STRUCTURE AND DETERMINANTS OF WORKINO CAPITAL

The Structure d Working Capital denotes the

Canponenta of a r m s Working Capital and i t a basic

canponmts a re current assets and current l i a b i l i -

t i e s . The main elements of current aseets a n cash

and bank balancer, receivables, inventories and

other resources l ike short tern investment#. Currant

l i a b i l i t i e s include payables, bank w e r drafts, out-

standing expanses and proposed dividends, tax paya-

b le incane received i n adPance and othem.

The managanent of an enterprise should t r y

t o take maximum ut i l isat ion of its canparents a t the

minimum porsible cost. This is highly dependent on

the structure of Working CapitalL and hence the study

-f the Structure of Working Capital is an important

ons.

In dew of the importanca of th i s study an

attempt is made in th i s chapter t o analyse the volume

of the current asrets in tern8 of its canpments, the

1. Ravi K Ja in? Working Capital Manapent of State enterprises in India, National Publishing House, Jaigur, 1988, P.18.

balanced dis t r ibut icm of t h e Working Cap i t a l

nmong its canpanants etc. It is a l s o aimed a t

f ind ing ou t t h e adequacy of t h e Working Cap i t a l

and t h e i r capaci ty t a i n c r e a a e p ro f i t ab i l i t y .

I n t h i s regard, V.E. Ramamoorthy adopting

Adolph E Grunewald and Erwin -Esser ~anmers , '"the

flow of en te rp r i se values* concept and Jerome B.

Cohen and Sydney ~ . ~ o b i n s ~ Cash and c r e d i t pa ths

of a manufacturing Company; cu r ren t flows. Cap i t a l

f lows and f ixed a s s e t s flows concept popularised

*a pipe l ine' approsch t o working Capi ta l Manage-

ment. I n t h i s approach t h e t o t a l Workinq Capi ta l

is canpared t o t h e volume of l i qu ld i n t h e tank

and pipes; t h e turnover of t h e Working Cap i t a l

t o the speed; and t h e various components t o t h e

mixture of l i qu id used i n t h e operating c y c l e

of a businese.

The 'volumen, 'the ra te" and t h e *spreadn,

t h e t h r e e c r l t i c a l elements of Working Cap i t a l

2. Adolph E Grunewald and Erwin Esser Nemners, Basic Managerial Finance, Ho l t Rinehart and Winston Inc t New York. f969r p.18.

3. Jercme B Cohen and Sidney M Robbins, The Financia l Manaqer, Harper and Row, ~ew-york, 1968, P-307.

flow, deserve t h e c lose and continuous a t t en t ion

of t h e f inance manager. The Working Capi ta l stream

is n o t an unhindered s t r e t c h b u t is a l i n k up of

' s tocks ' and 'flows'. ~t is a sequence of s t o r a m

and re leases . Tho number of intermediate ' s to rage

points ' and t h e i r r e l a t i v e s h i f t s i n s i z e come

f o r considerntion when reviewing the Working

Cap i t a l spread. 4

The relevance of t h e "volume" of Working

Capi ta l is t h a t t h e en te rp r i se has t o keep i ts

main cash reservoir and t h e contr ibutory reser-

v o i r s on inventor ies and book debts f r an g e t t i n g

over f i l l e d , on the one hand, o r depleted on t h e

other.

The f l w channels l i nk ing up the resbrvpir of

s tock l w e l s and flow l w e l s have t o be maintained

a t a s t a t e of balance bet- surplus and inade-

quacy. Excessive levels i n these tanks w i l l mean

depleted l e v e l s i n the f l o v channels o r t h e p ipe

l i n e unless addi t ional fund0 have beon pumped in , and

4. V.E. Ramamoorthyl Working Capi ta l Managanent, IFMR Publications, Madras - 34, 1978, pp.28-33.

i f they a r e maintained a t low levels, the

supplia6 t o pipe l i n e w i l l a l s o be sparse and

the manufacturing process w i l l be subjected t o

interruption and hold ups, affect ing earnings

adversely. The aggregate s ize of the *stock1 and

'flow levels w i l l detennine the quantum of invest-

ments i n Working Capital and th i s , in turn, w i l l

depend upon the s ize and ac t iv i ty of the enterprise.

An enterprise with seasonal fluctuations i n pro-

ducticn and sales, the volume of the Working Capi-

t a l w i l l be subjected t o rhort t a m changer. The

finance manager has, theref ore, t o assess the needs

conertsntly and implement decisions and action t o

bnsure optimal investment in Working Capital

canforming t o sh i f t ing needs £ran time t o time.

The significance of t h e * r a t e 1 of Working

Capital i r t h a t the turnover of the Working Capital

i s a function of its ra te of flow and hence t o get

the best out of the investments i n Working Capital,

i t s turnover ha6 t o be kept as high a s possible.

This c a l l s f o r conscious management e f f o r t i n wat-

ching out f o r breaks and blocks in the channels of

Working Capital flow. When the funds move through

t h e cycle a t reduced velocity,they tend t o accu-

mulate and stagnate a t t h e 'hal t ing points ' . ~f

these accmulat ions a r e not detected and the flow

energised, the enterprise a c t i v i t y a l s o slows down

and p r o f i t s decline. On the otherhand, i f the mana-

gement's e f f o r t s succeed i n sustaining an ac t ive

r a t e of Working Capital flow, the Working Capital

investment f o r a given levels of enterprise a c t i -

v i t y can be reduced, with profi table resul ts . A

reduced r a t e of flow w i l l c a l l f o r c m p e n s ~ t i n g

increase0 in Working Capital invcntmcnta. An

accelerated rote of flow of funds a l so ensures t h a t

current obligations a r e promptly met when they

becane due.

The 'spread' of Working Capital i s concerned

with the s t ruc tura l aspects of the canponents of

Working Capital. The balanced allocaticm of t h e

t o t a l Working Capital funds between inventories,

book debts and other canponents of Working Capital

i s a c ruc ia l phase of Working Capital management.

Th* investment 'spread* among raw materials, stock

and work-in-process inventories a l so need t o be

ca re fu l ly planned and determined i.e. the al loca-

t ion of resources among t h e components of Working

Capital and a s between individual items of each

canponent group has t o be based on a careful ana-

l y s i s of f a c t s and trends pertaining t o the opera-

t ions of t h e enterprise.

The foregoing analogous discussion of the

pipel ine approach t o working cap i ta l management

is able t o make c l e a r t h a t the a) stock leve l s and

the flow level6 of the Working Capital have t o be

maintained a t s a t a t a of balance between s u r f e i t

and inadequacy$ b) the turnover of the Working

Capital has t o be kept a s high a s possible t o get

t h e bes t out of the investmanta in Working Capital)

and c ) the a l l o c a t i m of the t o t a l Working Capital

between i t s various components has t o be balanced

s o a s t o maximise the p r o f i t s an8 minimise the cost

of financing Working Capital.

Determinants of Working Capital

The determinants of Working Capital a r e a l so

an important area t o be looked i n t o by t h e finance

manager, because they a l s o have a considerable

impact on t h e volme, and s t r u c t u r e of Working

Capital . The major determinants of Working Capi ta l

a r e s t a t e d i n Chapter 111.

St ruc tu re of Working Cap i t a l of public en te rp r i se s

of Tamil Nadu

Since t h e nature and s i ze , manufacturing

cycle and growth and expansion a c t i v i t i e s of t he

publ ic en te rp r i ae being d i f f e r e n t i n each and

every un i t , the requirements of Working Capi ta l ,

t h e types of Working Cap i t a l etc., a l s o vary from

firm t o firm. But because of t h e cmmon production

policy, c r e d i t policy and o the r f ac to r s l i k e canmon

p r o f i t planning,dividend and depreciation pol ic ies ,

t h e components of t h e Working Capi ta l (Gross) a r e

uniformly given a s (a) inventor ies (b) Sundry

debtors (c) cash and bank balances (d) l w n s and

advances and (3 others, eventhough the type of

inventory used, t h e loans and advances received vary

f run u n i t t o uni t .

Likewise t h e shor t t e r n sourco of funda of

t h e publ ic en te rp r i se s of Tamil Nadu a r e given

a s usual a s (a) internal and (b) external. The

in te rna l source being (1) proposed dividend and

(2) provision f o r taxation, t h e external source

is the ( 3 ) Working Capital loan i n the form of

w a y and means advance £ran the government (4)cash

c r e d i t frcm the cannercial banks and ( 5 ) other

borrowings. The following exhibi t i s used here

t o portray the Working Capital s t ructure of the

public en te rpr i ses of Tamil Nadu.Exhibit 1.

Short t e n source of Uses of ahort term funds finance o r current asse t s

In te rna l

1. Provision f o r 1. Inventoriea taxation

2. Proposed dividen8s 2. Sundry Debtors

mcternsl 3. Loans and advances Working Capital Loans:

Ways and means 4. Cash and bank balances nce

2. Cash credit 5. And others

3. Trade c r e d i t and

4. Other borrowins

The s t ructure of the Working Capital i s normally

analysed with the help of i t s mponents . This analysis

i s conducted f o r the purpose of examining whether the

Working Capital of the firm i s adequate o r not? Whether

the Working Capital has been allocated f a i r l y among the

various canponents o r not? Whether t h i s al location i s

able t o help the firm in i t s e f f i c i en t u t i l i s a t i on of

the same o r not?

