Working capital management and the importance

Working capital

1. A STUDY ON WORKING CAPITAL MANAGEMENT IN TTPL Submitted by Southa 20203081201238

2. THEORERICAL BACKGROUND MEANING OF WORKING CAPITAL Those current assets, which are convertible into cash, within a period of one accounting year and those funds needed for meeting day-to-day operations. Working Capital means the funds (i.e. capital) available and used for day-to-day operations ( ie . working) of an enterprise. Working capital is defined as the excess of current assets over current liabilities and provisions. DEFINITION OF WORKING CAPITAL MANAGEMENT     1. According to Prof.K.V.Smith , "Working Capital Management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter-relationship that exists betweenthem ."   2. James C. Van Horne is of the view that, "Current assets, by definition, are assets normally converted into cash within one year. Working Capital Management is concerned with the administration of these assets - namely cash and marketable marketable securities, receivables and inventories.

3. SIGNIFICANCE OF WORKING CAPITAL It protects a business from the adverse effects of shrinkage of the values of current assets. It ensures to a greater extent the maintenance of a company's credit standing and provides for such emergencies as strikes, floods, fires, etc. It permits the carrying of inventories at a level that would enable a business to serve satisfactorily the needs of its customers. It enables a company to extent favorable credit terms to customers. It enables a business to withstand periods of depression smoothly .   DANGERS OF INADEQUATE WORKING CAPITAL It cannot buy its requirements in bulk and cannot avail of discounts, etc. It becomes difficult for the firm to exploit favourable market conditions and undertake profitable projects due to lack of working capital. The rate of return on investments also falls with the shortage of working capital. It is not possible for it to utilize production facilities fully for want of working capital. The modernization of equipment and even routine repairs and maintenance facilities may be difficult to administer. A company will not be able to pay its dividends because of the non-availability of funds. A company may have to borrow funds at exorbitant rate of interest. Its low liquidity may lead to low profitability in the same way as low profitability results in low liquidity.

4. DATA ANALYSIS AND INTERPRETATION YEAR CURRENT ASSET CURRENT LIABILITY WORKING CAPITAL 2017 779272351 1648166289 -868893938 2018 972359876 1674398101 -702038225 2019 1210290427 1827432143 -617141716 2020 1231991149 2004693011 -772701862 2021 1093056806 2410547653 -1317490847 WORKING CAPITAL W o rking capital = Current asset – Current liability INFERENCE: The working capital from 2017 to 2021 is not satisfactory. Low working capital means that the company has not enough liquid asset to meet day to day expenses.

5. RATIO ANALYSIS 1) LIQUIDITY RATIOS 1.1) Current ratio The ratio is worked out by dividing the current assets of the concern by its Current liabilities. Current Ratio = Current Assets/ Current liabilities INFERENCE: The above table 1.1 shows that the current ratio of TTPL is not close to the standard ratio. So it is not satisfactory for the past 5 years. YEAR CURRENT ASSET CURRENT LIABILITY CURRENT RATIO 2017 779272351 1648166289 0.47 2018 972359876 1674398101 0.58 2019 1210290427 1827432143 0.66 2020 1231991149 2004693011 0.61 2021 1093056806 2410547653 0.45

6. 1.2 QUICK RATIO Quick ratio = Liquid Assets/Current liabilities Inference The above table 1.2 shows that, the quick ratio of TTPL does not shows a satisfactory level as it is close to the low level. It means that the company does not has sufficient liquid asset to cover the current liabilities. The previous year indicates also a very low financial position and a low solvency position. Year Liquid assets Current liabilities Quick ratio 2017 382753434 1648166289 0.23 2018 543097467 1674398101 0.32 2019 668949840 1827432143 0.36 2020 837944333 2004693011 0.41 2021 780890565 2410547653 0.32

7. 2) LEVERAGE RATIOS 2.1 Debt-Equity ratio Debt-Equity Ratio = Total liabilities/ Shareholders fund INFERENCE: The favorable Debt- Equity ratio is 2:1. It is observed in the above table .2.1 that, the shareholders fund is in increasing trend but also the liabilities also. Debt equity ratio from 2017 to 2020 is not satisfactory but in 2021 the ratio is low and satisfactory. Year TOTAL LIABILITY SHAREHOLDERS FUND DEBT-EQUITY RATIO 2017 1463867691 807684656 1.81 2018 1638917574 630509849 2.59 2019 1842493344 549223640 3.35 2020 1880116859 709665183 2.64 2021 1802905593 1380353211 1.3

