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It is one of the largest and most respected companies in India's private sector. Seven decades of a strong, customer-focused approach and the continuous quest for world-class quality have enabled it to attain and sustain leadership in all its major lines of business. L&T has an international presence, with a global spread of offices. A thrust on international business has seen overseas earnings grow significantly. It continues to grow its overseas manufacturing footprint, with facilities in China and the Gulf region. The company's businesses are supported by a wide marketing and distribution network, and have established a reputation for strong customer support. L&T believes that progress must be achieved in harmony with the environment. A commitment to community welfare and environmental protection are an integral part of the corporate vision.
M/s Larsen & Toubro Ltd. ECC Division is prestigious organization having business worldwide, its ECC Division undertake engineering contracts of various construction in the field of Electrical, Mechanical & Civil Engineering. The Company having its headquarter at Chennai, and whole India is distributed in regions having respective regional headquarters, viz. Mumbai, Ahmadabad, Kolkata, Delhi, Hyderabad, Chandigarh etc. which coordinate all activities of sites within their region.
Chattisgarh state have rich natural resources, coal is found in abundance thus various thermal power plant are established at various places, Sipat Super Thermal Power Plant is one of the biggest Thermal Power Plant, wherein our company execute construction of Boiler Erection & Electrical Cabling works and some other misc. works. Our Principal employer is M/s National Thermal Power Corporation Ltd.
The workforces consist of 2500 workmen and Engineers and staff in various cadre, the workforce consist of employees from all over India.
Working Capital is the amount of capital that a business has available to meet the day to day cash requirements of its operations. It is concerned with the problem arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. Working Capital is the difference between resources in cash or readily convertible into cash and organizational commitments for which cash will soon be required or within one year without undergoing a diminution in value and without disrupting the operation of the firm. It also refers to the amount of current Assets that exceeds current Liabilities.
Working Capital refers to that part of the firm capital, which is required for financing Short-Term or Current Assets such as Cash, Marketable Securities, Debtors and Inventories. Working Capital is also known as Revolving or Circulating Capital or Short Term Capital. The goal of working capital management is to manage the firms current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety. Capital required for a business can be classifies under two main categories: Fixed Capital Working Capital
Every business needs funds for two purposes for its establishments and to carry out day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land and building, furniture etc. Investments in these assets are representing that part of firms capital which is blocked on a permanent or fixed basis and is called fixed capital.
Funds are also needed for short term purposes for the purchasing of raw materials, payments of
wages and other day to day expenses etc. These funds are known as working capital. In simple words, Working capital refers to that part of the firms capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories.
There are two concepts of working capital: Balance Sheet concepts Operating Cycle or circular flow concept
The term working capital refers to the Gross working capital and represents the amount of funds invested in current assets. Thus, the gross working capital is the capital invested in total current assets of the enterprises. Current assets are those assets which are converted into cash within short periods of normally one accounting year. Example of current assets is: Constituents of Current Assets: Cash in hand and Bank balance Bills Receivable Sundry Debtors Short term Loans and Advances Inventories of Stock as: Raw Materials Work in Process Stores and Spaces
Finished Goods Temporary Investments of Surplus Funds Prepaid Expenses Accrued Incomes The term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities or say
The term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities or say:
The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital.
And ends with the realization of cash from the sales of finished goods. It involves purchase of raw material and stores, its conversion into stocks of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stocks into sales,
debtors and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. The speed/ time of duration required to complete one cycle determines the requirements of working capital longer the period of cycle, larger is the requirement of working capital.
The gross operating cycle of a firm is equal to the length of the inventories and receivables conversion periods. Thus,
Net Operating Cycle Period = Gross Operating Cycle Period Payable Deferral period
Further, following formula can be used to determine the conversion periods. Raw Material Conversion Period
capital and net working capital. The classification is important from the point of view of the financial manager. On the basis of time, working capital may be classified as: Permanent or Fixed working capital Temporary or Variable working capital
1. PERMANENT OR FIXED WORKING CAPITAL: Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operations.
2. TEMPRORAY 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.Varibles working capital can be further classified as second working capital and special working capital. The capital required to meet the seasonal needs of the enterprises is called the seasonal 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.
