Executive Summary

CHAPTER-1

INTRODUCTION

CHAPTER-2
COMPANY PROFILE

CHAPTER-3
LITERATURE REVIEW

CHAPTER -4

RESEARCH METHDOLOGY

CHAPTER -5
ANALYSIS & FINDINGS
CHAPTER-6
CONCLUSION & SUGGESTION
CHAPTER-7

ANNEXURE & BIBLIOGRAPHY

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 EXECUTIVE SUMMARY

Working capital is one of the most difficult financial concepts to understand for the business owner. In
fact, the term means a lot of different things to a lot of different people. By definition, working capital is
the amount by which current assets exceed current liabilities.

Businesses are an essential element of a healthy and vibrant economy. They are seen as vital to the
promotion of an enterprise culture and to the creation of jobs within the economy. Cash is the lifeline of a
company. Understanding a company’s cash flow health is essential to making investment decisions. A
good way to judge a company’s cash flow prospects is to look at its working capital management.
Working Capital is also known as operating capital. It represents the day by day operating liquidity
available to a business. Studies have shown that weak financial management - particularly poor working
capital management and inadequate long-term financing - is a primary cause of failure among businesses.

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 is important to the financial health of businesses of all sizes. The amounts
invested in working capital are often high in proportion to the total assets employed and so it is vital that
these amounts are used in an efficient and effective way.

In this project I will consider these working capital management issues relating to businesses then I will
analyze financial statements of two companies in order to identify and solve the working capital
problems.

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 CHAPTER – 1
INTRODUCTION

HCL is India’s premier hardware, services and Information and communications technology
(ICT) systems Integration Company offering a wide spectrum of ICT products that includes
Computing, Storage, Networking, Security, Telecom, Imaging and Retail. HCL is a one-stop-
shop for all the ICT requirements of an organization. India's leading System Integration and
Infrastructure Management Services Organization, HCL has specialized expertise across
verticals including Telecom, BFSI, e-Governance & Power.

TABLE 1.1 – ABOUT HCL

Type Public
(BSE: 500179,BSE: 532281)
Founded 11 August 1976

Headquarters Noida, India

(Delhi metropolitan area), India

Key People Shiv Nadar, Founder, Chairman & CEO

Sanjay Kumar Choudhary , Vineet Nayar

Industry Information Technology Services

Revenue ▲4.7 billion USD

Employees ~53,000 (as on 31st Dec 2007)

Website www.hcl.in

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VISION AND MISSION

A global corporation enriching lives and enabling business transformation for our customers,
with leadership in chosen technologies and markets. Be the first choice for employees and
partners, with commitment to sustainability.

We enable business transformation and enrichment of lives by delivering sustainable world class
technology Products, Solutions & Services in our chosen markets thereby creating superior
shareholder value.

We shall deliver defect free products, services and solutions to meet the requirements of our
external and internal customers the first time, every time.

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 CHAPTER - 2
COMPANY PROFILE

HCL

HCL began an exciting journey more than three decades ago with a dream to give India its very
own microcomputer. The sheer clarity of vision and hard work led to a revolution and laid a
foundation for the Indian IT industry, which has today acquired a distinct position amongst
major economies in the world. Today HCL is a USD 5 billion global enterprise and Ajai
Chowdhry one of the founder members has been the key force in driving the growth of HCL and
today leads, HCL the flagship company.

HCL, the flagship company of the HCL enterprise, had a turnover of Rs. 400.6 crores (USD 85
million) in 1994 which underwent tremendous growth to become Rs. 13,137 crores (USD 2.6
billion) today. Employing - 7200 people, the company has today emerged not only as the
country’s information-enabling powerhouse but a great place to work with industry accolades
and awards received year after year.

HCL has a long standing history of being involved ever since the inception of the IT Industry in
the country. When government was seeking collaboration, HCL were one of the first to partner
in laying down the IT infrastructure in India from something as basic as introducing a computer
in the remotest part of the country. In a developing country like ours where we are leapfrogging
to match the pace of developed global economies, ICT is rapidly becoming the core of any
intelligent infrastructure and HCL has developed customized & efficient system integration
solutions designed to fuel the Indian growth engine.

Today HCL has become one of the leading System Integration Company in the country,
implementing several turnkey Systems and Networking Integration projects nationwide and
across most of the vertical business segments. HCL is uniquely poised today in the market
making it the only company with India as its primary focus, offering state of the art technology

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solutions to empower a host of Defence, Homeland Security frameworks, social sectors and
government schemes for Nation building. HCL has being powering numerous projects across
sectors like Defence, Homeland Security, Airport & Railways Intelligent Infrastructure,
Telecom, Banking, Public Distribution System, E-governance, Education, NREGA etc. With
global expansion and sharing best practices with the world and in particular developing markets,
the company is today strategically expanding in markets like Middle East, Southeast Asia and
Africa.

HCL today has India's largest vertically integrated computer manufacturing facility with over
three decades of electronic manufacturing experience & HCL desktops is the largest selling
brand into the enterprise space. With India’s largest ICT services network that reaches to every
corner of India, HCL’s award winning Support Services makes it the preferred choice of
enterprise and consumers alike. HCL has a 100% subsidiary that addresses the physical security
technology system integration market.

RELATIONSHIP PROGRAMME

HCL strongly believes in the power of relationships and partnership. No matter the size of your
business, partnering with HCL will help you succeed. Leveraging over three decades of
experience in total technology solutions, it’s our commitment to help you be as successful as
possible. We provide you access to HCL’s innovative technologies, marketing strategies and
value added services. By working on every aspect of the ICT industry, we have the experience to
create world class products and services to help you give the best to your customers.

 Reliable IT Backbone - In a world where the right technology infrastructure is a

prerequisite, we offer a reliable IT backbone to our partners. HCL combines technical
innovation with built-in reliability to keep your business running. We provide a one stop
shop for meeting end-to-end IT requirements, thus offering a smooth ICT management.
Additionally, we offer industry leading technology, designed to deliver a price to

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 performance advantage to help you provide increased benefits to your customers. Our
high-quality products and services give you means to work in a smarter way and be more
productive and competitive.

 We have constantly innovated to offer a range of products to cater to different

requirements of the customers. We have pioneered the home PC market of India - we
designed India’s first Multimedia-enabled Beanstalk Media Centre PC for home users;
we have developed Ezeebee and Busybee PCs and ME Laptops for personal productivity.
Whether gaming, enjoying music or movies or connecting to the Internet, these systems
offer ease of use that transcends to greater performance and more satisfaction for the
individual user is for work or home. We bring this exciting range of Desktops and
Laptops through our vast network of neighborhood partner outlets for buying
convenience of the customers. Further these products are backed by HCL’s 24X7
Consumer Support Helpline. Enterprises have unique needs for their computing platforms
and HCL’s range of business Desktops and Laptops come with unique features that
enhance productivity while reducing TCO. For our Enterprise & SMB customers who
buy directly from us, or through Enterprise Rate Contracts or through our vast network of
Strategic Business Partners we offer customized built to order range of ME Business
Laptops and Infiniti Desktops. Leveraging on three decades of expertise in total
technology solutions, HCL business Desktops and Laptops offers increased security,
ultra-efficient manageability and maximum productivity for a smart business landscape.
HCL's manufacturing facilities are ISO 9001 - 2000 & ISO 14001 certified and adhere to
stringent quality standards and global processes. HCL Desktops and Laptops are
manufactured and marketed specially to withstand unique Indian terrain and conditions.
HCL commits to manufacture “Green” PCs and Laptops that are RoHS compliant and
adhere to stringent environment management standards. As market leaders in ICT arena
we offer our partners the best of options.

 Extensive Marketing Support - HCL has closely seen the IT industry rise from scratch,
and has actively participated in its progress. We have picked up valuable marketing

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lessons in serving the IT needs of the Indian customers. You can combine your individual
strengths and reputation with the power of a global brand. We can help you to focus on
some of the most critical marketing needs facing your business. Additionally, we can
provide you a set of proven sales and marketing tools designed to help you generate new
leads, increased demands for products and services and help you reach your business
goals.

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HCL ADVANTAGE

HCL (HCLI) draws its strength from 30 years of experience in handling the ever changing IT
scenario , strong customer relationships, ability to provide the cutting edge technology at best-
value-for-money and on top of it, an excellent service & support infrastructure.