In t h i s study, the examination of the adequacy

o r otherwise of the Working Capital has been made with

the help of tools l i ke r a t i o analysis, correlation and

trend analysis.

STRUCTURE OF WORKING CAPITAL OF TANSI

The Gross Working Capital of TANSI consists of

Inventories, S u n d r y debtors, Cash and Bank balances,

loans and advances and others as presented i n Table IV. l .

The examination of the Working Capital r w e a l s t h a t the

Inventories have been i n the order of 49.84 per cent,

53.75 per cent, 51.82 per cent, 41.52 per cent, 41.57

per cent, 38.07 per cent, 40.80 per cent, 40.60 per cent

42.47 per cent and 38.50 per cent of the t o t a l current

asse ts .of TANSI over the period from 1979-80 t o 1988-89.

Table 1V.I C m p p s ~ t ~ o n of current a r s ~ t s o f TMSl Rr. I n Lakhs

1179-81 1 W - 8 1 1981-82 1W2-83 1983-81 IV81-85 1985-86 1986-87 1981-88 1788-89 TOlAL

Inventory 1412.16 11h1.12 1611.11 1291.11 1278.91 1212.11 1391.51 1111.68 1236.55 1117.71 12961.16 119.811 153.751 151.82) 111.52) 111.571 138.171 111.81) I1 I .MI 112.111 138.51) 113.82)

Loans l 618.65 715.81 851.13 1151.72 Plb.3I 111'1.28 1116.95 529.13 671.11 627.85 8286.24 Advancer 121.83) 125.961 127.191 133.771 131.711 133.98) 131.51) 121.171 123.Y) 123.17) 128.111 ...................................................................................................................

CashkBmk 11.91 81.32 72.12 96.12 67.76 121.83 31.26 68.15 115.92 21.15 683.75 balances 11.531 12.911 12.321 12.961 12.211 13.191 11.911 12.751 (3.611 0.891 12.311

Figures i n t k brackets are the pertentapes. I TCA - Total Current Arsetr

Source : Computed from the Annual r e v l n s of t k State Bureau o f P u b l ~ c Ln te rp r l res

During t h i s period, t he Inventory had been on an

average 43.83 p e r cent of t he t o t a l current asse ts .

Inventories were, on an average 60 pe r cent of the

current a s s e t s of the publ ic l imi ted companies i n

1ndia.' Judged f n m t h i s , TANS1 have maintained a

f a i r l eve l of Inventory i f not a high level. The

interviews with the o f f i c i a l s of the S t a t e BPE a l s o

reveal t h a t they adhere t o the prudence of inventory

management. In no year of t he study the o the r compo-

nents of current a s se t s a r e more than the Inventory.

This shows t h a t the Inventory had been the major

por t ion of the current asse ts . The t ab le fu r the r

reveals t h a t the Sundry debtors cons t i tu t e 27.80 per

cent, 17.29 pe r cent, 18.50 per cent, 21.60 par ccnt.

19.69 p e r cent, 18.78 pe r cent, 18.86 per cent, 30.08

pe r cent, 25.75 pe r cent, and 32.15 per cent of the

t o t a l current a s se t s respect ively w e r the period. I t

cons t i tu t e s on an average 23.07 pe r cent of the t o t a l

current a s s e t s over the study period. The s a l e s

pa t t e rn of t he publ ic en te rp r i se s reveals t h a t most

p a r t i s On cash bas is and only a small p a r t is on

c r e d i t and t h a t too f o r the Government o r f o r Gwern-

ment organisations. Therefore the ef fect iveness of

5. Reserve Bank of India, Bulletin, September 1977.

the c r e d i t policy on sa l e s w i l l have a l i t t l e impact

and hence does not warrant a study.

The Lodns and Advances have been forming p a r t

of 21.83 per cent, 25.96 per cent, 27.29 per cent,

33.77 per cent, 31.74 per cent, 33.90 per cent, 34.51

per cent, 21.17 per cent, 23.06 per cent and 23.07

per cent of the t o t a l current asse ts of the respective

years. Over the period, it had been on an average

27.63 per cent. The Sundry debtors and loans and

advances put together const i tu te , on an average 50.00

per cent of the t o t a l current asse ts of TANSI. This

evidences (11 over investments i n t h i s component and

hence (21 weak collection policy of TANSI.

A s the table reveals, the Cash and Bank balances

cornponent of the current asse ts of TANSI has been 0.52

per cent, 2.99 per cent, 2.32 per cent, 2.96 per cent,

2.20 per cent, 3.79 per cent, 0.91 per cent, 2.75 per

cent, 3.64 per cent and 0.89 per cent i n the respective

years. On an average it has been 2.29 pe r cent being

a t Rs.68.37 lakhs. I t s adequacy o r otherwise ha8 been

tes ted i n quick ratio. However, t h i s percentage share

of Cash and Bank balances i s a s per the trends i n

India.

Apart fran these, there is a l so another i t e m

namely others which include the advances/deposits

received from the custuners. There were no other

current a s se t s i n the years from 1979-80 t o 1982-83.

But,there were other current asse ts from 1983-84 t o

till the end of the study period. This item was i n

the order of 4.50 per cent, 5.43 per cent, 4.90 per

cent, 5.38 per cent, 5.06 per cent, and 5.37 per cent

of the t o t a l cur tent assets. On an average it had

been 5.10 per cent of the t o t a l current assets.

The analysis fu r the r r w e a l t h a t the t o t a l of

the current asse ts are not a constant factor. The

trend r a t i o s conducted on the growth of the gross

current a s se t s r w e a l t h a t i t had been fluctuating

between 88.18 per cent, the lowest i n the year 1986-87

and 120.34 per cent, the highedt i n the year 1985-86.

It a l so shows tha t the t o t a l s of the current a s se t s

were showing more o r l e s s an increasing trend upto

the year 1985-86 and declined i n the year 1986-87 and

picked up i n the next year. The gross working cap i t a l

of T W S I has been on an average Rs.2957.73 lakhs, the

t o t a l being Rs.29577.38 lakhs during the period of

study.

The determinants of working capi ta l of TmsI

is analysed with the help of multiple regression.

The probable variables which may influence the working

capi ta l of public enterpr ises considered are (1) sa les

(2) borrowed capital , (3) current l i a b i l i t i e s and

(4) t o t a l capi ta l employed. In t h i s un i t the influence

of current l i a b i l i t i e s on working capi ta l i s s ign i f i -

cant and t o a l e s se r degree the sa l e s is a lso able t o

influence the s i ze of mrking capital . The borrowed

capi ta l and t o t a l cap i t a l employed did not have much

influence. On the other hand sane unidentified var i -

ables are able t o explain the s i ze of working capi ta l

t o an extent of 25 per cent.

THE STRUCPURE OF WORKING CAPITAL OF

BOUTHERN BTRUCTURALS LIMITED.

The s t ructure of working capi ta l of southern

Structura ls Limited has been presented i n Table IV.2.

The observation of the t ab le reveals t ha t Southern

Structural8 Limited a l so has the same s e t of current

aasets a8 t h a t of the TANSI.

The inventories irere 71.23 per cent of the

t o t a l current asse ts of the year 1979-80 and they were

33.88 per cent, 29.07 per cent, 39.82 per cent, 29.63

llluru i n f& br&U crt the pemntalw t ICd - Total krmt lueb

k t k t d d fm the Awl nrless of the Sttb Luuu of hbllc Bbrprlrc

per cent, 14.52 per cent, 12.20 per cent 20.63 per

cent, 46.68 per cent, and 39.29 per cent i n the res-

pective years of t he study. This being a manufactu-

r ing concern i n t he s t ruc tu ra l engineering, and

operating e i t h e r i n t h e medium o r large scale, the

inventories were subs t an t i a l l y l a rge r than the o ther

canponents of t he current assets. On an average it

formed p a r t of 30.98 per cent of the current asse ts

of sourthern St ructura ls Limited. No Other item

(except t he loans and advances i n two years and sundry

debtors i n f i ve years) is l a rge r than the inventories.

pecul iar ly sundry debtors and loans and advances are

more than the inventories i n t he years 1980-81 and

1981-82 (loans and advances) 1983-84, 1984-85, 1986-87

and 1988-89 sundry debtors. A drcprr ins ight i n t o it

is fu r the r able to reveal t h a t while loans and advances

were f luc tuat ing i n its trend, the sundry debtors were

showing an increasing trend. This increasing trend

i s a s ign of weak col lec t ion policy. The interview

with t he o f f i c i a l s a l so reveals t h a t they used t o have

only wri t ten reminders f o r collection. Therefore the

excess of the loans and advances and sundry debtors

over t he inventories i n these years can be a t t r i bu t ed

t o weak col lec t ion policy and not t o the lower share

of t he inventories i n the working cap i t a l structure.

