A PROJECT REPORT SUBMITTED TO MARWARI COLLEGE,

RANCHI, FOR SUMMER TRAINING PROGRAMME OF MBA

ON
“STUDY AND ANALYSIS OF WORKING CAPITAL
MANAGEMENT OF MECON LIMITED”

BY
Supriya Gautam
Roll No. 10MCRMC93041
Specialization: Finance
Marwari College, Ranchi

UNDER THE GUIDANCE OF

Mr. Pranjal Karmakar
Corporate Accounts & Treasury Management Group
MECON LIMITED
A government of India Enterprise
(An ISO: 9001:2000 COMPANY)
 PREFACE

To start any business, First of all we need finance and the success
of that business entirely depends on the proper management of
day-to-day finance and the management of this short-term capital
or finance of the business is called Working Capital
Management.

Working Capital is the money used to pay for the everyday

trading activities carried out by the business - stationery needs,
staff salaries and wages, rent, energy bills, payments for supplies
and so on.

I have tried to put my best effort to complete this task on the

basis of skill that I have achieved during the last one year study in
the institute.

I have tried to put my maximum effort to get the accurate

statistical data. However I would appreciate if any mistakes are
brought to my by the reader.
 ACKNOWLEDGEMENT

A work is never a work of an individual. I owe a sense of gratitude

to the intelligence and co-operation of those people who had been
so easy to let me understand what I needed from time to time for
completion of this exclusive project.

I am greatly indebted to my guides Prof. SANTOSH KUMAR,

faculty guide for Finance (summer internship) Marwari college &
Mr. Pranjal Karmakar, Senior Account Officer, Corporate Accounts
& Treasury Management Group, MECON LIMITED Ranchi for their
constant guidance, advice and help which enabled me to finish
this project report properly in time.

Last but not the least, I would like to forward my gratitude to my

friends & other faculty members who always endured me and
stood with me and without whom I could not have completed the
project.
 DECLARATION

I do hereby declare that this piece of project report entitled “A

Study & Analysis on Working capital Management
practices in MECON” for partial fulfillment of the requirements
for the award of the degree of “MASTER OF BUSINESS
ADMINISTRATION” is a record of original work done by me
under the supervision and guidance of Prof. SANTOSH KUMAR,
Marwari College Ranchi .This project work is my own and has
neither been submitted nor published elsewhere.

PLACE: SIGNATURE OF
THE STUDENT
DATE:
 TO WHOM IT MAY CONCERN

This is to certify that Miss. SUPRIYA GAUTAM student of MBA 3rd

semester bearing Marwari College Roll No 09MCRMC93041 has
successfully completed the project for the partial fulfillment of
Master of business administration session 2010-2012. She has
undergone 6 weeks project in the MECON LIMITED. On the topic
“study and analysis of working capital management of
MECON LIMITED “ in finance Specialization.

1 .Co-Ordinator …………………………………………………..
(Department of
MBA)

2. Internal supervisor……………………………………………

(Department of MBA)

3. External supervisor………………………………
 TABLE OF CONTENT

Chapter Introduction of study

-1  Definition of Working Capital 1
 Concept Of Working Capital 2
 Need Of Working Capital 3
 Period Of Study 4
 Scope Of Study 5
 Limitation Of Study 6
 Review of Literature 7

Chapter Organization Profile

-2  Brief On MECON LIMITED 8
 Vision And Mission 9
 Quality Policy 10
 Areas Of Activities 11 – 13
 Range Of Services 14 – 18
 Offices In India 19
 ISO Certification 20
Chapter Competitors And Clients of MECON
-3 Ltd 21 – 23
• Competitors 24 - 25
• Clients
Chapter Importance of Working Capital
-4 • Important things about Working 26
Capital 27
• Importance of Working Capital 28 - 29
 • Types of Working Capital 30 - 32
• Factors determining Working Capital
Chapter Analysis of Working Capital
-5 • Changes in Net worth 33
• Changes in Long Term Debt 34
• Changes in Non Current Assets 35
• Analysis of Working Capital 36 - 37
Composition
Chapter MECON – The Working Capital
-6 Management 38 – 42
• Analysis of Working Capital 43
Management 44 – 45
• Sundry Debtors & Turnover 46
• Current Ratio 47
• Quick Ratio 48
• Current Asset Turnover Ratio 49 - 52
• Current Asset to Total Assets
• Working Capital Trend of MECON
Ltd. From yr. 2005- 2010
Chapter Conclusion and Recommendations
-7  Conclusions 53
 Recommendations 54
 Scope for further Research 55 - 56
References
Bibliography
 EXECUTIVE SUMMARY

