WORKING CAPITAL - OVERALL VIEW

Working Capital management is the management of assets that are current in nature. Current assets, by
accounting definition are the assets normally converted in to cash in a period of one year. Hence
working capital management can be considered as the management of cash, market securities
receivable, inventories and current liabilities. In fact, the management of current assets is similar to that
of fixed assets the sense that is both in cases the firm analyses their effect on its profitability and risk
factors, hence they differ on three major aspects:

1. In managing fixed assets, time is an important factor discounting and compounding aspects of
time play an important role in capital budgeting and a minor part in the management of current
assets.

2. The large holdings of current assets, especially cash, may strengthen the firm’s liquidity position,
but is bound to reduce profitability of the firm as ideal car yield nothing.

3. The level of fixed assets as well as current assets depends upon the expected sales, but it is only
current assets that add fluctuation in the short run to a business.

To understand working capital better we should have basic knowledge about the various aspects of
working capital. To start with, there are two concepts of working capital:

 Gross Working Capital

Gross Working Capital: Gross working capital, which is also simply known as working capital, refers to
the firm’s investment in current assets: Another aspect of gross working capital points out the need of
arranging funds to finance the current assets. The gross working capital concept focuses attention on
two aspects of current assets management, firstly optimum investment in current assets and secondly in
financing the current assets. These two aspects will help in remaining away from the two danger points
of excessive or inadequate investment in current assets. Whenever a need of working capital funds
arises due to increase in level of business activity or for any other reason the arrangement should be
made quickly, and similarly if some surpluses are available, they should not be allowed to lie ideal but
should be put to some effective use.

Net Working Capital: The term net working capital refers to the difference between the current assets
and current liabilities. Net working capital can be positive as well as negative. Positive working capital
refers to the situation where current assets exceed current liabilities and negative working capital refers
to the situation where current liabilities exceed current assets. The net working capital helps in
comparing the liquidity of the same firm over time. For purposes of the working capital management,
therefore Working Capital can be said to measure the liquidity of the firm. In other words, the goal of
working capital management is to manage the current assets and liabilities in such a way that a
acceptable level of net working capital is maintained.

Importance of working capital management:

Management of working capital is very much important for the success of the business. It has been
emphasized that a business should maintain sound working capital position and also that there should
not be an excessive level of investment in the working capital components. As pointed out by Ralph
Kennedy and Stewart MC Muller, “the inadequacy or mis-management of working capital is one of a few
leading causes of business failure.

Current assets, in fact, account for a very large portion of the total investment of the firm.

It can be visualized from the table that in the first year of our study i.e. 2004 it was 31% which was
reduced to 26% in the next year and in 2006 it is 35% shows fluctuating trend.

Determinants of Working Capital:

There is no specific method to determine working capital requirement for a business. There are a
number of factors affecting the working capital requirement. These factors have different importance in
different businesses and at different times. So a thorough analysis of all these factors should be made
before trying to estimate the amount of working capital needed. Some of the different factors are
mentioned here below:-

1. Nature of business: Nature of business is an important factor in determining the working capital
requirements. There are some businesses which require a very nominal amount to be invested
in fixed assets but a large chunk of the total investment is in the form of working capital. There
businesses, for example, are of the trading and financing type. There are businesses which
require large investment in fixed assets and normal investment in the form of working capital.
2. Size of business: It is another important factor in determining the working capital requirements
of a business. Size is usually measured in terms of scale of operating cycle. The amount of
working capital needed is directly proportional to the scale of operating cycle i.e. the larger the
scale of operating cycle the large will be the amount working capital and vice versa.
3. Business Fluctuations: Most business experience cyclical and seasonal fluctuations in demand
for their goods and services. These fluctuations affect the business with respect to working
capital because during the time of boom, due to an increase in business activity the amount of
 working capital requirement increases and the reverse is true in the case of recession. Financial
arrangement for seasonal working capital requirements are to be made in advance.
4. Production Policy: As stated above, every business has to cope with different types of
fluctuations. Hence it is but obvious that production policy has to be planned well in advance
with respect to fluctuation. No two companies can have similar production policy in all respects
because it depends upon the circumstances of an individual company.