Be it a large multi-location enterprise, or a small/medium enterprise, or a small office or a home,

HCLI has a product range, sales & support capability to service the needs of the customer.

Last 30 years apart from knowledge & experience have also given us continuity in relationship
with the customers, thereby increasing the customer confidence in us. Our strengths can be
summarized as:

 Long standing relationship with customers.

 Pan India support & service infrastructure.
 Best-vale-for-money offerings. HCL's labs - Pioneers in design, development and
building ICT products.
 India's largest Hardware, System Integration, Networking Solutions & Distribution
Company.
 3 decades of expertise in technology solutions.
 Partners with leading global players to provide the best of solutions to end users.
 The largest manufacturer of PCs and Laptops in India.
 Largest direct sales, digital lifestyle product distribution and retail network.
 Extensive service network that reach out to 4,000 towns. HCL has consistently topped
best employer lists. In 2009, HCL was ranked No. 1 in Hewitt’s list of Best Employers in
India.

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  HCL has been one of India’s pioneering business houses with more than 35 years of
business practices history, listed on the stock market with a huge spread in business with
BFSI and NBFI sector.

TECHNOLOGY LEADERSHIP

HCL is known to be the harbinger of technology in the country. Right from our inception we
have attempted to pioneer the technology introductions in the country either through our R&D or
through partnerships with the world technology leaders.

Using our own R&D we have:

 Developed firewalls for enterprise & personal system security.

 Launched our own range of enterprise storage products.
 Launched our own range of networking products.

HCL has to its claim several technology pioneering initiatives. Some of them are:

 Country's first branded home PC - Beanstalk in 1995.

 Country's first Pentium 4 based PC at sub 40k price point.
 Country's first Media Center PC.

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MANUFACTURING

HCL's computer hardware manufacturing plants include 4 facilities, 2 at Puducherry, 1 at

Chennai & 1 at Uttaranchal.

The plant located in Puducherry are situated 165 kms south of Chennai on the coast of the Bay of
Bengal with proximity to Chennai Air/Sea port, special policies for Industries of local Govt, ,
Inland Container Depots, attractive power and labour rates - makes Puducherry an ideal place for
business.

HCL Puducherry, Uttarakhand, and Noida Manufacturing Units now ISO 9001:2008
Certified

State of the art IT systems in MRP, ERP, Online configurations enables this latest unit of HCL
(Rudrapur) to leverage the power of IT in delivering optimum efficiency. The plant is networked
& online with HCL branch and head offices. The Pondicherry plant has its own Product
Engineering Group (PEG) and R&D teams constantly engaged in developing new products and
solutions. Driven by a strong manufacturing objective, HCL promises to deliver defect free
products, services and solutions to meet the requirements of its external and internal customers,
right from the commencement of the relationship.

Driven by a strong Manufacturing Objective

"WE SHALL DELIVER DEFECT-FREE PRODUCTS, SERVICES AND SOLUTIONS TO

MEET THE REQUIREMENTS OF OUR EXTERNAL AND INTERNAL CUSTOMERS, THE
FIRST TIME, EVERY TIME."

All processes in the manufacturing are aligned to this guiding objective. A strong emphasis of
"Quality by Process" is ensured across all processes. The products manufactured here undergo
stringent tests that ensures their ruggedness & durability , which may be deployed anywhere in

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India and may have to face severe conditions like - heat , humidity , rough transportation &
handling .Our products undergo drop tests , hot & cold temperature chamber , client-site
simulation tests , reliability tests et al .

Computers are shipped to locations all over India with an extensive network of professional
logistic support partners. There is also a Customer satisfaction cell, in plant, to take care of
problems reported from field.

PHILOSOPHY OF QUALITY

"We shall deliver defect-free products, services and solutions to meet the requirements of our
external and internal customers, the first time, every time."

HCL believes in the Total Quality Management philosophy as a means for continuous
improvement, total employee participation in quality improvement and customer satisfaction. Its
concept of quality addresses people, processes and products.

Over the last 32 years, we have adapted to newer and better Quality standards that helped us
effectively tie Quality with Business Goals, leading to customer and employee satisfaction.

QUALITY AT HCL

The history of structured quality implementation in HCL began in the late 1980s with the focus
on improving quality of its products by using basis QC tools and Failure Reporting and
Corrective Active Systems (FRACAS). We also employed concurrent engineering practices
including design reviews, and rigorous reliability tests to uncover latent design defects.

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In the early 90s, the focus was not merely on the quality of products but also the process quality
systems. Our manufacturing unit at NOIDA was certified initially to ISO 9002:1994 by Bureau
VERITAS Certification in 1994 and later on to ISO 9001:1994 in 1997. As of now, all our
manufacturing units are certified by Bureau VERITAS Certification as per ISO 9001:2000 and
ISO 14001: 2004

Under our Quality Education System program, we train our employees on the basic concepts and
tools of quality. A number of improvement projects have been undertaken by our employees,
whereby process deficiencies and bottlenecks are identified, and Corrective Action Projects
(CAPs) are undertaken. This reduces defect rates and improves cycle times in various processes,
including personal quality.

Our certifications / awards in 2003 include ISO 9001-2000 by Bureau VERITAS Certification
for our Infostructure Services and award of First Prize by ELCINA (Electronic Component
Industries Association) for Quality, 2002-03. The ELCINA award criteria consider two aspects.
(1) Enablers (Leadership & Management commitment, Resource Management, Product
Realization, Measurement Analysis & Improvement) and Results (Product Quality, Customer /
Stake holder satisfaction , Business results).

The tryst for continuous quality improvement is never-ending in HCL. We always strive to
maintain high quality standards, which help us fulfill our mission to provide world-class
information technology solutions and services, to enable our customers to serve their customers
better.

ALLIANCE & PARTNERSHIP

To provide world-class solutions and services to all our customers, we have formed Alliances
and Partnerships with leading IT companies worldwide.

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HCL has alliances with global technology leaders like Intel, AMD, Microsoft, IBM, Bull,
Toshiba, Nokia, Sun Microsystems, Ericsson, NVIDIA, SAP, Scansoft, SCO, EMC, VERITAS,
Citrix, CISCO, Oracle, CA, RedHat, Infocus, Duplo, Samsung and Novell.

ABOUT HCL LEARNING

HCL Learning covers the entire length and breadth of education, learning and training needs
across schools, colleges, individuals and enterprises. Our initiatives are driven through passion,
innovation and imagination to create learning interventions that are engaging, effective, and
rewarding. We have created high quality educational content for a wide range of target
audiences. Our highly engaging content solutions have been creating value for clients and users
in schools, higher education institutions, universities, and professional educational settings.

ELEMENTS OF HCL LEARNING

HCL LEARNING comprises these four elements –

1. Schools
2. Colleges
3. Career development centre
4. Training solutions

There are 5 types of schools –

 Digischools
 Learn IT
 Language lab solution
 School management software

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 Digischool - Digischool’s philosophy is captured in the phrase “Equipped Teaching and
Easy Learning.” Digischool is about making learning fun and meaningful. Those days are
not far behind us when a typical school day involved listening to a lecture, taking
extensive notes, reading from the textbook, and completing lots of homework
assignments. Today, however, we’re moving into a new paradigm of teaching and
learning. Digischool is taking the lead in getting us there--Quickly--and smoothly.

 Learn IT – It was designed by HCL; Learn IT is an ICT (Information and

Communications Technology) education program that imparts holistic IT education to
school students. From teaching students the basics of computers and the Internet to
imparting programming skills that could positively impact a student's career choice, the
Learn IT program keeps students abreast of the latest in the IT world. The building of
technology skills forms an integral if not crucial part of childhood education in today's
times. The program incorporates all aspects of the educational requirement, including
content, course material for students and teachers, and training support that would ensure
a seamless integration of ICT into the academic curriculum.

 Language Labs for Schools - HCL Learning presents schools with an innovative and
proven effective way of learning English using interactive language learning software.
The English curriculum that is currently taught in schools focuses greatly on developing
reading and comprehension skills for students. However, speaking and listening skills are
not given enough importance, considering how crucial it is for students to develop their
communication skills in order to be successful in their higher education as well as
careers.