The internship report of MECON is based on to practically

experience the Finance practices studied in our course of MBA, on
Study & Analysis of Working Capital of MECON Ltd., especially to
know Working Capital Management and other Operations followed
at MECON ltd. As, now days there is tough competition in the
different Sectors of India, and it is one of the best consultancy
company, so this forced me to do competitive analysis to gain
complete understanding of concerned Treasury practices..

This project is sequenced as firstly with the Introduction of the

organization and telling the purpose and scope of study including
the hierarchy of company & Finance department. This proceeds
with policies, challenges and Findings of project, which
summarizes the Financial Management Practices followed in
MECON & detailed elaboration of 5 years Working Capital & Trend
of MECON
 CHAPTER - 1

INTRODUCTION OF
STUDY
1.1 CONCEPT:

Working capital means the funds which are required to meet the
daily transactions of the business .In other words it refers to that
part of the firm’s capital which is required for financing current
assets such as cash, marketable securities, debtors and
inventories. Thus working capital is very significant facet of
financial management. Every business concern should have
adequate working capital to run its operations smoothly. It should
have neither excess working capital nor inadequate working
capital because both of these have adverse effects on firm’s
profitability and liquidity positions. Therefore, business concerns
should maintain adequate working capital. The basic objective of
working capital is to manage the firm’s current assets and current
liabilities in such a way that that a satisfactory level of working
capital is maintained. Working capital policies have a great effect
on a firm’s liquidity and profitability. Therefore, the working
capital should be managed in such a way which will ensure higher
profitability and proper liquidity to the business concern. The
significance of working capital management is to ensure that the
organization maintains a ‘good fit’ with the changing environment
and strives to build the capability to cope with challenges.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital:
• Balance sheet concept or traditional concept.
• Operating cycle concept.

BALANCE SHEET CONCEPT OR TRADITIONAL CONCEPT

It shows the position of the firm at a certain point of time. It is
calculated on the basis of balance sheet prepared at a specific
date. In this method there are two types of working capital.
• Gross working capital
• Net working capital

GROSS WORKING CAPITAL

It refers to a firm’s investment in current assets. The sum of the
current assets is the working capital of the business. The sum of
the current is quantitative aspect of working capital which
emphasizes more on quantity than on its quality, but it fails to
reveal the true picture of the financial position of the business
because every increase in current liabilities will decrease the
gross working capital.

NET WORKING CAPITAL

It is difference between the current assets and current liabilities
or the excess of total current assets over total current liabilities. It
can also be defined as that part of a firm’s current asset which is
financed with long term funds. It may be either negative or
positive. When the current assets exceed the current liabilities,
the working capital is positive and vice-versa.

