Project report on analysis of working capital on j&k bank.1

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Project Made on Analysis of Working Capital in Banking (J&K) by Shameem Ahamad


PROJECT REPORT ON

Analysis of Working Capital in Banking (J&K)
SUBMITTED IN PARTIAL FULFILMENT OF
Degree of
Master of Business Administration
(2011-2013)
Submitted by:
Shameem Ahamad

Under Supervision of:
Mr.Syed Nadeem-Ul Haque
[Assttnt.Prof. JHU]
Department of Management Studies
JAMIA HAMDARD UNIVERSITY,NEW DELHI

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CONTENTS
Chapter
Acknowledgement
Declaration
Executive Summary
Research statement
Objective & Methodology
Literature Review
Chapter-1 Introduction to the Organization
i.

Overview of the Industry

ii.

Profile of the Organization

iii.

Product & Services of J & K Bank

Chapter-2 Conceptual Discussions
i.

Introduction to Working Capital

ii.

Method of Working Capital Finance

iii.

Classification of Working Capital

iv.

Managing of Working Capital

Chapter-3 Financial of Working Capital of J&K Bank
Chapter-4 Analysis of Working Capital of J&K Bank
i)

Ratio Analysis

ii)

Funds Flow Analysis

iii)

Budgeting

Summary, Conclusion, Suggestion and Limitation and References & Bibliography

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ACKNOWLEDGEMENT
Concentration, dedication and application are necessary but not sufficient to achieve any
goal. These must be awarded by guidance, assistance and co-operation of many people to
make it enable. And I am thankful to God that I got them all.
I am extremely grateful and remain indebted to my guide Mr. Syde Nadeem -Ul Haque
(Assistant Professor in JAMIA HAMDAR UNIVERSITY) for his invaluable guidance and
constant support throughout this project. I am thankful to his for valuable suggestions, which
have benefited me a lot while developing this project.
I am even grateful to the employees of J&K Bank for supporting me towards making this
study meaningful. I also express my sincere gratitude to my guide Mrs. MUGDHA GUPTA,
Advance Manager in J&K Bank G.K.1 and Branch Head Mr. K.S. SAMYAL (Highly
Thankful) for taking keen interest in my training/project work and giving me valuable
guidance at every stage.

Finally I acknowledge with deep gratitude, the immense support I received from my parents
and my brothers who have encouraged me, have been a source of inspiration and helped me
in continuing my effort.

This project was a great source of learning and value addition for me.

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STUDENT DECLARATION
The project on “Analysis of Working Capital” is exclusively done by me at J&K Bank,
Greater Kailash-1, Branch, New Delhi and I assure that it is not submitted in any other
institute.

Shameem Ahamad
MBA (G)
Session-2011-2013

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Executive Summary
I did my summer training programmed in J&K Bank. My project was based on the procedure
of “ANALYSIS OF WORKING CAPITAL IN INDIAN BANKING”. I got the exposure of
banking sector which is a very important sector of the Indian economy. The sector has made
a marked improvement in the liberalization period.

The Jammu and Kashmir Bank Limited was incorporated on 1st October, 1938 and
commenced its business from 4th July, 1939 at in Kashmir (India). The Bank was the first in
the country as a State owned bank. According to the extended Central laws of the state,
Jammu & Kashmir Bank was defined as a government. Company as per the provision of
Indian companies‟ act 1956.In the year 1971, the Bank received the status of scheduled bank.
It was declared as “A” Class bank by RBI in 1976. Today the bank has more than 500
branches across the country and has recently become a billion Dollar company. The total
business turnover at the end of December 2012 was Rs 79000 Crores, an increase of 21.5%
over the previous fiscal year. The Net Profit of the bank almost doubled during the said
period as it increased from Rs 309 Crores to nearly Rs 600 Crores.
Notably, Mustaq Ahmad, who is known as prudent banker having almost 40 years of
experience at his back, was appointed chairman and chief executive officer of the bank in
October 2010.Soon after assuming the charge; he revisited certain business areas of the bank
and renewed the strategy for achieving solid growth in the fundamentals of the bank.
My project is concerned with Working Capital in Indian banking. Firstly I would like to give
an introduction to working capitalWorking capital is critical for daily management of cash flows to settle bills, wages and other
variable cost. The working capital cycle is the period of time which elapses between the point
at which cash begins to be expended on the production of a product and the collection of cash
from sale of the product to its customers. Working capital requirements can be financed from
both internally generated resources (selling current assets) and externally acquired
alternatives (borrowing and securing current assets). In the Indian context of banking, a major

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part of the working capital requirements are met by bank credit.
As critical part of this project report is three cases of working capital has been taken which
are comprehensive enough to cover all the aspects of working capital.

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Literature Review
The purpose of this chapter is to present a review of literature of relating to the working
capital management. Although working capital is an important ingredient in the smooth
working of business entities, it has not attracted much attention of scholars. Whatever studies
have conducted, those have exercised profound influence on the understanding of working
capital management good number of these studies which pioneered in this area have been
conducted.
The size and composition of working capital can vary between industries (Atrill P, 2006). For
some types of business, the investment in working capital can be substantial. For example, a
manufacturer will invest heavily in raw materials, work-in-progress and finished good and it
will often sell its goods on credit, thereby generating trade debtors. A retailer, on the other
hand, will hold only one form of stock (finished goods) and will usually sell goods for cash.
Working capital represents a net investment in short-term assets. These assets are continually
flowing into and out of a business and are essential for day-to-day operation. Further Atrill P,
2006 believe that the various elements of working capital are interrelated and can be seen as
part of a short-term cycle.
According to Richard pike and Bill Neale "working capital refers to current assets less
current liabilities - hence its alternative name of net current asset. Current assets include cash,
marketable securities, debtors, and stocks. Current liabilities are obligations that are expected
to be repaid within the year". Long term investment and financing decisions give rise to
future cash flows which, when discounted by an appropriate cost of capital, determine the
market value of a company. However, such long term decision will only result in the
expected benefits for a company if attention is also paid to short term decision regarding
current assets and liabilities. Current assets and liabilities, that are assets and liabilities with
maturities of less than one year, need to be carefully managed. Net working capital is the
term given to the difference between current assets and current liabilities.
Watson D and Head A, 2007 argued that "maintaining adequate working capital is not just
important in the short term. Adequate liquidity is needed to ensure the survival of the
business in the long term". Even a profitable company may fail without adequate cash flow to