8. 2.2 PROPRIETARY RATIO Proprietary Ratio= Shareholders Fund/Total Assets Inference It is observed from the above table 2.2 that, the proprietary ratio was fluctuating over the past five years. The total asset of the company is satisfactory, and it is higher than the shareholders fund, which is actually good. The company attained the highest proprietary ratio on 2021 and lowest proprietary ratio on 2019 for the past 5 years. Year SHAREHOLDERS FUND TOTAL ASSETS PROPRIETARY RATIO 2017 807684656 1463867691 0.55 2018 630509849 1638917574 0.38 2019 549223640 1842493344 0.29 2020 709665183 1880116859 0.37 2021 1380353211 1802905593 0.76

9. 3.ACTIVITY RATIOS 3.1 WORKING CAPITAL TURN OVER RATIO Working Capital Turnover Ratio =Net sales/ working Capital INFERENCE: It is observed from the above table 3.1 that, the working capital turnover ratios show major changes over the year. The working capital turnover ratio keeps decreasing for the past five yeas. The decreasing trend of the sales causes the lower working capital turnover ratios. So this decreasing trend shows the poor performance of the company. The working capital turn over ratio is in negative value which means the current liabilities exceed its current income and assets . Year Net Sales Working Capital Working Capital Turnover Ratio 2017 153949552 -868893938 -0.17 2018 2021313272 -702038225 -2.87 2019 2086700693 -617141716 -3.38 2020 1777344062 -772701862 -2.3 2021 1656100087 -1317490847 -1.25

10. 3.2 INVENTORY TURNOVER RATIO Inventory Turnover Ratio = Cost of goods Sold / Average Inventory INFERENCE: It is observed from the above table .3.2 that, the inventory turnover ratios shows a increasing trend over the past five years. That means, the stocks are moving well and there is a efficient inventory management; and shows a very good improvement on the financial year 2021, which is satisfactory as compared to the previous years. YEAR COST OF GOODS SOLD INVENTORY INVENTORY TURN OVER RATIO 2017 1359956023 396518917 3.42 2018 1556140177 429262409 3.62 2019 2028309429 541340587 3.74 2020 1873121283 394046816 4.75 2021 2326203880 312166241 7.45

11. 3.3 DEBTOR-TURNOVER RATIO Debtor-turnover ratio =Net sales/Average trade recievables INFERENCE: From the above table 3.3.3. , it is inferred that the debtors turnover ratios keep varying over the periods. The highest ratio was on 2017 and then later shows a decreasing trend. But it runs under satisfactory level as the company’s credit policy is effective. It means that your customers are paying on time and TTPL is good at collecting. YEAR NET SALES AVERAGE TRADE RECIEVABLES DEBTOR TURN OVER RATIO 2017 1539495522 81830947 18.3 2018 2021313272 135094354 14.9 2019 2086700893 226568170 9.2 2020 1777344062 179993687 9.8 2021 1656100087 133996701 12.3

12. 3.4 FIXED ASSET TURNOVER RATIO Fixed asset turnover ratio=Net sales / Fixed assets INFERENCE: It is observed from the table 3.3.3.4 that, the fixed asset turnover ratios are decreasing in nature. So it is concluded that there is no effective utilization of fixed asset. The highest ratio was on the period of 2019 and the lowest ratio was on the year 2017 . The fixed asset turnover ratio of the company is not satisfactory YEAR NET SALES FIXED ASSET FIXED ASSET TURNOVER RATIO 2017 1539495522 684595340 2.24 2018 2021313272 666557698 3.03 2019 2086700893 632202918 3.3 2020 1777344062 648125710 2.74 2021 1656100087 708928787 2.33

13. 3.5 CURRENT ASSET TURNOVER RATIO CURRENT ASSET TURNOVER RATIO = NET SALES /CURRENT ASSET INFERENCE: It is observed form the table 3.3.3.5 that, the current asset turnover ratio shows the decreasing trend. The current asset turnover ratio is highest in the period of 2018 and lowest in the period of 2020, So it is concluded that better to increase the current position. YEAR NET SALES CURRENT ASSET CURRENT ASSET TURNVER RATIO 2017 1539495522 779272351 1.97 2018 2021313272 972359876 2.07 2019 2086700893 1210290427 1.72 2020 1777344062 1231991149 1.44 2021 1656100087 1093056806 1.51

14. 4.PROFITABILITY RATIOS 4.1 NET PROFIT RATIO Net profit ratio = Net Profit / Net Sales×100 Inference Higher the ratio is better because it gives improved efficiency of the concern. From the above table 3.3.4.1, it is observed that during the year 2018 the net profit ratio is high and shows decreasing trend then. So the operational efficiency of the organization is not effective. YEAR NET PROFIT NET SALES NET PROFIT RATIO 2017 33164832 1539495522 2.15 2018 192549640 2021313272 9.52 2019 80585865 2086700893 3.86 2020 -68667385 1777344062 -3.86 2021 -635105997 1656100087 -38.34

