A REPORT ON

EVALUATION OF WORKING CAPITAL MANAGEMENT IN

INDIAN OVERSEAS BANK

BY

RUPALI P. ADHANGLE

INDIAN OVERSEAS BANK

A PROJECT REPORT ON

ANALYSIS OF WORKING CAPITAL MANAGEMENT IN

INDIAN OVERSEAS BANK

BY

(RUPALI P ADHANGLE)

(MS111 201)

A PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF

THE MMS PROGRAM (CLASS OF 2012)

INSTITUTE OF MANAGEMENT AND COMPUTER STUDIES

CERTIFICATE

This is to certify that the Project report titled Evaluation of working capital management in Indian overseas bank submitted by Miss.Rupali p. Adhangle. Enrolment No. MS111201 during Semester III of the MMS Program (Class Of 2013) embodies original work done by her.

Signature of the Project Guide

Name : ANIL MATKAR

Designation: PROFESSOR

Institute: IMCOST

ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and supported me during the writing of this book.

My deepest thanks to MR. ANIL MATKAR the guide of the project for guiding and correcting various documents of mine with attention and care.

He has taken pain to go through the project and make necessary correction as and when needed.

My deep sense of gratitude to Mr. Das as a Chief Manager & Mr. Vinayak Kulkarni, spl Assistant, INDIAN OVERSEAS BANK support and guidance. Thanks and appreciation to the helpful people at INDIAN OVERSEAS BANK, for their support.

I would also thanks my institution and my faculty members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family and well wishers.

THANK YOU,

PLACE: MUMBAI RUPALI P.ADHANGLE

DATE: 15TH OCT,2012

DECLARATION

I here by declare that the project work entitled “ EVALUATION OFWORKING CAPITAL MANAGEMENT IN INDIAN OVERSEASBANK” submitted to the Mumbai university, is a record of an originalwork done by me under the guidance of MR. ANIL MATKAR, facultymember, from INSTITUTE OF MANAGEMENT & COMPUTERSTUDIES, THANE

I further declare that this project is the result of my own efforts.

Place: MUMBAI RUPALI P. ADHANGLE

Date: 15TH OCT,2012

TABLE OF CONTENT

SR NO. / TITLE / PAGENO.
EXECUTIVE SUMMARY / 9
CHAPTER 1. / INRODUCTION
  1. Introduction
  2. Objective
  3. Scope
  4. Company profile
  5. Organization chart
  6. Research methodology
  7. Primary data
  8. Secondary data
/ 11
12
12
13
14
15
CHAPTER 2. / CONCEPTUAL RELEVANCE
  1. What is working capital
  2. Definition of working capital
  3. Importance Working capital
  4. Working capital management
  5. Introduction
  6. Composition of working capital
  7. Concept of working capital
  8. On the basis of concept
  9. On the basis of time
  10. Determinants of working capital needs
  11. Approaches to managing working capital
  12. Adequacy of working capital
/ 17
17
17
18
19
20
21-23
24
25-26
CHAPTER 3. / PRACTICAL APPLICATION OF IOB
  1. Working capital assessment in IOB
  2. Computation of working capital limit
  3. Case study analysis
/ 28
29
30-33
CHAPTER 4. / REVIEW OF LITERATURE / 34-36
CHAPTER 5. / GROWTH AND PERFORMANCE OF IOB
  1. Balance sheet of IOB
  2. Profit & loss A/C of IOB
  3. Analysis of NWC of IOB
  4. Comparison of IOB with their competitors
  5. Analysis & interpretation of IOB with their competitors
/ 38
39
40-46
47
48-60
CHAPTER 6. / FINDINGS, SUGGESTIONS & CONCLUSION
  1. FINDINGS
  2. SUGGESTIONS
  3. CONCLUSION
/ 61
62
63
64
CHAPTER 7. / BIBLIOGRAPHY / 65-66

TABLE OF CHART & ILLUSRATION

SR NO. / CONTENT / PAGE NO.
1. / Organisation of chart / 13
2. / Assessment of working capital / 32
3. / IOB balance sheet as at 31.3.13 / 37
4. / IOB profit & loss a/c as at 31.3.13 / 38
5. / Analysis of net working capital
5.1. graph for Current assets
5.2. graph for current liabilities
5.3. graph for net working capital / 39
40
41
6. / Graph of current ratio / 42
7. / Graph of quick ratio / 43
8. / Graph of working capital ratio / 44
9. / Comparison of IOB with their competitors
9.1. analysis & interpretation of IOB with their competitors / 46
47-60

EXECUTIVE SUMMARY

Management of working capital includes consideration for net working capital, by managing current assets to current liabilities. This means organization have to factor in a certain amount of risk-return trade-offs in the decision making process.

In order to avoid problems organization have to make good decisions which overlap between current assets and current liabilities are used.

The essence of the study is that the highest valued assets of a banking company is its working capital which constitutes the major part of total capital of the banking company. It helps to know the current condition of the bank the total amount of its current assets & total amount of current liabilities.