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meet its liabilities. It can be argue as according to ACCA paper 2.4, 2005, "an excessively
conservative approach to working capital management resulting in high-level of cash
holdings will harm profits because the opportunity make a return on the assets tied up as cash
will have been missed".
Therefore, in short, working capital is money used to pay short-term obligations such as
creditors, to purchase stock, for paying wages etc - costs that are used to make and sell your
product or deliver your service and will ultimately be recovered from sales. Basically
working capital represents the funds that are required to operate a business on a day to day
basis.
The management of working capital is an essential part of a business's short-term planning
process. It is necessary for managers to decide how much of each element should be held.
Watson D and Head A, 2007 have noted that there are costs associated with holding both too
much and too little of each element. Managers must be aware of these costs in order to
manage effectively. They must also be aware that there may be other, more profitable uses
for the funds of the business. Hence the potential benefits must be weighed against the likely
costs in order to achieve the optimum investment.
Level/scale of working capital
According to Meade, N & Gormley , F. 2006 the working capital needs of a particular
business are likely to change over time as a result of change in the commercial environment.
This means that working capital decisions are rarely one-off decisions. Managers must try to
identify changes in an attempt to ensure the level of investment in working capital is
appropriate. In addition to changes in the external environment, changes arising within the
business such as changes in production methods (resulting, perhaps, in a need to hold less
stock) and changes in the level of risk that managers are prepared to take could alter the
required level of investment in working capital. Peter April, 2006 has also tried to explain the
level of working capital in total investment.
Several factors motivate an understanding of the basics of investment analysis. First, the
professional manager - regardless of functional specialty - benefits from a practical
knowledge of the important elements of analyzing and selecting capital projects. Second, a

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well-executed analysis often requires estimates best provided by those with functional area
expertise and experience. For example, from the view point of working capital, the analyst
may call on the marketer to estimate sales levels at various prices and trade discounts which
affect debtors (customers) or the production specialist which affect creditors of raw material
and up to some extent stocks and accountant to estimate variable costs of production, cash
management and receivables. (Steven S et al, 1997)
The level of working capital required is also affected by the following factors:


The nature of business, for e.g. manufacturing companies need more inventory than
service companies.



Uncertainty in supplier deliveries, uncertainty would mean that extra inventory needs
to be carried in order to cover fluctuations.



The overall level of activity of the business, as output increases, receivables,
inventory, etc. all tends to increase.



The company's credit policy, the tighter the company's policy the lower the level of
receivables.



The length of the operating cycle. The longer it takes to convert material into finished
goods into cash the greater the investment in working capital.

The credit policy of suppliers. The less credit the company is allowed to take, the lower the
level of payables and the higher the net investment in working capital (ACCA- F9, 2007/08).
The investment of a business in working capital can be expressed in terms of time taken to
move from cash ready for investment back to cash again. As Alan Pizzey, 1998 stated in his
book that the working capital cycle starts with an order to supplier of raw material, which is
delivered and waits in stock until requisitioned for use in the factory. This cost is combined
with labour and overheads as work in progress during the production process, and then
becomes finished goods stock awaiting sale. Once, sold the stock is transformed into a debtor
and when the credit period has elapsed the debtor is changed into cash. Somewhere in this
cycle, the supplier (a trade creditor) is paid for the material. A good manager will be able to
reduce the time lag by increasing the velocity of circulation in the cycle, and making the
funds invested work harder. The cash budget is a useful tool in this exercise.

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The consequences of insufficient working capital:
The disadvantages suffered by a business which does not have sufficient working capital
underline its importance. According to White, Get all 2001 operations may be prejudiced and
growth stunted if there is not enough investment to finance stock and debtors. The major
disadvantages are as follows:


Inability to adapt or respond to opportunities - without cash in the bank or unused
overdraft facilities a manager cannot buy a cheap line of raw material as a special
offer, or reorganize production to include a new product.



Trade discounts - all purchasing officers know that a large order can be used to
negotiate a low price, but once the order is placed, the customer must take delivery
and make payment. If there is not enough working capital to finance large stocks,
large orders cannot be placed at favorable prices.



Cash discounts - suppliers may offer a cash discount for early payment. If a company
has insufficient working capital it will not be able to take advantage of it.

Overtrading:
A company which tries to finance a certain volume of trade with insufficient working capital
is said to be overtrading. Soufani, K. 2000 explains that expansion means more funds tied up
in stock and debtors, and without capital available in the business this can only be
accomplished by taking longer to pay trade creditors or by increasing the overdraft up to and
even beyond the agreed limit. The working capital ratio may fall below 1:1, and the acid test
ratio and debt to equity ratio will show signs of financial distress. If the trade creditors and/or
the bank and/or the Inland Revenue withdraw their support, liquidation may be the result.
Good working capital management means that the business will always have a reserve of
liquid resources for use if the payment situation deteriorates. An overtrading business often
needs only the slightest upset to its expected cash receipts to overbalance the fragile structure

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of other people's money which it is using to finance its operation.
Major parameters of working capital:
Inventory:
Another name of stocks is inventory. Inventory, or stock, may be classified into the
following:


Pre-production inventory of raw materials and bought in parts.



In process inventory - work in progress at various stages of the production process.



Finished goods inventory - manufactured goods ready for sale.

In most cases, finished goods will convert most rapidly into cash, but where customer tastes
change rapidly, such as in the fashion trade, this stock can also be the most risky. Inventory is
the least liquid of current assets. It is therefore vital to manage it in such a way that it can be
converted from raw material to work in progress and finished goods as quickly as possible.
(Pike R, Neale B, 1999). The form of inventory level varies from one firm to another. For a
construction firm it may consist of bricks, timber and unsold houses, while for a retailer it is
goods bought in for sale but as yet unsold. The level of inventory held is determined by
factors such as the predictability of sales and production (more instability may call for more
safety stocks), the length of time it takes to produce and the nature of the product. On the last
point, note that a dairy company is likely to have low stock levels relative to sales because of
the danger of deterioration, whereas a jeweler will have large inventories to offer greater
choice to the customer. Manufacturers with lengthy production cycles such as shipbuilders
will have proportionately higher inventories than, say, a fast food chain (Arnold G, 2005).
Further, significant amounts of working capital can be invested in stocks of raw material,
work in progress and finished goods. Stocks of raw material and work in progress can act as a
buffer between different stages of the production process, ensuring its smooth operation.
Stocks of finished goods allow the sales department to satisfy customer demand without
unreasonable delay and potential loss of sales. These benefits of holding stock must be
weighed against any costs incurred, however, if optimal stock levels are to be determined.

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Investments which may be incurred in holding stocks include:


holding costs, such as insurance, rent and utility charges



replacement costs, including the cost of obsolete stock



the cost of the stock itself



The opportunity cost of cash tied up in stock. (Watson D and Head A, 2007)

Firms have the difficult task of balancing the costs of holding inventories against the costs
which arise from having low inventory levels. The cost of holding inventories include the lost
interest on the money tied up in stocks as well as additional storage cost (for e.g. rent, secure
and temperature-controlled warehouses), insurance cost and the risk of obsolescence.
The cost of holding low stocks levels fall into two categories.


