Date: 10th July 2019

TO WHOMSOEVER IT MAY CONCERN

This is to certify that Mrs. Haritha Thurlapati, a student of Master of

Management Studies, Mumbai University has successfully completed her
internship in our organization from 2nd May 2019 to 30th June 2019 in the
Finance department.

We are deeply impressed with her sincere and hardworking attitude of Mrs.
Haritha Thurlapati.

We wish her all success in her future endeavours.

For Wind World India Limited

Authorized signatory

1
 CERTIFICATE

This is to certify that the dissertation entitled “Wind World India Ltd.” is
bonafide work “Haritha Thurlapati” (Seat No.8110208) submitted to
University of Mumbai in partial fulfilment of the requirement for the award of
the degree of “Master of management studies” in “Finance”.

Date:

Place:

College Seal:

2
 ACKNOWLEDGEMENT

It is a matter of great satisfaction and pleasure to present this report on

Working Capital Management of WIND WORLD INDIA LIMITED. I take this
opportunity to owe my thanks to all those involved in my training.

Firstly I would like to thank WIND WORLD INDIA LIMITED for giving the
opportunity to complete my project in the organization. I put on record my
sincere thanks to my college, KALA INSTITUTE OF MANAGEMENT STUDIES AND
RESEARCH for giving me such an opportunity. I am extremely grateful to
MS.SUCHITRA PATIL for the encouragement, discussions and critical
assessment of the project. It was a good experience for me to work with
WWIL, a pioneer in the wind power industry. I am greatly obliged to Mr.
Sandeep Das Gupta and Mr. Kaushik Guha who have shared their expertise and
knowledge with me without which the completion of project would not have
been possible.

I express my gratitude towards staff of WIND WORLD INDIA LIMITED, those

who have helped me directly or indirectly in completing the training.

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4
WIND WORLD INDIA LTD is leading wind Power Company. It has more than 10 branches all
over the India.

The major purpose of the study is to analyse the working capital management of WWIL by

considering the annual report of two years. The financial statement explains the trend

analyses and the ratio analyses along with the comparative balance statements. Working

capital is one of the most difficult financial concepts. In fact, the term means a lot of

different things to a lot of different people. By definition, working capital is the amount by

which current assets exceed current liabilities. It involves the relationship between a firm‘s

short term assets and its short term liabilities. Funds needed for short term needs for the

purpose like payment of wages and other day to day expenses are known as working capital.

The goal of working capital management is to ensure that the firm is able to continue its

operation and that it has sufficient cash flow to satisfy both maturing short term debt and

upcoming operational expenses. Working capital is primarily concerned with inventories

management, receivable management, cash management and payable management. The

study involved few personal interviews with the financial heads of the company and through

observation methods. Company annual reports were being evaluated and working capital

management was being analysed from it. For the purpose of the study convenience

sampling technique has been used. The study has shown that the working capital of the

company has improved as the current asset is more than that of the current liabilities.

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6
The power sector in the country has been witnessing far-reaching changes in the last few
years. Most of the monolithic State Electricity Boards have been unbundled and generation,
transmissions and distribution activities separated by creating separate companies.
Regulatory Commission has been setup to ensure efficiency and economy in activities of
electricity industry besides fixing electricity tariffs in a transparent manner. All these
measured were initiated to improve the poor financial health of the State.

The wind power industry is the industry involved with the design, manufacture,
construction, and maintenance of wind turbines. Although the wind power industry is small
compared to those of the conventional power generation technologies (hydro, coal, natural
gas, and nuclear), it is growing at a much faster rate.

The modern wind power industry began in 1979 with the serial production of wind turbines
by Danish manufacturers Kuriant, Vestas and Nordtank. Initially, most of these early
turbines were installed in western Denmark. California, USA experienced a wind power
boom from 1982 to 1986 when thousands of Danish and American wind turbines were
installed in massive arrays. India got involved in wind power in the mid-1980s as well, while
Germany and Spain gradually developed domestic wind power industries starting in the
early 1990s.

