INDEX

No. Particulars Page No:

1 Executive Summary 6

2 Objective & Scope of Project 2

3 Company Profile 3
4 Theoretical Methodology 4
5 Research Methodology
6 Data Analysis
7 Findings

8 Conclusion

9 Bibliography

7
 EXECUTIVE SUMMARY
Executive summary is the quick review of the whole project
report the study of working capital management. The study was
conducted at the head office of Kirloskar Pneumatic Co. Ltd. Pune. At
Kirloskar Pneumatic date manufacturing facilities, including CNC
machines, Stringent quality control procedures and systems,
research & development, a foundry, heat treatment facilities, screw
rotor machine, gear grinding machines, metallurgical laboratories,
tool room, and integrated computer system, have all been set up
with the sole idea of achieving the highest standards of quality
performance. The executives & staff collected the data
&also made use of company records & annual reports. the data
collected were then compiled, tabulated, and analyzed.
Working capital management is a very important facet of
financial management due to:
1) Investments in current assets represent a substantial portion
of total investment.
2) investments in current assets & the level of current liabilities
have to be geared quickly to change sales.
Some of the points to be studied under this topic are:
 How much cash should a firm hold?
 How & when to pay the creditors of the firm?
 What should be the firm’s credit policy?

8
 OBJECTIVES

1) To understand the concept and importance of working

capital management.
2) To understand the financial strength of the company.
3) To compare the financial ratios of working capital
management of Kirloskar pneumatic.
4) To analyze overall performance of the company.

9
 OVERVIEW OF KPCL
Established in 1958, Kirloskar pneumatic company limited started
with the manufacture of air compressors and pneumatic tools.
Immediately thereafter the company expanded its activation in the
field of air-conditioning and refrigeration machinery. Further
diversification in the manufacture of hydraulic power transmission
equipment followed.
Kirloskar pneumatic is held in high esteem for process system
engineering and turnkey project expertise. The result of its success in
this area is reflected in the company's association with virtually every
project and industry in the country.
At Kirloskar pneumatic, up-to-date manufacturing facilities, including
CNC stringent quality control procedures and system, Rand D,
foundry. heat treatment facilities, screw rotor machines, gear
grinding machines, metallurgical and metrological labs, a tool room,
and an integrated computer system have all been set up with the
sole idea of achieving the highest standards of quality and
performance.
KPLC is among the first few companies in India to secure the ISO
9001 certification in all its operations.
Companies’ products are manufactured under the survey of
renowned inspection agencies such as Lloyd's, MMD, IRS, NTPC, EIL,
PDIL, DGS and D, RITES, And many more. And are well accepted not
only in India but also in countries of Southeast Asia, Africa,the gulf,
the middle east, west Asia, Europe, and the U.S.
ACD (Air compressor divisiconsistssist of two subdivisions
。 ACD machine shop
。ACD assemb

10
11
 ORGANIZATION CHART
Mr. Suhas Kolhatkar (Vice President)

Asst. Vice Presindent

General Income and Sales Tax Cash Excise, Customs

Ledger and section &purchase Octroi, insurance
Branches Bill Section & Internal Audit

Cost Accounts Finance And Budgeting

Drs. For sales (Sec)

Managers
Asst. Managers

Officers

12
 INTRODUCTION
Management is the art of anticipating and preparing for risks and
uncertainties and overcoming obstacles. An essential precondition for
sound and consistent assets management is establishing sound and
consistent assets management policies covering fixed as well as
current assets. In modern financial management, efficient allocation
of funds has a great scope, in finance and profit planning, for the most
effective utilization of enterprise resources, the fixed and current
assets have to be combined in optimum proportions.

Working capital in simple terms means the amount of funds that a

company requires for financing its day-to-day operations. The
finance manager should develop sound techniques of managing
current assets.

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WHAT IS WORKING CAPITAL?
Working capital refers to the investment by the company in
short-term assets such as cash, and marketable securities. Net current
assets or net working capital refers to the current assets less than
current liabilities.
Symbolically, it means
Net Current Assets = Current Assets - Current Liabilities.
DEFINITIONS OF WORKING CAPITAL:
The following are the most important definitions of Working capital
1) "Working capital is the difference between the inflow and outflow
of funds. In other words, it is the net cash inflow
2) Working capital represents the total of all current assets. In other
words, it is the "Gross working capital, it is also known as "Circulating
capital" or "Current capital for current assets are rotating in their
nature.
3) Working capital is defined as "The excess of current assets over
current liabilities and provisions". In other words it is the "Net Current
Assets or Net Working Capital
IMPORTANCE OF WORKING CAPITAL
Working capital may be regarded as the lifeblood of the business.
Without insufficient working capital, any business organization cannot
run smoothly or successfully.
in the business, the Working capital is comparable to the blood of
the human body. Therefore the study of working capital is of major
importance to internal and external analysis because of its close
relationship with the current day-to-day operations of a business.

14
The inadequacy of mismanagement of working capital is the leading
cause of business

To meet the current requirements of a business enterprise such as

the purchases of services, raw materials, etc, working capital is
essential. It also pointed out that working capital is nothing but one
segment of the capital structure of a business.
In short, the cash and credit in the business are comparable to the
blood in the human body like finance's life and strength in profit of
solvency to the business enterprise. Financial management is called
upon to maintain always the right cash balance so that flow of funds
is maintained at a desirable speed not allowing slow down. Thus
enterprises can have a balance between liquidity and profitability.
Therefore the management of working capital is essential in each
and every activity.