A low stock level calls for frequent recording. Each order involves administration cost
and the physical handling of the goods.



In a world on uncertainty there is a risk of stock out when production is halted for
want of raw material or WIP and /or sales are lost because of inadequate stocks of
finished goods. Stock out cost can be considerable; in the short term sales and profits
fall, and in the long run customer goodwill is lost. (Arnold G, 2005).

Furthermore, other costs, such as lost sales or the opportunity cost of tying up funds will not
be directly recorded by the accounting system. This lack of information concerning the cost
of holding particular levels of stock makes the management of stock more difficult. (Atrill P,
2006)
Stock is carried for two reasons:
1. Business is uncertain: consumer demand and production requirements are difficult to
forecast, and suppliers may not always be reliable in meeting delivery requirements.
The cost of being out of stock, in terms of lost sales, profits and goodwill, is generally
very high.
2. Economics in ordering: each business needs to determine its economic order quantity
for its main stock items.

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Inventory control is an important topic for both production management and financial
management, which should work closely to establish an inventory policy that meets customer
requirement while operating at optimum stock levels.
Overstocking results in the following:


An unduly high level of working capital investment.



Additional storage space requirements and greater handling and insurance costs.



Possible deterioration and increased obsolescence risk.

Under stocking reduces the working capital required, but can lead to out of stock situation
with orders unfulfilled, idle machines and underemployed workers. In the past, carrying
higher than necessary stocks has been a way of compensation for inefficient production and
distribution or poor forecasting. But in today's highly competitive global markets, with
Japanese and other overseas businesses operating efficient production schedules and minimal
stock levels, European companies have been forced to examine their inventory management
processed more closely (Pike R, Neale B, 1999). P.L. Primrose, 1992 noted that "despite the
almost universal belief to the contrary, inventory reduction should not be a major objective
for investing in advanced manufacturing technology because the financial benefits from it can
be relatively small compared with other benefits. High inventory levels are only a symptom
of other problems;" if these problems are not first identified and solved, inventory reductions
can be counterproductive. Further, according to Martin Smith and Chris Poole, 2007 "it may
seem obvious that if you do not have products on the shelf, then business will be lost. What is
not obvious, however, is the extent to which this can destroy value for retailers and
manufacturers. For the manufacturer, 46 per cent of the time the shopper will either substitute
for another brand or not buy at all, according to recent research for ECR (Efficient Consumer
Response) Europe. For the retailer, the biggest risks are that products are not bought at all, or
that the shopper will buy the product from a competing store. When they have no stock, this
happens 30 per cent of the time."

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Research Statement
How management of Working Capital does take place in corporate banking?

Objective of the study
The study will try to achieve the following aims:
 To understand meaning of working capital in terms of RBI guidelines.
 To study different ways of classification of working capital.
 To study how working capital affects overall profitability of banks.
 To study RBI guidelines on sale or purchase of working capital.
 To analyze current trend of working capital in banking context.
 To understand finance to the working capital.

Methodology
The study includes descriptive research and based on the secondary data.

Sources of data
Entire information is collected through a secondary source i.e. through a data, which have
been gathered for some other purposes. Some of the sources of secondary data are;

 Books on working capital and handbook on banking information etc.
 Information collected from various sites on internet.
 Articles from Magazines like Business World, Financial Express etc.
 Information collected from J&K Bank staff at G.K.1 New Delhi.
 Information collected from investerWords.com.

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CHAPTER-1
INTRODUCTION TO THE ORGANISATION

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1.1 OVERVIEW OF THE INDUSTRY AS A WHOLE
Banking in India
The economic reforms undertaken in the last 15 years have brought about a considerable
improvement in the health of banks and financial institutions in India. The banking sector is a
very important sector of the Indian economy. The sector has made marked improvements in
the liberalization period. There has been extraordinary progress in the financial health of the
commercial banks with respect to capital adequacy, profitability assets quality and risk
management. Deregulation has opened new doors for banks to increase revenues by entering
into to investment banking, insurance, credit cards, depository services, mortgage,
securitization etc.
Currently, banking in India is generally fairly mature in terms of supply, product range and
reach even through reach in rural India still remains a challenge for the private sector and
foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered
to have clean, strong and transparent balance sheet relative to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the government. The stated policy of the bank of Indian Rupee is to manage
volatility but without any fixed exchange rate and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time especially
in its services sector the demand for banking services are expected to be strong.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in
Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has
been allowed to hold more than 5% in a private sector bank since the RBI announced norms
in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by
them.

Currently, India has 96 scheduled commercial banks (SCBs) 31 private sector banks and 27
are public sector banks and 38 foreign banks. They have a combined network of over 53000
branches and 49000 ATMs. According to a report by ICRA Limited, a rating agency, the

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public sector banks hold over 75 percent of total assets of the banking industry with the
private and foreign banks holding 18.2% and 6.5% is just say.

Liberalization and globalization have created a more challenging environment in banking
sector as well as the other segments of the financial sector such as mutual funds, non-banking
finance companies, post offices, capital market, venture capitalist etc. Now the challenge
faced by the sector would be gaining profitability, reinforcing technology, maintaining global
standards, corporate governance, risk management and the most important of all, to establish
customer intimacy.

1.2 PROFILE OF THE ORGANISATION
Brief History of the Bank
Jammu and Kashmir Bank Limited was incorporated on 1st October, 1938 and commenced its
business from 4th July 1939 at in Kashmir (India). The bank was the first in the country as a
state owned bank.

“In my opinion the bank should be an organ of public interest and not an instrument for the
government or the shareholders to achieve their own end.”
(Maharaja Hari Singh)

According to the extended central laws of the state, Jammu and Kashmir Bank was defined as
a government company as per the provision of Indian companies act 1956. In the year 1971,
the bank received the status of scheduled bank. It was declared as “A” class bank by RBI in
1976.

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Today the bank has more than 500 branches across the country and has recently become a
billion dollar company.

o Incorporated in 1938 as a limited company.
o Governed by the companies act and banking regulation bank of India.
o Regulated by the Reserve Bank of India and SEBI.
o Listed on the NSE and BSE.
o 53 percent owned by the government of J&K.

Unique characteristics of the bank
o Private sector bank deposit government holding 53 percent of equity.
o Sole banker and lender of last resort to the government of J&K.
o Plan and non-plan fund, taxes and non-taxes revenues routed through the bank.
o Salaries of government officials disbursed by the Bank.

Mission Statement:
“Our mission is two- fold: To provide the people of J&K international quality financial
service and solutions and to be a super specialist bank in the rest of the country. The two
together will makes the most profitable bank in the country.”

