Synopsis Working Capital Management
Synopsis Working Capital Management
INTRODUCTION
Working Capital Management is the controlling nerve of all organizations. It
is a managerial accounting strategy focusing on maintaining efficient levels
of both components of Working Capital, current assets and current liabilities,
in respect to each other. Management of Working Capital ensures a company
has sufficient cash flow in order to meet its operating expenses.
The term Current assets refer to the assets, which in the ordinary course of
business will be converted into cash within one year without undergoing any
diminution in value and un-interruption of the operations of the business.
The
main
current
assets
are
cash,
marketable
securities,
accounts
receivables and inventory. Current liabilities are the liabilities, which are
intended at their inception, to be paid in the ordinary course of business,
within a year, out of the current assets or earnings of the business. The basic
current liabilities are accounts payable, bills payable, bank overdraft and
expenses payable.
Each of the current assets should be managed with efficiency in order to
maintain the liquidity of the business, while not keeping any of the items of
the current assets at a high level. Each of the short-term finance items
coming under current liabilities should be continuously managed to ensure
that they are obtained and used in the best possible manner.
Decisions relating to working capital and short term financing are referred to
as working capital management. These involve managing the relationship
between a firms short-term assets and its short-term liabilities. The goal of a
working capital management is to ensure that the firm is able to continue its
operations
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PURPOSE OF STUDY
Proper working capital management, effective controls and
cost reduction strategies are the most important methods to improve the
profitability of the company. The liquidity of the organization may be much
affective by the policy of purchasing bulk quantity and storing them for a
longer period. The company is maintaining a good turnover and the only
problem areas where the management has to give extra importance are the
credit policy, inventory holding policy and cash inflow and out flow.
Working capital represented by current assets constitutes a dominant
segment of the total capital invested, so a business concern has to ensure its
optimum utilization. A company can incur loss due to sub-optimal utilization
of resources, excessive investments in inventories and unsound collection
policies etc. Imprudent management of working capital either make the firm
incur loss or does not allow the firm to earn high rate of return.
In the current study, an attempt will be made to study the present state
affairs of working capital and its components of SHARQ AL MANAR
INDUSTRIAL & OILFIELD SUPPLIES LLC. By definitions, working capital
management entails short term decisions generally, relating to the next one
year period which is reversible. These decisions are thereof not taken on
the same basis as capital investment decisions (NPV or related, as above)
rather they will be based on cash flows and / or profitability.
OBJECTIVE AND SCOPE OF THE STUDY
SIGNIFICANCE
OF THE STUDY
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Many organizations that are profitable on paper are forced to cease trading
due to an inability to meet short-term debts when they fall due. In order to
maintain in business it is essential that an organization successfully manages
its working capital. Too often however, this is an area which is ignored. This
article will look at the items which compromise working capital, and using
live examples will consider the level of working capital required by
businesses operating in different industries. We will also look at the problems
faced by small businesses before reviewing some of the ways in which an
organization can improve its management of working capital.
A review of the previous studies on Working capital management is
necessary to know the areas already covered. The earlier studies made on
working capital management are briefly reviewed here.
OBJECTIVES OF THE STUDY
To
To
To
To
cycle.
To study the importance in Optimizing Working Capital Management.
To analyze how they adopt the theoretical aspects of working capital
management in practical.
The main objective of the study is to find out solution for increasing the
liquidity of the business and to reduce the carrying cost of the items
traded.
SCOPE OF THE STUDY
The study is conducted on the financial data of the business including the
inventory of the business carried from year to year. The analysis of the
inventory according to their importance as to financial commitment in each
category of items is to be looked into.
A study
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4 the financial data of the company reveals the inadequacy of a
proper working capital management. The problems inherent in the working
capital management and suggestions to overcome it are the main features of
this study report.
The study is divided into the problems, procedures and solutions
of different items of the Net Working Capital so as to maintain and manage a
satisfactory level of the Working Capital.