The sundry debtors were forming p a r t of 14.95

per cent, 17.66 per cent 25.63 per cent 25.77 per

cent 61.43 per cent, 60.06 per cent, 59.13 per cent

40.10; per cent, 39.23 per cent, and 43.61 per cent

of the t o t a l current a s se t s of southern s t ruc tu ra l

l imited during the study period. On an average the

sundry debtors were 42.82 per cent of the current

a s se t s during t h i s period. The s tudies of t he Reserve

Bank of India have proved t h a t t h i s source w i l l nor-

mally range f ran 30 t o 35 per cent of t o t o t a l current

asse ts . Therefore the higher share of the sundry

debtors is a s ign of weak col lec t ion policy as olrcady

s ta ted .

Loans and advance8:the per centage share of

loans and advances i n the current a s se t s of southern

s t ruc tu ra l l imited a r e 12.33 per cent, 47.35 per cent,

44.41 pe r cent, 33.90 per cent, 6.64 per cent, 6.44

per cent, 8.42 per cent, 13.18 per cent, 11.18 p e r

cent and 16.02 per cent respectively during the period

of study. There is no consistancy i n the usage of

the loans and advances and hence been varying from a

low of 6.44 p e r cent i n the year 1984-85 t o a high of

47.35 per cent during the year 1980-81. The loans and

advances have been on an average 20.02 per cent over

t h i s period. The loans and advances and sundry debtors

put together becanes substant ia l ly l a rge r than the

percentage share of Inventory. This leads t o inbalan-

ced d i s t r ibu t ion of current a s se t s i n southern s t ruc tu ra l

limited.

The Oash and bank balances of Southern Structura l

Limited were forming p a r t of 1.40 per cent, 1.09 per

cent, 0.87 per cent, 0.49 per cent, 2.28 per cent, 2.12

per cent, 6.33 per cent 1.02 per cent 0.94 per cent

and 0.21 per cent of the t o t a l current asse ts during

the study period. On an average the cash and bank

balances am 1.67 per cent being a t Rs.191.11 lakhs

and t h i s is as per the a l l India trend only. The t o t a l

of th in item i s 1.46 per cent of the t o t a l gross working

cap i t a l of Souther S t ruc tu ra l Limited. The adequacy of

which is tes ted by quick ra t io .

The other current a s se t s are avai lable only i n

the years 1979-80, 1984-85, 1985-86, 1986-87, 1987-88,

and 1988-89. The share of t h i s component of working

cap i t a l a r e 0.02 per cent, 16.83 per cent, 13.90 per

cent, 25.04 per cent, 1.27 per cent and 0.86 per cent,

respectivaly during the years. It has been prominent

only i n the year 1986-87 being at25.04 per cent of t he

current a s se t s of t h a t year.

The determinants of t he level of gross working

cap i t a l i n t h i s un i t are8 Sales have subs tant ia l ly

and s ign i f i can t ly influenced the level of working

cap i t a l and current l i a b i l i t i e s have influenced t o a

l e s s e r degree.

The trend of working of capi ta l of Southern

St ructura l Limited over t he period i s almost increasing

year a f t e r year wen though with s l i g h t f luctuation.

It showed an increase i n the f i r s t three years and

there was a decline i n the fourth and f i f t h years and

then picked up s t ead i ly throughout the period. This

increasing trend of working cap i t a l i s a sign of in-

creased business ac t iv i ty . The lower share of Inven-

t o ry i n s p i t e of this increasing trend of working

cap i t a l warrents deeper analysis.

WORKING CAPITAL STRUCTURE OF TACEL

The s t ruc tu re of working cap i t a l of TACEL has

been presented i n Table N.3. It has been analysed as

the percentage share of the individual items i n t he

lrpd I99 9 5 . 8 115 43 123.23 136 32 161 41 166 31 191 24 189 91 128.85 r1tb

IIm In tk brahtr uc k pcmnhgu. t 1Cb - lob1 Curnnt

Sauec . Colruted lm tk lnavll nilar of k State 8 w u of hbllc hte1pr1113

t o t a l current a s se t s i n t h a t par t icular year and then

percentage changes over the period of study. The

canparison of it with the trends i n working cap i t a l i n

India o r i n the respective industry may help t o take

correct ive measures.

For instances the inventories were i n the order

of 57.20 per cent i n the t o t a l current a s se t s i n the

year 1979-80, but the same were 56.20 per cent, 69.92

per cent, 69.19 per cent, 55.57 per cent, 54.53 per

cent, 61.92 per cent, 40.84 per cent and 20.46 per-

centages respectively during the period of study.

There is no much consistency i n the use of inventory

over t h i s period, it is a s low as 20.46 per cent i n

the year 1988-89 and a s high as 69.19 per cent i n the

year 1983-84. On an average TACEL has maintained

54.67 per cent of i t s current a s se t s a s inventory

during t h i s period. This is more than the inventory

levels maintained by TANS1 and Southern Structura l

Limited but a s per the trends i n India.

Sundry debtors were f o n i n g p a r t of 15.09 per

cent, 20.35 per cent, 17.75 per cent, 19.99 per cent,

17.81 p e r cent, 16.54 per cent, 19.14 per cent, 17.75

per cent, 19.53 per cent, 23.58 per cent of the current

asse ts of the respective years fmm 1979-80 t o 1988-89.

On an average t h i s is 31.76 per cent over t h i s period.

When compared t o TANS1 and Southern Stxucture Limited

the percentage share of sundry debtors i n TACEL i s f a i r

being the second l a rges t item of the:current assets.

This i s a l so i n l i n e with the trends i n the manufactu-

r ing concerns i n India.

The loans and advances are fluctualing i n bet-

ween 4.59 per cent i n the year 1988-89 t o 18.54 per

cent i n t he year 1980-81. The percentage shares of

t h i s over the period of study are 16.60 per cent, 18.54

par cent, 11.59 per cent, 12.43 per cent, 6.00 per cent,

G.34 per cent, 11.01 per cent, 7.28 per cent, 6.03 per

cent and 4.59 per cent respectively. It i s on an aver-

age 15.73 per cent of the t o t a l current assets. Cmbin-

ing t h i s with sundry debtors i s a lso not much alarming,

because a t i l l it i s within t he trends i n India.

Cash and bank balances of TACEL a re 4.11 per cent,

5.00 per cent, 2.69 per cent, 4.63 per cent, 3.05 per

cent, 18.29 per cent, 15.12 per cent, 12.87 per cent,

33.45 per cent, and 25.02 per cents of the t o t a l current

asse ts i n the respective years, of the study. On an aver.

age t h i s is 23.84 per cent of its current assets. In no

o the r u n i t of study, the cash balances a r e s o high a s

i n t h i s unit . This is a l so above the trends i n India.

Therefore this is a case of excess holding of cash

balances devoid of earning income i n o ther opportune

investments. This may a l s o cos t TACEL unnecessarily

i n the form of I n t e r e s t charges . The other current a s se t s have been used only i n

seven out of t h e ten years of study. The percentage

shares of t h i s item a r e 6.98 per cent, 3.93 pe r cent,

3.25 per cent, 0.18 p e r cent, 0.16 per cent, 1.81 pe r

cent, and 26.32 pe r cent pe r cent of the t o t a l current

a s se t s of the yeara 1979-80, 1983-84, 1984-85, 1985-86,

1986-87, 1987-88 and 1988-89 respectively. Except i n

the year 1988-89 i n none of the years the share of t h i s

source i s substantial .

The trend of the t o t a l current a s se t s indicate

t h a t except i n the year 1980-81 and the l a s t year of

the study the working c a p i t a l of TACEL have been increa-

s ing year a f t e r year. Even i n th i s , t he l a s t years

t o t a l current a s se t s a r e more than the base year balances

and hence the decl ine i n the working c a p i t a l is only i n

the year 1980-81.

WORKING CAPITAL STRUCTURE OF TASCO

The working cap i t a l s t ructure of TASCO has been

presented i n Table IV.4 f o r analysis. The t o t a l cur-

rent a s se t s have been Rs.10.046.58 lakhs over t h i s

period and the components a r e i n the proportion of

59.73 per cent, 1.15 pe r cent, 20.09 per cent, 28.89

pe r cent and 0.13 pe r cent respectively. The invent-

o r i e s and the loans and advances have been the major

source of current a s se t s during t h i s period. The sun-

dry debtors and other current a s se t s are a t the minimal.

The cash and bank balances are more o r l e s s onef i f th of

the t o t a l current a s se t s used i n t h i s period. The lower

shore of the sundry debtors reveal the ef fecient collec-

t ion policy.