OPERATING CYCLE CONCEPT

The duration or time required to complete the sequence of events
right from the purchase of raw materials for cash to the
realization of sales in cash is called operating cycle or working
capital cycle. The operating cycle consists of three phases: In
phase 1, cash gets converted into inventory. This would include
purchase of raw materials, conversion of raw materials into work-
in-progress, finished goods and terminate in the transfer of goods
to stock at the end of the manufacturing process. In the case of
trading organization, this phase would be shorter as there would
be no manufacturing activity and cash will be converted into
inventory directly. The phase will, of course, be totally absent in
case of service organizations.
In phase 2 of the cycle, the inventory is converted into
receivables as credit sales are made to customers. Firms which do
not sell on credit will obviously not have phase 2 of the operating
cycle.
The last phase, phase 3, represents the stage when receivables
are collected. This phase completes the operating cycle. Thus, the
firm has moved from cash to inventory, to receivables and to cash
again.
1.2 NEED OF THE STUDY :
Any organization should always assess itself its performance for
its survival and growth, more so in the present scenario of
globalization and liberalized economy.
From a company's point of view, excess working capital means
operating inefficiencies. Money that is tied up in inventory or
money that customers still owe to the company cannot be used to
pay off any of the company's obligations. So, if a company is not
operating in the most efficient manner (slow collection), it will
show up as an increase in the working capital. This can be seen
by comparing the working capital from one period to another;
slow collection may signal an underlying problem in the
company's operations. Poor working capital management can
lead to over-capitalization and overtrading.
Characteristics of over-capitalization are:
✔ excessive stocks
✔ debtors
✔ cash
✔ Low return on investment with long term funds tied up in
non-earning short term assets.
Overtrading leads to escalating debtors and creditors, and if
unchecked, ultimately to cash starvation.
Planning for working capital management is an essential function
of management in any business. The inflow of funds cannot be
synchronized completely, if these were possible, then it would not
necessary to maintain more than a minimum of cash or near cash
resources. Broadly, the objective of this study is mainly
➢ To analysis the structure of organization for management
of working capital.
➢ To see adequacy or inadequacy of working capital in the
organization and how the situation has been dealt with.
➢ To suggest the suitable policy measurement for effective
management of working capital.
1.3 PERIOD OF THE STUDY:

The study relates to the five (5) years period 2005 to 2010. Due
to turn around in the steel industry, the company started making
profit from 2006. Thus the period of selection for study is justified
due to gradual upward boom in the core sector (steel) and
subsequent progressive turn around of the company from sick
company to profit making company giving due impact of the
business environment in the present scenario.

1.4SCOPE OF THE STUDY:

The scope of study covers in detail of the working capital in

MECON LIMITED is being managed and the scope of improving the
same, if possible. An attempt has also been made to compare the
management of working capital in manufacturing industries vis-à-
vis in consultancy organization. Ratio analysis technique has
been employed in analysis of working capital management by
using the secondary data as available in the annual reports of the
Company.

1.5 LIMITATIONS OF THE STUDY:

The published financial statements of MECON LIMITED, is the

major source of data and hence conclusions are limited to the
extent of information available in the published financial
statement. Some of the major limitations are listed.
Limitations of the Balance Sheet: Cognizance has to be taken of
the common limitations of financial statements. Firstly, the
financial statements give expressions of exactness and
completeness with regard to value shown in them. The real value
of assets can be found only if the assets are realized.
The inflationary impact of the values is not brought out in these
statements. They reflect transactions that involve the values of
the many dates and the value of money has gone down
considerably during the past few years. The influence of these
changes in Rupee value on the relationship of items and trends
from period to period has not been isolated for want of reliable
methods. This affects the comparability of data. The business of
MECON has changed over a period of time due to glut in the steel
industry and has to diversify to other fields like defence sector
and oil sector.
The other limitations being the co-operation from the respondents
due to time pressure, authority problem, attitudinal problem.

1.6REVIEW OF THE LITERATURE:

Working capital :
Working capital may be regarded as the life blood of business.
Working capital is of major importance to internal and external
analysis because of its close relationship with the current day-to-
day operations of a business. Every business needs funds for two
purposes.
* Long term funds are required to create production facilities
through purchase of fixed assets such as plants, machineries,
lands, buildings & etc
* Short term funds are required for the purchase of raw materials,
payment of wages, and other day-to-day expenses. . It is other
wise known as revolving or circulating capital
It is nothing but the difference between current assets and
current liabilities. i.e. Working Capital = Current Asset – Current
Liability.
Businesses use capital for construction, renovation, furniture,
software, equipment, or machinery. It is also commonly used to
purchase inventory, or to make payroll. Capital is also used often
by businesses to put a down payment down on a piece of
commercial real estate. Working capital is essential for any
business to succeed. It is becoming increasingly important to
have access to more working capital when we need it.
Importance of Adequate Working Capital
A business firm must maintain an adequate level of working
capital in order to run its business smoothly. It is worthy to note
that both excessive and inadequate working capital positions are
harmful. Working capital is just like the heart of business. If it
becomes weak, the business can hardly prosper and survive. No
business can run successfully without an adequate amount of
working capital.
Danger of inadequate working capital
When working capital is inadequate, a firm faces the following
problems. Fixed Assets cannot efficiently and effectively be
utilized on account of lack of sufficient working capital. Low
liquidity position may lead to liquidation of firm. When a firm is
unable to meets its debts at maturity, there is an unsound
position. Credit worthiness of the firm may be damaged because
of lack of liquidity. Thus it will lose its reputation. There by, a firm
may not be able to get credit facilities. It may not be able to take
advantages of cash discount.

Concept of working capital

1) Gross Working Capital = Total of Current Asset

2) Net Working Capital = Excess of Current Asset over

Current Liability

Current Assets Current Liabilities

 Cash in hand / at Bills Payable
bank Sundry Creditors
Bills Receivable Outstanding expenses
Sundry Debtors Accrued expenses
Short term loans Bank Over draft
Investors/ stock
Temporary
investment
Prepaid expenses
Accrued incomes

One of the most important areas of finance to monitor is your

company's working capital, which is the difference between
current assets and current liabilities. As a small business owner,
you must constantly be alert to changes in working capital and
their implications; otherwise, you may miss some warning signs
that can lead to business failure. The most important component
of working capital is cash, far the most important asset of any
business, particularly a small business. Without it, the business
will fail. So it is of paramount importance for you as the business
owner to control all cash transactions.

CHAPTER – 2
 COMPANY PROFILE

ORGANISATION PROFILE: MECON LIMITED

2.1 Brief on MECON LIMITED
MECON LIMITED formally it was known as METTALURGICAL &
ENGINEERING CONSULTANTS (INDIA) LIMITED is a Government of
India Public Sector undertaking under Ministry of Steel. MECON
LTD, established in 1959 as Hindustan Steel Limited (HSL), Is
India’s frontline engineering, consultancy and contracting
organization offering full range of services required for setting up
of projects from Concept to Commissioning, including turnkey
execution. HSL was transformed into Mecon Limited in 1973.
MECON LTD is a multi disciplinary disciplinary designing, planning,
engineering, consultancy and contracting organization an
established engineering & contracting, ISO 9001 company
employs with qualified & experienced engineers, scientists,
technical & supporting staff, possesses offices. Company’s
corporate office at Ranchi is modern and equipped with a large
computer network and laboratories for testing and making
models.

MECON has collaboration agreements with leading firms form the

USA, Germany, France, Italy, Russia, etc in various fields. The
organization is quite familiar in working with collaborators who
provide process known how and basic engineering. MECON is a
multi disciplinary firm with 1030 experienced and dedicated
engineers, scientists and technologists, having a wide network of
offices spread all over the country. Experienced in handling
consultancy assignments and EPC projects. MECON LTD. Has
played a significant role in the development of the Indian
industry. MECON Ltd is an ISO 9001 : 2000 certified company and
is registered with International financial institutions like the World
Bank, Asian Development Bank, African Development Bank and
has technological tie ups with world’s leading organizations
MECON played a pivotal role in the development and expansion of
the Iron and Steel Industry of the country. Mecon has
subsequently diversified far beyond ferrous metallurgy and
consolidated its position in:

• Non ferrous metallurgy

• Defence
• Space
• Environment
• Power
• Petrochemical
• Oil/gas pipelines
• Infrastructure
• Other sectors

2.2 VISION AND MISSION OF MECON LIMITED:

VISION
 To provide appropriate “state of the art” technology as also
quality services at competitive prices to customers.
 To implement and maintain total quality management (TQM)
in all spheres.
 To optimize gross margin by operation through identified
strategic business units(SBU)
 To get more business from foreign markets
 To foster and sustain a competent and highly responsive
workforce
 Quantification of quality objectives under “business related”,
customer related” “performance related” and “improvement
related issues”.

