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Working Capital Management In A Manufacturing Company Finance Essay

Era Buildsys Limited is the pre- engineering arm of the Era group of companies. An ISO 9001:2000, ISO 14001:2004 and OHSAS 18001:2007 certified company, Era Buildsys holds the distinction of being one of the single largest, fastest growing and fully integrated PEB manufacturing units at Pantnagar in North India.

The Company is equipped with a fully integrated facility, an automated laboratory and ultra-modern machinery for offering complete turnkey Pre-Engineered Building (PEB) solutions for hi-end applications across diverse sectors. The group’s construction prowess and over two decades of experience have armed Era Buildsys with remarkable design, execution, erection and on-time delivery capabilities.

Working capital is the life blood of the company. From February to May 2011, I propose to conduct a thorough analysis of the working capital management at Era Buildsys Limited. I plan to study the working capital requirements of the company by analyzing the secondary information available in annual reports, company records and other internal reports.

The project contain the basic postulates of working capital, procedure of analysis of working capital, ratio being used to define the working capital and the impact of working capital in the company in case of excess or inadequacy. Also, the project contains analysis of estimation of working capital requirement and the procedure to estimate working capital requirement in manufacturing and trading concern and from the data available it can be concluded that it holds a very strong position in the market.

Working capital management is a very important facet of financial management due to:

Investment in current asset represents a substantial portion of total investment.

Investments in current asset and level of current liability have to be geared quickly to change sales.

I also plan to collect the data regarding company policies, future plans, possible expansions etc. by interviewing head of departments and other staff for deriving my own set of assumptions to come out with the projected financial figures, which are needed for the completion of credit monetary assessment form.

After compilation and tabulation of the above said data, I plan to analyze it with the help of different financial ratios and other financial instruments and compare the result with industry benchmarks, hence identifying the financial strengths and weakness of the company.

Finally after a thorough analysis of the data, a set of most important attributes/ components can be found out, which has a major contribution to the working capital cycle or requirement of the company. So that steps or methods can be identified to control or manage these components.

Review of literature:

Impact of Working Capital Management Policies on Corporate Performance—An Empirical Study

Sushma Vishnani, Bhupesh Kr. Shah (2007)

It is felt that there is the need to study the role of working capital management policies on profitability of a company. Conventionally, it has been seen that if a company desires to take a greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, therefore of profitability. Hence, a company should strike a balance between liquidity and profitability. In this paper an effort has been made to make an empirical study of Indian Consumer Electronics Industry for assessing the impact of working capital policies & practices on profitability during the period 1994–95 to 2004–05. The impact of working capital policies on profitability has been examined by computing coefficient of correlation and regression analysis between profitability ratio and some key working capital policy indicator ratios.

Working Capital Management: A Study on British American

Tobacco Bangladesh Company Ltd.

Md. Sayaduzzaman (2007)

The efficiency of working capital management of British American Tobacco Bangladesh Company Ltd. is highly satisfactory due to the positive cash inflows, planned approach in managing the major elements of working capital. Applications of multi-dimensional models of current assets mix may have positive impact on the continuous growth & development of this multinational enterprise. This depends on co-operation of the stakeholders and business environment in the context of globalization.

The Effect of Working Capital Management on Firm Profitability: Evidence from Turkey

F. Samiloglu and K. Demirgunes (2008)

The aim of this study is to analyze the effect of working capital management on firm profitability. In accordance with this aim, to consider statistically significant relationships between firm profitability and the components of cash conversion cycle at length, a sample consisting of Istanbul Stock Exchange (ISE) listed manufacturing firms for the period of 1998- 2007 has been analyzed under a multiple regression model. Empirical findings of the study show that accounts receivables period, inventory period and leverage affect firm profitability negatively; while growth (in sales) affects firm profitability positively.

Working Capital Management, Growth and Performance of New Public Companies By Beneda, Nancy, Zhang, Yilei (2008)

The current study contributes to the literature by examining impact of working capital management on the operating performance and growth of new public companies. The study also sheds light on the relationship of working capital with debt level, firm risk, and industry. Using a sample of initial public offerings (IPO's), the study finds a significant positive association between higher levels of accounts receivable and operating performance. The study further finds that maintaining control (i.e. lower amounts) over levels of cash and securities, inventory, fixed assets, and accounts payables appears to be associated with higher operating performance, as well. We find that IPO firms which are experiencing unusually high growth tend not to perform as well as those with low to moderate growth. Further firms which are experiencing high growth tend to hold higher levels of cash and securities, inventory, fixed assets, and accounts payables. These findings tend to suggest that firms are willing to sacrifice performance (accept low or negative operating returns) to increase their growth levels. The higher level of growth is also associated with higher operating and financial risk. The findings of this study suggest that perhaps IPO firms should stay more focused on their operating performance than on maintaining high growth levels.