Inventories had been i n the order of 16.70 per

cent, 20.17 per cent, 42.59 per cent, 74.66 per cent,

50.44 per cent, 43.82 pe r cent, 72.49 per cent, 44.93

per cent, 44,93 per cent and 72.25 per cent of the t o t a l

current a s se t s during t h i s period. On an average the

inventor ies were worth about Rs, 499.65 lakhs forming

p a r t of 48.29 per cent of t he t o t a l current a s se t s with

a standard deviation of 119.29. This high deviation

Ilgure? ,a 'fir brackets are tk ~rc t0 tnge5 1 ICA lob1 Current ASSZU

Sourte C o l p t e d fro1 tk Annual rerllsr of tk Stnte hrau o! Rbllc bklprlsc:

and t h e range of 16.70 p e r cen t t o 74.66 per cen t shows

t h a t t h e r e i s no consistency i n t h e usage of t h e inven-

tow. This high f l u c t u a t i o n i n t h e usage of inventor ies

may be a t t r i b u t e d t o t h e f a c t o r s l i k e monsoon and crop-

ping p a t t e r n of t h e c u l t i v a t o r s etc. Even though t h e

demand f o r sugar is a cons tan t fac tor , t h e inventory

ie . , the sugarcane is a dependent f a c t o r upon t h e mon-

soon, cropping p a t t e r n and p r i c i n g pol icy of Agr icu l tura l

products. The average of t h e inventory i n t h i s u n i t i s

well below t h e indus t ry average of ahove 60 p e r cent.6

The low l e v e l of inventory revea ls t h e under u t i l i s a t i o n

of capac i ty i n sane years.

The sundry debtors a r e worth about Rs.115.86 lakhs

and i t is spread w a r a s 0.38 prr cpnt, 0.54 prr cont.

0.50 p e r cant , 1.50 p e r cent , 1.07 p e r cen t , 1.29 per

cent , 0.45 p e r cent , 1.78 p e r cent , 1.78 p e r c e n t and

1.79 p e r c e n t of t h e t o t a l c u r r e n t a s s e t s i n t h e respec-

t i v e years. On an average it is Rs.11.53 lakhs + 8.68

lakhs over t h i s period. I n r e l a t i v e terms it is on an

average 1.11 p e r c e n t over t h i s period.

6. Ibid.

The loans and advances of TASCO a r e of t h e o r d e r

of 51.41 p e r cent , 72.79 p e r cent , 52.29 p e r cent , 22.44

p e r cent , 28.33 p e r cent , 26.10 p e r cent , 16.29 p e r c e n t

12.29 p e r cent , 12.29 p e r cen t and 13.31 p e r c e n t of t h e

t o t a l c u r r e n t a s s e t s i n t h e respec t ive years. The t o t a l

loans and advances o f f e r e d by it is Rs.2503.00 lskhs.

The average of which i s Rs.290.30 lakhs with a s tandard

d e v i a t i o n of 2 Rs.180.83 lakhs. This high Standard de-

v i a t i o n is an i n d i c a t i o n t h a t t h e r e is no cons is ten t

p o l i c y i n t h i s regard. I n r e l a t i v e terms t h e loans and

advances a r e on an average 30.75 p e r c e n t of t h e c u r r e n t

a s s e t s over t h e period. This again revea ls t h a t on ly i n

T.'9CO t h e average percentage of t h e loans and advances

a r e s o high end hence it requi res a propr r policy. while

clubbing t h e sundry debtors and loansand advances, it

becernes 31.68 p e r c e n t and hence within t h e 1Mt.

The t o t a l cash and bank balances a r e Rs.2018.72

lakhs and t h i s has been d i s t r i b u t e d a s 31.33 p e r cen t ,

6.19 p e r cent , 4.06 p e r cent , 1.39 p e r cent , 20.16 p e r

cent , 28.77 p e r cent , 10.65 p e r cent, 40.52 p e r cent ,

40.52 p e r c e n t and 12.63 p e r cen t of t h e t o t a l c u r r e n t

a s s e t s i n t h e r e s p e c t i v e years. On an average t h e cash

and bank balances during t h i s period a r e Rs.201.82

lakhs + 146.46 lakhs. I n r e l a t ive terms, it is on an

average 19.68 per cent. The absolute f igures show

the high deviations around the average and t h i s reveals

t he lack of proper cash management policy. Cash and

bank balances have been held i d l e t o a l a rge r extent.

In India, cash const i tu ted 6.7 per cent of the current

asse tse7 Judged frcm t h i s angle a l so TASCO has main-

tained high level of cash and bank balances foregoing

opportune income.

The other current a s se t s have been used only i n

four out of the ten years ie., i n the year 1979-80.

1985-86, 1986,87 and 1987,88 and have formed p a r t of

0.16 pe r ccnt, 0.12 par cent, 0.47 per cent and 0.47

per cent of the t o t a l current asse ts of the respective

years. The poor share of t h i s and a l so the small number

of years i n which it has been used reveal t h a t it i s

occasional source.

The trend of the t o t a l current a s se t s of TMCO

have revealed t h a t it had been f luctuat ing and the trend

percentages have been ranging from 54.09 per cent i n the

year 1982-83 t o 169.76 pe r cent i n the year 1988-89.

7. Reserw Bank of India, Bulletin, S.U., p.532.

It does not show any di rect ion of movement. This may

be due t o the r e a l i t y t h a t the sugar industry a l so

move i n the same way a s the sugarcane production move

which is dependent upon the good monsoon and cropping

pattern.

WORKING CAPITAL STRUCTURE OF TAMIN

The gross wrk ing cap i t a l s t ructure of TAMIN

has been presented i n Table IV.5. The t o t a l of the

current a s se t s is Rs.2995.33 lakhs over the period.

I t had been comprising of inventory 46.64 per cent,

sundry debtors 6.60 per cen t cash and bank balances

31.03 pe r cent, loans and advances 14.49 per cent and

others 1.23 pe r cent of the t o t a l current assets.

The year wise inventory levels of TAMIN exhlbi t

t h a t it is forming p a r t of 38.26 pe r cent, 72.75 per

cent, 67.95 per cent, 75.59 per cent, 76.54 per cent,

59.39 pe r cent, 59.59 per cent, 59.55 pe r cent, 41.96

per cent and 29.05 pe r cent of the t o t a l current a s se t s

i n the respective years. On an average the inventor ies

were worth about Rs.139.69 lakhs with a standard devi-

a t ion of + Rs.95.41 lakhs. In r e l a t ive terms the aver-

age of t h i s is 57.16 pe r cent of the t o t a l current a s se t s

Sourn . Computed fm the hual mils$ of Ihe Slate BUtdu of Wlic hterpriw

of TAMIN. A s per t h e Reserve Bank of India study of lb50

companies f o r t h e year 1974-75 it was 23.2 per cent

f o r t h e mining industry. Judged from t h i s angle TAMIN

possesses excess inventorye revealing a poor inventory

policy.

The sundry debtors a r e 2.09 per cent, 6.60 per

cent, 15.25 pe r cent, 6.11 per cent, 1.97 per cent,

6.0 pe r cent, 11.99 pe r cent, 14.04 per cent, 1.74 pc r

cent and 5.25 per cent of t h e t o t a l current a s se t s i n

t he respect ive years. The average sundry debtors a r e

Rs.19.78 lakhs with a standard deviation of tRs.20.79

lakhs. In r e l a t i v e terms t h e average i s 7.15 per cent

over t he period. The higher standard deviation than

the mean ind ica t e t he uneven contribution of t h i s so-

urce. I t f u r t h e r reveals t h a t t he sundry debtors a r e

subs t an t i a l i n t he years 1985-86, 1986-87 and 1908-89

t h i s shows l a x i t y i n col lec t ions . In o the r years i t

is f a i r l y d is t r ibuted .

The loans and advances a r e conot i tu t ing 2.71

pe r cent, 10.29 pe r cent, 6.05 per cent 11.16 per cen t

6.45 pe r cent, 23.57 pe r cent, 14.02 pe r cent, 12.50

8. V.E., Ramamoorthy Working Capital Manaqcment, Op.Cit., p.193.

per cent and 17.60 per cent of the t o t a l current asse ts

i n the respective years. On an average it is 11.75 pe r

cent during t h i s period. In absolute terms, the t o t a l s

of the loans and advances a re 434.00 lakh and the aver-

age of which is Rs.43.40 lakhs with a standard devia-

t i on of 2 Rs.51.811 lakhs. The high var iabi l i ty of

loans and advances f m mean i s due t o large portions

of t he same i n the l a s t three years. The ten years per-

centage share of loans and advances are f a i r , but the

high va r i ab i l i t y i s an evidence t o suggest t ha t the

loans and advances a re not arranged i n an even way.

The sundry debtors and loans and advances put together

a lso the percentage share of these source i s below the

norm. This shows the e f f i c i e n t collection policy or

cash sales.

Cash and bank balances of TAMIN forms 56.73 per

cent, 18.01 per cent, 4.96 per cent, 6.99 per cent,

24.00 per cent, 10.99 per cent, 15.96 per cent, 11.40

per cent, 40.85 per cent and 46.36 per cent of the t o t a l

current a s se t s used i n the respective years. The aver-

age of which has been Rs.92.95 lakhs with a deviation of

2 Rs.45.88 lakhs. The high va r i ab i l i t y i a due t o high

contr ibut ion of t h i s source during the l a s t two years

of t he study. In a l l the o ther years, the t o t a l of

cash and bank balances a re not a s high a s these two

years. But however i n o ther years a l so it shows the

uneven share i n the working cap i t a l structure. This

uneven share exhibi ts the lack of proper cash manage-

ment policy. The average percentage of t h i s source i s

23.62. This again shows the excess cash balances i n

TAMIN foregoing opprotune income from the investments

and incurring addi t ional i n t e r e s t charges i f they were

borrowed.