MISSION

“Developing into an internationally recognized centre of

excellence for providing quality services in technical consultancy,
design and engineering, design and supply of plant, equipment
and systems, Project implementation from concept to
commissioning for industrial development and up gradation
ventures, development of infrastructure and other service
sectors.”
2.3 QUALITY POLICY

MECON has the distinction of being the first engineering

consultancy organization in the country to get ISO- 9001
certification. Recently the organization has ventured into providing
services in ISO- 9000 Quality Management System and ISO-14000
Environment management to its clients.
2.4 AREAS OF ACTIVITIES

Mecon provides its services in the following areas:

 METALS:

• Iron Making
• Steel Making
• Rolling Mills
• Non ferrous
• By products and Mining
• Raw Materials & Mining
• Refectories
• Research & Development
• Beach Sand Mining

 POWERS:

• Thermal and Hydel Power Plant

• Transmission and Distribution
• Non-Conventional Energy
Sources
• Energy Management and Audit
• RLA and RMO Studies
 OIL AND GAS:

• Oil and Gas pipelines

• Petro chemicals and
Refineries
• CNG stations and city
• Gas Distributions
• POL Depots
• LPG Bulk Storage, Bottling
And Transportation
• Off-Shore Platforms and
Marine Pipelines
• Retail Outlets

 INFRASTRUCTURES:
• Civil and Structural
Engineering
• Architecture and Town
Planning
• Road, Bridges, Highways and
Fly overs
• Defence Related Projects
• Environmental Planning
• Hydro Engineering
• Information Technology
BUSINESS

The CORE FOCUS OF Mecon is providing engineering consultancy

and project management services to its client, which are basically
industrial. Mecon has carved out a niche for providing its
engineering services for large scale projects globally. It is serving
a large number of clients in the public and the private sector.
In view of the cyclic demand in the Steel Sector over the past few
years. Mecon has made forays into a number of diversified
sectors of the economy especially Oil and Gas, Power and
Infrastructure.
Business procurement in the area of Engineering Consultancy
services has shown an upward trend. The company has thus laid
more emphasis on its operations in this area.

RANGE OF SERVICES:

• Planning, Analysis and Feasibility Reports

• Market Survey
• Site Selection
• Basic and Project Engineering
• Construction Management
• EIA/EMP reports
• Environmental Management System ISO : 14000
• ISO 9001:2000 Quality System Implementation
2.5 SWOT

STRENGTH
• Experience in setting up of projects in green / brown fields
from concept to commissioning on single point responsibility
basis.
• Consultancy, design and detailed engineering capabilities.
• Multidisciplinary highly experienced and capable pool of
engineers/technologists in various specialized technical
disciplines.
• Vast database and reference materials.
• Capability in equipment & system design and supply &
execution.
• Market recognition in core competence area of metals.

WEAKNESSES
• Will take time to consolidate strength in new strategic
businesses.

OPPORTUNITIES
• Major investments in iron & steel sectors.
• Investments in diversified sectors
• Tie-ups with other vendors/contractors for synergizing
mutual strength
• Greater concern in the country for environment and ecology.

THREATS
• Mushrooming of small consultancy firms.
• Trend of setting up in house consultancy outfits
• Stringent financial pre qualification criteria
• Stress for consortium bidding along with foreign partner in
lead
• Highly fluctuating business scenario in the metals sector
2.6 BUSINESS DIVERSIFICATION