Along with the inventory management, the management of
the cash, debtors and creditors of the organization is to be made in order to
optimize the working capitals synchronized function to harmonize the
business objective is to be adopted.
LIMITATIONS OF THE STUDY
1. The entire study is based on the financial statements provided by the
company. So the authenticity of the study depends on the accuracy of
the financial statement.
2. Since the firm is in a monopoly situation, inter firm comparison is not
possible.
3. The entire study is based on the data collected for five years i.e. from
the period of 31st December 2008 to 31st December 2012.
4. Only the financial health of the company was studied. The other
aspects like the managerial efficiency, labor efficiency, market
effectiveness etc has not been analyzed.
INDUSTRY PROFILE
OVERVIEW AND HISTORY
Sharq Al Manar Industrial & Oilfield Supplies L.L.C (commonly known as
SAMIOUS) was established in the year 1983 in Abu Dhabi to cater the needs
of oil and petrochemical industry in UAE. Since then SAMIOUS had developed
a good report in the market and has become one of the most trusted and
leading suppliers of bulk piping and flow line materials, valves, hoses and
accessories
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engineering industry.
CREDENTIALS
SAMIOUS has its main office and warehouse facilities in the Mussafah
Industrial area of Abu Dhabi which is the main oil hub of UAE with similar
facilities in Jebal Ali Free Zone (Dubai) and Sharjah which has a total area of
4,00,000 Square Feet of which 50% is Covered warehouse. This Facilitated
into expanding their business activities throughout Middle East and the Asian
Continent.
ACTIVITIES
SAMIOUS acts as an agent in UAE for a wide range of products from reputed
manufacturers all over the world. The company specializes principally in
valves and pipeline systems and equipments. It also stocks a wide range of
spares and equipments to cater to the needs of its clients which include well
known oil & engineering companies in the Arabian Gulf.
QUALITY ASSURANCE
SAMIOUS is managed by a team of experienced professionals which coupled
with its mission to keep abreast of the latest technological innovation
worldwide and is adequately geared towards meeting the needs of its clients
in the years to come. The Company operates in Strict Accordance with
International Organization for Standardization 9001:2008.
MISSION
To
provide
quality
services
at
optimum
cost
to
their
customers,
added
to| their
services by diversifying their activities and also by introducing
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6
world-renowned manufacturers /service providers to the UAE markets.
SAMIOUS is committed to meet the ultimate satisfaction of their clients in the
energy sector by providing a cost-effective and top quality service in a timely
manner. It is committed to a clean environment in keeping with the Arab
tradition of living in balance with wildlife and respecting nature. Company is
also
committed
to
conform
the
health,
safety
and
environmental
TEAMS
The philosophy of SAMIOUS is The Employees are the most valuable assets
of the company. Hence they employ qualified and experienced personnel
who are dedicated to their work and who fulfils their duties promptly and
accurately.
HYPOTHESIS FORMULATION
The concepts of working capital management in a practical situation can be
interpreted with certain concepts and the hypothesis of the study depends
on these concepts.
a) Logistics Chain
The primary objective of a business organization is to get its goods to the
customers in the right quantity at the right time. The problem is
compounded
as todays customers expect a larger number of deliveries of
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smaller quantities at a time with protracted credit facilities with a view to
optimize their working capital.
To meet this objective the business supplying the goods might get the right
quantities at the right time at right terms. All these activities which are
performed by several persons in various departments have to be carried out
in an efficient and integrated manner. This is usually referred to as the
logistic chain, which is to be managed efficiently to enhance the profitability.
Today the logistics in every business has come to play an important part in
the companys profitability. At the core of this vital function of physical
distribution is the store. The management of inventory and store should be
peak to enhance the profitability of the business.
b) Time Management
Conventional Management theories project the four resources- Men, Money,
Machines, and Materials-available to a manager to manage his work. The
manager is expected to optimize the productivity of these resources while
converting these resources known as input to output.