The other current a s se t s a l so used by TAMIN a re

ranging from Rs.0.05 lakhs t o 19.2G lakhs i n absolute

terns and constituted 0.21 per cpnt, 0.48 p r r crnt,

0.96 per cent, 0.13 pe r cent, 0.03 per cent, 0.03 per

cent 0.09 p e r cent, 0.97 pe r cent, 2.95 per cent, and

1.25 per cent of the t o t a l current a s se t s used during

the period of study. On an average the other current

a s se t s a re 0.62 per cent w e r t h i s period. In absolute

terms the average is Rs.3.69 lakhs w i t h a deviation of

Rs.6.42 lakhs. In t h i s u n i t the deviations a re more

than the mean because of the f a c t t h a t t he usage of

t h i s source s t a r t ed increasing only from the year

1986471pr ior to 1986-87 t h i s source was very feable.

The trend of the gross working cap i t a l of TAMIN

reveals t h a t the trend r a t i o s of the t o t a l s of the

current a s se t s a re increasing year a f t e r year from 100

pe r cent i n the year 1979-80 t o a high of 9619.86 per

cent i n the year 1988-89. It is increasing consisten-

t l y throughout the period. This i s an indication of

increased business ac t iv i ty .

ADEQUACY OF WORKING CAPITAL

The importance of adequacy of working cap i t a l i n

a business cannot be over emphasised. To run a business

ef fecient ly , adequate amount of working cap i t a l i s very

essent ia l . The long term funds i n the fonn of fixed

a s se t s cannot be used gainful ly unless adequate working

cap i t a l is available. According t o Dowing the fixed

a s se t s of the business is a m i l l and the current asse ts

t h e g r i s t the m i l l grinds. The business i s the m i l l

and g r i s t together.' Though the current l i a b i l i t i e s a re

paid from cash generated by the current a s se t s as a

whole, the working c a p i t a l should be su f f i c i en t t o the

current a s se t s t o provide agains t the danger from a

9. Arther Stone Dewing, The Financial Policy of the Corporation, Ronald Press Company, New York, 1953 a s quoted by V.E. Ramamoorthy i n Workinq Capital Manaaemenf IFMR Publications, Madras 34, p.8.

Shrinkage i n t he value of Current assets, par t iculary

A study of working cap i t a l is a major

importance t o i n t e rna l and external analysts because

of i t s c lose re la t ionship t o current day t o day oper-

a t ions of business. Inadequacy o r mismanagement of

working c a p i t a l i s t he leading cause of business f a i l -

ures.'' Such an important area of working cap i t a l viz.

the adequacy of working cap i t a l is analysed here with

t he help of the t oo l s l i k e (1) r a t i o analysis, (2 ) Correl-

a t ion and (3) trend analysis.

Accounting r a t i o s a r e the relationships expresses

i n mathematical terms betmen figures which are conno-

cted with each other i n some manner.12 Ratios are

ayrnptomo l i k e the blood presauro, the pulses, o r the

temperature of an individual. Some managements can

overcome o r mitigate the e f f e c t of disease on the bas is

of symtpom. o ther lack t h a t ab i l i t y , the aggressiveness

10. Brown, J.L., and Howard, L.R., Principles and Prac t ice of Management Accountancy, Mac Donald and Evans Ltd., Londen 1975, p.56.

11. Ke~ledy, R.D., and M c Mullen, S.Y., Financial State, ment and In terpre ta t ions , Richard. D., Irwin Hme- wood 1964, p.225.

12. Maheswari, S.N., Management Accountinq and r inancia l control , Sultan chand and sons, New c el hi 2. 1987, p..

and the knowledge t o d0.13 The primary objective of

the usage of t he r a t i o analysis i s t o determine the

solvency, t h a t is the probable a b i l i t y of the enter-

p r i s e t o meet i t s debts promptly and without any loss.

and the secondary objective i s t o determine the a b i l i t y

to provide funds fo r day t o day business operations

without interruption. Therefore the appropriate r a t i o s

used here a r e the current ratio/working cap i t a l r a t i o

and the quick ratio.

The absolute s i z e of working cap i t a l does not

provide a r e l i ab l e measure of adequacy o r otherwise of

working capi ta l . Therefore financial analysts t r y t o

view the level of working cap i t a l i n re la t ion t o the

volume of sales.14 Therefore the trend percentages

a r e worked out t o study whether the working capi ta l i s

growing i n the same way as the sales, o r not. The co-

e f f ec i en t of corre la t ion between sa l e s and working

cap i t a l have a l so been worked out t o f ind t h e i r re la t ion-

s hip.

13. Roy, A., Folke, Prac t ica l Financial Statement Analysis In ternat ional Students Edition, MC Graw H i l l Publi- shing Canpany Ltd. , 1966. p.172.

14. Sahay, S.N., Financial Nana anent of Pub,ir cntrrr- r i s e s , S. Chand and Cornpan;, Ltd., New ~ e . . t i i kim

Final ly ^he l i neo r regression have been used

considering sa l e s a s independent f ac to r and working

cap i t a l a s a r e su l t an t dependent factor, t o f ind out

the Geivsi.*nce 02 working c a p i t a l on Saies and a l so

tihe ex t en t of de;,encience, so a s t o t a r e e f L e ~ t i ~ 6

working c ~ j a i t a i decisions. Since the various l eve l s

of dcgendence as expiained by the adjusted R. Squares

of these equations of the public are more uersful t o

take financing decision r a the r than t o use as a t e s t

of adequacy, it has been given deta i led treatment i n

the chapter V.

TESTS OF ADEWACY

Lxrrent r a t i o is the most common l iqu id i ty r a t i o

used i n the iinclnc;o; analyst?. It i s comp~lted k y d iv i -

ding current a s se t s by current l i i h i l i t i e s . Because of

t h i s and ~ : s iink w i t h wor'lng cap i t a l tha cu-rent r a t i o

i s sometrnle referred a s 'working cap i t a l ra t io ' . I t

measures t h o a b l i ~ t y of t he company t o maintain solvency

i n t he sho r t run. The obl iga t ions which normally m?ture

within one year are the current l l a b i l i t i c , . Thus, the

r a t i o can reveal the extent t o which the enterpr ise can

cover such l i a b i i i t i e a with current assets. The current

r a t i o a i s o gives tne analys ts a general p ie ture of t he

adcquacy of t h e working c a p i t a l of a concern and i t s

a b i l i t y t o meet i ts day to-day payment ob l iga t ions .

Likewise, f t a l s o measures t h e margin of s a f e t y pro-

vided f o r paying c u r r e n t deb ts i n t h e event of a

reduction i n t h e va lue of c u r r e n t assets.15 The

p e r t i n e n t r a t i o t o be used here is presumably t h e

"cur ren t ra t io" . This r a t i o i s widely and exten-

s i v e l y used here due t o i ts s ign i f icance Wing f e l t

j n such an analysis . Being an ind ica t ion of t h e

f irms' capac i ty t o meet i t s c r e d i t ob l iga t ions , this

i d e a l norm of 211 of c u r r e n t r a t i o could be applied

i n t?le ana lys i s .

Undrr t h i s back yround t h e c u r r e n t r a t i o f - r

t h e sample prlbl .1~ c n t c q r j n e s have k-en computed a n d

prosentod i n t a b l e TV.6 f o r analysis .

The a n a l y s i s of t h e t a b l e IV.6 shows t h a t t h e

c u r r o n t r a t i o s of a l l thl? p t b l i c e n t e r p r i s e a r e f l u c t -

ua t ing throughout t h e per iod due t o f l u c t u a t i o n s i n

c u r r e n t a s s e t s and c u r r e n t l i a b i l i t i e s . The u n i t wise

a n a l y s i s r e v e a l s t h a t i n TAN51 t h e r a t i o i s f luc tua-

t i n g because of t h e changes i n c u r r e n t a s a e t s and

c u r r e n t s l i a b i l i t i e s . I n t h e f i r s t f o u r years o f '

15. Donaid, E., Ml i le r , ST M~n39eTlal I n t r c p r e t a t i o n o' Financi,al Sta>m&Le the causes and e f f e c t s , r a t i o approach, 1966, p.20.

TABLE I V . 6

CURRlENT RATIO OF SELECTED PUBLIC WTERPRISES

Y e a r s TANS1 S S L M TACEL TASCO TAMIN Combined

Average 1.88 2.36 1.62 3.26 3.00 1.99

S t d d e v i - ation from 0.6 0.07 0.30 1.2 0.8 mean

S o u r c e : Camputed fran the annual ' r e v i e w 8 of S t a t e BPE.

t h e s tudy t h e r a t i o is more than 2t1 exhibi t ing a

s a t i s f a c t o r y s t a t e of a f f a i r s . In another two years

namely 1983-84 and 1987-88 t h e r a t i o is 1.511 and

above and i n the r e s t of t h e fou r years namely 1984-85

1985-86, 1986-87, 1988-89 TANSI had operated without

having adequate amount of cu r ren t a s s e t s t o pay f o r

t he cu r ren t l i a b i l i t i e s . The average of the cu r ren t

r a t i o over the per iod had been 1.8811 with a standard

d w i a t i o n of + 0.6. This r a t i o is l e s s than t h e norm.