15. 4.2 Return on Total Asset Return on Total Asset=Net Profit/Total Asset *100 INFERENCE: It is inferred from the above table 3.3.4.2 that, the return on total asset shows the decreasing trend as it shows the negative values. Also it indicates the poor performance of the company. The return on total asset is highest during the period of 2018 and lowest during the period of 2021. YEAR NET PROFIT TOTAL ASSET RETURN ON TOTAL ASSET 2017 33164832 1463867691 2.26 2018 192549640 1638917574 11.74 2019 80585865 1842493344 4.37 2020 -68667385 1880116859 -3.65 2021 -635105997 1802905593 -35.22

16. 4.3 Gross Profit Ratio Gross Profit Ratio=Gross Profit/ Net Sales * 100 INFERENCE : It is observed from the above table 3.3.4.3 that, the gross profit trend is decreasing over the past five years and is not satisfactory. So the company needs to more concentrate on getting high gross profit. YEAR GROSS PROFIT NET SALES GROSS PROFIT RATIO 2017 179539499 1539495522 11.66 2018 465173095 2021313272 23.01 2019 58391464 2086700893 2.79 2020 -95777221 1777344062 -5.38 2021 -670103793 1656100087 -40.46 .

17. FINDINGS, SUGGESTIONS & CONCLUSION FINDINGS The working capital of the company shows a decreasing trend over the past five years and is not satisfactory .The working capital of the TTPL is in negative values and means that the organization does not have enough capital to meet the day to day expenses. The current ratio of TTPL is not close to the standard ratio. So it is not satisfactory for the past 5 years. The quick ratio of TTPL does not shows a satisfactory level as it is not close to the standard level. It means that the company doesn’t has sufficient liquid asset to cover the current liabilities The previous year indicates also a very low financial position and a low solvency position. Debt equity ratio from 2017 to 2020 is not satisfactory but in 2021 the ratio is low and satisfactory. It is observed that, the shareholders fund is in increasing trend but also the liabilities also. The proprietary ratio was fluctuating over the past five years. The total asset of the company is satisfactory, and it is higher than the shareholders fund, which is actually good. The company attained the highest proprietary ratio on 2021 and lowest proprietary ratio on 2019 for the past 5 years. The working capital turnover ratio keeps decreasing for the past five years. The decreasing trend of the sales causes the lower working capital turnover ratios. So this decreasing trend shows the poor performance of the company.

18. The inventory turnover ratios shows a increasing trend over the past five years. That means, the stocks are moving well and there is efficient inventory management; and shows a good improvement on the financial year 2020-21, which is satisfactory as compared to the previous years. The debtors turnover ratios keep varying over the periods. The highest ratio was on 2017 and then later shows a decreasing trend. But it runs under satisfactory level as the company’s credit policy is effective. It means that your customers are paying on time and TTPL is good at collecting. The highest ratio was on the period of 2019 and the lowest ratio was on the 2017 year. The fixed asset turnover ratio of the company is not satisfactory. The current asset turnover ratio is highest in the period of 2018 and lowest in the period of 2020, so it is concluded that better to increase the current position. It is observed that during the year 2018 the net profit ratio is high and shows decreasing trend then. So the operational efficiency of the organization is not effective. The return on total asset shows the decreasing trend as it shows the negative values. Also it indicates the poor performance of the company. The return on total asset is highest during the period of 2018 and lowest during the period of 2021. The gross profit trend is decreasing over the past five years and is not satisfactory. So the company needs to more concentrate on getting high gross profit.

19. SUGGESTION It is observed that the working capital of the organization is not enough and is in negative values because of the decrease in the sales . T he company should focus on improving its actual sales . The inventory turnover ratios shows a increasing trend over the past five years . The company should reform new credit policies as the current ones are not much effective TTPL should focus on lowering their current liabilities and increasing their assets T he operational efficiency of the organization is not effective, therefore it has to focus on improving its operational sector T he company should focus on all these aspects to improve its working capital efficiency

20. CONCLUSION The above study is conducted by the secondary data provided by the company. Working Capital Management is one of the tending contemporary issue , which the business enterprises and organizations are facing now-a-days. So , TTPL should apply the Working Capital Management techniques and prepare smart techniques for procurement of Working Capital for the growth, profitability and ultimate success of their business. The working capital of the TTPL is in declining manner and the management should focus on that. A proper working capital is needed in order to smoothly operating of the organization.

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