 School Management Software - School Management Software or SMS is an ‘Education

Resource Planning’ (ERP) solution designed to automate a school's diverse operations
from classes and exams to school events calendar, attendance and so on. In a way, it
brings all stakeholders of a school like teachers, students, and parents on a common
interactive platform to seamlessly manage the school affairs.

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 Xcelerate - HCL Learning and Resonance together bring to you Xcelerate – coaching for
IIT-JEE, AIEEE, AIPMT, NTSE, KVPY and International Olympiads using state-of-the-
art Live Video Learning Technology and Distance Learning. The tried, trusted and tested
teaching methodology of Resonance for IIT-JEE coaching and National level
benchmarking is now available to you via HCL Learning's state-of-the-art network in the
form of Xcelerate. The program follows a model that aims to liaison & build a long-term
relationship with schools across the country and abroad, providing schools with a lasting
partnership for their coaching needs. The program integrates school learning with
specialized competitive coaching for IIT-JEE at the school premises. This saves students
precious time that they would otherwise spend commuting to coaching centres. A well-
planned and comprehensive course structure ensures that students get a holistic exposure
to knowledge, skills, and techniques required succeeding in competitive examinations.
IIT-JEE 2012
AIEEE-2012
AIPMT-2012
NTSE

 COLLEGES - HCL’s key offerings for colleges include a wide variety of training
programs and advanced learning solutions for participants who are graduates or pursuing
their graduation.

There are 4 types of colleges –

 DigiCampus
 Career-Oriented Training
 Language Lab
 Knowledge Kinetics

 Career-Oriented Training - HCL’s Career-Oriented Training program CareerAce

provides an in-depth skill-based education that equips college graduates with the
skills they need to succeed in the job market. Industry today is looking for employees
with core domain knowledge and multiple skills. This includes the knowledge of

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 tools, such as MS office, MIS, etc, as well as inter-personal skills, such as
negotiation, communication, etc. However, the fact remains that conventional
education in India does not address industry-relevant skills. As part of our Career-
Oriented Training program, we provide industry-relevant training to first-time job
seekers. The training is focused on improving the employability and enhancing the
skills and value of the student in the job market. The Career-Oriented Training
program has been designed with the following objectives in mind:
To bridge the gap between existing knowledge/skill and desired
knowledge/skill by means of training.
To ensure that the training maximizes knowledge retention and expertise
in situational skill application.

 Knowledge Kinetics – K2 or Knowledge Kinetics, the industry academic interface

program, is an HCL initiative to bridge the gap between the demand and supply of
industry-ready ICT professionals by creating a skilled workforce and making them
available to organizations deploying ICT. The K2 Academy provides an end-to-end
solution catering to IT training and educational requirements. The program follows a 360
degree approach of grooming students from overall perspective relevant to make them
Industry ready, during the college education span, within the institution.

 Career Development Centre - HCL CDC, an HCL Learning initiative, is among the
most well-known Training Providers in the country with a pan-India network of 128
centers. It has been formed to share the HCL Enterprise’s rich pool of expertise through
globally accepted best practices in knowledge delivery. Apart from offering IT and non-
IT career-oriented programs for individuals, CDC partners with organizations and
institutions to impart industry-relevant IT training to their members. HCL CDC enables
students to get an early foothold in the industry owing to its strong placement services.

There are 3 types of career development centre –

 SAP
 Language lab solutions

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  ICT training

 SAP - SAP (Systems, Applications, and Products in Data Processing) is an ERP

(Enterprise Resources Planning) software solution. SAP helps create a wide- range of
business software and enterprise applications that help accelerate business innovation.
Today, customers in more than 120 countries run SAP applications, which accurately
address the needs of small businesses, midsize companies, or large enterprises to suit
offerings for global organizations. These solutions are distinctly based on procedures that
drive businesses for enhanced operational visibility, improved decision making, and
reduced costs. A sound knowledge of SAP applications will prepare business and
technical students for the corporate world. Business and IT Graduates with SAP ERP
Application knowledge can introduce these applications as tools for better business
practices and processes. Job-seekers and future Engineers, Technocrats, Computer
Application, Business Administration students would be well advised to gain an intimate
know-how of the applications used in the real-world.

 ICT Training - Over three decades of experience in the field of IT and software
development has given HCL a technology edge to adequately understand the pulse and
needs of the Indian IT industry. A huge gap in the Indian IT talent supply chain has
prompted HCL to create industry-ready software and hardware courses in Computing,
Storage, Networking, Dot Net, Oracle, Java, C language and many others. These courses
are tailor-made for individuals, who want to better their existing ICT knowledge and
skills for a better job opportunity.

 Training Solutions - HCL Learning specializes in creating unparalleled training

solutions that help improve performance through better training. At HCL Learning, we
offer a full spectrum of consumer and business training solutions to meet varied learning
and development needs of individuals, Government and Corporate enterprises.

There are 3 types of training solutions –

 Corporate Training

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  Government Skill development
 E-learning solutions

 Corporate Training - Effective, well-trained and skilled workforce is the greatest

competitive advantage—and that makes all the difference when it comes to guaranteed
success. At HCL learning, comprehensive corporate training programs are created to
provide this competitive business advantage to various organizations. These learning and
training programs enable various corporate enterprises to train their employees cost
effectively and efficiently. The corporate training programs are developed after
understanding the individual business processes to help organizations accelerate their
business growth and create significant value for their customers.

 Government Skill Development - HCL’s Career Development Centre (CDC) provides IT

and Training solutions to the Government of India through various initiatives. The
solutions focus on capacity building within the government as well as for the rural sector
with special emphasis laid on programs for youth development and women
empowerment. In the area of customized skill development, HCL CDC offers e-
governance training, faculty development, as well as employee development programs.
The role of IT education and training in the rural sector cannot be overemphasized. HCL
CDC spearheads initiatives centred on disseminating relevant knowledge of IT to
enhance the pace of development in rural India through education and training programs.

Some of HCL’s skill development and rural empowerment initiatives for the Government
include:

Broadband and PC provision to rural areas - HCL Bharat PC

Skill development by HCL Education.
HCL support to various Government schemes like NREGA, PDS, and the
UID.
HCL agriculture assistance and allied business.
HCL rural kiosk opportunities

The objective of these programs is to:

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 Diminish the digital divide that exists between the rural and urban sector.
Improve the skills of rural people through training so that they can earn a livelihood.
Provide the latest IT training and skill enhancement to government departments.

 E-Learning Solutions - HCL Learning offers custom development of highly interactive E-

Learning solutions to effectively address all training and development requirements of
individuals and corporate. Our learning designs, which are built on the latest E-Learning
standards, are delivered through various modalities like CBTs, WBTs, ILTs and Blended
Learning. These learning designs are made unique after methodical analysis of the
learner’s profile, needs, and learning context to better the learning outcome.

MANAGEMENT OF WORKING CAPITAL

Every business needs funds for two purposes for its establishment and to carry out its
day- to-day operations. Long terms funds are required to create production facilities
through purchase of fixed assets such as plant and machinery, land, building, furniture,
etc. Investments in these assets represent that part of firm’s capital which is blocked on
permanent or fixed basis and is called fixed capital. Funds are also needed for short-term
purposes for the purchase of raw material, payment of wages and other day – to- day
expenses etc.

CONCEPT OF WORKING CAPITAL

Working capital (abbreviated WC) is a financial metric which represents operating

liquidity available to a business, organization, or other entity, including governmental
entity. Along with fixed assets such as plant and equipment, working capital is

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considered a part of operating capital. Net working capital is calculated as current assets
minus current liabilities. It is a derivation of working capital that is commonly used in
valuation techniques such as DCFs (Discounted cash flows). If current assets are less than
current liabilities, an entity has a working capital deficiency, also called a working capital
deficit.

Working capital = current assets

Net working capital = current assets − current liabilities

Net operating working capital = current assets − non interest-bearing current

liabilities

Equity working capital = current assets − current liabilities − long-term debt

A company can be endowed with assets and profitability but short of liquidity if its assets
cannot readily be converted into cash. Positive working capital is required to ensure that a
firm is able to continue its operations and that it has sufficient funds to satisfy both
maturing short-term debt and upcoming operational expenses.

There are two concepts of working capital:

1. Gross working capital.

2. Net working capital

 Gross working capital - The gross working capital is the capital invested in the
total current assets of the enterprises. Current assets are those assets which can be
converted into cash within a short period of time

Gross working capital = Total current assets.