Working Capital and Financial Management Practices in the Small Firm Sector Michael J. Peel, Nicholas Wilson (2008)

MICHAEL J. PEEL IS A LECTURER IN accountancy and finance at Cardiff Business School, University of Wales, and Nicholas Wilson is Professor of Credit Management at the University of Bradford, England. Very little research has been conducted on the capital budgeting and working capital practices of small firms. The purpose of this paper is to present the results of a preliminary study on the working capital and financial management practices of a sample of small firms located in the north of England. In general, the results of the survey indicated that a relatively high proportion of small firms in the sample claimed to use quantitative capital budgeting and working capital techniques and to review various aspects of their companies' working capital. In addition, the firms which claimed to use the more sophisticated discounted cash flow capital budgeting techniques, or which had been active in terms of reducing stock levels or the debtors' credit period, on average tended to be more active in respect of working capital management practices. It is hoped that the issues raised will stimulate further theoretical and empirical contributions on this neglected and important area of small business research.

Study on working capital management

Stuttgart/Munich, June 29, 2009

Roland Berger Strategy Consultants study on working capital management: Optimizing current assets helps tap into cash potential and build buffers against insolvency

Our study entitled "Working capital – Cash for recovery" looks at 216 European companies with total sales of EUR 3,700 billion and total EBIT of EUR 422 billion Presently, the insolvency risk is increasing as higher cash requirements coincide with reduced cash supply and high financing costs

Internal sources of finance are becoming more interesting: one of the main lever is tapping into the cash potential in working capital

The companies surveyed had a combined potential of EUR 353 billion in Q1 2009, roughly one third more than in 2008.

Relative to tied-up working capital, utilities and engineered products companies have the greatest cash reserves hidden in their working capital.

In the current economic situation, companies are facing a higher risk of insolvency. On the one hand, they need more cash; on the other, lenders are more tightfisted than usual and the financing costs are higher. In its study entitled "Working capital – Cash for recovery", Roland Berger Strategy Consultants has analyzed 216 European companies by taking a close look at their internal sources of finance.

Result- At the moment, releasing the cash reserves hidden in working capital offers the greatest potential for improving liquidity. According to the Roland Berger experts, the companies surveyed had a total cash potential of EUR 353 billion. This turned out to be especially true for utilities and engineered products companies.

"In the current recession, working capital is emerging as a key source of internal finance," says Roland Schwientek, Partner at Roland Berger's Operations Strategy Competence Center. Increased cash requirements and a reduced cash supply with higher financing costs combine to increase the likelihood of insolvency. In their study called "Working capital – Cash for recovery", the experts highlight alternative sources of internal finance: "As some traditional sources of cash have dried up, the most promising solution is to tap into the liquidity potential hidden in working capital," says Schwientek. According to the experts, internal finance based on optimized working capital is much more effective than external finance. Even small improvements in receivables, inventories and payables can generate significant reductions in external finance requirements.

Objective of the Project:

To make item wise analysis of the elements or component of working capital to identify the items responsible for change in working capital.

To study liquidity position of the company by taking various measurement.

To analyze the management of Non- Fund based Working Capital limits of the company.

To evaluate company’s performance relating to financial statement analysis.

To find out the utility of financial ratio in credit analysis and determining the financial capacity of the company.

To identify the effectiveness of working capital management in Era Buildsys Limited and make suggestions for its improvement.

Methodology:

Collection of Data:

In this project, I intend to collect the primary and secondary financial data about the company through various sources which are within and outside the company like annual reports, corporate magazines, policy manuals of different department etc.

Collection of the primary financial data by interviewing the executives and staff of the company.

Understanding the assumptions made by the company for the projection of its financial reports.

Research Design: The research design for the comparative study is of exploratory type and the focus is given to discover the possible measures, by detailed analysis, for the company which would be helpful up to some extent to retain a good position in the competitive market. The research design is not formal and rigid one as the focus depends upon the availability of new ideas and relationship among variables.

Analysis of Data: In order to analyze the data I would be using various tools. Those are as follows:

Ratio analysis: It is an important and age-old technique. It is a powerful tool of financial analysis. It is defined as “the indicated quotient of two mathematical expression” and as “the relationship between two or more things”. Systematic use of ratio is to interpret the financial statement so that the strength and weakness of a firm as well as its historical performance and current financial condition can be determined.

Trend analysis

Analysis of components of working capital

Schedule:

EXPECTED DATE

ACTIVITY

31stMarch 2011

Study of literature available on the topic

10thApril 2011

Collection of relevant data

14thApril 2011

Analyze the collected data and use technical analysis

15thApril 2011

Submit the interim report

25thApril 2011

Interpret the data

30thApril 2011

Contact executives working in various departments and collect their views on the topic and result of the data.

7thMay 2011

Draft the project report

14thMay 2011

Edit the report and submit it to the organization and college

Limitations of the study:

The financial statements contain only historical data and would not necessarily reflect the future.

It is difficult to account in price level changes in financial accounting.

The reliability and accuracy of calculations and interpretation depends very much on the information supplied in the form of annual reports and other records.

The bank may or may not show true financial result in annual report.

Time factor plays a vital role. The study was conducted within 14 weeks & is restricted for a period of three years.

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