In the modern management concept optimization of inputs into outputs, in
addition to the four Ms, emphasis is to be given to the resource of time.
Time has no separate existence and no physical form.
The theorem is that compression of time automatically increases the
productivity, which results in profitability. This is especially true in the case of
Goods for trading because nearly 70% of a companys expenditure relates to
purchases only. Therefore we can state that time is money. The cycle of
operation of a business has three components Goods Purchased, Goods Sold
and Money Received. We start with investing money for purchase of goods,
which in turn we convert back to money by selling them. Our profit lies in the
last segment. The faster the cycle the greater our profit, which means the
compression of the time in the cycle of money to money.
c)
Value
Page
| 8 of Cost
Due to the liberalization of the economy throughout the World, the market is
characterized by new technologies and severe competition.
The Policies have changed the equation of revenue from
Cost + Profit = Revenue
to
FORMULATING
THE RESEARCH PROBLEM
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There are two types of research problems, viz., those which relate to the
status of nature and those which relate to relationships between variables.
First the researcher must decide the general area of interest or aspect of a
subject matter that he would like to inquire into. Initially the problem may be
stated in broad general ways and then the ambiguities, if any, relating to the
problem be resolved. Then, the feasibility of a particular solution has to be
considered before a working formulation of a problem can be set up.
DEVELOPMENT OF WORKING HYPOTHESIS
After extensive literature survey the researcher should state in clear terms
the working hypothesis. Working hypothesis is tentative assumption made in
order to draw out and test its logical or empirical consequences. As such the
manner in which hypothesis are developed is particularly important since
they provide the focal point of the research. The role of hypothesis is to
guide the researcher by delimiting the area of research and to keep him on
the right track.
Alternative Hypothesis
1. The working capital of the company is utilized effectively.
2. Working capital and cash conversion cycle are related.
Null Hypothesis
1. The working capital of the company is not utilized effectively.
2. There is no relation between working capital and cash conversion
cycle.
RESEARCH METHODOLOGY
Research in common refers to a search for knowledge. It is a careful inquiry
or examination to discover new information or relationship and to expand or
verify
knowledge. Research is the solution of the problem, whether
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| 10
created or already generated.
Characteristics that define Research Methodology:
I.
II.
III.
IV.
V.
Methodology Definition
Defined as the
1. Analysis of the principles of methods, rules and postulates employed by a
discipline
2. Systematic study of methods that are, can be, or have been applied within
a discipline
3. Particular procedure or set of procedures.
STEPS OF RESEARCH
In order to study problem in education, the research works have to undertake
several steps in well-regulated order. Failing in any one of these steps may
lead to an artificial lapse in the whole attempt ends in unsatisfactory results.
1.
2.
3.
4.
5.
6.
RESEARCH DESIGN
Throughout the study an attempt has been made to arrive at the conclusions
with help of economic reasoning, experience derived from secondary
markets from the lessons of the economic history. The assets, which the
corporation
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historical perspective.
Important concepts relating to Research Design
1.
2.
3.
4.
5.
6.
7.
8.
The design may be specific presentation of the various steps in the process
of research. These steps include:
should
in mind two types of data viz., primary and secondary. The
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12
researcher usually makes use of the secondary data because it gives him a
starting point and they are readily available.
PRIMARY DATA
The primary data are those which are collected afresh and for the first time,
and thus happens to be original in character. They are the actual information,
which are received by researcher for study from the actual field of research.
The data for the study is collected through structured interview. It can also
be obtained by means of Questionnaire and in schedules. In some fields
primary data were obtained through administrating Questionnaire designed
especially for the study.
METHODS OF DATA COLLECTION
Questionnaire
Observation
Personal Interview
Telephone Interview
Schedules
SECONDARY DATA
Secondary data means data that are already available i.e., they refer to the
data which have already been collected and analyzed by some else. They are
the information, which are attained indirectly. The researcher does not attain
them himself or directly. Such as data are attained generally from published
and are attained generally from published and unpublished material.