 Net working capital - In a narrow sense, the term working capital refers to the
net working. The net working capital refers to working capital as excess of current

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 assets over current liabilities. In other words net working capital refers to current
assets financed by long term funds.

Net working capital = Current assets – Current liabilities.

The net working capital position of the firm is an important consideration, as this will
determine the firm’s profitability and risk. Here the profitability refers to profits after
expenses and risk refers to the probability that a firm will become technically insolvent
where it will be unable to meet obligations when they become due for payment. Net
working capital can be positive or negative.

INFLOWS AND OUTFLOWS OF WORKING CAPITAL

Inflows Outflows
Cash sales to customers. Purchasing finished goods for re-sale.
Receipts from customers who were Purchasing raw materials and other
allowed to buy on credit (trade components needed for the
debtors). manufacturing of the final product.
Interest on bank and other balances. Paying salaries and wages and other
operating expenses.
Proceeds from sale of fixed assets. Purchasing fixed assets.
Investment by shareholders. Paying the interest on, or repayment of
loans.
Paying taxes.

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CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank.

2) Bills receivables.
3) Sundry debtors.
4) Short term loans and advances.
5) Inventories of stock as:
a. Raw material.
b. Work in process.
c. Stores and spares.
d. Finished goods.
6) Temporary investment of surplus funds.
7) Accrued incomes.
8) Marketable securities.

The gross working capital concept is financial or going concern concept whereas net
working capital is an accounting concept of working capital. Both the concepts have their
own merits.

The gross concept is sometimes preferred to the concept of working capital for the
following reasons:

1) It enables the enterprise to provide correct amount of working capital at correct

time.
2) Every management is more interested in total current assets with which it has to
operate then the source from where it is made available.
3) It take into consideration of the fact every increase in the funds of the enterprise
would increase its working capital.

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 It is qualitative concept, which indicates the firm’s ability to meet to its operating
expenses and short-term liabilities.
 IT indicates the margin of protection available to the short term creditors.
 It is an indicator of the financial soundness of enterprises.

A finance manager has to make an appropriate financing mix, which will limit the risk
and increase the profitability. Financing mix refers to the proportion of current assets
financed by current liabilities and long term funds.

There are two approaches which determine the financing mix (1) Aggressive approach
(2) Conservative approach.

Aggressive approach - According to aggressive approach the long term funds are
used to finance only the core or fixed portion of current assets (e.g., minimum
level of finished goods inventory, raw material etc) and the other portion i.e.
temporary and seasonal requirements are financed by short term funds. This is of
high risk and high profit financing mix.
Conservative approach - According to conservative approach the total current
assets are financed from long term sources and short term sources are used only in
emergency situation i.e. when there is an unexpected cash outflow. This is of low-
risk and low-profit financing mix.

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CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways:

 On the basis of concept.

 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 assets 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.

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.

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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 enable a concern to avail cash
discounts on the purchases and hence reduce 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.

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.

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 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.

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.

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.

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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. Length of production 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.
3. Seasonal variations - Generally, during the busy season, a firm requires larger
working capital than in slack season.
4. 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.
5. 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.
6. 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.
7. Rate of growth of business - In faster growing concern, we shall require large amt.
of working capital.
8. Earning capacity and dividend policy - Some firms have more earning capacity
than other due to quality of their products, monopoly conditions, etc. Such firms

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 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.
9. Price level changes - Change in the price level also affect the working capital
requirements. Generally rise in prices leads to increase in working capital.
10. Others factors - These are:
a. Operating efficiency.
b. Management ability.
c. Irregularities of supply.
d. Importance of labor.
e. Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL

Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-
term assets and its short-term liabilities.

Management of working capital is concerned with the problem that arises in attempting
to manage the current assets, current liabilities. The goal of Working capital management
is therefore to ensure that the firm is able to operate, and that it has sufficient cash flow to
service long term debt, and to satisfy both maturing short-term debt and upcoming
operational expenses. In so doing, firm value is enhanced when, and if, the return on
capital exceeds the cost of capital. In other words, 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

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 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. 

DECISION CRITERIA

Working capital is the amount of capital which is readily available to an organization.

That is, working capital is the difference between resources in cash or readily convertible
into cash (Current Assets), and cash requirements (Current Liabilities). As a result, the
decisions relating to working capital are always current, i.e. short term, decisions.

 The most widely used measure of cash flow is the net operating cycle, or cash
conversion cycle. This represents the time difference between cash payment for
raw materials and cash collection for sales. The cash conversion cycle indicates
the firm's ability to convert its resources into cash. Because this number
effectively corresponds to the time that the firm's cash is tied up in operations and
unavailable for other activities, management generally aims at a low net count.
(Another measure is gross operating cycle which is the same as net operating
cycle except that it does not take into account the creditor’s deferral period.)

Guided by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These policies aim at managing the
current assets (generally cash and cash equivalents, inventories and debtors) and the short
term financing, such that cash flows and returns are acceptable.

Cash management - Identify the cash balance which allows for the business to
meet day to day expenses, but reduces cash holding costs.

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 Inventory management - Identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials - and
minimizes reordering costs - and hence increases cash flow; see Supply chain
management; Just in Time (JIT); Economic order quantity (EOQ); Economic
production quantity (EPQ).
Short term financing - Identify the appropriate source of financing, given the
cash conversion cycle: the inventory is ideally financed by credit granted by the
supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to
"convert debtors to cash" through "factoring".

OPERATING CYCLE

Operating cycle is the length of time for a company to acquire materials, produce the
product, sell the product, and collect the proceeds from customers.

The objective of financial management is to maximize the shareholders wealth. So it is

needed to generate sufficient profits. The profits generated depend mainly on sales
volume.

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As there is a time lag between sales and realization of receivables there is a need for
sufficient working capital to deal with the problem which arises due to lack of immediate
realization of cash against goods sold. The operating cycle is the length of time required
for conversion of non-cash assets into cash. This operating cycle refers to the time taken
for the conversion of cash into raw material, raw materials into work-in-progress, work-
in-progress into finished goods, finished into receivables into cash and this cycle repeats.

The length of operating cycle can be calculated by calculating periods of raw material
storage, work in process, finished gods storage and debtors collection period.

1. Raw materials storage period = Average stock of raw materials and stores/
Average daily consumption of raw material and stores
2. Work in process period = Average work in process inventory /Average cost
of production per day.
3. Finished goods storage period = Average finished goods inventory / Average
cost of goods sold per day.
4. Debtors collection period = Average book debts / Average credit sales per
day.
5. Length of operating cycle = 1+2+ 3+4

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.

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 2. Fund flow analysis.
3. Budgeting.

 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:

 Current ratio.
 Quick ratio.
 Inventory turnover.
 Receivables turnover.
 Working capital turnover ratio.

 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:

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.

 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

33
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. 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.

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35
  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 liabilities

The two components of this ratio are:

1) Current assets
2) Current liabilities

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.

 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 asset/current liabilities

Where Quick Assets are:

1. Marketable Securities.
2. Cash in hand and Cash at bank.
3. Debtors.

36
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.

A. CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits. The
efficiency with which assets are managed directly affects the volume of sales. The better
the management of assets, large is the amount of sales and profits. Current assets
movement ratios measure the efficiency with which a firm manages its resources. These
ratios are called turnover ratios because they indicate the speed with which assets are
converted or turned over into sales. Depending upon the purpose, a number of turnover
ratios can be calculated. These are -

1. Inventory Turnover Ratio.

2. Debtors Turnover Ratio.
3. Working Capital Turnover Ratio.

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 1) INVENTORY TURNOVER OR STOCK TURNOVER RATIO :

Every firm has to maintain a certain amount of inventory of finished goods so as to meet
the requirements of the business. But the level of inventory should neither be too high nor
too low. Because it is harmful to hold more inventory as some amount of capital is
blocked in it and some cost is involved in it. It will therefore be advisable to dispose the
inventory as soon as possible.

Inventory turnover ratio = cost of goods sold/average inventory

Inventory turnover ratio measures the speed with which the stock is converted into sales.
Usually a high inventory ratio indicates an efficient management of inventory because
more frequently the stocks are sold; the lesser amount of money is required to finance the
inventory. Whereas low inventory turnover ratio indicates the inefficient management of
inventory.