In view of the cyclic demand/investments in the Steel sector over

the past several years, the company has made forays into a
number of diversified sectors of the economy especially oil & gas,
power and infrastructure. This has been achieved by formation of
distinct Strategic Business Units in the company. The company
has gained substantial experience and recognition in some of
these sectors and would like to build a strong portfolio of services
to meet the growing demand of clients. This would also help the
company in adjusting to the sectorial market fluctuations by
aligning itself towards the sectors having higher opportunities in
future. During the year 2008-09, consultancy business procured
from the diversified sectors (other than metal) has been
significant. In Engineering and Consultancy, the company’s order
booking is 21.97% (previous year 17.53%) in the diversified
sectors and 78.03% (previous year 82.47%) in metal sector. In
case of supply/turnkey projects, it is 12.16% (previous year
1.83%) in the diversified sectors and 87.84% (previous year
98.17%) in metals sector.
1.) BUSINESS PROCURED (CONSULTANCY): FOLLOWING
FIGURES ARE IN RS. CRORES:

Fig.-2 ,Source-PDF file of annual report of MECON 2009-2010.

2.) BUSINESS PROCURED (SUPPLY): FOLLOWING FIGURES

ARE IN RS. CRORES

Fig.-3, Source-PDF file of annual report of MECON 2009-2010

NOTE: 2009-10 FIGURES ARE ESTIMATED/PROJECTED
SECTOR WISE BUSINESS PROCURED (CONSULTANCY)
The above bar graph shows that the supply is not in the same
ratio of production.
3.)
Fig.-4, Source-PDF file annual report of MECON 2008-2009
From the above pie-chart it is clear that the major business
procured part is in the field of metals i.e 78%,and the power(8%),
oil & gas(11%) and infrastructure(3%) only forms a minor part of
the business of MECON
 2.7 OFFICES IN INDIA:

HEAD OFFICE OVERSEAS OFFICES

Ranchi Vivekananda path, Logos, Nigeria Metallurgical &
Engineering Consultancy (Nigeria)
Doranda Ranchi-834002 Limited
Jharkhand B-13, LSDPC Flats 24, Adela
Odeku Street P.O.-73001
Victoria Island, Logos , Nigeria
OTHER OFFICES
Adipur(Gujarat) Bangalore(Karnataka)
Bhilai (Chhattisgarh) Bhubaneshwar (Orissa)
Borako (Jharkhand) Chavara (Kerala)
Chennai (Tamil Nadir) Cochin (Kerala)
Delhi(Delhi) Duburi (Orissa)
Durgapur ( Westbengal) Jaipur (Rajasthan)
Jamnagar ( Gujrat) Kanpur ( UP)
Karwar ( Karnataka) Kolkata(West Bengal)
Mecheri (TamilNadu) Mangalore( Karnataka)
Mundra Nagapattnam(Tamil Nadu)
Navi Mumbai (Maharashtra) Neyveli (TamilNadu)
Rourkela (Orissa) Sambalpur(Orissa)
Secunderabad (Andhra Pradesh ) Trivandrum (Kerala)
Tuticorin (Kerala) Vazhakkala (Kerala)
Vishakhapatnam (AP)

2.8 ISO CERTIFICATION:

MECON is the first consultancy organization in the country to be

accredited with ISO Certification. MECON was certified in the year
1994. MECON Ltd. Has received the ISO 9001: 2000 certification
from RWTUV of Germany. ISO stands for International
Organization for Standardization which is the world’s largest
developer and publisher of International Standards. 9001 refers to
the series of certification standards, whereas 2000 refers to the
year in which the standards for certification were revised by the
ISO. The certificate is valid for 3 years from the date of
certification. The present certificate of MECON is valid upto jan
2009. The certification necessitates the creation of Quality
Management System (QMS) to maintain the proper quality
standards as per the requirement of ISO. Certain clauses which
relate to the ISO Standards are explained in brief below:
✔ Quality management System
✔ Management Responsibility
✔ Resource Management
✔ Production Realization
✔ Measurement Analysis and Improvement
 CHAPTER-3