Even though t h e r a t i o is l e s s than the norm, it have

more of cu r ren t a s s e t s than t h e cu r ren t l i a b i l i t i e s

providing funds f o r working c a p i t a l a l s o and hence

TANSI would have paid f o r t h e cu r ren t l i a b i l i t i e s i f

t h e r e was no s t eep fall i n the value of t he cu r ren t

a s se t s . The o t h e r t e s t s l i k e c o r r e l a t i o n between

s a l e s an8 working c a p i t a l and the regression ana lys i s

have a l s o proved t h a t TANSI had heavy i n i t i a l funds

and hence the n e t working c a p i t a l d i d no t increase.

As p e r the norms l a i d down by Tandon ~ u m n i t t e e l ~

1.1711 and 1.3311 a r e the expected cu r ren t r a t i o under

method I and 11 respectively. Maintanence of adequate

16. Reserve Bank of Ind ia Guidelines on t h e bas i s of recommendations of PL. Tandon Committee.

n e t w r k i n g c a p i t a l i n the form of current r a t i o t o

be more than one under method I and 1.33rl under

rnethcsd I1 has been considered a s a p a r t of f inanc ia l

discipl:ne.17 Judged £ran t h i s angle, TANS1 has

mairltalncd a current r a t i o of more than 1.2511 through-

out the period. In t repre ted t h i s i n another angle

t h a t the maintanence of excese current a s se t s more

than sa t i s fy ing the eolvency norm and the current

claims i s a s ign of lo s ing p ro f i t ab i l i t y . The cu r ren t

a s s e t s which a r e maintained morethan required t o meet

cu r ren t l i a b i l i t i e s a r e i d l e investments, which would

have earned some income otherwise invested elsewhere.

In Southern S t m c t u r a l s Ltd., a l so the

current r a t i o is f luc tua t ing throughout the period

due t o f luctuat ions i n t h e currents a s s e t s and cu r ren t

l i a b i l i t i e s , even though t h e f luctuat ions i n current

asse ta a r e more than the f luctuat ions i n current l i a b i -

l i t i e s . I n s i x years namely 1979-80, 1983-84, 1984-85,

1906-07, 1987-88 and 1988-89 the current r a t i o is more

than the norm and i s a case of excess investments i n

cu r ren t asse ts . In another four years n m r l y 1900-81,

198142, 1982-83 and 1985-06 tlre cu r ren t a s s z t s a re

17. K.M. Chitnis, LQI:~!~ Capital ?lw-eq-mmt of Large Inivstrir7i uni ts , Uastane Ramachandhra and Company 1988, p.57.

a r e more than the current l i a b i l i t i e s , but t h e r a t i o

i s l e s s than the nonn and is a case of inadequate

investments i n cu r ren t asse ts . On an average Southern

S t ruc tu ra l Ltd., had current a s se t s more than required

t o meet cu r ren t l i a b i l i t i e s . (2.36~1). But the pecu-

l i a r i t y is it had more of current a s s e t s i n s i x years

an8 l e s s of current a s s e t s t o secure solvency i n fou r

years. While the lower r a t i o is a sign of poor sol -

vency leading t o t h e r i s k of insolvency, the higher

r a t i o is a s ign of excess investments i n current

a s se t s leading t o a l o s s of income. It is always

b e t t e r t o avoid the excess and inadequate investments

i n current a s s e t s s o a s t o optimise the re turns and

minimise t h e cos t / r i sk i n Southern S t ruc tu ra l Limited.

ir Judgindfrom the norms of the Tandon and chore

committees' recvmnendations, the r a t i o is favourable

while it is a s a t i s f a c t o r y s t a t e of a f f a i r s , from

the po in t of l i qu id i ty , it is unsat is factory from t h e

po in t of return. The higher l i q u i d i t y may increase

t h e c o s t of working c a p i t a l and a l so l o s e the opportune

incme.

m e current r a t i o obtained from the accounts

of TACEL reveals tha t except i n one year 1986-87 i n

none of the years, the r a t i o is as per the norm.

It had been fluctuating between the low of 1 . 1 1 8 1

i n the year 1979-80 t o a high of 2.0381 i n the year

1986-87. In three years, (1980-81, 1984-85 and

1985-86) even though the r a t i o is not as per the

norm, it i s close t o the norm being a t 1.981. 1.981

and 1.9581. In the remaining s i x years the r a t i o

reveals t h a t the current assets a re more than the

current l i a b i l i t i e s , but l e s s than norm. The ten

years average of t h i s r a t i o also reveals that the

r a t i o have been l e s s than the norm being a t 1.62.

Judged from the norms of the Tandon Committee, it is

a sign of effecient management of working capital,

because the average of the ten years is a l i t t l e

above 1.3381 with a meagre standard deviation of

+ 0.30. Therefore it can be concluded tha t it would - not have been a problem f o r TACEL t o pay for the

current l i a b i l i t i e s , i f the values of the current

assets had remained constant. But had the values of

the current assets s t a r t fa l l ing, it would not have

been possible f o r TACEL t o pay f o r the short term

creditors, and t o t h a t extent the investments i n

current asse t s are not f a i r i n TACEL.

The current r a t i o of TASCO indicates t h a t it

has maintained a high ra t io . Only i n one year (1988-89)

the r a t i o is near t o the nonn and i n a l l t he o the r

years (except 1984-85). it is more than the nonn.

In another s i x years, t h e current a s se t s a re th ree

times more than the cu r ren t l i a b i l i t i e s and i n two

years it is f i v e times more than current l i a b i l i t i e s .

The ten years average being 3.2611 have evidenced a

d e f i n i t s ign of excess investments i n current a s s e t s

and poor management of t he working capi ta l . The devia-

t i ons from t h i s average having been + 1.2 reveals the

high f luctuat ions hence i s a sign of excess investments

i n current assets.

Judging it from the nonn of Tandon Cornnittee

recommendations t h i s is t h e extreme case of poor working

c a p i t a l management among the publ ic e n t e ~ p r i s e s studied.

Of a l l t h e f i v e publ ic en te rp r i se s taken f o r study,

t h i e concern only has such a high r a t i o showing the

apathy on the p a r t of t h e management towards t h i s v i t a l

area of management.

The current r a t i o of TAMIN a l s o reveals t ha t ,

t h i s too has maintained excess working c a p i t a l over

t h e period. Only i n one year (1985-86) the r a t i o is

l e s s than 281 norm and i n a l l o ther years it had

maintained more than 281 r a t io . I n s w e n ou t of

the ten years, t he r a t i o had been more than 3.26

and l e s s than 4.29. The t en years average of the

r a t i o having been 381 evidences the poor s t a t e of

a f f a i r s i n thirr area and t h e deviation f r an t h i s

average being 0.8 shows the remedial measures t o

be taken t o reduce the r a t i o and thereby cost and

increase the re turn t h a t w i l l be avai lable t o TAMIN.

Judging from the Tandon Omanittee norms a l so

i n a l l t he nine years TAMIN had maintained a high

l i q u i d i t y foregoing income and increasing the t o t a l

cos t of working capi ta l . There i s every roan f o r

decreasing t h i s r a t i o and increasing the prof i tabi -

l i t y of TAMIN by way of reducing t h e investments i n

excess current assets.

On the Whole t h e publ ic en te rp r i se s of Tamil-

nadu have maintained a cu r ren t r a t i o ranging f r an

1.53 i n the year 1985-86 and 2.64 i n the year 1981r82.

Only i n four out of t h e t en years they have maintained

the cu r ren t a s s e t s below t h e norm of 281. On an aver-

age they have maintained the current a s s e t s and current

l i a b i l i t i e s i n the r a t i o of 1.9981.

Thia shows, t he norm of 211 i s almost sa t i s f ied ,

but looked a t from the point of Reserve Bank of India,

guidelines, they have not cared f o r the financial dis-

cipline, t o maintain the l iquidi ty and prof i tabi l i ty .

The current r a t i o exhibited the solvency of the

study un i t s and revealed the excess investments i n

current asse ts i n some un i t s i n some years between the

current asse ts and current l i a b i l i t i e s t h a t i s the ten-

dency of one towards the o ther and t h i s can well be

studied with the help of correlation analysis. The co-

e f f i c i en t of correlation between current assets and

current l i a b i l i t i e s is presented in table IV.7.

TABLE IV.7

COEFFICIENTJOF CORRELATION BETWEEN CVRRENT ASSET8 AND CURRmT LIABILITIES OF SELECTm

PUBLIC ENTERPRISES OF TAMILNADU

Par t iculars TANS1 SSLtd TACEL TASCO TAMIN

coeff ic ient of ( r ) 0.55 0.76 0.88 0.74 0.95

Source: computed from the annual reviews of Sta te BPE.