The wind power industry is currently undergoing a period of rapid globalization and
consolidation, with much of the recent wind farm development occurring outside the older
established markets. Several large companies with market capitalizations greater than the
entire wind power industry itself (General Electric, Siemens, BP, Wind World India ltd.) are
now making large investments in wind power. To meet a global wind turbine supply
shortage, start-up wind turbine manufacturers are still appearing and ramping up the
production of their new wind turbine models as quickly as possible.

Owned power utilities, overcome the power shortage (particularly during peak hours) and
to ensure reliability and quality of power to the consumers. It is a recognized fact that in the
past, of the 3 main segments of the power industry i.e. generation, transmission and

7
distribution, the distribution segment was getting the least attention, both technically and
financially and needed an immediate action plan.

Wind turbine manufacturers design, test, manufacture, and assist with the operation and
maintenance of wind turbines. Important choices facing them include turbine design
(generator type, gearbox vs. gear-less and materials) and how much control to maintain
over component supplies (internal vs. external). They must be concerned with maintaining
their extensive fleets of operating turbines while at the same time developing newer and
ever-larger models. The largest wind turbine manufacturers are based in Denmark,
Germany, Spain, India, and USA.

Wind farm developers develop and sometimes own and operate wind farms. This involves
purchasing or leasing land, installing meteorological equipment to quantify the wind
resource, and securing transmission, power sales, turbine supply, construction, and
financing agreements.

Wind farm construction companies construct and sometimes assist with the operation and
maintenance of wind farms.

Wind farm Operation and Maintenance companies (also called Wind O&M contractors, or
simply Wind Operators). This rapidly growing industry segment assists with the operation
and maintenance of wind farms, under contract with companies which own those wind
farms. O&M Contracts typically focus on the maintenance of the turbines, towers, and
blades; with responsibility for the generation of electricity (conversion of mechanical energy
to electricity), but they usually are not responsible for the actual transmission of this
electricity to the grid through electrical substations which are located at or near the wind
farms.

Wind farm finance companies sell loans and other financial products to wind farm
developers and wind turbine manufacturers. Most of these companies are large banks with
experience in providing financing to other large industrial projects.

8
9
Wind World (India) Limited since its inception in 1994, has been making giant strides in the
wind energy segment. It has already installed more than 6204 wind energy converters in
India with a total installed capacity exceeding 4561 MW. It was a time when wind energy
emerged not as an alternative, but a mainstream, renewable, eco-friendly source of power
generation. Since then the company emerged as the country's preferred wind power
solution provider, on a number of counts.

Wind World (India) Limited (WWIL) formerly Enercon (India) Limited has always been a path
breaker, with innovations that have consistently left the others behind. Gearless technology,
an energy-efficient grid feeding system and long-lasting warp resistant blades are just cases
in point.

Company’s wind farms today straddle seven high winds potential states Karnataka,
Maharashtra, Tamil Nadu, Rajasthan, Gujarat, Madhya Pradesh and Andhra Pradesh, spread
across 3,000 kilo meters of India. The company have installed over 6204 Wind Energy
Converters (WECs) with a capacity of over 4561 MW. WWIL is maintaining these WECs
round the clock 24 x 7 for optimum performance.
WWIL is an ISO 9001:2008 certified company for Manufacturing, Installations and Services.

Wind energy converters are manufactured at four plants in Daman; while concrete towers
are manufactured at facilities in Gujarat, Karnataka and Tamil Nadu. Company employ over
5,600 dedicated people and have set up the Wind World Training Academy at Daman, for
training world class operations, maintenance and asset management support teams.
In terms of business results, company achieved a turnover of INR 3636 crores in FY 2010-11
and recorded highest ever turnover of INR 4270 in FY 2011 -12, WWIL is poised to cross INR
4500 crore mark in the year ahead (FY 2013-14).
So what powers our success?

 Concept-to-Commissioning-to-Lifetime care solutions.

 Superior product offering.

 An obsession with Quality.

 Trained Manpower.

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'Over the years, our passion about wind energy continues to power our sails.