Average stock = opening stock + closing stock/2

2) DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to increase its sales and a liberal
credit policy may result in tying up substantial funds of a firm in the form of trade
debtors.

a) Debtors Turnover Ratio.

b) Average Collection Period

A) Debtors turnover ratio = total sales (credit)/average debtors

Debtor’s velocity indicates the number of times the debtors are turned over during a year.
Generally higher the value of debtor’s turnover ratio the more efficient is the
management of debtors/sales or more liquid are the debtors. Whereas a low debtors
turnover ratio indicates poor management of debtors/sales and less liquid debtors. This

38
ratio should be compared with ratios of other firms doing the same business and a trend
may be found to make a better interpretation of the ratio.

Average debtors = opening debtors + closing debtors/2

B) Average collection period :

Average Collection Period =    No. of working days/debtors turnover ratio

3) WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of net working capital.
This ratio indicates the number of times the working capital is turned over in the course
of the year. This ratio measures the efficiency with which the working capital is used by
the firm. A higher ratio indicates efficient utilization of working capital and a low ratio
indicates otherwise. But a very high working capital turnover is not a good situation for
any firm.

Working Capital Turnover Ratio = Cost of Sales/Net Working Capital

Working Capital Turnover = Sales/Networking Capital

FINANCIAL STATEMENTS

Financial statement is a collection of data organized according to logical and consistent

accounting procedure to convey an under-standing of some financial aspects of a business
firm. It may show position at a moment in time, as in the case of balance sheet or may
reveal a series of activities over a given period of time, as in the case of an income
statement. Thus, the term ‘financial statements’ generally refers to the two statements

1. The position statement or Balance sheet.

2. The income statement or the profit and loss Account.

39
OBJECTIVES OF FINANCIAL STATEMENTS

According to accounting Principal Board of America (APB) states the following

objectives of financial statements: -

1. To provide reliable financial information about economic resources and

obligation of a business firm.
2. To provide other needed information about charges in such economic resources
and obligation.
3. To provide reliable information about change in net resources (recourses less
obligations) missing out of business activities.

LIMITATIONS OF FINANCIAL STATEMENTS

Though financial statements are relevant and useful for a concern, still they do not
present a final picture a final picture of a concern. The utility of these statements is
dependent upon a number of factors. The analysis and interpretation of these statements
must be done carefully otherwise misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in
these statements is only approximate. The actual value can only be determined
when the business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods,
generally one year, during the life of a concern. The costs and incomes are
apportioned to different periods with a view to determine profits etc. The
allocation of expenses and income depends upon the personal judgment of the
accountant. The existence of contingent assets and liabilities also make the
statements imprecise. So financial statement are at the most interim reports rather
than the final picture of the firm.

40
 3. The financial statements are expressed in monetary value, so they appear to give
final and accurate position. The value of fixed assets in the balance sheet neither
represent the value for which fixed assets can be sold nor the amount which will
be required to replace these assets. The balance sheet is prepared on the
presumption of a going concern. The concern is expected to continue in future. So
fixed assets are shown at cost less accumulated depreciation. Moreover, there are
certain assets in the balance sheet which will realize nothing at the time of
liquidation but they are shown in the balance sheets.
4. There are certain factors which have a bearing on the financial position and
operating result of the business but they do not become a part of these statements
because they cannot be measured in monetary terms. The basic limitation of the
traditional financial statements comprising the balance sheet, profit & loss A/c is
that they do not give all the information regarding the financial operation of the
firm. Nevertheless, they provide some extremely useful information to the extent
the balance sheet mirrors the financial position on a particular data in lines of the
structure of assets, liabilities etc. and the profit & loss A/c shows the result of
operation during a certain period in terms revenue obtained and cost incurred
during the year. Thus, the financial position and operation of the firm.

FINANCIAL STATEMENT ANALYSIS

It is the process of identifying the financial strength and weakness of a firm from the
available accounting data and financial statements. The analysis is done calculations of
ratios. Ratios are relationship expressed in mathematical terms between figures, which
are connected with each other in some manner.

41
 CHAPTER – 3

LITERATURE REVIEW

42
43
44
INTRODUCTION

A literature review is a body of text that aims to review the critical points of current knowledge
including substantive findings as well as theoretical and methodological contributions to a
particular topic. Literature reviews are secondary sources, and as such, do not report any new or
original experimental work.

Simai Haji Mati was quoted saying that literature review should be referred to as reviewing and
analyzing the work of literature in relation to the specified topic in research.

A well-structured literature review is characterized by a logical flow of ideas; current and

relevant references with consistent, appropriate referencing style; proper use of terminology; and
an unbiased and comprehensive view of the previous research on the topic.

LITERATURE REVIEW ON WORKING CAPITAL MANAGEMENT

There is no doubt about the criticality of this issue to firms as holding too much working capital
is inefficient and holding too little is dangerous to the organization's survival. This study looks at
how to investigate the methods of managing the working capital and identifies how organization
creates balance in their working capital.

IMPACT OF WORKING CAPITAL MANAGEMENT POLICIES ON CORPORATE

PERFORMANCE—AN EMPIRICAL STUDY

Sushma Vishnani, Bhupesh Kr. Shah (2007)

It is felt that there is the need to study the role of working capital management policies on
profitability of a company. Conventionally, it has been seen that if a company desires to take a
greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its
sales. If it is interested in improving its liquidity, it increases the level of its working capital.
However, this policy is likely to result in a reduction of the sales volume, therefore of
profitability. Hence, a company should strike a balance between liquidity and profitability. In
this paper an effort has been made to make an empirical study of Indian Consumer Electronics
Industry for assessing the impact of working capital policies & practices on profitability during

45
the period 1994–95 to 2012–13. The impact of working capital policies on profitability has been
examined by computing coefficient of correlation and regression analysis between profitability
ratio and some key working capital policy indicator ratios.

THE EFFECT OF WORKING CAPITAL MANAGEMENT ON FIRM

PROFITABILITY: EVIDENCE FROM TURKEY

F. Samiloglu and K. Demirgunes (2008)

The aim of this study is to analyze the effect of working capital management on firm
profitability. In accordance with this aim, to consider statistically significant relationships
between firm profitability and the components of cash conversion cycle at length, a sample
consisting of Istanbul Stock Exchange (ISE) listed manufacturing firms for the period of 1998-
2007 has been analyzed under a multiple regression model. Empirical findings of the study show
that accounts receivables period, inventory period and leverage affect firm profitability
negatively; while growth (in sales) affects firm profitability positively.

WORKING CAPITAL MANAGEMENT, GROWTH AND PERFORMANCE OF NEW

PUBLIC COMPANIES

The current study contributes to the literature by examining impact of working capital
management on the operating performance and growth of new public companies. The study also
sheds light on the relationship of working capital with debt level, firm risk, and industry. Using a
sample of initial public offerings (IPO's), the study finds a significant positive association
between higher levels of accounts receivable and operating performance. The study further finds
that maintaining control (i.e. lower amounts) over levels of cash and securities, inventory, fixed
assets, and accounts payables appears to be associated with higher operating performance, as
well. We find that IPO firms which are experiencing unusually high growth tend not to perform
as well as those with low to moderate growth. Further firms which are experiencing high growth
tend to hold higher levels of cash and securities, inventory, fixed assets, and accounts payables.
These findings tend to suggest that firms are willing to sacrifice performance (accept low or
negative operating returns) to increase their growth levels. The higher level of growth is also

46
associated with higher operating and financial risk. The findings of this study suggest that
perhaps IPO firms should stay more focused on their operating performance than on maintaining
high growth levels.

WORKING CAPITAL AND FINANCIAL MANAGEMENT PRACTICES IN THE

SMALL FIRM SECTOR

Michael J. Peel ,Nicholas Wilson (2008)

MICHAEL J. PEEL IS A LECTURER IN accountancy and finance at Cardiff Business School,

University of Wales, and Nicholas Wilson is Professor of Credit Management at the University
of Bradford, England. Very little research has been conducted on the capital budgeting and
working capital practices of small firms. The purpose of this paper is to present the results of a
preliminary study on the working capital and financial management practices of a sample of
small firms located in the north of England. In general, the results of the survey indicated that a
relatively high proportion of small firms in the sample claimed to use quantitative capital
budgeting and working capital techniques and to review various aspects of their companies'
working capital. In addition, the firms which claimed to use the more sophisticated discounted
cash flow capital budgeting techniques, or which had been active in terms of reducing stock
levels or the debtors' credit period, on average tended to be more active in respect of working
capital management practices.