WORKING CAPITAL MANAGEMENT

INTRODUCTION:
Working Capital is the key difference between long-term financial
management and short-term financial management in terms of the
timing of cash.
Long-term finance involves the cash flow over an extended period of
time 5 to 15 years, while short-term financial decisions involve cash
flow within a year or within the operating cycle. Working capital
management is short-term financial management.
Working capital management is concerned with the problems that
arise in attempting to manage the current assets, the current
liabilities & the interrelationship that exists between them. The

15
current assets refer to those assets which can be easily converted
into cash in the ordinary course of business, without disrupting the
operations of the firm,

⚫ Composition of working capital

• Major Current Assets
1) Cash
2) Accounts Receivables
3) Inventory
4) Marketable Securities

⚫ Major Current Liabilities

1) Bank Overdraft
2) Outstanding Expenses
3) Accounts Payable
4) Bills Payable
The Goal of Capital Management is to manage the firm's current
assets & liabilities so that a satisfactory level of working capital is
maintained. If the firm can not maintain a satisfactory level of
working capital, it likely to become insolvent & may be forced into
bankruptcy. To maintain the margin of safety current asset should be
large enough to cover its current assets
Main theme of the theory of working capital management is
interaction between the current assets & current liabilities.
CONCEPT OF WORKING CAPITAL:
There are 2 concepts:

16
✓ Gross Working Capita
✓Net Working Capital

17
Gross working capital-It is referred as total current assets.
Focuses on,
1) Optimum investment in current assets:
Excessive investments impairs firm's profitability, as idle
investment earns nothing. Inadequate working capital can threaten
solvency of the firm because of its inability to meet its current
obligations. Therefore there should be adequate investment in
current assets.
2)Financing of current assets:
Whenever the need for working capital funds arises, agreement
should be made quickly. If surplus funds are available they should be
invested in shortterm securities.
Net working capital (NWC)-defined by 2 ways. Difference between
current assets and current liabilities > Networking capital is that
portion of current assets which is financed with long term funds.
NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES
If the working capitalis efficiently managed then liquidity and
profitability both will improve. They are not components of working
capital but outcome of working capital. Working capital is basically
related with the question of profitability versus liquidity & related
aspects of risk.
Implications of Not Working Capital:
Net working capital is necessary because the cash outflows and
inflours do not coincide. In general the cash outflows resulting from
payments of current liability are relatively predictable. The cash
inflows are however difficult to predict. More predictable the cash
inflows are, the less NWC will be required. But where the cash
inflows are uncertain, it will be necessary to maintain current assets

18
at level adequate to cover current liabilities that are there must be
NWC
For evaluating NWC position, an important consideration is trade off
between probability and risk.
The term profitability is measured by profits after expenses. The
term risk is defined as the profitability that a firm will become
technically insolvent so that it will not be able to meet its obligations
when they become due for payment. The risk of becoming
technically insolvent is measured by NWC.
If the firm wants to increase profitability, the risk will definitely
increase If firm wants to reduce the risk, the profitability will
decrease
PLANNING OF WORKING CAPITAL:
Working capital is required to run day to day business operations.
Firms differ in their requirement of working capital (WC) Firm's aim is
to maximize the wealth of shareholders and to eam sufficient return
from its operations.
WCM is a significant facet of financial management. Its importance
stams from two reasons:
• Investment in current asset represents a substantial portion of
total investment.
• Investment in current assets and level of current liability has to
be geared quickly to change in sales.
Business undertaking required funds for two purposes:
• To create productive capacity through purchase of fixed assets.
• To finance current assets required for running of the business.
The importance of WCM is reflected in the fact that financial

19
managers spend a great deal of time in managing current assets and
current liabilities.The extent to which profit can be earned is
dependent upon the magnitude of sales. Sales are necessary for
earning profits. However, sales do not

20
convert into cash instantly, there is invariably a time lag between
sale of goods and the receipt of cash. WC management affect the
profitability and liquidity of the firm which are inversely proportional
to each other, hence proper balance should be maintained between
two.
To convert the sale of goods into cash, there is need for WC in the
form of current asset to deal with the problem arising out of
immediate realization of cash against good sold. Sufficient WC is
necessary to sustain sales activity. This is referred to as the operating
or cash cycle.
WORKING CAPITAL CYCLE:

A firm requires many years to recover initial investment in fixed

assets. On contrary the investment in current asset is turned over
many times a year. Investment in such current assets is realized
during the operating cycle of the firm.

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Each component of working capital (namely inventory, receivables
and payables) has two dimensions TIME and MONEY. When it comes
to managing working capital-TIME IS MONEY. If you can get money
to move faster around the cycle (eg. collect dues from debtors more
quickly) or reduce the amount of money tied up (eg. reduce
inventory levels relative to sales), the business will generate more
cash or it will need to borrow less money to fund working capital. As
a consequence, you could reduce the cost of bank interest or you'll
have additional free money available to support additional sales
growth or investment. Similarly, if you can negotiate improved terms
with suppliers eg. get longer credit or an increased credit limit, you
effectively create free finance to help fund future
It can be tempting to pay cash, if available, for fixed assets e.g.
computers. plant, vehicles etc. If you do pay cash, remember that
this is now longer available for working capital. Therefore, if cash is
tight, consider other ways of financing capital investment-loans,
equity, leasing etc. Similarly, if you pay dividends or increase
drawings, these are cash outflows and, like water flowing down a
plughole, they remove liquidity from the business.

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 If you…… Then………
•Collect receivables (debtors) •You release cash from the cycle.
Faster.
•Collect receivables debtors •your receivables soak up cash
Slower.
• Get better credit (in terms of • Your increase your cash
Duration from suppliers. Resources.
• Shift inventory faster •you free up cash.
•Move inventory slower. •You consume more cash.

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Operating cycle:
The working capital cycle refers to the length of time between the
firms paying the cash for materials, etc entering into production
process/stock & the inflow of cash from debtors (sales), suppose a
company has certain amount of cash it will need raw materials. Some
raw materials will be available on credit but, cash will be paid out for
the other part immediately. Then it has to pay labour costs & incurs
factory overheads. These three combined together will constitute
work in progress. After the production cycle is complete, work in
progress will get converted into sundry debtors Sundry debtors will
be realized in cash after the expiry of the credit period This cash can
be again used for financing raw material, work in progress etc. thus
there is complete cycle from cash to cash wherein cash gets
converted into raw material, work in progress, finished goods and
finally into cash again. Short term funds are required to meet the
requirements of funds during this time period. This time period is
dependent upon the length of time within which the original cash
gets converted into cash again. The cycle is also known as operating
cycle or cash cycle.