CIVIL INFRASTRUCTURE & ROAD DEVELOPMENT

Prior to the setting up of wind farms, site development activities are undertaken, which are
purely dependent on terrain conditions and soil strata.
While certain sites need minimum road work due to their flat and hard terrain, the extent of
work required for constructing a road on a hilly terrain is huge. The best route to reach the
top of the hill is first worked out.
Next, hill cutting and the road work is undertaken, to enable trailers which carry the
materials and cranes, reach the point of installation. Here, aspects like gradient, width and
turning radius of a road should be considered to support smooth flow of material. Proper
drainage facilities are then constructed and maintained, to ensure natural flow of water
without affecting the ecology.
The roads are maintained though out the lifetime of the project. This ensures that each and
every machine is easily accessible, for the benefit of maintenance activities..

11
Company’s main product

 Gearless construction

 Continuous variable wind speed operation in sync with varying wind speeds

 Continuous variable active pitch regulation of blades

 Three independent braking and lighting systems for blades

 Ability to withstand voltage fluctuations of -20% to +20% of nominal voltage

 Synchronous generator directly connected to turbine rotor

 Optimum adaptation to many grid voltages at different locations

 Maximum utilization of grid connection capacity for feeding in power.

Wind World (India) Limited has two separate plants for assembly of wind turbines at
Daman. Together these occupy a total surface area of 2,500 sq. mts. and have an annual
production capacity over 1000 MW.

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NACELLE ASSEMBLY
The Nacelle is the main housing of the turbine, which is assembled with the yaw drive, it is
directly mounted on the tubular tower. The main carrier is a single cast frame that permits
stable mechanical behaviour and performance.

ROTOR ASSEMBLY
Rotor head production comprises the manufacture and integration of the pitch drive,
bearing, axle pin, stator-rotor and balancing assembly, under a single roof.
The rotor hub or unit along with pitch drive and annular generator are interconnected to
form a single gearless unit. The rotor unit is then mounted on a fixed axis, called the axle
pin.
As compared to conventional geared systems with a large number of bearing points in a
moving drive train, our drive system requires only two slow-moving taper roller bearings,
due to its low direct drive speed @ 25 RPM. Bearing fitment is executed using the shrink as
well as induction heating techniques.
Wind turbines are equipped with a variable pitch technology. This allows for feathering the
angle of the blades for each wind speed; whereby controlled extraction is done using the
maximum energy in the wind flow.
In below-normal wind conditions, the pitch is tailored to derive maximum energy potential;
while in above-normal conditions, the pitch is altered to derive a controlled amount of
energy, so that the machine produces the rated power in a controlled and stable manner up
to cut out wind speed.
Besides maximizing wind energy derived, this system reduces torque on the device and
allows for the use of the full blade as an aerodynamic brake.
At every stage of assembly standard quality checks are executed as per our quality protocol
requirement. This is executed by trained personnel using high quality calibrated equipment,
to provide evidence of product conformity to requirements.

13
TRANSPORTATION

After assembly of the Nacelle and Rotor Head, specialized care is taken to mount the
composite equipment onto specially constructed trailer beds that are hauled to their
destination on the wind farm.
Trained drivers deal with some of the country's most challenging and difficult terrain to
ensure their critical load is transported to the end destination safely, meeting all the
stringent quality parameters with which it left the assembly line.
An 8000 square meter tent surface is situated close to Jamnagar, where our first mobile
prefab concrete tower factory emerged. Arranged in a figure eight, this double tent
measures 50 meters in diameter through the main section and is 36 meters high.
WW-53 towers are produced here in 18 segments with a 5.50 m base diameter and a tower
top diameter of 1.80 m.
Our engineers have been trained at the production site and at various construction sites to
gain experience in producing and mounting prefab towers.

Wind World (India) Ltd. helps organize project finance for Wind World (India) Ltd.'s own
Independent Power Projects (IPPs), as well as for the Engineering Procurement and
Construction EPC customers of Wind World (India) Ltd. The company have successfully
arranged project finance to the tune of Rs.2,000 crores till date.

