NEED FOR THE STUDY

The study is conducted to know the future working capital requirements.

The study is conducted to know the operational efficiency of the company.
The study is conducted to know the level of changes in working capital taking place in the
company.
The study helps us to know whether the management is maintaining a satisfactory level of
working capital.
SCOPE OF THE STUDY
Through this project I would study the various methods of the working capital management.
The study helps to determine the ability to meet future operational needs for management of
investments and their financing.
The study will help them to control the expenditure and increase the profit. Also it is useful in
marketing strategy, decision making which will increase the income.
The study helps us to enable the enterprise to provide correct amount of working capital at
correct time.
The study is also useful in determining the rate of return on investments in working capital.

OBJECTIVES
Primary Objectives
To evaluate the TNPL performance during last 5 years.
Secondary objectives
The secondary objectives of the study is to analyse the financial performance of the company
through the relevant financial analysis.
To interpret the financial performance and financial positions of various business activities with
the help of financial statements of TNPL
To measure the short term and long term solvency of business
To determine future potential of the TNPL
To compare operational efficiency engaged in the same industry
The main purpose of our study is to render a better understanding of the concept working capital
management.
To provide valuable suggestions and recommendations to the company.

WORKING CAPITAL MANAGEMENT

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.
CONCEPTS OF WORKING CAPITAL:
There are two concepts of working capital:
Balance Sheet concepts
Operating Cycle or circular flow concept
BALANCE SHEET CONCEPT:
There are two interpretation of working capital under the balance sheet concept:
Gross Working Capital

 Net Working Capital

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:
Net Working Capital = Current Assets Current Liabilities.
NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:
When the current assets exceed the current liabilities, the working capital is positive and the
negative working capital results when the current liabilities are more than the current assets.
Current liabilities are those liabilities which are intended to be paid in the ordinary course of
business within a short period of normally one accounting year of the current assets or the
income of the business. Examples of current liabilities are:
CONSTITUENTS OF CURRENT LIBILITIES:
Bills Payable
Sundry Creditors or Account Payable

 Accrued or Outstanding Expenses

Short term Loans, Advances and Deposits
Dividends Payable
Bank Overdraft
Provision for Taxation, If does not amount to appropriation of profits.
The gross working capital concept is financial or going concern concept whereas net working
capital is an accounting concept of working capital.
OPERATING CYCLE OR CIRCULATING CASH FORMAT:
Working Capital refers to that part of firms capital which is required for financing short term or
current assets such as cash, marketable securities, debtors and inventories. Funds thus invested in
current assets keep revolving fast and being constantly converted into cash and these cash flows
out again in exchange for other current assets. Hence it is also known as revolving or circulating
capital. The circular flow concept of working capital is based upon this operating or working
capital cycle of a firm. The cycle starts with the purchase of raw material and other resources
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.

CLASSIFICATION OR KIND 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 is classified as gross working capital and networking
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
IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL:
Working capital is the life blood and nerve centre of a business. Just a circulation of a blood is
essential in the human body for maintaining life, working capital is very essential to maintain the
smooth running of a business. No business can run successfully without an adequate amount of
working capital. The main advantages of maintaining adequate amount of working capital are as
follows:

Solvency of the Business

Goodwill
Easy Loans
Cash discounts
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

THE NEED OR OBJECTS OF WORKING CAPITAL:

The need for working capital cannot be emphasized. Every business needs some amount of
working capital. The need of working capital arises due to the time gap between production and
realization of cash from sales. There is an operating cycle involved in the sales and realization of
cash. There are time gaps in purchase of raw materials and production, production and sales,
And sales, and realization of cash, thus, working capital is needed for the following purposes:

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.

FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT:

The working capital requirements of a concern depend upon a large number of factors such as
nature and size of the business, the characteristics of their operations, the length of production
cycle, the rate of stock turnover and the state of economic situation. However the following are
the important factors generally influencing the working capital requirements.
NATURE OR CHARACTERSTICS OF A BUSINESS:
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.
MANAFACTURE PRODUCTION POLICY:
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. d stock.
AVABILITY OF RAW MATERIAL:
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 EXAPNSION:

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.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY:

The following are the general principles of a sound working capital management policy:

Principle of risk
variations
Principles of
Working Capital
Management

Principles of cost
of capital
Principles of
Equity principles
Principles of
maturity of
payments

1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY):

Risk here refers to the inability of a firm to meet its obligations as and when they become due for
payment. Larger investment in current Assets with less dependence on short term borrowings,
increase liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the
other hand less investments in current assets with greater dependence on short term borrowings,
reduces liquidity and increase profitability. In other words there is a definite inverse relationship
between the degree of risk and profitability. In other words, there is a definite inverse
relationship between the risk and profitability. A conservative management prefers to minimize
risk by maintaining a higher level of current assets or working capital while a liberal
management assumes greater risk by reducing working capital. However, the goal of
management should be to establish a suitable tradeoff between profitability and risk.