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Working capital cycle can be determined by adding the number of
days required for each stage in the cycle. For example, company
holds raw material on average for 60 days, it gets credit from the
supplier for 15 days, finished goods are held for 30 days & 30 days
credit is extended to debtors. The total days are 120, ie, 60-
15+15+15+30+30 days is the total of working capital.
Thus the working capital cycle helps in the forecast, control &
management of working capital. It indicates the total time lag & the
relative significance of its constituent parts. The duration may vary
depending upon the business policies. In light of the facts discusses
above we can broadly classify the operating cycle of a firm into three
phases viz.
1 Acquisition of resources.
2 Manufacture of the product and
3 Sales of the product (cash/credit).
First and second phase of the operating cycle result in cash
outflows, and be predicted with reliability once the production
targets and cost of inputs are known.
However, the third phase results in cash inflows which are not
certain because sales and collection which give rise to cash inflows
are difficult to forecast accurately.
Operating cycle consists of the following
• Conversion of cash into raw-materials • Conversion of raw-material
into work-in-progress:
• Conversion of work-in-progress into finished stockConversion of
finished stock into accounts receivable through sales and
• Conversion of accounts receivable into cash In the form of an
equation, the operating cycle process can be expressed.

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26
BALANCED WORKING CAPITAL POSITION

The firm should maintain a sound working capital position. It should

have adequate working capital to run its business operations. Both
excessive as well as inadequate working capital positions are
dangerous from the firm's point of view, Excessive working capital
not only impairs the firm's profitability but also result in production
interruptions and inefficiencies
The dangers of excessive working capital are as follows:
 It results in unnecessary accumulation of inventories. Thus,
chances of inventory mishandling, waste, theft and losses increase
> It is an indication of defective credit policy stack collections period.
Consequently, higher incidence of bad debts results, which adversely
affects profits.
> Excessive working capital makes management complacent which
degenerates into managerial inefficiency.
> Tendencies of accumulating inventories tend to make speculative
profits grow. This may tend to make dividend policy liberal and
difficult to cope with in future when the firm is unable to make
speculative profits
Inadequate working capital is also bad and has the following dangers:
> It stagnates growth. It becomes difficult for the firm to undertake
profitable projects for non-availability of working capital funds.
It becomes difficult to implement operating plans and achieve the
firm's profit target.
> Operating inefficiencies creep in when it becomes difficult even to
meet day commitments.
27
> Fixed assets are not efficiently utilized for the lack of working
capital funds. Thus, the firm's profitability would deteriorate.
> Paucity of working capital funds render the firm unable to avail
attractive credit opportunities etc
The firm loses its reputation when it is not in a position to honour its
short-term obligations.
As a result, the firm faces tight credit terms.
An enlightened management should, therefore, maintain the right
amount of working capital on a continuous basis. Only then a proper
functioning of business operations will be ensured. Sound financial
and statistical techniques, supported by judgment, should be used to
predict the quantum of working capital needed at different time
periods.
A firm's net working capital position is not only important as an index
of liquidity but it is also used as a measure of the firm's risk.
Risk in this regard means chances of the firm being unable to
meet its obligations on due date. The lender considers a positive net
working as a measure of safety. All other things being equal, the
more the net working capital a firm has, the less likely that it will
default in meeting its current financial obligations. Lenders such as
commercial banks insist that the firm should maintain a minimum
net working capital position.
DETERMINANTS OF WORKING CAPITAL
There are no set res or formula to determine the working capital
requirements of firms. A large number of factors, each having a
different importance, influence working capital needs of firms. Also,
the importance of factors changes for a firm over time. Therefore, an
analysis of relevant factors should be made in order to determine
total investment in working capital. The following is the description
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of factors that generally influence the working capital requirements
of firms
✓ Nature of Business
✓Sales and Demand Conditions
✓ Technology and Manufacturing Policy
✓Credit Policy
✓ Availability of Credit
✓Operating Efficiency
✓ Price Level Changes

Nature of Business:
The working capital requirements of a firm are basically influenced
by the nature of its business. Trading and financial firms have a very
small investment in fixed assets but require a large sum of money to
be invested in working capital. Retail stores, for example, must carry
large stocks of a variety of goods to satisfy the varied and continu
demandsmand of their customers. Some manufacturing businesses,
such as tobacco manufacturers and construction firms, also have to
invest substantially in working capital and a nominal amount in fixed
assets. In contrast, public utilities have a very limited need for
working capital and have to invest abundantly in fixed assets. Their
working capital requirements are nominal because they may have
only cash and supply services, not products. Thus, no funds will be
tied up in debtors and stock (inventories). Working capital requires
most of the manufacturing concerns to fall between the two extreme
requirements of trading firms and public utilities. Such concerns have

29
to make adequate investments in current assets depending upon the
total assets structure and other variables

Sales and Demand Conditions:

The working capital needs of a firm are related to its sales. It is
difficult to precisely determine the relationship between volume of
sales and working capital needs. In practice, current assets will have
to be employed before growth takes place. It is, therefore, necessary
to make advance planning of working capital for a growing firm on a
continuous basis
A growing firm may need to invest funds in fixed assets in order to
sustain its growing production and sales. This wit, in turn, increase
investment in current assets to support enlarged scale of operations.
It should be realized that a growing firm needs funds continuously. It
uses external sources as well as internal sources to meet increasing
needs of funds. Such a firm faces further financial problems when it
retains substantial portion of its profits. It would not be able to pay
dividends to shareholders. It is therefore, imperative that proper
planning be done by such companies to finance their increasing
needs for working capital.
Sales depend on demand conditions. Most firms experience seasonal
and cyclical fluctuations in the demand for their products and
services. These business variations affect the working capital
requirements, specially the temporary working capital requirement
of the firm. When there is an upward swing in the economy, sales
will increase correspondingly, the fem's investment in inventories
and debtors will also increase. Under boom, additional investment in
fixed assets may be made by some firms to increase their productive
capacity. This act of firm will require further additions of working
capital. To meet their requirements of funds for fixed assets and
30
current assets under boom further additions of working capital. To
meet their requirements of funds for fixed assets and current assets
under boom period, firms generally resort to substantial borrowing.
On the other hand, when there is a decline in the economy, sales will
fall and consequently, levels of inventories and debtors will also fall.
Under recessionary conditions, firms try to reduce their short term
borrowings
Seasonal fluctuations not only affect working capital requirements
but also create production problems for the firm. During periods of
peak demand. increasing production may be expensive for the firm.
Similarly, it will be more expensive during slack periods when the
firm has to sustain its working force and physical facilities without
adequate production and sales. A firm may, thus, follow a policy of
steady production, irrespective of seasonal changes in order to utilize
its resources to the fullest extent. Such a policy will mean
accumulation of inventories during off season and their quick
disposal during the peak season.
The increasing level of inventories during the stack season will
require increasing funds to be tied up in the working capital for some
months. Unlike cyclical fluctuations, seasonal fluctuations generally
conform to a steady pattern. Therefore, financial arrangements for
seasonal working capital requirements can be made in advance.
However, the financial plan or arrangement should be flexible
enough to take care of some abrupt seasonal fluctuations.
Technology and Manufacturing Policy
The manufacturing cycle (or the inventory conversion cycle)
comprises of the purchase and use of raw material the production of
finished goods. Longer the manufacturing cycle, larger will be the
firm working capital requirements. For example, the manufacturing
cycle in the case of a boler, depending on its size, may range