I am releving theoretical aspects related to working capital management in the IOB, profile of IOB,major other banks who is the competitors of IOB and analysis of their performance & growth, analysis & interpretation of working capital of IOB gives overall financial view of IOB in the banking sector.

CHAPTER 1

INTRODUCTION

  1. INTRODUCTION

The overall success of the company depends upon its working capital position. So it should be handled properly because it shows the efficiency & financial strength of a company.

WCM is highly important in firms as it is used to generate further returns for thr stakeholders.

Working Capital Management is a very important fact of financialmanagement due to:

Investments in current assets represent a substantial portion of

total investment.

Investment in current assets & the level of current liabilities have tobe geared quickly to change sales.

The working capital is the life blood & nerve centre of a business firm. The importance of working capital in any industry needs no special emphasis. No business can run effectively without a sufficient quantity of working capital.

It is crucial to retain right level of working capital. WCM is one of the most important functions of corporate management. A business enterprises with ample working capital is always in a position to avail advantages of any favourable opportunity either to buy raw material or to implement a special order or to wait for enhanced market status.

Working capital can be utilized for operating costs that are involved in the everyday life of business. Even very successful business owners may need working capital funds when the unexpected circumstances arises.

WCM is highly important in firms as it is used to generate further return for the stakeholders. When working capital is managed improperly, allocating more than enough of it will render management non-efficient & reduce the benefits of short term investments. On the other hand, if working capital is too low, the company may miss a lot of profitable investment opportunities or suffer short term liquidity crises, leading to degradation of company credit, as it cannot respond effectively to temporary capital requirements.

Some the points to be studied under this topic are:

  • How much cash should a firm hold?
  • What should be the firms credit policy?
  • How to & when to pay the creditors of the firm?
  1. OBJECTIVES

The objectives of project on Management of working capital are as follows-:

To determine policy regarding profitability, liquidity and risk by considering

company s objectives.

To determine the quantum and structure of current assets.

Determining the relationship between the current assets and current liabilities and

hence liquidity is determined.

Optimization of the amount of sales and investment in receivables.

Analysis of Financial Statements

  1. SCOPE

The management of working capital helps us to maintain the working capital at a

satisfactory level by managing the current assets and current liabilities. It also helps to

maintain proper balance between profitability, risk and liquidity of the business

significantly.

By managing the working capital, current liabilities are paid in time. If the firm makes

payment to it creditors for raw material in time, it can have the availability of raw

material regularly, which doesn t cause any obstacles in production process. Adequate

working capital increases paying capacity of the business but the excess working capital

causes more inventory, increases the possibility of delay in realization of debts.

On the other hand, absence of adequate working capital leads to decrease in return on

investment. The goodwill of the firm is also adversely affected due to the inability to pay

current liabilities in time.

Hence, the management of working capital helps to manage all the factors affecting theworking capital in the most profitable manner.

  1. COMPANY PROFILE

Established in 1937, Indian Overseas Bank (IOB) is a leading bank based in Chennai, India. IOB had the distinction of simultaneously commencing operations in three branches at Karaikudi, Chennai, and Yangon (Myanmar). Since IOB aimed to encourage overseas banking and foreign exchange operations, it soon opened its branches in Penang and Singapore. Today, Indian Overseas Bank boasts of a vast domain in banking sector with over 1400 domestic branches and 6 branches overseas.
IOB was the first bank to venture into consumer credit, as it introduced the popular Personal Loan scheme. In 1964, the Bank started computerization in the areas of inter-branch reconciliation and provident fund accounts. Indian Overseas Bank was one of the 14 major banks which were nationalized in 1969. After nationalization, the Bank emphasized on opening its branches in rural parts of India. In 1979, IOB opened a Foreign Currency Banking Unit in the free trade zone in Colombo.
In the year 2000, Indian Overseas Bank undertook an initial public offering (IPO) that brought the government's share in the bank's equity down to 75%. The equity shares of IOB are listed in the Madras Stock Exchange (Regional), Bombay Stock Exchange, and National Stock Exchange of India Ltd., Mumbai. Since its inception, IOB has absorbed various banks including the latest — Bharat Overseas Bank — in 2007.
The Bank's IT department has developed software, which is used by its 1200 branches to provide online banking to customers. Indian Overseas Bank also has a network of about 500 ATMs throughout India. Its International VISA Debit Card is accepted at all ATMs belonging to the Cash Tree and NFS networks. IOB also offers Internet Banking; it's one of the banks that the Govt. of India has approved for online payment of taxes.

Indian Overseas Bank offers investment options like Mutual Funds and Shares. It provides a wide range of consumer and commercial banking services, including Savings Account, Current Account, Depositary Services, VISA Cards, Credit Cards, Debit Cards, Online Banking, Any Branch Banking, Home Loans, NRI Account, Agricultural Loans, Payment of Bills / Taxes, Provident Fund Scheme, Forex Collection Services, Retail Loans, etc.

  1. ORGANISATION CHART
  1. RESEARCH METHODOLOGY

6.1.Primary Data:

The information is collected through the primary sources like:

Talking with the employees of the department.