14
This is done through Wind World Financial Consultancy Private Limited (WWFCPL) a 100%
subsidiary of Wind World (India) Ltd. (WWIL).
Detailed below are some of the core activities of WWFCPL:

FINANCING INDEPENDENT POWER PROJECTS

WWFCPL has successful in arranged project financing for large size wind energy IPPs on a
project recourse basis. This is done in line with financing of similar projects internationally,
for tenors that are comfortably managed by such projects, often at extremely optimum
interest cost.
WWFCPL has been successful in assisting Foreign Direct Investment in this sector, by
advising foreign companies to set up wind energy projects in India through equity infusion
from abroad; with the balance being arranged as Rupee debt at accepted levels of tenor and
interest cost, on a project recourse basis.

FINANCE FOR PROJECTS WITH LONG TERM POWER PURCHASE AGREEMENTS

Finance for projects with long term Power Purchase Agreements (PPAs), are done with third
parties supplying power to them under the Open Access Regime.
One such Wind World (India) Ltd. project has a long term power purchase agreements
signed with private parties, wherein Wind World (India) Ltd. has established the power
projects and are supplying power to private parties, with a high credit rating.
We have successfully managed to arrange finance against security of the receivables due
from the sale of power, to the private parties.

15
KEY STATISTICS

Our employees are proudly called WinDirecters. A WinDirecter is one who rededicates
himself, to live up to our motto of "Clean Energy Forever" for our country. They are the ones
who will bring on Quality Gigawatts in times to come.

 Year of commencement: 1994

 Employees: 5600

 No. of customers: 900 (approx.)

 Total service technicians trained at WTA: 2230

 Market share: 26% overall, > 50 % in the most demanding IPP segment

 Installed capacity in operation: Exceeding 4561 MW

 Energy generated by our turbines: 44638 Million Units

 Footprint: 7 high wind energy states - Madhya Pradesh, Gujarat, Rajasthan,

Maharashtra, Karnataka, Tamil Nadu and Andhra Pradesh

 Manufacturing: Daman - Blade Plants, Generator Plant, Mechanical Assembly,

Electrical Assembly

 Concrete Towers - Gujarat, Karnataka & Tamil Nadu, Rajasthan (under construction)

16
MAIN CUSTOMERS OF THE WWIL

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18
Management is an art of anticipating and preparing for risks, uncertainties and overcoming
obstacles. An essential precondition for sound and consistent assets management is
establishing the sound and consistent assets management policies covering fixed as well as
current assets. In modern financial management, efficient allocation of funds has a great
scope, in finance and profit planning, for the most effective utilization of enterprise
resources, the fixed and current assets have to be combined in optimum proportions.
Working capital in simple terms means the amount of funds that a company requires for
financing its day-to-day operations. Finance manager should develop sound techniques
of managing current assets.

WHAT IS WORKING CAPITAL?

Working capital refers to the investment by the company in short terms assets such as cash,
marketable securities. Net current assets or net working capital refers to the current assets
less current liabilities.

Symbolically, it means,

Net Current Assets = Current Assets - Current Liabilities.

In accounting, Working capital is the difference between the inflow and outflow of funds. In
other words, it is the net cash inflow. It is defined as the excess of current assets over
current liabilities and provisions. In other words, it is net current assets or net working
capital.

Working capital represents the total of all current assets. In other words it is the Gross
working capital, it is also known as Circulating capital or Current capital for current assets
are rotating in their nature.

A study of working capital is of major importance to internal and external analysis because
of its close relationship with the day-to-day operations of a business. Working Capital is the
portion of the assets of a business which are used on or related to current operations, and
represented at any one time by the operating cycle of such items as against receivables,
inventories of raw materials, stores, work in process and finished goods, merchandise, notes
or bill receivables and cash.

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Working capital comprises current assets which are distinct from other assets. In the first
instance, current assets consist of these assets which are of short duration. Working capital
may be regarded as the life blood of a business. Its effective provision can do much to
ensure the success of a business while its inefficient management can lead not only to loss
of profits but also to the ultimate downfall of what otherwise might be considered as a
promising concern.

The funds required and acquired by a business may be invested to two types of assets:

1. Fixed Assets.

2. Current Assets

Fixed assets are those which yield the returns in the due course of time. The various
decisions like in which fixed assets funds should be invested and how much should be
invested in the fixed assets etc. are in the form of capital budgeting decisions. This can be
said to be fixed capital management.