31
between six to twenty-four months. On the other hand, the
manufacturing cycle of products such as detergent powder, soaps,
chocolate etc. may be a few hours. An extended manufacturing time
span means a larger tie-up of funds in inventories. Thus, if there are
alterative technologies of manufacturing a product, the technological
process with the shortest manufacturing cycle may be chosen. Once
a manufacturing technology has been selected, it should be ensured
that manufacturing cycle is completed within the specified period.
This needs proper planning and coordination at all levels of activity.
Any delay in manufacturing process will results in accumulation of
work-in- process and waste of time. In order to minimize their
investment in working capital, some firms, especially firm
Manufacturing industrial products have a policy of asking for
advance payment from their customers. Non-manufacturing firms,
service and financial enterprises do not have a manufacturing cycle.
A strategy of constant production may be maintained in order to
resolvethe working capital problems arising due to seasonal changes
in the demand for the firm product. A steady production policy will
cause inventories to accumulate during the off- reason periods and
the firm will be exposed to greater inventory costs and risks. Thus, if
costs and risks of maintaining a constant production policy, varying
its production utilized for manufacturing varied products, can have
the advantage of diversified Activities and solve their working capital
problems. They will manufacture the original product line during its
increasing demand and when it has an off season, other products
may be manufactured to utilize physical resources and working
force. Thus, production policies will differ from firm to firm,
depending on the circumstances of individual firm.

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REQUIREMENTS OF FUNDS

Funds Requirements of Company

FIXED CAPITAL WORKING CAPITAL

- Premilinary Expenses - Raw Material
- Purchase of Fixed Assets - Inventories
- Establishment work exp - Goods in Prosses
- Fixed working capital - Others

Every company requires funds for investing in two types of capital Le

fixed capital, which requires long-term funds, and working capital,
which requires short-term funds.

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 SOURCES OF WORKING CAPITAL

Long term source short term source

(Fixed working capital) (Temporary working c)
a)Loan from financial institution a)Factoring
b)Floating of debenture b)Bill discounting
c)Accepting public deposits c)Bank overdraft
d)Issue of shares d)Trade credit
e)Cash credit
f)Commercial paper

Sources of additional capital include the following ;

1) Existing cash reserves.
2) Profits (when you secure it as cash)
3) Payables (credit from suppliers)
4) New equity or loans from shareholders
5) Bank overdrafts or lines of credit
6) Term loan

If you have insufficient working capital and try to sales, you can
easily overstretch the financial resources of the business. This is
called overtrading. Early warming signs include;

34
 1) Pressure on existing cash
2) Exceptional cash generating activities eg offering high
discounts forearly cash payment.
3) Bank overdraft exceeds authorized limit.
4) Seeking greater overdrafts or lines of credit.
5) Part-paying suppliers or other creditors.
6) Paying bills in cash to secure additional supplies
7) Management pre-occupation with surviving rather than
managing
8) Frequent short-term emergency requests to the bank (to
help pay wages, pending receipt of a cheque)

LONG TERM SOURCES

ISSUE OF SHRES
Ordinary shares are also known as equity shares and they are the
most common form of share in the UK. An ordinary share gives the
right to its owner to share in the profits of the company (dividends)
and to vote at general meetings of the company.
Since the profits of companies can vary wildly from year to year, so
can the dividends paid to ordinary shareholders. In bad years,
dividends may benothing whereas in good years they may be
substantial.
The nominal value of a share is the issue value of the share-it is the
valuewritten on the share certificate that all shareholders will be
given by the company in which they own shares.
The market value of a share is the amount at which a share is being
sold on the stock exchange and may be radically different from the
nominal value. When they are issued, shares are usually sold for

35
cash, at par and/or at a premium, Shares sold at par are sold nominal
value only so if Rs. 10 share is sold at par, the company selling the
share will receive Rs. 10 for every share it issues.
If a share is sold at a premium, as many shares are these days, then
the isue price will be the par value plus an additional premium.

36
DEBENTURES
Debentures are loans that are usually secured and are said to have
either fixed or floating charges with them.
A secured debenture is one that is specifically tied to the financing of
a particular asset such as a building or a machine. Then, just like a
mortgage for a private house, the debenture holder has a legal
interest in that asset and the company cannot dispose of it unless
the debenture holder agrees. If the debenture is for land and/or
buildings it can be called a mortgage debenture.
Debenture holders have the right to receive their interest payments
before any dividend is payable to shareholders and, most
importantly, even if a company makes a loss, it still has to pay its
interest charges. If the business fails, the debenture holders will be
preferential creditors and will be entitled to the repayment of some
or all of their money before the shareholders receive anything.