The analysis of thds table reveals the degree of

l i nea r coeff ic ient of correlation between the current

asse ts and current l i a b i l i t i e s . This shows t h a t the

current a s se t s and current l i a b i l i t i e s of the se lec t

public enterprises of Tamilnadu a re correlated i n d i f f -

erent degrees. In none of the cases they a re perfectly

po# i t i r e ly correlated +1 nor perfect ly negatively cor-

re la ted -1 or absence of corre la t ion either. In a l l t he

cases they range fmm zem (absence of correlation) to +l.

In TANSI it is 0.55 t h a t i s moderately correlated, i n

Southern Structura l Limited and TASCO current assets/

current l i a b i l i t i e s have a moderately high correlation,

and i n TACEL and TAMIN they ara highly correlated. This

moderate o r moderately high o r high corre la t ion reveals

t h a t the public enterpr ises have followed a uniform method

i n financing current a s se t s and current l i a b i l i t i e s t h a t

i s they respond to each others requirements.

I n TANSI, the working cap i t a l and sa les are nege-

t i ve ly corre la ted and t h a t is why vorking capi ta l decre-

ased while tha sa l e s increased. This i s explained by the

i n i t i a l heavy expenses on fixed and current asse ts and

has ref lec ted i n moderate corre la t ion between current

asse ts and current l i a b i l i t i e s . In the o ther cases l i k e

Southern Structura l Limited and TASCO where the correl-

ation i s moderately high, the current l i a b i l i t i e s have

responded more favourably towards the needs of current

a s se t s and current a s se t s i n turn earn t o pay f o r them

In o the r cases l i k e TACEL and TAMIN the corre la t ion is respond

high s ignal l ing t h a t they/more o r l e s s on equal terms.

In short , t he coeff ic ient of corre la t ion have proved

current l i a b i l i t i e s and current a s se t s have mwed

simalhaneously more o r l e s s responding

t o t h e i r requirements. This show t h a t the working

cap i t a l was assured off f o r the changing requirements

i n a l l t he units.

Since the current ra t io , o r coeffecient of

corre la t ion is not a measure of l iquidi ty of the

public enterprises, quick/liquid or acid t e s t r a t i o

have been used t o t e s t t he capacity of the public

enterpr ises t o pay f o r the current l i a b i l i t i e s a t a

pa r t i cu la r point of time.

The quick or l iquid r a t i o shows the a b i l i t y of

the business t o meet i ts m e d i a t e commitments a t a

point of time and hence it i s a lso known as l iquid

assets. They usually consis ts of cash i n hand and a t

bank, b i l l s receivables sundry debtors and markctoblo

secu r i t i e s representing cash temperorily invested.

It i s wise t o keep the l iquid asse ts a t l e a s t equal t o

the current obligations a t a l l time.'' The norm being

t h a t t he quick a s se t s should be equal t o the current

l i a b i l i t i e s , *en the r a t i o i s less , it implies t h a t

the quick a s se t s do not cover current l i a b i l i t i e s and,

therefore, s teps should be taken t o obtain additional

cash. The object of calculating t h i s r a t i o i s t o as-

ce r t a in as t o whether the firm i n question i s i n a

posit ion t o pay f o r t he credi tors ( i f they pressurise

f o r i t ) o r not.

18. Om Prakash, &., Ratio Analysis f o r Management new Perspective Management ra t io , Mmalaya Publishing House, Bombay, 1987, D-75.

The quick r a t i o s obtained f m n the selected

public enterpr ises a re presented i n t ab le IV.8.

The analysis of the t ab le IV.8 reveals t ha t

the quick r a t i o i s ranging £ran 0.481 i n TACEL i n

the year 1983-84 t o a highest of 4.181 i n Southern

Structura ls Limited t h a t too i n the year 1988-89.

The u n i t wise observation reveals t h a t TANS1

had a lowest r a t i o of 0.781 i n the year 1985.86 t o

a highest of 1.481 i n the years 1981-82 and 1982-83.

The r a t i o showed a sa t i s f ac to ry posit ion i n the f i r s t

four years of the study and i n the remaining s i x years.

the quick a s se t s a re lower than the current l i a b i l i t i e s .

I t indlcatcs tha t i n e ix out of thr ten years TANS1

i s not l iquid, even though it i s solvent. But, how-

ever, over the ten years period of study, the average

of t h i s r a t i o being 1.0181 having a deviation of f; 0.25

is able t o show t h a t it is l iquid w e t t h i s period.

While current r a t i o showed a solvent posit ion, the

quick r a t i o proved it a3 not l iquid t o pay f o r current

liabilities a t l e a s t i n s i x out of the ten years.

Even though it i s a welcome sign of e f f i c i e n t mana-

gement of working cap i t a l £ran the TANSI's point of

TABLE IV.8

WICK RATIO OF THE SELECTED PUBLIC

ENTERPRISES OF TAMILNADU

Year TANS1 SSLtd TACEL TASCO TAMIN Combined

Average 1.01 1.5 0.8 1.76 1.3 1.17

S t d d w i a t - 0.25 1.02 0 . 3 1.1 0.5 ion

Source: Computed f r w the annual reviews of S t a t e BPE.

view, it is not liquid enough in s i x years f m the

creditors point of view and therefore it may lead to

stringent terms and conditions by the creditors.

The quick ra t io of Southern Structurals Ltd.,

show4 tha t it had quick assets less than the current

l i a b i l i t i e s i n the f i r s t two years of the study. In

the remaining eight years it had enough quick assets

t o pay for the current l i ab i l i t i es . However in s i x

yearn from 1983-84 t o 1980-89 Southern Structural8

Ltd. had quick assets more than current l i ab i l i t i es .

The average ra t io being 1.521 with a deviation of

+ 1.0 shown the need for efficiency i n the management - of quick assets. The current rat io showed a good

solvency position and the quick ra t io showed a

bet ter l iquidi ty position, but however, the ra t io

being more than the norm and standard deviation

also being more, points out the need for imprwement

i n the e f f ic ien t u t i l i sa t ion of current assets.

I n TACEL, the ten years avsrage of the ra t io

being O.Br1 reveals tha t the liquidity position is

not satisfactosy i.e. the quick assets are lesser

than current l i a b i l i t i e s and hence it may not be

able t o pay for the current l i a b i l i t i e s i f the

c red i to r s press f o r it. Only i n the three years

1984-85, 1987-88 and 1988-89, the r a t i o is s a t i s -

fac tory and i n another year (1985-86) it is near t o

t h e norm, but i n the r e s t of the years the r a t i o i s

l e s s than the norm. In general it points out the

need f o r improvement i n the management of the

Working Capital. The comparison of t h i s r a t i o

with t h a t of t he current r a t i o of the same u n i t

r w e a l s t h a t there is some amount of consistency,

i n the sense t h a t t he current r a t i o showed an e f f i c i -

ency i n the usage of the current asse ts , whereas

t h i s r a t i o a l s o showed a high u t i l i s a t i o n of current

a s se t s wenthough it cannot pay f o r the current

c red i to r s a t a p a r t i c u l a r point of time and hence

not good from t he c red i to r s point of view.

The quick r a t i o of TASCO f luc tua te between a

low of 0.6 i n the year 1988-89 and a high of 481 i n

the year 1980-81. On an average it wae 1.7681 with

a standard deviation of f 1.1. Only i n one year

1983-84, t he r a t i o is a s pe r the now; and i n two

years, t he r a t i o is near t o the norm and i n another

two years t h e quick a s se t s a r e l e s s e r than the

cu r ren t l i a b i l i t i e s . But i n 5 yeara TASCO has quick

asse t s more than the current l i a b i l i t i e s . On the

whole, the quick a s se t s a r e more than the current

l i a b i l i t i e s w a r the period. pointing out the need

f o r reducing the excess cash balances i n the i d l e

£om.

h e quick r a t i o of TAMIN shows t h a t it has

quick a s se t s l e s s than the current l i a b i l i t i e s i n

three years i n another th ree years, the quick

a s se t s a r e j u s t equal t o the current l i a b i l i t i e s

i.e. the r a t i o is as per the norm and i n the r e s t

of the four years, there i s excess investments i n

quick a s se t s without earning arty income. Eventhough

the ten years average of the r a t i o is 1 . 3 ~ 1 with a

deviation of 2 0.5 and portrays a sa t is fac tory s t a t e

of a f f a i r s , s t i l l there i s every poss ib i l i t y f o r

toning up the managanent t o avaoid insuff ic ient quick

a s se t s i n sane years and excess investments i n quick

a s se t s i n some other years.

The combined quick r a t i o of the public

enterpr ises of Tamilnadu a l so f luctuates between 0.88

times i n t h e year 1985-86 and 1.42 times i n t h e year

1981-82 . On average t h i s has been 1.17. This shows

t h a t the quick asse ta a r e su f f i c i en t t o meet the

current l i a b i l i t i e s of them. On the other hand the

canbined quick r a t i o i s equivalent t o tha t of the

current r a t i o under method-I of the Tanclon Cawnittee

recarmendations. This proves tha t the investments

i n current asse ts are more than the standard.