Other types of assets are equally important i.e. Current Assets.

These types of assets are required to ensure smooth and fluent business operations and can
be said to be life blood of the business. There are two concepts of working capital Gross and
Net. Gross working capital refers to gross current assets. Net working capital refers to the
difference between current assets and current liabilities. The term current assets refers to
those assets held by the business which can be converted into cash within a short period of
time of say one year, without reduction in value. The main types of current assets are stock,
receivables and cash. The term current liabilities refer to those liabilities, which are to be
paid off during the course of business, within a short period of time say one year. They are
expected to be paid out of current assets or earnings of the business. The current liabilities
mainly consist of sundry creditors, bill payable, bank overdraft or cash credit, outstanding
expenses etc.

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NEED FOR WORKING CAPITAL

Working capital may be regarded as the lifeblood of the business. Without insufficient
working capital, any business organization cannot run smoothly or successfully. In the
business the Working capital is comparable to the blood of the human body. Therefore the
study of working capital is of major importance to the internal and external analysis because
of its close relationship with the current day to day operations of a business. The
inadequacy or mismanagement of working capital is the leading cause of business failures.

The need of gross working capital or current assets cannot be overemphasized. The object
of any business is to earn profits. The main factor affecting the profits is the magnitude of
sales of the business. But the sales cannot be converted into cash immediately. There is a
time lag between the sale of goods and realization of cash. There is a need of working
capital in the form of current assets to fill up this time lag. Technically, this is called as
operating cycle or working capital cycle, which is the heart of need for working capital. This
working capital cycle can be described in the following words. If the company has a certain
amount of cash, it will be required for purchasing the raw material though some raw
material may be available on credit basis. Then the company has to spend some amount for
labour and factory overheads to convert the raw material in work in progress, and
ultimately finished goods. These finished goods when sold on credit basis get converted in
the form of sundry debtors. Sundry debtors are converted in cash only after the expiry of
credit period. Thus, there is a cycle in which the originally available cash is converted in the
form of cash again but only after following the stages of raw material, work in progress,
finished goods and sundry debtors. Thus, there is a time gap for the original cash to get
converted in form of cash again. Working Capital needs of company arise to cover the
requirement of funds during this time gap, and the quantum of working capital needs varies
asper the length of this time gap.

Thus, some amount of funds is blocked in raw materials, work in progress, finished goods,
sundry debtors and day-to-day requirements. However some part of these current assets
may be financed by the current liabilities also. E.g. some raw material may be available on
credit basis, all the expenses need not be paid immediately, workers are also to be paid
periodically etc. But still the amounts required to be invested in these current assets is

21
always higher than the funds available from current liabilities. This is precise reason why the
needs for working capital arise.

From the Financial management point of view, the nature of fixed assets and current assets
differ from each other

1. The fixed assets are required to be retained in the business over a period of time and they
yield the returns over their life, whereas the current assets lose their identity over a short
period of time, say one year.

2. In the case of current assets, it is always necessary to strike a proper balance between the
liquidity and profitability principles, which is not the case with fixed assets. E.g. If the size
of current assets is large, it is always beneficial from the liquidity point of view as it ensures
smooth and fluent business operations. Sufficient raw material is always available to cater
to the production needs, sufficient finished goods are available to cater to any kind of
demand of customers, liberal credit period can be offered to the customers to improve the
sales and sufficient cash is available to pay off the creditors and so on.

However, if the investment in current assets is more than what is ideally required, it affects
the profitability, as it may not be able to yield sufficient rate of return on investment. On the
other hand, if the size of current assets is too small, it always involves the risk of frequent
stock out, inability of the company to pay its dues in time etc. As such, the investment in
current assets should be optimum. Hence, it is necessary to manage the individual
components of current assets in a proper way. Thus, working capital management refers to
proper administration of all aspects of current assets and current liabilities. Working Capital
Management is concerned with the problems arising out of the attempts to manage current
assets, current liabilities and inter-relationship between them. The intention is not to
maximize the investment in working capital nor is it to minimize the same. The intention is
to have optimum investment in working capital. In other words, it can be said that the aim
of working capital management is to have minimum investment in working capital without
affecting the regular and smooth flow of operations. The level of current assets to be
maintained should be sufficient enough to cover its current liabilities with a reasonable
margin of safety. Moreover, the various sources available for financing working capital

22
requirements should be properly managed to ensure that they are obtained and utilized in
the best possible manner.