5. Firm’s Credit Policy: The credit policy of a firm affects working capital by influencing the level of
book debts. The credit term is fairly constant in an industry but individuals also have their role in
framing their credit policy. A liberal credit policy will lead to more amount being committed to
working capital requirements whereas a stern credit policy may decrease the amount of working
capital requirement appreciably but the repercussions of the two are not simple. Hence a firm
should always frame a rational credit policy based on the credit worthiness of the customer.
6. Availability of Credit: The terms on which a company is able to avail credit from its suppliers of
goods and devices credit/also affects the working capital requirement. If a company in a position
to get credit on liberal terms and in a short span of time then it will be in a position to work with
less amount of working capital. Hence the amount of working capital needed will depend upon
the terms a firm is granted credit by its creditors.
7. Growth and Expansion activities: The working capital needs of a firm increases as it grows in
term of sale or fixed assets. There is no precise way to determine the relation between the
amount of sales and working capital requirement but one thing is sure that an increase in sales
never precedes the increase in working capital but it is always the other way round. So in case of
growth or expansion the aspect of working capital needs to be planned in advance.
8. Price Level Changes: Generally increase in price level makes the commodities dearer. Hence
with increase in price level the working capital requirements also increases. The companies
which are in a position to alter the price of these commodities in accordance with the price level
changes will face fewer problems as compared to others. The changes in price level may not
affect all the firms in same way. The reactions of all firms with regards to price level changes will
be different from one other.
 FINDINGS & SUGGESTIONS

This chapter deals with the concluded aspects of the study carried out on “General perception
about Life Insurance”. The basic objective for which the study was carried out has been fulfilled
in the earlier chapter, based on the objective interview schedule was designed. Data collected
based on schedule was analyzed and some findings have emerged.

Major Findings of the Study

 Most of the people are satisfied with the extent of their life insurance cover. They are not
interested in buying more life insurance.
 People do not consider life insurance as a good savings because of low returns.
 As life insurance is a long term contract. Maximum people do not have faith on private life
insurance companies, they still prefer LIC.
 Because of less advertising not many people are aware about private life insurance
companies.
 Most of the people do not know about broker, corporate agents and banc assurance, they rely
on their agents only
 The most preferred type of plan is money back. The reason being availability of funds after
every five years which can be used for paying further premium, thus saving the regular
income.
 Some people have no idea about what type of cover they have.
 Most of the people feel that life insurance is essential but they think returns are low.
 Some people have their doubts on the credibility and long stay of private insurance
companies.
Suggestions
 Advertising of the insurance product should stress on the need of security.
 Insurance should be popularized as the means of securing future rather than saving tax.
 New entrants should come out with innovative riders.
 Policies should be issued quickly and with less formalities
 Other service should also be improved.
 Newspaper/Magazines and television are the most effective medium of advertising life
insurance.
 Insurance agents should be well trained.

Findings:

 Current assets comprise a significant portion i.e. 30.89% (average for three years of study) of
total investment in assets of the company. There is fluctuating and rather increasing trend of
this ratio during the period which shows management in-efficiency in managing working capital
in relation to total investment. Further current assets to fixed assets ratio also shows on
fluctuating trend during the study period which substantiate above mentioned criterion of in-
effectiveness in management of working capital by the company.
 Current assets turnover ratio for the first three years of study shows fluctuating trend which is
due to significant increase in sales. In 2005 current assets turnover ratio is highest one i.e. 2.98
during the study, reasons being during this year company has achieved sales growth 44.36%
over the previous year.
 The ratio used for analysis of liquidity position are current ratio and quick ratio. These ratio
reveals that company has sound liquidity position throughout the period of study. Both the ratio
shows fluctuating trend within reasonable limit but these ratio are higher than conventionally
accepted norms i.e. 2:1 in case of current ratio & 1:1 in case of quick ratio, which shows
ineffectiveness of the management in managing current/quick assets in relation to current
liabilities.
 The ratios used for cash management are cash to current assets ratio, cash to current liabilities
ratio. Cash to current liabilities also shows decreasing trend and cash to current assets ratio also
shows decreasing trend. All these ratios reveals that management has no definite cash policy.
 Inventory turnover ratio depict the fluctuating trend which indicates the accumulation of
inventory in turn which cause loss to the company by way of deterioration of stock, interest loss
on blockage of stock etc. Further composition of inventory reveals that portion of individual
element of inventory has fluctuating trend which indicates that management has no policy in
respect of inventory management.
 Debtors Turnover ratio reveals a decreasing trend during the period of study and average
collection period ranges from 38 to 46 days. Keeping in view of INSURANCE industry trend credit
period of 41 days is quite very higher. It reveals that management has no specific policy in
respect of debtors management.

Keeping in view of detailed analysis of our study and our findings mentioned in above paragraphs, the
following suggestions shall be helpful in increasing the efficiency in working capital management.

 Company should make a policy in respect of investment of excess cash, if any; in marketable
securities and overall cash policy should be introduced.
 In case of inventory management ABC analysis, FSN technique, VED technique should be
adopted to increase the efficiency of inventory management. Further a inventory monitoring
system should be introduced to avoid holding of excess inventory.
 Management should develop a credit policy and proper self realisation system from customers
so that efficient and effective management of accounts receivable can be ensured. This will
significantly improve the profitability and liquidity of the company.

 Purchase policy regarding raw material, consumables, and tools and packing materials etc.
should be introduced which ultimately helps in planning of inventory, availment of maximum
trade cash discount and availment of maximum credit period from suppliers.