Solvency of the Business Goodwill Easy Loans Cash discounts Regular supply of Raw Materials
Regular payments of salaries, wages & other day to day commitments. Exploitation of favorable market conditions Ability of crisis Quick and regular return on investments High morals
For the purchase of raw materials , components and spaces. To pay wages and salaries. To incur day to day expenses and overhead costs such as fuel, power and office expenses etc. To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers. To maintain the inventories of raw materials, work in- progress, stores and spares and finished stock
The nature and the working capital requirement of enterprises are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprises involve in providing services. The amount required also varies as per the nature, an enterprises involved in production would required more working capital then a service sector enterprise.
Each enterprises in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time and other may follow the principles of demand based production in which production is based on the demand during the particular phase of time. Accordingly the working capital requirements vary for both of them. OPERATIONS:
The requirement of working capital fluctuates for seasonal business. The working capital needs of such business may increase considerably during the busy.
MARKET CONDITION:
If there is a high competition in the chosen project category then one shall need to offer sops like credit, immediate delivery of goods etc for which the working capital requirement will be high. Otherwise if there is no competition or less competition in the market then the working capital requirements will be low.
If raw material is readily available then one need not maintain a large stock of the same thereby reducing the working capital investment in the raw material stock . On other hand if raw material is
not readily available then a large inventory stocks need to be maintained, there by calling for substantial investment in the same.
Growth and Expansions in the volume of business result in enhancement of the working capital requirements. As business growth and expands it needs a larger amount of the working capital. Normally the needs for increased working capital funds processed growth in business activities. PRICE LEVEL CHANGES :
Generally raising price level requires a higher investment in the working capital. With increasing prices, the same levels of current assets needs enhanced investments.
MANAFACTURING CYCLE:
The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period the need for working capital would be more. At time business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of the working capital requirement is made keeping this factor in view. Each constituents of the working capital retains it form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement the duration at various stages of the working capital cycle is estimated. Thereafter proper value is assigned to the respective current assets, depending on its level of completion. The basis for assigning value to each component is given below:
COMPONENTS OF WORKING CAPITAL Stock of Raw Material Stock of Work -in- Process Stock of finished Goods Debtors Cash
BASIS OF VALUATION Purchase of Raw Material At cost of Market value which is lower Cost of Production Cost of Sales or Sales Value Working Expenses
Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or overassessment of the working capital and both of them are dangerous.
1. Current assets as a percentage of total assets and 2. Current assets as a percentage of total sales
While deciding about the composition of current assets, the financial manager may consider the relevant industrial averages.
INVENTORY MANAGEMNT:
Inventory includes all type of stocks. For effective working capital management, inventory needs to be managed effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously stock out costs should be minimized. Business therefore should fix the minimum safety stock level reorder level of ordering quantity so that the inventory costs is reduced and outs management become efficient.
RECEIVABLE MANAGEMENT:
Given a choice, every business would prefer selling its produce on cash basis. However, due to factors like trade policies, prevailing market conditions etc. Business are compelled to sells their goods on credit. In certain circumstances a business may deliberately extend credit as a strategy of increasing sales. Extending credit means creating current assets in the form of debtors or account receivables. Investment in the type of current assets needs proper and effective management as, it gives rise to costs such as.
Thus the objective of any management policy pertaining to accounts receivables would be to ensure the benefits arising due to the receivables are more than the costs incurred for the receivables and the gap between benefit and costs increased resulting in increased profits. An effective control of receivables helps a great deal in properly managing it. Each business should therefore try to find out coverage credit extends to its clients using the below given formula:
Average Credit = Total amount of receivable (Extend in days) Average credit sale per day
Each business should project expected sales and expected investments in receivable based on various factor, which influence the working capital requirement. From this it would be possible to find out the average credit days using the above given formula. A business should continuously try to monitor the credit days and see that the average. Credit offer to clients is not crossing the budgeted period otherwise the requirement of investment in the working capital would increase and as a result, activities may get squeezed. This may lead to cash crisis.
CASH BUDGET:
Cash budget basically incorporates estimates of future inflow and outflows of cash cover a projected short period of time which may usually be a year, a half or a quarter year. Effective cash management is facilities if the cash budget is further broken down into months, weeks or even a daily basis. There are two components of cash budget are: 1. Cash inflows 2. Cash outflows
The main sources for these flows are given here under: 1. Cash Sales 2. Cash received from debtors 3. Cash received from Loans, deposits etc. 4. Cash receipts other revenue income 5. Cash received from sale of investment or assets.
CASH OUTFLOWS:
1. Cash Purchase 2. Cash payments to Creditors 3. Cash payment for other revenue expenditure 4. Cash payment for assets creation 5. Cash payments for withdrawals, taxes. 6. Repayments of Loan etc.