Working Capital Cycle

Working capital cycle indicates the length of time between a firm‘s paying for materials
entering into stock and receiving the cash from sale of finished goods. In a manufacturing
firm, the duration of time required to complete the sequence of events is called operating
cycle.

In case of a manufacturing company, the operating cycle is the length of time necessary to
complete the following cycle of events –

1. Conversion of cash into raw materials.

2. Conversion of raw materials into work-in-progress.

3. Conversion of work-in-progress into finished goods.

4. Conversion of finished goods into accounts receivables.

5. Conversion of accounts receivable into cash.

The above operating cycle is repeated again and again over the period depending upon the
nature of the business and type of product etc. the duration of the operating cycle for the
purpose of estimating working capital is equal to the sum of duration allowed by the
suppliers.

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Working capital cycle can be expressed as

R+W+F+D+C

Where ,

R – Raw material storage period = avg. stock of raw material / avg. cost of production per
day

W – Work in progress holding period = avg. work in progress inventory / avg. cost of
production per day

F –finished goods storage period = avg. stock of finished goods / avg. cost of goods sold per
day

D – Debtors collection period = avg. book debts / avg. credit sales per day

C – Credit period availed = avg. trade creditors avg. credit purchases per day.

WORKING CAPITAL MANAGEMENT

To start any business, First of all we need finance and the success of that business entirely
depends on the proper management of day-to-day finance and the management of this
short term capital or finance of the business is called Working Capital Management.
Working Capital is the key difference between the long term financial management and
short term financial management in terms of the timing of cash. Working capital
management is a short term financial management. Working capital management is
concerned with the problems that arise in attempting to manage the current assets, the
current liabilities & the interrelationship that exists between them. The current assets refer
to those assets which can be easily converted into cash in ordinary course of business,
without disrupting the operations of the firm.

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Working capital management or short-term financial management is a significant facet
of financial management. It is important due to 2 reasons:

o Investment in current assets represents a substantial portion of total investment

o Investment in current assets and the level of current liabilities have to be geared
quickly to changes in sales.

Working capital involves activities such as arranging short-term finance, negotiating

favourable credit terms, controlling the movement of cash, administrating accounts
receivables, and monitoring the investment in inventories also take a great deal of time.

Management of working capital is concerned with the problem that arises in attempting to
manage the current assets, current liabilities. The basic goal of working capital management
is to manage the current assets and current liabilities of a firm in such a way that a
satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as
both the situations are bad for any firm. There should be no shortage of funds and also no
working capital should be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm has a
great on its probability, liquidity and structural health of the organization. So working capital
management is three dimensional in nature as

1. It concerned with the formulation of policies with regard to profitability, liquidity

and risk.
2. It is concerned with the decision about the composition and level of current assets.
3. It is concerned with the decision about the composition and level of current
liabilities.

Composition of working capital--

 Major Current Assets

1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.

25
5) Inventories of stock as:
a. Raw material.
b. Work in process.
c. Stores and spares.
d. Finished goods

6) Temporary investment of surplus funds.

7) Prepaid expenses

8) Accrued incomes.

9) Marketable securities.

 Major Current Liabilities

1) Accrued or outstanding expenses.
2) Short term loans, advances and deposits

3) Dividends payable.

4) Bank overdraft.

5) Provision for taxation, if it does not amt. to app. Of profit.

6) Bills payable.

7) Sundry creditors.

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.

26
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 Goal of Capital Management is to manage the firm s current assets & liabilities, so that
the satisfactory level of working capital is maintained. If the firm cannot maintain the
satisfactory level of working capital, it is likely to become insolvent & may be forced into
bankruptcy. To maintain the margin of safety current asset should be large enough to cover
its current assets.

Main theme of the theory of working capital management is interaction between the
current assets & current liabilities.

27
CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways:

 On the basis of concept.

 On the basis of time.

