are primarily interested to know
the ability of a firm to meet its obligations in time. The short term obligations
of a firm can be met in time only when it is having sufficient liquid assets. So
to with the confidence of investors, creditors, the smooth functioning of the
firm and the efficient use of fixed assets the liquid position of the firm must be
strong. But a very high degree of liquidity of the firm being tied – up in current
assets. Therefore, it is important proper balance in regard to the liquidity of the
firm. Two types of ratios can be calculated for measuring short-term financial
position or short-term solvency position of the firm.

1.     Liquidity ratios.

2.     Current assets movements ‘ratios.

A)   LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as

and when these become due. The short-term obligations are met by realizing
amounts from current, floating or circulating assts. The current assets should
either be liquid or near about liquidity. These should be convertible in cash
for paying obligations of short-term nature. The sufficiency or insufficiency
of current assets should be assessed by comparing them with short-term
liabilities. If current assets can pay off the current liabilities then the liquidity
position is satisfactory. On the other hand, if the current liabilities cannot be
met out of the current assets then the liquidity position is bad. To measure the
liquidity of a firm, the following ratios can be calculated:

1.     CURRENT RATIO
 2.     QUICK RATIO

3.     ABSOLUTE LIQUID RATIO

1.   CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of

general liquidity and its most widely used to make the analysis of short-term
financial position or liquidity of a firm. It is defined as the relation between
current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS 

                                    CURRENT LIABILITES

The two components of this ratio are:

1)     CURRENT ASSETS

2)     CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables,

sundry debtors, inventories and work-in-progresses. Current liabilities include
outstanding expenses, bill payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and
has the ability to pay its current obligations in time. On the hand a low
current ratio represents that the liquidity position of the firm is not good and
the firm shall not be able to pay its current liabilities in time. A ratio equal or
near to the rule of thumb of 2:1 i.e. current assets double the current liabilities
is considered to be satisfactory.

 
CALCULATION OF CURRENT RATIO

                                                                              (Rupees in Lakes).

Year 2012 2011 2010 2009 2008

Current Assets 1,32,572.7 1,23,255.2
23,93,472.15 9 1,39,460.82 6 40,583.37
Current
Liability 3,24,449.73 56,251.49 49,003.90 35,481.02 33,498.17
Current ratio 7.377020 2.356787 2.705352 3.473836 1.211510

Interpretation:-

As we know that ideal current ratio for any firm is 2:1. If we see the current
ratio of the company for last three years it has increased from 2006 to 2008.
The current ratio of company is more than the ideal ratio. This depicts that
company’s liquidity position is sound. Its current assets are more than its
current liabilities.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio
may be defined as the relationship between quick/liquid assets and current or
liquid liabilities. An asset is said to be liquid if it can be converted into cash
with a short period without loss of value. It measures the firms’ capacity to
pay off current obligations immediately.

QUICK RATIO = QUICK ASSETS

                               CURRENT LIABILITES

Where Quick Assets are:

 1)           Marketable Securities

2)           Cash in hand and Cash at bank.

3)           Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet
its current liabilities in time and on the other hand a low quick ratio
represents that the firms’ liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally

thought that if quick assets are equal to the current liabilities then the concern
may be able to meet its short-term obligations. However, a firm having high
quick ratio may not have a satisfactory liquidity position if it has slow paying
debtors. On the other hand, a firm having a low liquidity position if it has fast
moving inventories.

CALCULATION OF QUICK RATIO                                                             

(Rupees in Lacks)

Year 2012 2011 2010 2009 2008

Quick Assets 1,32,572.7
23,93,472.15 9 67,357.35 81,734.73 -67,682.88
Current
Liabilities 278902.56 228509.96 49003.9 35481.02 33498.17
Quick Ratio -
8.581750379 0.580162 1.3745304 2.30361839 2.0204949

Interpretation :

       A quick ratio is an indication that the firm is liquid and has the ability to
meet its current liabilities in time. The ideal quick ratio is   1:1. Company’s
quick ratio is more than ideal ratio. This shows company has no liquidity
problem.
 3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid
than inventories, yet there may be doubts regarding their realization into cash
immediately or in time. So absolute liquid ratio should be calculated together
with current ratio and acid test ratio so as to exclude even receivables from
the current assets and find out the absolute liquid assets. Absolute Liquid
Assets includes :

ABSOLUTE LIQUID RATIO =      ABSOLUTE LIQUID ASSETS

                                                       CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g.                                                          (Rupees in Crore)

Year 2012 2011 2010 2009 2008

Absolute
Liquid Assets 1,11,841.44 3,865.89 85,868.11 1,13,071.19 88,956.37
Current
Liabilities 3,24,449.73 56,251.49 49,003.90 35,481.02 33,498.17
Absolute
Liquid Ratio 0.35 0.25 1.75 3.19 2.66

Interpretation :

       These ratio shows that company carries a small amount of cash. But there
is nothing to be worried about the lack of cash because company has reserve,
borrowing power & long term investment. In India, firms have credit limits
sanctioned from banks and can easily draw cash.