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Vision Statement:
“To catalyze economic transformation and capitalize on growth.”

Board of Directors of J&K Bank
Mushtaq Ahmad (Chairman and CEO)

Past Performance
o The bank has delivered a strong performance in 2011.
o The bank strategy of consolidation re-engineering, re-pricing and re-organization has
resulted in productive and efficient growth, robust balance sheet top notch assets book
and substantial provision.
o The bank aggregate business crossed yet another psychological mark and stood
Rs70869.57 crores at the end of financial year 2010-2011.
o The bank total business increased by Rs 10575.18 crores from the previous figure of
60294.39 Crores, registering a growth of 17.54%.
o The bank continued its prudent approach in expanding quality credit assets in line
with its policy on credit risk management. Its net advance increased by Rs 3136.41
Crores.
o The Bank‟s performance in the recovery of NPAs during the year continued to be
good.
o Investment portfolio increased by Rs 5,739.52 Crores from 13956.25 and 19695.77 as
on 2011.
o The Bank has earned an income of Rs 26.14 crores from the Insurance business. In
life insurance mobilized a business of Rs 103.02 crores and in non-life segment Rs
59.36 crores was mobilized during the year.

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o The gross profit for the financial year 2010-11 stood at Rs 1149.49 crores.
o The highest ever net profit of Rs 615.2 crores.

Area

Branches

Metro

39

Urban

168

Semi-Urban

118

Rural

223

Total

548

Future Planning and Turnover
To build a global brand we need to do two things- go global physically and second more
importantly, have a unique business model product offering and services standards, all of
which are globally recognized.
We have taken initial step to achieve the first. As of today, after the state government. Our
second largest shareholders are foreign institutional investors with a combined stake of
almost 36%.

The total turnover increased 60294.39 crores to 70869.57 is 10575.18 crores. This growth is
registered of 17.54%.

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1.3 Products and Services
Financial Products
o Personal finance
o Specialized finance
o Agriculture and Allied Finances
o Business Loan
o Micro finance.

Deposit Products
o Savings Banks Account
o Current Deposit
o Term Deposit.
o Depositors Pension

Technology based financial service
o Anywhere Banking
o Internet Banking
o ATM Services
o Debit and Credit Cards
o Merchant acquiring

Depository services
o Dematerializations
o Stock broking Services through investment
o Depository Participant of NSDL and CDSL.

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Meaning and Conceptual Frame
Working capital means the total amount of circulating funds and current assets. It requires a
specified minimum level of current assets namely raw materials, stock in progress and
finished goods and receivables apart from reasonable cash in hand and certain other current
assets. Working capital is also known as MPBF(Maximum Permissible Bank Finance).

Particulars

Classification

Working capital

Current assets such as cash,stocks,book-debts,other current assets

Net WC

Current assets – current liabilities or long term sources – long term
uses

Working capital gap

CA – CL

WC limits

Bank facilities needed to purchase current assets. The facilities are
cash credit, overdraft, bills purchase etc.

The working capital comprises;
 Amount of raw material of various kinds in store or in transportation.
 Amount of consumable stores and other material required for production process.
 Value of stock in process.
 Value of all finished goods including in transit.

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 Amount of receivables or sundry debtors.

Mean to Finance to working capital are;
 Credit available for suppliers on purchases.
 Surplus of long term funds over the long term uses.[i.e.Net Working Capital]
 Short term bank borrowing.
 Other current liabilities.

Concept of Net Working Capital
Generally net working capital refers current assets minus current liabilities. Working capital
measures how much in liquid assets a company has available to build its business. The
number can be positive or negative, depending on how much debt the company in carrying.
In general, companies that have a lot of working capital will be more successful since they
can expand and improve their operations. Companies with negative working capital may lack
the funds necessary for growth.
Net working capital also called liquid surplus, net current assets or current capital.

Meaning of Net Working Capital
Working capital refers to the funds required for financing the minimum total current assets.
Liquid surplus or net working capital refers to the surplus long term sources over long term
uses. It is desirable, that the net working capital should be positive which would signify
liquidity and availability of adequate working funds. If in a particular case, the net working
capital is negative, the difference will be called as net working capital deficit.

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Constituents of Current assets
1) Cash at bank
2) Cash in hand
3) Bills receivables
4) Sundry debtors
5) Inventories of stock as;
a) Raw material
b) Work in progress
c) Stores and spares
d) Finished goods
6) Temporary investment of surplus fund
7) Prepaid expenses
8) Accrued income
9) Marketable securities

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Constituents of current liabilities
1) Accrued or outstanding expenses
2) Short term loan and advances
3) Dividends payable
4) Bank overdraft
5) Provision and Taxation
6) Bills payables
7) Sundry credit

The gross working capital concept is financial or going concern concept whereas net working
capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the following
reasons:
1.

It enables the enterprise to provide correct amount of working capital at correct time.

2.

Every management is more interested in total current assets with which it has to
operate then the source from where it is made available.

3.

It take into consideration of the fact every increase in the funds of the enterprise
would increase its working capital.

4.

This concept is also useful in determining the rate of return on investments in
working capital. The net working capital concept, however, is also important for
following reasons:

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

It is qualitative concept, which indicates the firm‟s ability to meet to its
operating

expenses and short-term liabilities.



It indicates the margin of protection available to the short term creditors.



It is an indicator of the financial soundness of enterprises.



It suggests the need of financing a part of working capital requirement out of
the permanent sources of funds of working capital.

Classification of working capital
Working capital may be classified in two ways;
1)

On the basis of concept

2)

On the basis of time

On the basis of concept working capital can be classified as gross working capital
and net working capital. On the basis of time, working capital may be classified as:


Permanent or fixed working capital



Temporary or variable working capital



Seasonal working capital



Adhoc working capital



Working capital term loan



Working capital gap

Permanent/fixed working capital
Permanent or fixed working capital is minimum amount which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm
has to maintain a minimum level of raw material, workin-process, finished goods and cash
balance. This minimum level of current assets is called permanent or fixed working capital as
this part of working is permanently blocked in current assets. As the business grow the

29



requirements of working capital also increases due to increase in current assets.

Temporary/ Variable working capital
Temporary or variable working capital is the amount of working capital which is required to
meet the seasonal demands and some special exigencies. Variable working capital can further
be classified as seasonal working capital and special working capital. The capital required to
meet the seasonal need of the enterprise is called seasonal working capital. Special working
capital is that part of working capital which is required to meet special exigencies such as
launching of extensive marketing for conducting research, etc.
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.

Seasonal working capital
Seasonal working capital requirement for additional current assets due to seasonal nature of
the industry say rice sheller, fan manufacturing etc.

Adhoc working capital
Adhoc working capital means requirement of additional current assets for meeting the needs
arising out of special circumstances such as execution of special orders.