COMPETITOR AND
CLIENTS
3.1COMPETITORS AND CLIENTS OF MECON

This chapter discusses the conditions for perfect competition. It

also investigates the significance of competitive equilibrium in a
perfectly competitive market. It explains the meaning of excess
demand and supply. To understand the complete effect of a shift
in demand or supply, it is necessary to consider both sides of the
market. Generally, the effect of any change in demand or supply
depends on the elasticity’s with respect to price of both demand
and supply. The time horizon is a key factor affecting the
elasticity’s of demand and supply. Prices are more volatile and
quantity adjustment takes relatively longer in industries where
production involves substantial sunk costs. Finally, it is important
to distinguish a receipt or payment from incidence. A payment or
receipt can be shifted from one to the other side of the market.
Incidence is fundamental and depends only on the elasticity’s of
demand and supply.
MECON LIMITED is the first engineering consultancy organization
in the country to be accredited with ISO 9001. The company not
only provides consultancy services in the field of basic
engineering, detailed engineering, project management etc., but
has also developed considerable expertise in the design and
supply of equipment for the ferrous, non-ferrous, oil and gas,
petrochemical and other general industries. Plan outlay (IEBR) is
for renovation and expansion of office space/guest house at
various locations.

ITS MAJOR COMPETITORS ARE THOSE WHICH ARE UNDER

THE MINISTRY OF STEEL AS FOLLOWING:
MSTC: The Company, a trading concern of Government of India,
undertakes disposal of ferrous scrap and other secondary arising
generated in integrated steel plants disposal of scrap, surplus
stores, etc. from other public sector enterprises and Government
Departments. After decanalisation, the Company has no canalized
item and arranges imports of scrap as well as other items as per
the needs of actual users in competition with the private sector.
Outlay, to be met from IEBR, is for setting up a Joint Venture for
Logistics.

1) FERRO SCRAP NIGAM: Earlier a Joint Sector Company

between MSTC Ltd. and M/s Harsco Corporation Inc.USA,
FSNL is now a 100% subsidiary of MSTC Ltd. with the
acquiring of 40% equity shares held by M/s Harsco by MSTC.
The Company undertakes recovery and processing of scrap
from steel plants Durgapur, Rourkela, Burnpur, Bhilai,
Bokaro, Visakhapatnam and Dolvi. For processing the slag
and reclaiming iron and steel from dumps the company has
to depend on various types of equipment and modern
technology. Plan outlay is for AMR schemes and is to be met
from IEBR of the company.

2) SPONGE IRON INDIA: The Sponge Iron Plant was set up

with UNDP/UNIDO assistance to establish the techno
economic feasibility of producing Sponge Iron from Lump
Iron Ore and 100% non cooking coal. The Unit, which went
into regular operation in November, 1980, has been
designed both for production and for R&D. No outlay has
been proposed for 2009-10 as Govt. of India has approved
merger of SIIL with NMDC Ltd. and the ‘Date of Merger’ has
been fixed as 30.6.2008. The merger process is likely to be
completed by March, 2009

3) HINDUSTAN STEELWORK CONSTRUCTION LIMITED:

Incorporated in 1964, this Company has the expertise for
undertaking complete construction of modern steel plants as
also projects in the infrastructure sector involving high
degree of co-ordination and modern sophisticated
techniques. Plan budgetary support has been provided for
procurement and capital repair of construction equipments
and machinery
5) BHARAT REFRACTORIES LIMITED: It has four units –
Bhandaridah Refractories Plant, Ranchi Road Refractories
Plant, Bhilai Refractories Plant and IFICO Refractories Plant
under its control. The company manufactures various kinds
of refractories for steel plants. Govt. of India on 24.4.2008
approved the merger of BRL with SAIL. The merger is
deemed to have taken effect from1.4.2008 for all legal and
accounting purposes and the merger process is to be
completed by March, 2009. Outlay has provided been for
AMR Schemes and is to be met from IEBR of the company.

6) NMDC LIMITED (formerly National Mineral

Development Corporation): NMDC is the single largest
producer of iron ore and diamonds in the country. The
company is also entering into the field of producing high
value products like Ferric Oxide, Iron Powder, etc. Plan
outlay has been made for schemes/projects like Bailadila
Deposit-11B, Windmill in Karnataka, 3 million tones Steel
Plant in Chattisgarh, AMR/Township, Expansion of SIIL, R&D
schemes, etc. Total outlay will be met from IEBR of the
company.