STUDY ON WORKING CAPITAL MANAGEMENT

Stuttgart/Munich, June 29, 2009

Roland Berger Strategy Consultants study on working capital management: Optimizing current
assets helps tap into cash potential and build buffers against insolvency

 Our study entitled "Working capital – Cash for recovery" looks at 216 European
companies with total sales of EUR 3,700 billion and total EBIT of EUR 422 billion.

47
  Presently, the insolvency risk is increasing as higher cash requirements coincide with
reduced cash supply and high financing costs.
 Internal sources of finance are becoming more interesting: one of the main levers is
tapping into the cash potential in working capital.

In the current economic situation, companies are facing a higher risk of insolvency. On the one
hand, they need more cash; on the other, lenders are more tightfisted than usual and the financing
costs are higher. In its study entitled "Working capital – Cash for recovery", Roland Berger
Strategy Consultants has analyzed 216 European companies by taking a close look at their
internal sources of finance. The result? At the moment, releasing the cash reserves hidden in
working capital offers the greatest potential for improving liquidity. According to the Roland
Berger experts, the companies surveyed had a total cash potential of EUR 353 billion. This
turned out to be especially true for utilities and engineered products companies.

"In the current recession, working capital is emerging as a key source of internal finance," says
Roland Schwientek, Partner at Roland Berger's Operations Strategy Competence Center.
Increased cash requirements and a reduced cash supply with higher financing costs combine to
increase the likelihood of insolvency. In their study called "Working capital – Cash for
recovery", the experts highlight alternative sources of internal finance: "As some traditional
sources of cash have dried up, the most promising solution is to tap into the liquidity potential
hidden in working capital," says Schwientek. According to the experts, internal finance based on
optimized working capital is much more effective than external finance. Even small
improvements in receivables, inventories and payables can generate significant reductions in
external finance requirements.

48
 PURPOSE OF STUDY

The objectives of this project were mainly to study the inventory, cash and receivable at HCL
learning, but there are some more and they are -

The main purpose of our study is to render a better understanding of the concept
“Working Capital Management”.
To understand the planning and management of working capital at HCL Learning.
To measure the financial soundness of the company by analyzing various ratios.
To suggest ways for better management and control of working capital at the concern.

49
 CHAPTER – 4
RESEARCH METHODOLOGY

4.1 BACKGROUND OF THE PROBLEM

At HCL a substantial part of the total assets are covered by current assets. Current assets from
around 80% of the total assets. However this could be less profitable on the assumption that
current assets generate lesser returns as compared to fixed assets.

But in today’s competition it becomes mandatory to keep large current assets in form of
inventories so as to ensure smooth production an excellent management of these inventories has
to be maintained to strike a balance between all the inventories required for the production.

So, in order to manage all these inventories and determine the investments in each inventories,
the system call for an excellent management of current assets which is really a tough job as the
amount of inventories required are large in number.

Here comes the need of working capital management or managing the investments in current
assets. Thus in big companies like HCL it is not easy at all to implement a good working capital
management as it demands individual attention on its different components.

So, I have been given this topic to make an in-depth analysis and detailed study to come out with
a clear magnified view as to whether the management of working capital at HCL is sound or not.

4.2 RESEARCH OBJECTIVES OF THE STUDY

This research Project covers the two most important aspects or features of the functioning of the
Finance and Accounts Department of the HCL.

The first part is both, an analytical as well as an academic study that involves an analysis of the
working capital and working capital management policies of the organization i.e. HCL.

50
The main objectives of this study are –

 To understand the working capital management policies of the organization.

 To understand the importance of working capital management.
 To analyze the liquidity position of the organization.
 To analyze the short-term financing policies and patterns, which affect the working
capital of the organization?
 To study the factor that affects the working capital management at HCL.
 To find out the profitability and operational efficiency of the organization.

4.3 RESEARCH METHODOLOGY

Methodology includes the overall research procedures, which are followed in the research study.
This includes Research design, the sampling procedures, and the data collection method and
analysis procedures. To broad methodologies can be used to answer any research question-
experimental research and non-experimental research. The major difference between the two
methodologies lies in the control of extraneous variables by the intervention of the investigator in
the experimental research.

4.3.1 RESEARCH DESIGN

A research design is defined, as the specification of methods and procedures for acquiring the
Information needed. It is a plant or organizing framework for doing the study and collecting the
data. Designing a research plan requires decisions all the data sources, research approaches,
Research instruments, sampling plan and contact methods.

Research design is mainly of following types: -

1. Exploratory research.
2. Descriptive studies

Exploratory research - Exploratory research is a type of research conducted for a problem that
has not been clearly defined. Exploratory research helps determine the best research design, data

51
collection method and selection of subjects. It should draw definitive conclusions only with
extreme caution. Given its fundamental nature, exploratory research often concludes that a
perceived problem does not actually exist. The major purposes of exploratory studies are the
identification of problems, the more precise formulation of problems and the formulations of
new alternative courses of action. The design of exploratory studies is characterized by a great
amount of flexibility and ad-hoc veracity.

Exploratory research often relies on secondary research such as reviewing available literature
and/or data, or qualitative approaches such as informal discussions with consumers, employees,
management or competitors, and more formal approaches through in-depth interviews, focus
groups, projective methods, case studies or pilot studies. The Internet allows for research
methods that are more interactive in nature. The results of exploratory research are not usually
useful for decision-making by themselves, but they can provide significant insight into a given
situation. Although the results of qualitative research can give some indication as to the "why",
"how" and "when" something occurs, it cannot tell us "how often" or "how many".

Descriptive research - Descriptive research, also known as statistical research, describes data
and characteristics about the population or phenomenon being studied. Descriptive research
answers the questions who, what, where, when and how...

Although the data description is factual, accurate and systematic, the research cannot describe
what caused a situation. Thus, Descriptive research cannot be used to create a causal
relationship, where one variable affects another. In other words, descriptive research can be said
to have a low requirement for internal validity.

The description is used for frequencies, averages and other statistical calculations. Often the best
approach, prior to writing descriptive research, is to conduct a survey investigation. Qualitative
research often has the aim of description and researchers may follow-up with examinations of
why the observations exist and what the implications of the findings are.

In short descriptive research deals with everything that can be counted and studied. But there are
always restrictions to that. Your research must have an impact to the lives of the people around

52
you. The major purpose of descriptive research is to give a description of the state of affairs, as it
exists in the present. The main characteristic of this method is that researcher has no control over
the variables. The researcher can only report what has happened or what is happening. What,
where, When, How are the researcher and not “Why”. Descriptive Report is that subscription
which answers or addresses all these questions. The study mainly based on the secondary data
which refers to that form of information that has been already collected and is available. These
include some internal sources within the company and externally these sources include books
and periodicals, published reports and data of HCL and the annual reports of the company.
Interaction with the various employees of the accounts department has also been a major source
of information. The Data & Financial result of the past five years have been taken into
consideration for analysis and calculations.

4.3.2 DATA COLLECTION

Data collection is a term used to describe a process of preparing and collecting data. The purpose
of data collection is to obtain information to keep on record, to make decisions about important
issues, to pass information on to others. Primarily, data is collected to provide information
regarding a specific topic.

As we all know that while making project on working capital management all the data required is
secondary data because all the relevant information will be available in the annual reports.

Secondary data – Secondary data is data collected by someone other than the user. Common
sources of secondary data for social science include censuses, surveys, organizational records
and data collected through qualitative methodologies or qualitative research. Primary data, by
contrast, are collected by the investigator conducting the research.

Secondary data analysis saves time that would otherwise be spent collecting data and,
particularly in the case of quantitative data, provides larger and higher-quality databases than
would be unfeasible for any individual researcher to collect on their own. In addition to that,
analysts of social and economic change consider secondary data essential, since it is impossible
to conduct a new survey that can adequately capture past change and/or developments.

53
Advantages of Secondary data

1) It is economical. It saves efforts and expenses.