Working capital term loan
Working capital term loan is not used to buy long term assets or investment. Instead it is
used to clear up accounts payable, wages etc. A loan whose purpose is to finance everyday
operations of a company.

30



31



Managing of Working Capital
1) Working capital cycle
2) Sources of working capital
3) Handling of receivables (debtors)
4) Managing of payable

(creditors)

5) Inventory management
6) Key working capital ratio
7) Introducing plan ware
8) Copyright and legal stuff

Working capital cycle
Working capital is the cash needed to pay for the day to day operations of the business. In
other words, working capital is needed by the business to:
 Pay suppliers and other creditors
 Pay employees
 Pay for stock
 Allow for customer who is allowed to buy now, but pay later so called trade debtors.
Cash in

Goods sold

Payment to suppliers /employers

Goods purchased

32



2)

Sources of working capital

 Net Income
 Long term loans
 Sale of capital assets
 Injection of funds by stockholders
 Customers
 Trade vendors
 Commercial banks
 Short term loans
 Short term assets(Inventories, loans and advances, drs ,investment,cash and bank
balance)
 Short term liabilities(Creditors, Trade advances, borrowings and provisions)

These sources are main sources of working capital. All these sources play a very
important role in collecting working capital. Without these sources any business
cannot stand in the world. Therefore we can say that commencing of any business is
totally depending on working capital management. Working capital is the life blood
of most small businesses. Access to working capital provides the ability to support
and grow a healthy cash flow for your business. So let‟s take a look at just a few easy
sources of working capital. First did you know that your credit card receipts can be a
source of working capital? There are many small business lenders that will know now
purchase amount of your “future” credit card receipts and in return you get working
capital. If your business has account receivables with other businesses that too can be
a quick and easy source of working capital. With this source of working capital your
business sells the outstanding receivables to the lender and the lender gives your
business cash for working capital now.
Does your business own equipment? Owned equipment can be turned in to working
capital through a small business loan called a sale and leaseback. Your business sells
your equipment to the lender for cash you then lease the equipment back from the

33



lender for a monthly payment ,and at the end of lease your owns the equipment again.

34



Method of Working Capital
There are four methods of financing working capital gap. In order to explain the methods we
took an example of projected financial results of ABC traders this is as follows:

(Resin Lacks)

Liabilities
Capital

Amount

Assets

Amount

4.00

Fixed Assets

1.00

Unsecured Loans

2.00

Cash in hand

1.25

Sundry Creditors

3.25

Stocks

10.00

C/C Limit

10.00

Sundry Debtors

Total

35

19.25

Total

7.00

19.25



Sales

: Rs 60 Laces

Purchases

: Rs 59.15 Lacs

Cost of Sales

:Rs 60 Lacs

Gross Profit

: Rs 4 Lacs

Net Profit

: Rs 1.5 Lacs

CA

: Rs 18.25 Lacs

(Assets which are realizable within one year)

CL

: Rs 13.25 Lacs

(Liabilities which are payable within one year)

NWC = CA-CL
=5.00 Lacs

Current Ratio = CA/CL
=18.25/13.25

36

= 1.37:1



37



Holding Periods:
Stocks

= stock*365/Cost of Sales
= 65 Days

Debtors

= Debtors*365/Sales
= 43 Days

Creditors

= Creditors*365/Purchases
= 20 Days

A.

Traditional Method

Holding
Periods

Amount

65

10

25

2.5

7.5

43

Particulars

7

50

3.5

3.5

Margin%

Margin
Amt

MPBF

Stocks

Sundry
Debtors

38



Working
Expenses
0.25

100

0.25

Nil

6.25

11

Total
17.25
Less Creditors
20

3025

Amount
Sectioned
7075

Deficit in NWC = Rs 2.25 Lacs

B. First Method of Finance

S.No.

Particulars

Holding Period

Amount

Current Assets

A

Stock
65

10

43

7

S. Debtors
Others
0.25
Total
17.25
Current Liabilities

B

S. Creditors
20

39


3.25


Others
Nil

Nil

Total
3.25

C.

Working Capital Gap

A-B

D.

Stipulated margin

@ 25% in SSI and 40
% in trading units of
“A”

E.

Projected NWC

F.

MPBF

14.00
4.31

4.00

40

C-(D or E whichever
is higher)


9.69


C. Second Method of Finance
S. No.

Particulars

Holding Period

Amount

Current Assets

A.

Stock in Trade
65 Days

10.00

43 Days

7.00

S. Debtors
Others
0.25
Total
17.25
Current Liabilities

B.

S. Creditors
20 days

3.25

Others
Nil
Total
3.25

C.

Working Capital Gap

D.

Stipulated Margin @ 25%

E.

Projected NWC

F.

MPBF

(A-B)
14.00
25% of WCG
3.50
4.00

41

C-(D or E whichever
is higher)


10.00


42



D. Turnover Method
S. No.

Particulars

Amount

Accepted sales

A.

60.00 Lacs
Working Capital Requirement @ 25% of A

B.

15.00 Lacs
Margin @ 5% of A

C.

3.00 Lacs

Projected NWC

D.

4.00 Lacs
Permissible Limit = B-( C or D whichever is
higher)

E.

11.00 Lacs

43



CHAPTER- 3
CASES OF WORKING CAPITAL OF J&K

44



Balance Sheet of Jammu and Kashmir Bank ------------------- in Rs. Cr. -------------------

Mar '11 Mar '10

Mar '09

Mar '08

Mar '07

12 mths 12 mths

12 mths

12 mths

12 mths

Total Share Capital

48.49

48.49

48.49

48.49

48.49

Equity Share Capital

48.49

48.49

48.49

48.49

48.49

Share Application Money

0.00

0.00

0.00

28.10

0.00

Preference Share Capital

0.00

0.00

0.00

0.00

0.00

Reserves

3,430.19 2,961.97

2,574.37

2,232.34

1,960.24

Revaluation Reserves

0.00

0.00

0.00

0.00

Net Worth

3,478.68 3,010.46

2,622.86

2,308.93

2,008.73

Deposits

44,675.9437,237.16

33,004.10

28,593.26

25,194.2

Borrowings

1,104.65 1,100.21

996.63

751.79

620.19

Total Debt

45,780.5938,337.37

34,000.73

29,345.05

25,814.4

Other Liabilities & Provisions

1,248.88 1,198.97

1,069.67

1,102.02

823.31

Total Liabilities

50,508.1542,546.80

37,693.26

32,756.00

28,646.5

Mar '11 Mar '10

Mar '09

Mar '08

Mar '07

12 mths 12 mths

12 mths

12 mths

12 mths

Cash & Balances with RBI

2,974.96 2,744.73

2,302.95

3,219.97

1,854.77

Balance with Banks, Money at Call

573.85

2,971.81

1,217.27

1,758.99

Advances

26,193.64 23,057.23

20,930.41

18,882.61

17,079.9

Capital and Liabilities:

0.00

Assets

45

1,869.51



Investments

19,695.77 13,956.25

10,736.33

8,757.66

7,392.19

Gross Block

788.10

561.35

517.90

471.32

433.63

Accumulated Depreciation

396.47

358.54

321.61

289.10

256.94

Net Block

391.63

202.81

196.29

182.22

176.69

Capital Work In Progress

2.13

1.32

3.13

9.79

6.76

Other Assets

676.17

714.95

552.34

486.47

377.19

Total Assets

50,508.15 42,546.80

37,693.26

32,755.99

28,646.5

Contingent Liabilities

18,189.26 8,291.77

6,578.22

7,959.21

1,844.39

Bills for collection

8,790.08

3,502.74

3,933.76

1,996.48

Book Value (Rs)

717.58

541.04

470.49

414.36

46

3,799.74
621.00



Financials of J&K Bank (B/S as on 2010-011)
PARTICULARS

AMOUNT(2010)

AMOUNT(2011)

Capital

484,922

484,922

Reserve and Surplus

34,301,946

29,619,706

Deposit

446,759,350

372,371,604

Borrowings

11,046,502

11,002,064

Other liabilities and
provision

12,488,814

11,989,652

TOTAL

505,081,534

425,467,948

Cash and balance with RBI

29,749,638

27,447,263

Balance with Banks

5,738,477

18,695,109

Investment

196,957,679

139,562,473

Advances

261,936,350

230,572,250

Fixed Assets

3,937,702

2,041,332

Other assets

6,761,688

7,149,521

505,081,534

425,467,948

255,176,641

114,992,485

Capital and liabilities

ASSETS

TOTAL
Contingent liabilities

BALANCE SHEET AS ON 31ST March 2009-2010

47



AMOUNT AS ON 31ST
MARCH 2009
(„000‟omitted)

AMOUNT AS ON 31ST
MARCH 2010
(„000‟omitted)

Capital

484,922

484,922

Equity share capital

-

280,950

Reserve and surplus

25,743,684

22,323,351

Deposit

330,041,036

285,932,630

Borrowings

9,966,265

7.517,861

Other liabilities and
provisions
TOTAL

10,696,711

11,020,157

376,932,618

327,559,871

Cash and Balance with RBI

23,029,505

32,199,667

Balance with Banks

27,718,115

12,172,743

Investment

107,363,347

87,576,631

Advances

209,304,113

188,826,118

Fixed Assets

1,994,143

1,920,015

Other Assets

5,523,395

4,864,697

TOTAL

376,932,318

327,559,871

Contingent liabilities

91,409,177

112,644,286

Bills for Collection

9,490,429

6,285,380

PARTICULARS

Capital and Current liabilities

Assets

48



CHAPTER- 4
ANALYSIS OF WORKING CAPITAL

49



50



ANALYSIS OF WORKING CAPITAL
The analysis of working capital can be conducted through a number of devices, such as:
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting.
1. RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another.

The technique of ratio analysis can be employed for measuring short-term liquidity or
working capital position of a firm. The following ratios can be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Gross Profit Ratio
4. Fixed Assets turnover ratio
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Net Profit Ratio
9. Ratio of current liabilities to tangible net worth.
10. Total assets turnover ratio.
2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the

study the source from which additional funds were derived and the use to which these sources
were put. The funds flow analysis consists of
a. Preparing schedule of changes of working capital
b. Statement of sources and application of funds.

51



It is an effective management tool to study the changes in financial position (working capital)
business enterprise between beginning and ending of the financial dates.

3. WORKING CAPITAL BUDGETING

A budget is a financial and / or quantitative

expression of business plans and polices to be pursued in the future period time. Working
capital budget as a part of the total budge ting process of a business is prepared estimating
future long term and short term working capital needs and sources to finance them, and then
comparing the budgeted figures with actual performance for calculating the variances, if any,
so that corrective actions may be taken in future. He objective working capital budget is to
ensure availability of funds as and needed, and to ensure effective utilization of these
resources. The successful implementation of working capital budget involves the preparing of
separate budget for each element of working capital, such as, cash, inventories and
receivables etc.

52



Calculation of Ratios
1. Current Ratio: - Current ratio is calculated by current assets upon current liabilities.
It measures short term paying ability of the firm.
Year

2009

2010

2011

Current Assets

37371.65

42343.9

50116.52

Current Liabilities

36623.6

41347.8

49259.3

Current Ratio

1.02

1.02

1.01

Significance: - An ideal current ratio is 2:1. This ratio is used for short term paying ability of
the firm. Approximate of 1 of current ratio the creditors will be able to get their payment in
full.
2. Quick Ratio: - This ratio is also known as liquid ratio. It measures short term paying
ability by measuring short term liquidity.

Year

2009

2010

2011

Liquid assets

37371.65

42343.9

50116.52

Current liabilities

36623.6

41347.8

49259.3

Liquid Ratio

1.024

1.02

1.01

.
Significance: - This ratio is able to payment for its creditors. This ideal figure is 1.

53



3. Gross profit ratio: - Gross profit ratio indicates the efficiency of the production or
operation of trading. It expresses relation between gross profit and net sales.
G.P. Ratio= Gross profit/net sales* 100
Year

2009

2010

2011

Gross profit

774.45

958.21

1149.49

Net Sales

53934.51

60294.39

70869.57

G.P.R.

14.3%

15.8%

16.2%

Significance:- This ratio indicates the degree to which the selling price of goods per
unit may decline without resulting in losses from operations to the firm. If there is
continuous increment in gross profit ratio then it means the selling price of goods is
increasing day by day.
4. Net Profit Ratio: - Net profit ratio indicates efficiency of P&L A/C of the firm. It
intends relation between net profit and net sales.
Net Profit Ratio= N.P. /Net sales*100
Year

2009

2010

2011

Net Profit

409.84

512.38

615.2

Net sales

53934.51

60294.39

70869.57

N.P.R

7.5%

8.4%

8.6%

Significance: - Net profit ratio indicates net margin on sales. This margin is
continuously increasing year to year.