On the basis of concept working capital can be classified as

 gross working capital and

 Networking capital.

On the basis of time, working capital may be classified as:

 Permanent or fixed working capital.

 Temporary or variable working capital

PERMANENT OR 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, work- in-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 requirements of working capital also increases due to increase in current
assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to
meet the seasonal demands and some special exigencies. 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.

28
The extra working capital needed to support the changing production and sales activities, is
called variable or functioning or temporary working capital.

Temporary working capital differs from permanent working capital in the sense that is
required for short periods and cannot be permanently employed gainfully in the business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

 Solvency of the business: Adequate working capital helps in maintaining the solvency
of the business by providing uninterrupted of production.
 Goodwill: Sufficient amount of working capital enables a firm to make prompt
payments and makes and maintain the goodwill.
 Easy loans: Adequate working capital leads to high solvency and credit standing can
arrange loans from banks and other on easy and favourable terms.
 Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.
 Regular supply of Raw Material: Sufficient working capital ensures regular supply of
raw material and continuous production.
 Regular Payment of Salaries, Wages and Other Day TO Day Commitments: It leads to
the satisfaction of the employees and raises the morale of its employees, increases
their efficiency, reduces wastage and costs and enhances production and profits.
 Exploitation of Favourable Market Conditions: If a firm is having adequate working
capital then it can exploit the favourable market conditions such as purchasing its
requirements in bulk when the prices are lower and holdings its inventories for
higher prices.
 Ability to Face Crises: A concern can face the situation during the depression.
 Quick And Regular Return On Investments: Sufficient working capital enables a
concern to pay quick and regular of dividends to its investors and gains confidence of
the investors and can raise more funds in future.
 High Morale: Adequate working capital brings an environment of securities,
confidence, high morale which results in overall efficiency in a business .

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EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate amount of working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate nor
shortages of working capital. Both excess as well as short working capital positions are bad
for any business. However, it is the inadequate working capital which is more dangerous
from the point of view of the firm.

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises
due to the time gap between production and realization of cash from sales. There is an
operating cycle involved in sales and realization of cash. There are time gaps in purchase of
raw material and production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:·

o For the purpose of raw material, components and spares.

o To pay wages and salaries
o To expenses and overload costs such as office expenses.
o To meet the selling costs as packing, advertising, etc.
o To provide credit facilities to the customer.
o To maintain the inventories of the raw material, work-in-progress, stores and spares
and finished stock

For studying the need of working capital in a business, one has to study the business under
varying circumstances such as a new concern requires a lot of funds to meet its initial
requirements such as promotion and formation etc. These expenses are called preliminary
expenses and are capitalized. The amount needed for working capital depends upon the size
of the company and ambitions of its promoters. Greater the size of the business unit,
generally larger will be the requirements of the working capital.

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FACTORS AFFECTING WORKING CAPITAL MANAGEMENT

The amount of working capital required depends upon a number of factors which can be
stated as below

Nature of Business:

Some businesses are such, due to their very nature, that their requirement of fixed capital is
more rather than working capital. These businesses sell services and not the commodities
and not the commodities and that too on cash basis. As such, no funds are blocked in piling
inventories and also no funds are blocked in receivables. E.g. Public utility services like
railways, electricity boards, infrastructure oriented projects etc. Their requirement of
working capital is less. On the other hand, there are some business like trading activity,
where the requirement of fixed capital is less but more money is blocked in inventories and
debtors. Their requirement of the working capital is more.

Length of Production Cycle

In some business like machine tool industry, the time gap between the acquisitions of raw
material till the end of final production of finished product itself is quite high. As such more
amounts may be blocked either in raw materials, or work in progress or finished goods or
even in debtors. Naturally, their needs of working capital are higher. On the other hand, if
the production cycle is shorter, the requirement of working capital is also less

Size and Growth of Business:

In very small companies the working capital requirements are quite high overheads, higher
buying and selling costs etc. As such, the medium sized companies positively have an edge
over the small companies. But if the business starts growing after a certain limit, the
working capital requirements may be adversely affected by the increasing size.