LOANS FROM OTHER FINANCIAL INSTITUTIONS

The term debenture is a strictly legal term but there are other forms
of loan or loan stock. A loan is for a found amount with a sed
repayment schedule and may appear on a balance sheet with a
specific name telling the reader exactly what the loan is and its main
details.
SHORT TERM SOURCES
FACTORING
Factoring allows you to raise finance based on the value of your
outstanding invoices. Factoring also gives you the opportunity to
outsource

37
your sales ledger operations and to use more sophisticated credit
rating systems. Once you have set up a factoring arrangement with a
Factor, it works this way:
Once you make a sale, you invoice your customer and send a copy of
the invoice to the factor and most factoring arrangements require
you to factor all your sales. The factor pays you a set proportion of
the invoice value within a pre-arranged time-typically, most factors
offer you 80-85% of an invoice's value within 24 hours.
The major advantage of factoring is that you receive the majority of
the cash from debitors within 24 hours rather than a week, three
weeks or even longer.
INVOICE DISCOUNTING
Invoice discounting enables you to retain the control and
confidentiality of your own sales ledger operations.
The client company collects its own debts. "Confidential invoice
discounting ensures that customers do not know you are using
invoice discounting as the client company sends out invoices and
statements as usual. The invoice discounter makes a proportion of
the invoice available to you once it receives a copy of an invoice sent.
Once the client receives payment, it must deposit the funds in a bank
account controlled by the invoice discounter. The invoice discounter
will then pay the remainder of the invoice, less any charges.
The requirements are more stringent than for factoring. Different
invoice discounters will impose different requirements

OVERDRAFT FACILITIES
Many companies have the need for external finance but not
necessarily on a long-term basis. A company might have small cash
flow problems from
38
time to time but such problems don't call for the need for a formal
long-term loan. Under these circumstances, a company will often go
to its bank and arrange an overdraft. Bank overdrafts are given on
current accounts and the good point is that the interest payable on
them is calculated on a daily basis. So if the company borrows only a
small amount, it only pays a little bit of interest. Contrast the effects
of an overdraft with the effects of a loan.

TRADE CREDIT
This source of finance really belongs under the heading of working
capital management since it refers to short-term credit. By a Tine of
credit" they mean that a creditor, such as a supplier of raw materials,
will allow us to buy goods now and pay for them later. Why do they
include lines of credit as a source of finance? They, if they manage
their creditors carefully they can use the line of credit they provide
for us to finance other parts of their business.
Take a look at any company's balance sheet and see how much they
have under the heading of Creditors falling due within one year - let's
imagine it is Rs. 25,000 for a company. If that company is allowed an
average of 30 days to pay its creditors then they can see that
effectively it has a short term loan of Rs. 25,000 for 30 days and it
can do whatever it likes with that money as long as it pays the
creditor on time.

39
CASH MANAGEMENT

40
 CASH MANAGEMENT:
Cash management is one of the key areas of WCM. Apart from the
fact that it is the most liquid asset cash is the common denominator
to which all current assets, that is, receivables & inventory get
eventually converted into cash.
Cash is oil of lubricate the ever-turning wheels of business without it
the process grinds to a shop.
Motives for holding cash-
Cash with reference to cash management is used in two senses:
1)It is used broadly to cover currency and generally accepted
equivalents of cash, such as cheques, drafts and demand deposits in
banks.
2)It includes near-cash assets, such as marketable securities & time
deposits in banks.
The main characteristic of these is that they can be readily sold &
converted into cash. They serve as a reserve pool of liquidity that
provides cash quickly when needed. They provide short term
investment outlet to excess cash and are also useful for meeting
planned outflow of funds.
CASH IS MAINTAINED FOR FOUR MOTIVES:
A. Transaction motive:
Transaction motive refer to the holding of cash to meet routine cash
requirements to finance the transactions which a firm cames on in
variety of transactions to accomplish its objectives which have to be
paid for in the form of cash. Eg. payment for purchases, wages, and
operating expenses. financial charges like interest, taxes, dividends
etc. Thus the requirement of cash balances to meet the routine need
is known as the transaction motive and such motive refers to the

41
holding of cash to meet anticipated obligations whose timing is not
perfectly synchronized with cash receipts.
B. Precautionary motive:
A firm has to pay cash for the purposes which can not be predicted
or anticipated. The unexpected cash needs at the short notice may
be due to:
Floods, strikes & failure of customer
Slow down in collection of current receivables
Increase in cost of raw material
Collection of some order of goods as customer is not satisfied
The cash balance held in reserves for such random and unforeseen
fluctuations in cash flows are called as precautionary balance. Thus,
precautionary cash provides a cushion to meet unexpected
contingencies. The more unpredictable are the cash flows, the larger
is the need for such balance.

C. Speculative motive:
It refers to the desire of the firm to take advantage of opportunities
which present themselves at unexpected moment & which are
typically outside the normal course of business. If the precautionary
motive is defensive in nature, in that firms must make provisions to
tide over unexpected contingencies, the speculative motive
represents a positive and aggressive approach. The speculative
motive helps to take advantages of
> An opportunity to purchase raw material at reduced price on
payment of immediate cash.

42
A chance to speculate on interest rate movements by buying
securities when interest rates are expected to decline.
Make purchases at a favorable price.
Delay purchase of raw material on the anticipation of decline in
prices.

43
OBJECTIVES OF CASH MANAGEMENT:
1 To meet the cash disbursement needs-
In the normal course of business firms have to make payment of
cash on a continuous and regular basis to the supplier of goods,
employees and so son. Also the collection is done from the debtor,
Basic objective is to meet payment schedule that is to have sufficient
cash to meet the cash disbursement needs of the firm.

II. To minimize the funds committed to cash balances-

First of all if we keep high cash balance, it will ensure prompt
payment together with all the advantages. But it also implied that
the large funds will remain idle, as cash is the non-eaming asset and
firm will have to forego profits. On the other hand, low cash balance
mean failure to meet the payment schedule. Therefore we should
have optimum level of cash balance.

FACTORS DETERMINING CASH NEEDS:

1) Synchronization of cash-need for the cash balances arises from the
non-synchronization of the inflows & outflows of cash. First need in
determining cash needs is, the extent of non-synchronization of cash
receipts & disbursements. For this purpose cash budget is to be
prepared. Cash budget point out when the firm will have excess or
shortage of cash.
2) Short cash-Cash period reveals the period of cash shortages. Every
shortage of cash whether expected or unexpected involves a cost
depending upon the security, duration & frequency of shortfall &
how the shortage is covered. Expenses incurred as a shortfall are
called short costs.