Secondary data are gathers from informations collected from the individual
and institution throughout personal diaries, letters and survey document.
Source of Data: The data required for the study was readily available with
the Manager and the Chief Accountant and with the concurrence of the
owner copies of the same was handed over for the study. The study required
some
to be answered and the same was given as questions
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| 13
regarding the procedural aspects of the inventory, receivables, cash, and
payables which constitute the net working capital. The interviews were and
answer to the questions was obtained from the Manager, Chief Accountant
and other clerical staff who were carrying out the main business activities.
SAMPLING
A section of the population selected in such a way that they are
representatives of the universe. Such a section of the population selected is
called a sample. It is a smaller representation of a large as whole. A single
member of the population is referred to as population element. When some
of the elements are selected with the intention of finding out something
about the population from which they are taken, that group of element is
referred as sample and process of selection is called sampling.
A single member of a population is referred to as a population element.
Sampling may be defined as the selection of part of an aggregate or totality
on the basis of which a judgment or interference about the aggregate or
totality is made.
METHODS OF SAMPLING
Systematic sampling
Stratified sampling
Cluster sampling
The
interview
method will be used to collect the required data for the
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| 14
analysis.
Convenience Sampling
Convenience Sampling refers to the collection of information from members
of the population who are conveniently available to provide it. It chooses the
individual that are easiest to reach or sampling that is done easily. It does
not represent the entire population so it is considered by us.
STATISTICAL TOOLS USED FOR ANALYSIS
The main tools used for analysis are Ratio Analysis, Comparative statement,
Trend Analysis, SWOT Analysis, Correlation Analysis and Fund Flow Analysis.
RATIO ANALYSIS:
It is a powerful tool for the analysis of the financial performance. It is
an important technique of financial analysis. In financial analysis and
performance of a firm, a ratio helps the analyst to make judgment
about the firms financial position and performance. In simple
language, ratio is one expressed in terms of another and can be
worked out by dividing one number into the other. In this study the
ratio analysis is used to calculate the profitability, liquidity, solvency
and working capital position of the firm.
CLASSIFICATION OF WORKING CAPITAL RATIOS
1.
2.
3.
4.
Liquidity Ratio
Leverage Ratio
Activity Ratio
Profitability Ratio
Types of Ratios:
1. Liquidity ratio: They indicate the firms ability to meet its current
obligation out of current resources. It includes the following:
strength.
Quick Ratio: It is also called the Acid-Test ratio and is also one of
SWOT
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16
SWOT analysis is a tool for auditing an organization and its
environment. It is the first stage of planning and helps marketers to
focus
on
key
issues
.SWOT
stands
for
strengths,
Weakness,
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analytical and exploratory in nature, I stick to exploratory analysis. I
make no hypothesis and instead analyze the collected data to arrive at the
position of the company with regard to its working capital position. I will also
present it in pictorial forms so as to help ready and better understanding. I
try to make use of graphs and diagrams to present my data and also to
present my analysis and findings.
CONCLUSION
The study titled A Study on the Working Capital Management of SHARQ AL
MANAR INDUSTRIAL AND OIL FIELD SUPPLIES LLC has been conducted to
analyze the financial strength and weakness of the firm.
The needs to issue debenture capital or long term borrowed funds to meet
the long term obligations will also be analyzed. The issue of debenture
capital helps the company to achieve the advantage of high leverage which
enables the company to yield maximum earnings to the owners of the firm,
because the fixed rate of interest is lower than the general rate of earnings
of the company.
The researcher also will try to find out whether company should provide
incentives to its creditors by way of early payment discounts which will have
a positive impact on working capital.
It may be concluded that the study will be conducted successfully keeping
the objective in mind.
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