2) It is time saving.
3) It helps to make primary data collection more specific since with the help of secondary
data, we are able to make out what are the gaps and deficiencies and what additional
information needs to be collected.
4) It helps to improve the understanding of the problem.
5) It provides a basis for comparison for the data that is collected by the researcher.

Disadvantages of Secondary Data

1) Secondary data is something that seldom fits in the framework of the marketing research
factors. Reasons for its non-fitting are:-
1.1. Unit of secondary data collection-Suppose you want information on disposable income,
but the data is available on gross income. The information may not be same as we
require.
1.2. Class Boundaries may be different when units are same.
1.3. Thus the data collected earlier is of no use to you.
2) Accuracy of secondary data is not known.
3) Data may be outdated.

Evaluation of Secondary Data

Because of the above mentioned disadvantages of secondary data, we will lead to evaluation of
secondary data. Evaluation means the following four requirements must be satisfied:-

1) Availability - It has to be seen that the kind of data you want is available or not. If it is
not available then you have to go for primary data.
2) Relevance - It should be meeting the requirements of the problem. For this we have two
criterion:-
i) Units of measurement should be the same.
ii) Concepts used must be same and currency of data should not be outdated.

54
 3) Accuracy - In order to find how accurate the data is, the following points must be
considered: -
i) Specification and methodology used;
ii) Margin of error should be examined;
iii) The dependability of the source must be seen.
4) Sufficiency - Adequate data should be available.

Sources of Secondary Data - Following are the main sources of secondary data:

1. Official Publications: Publications of the HCL LEARNING or the by the corporate office of
HCL LEARNING.
2. Unpublished Data: Data may be obtained from several companies, organizations, working in
the same areas. For example, data on HCL LEARNING by magazines.

4.3.3 LIMITATION OF THE STUDY:

The topic working capital management is itself a very vast topic yet very important also. In my
view my study of the working capital management has certain limitation. Because I just spent
only eight weeks in the HCL LEARNING and whatever information during that short period I
could gather, I am working upon that. Thus my study does not present an overall view of the
working capital management at “HCL LEARNING”. Due to time restraints it was not possible to
study in depth in get knowledge what practices are followed at HCL LEARNING. Nevertheless,
many facts and data are such that they are not to be disclosed because of the confidential nature
of the same. Hence because of that I cannot express any opinions upon various issues which it
limits the scope of my study. However I have tried to give an understanding of Working capital
management in as much as detail as possible.

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 CHAPTER – 5

ANALYSIS AND INTERPRETATION

RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements. It is the

process of establishing and interpreting various ratios for helping in making decisions. It only
means of better understanding of financial strengths and weaknesses of a firm. The main
emphasis has been on calculating the ratios related to a working capital management.

 LIQUIDITY RATIOS

These are the ratios which measures the short term solvency or financial position of a firm. In
other words, it refers to the ability of a concern to meet its current obligations as and when these
become due. To measure the liquidity of a firm, the following ratios can be calculated.

CURRENT RATIO

It may be defined as the relationship between current assets and current liabilities. This ratio
measures the ability of the firm to meet current liabilities. High current ratio indicates firm is
liquid and has the ability to pay its current obligations in time as and when they become due.

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.

Current Ratio = Current Assets

Current Liabilities

Table 5.1 – Current Assets and Current Liabilities

Years 2010 2011 2012 2013 2014

Current Assets 1543 2160 2704 2912 3615

56
Current Liabilities 1143 1475 1712 2014 2356

Current Ratio 1.35 1.46 1.58 1.45 1.53

Graph 5.1 – Current Ratio

Current Ratio
1.6
1.55
1.5
1.45
Current Ratio
1.4
1.35
1.3
1.25
1.2
2010 2011 2012 2013 2014

Interpretation - The ideal ratio is supposed to be 2:1. The higher the current ratio, the more
protected are the short term creditors. This also indicates that the firm is in a position to pay off
its creditors.
Company’s current ratio is quite good near to the idle position but the point of concern is that it
is not up to the mark or standard. The company has to focus on it so that it can increase it up to
the standard and can make creditors feel more secure.

LIQUID RATIO

This ratio is also known as quick ratio or acid test ratio. It is a more rigorous test of liquidity than
the current ratio. It is based on those current assets which are highly liquid. Inventory and

57
prepaid expenses are excluded because they are deemed to be least liquid component of current
assets. A high quick ratio is the indication that the firm is liquid and has the ability to meet its
current liabilities in time and on the other hand low ratio represents liquidity position is not good.

Quick Ratio = Quick or Liquid Assets

Current Liabilities

Quick Assets = Current Assets – Inventory – Prepaid Expenses

Table 5.2 – Quick Assets and Current Liabilities

Years 2010 2011 2012 2013 2014

Quick Assets 1265 1301 1666 1832 2497
Current Liabilities 1143 1475 1712 2014 2356
Quick Ratio 1.10 0.88 0.97 0.91 1.06

GRAPH 5.2 – QUICK RATIO

Quick Ratio
1.2

0.8
Quick Ratio
0.6

0.4

0.2

0
2010 2011 2012 2013 2014

58
Interpretation- Traditionally, a quick ratio of 1:1 is considered to be satisfactory or idle ratio.
But the company has too high quick ratio which indicates that the company’s cash position is
very good.
As per calculation of liquid ratio the performance of the company is not good because it is
decreasing in the year 2010 to 2014 1.1 to 0.91 respectively but in the year 2013 to 2014 it again
increased from 0.91 to 1.06 which is good for the company.

 WORKING CAPITAL RATIOS

WORKING CAPITAL TURNOVER RATIO

Working capital turnover ratio indicates the velocity of the utilization of net working capital.
This ratio measures the efficiency with which the working capital is being used by a firm.

Working Capital Turnover Ratio = (COGS) or (Sales)

Net Working Capital

Table 5.3 – Sales and Net Working Capital

Years 2010 2011 2012 2013 2014

Sales 2295 11648 12411 12211 11953
Working capital 400 685 992 898 1259
Working capital 5.74 17 12.51 13.59 9.49
turnover ratio

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 Graph 5.3 – Working Capital Turnover Ratio

Working Capital Turnover Ratio

18

16

14

12

10 Working Capital Turnover Ratio

0
2010 2011 2012 2013 2014

Interpretation- The higher is the ratio, the lower is the investment in working capital and the
greater are the profits. On the other hand a low working capital turnover ratio indicates that
working capital is not efficiently utilized.
So, according to my analyses company is doing well till 2011. After 2011 there is a fluctuation in
the ratio because it decreases in the year 2008 12.51 and again increases in the year 2013 to
13.22 but again decrease in 2014 it decreases to 9.49. So, overall company’s working capital
turnover ratio is good.

STOCK TURNOVER RATIO

This ratio tells the story by which stock is converted into sales. A high stock turnover ratio
reveals the liquidity of the inventory i.e., how many times on an average, inventory is turned
over or sold during the year.

Stock or inventory turnover ratio = cogs or sales

Average stock

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 Table 5.4 – Cost Of Goods Sold and Average Stock

Years 2010 2011 2012 2013 2014

Cost of goods 1919.11 10781.80 11166.95 11128.50 10869.63
sold
Average stock 240.31 791.73 898.37 888.26 835.40
Stock turnover 7.98 13.62 12.43 12.52 13.01
ratio

Graph 5.4 – Stock Turnover Ratio

Stock Turnover Ratio

16

14

12

10
Stock Turnover Ratio
8

0
2010 2011 2012 2013 2014

Interpretation - Inventory turnover ratio indicates the number of time the stock has been turned
over during the period and evaluates the efficiency with which a firm is able to manage its
inventory. Higher the ratio better it is because this indicates that more sales are being produced
by a unit of investment in stock.
As per the calculation there is a great fluctuation in the stock turnover ratio. It decreases in the
year 2012 but again pick up in 2009 to 12.53. In 2012 company suffer and ratio fall down to
12.43 but in 2010 company perform well and the ratio increases to 13.01.

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Overall company maintains a healthy rate of stock turnover ratio which is good.

DEBTOR TURNOVER RATIO

It indicates the velocity of debt collection of a firm. In simple words it indicates the number of
times average debtors (receivable) are turned over during a year.