44
There are following costs included in the short cash-
> Transaction cost: this is usually the brokerage incurred in relation
to the some short-term near-cash assets like marketable securities.
> Borrowing costs: these include interest on loan, commitment
charges & other expenses relating to loan Loss of cash discount that's
a loss because of temporary shortage ofcash.
> Cost associated with deterioration of credit rating
> Penalty rates: By a bank to meet a shortfall in compensating
balances
1) Excess cash balance-cost associated with excessively large cash
balances is known as excess cash balance cost. If large funds are idle
the implication is that the firm has missed the opportunity to invest
those funds and has thereby lost interest. This loss of interest is
primarily the excess cost.
2) Procurement & Management cost-cost associated with
establishing and operating cash management staff and activities.
They are generally fixed and accounted for by salary, handling of
securities etc.
3) Uncertainty - the first requirement in cash management is a
Precautionary cushion to cope with irregularities in cash flows,
unexpected delays in collection &disbursements, defaults and
unexpected cash needs.
The impact can be reduced through:
> Improved forecasting of tax payments, capital expenditure,
dividends etc.
> Increased ability to bomow through overdratt facility.

45
46
DEBTORS MANAGEMENT

47
The objective of Debtors management
Debtor management, or credit control, is everything you do to get
your clients and customers to pay their invoice as soon as possible.
For the cash flow of your company, it is important to keep the item
'debtors' on your balance sheet as low as possible compared to your
turnover.
Assessing customers for credit and minimizing debtors

The objective of debtor management is to minimize the time

between issuing an invoice to a customer and collecting payment in
full.

Debtor management involves four main decisions:

 Whether credit should be provided to customers.

 Which specific customers should be given credit.
 The credit period or trading terms given to customers.
 The maximum amount of credit to be given to a customer at
one time.
The ideal situation for a business is to offer no credit terms to
customers and collect 100% of the income upfront before providing
the goods or services. Unfortunately the reality is only a few
exceptional businesses, like Apple for example, can do that. For the
majority of businesses providing credit to their customers is essential
to maximise their sales.

The aim for businesses is to provide credit to ‘good’ customers who

pay their accounts on time as this maximises sales whilst not
incurring bad debt costs. Before offering credit to a new customer
the following needs to be done:

48
  Credit application form – The signature of the customer that
they have read and understood all the credit terms and
conditions and have agreed to abide by them.
 Customer approval to conduct a credit check.
 Credit check conducted and analysed.
 Three trade credit references supplied and checked.
 Comprehensive details of all directors, partners or owners.
 A deed of indemnity and guarantee provided by all the
directors of a ‘company’ customer.
Each customer’s credit limit and credit period should be set, agreed
with the customer, and enforced. The credit limit and credit period
reduce the credit risk to acceptable levels whilst maximising sales.

49
Advantages of Debtor

Here are a few advantages of having debtors in the business:

 Increase in Sales: Customers would like to buy goods on

crediTS as it will not result in bulk cash outflows. Selling goods
on credit creates a debtor for the business. Hence, debtors can
help increase sales.
 Surviving Competition: In present times, when most of the
businesses are offering their goods/services on credit, it
becomes important to follow the trend in order to survive the
competition.
 Loyalty: When you sell goods on credit to customers, it shows
them the company trusts its customers. This will motivate them
to be loyal to the company.
 Disadvantages of Debtor Here are a few
disadvantages of having debtors in the business:

 Impact of Cash Flow: Having huge debt balances have a

negative impact on the cash flows of the company as large
amount is blocked with the debtors.
 Increased Risk: Higher debt means a higher risk of default. The
debtors have to be managed carefully to reduce the risk of bad
debt.

50
  Impact on Growth of the Business: If the large amount is
blocked with the debtors, then the business will be left with no
or little money required for the growth of the business.

Conclusion

In any business transaction involving credit, there are two parties,

debtors and creditors. It is important for the business to manage its
debtors and creditors well as it has a huge impact on its working
capital.

51
CREDITORS MANAGEMENT

52
 MANAGING PAYABLES (CREDITORS)
Creditors are a vital part of effective cash management and should
be managed carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous purchasing

function can create liquidity problems. Consider the following;

• Who authorizes purchasing in your company is it tightly managed

or spread among a number of juniors) people?

• Are purchase quantities geared to demand forecasts?

• Do you use order quantities, which take account of stock holding

and purchasing costs? •
• Do you know the cost to the company of carrying stock?

• Do you have alternative sources of supply? If not, get quotes from

major suppliers and shop around for the best discounts, credit terms
and reduce dependence on a single supplier.

• How many of your suppliers have a returns policy?

• Are you in a position to pass on cost increases quickly through price

increases to your customers?

• it a supplier of goods or services lets you down can you chargeback

the cost of the delay?

53
• Can you arrange (with confidence) to have delivery of supplies
staggered or on a just-in-time basis?

There is an old adage in business that if you can buy well then you
can sell well. Management of your creditors and suppliers is just as
important as the management of your debtors. It is important to
look after your creditors- slow payment by you may create feeling
and can signal that your company is inefficient (or in trouble!).

54
INVENTORY MANAGEMENT

55
INVENTORY MANAGEMENT
Managing inventory is a juggling act. Excessive stocks can place a
heavy burden on the cash resources of a business. Insufficient stocks
can result in lost sales, delays for customers etc.

The key is to know how quickly your overall stock is moving or, put
another way, how long each item of stock sit on shelves before being
sold. Obviously, average stock-holding periods will be influenced by
the nature of the business. For example, a fresh vegetable shop
might tum over its entire stock every few days while a motor factor
would be much slower as it may carry a wide range of rarely-used
spare parts in case somebody needs them.

Nowadays, many large manufacturers operate on a Just-In-Time (JIT)

basis whereby all the components to be assembled on a particular
today, arrive at the factory early that morning, no earlier no later.
This helps to minimize manufacturing costs as JIT stocks take up little
space, minimize stock holding and virtually eliminate the risks of
obsolete or damaged stock. Because JIT manufacturers hold stock for
a very short time, they are able to conserve substantial cash, JIT is a
good model to strive for as it embraces alt the principles of prudent
stock management.