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Business/Trade Cycles:

If the company is operating in the period of boom, the working capital requirements may
be more as the company may like to buy more raw material, may increase the production
and sales to take the benefits of favourable markets, due to the increased sales, there may
be more and more amount of funds blocked in stock and debtors etc. Similarly, in case of
depression also, the working capital requirements may be high as the sales in terms of value
and quantity may be reducing, there may be unnecessary piling up of stocks without getting
sold, the receivables may not be recovered in time etc.

Rate of Stock Turnover:

There is an inverse co-relationship between the question of working capital and the velocity
or speed with which the sales are affected. A firm having a high rate of stock turnover will
need slower amt. of working capital as compared to a firm having a low rate of turnover.

Credit Policy:

The firm‘s credit policy directly affects the working capital requirement. If the firm has
liberal credit policy, hence the more credit period will be provided to the debtors so this will
lead to more working capital requirement. With the liberal credit policy operating cycle
length increases and vice versa.

Production Policy:

If the policy is to keep production steady by accumulating inventories it will require higher
working capital.

Seasonal Variations:

In certain industries like raw material is not available throughout the year. They have to buy
raw material in bulk during the season to ensure an uninterrupted flow and process them
during the year. Generally, during the busy season, a firm requires larger working capital
than in slack season.

Earning Capacity and Dividend Policy:

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Some firms have more earning capacity than other due to quality of their products,
monopoly conditions, etc. Such firms may generate cash profits from operations and
contribute to their working capital. The dividend policy also affects the requirement of
working capital. A firm maintaining a steady high rate of cash dividend irrespective of its
profits needs working capital than the firm that retains larger part of its profits and does not
pay so high rate of cash dividend.

Price Level Changes:

Changes in the price level also affect the working capital requirements. Generally rise in
prices leads to increase in working capital.

Others Factors:

 Operating efficiency.
 Management ability.
 Irregularities of supply.
 Import policy.
 Asset structure.
 Importance of labour.
 Banking facilities, etc.

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CONCEPT OF WORKING CAPITAL:

There are 2 concepts:

 Gross Working Capital

 Net Working Capital

Gross working capital: - It is referred as total current assets.

Focuses on,

 Optimum investment in current assets:

Excessive investments impair firm s profitability, as idle investment earns nothing.

Inadequate working capital can threaten solvency of the firm because of its inability to meet
its current obligations. Therefore there should be adequate investment in current assets.

 Financing of current assets:

Whenever the need for working capital funds arises, agreement should be made quickly.
If surplus funds are available they should be invested in short term securities.

Net working capital (NWC) defined by 2 ways,

 Difference between current assets and current liabilities

 Net working capital is that portion of current assets which is financed with long term
funds.

NET WORKING CAPITAL = CURRENT ASSETS CURRENTLIABILITIES

If the working capital is efficiently managed then liquidity and profitability both will
improve. They are not components of working capital but outcome of working capital.
Working capital is basically related with the question of profitability versus liquidity &
related aspects of risk.

PLANNING OF WORKING CAPITAL:

Working capital is required to run day to day business operations. Firms differ in their
requirement of working capital (WC). Firm s aim is to maximize the wealth of shareholders

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and to earn sufficient return from its operations. WCM is a significant facet of financial
management. Its importance stems from two reasons:

 Investment in current asset represents a substantial portion of total

investment.
 Investment in current assets and level of current liability has to be geared
quickly to change in sales.

Business undertaking required funds for two purposes:

 To create productive capacity through purchase of fixed assets.

 To finance current assets required for running of the business.

The importance of WCM is reflected in the fact that financial managers spend a great deal
of time in managing current assets and current liabilities. The extent to which profit can be
earned dependent upon the magnitude of sales. Sales are necessary for earning profits.
However, sales do not convert into cash instantly; there is invariably a time lag between sale
of goods and the receipt of cash. WC management affect the profitability and liquidity of the
firm which are inversely proportional to each other, hence proper balance should be
maintained between two.

To convert the sale of goods into cash, there is need for WC in the form of current asset to
deal with the problem arising out of immediate realization of cash against good sold.
Sufficient WC is necessary to sustain sales activity. This is referred to as the operating or
cash cycle.

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