Getting information by observations e.g. in manufacturing processes.

Discussion with the head of the department.

6.2.Secondary Data:

The data is collected through the secondary sources like:

Annual Reports of the company.

Office manuals of the department.

Magazines, Reports in the company.

Policy documents of various departments.

CHAPTER 2.

CONCEPTUAL RELEVANCE OF WCM IN IOB

  1. 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.

  1. DEFINITIONS OF WORKING CAPITAL:

The following are the most important definitions of Working capital:

1) Working capital is the difference between the inflow and outflow of funds. In other words it is the net cash inflow.

2) 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.

3) Working capital is defined as The excess of current assets over current liabilities and provisions. In other words it is the Net Current Assets or Net Working Capital

  1. IMPORTANCE OF 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.

To meet the current requirements of a business enterprise such as the purchases of services, raw materials etc. working capital is essential. It is also pointed out that working capital is nothing but one segment of the capital structure of a business.

In short, the cash and credit in the business, is comparable to the blood in the human body like finance s life and strength i.e. profit of solvency to the business enterprise. Financial management is called upon to maintain always the right cash balance so that flow of fund is maintained at a desirable speed not allowing slow down.

Thus enterprise can have a balance between liquidity and profitability. Therefore the management of working capital is essential in each and every activity.

  1. WORKING CAPITAL MANAGEMENT

4.1. INTRODUCTION:

Working Capital is the key difference between the long term financial management and short term financial management in terms of the timing of cash.

Long term finance involves the cash flow over the extended period of time i.e 5 to 15 years, while short term financial decisions involve cash flow within a year or within operating cycle.

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 inter relationship 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.

4.2. COMPOSITION OF WORKING CAPITAL:

4.2.1 Major Current Assets

1) Cash

2) Accounts Receivables

3) Inventory

4) Marketable Securities

4.2.2 Major Current Liabilities

1) Bank Overdraft

2) Outstanding Expenses

3) Accounts Payable

4) Bills Payable

The Goal of Working 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 interactionbetween the current assets & current liabilities.

  1. CONCEPT OF WORKING CAPITAL:

The term working capital denotes the requirement of then money by a manufacturing enterprises for its day-to-day financing of:-

  1. Purchase a raw material, stores & spares.
  2. Payment of wages to employees.
  3. Payment of other expenses towards energy, fuel & water consumption, statutory dues, rates & taxes carriage expenses etc.
  4. Other expenses required to be incurred in connection with the production, selling & administration etc

There are 2 types of working capital:

I)On the basis of concept

i)Gross working capital

ii)Net working capital

II)On the basis of time

i)Permanent/fixed working capital

ii)Fluctuating/ variable working capital

5.1 ON THE BASIS OF CONCEPT:-

5.1.1 Gross working capital: -

Grosss working capital means the firm’s investment in total current or floating (circulating) assets.

Optimum investment in current assets:

Excessive investments impairs 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.

5.1.2 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 CURRENT

LIABILITIES

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.

5.2ON THE BASIS OF TIME:-

5.2.1Permanent/fixed working capital:-

Permanent working capital may be defined as a minimum level of current assets. Which is required by a firm to carry on its business operation. Every firm has to maintain a minimum level of raw materials, WIP, finished goods and cash balances.

For e.g:- extra inventory of finished goods will have to be maintained to support the peak periods of sales permanent working capital is permanently needed for the business & therefore, it should be financed out of long term funds.

Fixed working capital remaining constant overtime

5.2.2Fluctuate/variable working capital:-

It is the extra working capital needed to support the changing production & sales activities of the firm. The amount of temporary working capital keeps on fluctuating on time to time on the basis of business activities.

Both king of working capital-permanent & variable(temporary) are necessary to facilitates production & sales through the operating cycle. The amount over & above permanent working capital is temporary variable of fluctuates.

Fixed working capital increasing over time

6 DETERMINANTS OF WORKING CAPITAL NEEDS

There are no set rules or formulas to determine the working capital requirements of a firm. The corporate management has to consider a number of factors to determine the level of working capital. The amount of working capital that a firm would need is affected not only by the factors associated with the firm itself but is also affected by economic, monetary and general business environment. Among the various factors the following are important ones.

6.1.Nature and Size of Business

The working capital needs of a firm are basically influenced by the nature of its business. Trading and financial firms generally have a low investment in fixed assets, but require a large investment in working capital. Retail stores, for example, must carry large stocks of a variety of merchandise to satisfy the varied demand of their customers. Some manufacturing businesses' like tobacco, and construction firms also have to invest substantially in working capital but only a nominal amount in fixed assets. In contrast, public utilities have a limited need for working capital and have to invest abundantly in fixed assets. Their working capital requirements are nominal because they have cash sales only and they supply services, not products. Thus, the amount of funds tied up with debtors or in stocks is either nil or very small. The working capital needs of most of the manufacturing concerns fall between the two extreme requirements of trading firms and public utilities.