56
The key issue for a business is to identify the fast and slow stock
movers with the objectives of establishing optimum stock levels for
each category and, thereby, minimizing the cash tied up in stocks.

Factors to be considered when determining optimum stock levels

include:

• What are the projected sales of each product?

• How widely available are raw materials, components etc.? How

long does it take for delivery by suppliers?

•Can you remove slow movers from your product range without
compromising best sellers?

Remember that stock sitting on shelves for long periods of time ties
up money, which is not working for you. For better stock control, try
the following :

•Review the effectiveness of existing purchasing and inventory

systems.

•Know the stock turn for all major items of inventory

• Apply tight controls to the significant few items and simplify

controls for the trivial many.

• Sell off outdated or slow-moving merchandise-it gets more difficult

to sell the longer you keep it.

57
• Consider having part of your product outsourced to another
manufacturer rather than make it yourself.

Review your security procedures to ensure that no stock is going out

the back door

Higher than necessary stock levels tie up cash and cost more in
insurance, accommodation costs and interest charges.

58
 RESEARCH METHODOLOGY

Primary Data:

The information is collected through primary sources like:

> Talking with the employees of the department.

>Getting information by observations eg, in manufacturing

processes.

> Discussion with the head of the department.

Secondary Data:

The data is collected through the secondary sources like

>Annual Reports of the company.

> Office manuals of the department

> Magazines, Reports in the company

>Policy documents of various departments.

59
 DATA ANALYSIS
OF
KIRLOSKAR PNEUMATIC
COMPANY

60
 RATIO ANALYSIS
CURRENT ASSET - INVENTORY
ACID TEST RATIO =
CURRENT LIABILITIES

PARTICULAR 2018 2019 2020 2021 2022

Q.A 305.1 269.99 262.39 410.94 376.15

Q.L 273.33 253.77 252.78 298.24 366.18

A.T.R 1.11 1.06 1.03 1.37 1.02

RATIO

1.6

1.4

1.2

0.8

0.6

0.4

0.2

0
2018 2019 2020 2021 2022

61
 PROFIT AND LOSS ANALYSIS

YEAR 2018 2019 2020 2021 2022

P&L 49.94 55.26 53.49 63.84 84.92

PROFIT&LOSS
90

80

70

60

50

40

30

20

10

0
2018 2019 2020 2021 2022

PROFIT&LOSS

62
 WORKING CAPITAL RATIO
NET SALES
WCTR = --- ---------------
NET WORKING CAPITAL
PARTICULARS 2018 2019 2020 2021 2022

SALES 1021.27 823.26 821.13 710.24 606.44

WORKING 121.19 112.56 168.81 219.94 212.72

CAPITAL
WCTR 8.42 7.31 4.86 3.22 2.85

WCTR
9

0
2018 2019 2020 2021 2022

WCTR

63
 PROFIT AND LOSS ACCOUNTS
March22 March21 March20 March19 March18
INCOME:

Sales Turnover 1021.17 823.26 710.24 606.44

821.13

Excise Duty .00 .00 .00 .00 .00

NET SALES 1021.17 823.26 821.13 710.24 599.43
Other Income 12.3240 10.1160 18.4680 14.5060 16.3350
TOTAL INCOME 1033.50 833.38 839.60 724.75 615.76
EXPENDITURE:
Manufacturing 99.04 77.64 78.37 56.09 41.76
Expenses
Material 575.68 460.58 456.14 385.19 323.48
Consumed
Personal 129.49 113.20 111.49 101.16 89.18
Expenses
Selling 2.58 .18 2.21 2.05 1.53
Expenses
Administrative 75.27 58.61 85.70 78.03 69.66
Expenses
Expenses .00 .00 .00 .00 .00
Capitalised
Provisions Made .00 .00 .00 .00 .00
TOTAL 882.05 710.22 733.91 622.52 525.60
EXPENDITURE

Operating 139.12 113.05 87.22 87.22 73.83

Profit
EBITDA 151.45 123.16 105.69 102.23 90.16

64
Depreciation 35.22 37.59 32.56 21.85 17.25
Other Write- .00 .00 .00 .00 .00
offs
EBIT 116.23 85.57 73.12 80.38 72.91
Interest 2.11 1.69 1.21 .15 .23
EBT 114.12 83.88 71.92 80.23 72.68
Taxes 29.20 20.04 18.42 24.97 22.74
Profit and Loss 84.92 63.84 53.49 55.26 49.94
for the Year
Non Recurring -.87 .38 -2.45 -.72 .65
Items
Other Non-Cash .00 .00 .00 .00 .00
Adjustments

Other .87 -.38 2.45 -.72 .65

Adjustments
REPORTED PAT 84.92 63.84 53.49 55.26 49.94
KEY ITEMS
Preference .00 .00 .00 .00 .00
Dividend
Equity Dividend 32.83 .00 21.43 17.35 10.23
Equity Dividend 254.70 .00 166.84 135.06 79.64
(%)
Shares in Issue 642.66 642.66 642.66 642.20 128.44
(Lakhs)
EPS - 13.21 9.93 8.33 8.61 38.88
Annualised (Rs)
Rs (in Crores)

65
 Cash Flow Statement
Particulars Mar22 Mar21 Mar20 Mar19 Mar18

Profit before Tax 114.12 83.88 71.92 80.23 72.68

Net Cash flow from 109.08 56.65 9.07 52.59 62.74

Operating Activity

Net Cash Used in -45.76 -48.65 -6.25 -56.05 -14.83

Investing Activity

Net cash Used in -72.22 9.81 -5.54 -26.27 -14.48

Financing Activity

Net inc/Dec in cash and -8.90 17.62 -2.42 -29.72 33.43

cash Equivalent

Cash and Cash 44.57 26.95 29.37 59.10 25.66

Equivalent-beginning of
the year
Cash and Cash 35.67 44.57 26.95 29.37 59.10
Equivalent-End of the
year
Rs(in crores)