2. PRINCIPLES OF COST OF CAPITAL:

The various source of raising working capital finance have different cost of capital and the
degree of risk involved. Generally, higher and risk however the risk lower is the cost and lower
the risk higher is the cost. A sound working capital management should always try to achieve a
proper balance between these two.
3. PRINCIPLE OF EQUITY POSITION:
The principle is concerned with planning the total investments in current assets. According to
this principle, the amount of working capital invested in each component should be adequately
justified by a firms equity position. Every rupee invested in current assets should contribute to
the net worth of the firm. The level of current assets may be measured with the help of two
ratios:
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
4. PRINCIPLES OF MATURITY OF PAYMENT:
The principle is concerned with planning the source of finance for working capital. According to
the principles, a firm should make every effort to relate maturities of payment to its flow of
internally generated funds. Maturity pattern of various current obligations is an important factor
in risk assumptions and risk assessments. Generally shorter the maturity schedule of current
liabilities in relation to expected cash inflows, the greater the inability to meet its obligations in
time.
CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:

Growth may be stunted. It may become difficult for the enterprises to undertake
profitable projects due to non-availability of working capital.
Implementations of operating plans may brome difficult and consequently the profit
goals may not be achieved.
Cash crisis may emerge due to paucity of working funds.
Optimum capacity utilization of fixed assets may not be achieved due to non-availability
of the working capital.

The business may fail to honor its commitment in time thereby adversely affecting its
creditability. This situation may lead to business closure.
The business may be compelled to by raw materials on credit and sell finished goods on cash. In
the process it may end up with increasing cost of purchase and reducing selling price by offering
discounts. Both the situation would affect profitable adversely.

Now avaibility of stocks due to non availability of funds may result in production stoppage.
While underassessment of working capital has disastrous implications on business
overassesments of working capital also has its own dangerous.
CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL:

Excess of working capital may result in un necessary accumulation of inventories.

It may lead to offer too liberal credit terms to buyers and very poor recovery system &
cash management.
It may make management complacent leading to its inefficiency.
Over investment in working capital makes capital less productive and may reduce return
on investment.

Working Capital is very essential for success of business & therefore needs efficient management
and control. Each of the components of working capital needs proper management to optimize
profit.
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:

Cost of carrying receivables

Cost of bad debts losses

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 increase profits. An
effective control of receivables help 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.

RESEARCH METHODOLOGY
This project requires a detailed understanding of the concept Working Capital Management.
Therefore, firstly we need to have a clear idea of what is working capital, how it is managed in
TNPL, what are the different ways in which the financing of working capital is done in the
company.
The management of working capital involves managing inventories, accounts receivable and
payable and cash. Therefore one also needs to have a sound knowledge about cash management,
inventory management and receivables management.
Then comes the financing of working capital requirement, i.e. how the working capital is
financed, what are the various sources through which it is done.
And, in the end, suggestions and recommendations on ways for better management and control
of working capital are provided.
In preparing of this project the information collected from the following sources.
Primary data
The Primary data has been collected from Personal Interaction with Finance manager
Secondary data
The major source of data for this project was collected through annual reports, profit andloss
account of 5 year period from 2006-2010 & some more information collected frominternet and
text sources.
SAMPLING DESIGN
Sampling unit : Financial Statements
Sampling Size : Last five years financial statements

TOOLS FOR ANALYSIS

The tools used for data analysis is as follows:
1)
2)
3)
4)
5)

Ratio Analysis
Statement Showing Changes In Working Capital Position
Fund flow Statement
Cash flow Statement
Working Capital Trend Analysis

LIMITATIONS OF STUDY
The project study is mainly based on information gathered from secondary data mainly Balance
sheet and profit and loss account.
The findings and results are formed only from the past five years data due to time constraint.