54



5. Fixed assets Turnover Ratio: - It indicates the investment in fixed assets has been
judicious or not. It calculated by the following formula;
FATOR = Net sales /Net fixed assets
Net fixed assets = Fixed assets – depreciation
Year

2009

2010

2011

Net sales

53934.51

60294.39

70869.57

Net fixed assets

1,994,1.43

3,937,7.02

1,920,0.15

FATOR

2.7 Times

1.53 Times

3.69 Times

Significance: - It indicates the extent to which the investment in fixed assets
contributes towards sales. It compared with the previous period, it indicates whether
the investment in fixed assets has been judicious or not.
6. Working capital Turnover Ratio: - Working capital ratio is talking about utilization of
working capital for the firm. Working capital turnover ratios express the relation
between net sales and working capital. It is calculate by the following formula;
WCTOR = Net Sales/Working capital
Year

2009

2010

2011

Net Sales

53934.51

60294.39

70869.57

Working capital

37371.65

42343.9

50116.52

WCTOR

1.44 Times

1.42 Times

1.41 Times

7. Total assets turnover ratio: - Total assets turnover ratio intends to the total assets to
total turnover. It indicates to efficiency of total assets and total turnover. This ratio is
very important for estimate the position of the firm. This ratio is calculated by the
following formula;

55



TATOR = Total assets/total turnover
Year

2009

2010

2011

Total assets

376,932,318

327,559,871

425,467,948

Turnover

53934.51

60294.39

70869.57

TATOR

69%

54%

60%

Significance;-

The Bank‟s aggregate business crossed yet another
psychological mark and stood at ` 70,869.57 Crores at
the end of the financial year 2010-11. The Bank‟s total
business increased by ` 10,575.18 Crores from the
previous year‟s figure of ` 60,294.39 Crores, registering
a growth of 17.54%

The above parameters are used for critical analysis of financial position. With the evaluation
of each component, the financial position from different angles is tried to be presented in well
and systematic manner. By critical analysis with the help of different tools, it becomes clear
how the financial manager handles the finance matters in profitable manner in the critical
challenging atmosphere, there commendation are made which would suggest the organization
in formulation of a healthy and strong position financially with proper management system. I
sincerely hope, through the evaluation of various percentage, ratios and comparative analysis,
the organization would be able to conquer it‟s in efficiencies and makes the desired changes.

56



ANALYSIS OF FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and consistent
accounting procedure to convey an under-standing of some financial aspects of a business
firm. It may show position at a moment in time, as in the case of balance sheet or may reveal
a series of activities over a given period of time, as in the case of an income statement. Thus,
the term „financial statements‟ generally refers to the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS: According to accounting Principal Board
of America (APB) states. The following objectives of financial statements: 1. To provide reliable financial information about economic resources and obligation of a
business firm.
2. To provide other needed information about charges in such economic resources and
obligation.
3. To provide reliable information about change in net resources (recourses less obligations)
missing out of business activities.
4. To provide financial information those assets in estimating the learning potential of the
business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not
present a final picture a final picture of a concern. The utility of these statements is
dependent upon a number of factors. The analysis and interpretation of these
statements must be done carefully otherwise misleading conclusion may be drawn.
Financial statements suffer from the following limitations: 1. Financial statements do not given a final picture of the concern. The data given in these
statements is only approximate. The actual value can only be determined when the business is
sold or liquidated.

57



2. Financial statements have been prepared for different accounting periods, generally one
year, during the life of a concern. The costs and incomes are apportioned to different periods
with a view to determine profits etc. The allocation of expenses and income depends upon the
personal judgment of the accountant. The existence of contingent assets and liabilities also
make the statements imprecise. So the financial statements are at the most interim reports
rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give final and
accurate position. The value of fixed assets in the balance sheet neither represent the value for
which fixed assets can be sold nor the amount which will be required to replace these assets.
The balance sheet is prepared on the presumption of a going concern. The concern is
expected to continue in future. So, the fixed assets are shown at cost less accumulated
depreciation. Moreover, there are certain assets in the balance sheet which will realize
nothing at the time of liquidation but they are shown in the balance sheets.
4. The financial statements are prepared on the basis of historical costs or original costs. The
value of assets decreases with the passage of time current price changes are not taken into
account. The statements are not prepared with the keeping in view the economic conditions.
The balance sheet loses the significance of being an index of current economic realities.
Similarly, the profitability shown by the income statements may be representing the earning
capacity of the concern.
5. There are certain factors which have a bearing on the financial position and operating
result of the business but they do not become a part of these statements because they cannot
be measured in monetary terms. The basic limitation of the traditional financial statements
comprising the balance sheet, profit & loss A/c is that they do not give all the information
regarding the financial operation of the firm. Nevertheless, they provide some extremely
useful information to the extent the balance sheet mirrors the financial position on a particular
data in lines of the structure of the basis of assets, liabilities etc. and the profit & loss A/c
shows the result of operation during a certain period in terms revenue obtained and cost
incurred during the year.

58



FINANCIAL STATEMENT ANALYSIS : - It is the process of identifying the financial
strength and weakness of a firm from the available accounting data and financial statements.
The analysis is done CALCULATIONS OF RATIOS. Ratios are relationship expressed in
mathematical terms between figures, which are connected with each other in some manner.

59



CONCLUSION
Working capital may be regarded as the life blood of business. 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. Every business needs funds for two purposes.

* Long term funds are required to create production facilities through purchase of fixed
assets such as plants, machineries, lands, buildings & etc

* Short term funds are required for the purchase of raw materials, payment of wages, and
other day-to-day expenses. . It is otherwise known as revolving or circulating capital
It is nothing but the difference between current assets and current liabilities. i.e. Working
Capital = Current Asset – Current Liability.
Businesses use capital for construction, renovation, furniture, software, equipment, or
machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is
also used often by businesses to put a down payment down on a piece of commercial real
estate. Working capital is essential for any business to succeed. It is becoming increasingly
important to have access to more working capital when we need it.
Importance of Adequate Working Capital
A business firm must maintain an adequate level of working capital in order to run its
business smoothly. It is worthy to note that both excessive and inadequate working capital
positions are harmful. Working capital is just like the heart of business. If it becomes weak,
the business can hardly prosper and survive. No business can run successfully without an
adequate amount of working capital.
Danger of inadequate working capital
When working capital is inadequate, a firm faces the following problems.
Fixed Assets cannot efficiently and effectively be utilized on account of lack of sufficient
working capital. Low liquidity position may lead to liquidation of firm. When a firm is
unable to meets its debts at maturity, there is an unsound position. Credit worthiness of the

60



firm may be damaged because of lack of liquidity. Thus it will lose its reputation. There by, a
firm may not be able to get credit facilities. It may not be able to take advantages of cash
discount.

It is helpful for us, as a business owner, to think of working capital in terms of five
components:

1. Cash and equivalents. This most liquid form of working capital requires constant
supervision. A good cash budgeting and forecasting system provides answers to key
questions such as:
Is the cash level adequate to meet current expenses as they come due?
What is the timing relationship between cash inflow and outflow?
When will peak cash needs occur?
When and how much bank borrowing will be needed to meet any cash shortfalls?
When will repayment be expected and will the cash flow cover it?