66
 Balance Sheet
Kirloskar Pneumatic Company Ltd
Mar22 Mar21 Mar20 Mar19 Mar18
Particulars

Liabilities
Share 12.89 12.85 12.84 12.84 12.84
Capital
Reserves & 645.57 575.79 481.78 480.99 448.75
Surplus
Net Worth 659.46 588.64 494.62 493.83 461.59

Secured .00 37.50 27.78 .53 .69

Loan
Unsecured .00 .00 .00 .00 .00
Loan
TOTAL 658.46 626.14 522.40 494.36 462.28
LIABILITIES
Assets

Gross 363.78 287.48 286.04 172.21 107.09

Block
(-) Acc. 134.41 112.46 79.39 50.43 32.28
Depreciation
Net Block 229.37 175.02 206.65 121.78 74.81

Capital Work in 10.90 7.92 9.21 64.12 67.54

Progress
Investments 205.48 223.27 137.72 195.90 198.74

Inventories 202.75 107.24 159.20 96.34 89.42

67
 Sundry 298.83 308.10 189.10 183.52 208.69
Debtors
Cash and 38.80 52.36 30.00 31.92 61.29
Bank
Loans and 38.52 50.48 43.29 54.55 35.12
Advances
Total Current 578.90 518.18 421.59 366.33 394.52
Assets

Current 354.08 288.22 240.78 244.61 265.17

Liabilities
Provisions 12.09 10.02 12.00 9.15 8.17

Total 366.18 298.24 252.78 253.77 273.33

Current Liabilities
NET CURRENT 212.72 219.94 168.81 112.56 121.19
ASSETS
Misc. - - - - -
Expenses
TOTAL 658.46 626.14 522.40 494.36 462.28
ASSETS(A+B+C+D+E)

Rs (in
Crores)

68
 Statement of changes in Working capital (2019-20)
Rs (in crores)
Particular 2019 2020 Increase Decrease
A)Current Assets:
a)Inventories 96.34 159.20 62.86 -
b)Sundry Debtors 183.52 189.10 5.58 -
c)Cash and bank 31.92 30.00 - 1.92
d)Loan and advance 54.55 43.29 - 11.26
Total Current Assets 366.33 421.59
B)Current Liabilities:
a) Current Liabilities 244.61 240.78 3.83 -
b) Provisions 9.15 12.00 - 2.85
Total Current Liabilities 253.77 252.78 72.27 16.03

Net Current Assets 112.56 168.81 56.25

Increase working capital 56.25
168.81 168.81 72.77 72.77

69
 Statement of changes in Working capital (2020-21)
Rs (in crores)
Particular 2020 2021 Increase Decrease
A)Current Assets:
a)Inventories 159.20 107.24 - 51.96
b)Sundry Debtors 189.10 308.10 119 -
c)Cash and bank 30.00 52.36 22.36 -
d)Loan and advance 43.29 50.48 7.19 -
Total Current Assets 421.59 518.18
B)Current Liabilities:
a) Current Liabilities 240.78 288.22 - 47.44
b) Provisions 12.00 10.02 1.98 -
Total Current Liabilities 252.78 298.24

Net Current Assets 168.81 219.94 150.53 99.4

Increase Working capital 51.13 51.13
219.94 219.94 150.53 150.53

70
 Statement of changes in Working capital (2021-22)
Rs (in crores)
Particular 2021 2022 Increase Decrease
A)Current Assets:
a)Inventories 107.24 202.75 95.51 -
b)Sundry Debtors 308.10 298.83 - 9.27
c)Cash and bank 52.36 38.80 - 13.56
d)Loan and advance 50.48 38.50 - 11.98
Total Current Assets 518.18 578.90
B)Current Liabilities:
a) Current Liabilities 288.22 354.08 - 65.86
b) Provisions 10.02 12.09 - 2.07
Total Current Liabilities 298.24 366.18

Net Current Assets 219.94 212.72 95.51 102.74

Decrease in working capital 7.23 7.23
219.94 219.94 102.74 102.74

Thi
Interpretation:

71
 The statement shows a decrease in working capital in the year
2021-22 by the decrease in cash & bank balance, inventories, loans
& advances.

Statement of showing Net Current Assets / Net Working Capital

Rs (in crores)
Particular 2018 2019 2020 2021 2022

A)Current Assets:

a)Inventories 89.42 96.34 159.20 107.24 202.75

b)Sundry Debtors 208.69 183.52 189.10 308.10 298.83

c)Cash and bank 61.29 31.92 30.00 52.36 38.80

d)Loan and 35.12 54.55 43.29 50.48 3850

advance
Total Current Assets 394.52 366.33 421.59 518.18 578.90

B)Current Liabilities:

a) Current Liabilities 265.17 244.61 240.78 288.22 354.08

b) Provisions 8.17 9.15 12.00 10.02 12.09

72
Total Current 273.33 253.77 252.78 298.24 366.18
Liabilities

Net Current Assets 121.19 112.56 168.81 219.94 212.72

(A-B)

Conclusions

The success of an organization primarily depends on its ability to

sustain its comparative advantage of the strategy it adopts. This
project studies the working capital of the management of KIRLOSKAR
PNEUMATIC, which is one of the most important aspects of any
organization, as it deals with managing the entire current assets and
current liability.
After analyzing the financial statement and having an in-depth study
of the working capital cycle and various ratios of the company we
conclude that the management of capital requires an evaluation of
the cost and benefits associated with each element. Kirloskar
Pneumatic maintains a sound position of working capital. Its
efficiency in receivable and deferral management is reflected in an
operating cycle that checks the credibility of the debtors as well as
enjoys a long duration of deferral period.

73
 Findings

1) The profit of the company is increasing year by year.

2) Working capital Turnover Ratio.

3) Cash and cash equivalents at end of the financial year

(35.67)Rs crores.

4) Decrease in working capital for this year 2022 (rs 7.23)in

crores.
5) The company has a good return on investment made on
capitals.

74
 Bibliography

1) Financial Management -Prasanna Chandra

2) Website of: https://www.kirloskarpneumatic.com/
3) Google
4) Financial Management – Satish Inamdar.
5) Annual Reports kpcl
https://www.kirloskarpneumatic.com/investors/annua
l-reports

75