Since the adequacy of the Working Capital have

ult imately to be analysed i n relation t o the volume

of sales, the trend of Working Capital and the sa les

of the public enterprises are exhibited i n Table IV.9

f o r analysis and testing.

The observation of the table reveals that the

trend percentages are fluctuating i n a l l the five uni ts

even though it shows de f in i t e direction only in certain

units. The trend percentages of working capi ta l and

sa l e s are analys& along with the coefficient of cor-

reclation between them.

The coeffdcient of correlation between sa les

and working capi ta l have been -0.5775 in TANS1 implying

t h a t there has been a negative correlation between them

during t h i s period. The working capi ta l exhibited a

decreasing trend while the sa les showed an increasing

Table 1Y.P The l r r n d l l n n l r k l n q c a p l t l l and Sa l t s I n r e l r r t e d Publ lc m te rp r l ses

................................................................................................................... ~carr T M s l SS LTD TRCEL TRScO TMIY

I Y.C. Sale5 Y.C. S a l e . Sales Y.C. L l e r Y.C. Sal

1988-89 815.19 3106.18 1753.33 3671.22 63.56 31.57 929.42 3258.281 711.61 1112.11 153.211 111V.171 1838.18) IV33.1bl 1538.181 127.141 1125.581 1363.1bl 1296l.67l 1432P.721

................................................................................................................... I t r: -1.5715 r*I.9325 r=B,514h r=1.5216 r=1.7866

I Y.C: r o r k l nq r a p l t a l I t r = co -e f l l c l en t o f co r r c l a t l on ( f l q v r r s I n the bracket a r c tk p n c a t a q c s

Sourrr;Coaputed f r o # t he h n u a l R e n a s o f State 8lt

trend year a f t e r year. While the sa les have increased

79.07 per cent from the base year (1979-80), the

working cap i t a l have declined t o 53.24 per cent t h a t

is there is a decline i n the working capi ta l t o the

extent of 46.76 per cent.

This may be due t o management's aggressive f in-

ancing policy. h e l i n e a r regression worked out i n

between these two a l so proved t h a t TANS1 had heavy

fixed and working cap i t a l and t h a t i s why i n the sub-

sequent years it required reduced working capi ta l

f o r increased levels of sales. The t e s t s conducted

i n the l i n e a r regression could not give a de f in i t e

answer t o t h i s because of the presence of some unex-

plained variables. Therefore apparently it i s a sign

of e f f ec i en t u t i l i s a t i o n of working capi ta l i n so f a r

a s it has not hampared the routine business ac t iv i ty .

h e adequacy t e s t conducted i n Southern Struc-

t u r a l s Limited between the working cap i t a l and s a l e s

has proved t h a t they a re highly correlated t h a t i s

the working cap i t a l expands whenever there is an ex-

pansion i n the sales. The trend percentages calculated

between these two are a l so able t o prove t h a t the working

cap i t a l is growing t o match the growing sales, of

course, with a l i t t l e l e s s e r speed. There i s no

perfect corre la t ion nor equal growth i n both the

cases. However, it is sa t i s f ac to ry t h a t t he working

cap i t a l grows along with the growth i n sales. The

working cap i t a l has grown 730.48 per cent w e r the

period while the s a l e s have grown 833.86 per cent

over the same period.

I n TACFL the s a l e s i s going an increasing

with minor f luctuat ions i n between, but a t the end

of the period t h a t is 1988-89 it is 538.18 per cent

of t he base year. But the working cap i t a l of TACEL

was going on increasing with minor fluctuationn.

It grew t o 209.08 over the period and then declined

t o 27.04. The coe f f i c i en t of e r r e l a t i o n worked out

is pos i t ive with 0.5046 and hence it shows t h a t t he

working c a p i t a l moves w i t h sales. The inconsistency

between the corre la t ion coeff ic ient and the trend per-

centages i s t h a t t he former is moderate while the trend

percentages of s a l e s has grown more than the growth of

working capi ta l .

The coeff ic ient of corre la t ion between the

s a l e s and working cap i t a l of TASCO has a l so been

posi t ive and (0.5216) moderate giving a clue t h a t

the working cap i t a l has grown along with the sales.

The trend percentages calculated a l so reveal t h a t

both sa l e s and working c a p i t a l have g r o w (with

sane f luctuat ions i n i ts trend). The s a l e s have

grown t o 263.46 per cent and the working cap i t a l

has grown t o 25.58 pe r cent. Even though the wor-

king cap i t a l has grown a t a l e s s e r speed than the

speed of s a l e s TASCO d id not exhibi t any evidence of

suffer ings from dearth of wrk ing capi ta l . The s a l e s

i e high only i n the l a s t two years of the stuay, ht

the working cap i t a l i a high only i n the l a s t year of

study - otherwise both of them reveal more o r l e s s

s imi l a r trend. From t h i s it can be concluded t h a t

the working cap i t a l s t ruc tu re of TASCO is # a b l e t o

provide adequate amount of working cap i t a l t o meet

its requirements.

I n TAMIN the co-efficient of corre la t ion worked

ou t between s a l e s and working cap i t a l i s pos i t i ve and

is a l s o moderately high ( r - 0.7866) revealing t h a t

the working cap i t a l has responded favourably with the

increase i n sales. The trend percentages of the

same a l s o revealed t h a t both of than have grown

w i t h sane minor fluctuations. But however, the

growth of the working cap i t a l is not as propor-

t i ona te a s the growth of sales. (sa les have

grown 4229.72 per cent while the working cap i t a l

have grown only up t o 2860.67 per cent a s t h a t

of the base year). Since mining industry required

a l i t t l e of raw mater ia l and other inventory, it re-

quired l e s s of working c a p i t a l and it has not evi-

denced any draw back due t o in su f f i c i en t working

c a p i t a l and therefore it can be concluded that

TAMIN a l so had adequate working capi ta l .

The s t ruc tu re of working cap i t a l is made up of

various components l i k e inventories, receivable, cash

and bank balances, sundry debtors and secur i t i e s which

are eamily converted i n t o cash. These current a s se t s

w i l l normally be financed by payables, bank w e r

d ra f t s , outstanding expenses, proposed dividends, tap(

payable and income received i n advance. The object-

i ves of t he management i n t h i s regard should be t o

take maximum u t i l i s a t i o n of i t s ccmponents a t the

l e a s t poss ible cost.

!The analysis of the s t ructure of working

cap i t a l of public enterpr ises of Tmilnadu has shown

the use of inventories, sundry debtors, cash and bank

balances, loans and advances, on and off the o ther

items l i k e interestJadvances received on the compon-

ents of the current amsets i n varying degrees. The

current l i a b i l i t i e s have been the sundry credi tors ,

b i l l s payable, working cap i t a l loan i n the fonn of

cash c r e d i t s etc.

This study i s carr ied out f o r the purpose of

finding out whether the working cap i t a l is adequate

o r not with the help of t he current r a t io , quick

ra t io , coeff ic ient of corre la t ion and the trend per-

centages. The current r a t i o applied t o TANS1 reve-

aled sa t i s f ac t ion even though it is l i t t l e l e s se r

than the norm. In southern Structura l Limited it

showed the excess investments i n current assets. In

TACEL the current a s se t s a r e inadequate t o pay f o r

the c red i to r s in case of f a l l ln value. TASCO ex-

h ib i t ed the highest investments i n current a s se t s

ca l l i ng f o r f inancia l d isc ipl ine . In TAMIN a l so

there is excess investments i n current assets. In

general the public enterpr ises have adequate working

capi ta l . This a l s o cautions t h a t they have not pro-

f i t a b l y invested the excess current assets.

The quick r a t i o s of t he public enterpr ises

have proved t h a t except TACEL a l l t he o thers possess

quick a s s e t s s u f f i c i e n t t o meet the current l i ab i -

l i t i e s . In some cases l i k e Southern Structura l Limited

and TASCO there a re excess investments i n current

asse ts . This again has revealed t h a t the public enter-

p r i s e s a r e conservative by way of maintaining more of

current and quick a s s e t s t o pay f o r current l i a b i l i t i e s .

The coeff ic ient of corre la t ion worked out bet-

ween current a s se t s and current l i a b i l i t i e s have pr-

oved t h a t i n four cases they a re posi t ively corre la ted

indicat ing t h a t they move together and the working

c a p i t a l waa provided to carry out t h e i r oparatlons.

But i n the case of TANS1 they a r e negetively correl-

ated, s t i l l was able t o provide enough working capi ta l .

The trend percentages worked out a l so revealed

t h a t even though they a r e f luctuat ing and no t able t o

show a d e f i n i t e d i rec t ion, they move together. In .

one case (TACEL) the sales have grown a t a faster

ra te than the working capi tal and i n some other

cases (TAMIN) the contrary i s the result.

An attempt was made i n th i s chapter t o

study the adequacy of working capital. They have

proved tha t the working capi tal structure of the

public enterprises a re able to pmvide adequate

working capital. The appropriate mix of the working

capi tal and the e f f ic ien t use of the same are t o be

analysed i n the subsequent chapters.