2. Accounts receivable. Many businesses extend credit to their customers. If you do, is the
amount of accounts receivable reasonable relative to sales? How rapidly are receivables being
collected? Which customers are slow to pay and what should be done about them?

3. Inventory. Inventory is often as much as 50 percent of a firm's current assets, so naturally it
requires continual scrutiny. Is the inventory level reasonable compared with sales and the
nature of your business? What's the rate of inventory turnover compared with other
companies in your type of business?

4. Accounts payable. Financing by suppliers is common in small business; it is one of the
major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable
relative to what you purchase? What is your firm's payment policy doing to enhance or
detract from your credit rating?

61



5. Accrued expenses and taxes payable. These are obligations of your company at any given
time and represent a future outflow of cash.

62



FINDINGS
Ratio analysis can be used by financial executives to check upon the efficiency with which
working capital is being used in the enterprise. The following are the important ratios to
measure the efficiency of working capital. The following, easily calculated, ratios are
important measures of working capital utilization.
Ratio

Formulae

Result

Interpretation

`

Average Stock *

= x days

On average, you turn over the value of your

365/

entire stock every x days. You may need to

Cost of Goods

break this down into product groups for

Sold

effective stock management.
Obsolete stock, slow moving lines will extend
overall stock turnover days. Faster production,
fewer product lines, just in time ordering will
reduce average days.

Receivables Debtors * 365/
Ratio

= x days

It takes you on average x days to collect
monies due to you. If you‟re official credit

Sales

(in days)

terms are 45 day and it takes you 65 days...
why?
One or more large or slow debts can drag out
the average days. Effective debtor
management will minimize the days.

Payables

Creditors * 365/

= x days

On average, you pay your suppliers every x

Ratio

Cost of Sales (or

days. If you negotiate better credit terms this

(in days)

Purchases)

will increase. If you pay earlier, say, to get a
discount this will decline. If you simply defer
paying your suppliers (without agreement) this
will also increase - but your reputation, the
quality of service and any flexibility provided
by your suppliers may suffer.

63



Current

Total Current

= x times Current Assets are assets that you can readily

Ratio

Assets/

turn in to cash or will do so within 12 months

Total Current

in the course of business. Current Liabilities

Liabilities

are amount you are due to pay within the
coming 12 months. For example, 1.5 times
means that you should be able to lay your
hands on $1.50 for every $1.00 you owe. Less
than 1 time e.g. 0.75 means that you could
have liquidity problems and be under pressure
to generate sufficient cash to meet oncoming
demands.

Quick Ratio (Total Current

= x times Similar to the Current Ratio but takes account

Assets -

of the fact that it may take time to convert

Inventory)/

inventory into cash.

Total Current
Liabilities
Working

(Inventory +

As %

A high percentage means that working capital

Capital

Receivables -

Sales

needs are high relative to your sales.

Ratio

Payables)/
Sales

Other working capital measures include the following:

Bad debts expressed as a percentage of sales.
Cost of bank loans, lines of credit, invoice discounting etc.
Debtor concentration - degree of dependency on a limited number of customers.
Once ratios have been established for our business, it is important to track them over time and
to compare them with ratios for other comparable businesses or industry sectors.

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65



SUMMARY
Cash flows in a cycle into, around and out of a business. It is the business's life blood and
every manager's primary task is to help keep it flowing and to use the cash flow to generate
profits. If a business is operating profitably, then it should, in theory, generate cash surpluses.
If it doesn't generate surpluses, the business will eventually run out of cash and expire. The
faster a business expands, the more cash it will need for working capital and investment. The
cheapest and best sources of cash exist as working capital right within business. Good
management of working capital will generate cash will help improve profits and reduce risks.
Bear in mind that the cost of providing credit to customers and holding stocks can represent a
substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash - Inventory (stocks and workin-progress) and Receivables (debtors owing you money). The main sources of cash are
Payables (your creditors) and Equity and Loans.

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 (e.g. collect monies
due from debtors more quickly) or reduce the amount of money tied up (e.g. 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 e.g. get longer
credit or an increased credit limit, you effectively create free finance to help fund future sales.

66



CONCLUSION
Any change in the working capital will have an effect on a business's cash flows. A positive
change in working capital indicates that the business has paid out cash, for example in
purchasing or converting inventory, paying creditors etc. Hence, an increase in working
capital will have a negative effect on the business's cash holding. However, a negative change
in working capital indicates lower funds to pay off short term liabilities (current liabilities),
which may have bad repercussions to the future of the company. If you would like to get a
better understanding of financial statements or budgeting contact nkavithamba@yahoo.co.in.
Therefore we can say that working capital plays a very important role in Corporate Banking.
o Without working capital any business cannot run.
The bank aggregate business crossed yet another psychological mark and stood
Rs70869.57 crores at the end of financial year 2010-2011.
o The bank total business increased by Rs 10575.18 crores from the previous figure of
60294.39 Crores, registering a growth of 17.54%.
o The bank continued its prudent approach in expanding quality credit assets in line
with its policy on credit risk management. Its net advance increased by Rs 3136.41
Crores.
o The Bank‟s performance in the recovery of NPAs during the year continued to be
good.
o Investment portfolio increased by Rs 5,739.52 Crores from 13956.25 and 19695.77 as
on 2011.
o The Bank has earned an income of Rs 26.14 crores from the Insurance business. In
life insurance mobilized a business of Rs 103.02 crores and in non-life segment Rs
59.36 crores was mobilized during the year.
o The gross profit for the financial year 2010-11 stood at Rs 1149.49 crores.
o The highest ever net profit of Rs 615.2 crores.

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SUGGESTION
After a lot of research of working capital, I am able to say that there should be more liquid
surplus for smooth running of any business. But under the corporate banking this is more
prominent requirement. Because in banking, working capital is more exchangeable as
compare other organization. When we provide term loan to our customer as per RBI
guidelines. Loan can be short term or long term. Profitability of the bank is also affect by
working capital.
Generally, all things are affected by working capital under in a house.
The J&K Bank is the only private sector bank in the country assigned with the responsibility
of convening State Level Banker‟s Committee meetings. The bank continued to discharge its
lead bank responsibility in 12 out of 22 districts of J&K State satisfactory.

68



REFERENCES AND BIBLIOGRAPHY
During the completion of this project work I have taken references from various sources
which include:

 Annual report of The Jammu and Kashmir Bank ltd.
 Magazines such as Business Economics, Newspaper such as Greater Kashmir, Bank
Dairy, Bank Catalogue, Bank magazine etc.
 Yearly journals of the Jammu and Kashmir Bank Ltd.
 Website of the bank;

www.jkbank.net
www.jkbank.com
www.rbi.org.in
 Circulars of J&K Bank

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