2.Profitable Ratio
 Profitability ratios measure the efficiency of management in the
employment of business resources to earn profits. These ratios indicate the
success or failure of a business enterprise for a particular period of time.
Profitability ratios are used by almost all the parties connected with the
business.
A strong profitability position ensures common stockholders higher
dividend income and appreciation in the value of the common stock in future.
Creditors, financial institutions and preferred stockholders expect a prompt
payment of interest and fixed dividend income if the business has good
profitability position.
Management needs higher profits to pay dividends and reinvest a
portion in the business to increase the production capacity and strengthen the
overall financial position of the company.
Some important profitability ratios are given below:
1. Net profit ratio
2. Gross profit ratio (GP ratio)
3. Operating ratio
4. Expense ratio
5. Dividend yield ratio
6. Dividend payout ratio
7. Return on capital employed ratio
8. Earnings per share (EPS) ratio
9. Return on shareholder’s investment/Return on equity
10. Return on common stockholders’ equity ratio

1. Net Profit Ratio

 Net profit ratio is computed by dividing the net profit (after tax) by net
sales. It is a very popular profitability ratio that shows the net operating
earnings on sale of $100.
Formula:

For the purpose of this ratio, net profit is equal to gross profit minus
operating expenses and income tax.  All non-operating revenues and expenses
are not taken into account because the purpose of this ratio is to evaluate the
profitability of the business from its primary operations. Examples of non-
operating revenues include interest on investments and income from sale of
fixed assets. Examples of non-operating expenses include interest on loan and
loss on sale of assets.

Year 2012 2011 2010 2009 2008

Net Profit 1,17,725.95 98,616.00 70,097.56 45,954.94 2,134.12
Sales 2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07
Net Profit Ratio 47.43 52.31 50.34 40.48 26.08

Interpretation

Net profit margin measures how much of each dollar earned by the
company is translated into profits. A low profit margin indicates a low margin
of safety: higher risk that a decline in sales will erase profits and result in a net
loss.

2. Gross Profit Margin

Gross profit ratio is a profitability ratio that shows the gross profit as a percentage of total net sales
revenue. It is a popular tool to evaluate the operational performance of the business . It is computed
by dividing the gross profit figure by net sales and is expressed in percentage.
Formula:

The basic components of the formula of gross profit ratio (GP ratio) are gross profit and net sales.
Gross profit is equal to net sales minus cost of goods sold. Net sales are equal to total gross sales
less returns inwards and discount allowed.  The information about gross profit and net sales is
normally available from income statement of the company.
 Year 2012 2011 2010 2009 2008
Gross profit 1,17,725.95 98,616.00 70,097.56 45,954.94 2,134.12
Sales 2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07
Gross profit
Ratio 47.43 52.31 50.34 40.48 26.08

Interpretation
The ideal level of gross profit margin depends on the industries, how long the business has
been established and other factors. Although, a high gross profit margin indicates that the company
can make a reasonable profit, as long as it keeps the overhead cost in control. A low
margin indicates that the business is unable to control its production cost.

3. OPERATION RATIO

This ratio is a test of the efficiency of the management in their business operation. It is a
means of operating efficiency. In normal conditions, the operating ratio should be low
enough so as to leave portion of the sales sufficient to give a fair return to the investors.

Operating ratio plus operating profit ratio is 100. The two ratios are obviously interrelated.
For example, if the operating profit ratio is 20%, it means that the operating ratio is 80%. A
rise in the operating ratio indicates a decline in the efficiency.