Debtors Turnover Ratio = Net Credit Sales

Average Trade Debtors

Average Trade Debtors = (opening + closing) debtors + (opening + closing) bills receivables

Table 5.5 - Net Credit Sales and Average Debtors

Year 2010 2011 2012 2013 2014

Net credit sales 2295 11648 12411 12211 11953
Average trade 511.26 1002.51 1241.26 1498.26 1956.92
debtors
Debtors turnover 4.49 11.62 9.99 8.15 6.11
ratio

Graph 5.5 – Debtors Turnover Ratio

Debtors Turnover Ratio

14
12
10
8 Debtors Turnover Ratio

6
4
2
0
2006 2011 2012 2013 2014

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Interpretation - In general, the higher the value of debtor’s turnover the more efficient is the
management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio
implies inefficient management of debtors or less liquid debtors.

Company is suffering in the case of debtor’s turnover ratio except the year 2011 because in that
year the ratio is highest but it again fall down in 2008 to 9.99 and same in 2013 to 8.15 and in
2014 to 6.11. It means the debtors are not much liquid.

AVERAGE COLLECTION PERIOD

The average collection period ratio represents the average number of days for which a firm has to
wait before its debtors are converted into cash.

Average collection period = No. of days in a year

Debtor’s turnover ratio

Table 5.6 – No. Of Days in a Year and Debtors Turnover Ratio

Years 2010 2011 2012 2013 2014

No. of days in a year 365 365 365 365 365
Debtors turnover ratio 4.49 11.62 9.99 8.15 6.11
Average collection period 81 31 36 45 60

Graph 5.6 – Average Collection Period

Average Collection Period

90
80
70
60
Average Collection Period
50
40
30
20
10
0
2010 2011 2012 2013 2014

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Interpretation – In 2010, the average collection period is 81 days which means that the debtors
pay the money after a very long time period. In 2011 it decreases to 31 days approx but from
2012 – 2014 it again increases which means that company is not able to collect the money from
the debtors on the due date and needs a huge amount of working capital to operates its working
cycle.

 PROFITABILITY RATIOS

GROSS PROFIT RATIO

It is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship
between gross profit and sales. Gross profit is obtained by deducting cost of goods sold from net
sales. Net sales are basically determined by deducting sales returns from sales.

It evaluates the effectiveness of business. It indicates the efficiency of firm in terms of its
production and how much it has gained profit. Gross profit reflects the profit firm has made on
cost of goods sold.

Gross profit ratio = (Gross profit / Net sales) × 100

Table 5.7 – Gross Profit and Net Sales

Year 2010 2011 2012 2013 2014

Gross profit 411 417 497 454 396

Net sales 2295 11648 12411 12211 11953

Gross profit 17.25 3.89 4.01 3.42 3.43

ratio

64
 GRAPH 5.7 – GROSS PROFIT RATIO

Gross profit ratio

20
18
16
14
12
Gross profit ratio
10
8
6
4
2
0
2010 2011 2012 2013 2014

Interpretation – We can able to see that gross profit in 2010 is 17.25% which decreases by 5
times in 2011 but in 2012 it again increases but in 2013 and 2014 it remains same. From this we
can able to interpret that company is doing a lot of expenditure on direct expenses.

NET PROFIT RATIO

The net profit percentage is the ratio of after-tax profits to net sales. It reveals the remaining
profit after all costs of production and administration has been deducted from sales, and income
taxes recognized. As such, it is one of the best measures of the overall results of a firm,
especially when combined with an evaluation of how well it is using its working capital. Net
profit is not an indicator of cash flows, since net profit incorporates a number of non-cash
expenses, such as accrued expenses and depreciation.

Net profit ratio = Net profit × 100

Net sales

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 Table 5.8 – Net Profit and Net Sales

Year 2010 2011 2012 2013 2014

Net profit 280 316 300 240 242
Net sales 2295 11648 12411 12211 11953
Net profit 12.2 2.72 2.42 1.97 2.02
ratio

Graph 5.8 – Net Profit Ratio

Net profit ratio

14

12

10

8 Net profit ratio

0
2006 2011 2012 2013 2014

Interpretation – We can able to see that gross profit in 2010 is 12.2% which decreases from
2011 till 2013 but in 2014 it again increased which is good for the company. From this we can
able to interpret that company is doing a lot of expenditure on indirect expenses.

66
 FINDINGS

The working capital position of the company is not sound and the various sources
through which it is funded are optimal.
By conducting the study about working capital management, it is found out that working
capital management of HCL LEARNING is not so good. HCL LEARNING has not
sufficient funds to meet its current obligation every time.
The sales and collection policy that get along with the receivables management of the
firm is not up to the standard.
The various ratios calculated are an indicator as to the fact that the profitability of the
firm and sales are not so rising and also the deletion of the inefficiencies in the working
capital management.
The firm has not compromised on profitability despite the high liquidity is commendable.
HCL has reached a position where the default costs are as low as negligible and where
they can readily factor their accounts receivables for availing finance is noteworthy.

67
 CHAPTER - 6

CONCLUSION & SUGGESTION

SUGGESTION

The management of working capital plays a vital role in running of a successful business. So,
things should go with a proper understanding for managing cash, receivables and inventory.

HCL Learning is managing its working capital in a good manner, but still there is some scope
for improvement in its management. This can help the company in raising its profit level by
making less investment in accounts receivables and stocks etc. This will ultimately improve
the efficiency of its operations. Following are few recommendations given to the company in
achieving its desired objectives:

The business runs successfully with adequate amount of the working capital but the
company should see to it that the cash should not be tied up in excessive amount of
working capital.
Though the present collection system is near perfect, the company as due to the
increasing sales should adopt more effective measures so as to counter the threat of bad
debts.
The over purchasing function should be avoided as it could lead to liquidity problems.
The investment of cash in marketable securities should be increased, as it is very
profitable for the company.
Holding of excessive and insufficient stock must be avoided as it creates a burden on
the cash resources of a business and results in lost sales, delays for customers, etc
respectively.
The unit should also adopt proper inventory control like ABC analysis etc. This
inventory system can make the inventory management more result oriented. The EOQ
can be followed in stores.

68
 CONCLUSION

HCL is a good company to work in for. It has good reputation in the market. To maintain the
same reputation in the market it has to work on the improvement on it working capital
management. As a finance manager, working capital is the lifeline of every industry, irrespective
of whether it’s a manufacturing industry, services industry. Working Capital is the prime and
most important requirement for carrying out the day to day operations of the business. Working
Capital gives the much-needed liquidity to the business. Working Capital Finance reduces the
overall fund requirement, required to build up the Current Assets, which in turn help you
improve your Turnover Ratio. The company is performing exceptionally well due to the up
wising in the global market followed by the domestic market. It is an upcoming one with good
and innovative ideas and believed in improving all the areas of its operations. The company has a
good liquidity position and does not delay its commitment in case of both its creditors and
debtors. The company being mostly dependent on the working capital facilities, it is maintaining
very good relationship with their banks and their working capital management is well balanced.

1) The working capital position of the company is sound and the various sources through
which it is funded are optimal.
2) The company has used its dividend policy, purchasing, financing and investment
decisions to good effect can be seen from the inferences made earlier in the project.
3) The returns have been affected by a marked growth in working capital and return on
investment is good, but it got reduced.
4) The various ratios calculated are an indicator as to the fact that the profitability of the
firm and sales are on a rise and also the deletion of the inefficiencies in the working
capital management.
5) The firm has not compromised on profitability despite the high liquidity is commendable.

HCL has reached a position where the default costs are as low as negligible and where they can
readily factor their accounts receivables for availing finance is noteworthy.

Despite the fact that working capital management is a maturing profession still lacking a
generally accepted best practice and reporting structure, managers should not delay initiating

69
improvement projects. Managers can increase the efficiency of the cash conversion cycle
potentially by 3 – 7 days.

Economizing on cash trapped in working capital will be more important in the near future
because credit will no longer be as freely available as in the past and, if available, only at a
higher price. Basel III will force banks to adjust their income ratio for the credit risk taken in a
more sophisticated manner than before. This is likely to have a notable impact on all industries
and will differentiate more than ever before between strongly rated corporate and those corporate
with a low rating, an implied rating only or no rating at all.

Next to improving the cash conversion cycle, focus on working capital can unlock idle cash
balances outside the control of treasury leading to cost reductions in terms of process efficiency
and transparency of information.

70
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