Year 2012 2011 2010 2009 2008

Operating cost 1,15,189.3
1,48,109.80 9 82,408.07 66,873.10 4,626.74
Sales 2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07
Operating
Ratio 59.68 61.11 59.18 58.91 56.55

INTERPRETATION

Lower the operating ratio, the better is the position because greater is the profitability
and management efficiency of the concern. The higher the ratio, the less favorable is the situation,
because there will be smaller margin of profit available for the purpose of payment of dividend and
creation of reserves.
 3. Activity ratios:
Activity ratios (also known as turnover ratios) measure the
efficiency of a firm or company in generating revenues by converting its
production into cash or sales. Generally a fast conversion increases
revenues and profits.
Activity ratios show how frequently the assets are converted into cash or sales and,
therefore, are frequently used in conjunction with liquidity ratios for a deep analysis of
liquidity.
Some important activity ratios are:
1. Asset turnover ratio
2. Fixed assets turnover ratio
1. Assets Turnover ratio
The amount of sales generated for every dollar's worth of assets. It
is calculated by dividing sales in dollars by assets in dollars. It is an
activity ratio that measures the efficiency with which assets are used by a
company. It is computed by dividing net sales by average total assets for a
given period.

Year 2012 2011 2010 2009 2008

Sales 2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07
Total Assets 10,359.14 7,597.09 6,645.41 5,258.27 4,519.25
Assets
Turnover Ratio 23.96 24.81 20.95 21.59 1.81

Interpretation :
Asset turnover measures a firm's efficiency at using its assets in generating sales
or revenue - the higher the number the better. It also indicates pricing strategy:
companies with low profit margins tend to have high asset turnover, while those with
high profit margins have low asset turnover.

2. Fixed assets Turnover Ratio

A financial ratio of net sales to fixed assets. The fixed-asset
turnover ratio measures a company's ability to generate net sales
from fixed-asset investments - specifically property, plant and
 equipment (PP&E) - net of depreciation. A higher fixed-asset
turnover ratio shows that the company has been more effective in
using the investment in fixed assets to generate revenues. Fixed
assets turnover ratio (also known as sales to fixed assets ratio) is computed
by dividing cost of sales by net fixed assets. A high ratio indicates better
utilization of fixed assets and a low ratio means inefficient or under-utilization
of fixed assets.

This ratio is often used as a measure in manufacturing industries,

where major purchases are made for PP&E to help increase output.
When companies make these large purchases, prudent investors
watch this ratio in following years to see how effective the
investment in the fixed assets was.

Year 2012 2011 2010 2009 2008

Sales 2,48,190.28 1,88,507.22 1,39,251.70 1,13,512.25 8,182.07
Fixed Assets 23,93,472.15 5,30,564.25 4,20,993.40 3,25,142.11 2,84,182.90
Fixed Assets
Turnover
Ratio 0.10 0.36 0.33 0.35 0.03
Interpretation :
. A high ratio indicates better utilization of fixed assets and a low ratio means
inefficient or under-utilization of fixed assets.

3. Total Dept to Total Assets turnover ratio

A metric used to measure a company's financial risk by determining
how much of the company's assets have been financed by debt.
Calculated by adding short-term and long-term debt and then
dividing by the company's total assets.

Year 2012 2011 2010 2009 2008

 Total Dept 0.00 0.00 15,799.03 21,164.32 29,633.69
Total Assets 10,359.14 7,597.09 6,645.41 5,258.27 4,519.25
Total Dept to
Total Asset 0 0 2.377435 4.02495878 6.5572141
Interpretation :
A debt ratio of greater than 1 indicates that a
company has more debt than assets, meanwhile, a debt ratio of
less than 1 indicates that a company has more assets than debt.
Used in conjunction with other measures of financial health, the
debt ratio can help investors determine a company's level of risk.

Chapter-4
Credit monitoring Assessment 64
4.1 What is the meaning of credit monitoring assessment ?
o It is nothing but the bank financing for working capital

o It is earlier known as Credit authorization scheme

o RBI prescribed certain forms to be filled for applying is called as CMA data base.

o Calculation is done according to Tandon committee

CMA data is a useful tool consisting of financials of past two years, estimates of
current year and projections of next year of a company seeking debt, generally insisted
by bank to assess the CMA data is a detailed analysis of the working of any company.
To run a business smoothly business strategy required and to get live financial
strategy is required. So, they create a financial strategy plan to give it live that is
nothing but CMA REPORT, showing their past experience with ratio and data which
are also expecting about future market.
This is required to be submitted by the company who has to take more than Rs. 1
Crore of working capital loan from any bank. This is consisting of six parts commonly
known as six forms details are as under:-
Form-I Assessment of working capital required
Form-II Operating statement of the company
Form-III Analysis of balance sheet
Form-IV Comparative statement of current assets and current liabilities
Form-V Computation of Maximum permissible bank finance (MPBF).
Form-VI Fund flow analysis
4.2 FORM-1-WORKING CAPITAL ASSESSMENT REQUIRED
Any enterprise weather industrial, trading or other acquires two types of assets to run
its business as has already been emphasised time and again. It requires fixed assets
which are necessary for carrying on the production/business such as land and
buildings, plant and machinery, furniture and fixtures etc. For a going concern these
assets are of permanent nature and are not to be sold. The other types of assets
required for day to day working of a unit are known as current assets which floating in
nature and keep changing during the course of business. It is these ‘current assets’
which are generally referred as ‘working capital’. We are by now already aware of the
short term nature of these assets are classified as current assets. It may be noted here
that they may not be any fixed ratio between the fixed assets and floating assets for
different projects as their requirement would differ depending upon the nature of
project. Big industrial projects may require substantial investment in fixed assets and
also large investment for working capital. The trading units may not require heavy
investment in fixed assets while the may be carrying huge stocks in trade. The service
unit may hardly require any working capital and all investment may be blocked in
creation of fixed assets.
A set financing pattern is evolved to meet the requirement of a unit for acquisition of
fixed assets and current assets. Fixed assets are to be financed by owned funds and
long term liabilities raised by a unit while current assets are partly financed by long
term liabilities and partly by current liabilities and other short-term loans arranged by
the unit from the bank. The balance sheet of a unit under such dispensation may be
represented as:
The total current assets with the firm may be taken as gross working capital where as
the net working capital with the unit may be calculated as under: 66
Net Working Capital = Current Assets - Current Liabilities
(NWC) (GWC) (Including Bank Borrowings)
This net working capital is also sometimes referred to as ‘liquidated surplus’ with the
firm and has been margin available for working capital requirements of the unit.
Financing of working capital has been the exclusive domain of commercial banks
while they also grant term loans for creation of fixed assets either on their own or in
consortium with State level/All India financial institutions. The financial institutions
are also now considering sanction of working capital loans.
The current assets in the example given in earlier paragraph are financed as under:
Current Assets = Current liabilities + Working capital limits with
banks + Margin from long-term liabilities
The assessment of working capital may involve two aspects as under:-
 The level of current assets required to be held by any unit which is adequate for its
day to day functioning, and

 The mode of financing of these current assets.

The value of inventory as given in balance sheet is the position as on a particular day
on which balance sheet is drawn and may not be the actual average requirement of the
unit. We will have to; therefore, evaluate the actual consumption pattern to arrive at a
correct decision.
It must, however, be noted that assessment of working capital is always done for
future period, while the financial statements reveal the financial position of a 67
concern as it as a some point of time in the past. If the calculations are based on the
basis of the financial statements as on some previous date, the results derived may not
be workable. Furthermore the newly established units may not provide any financial
statements for the past period. The working capital is always to be assessed on tile
basis of projections for next year. The first most important point, therefore, is to make
as accurate projections as possible for the next year. The projections submitted to the
bank are very critically examined in relation to past performance of the unit, if any,
future prospects and market for the ultimate product production capacity of the unit
and general rate of inflation expected during the year. The projections given for the
next year are, therefore, to be supported by convincing logic to stand scrutiny in the
hands of the bankers.
We shall now make an attempt to define various components of working capital as
taken in the format and explain the most acceptable principles involved in calculating
them for overall assessment of working capital.
A new dimension to financing of working capital by banks was given by Reserve
Bank of India in 1975 by accepting the recommendations of ‘Tandon Committee’
which were later modified by ‘Chore Committee’. These recommendations were
applicable for large advances enjoying working capital limits of Rs. 50.00 lacs and
above. Reserve Bank of India also prescribed a standard format for assessment of
working capital limits to accounts covered
Under ‘Credit Authorisation Scheme’ later on renamed ass, ‘Credit Monitoring
Arrangement. This form has, however, been adopted by many of the banks for
assessment of limits for working capital advances exceeding Rs. 10.00 lacs.
Different firms adopting different techniques is thus in circulation for assessment of
working capital depending upon the size and category of projects as under:
6. Form for assessment of requirements of SSI units up to credit limits of Rs.
2,00,000/- (including composite loans)

7. Form for assessment of requirements of SSI units up to credit limits of above Rs. 2,
00,000/- and up to Rs. 15.00 lacs.

8. Form for assessment of requirements of units with credit limits above Rs. 15.00 lacs
and up to Rs. 1.00 crore

9. Form for assessment of requirements of units with credit limits above Rs. 100 crore.

10. CMA data form for assessment of requirements for units with credit limits above
Rs. 10.00 lacs or as per the cut off point fixed by individual banks.

11. Assessment of limits for projects falling under various segments of priority sector.
69

FORM-II