7) KUNDREMUKH IRON ORE COMPANY LIMITED: :

KIOCL was set up to manufacture iron ore concentrates for
export to Iran. Consequent upon Iran’s inability to lift iron-
ore concentrates as per agreement, a Pellet Plant to utilize 3
million tones of concentrates was approved in May, 1981.
The Project, implemented at a cost of Rs. 116.65 crores,
commenced commercial production in April, 1987. However,
as per the directions of Honorable Supreme Court, the
company had to stop mining at Kudremukh w.e.f.
31.12.2005. Plan outlay is mainly for AMR schemes
(including P filters). Other schemes included in the outlay are
Ductile Iron Spun Pipe Plant, infrastructure for receipt of iron
ore by rail at Mangalore, R&D/feasibility studies, Eco-Town
development at Kudremukh, Coal Injection System. Outlay is
being met from IEBR of the company.
8) MANGANESE ORE( INDIA) : MOIL is jointly owned by
Government of India and the Governments of Madhya
Pradesh and Maharashtra. It is the largest indigenous
producer of manganese ore in the country. To improve
profitability, the company has diversified into manufacture of
value added products like Electrolytic Manganese Dioxide
and Ferromanganese. Major portion of the outlay has been
allocated for investment in joint venture for Ferro
Manganese/Silico Manganese Plant. Other schemes included
in the outlay are sinking of new vertical shaft at Gudgeon
Mine, AMR schemes, township and R&D/feasibility studies.
Plan outlay is being met from IEBR of the company.

9) BIRD GROUP: Bird Group of Companies, taken over by the

Government of India in October, 1980, is mainly engaged in
mining activities and activities related to sinking of deep
tube wells and mineral exploration. Provision has been made
for afforestation & lease matters, Mineral & Ore based
industries and AMR schemes. Except for Rs.1.00 crore Plan
budgetary supports, outlay will be met from IEBR of the
company.

CLIENTS

1) STEEL AUTHORITY OF INDIA(SAIL) : The major project of

MECON LIMITED zis SAIL. As It has five major steel plants
located at Bokaro, Bhilai, Rourkela, Durgapur and Salem and
Alloy Steels Plant at Durgapur. With effect from 16.2.2006,
Indian Iron & Steel Company (IISCO), which has an
integrated steel plant at Burnpur and was a subsidiary of
SAIL, has been merged with SAIL and renamed as IISCO
Steel Plant. Maharashtra Electros melt Ltd., which is
engaged in the production of Ferro Alloys, is the only
subsidiary of SAIL. The plan outlay of SAIL Plants/Units and
its subsidiaries is being met from the IEBR of SAIL.
2) BOKARO STEEL PLANT: Outlay covers expenditure on
expansion of Bokaro Plant, Re-building of COB No.1& 2,
Installation of TB in Turbo Blower Station, Up gradation of BF
– 2 and other ongoing and new schemes.

3) BHILAI STEEL PLANT: Major portion (Rs.1100 crore) of the

total outlay is for modernization and expansion of the Plant.
The balance outlay is for schemes like Rebuilding of Coke
Oven Battery (COB) No.5 & 6, Installation of Slab Caster,
Main Step Down Station –5, 700 TPD Oxygen Plant and other
ongoing and new schemes.

4) ROURKELA STEEL PLANT(RSP): Major scheme included

in the outlay is expansion of RSP (Rs.1400 crore).Other
schemes are Re-building of COB No.4, 700 TPD Oxygen,
Plant, Simultaneous blowing of BOF Converters of SMS-II,
etc.

5) DURGAPUR STEEL PLANT: Out of total outlay of

Rs.650crore, Rs.500 crore is earmarked for expansion of the
Plant. Other schemes covered under the outlay include
Bloom Caster with associated facilities, Coal Dust Injection in
BF- 3 & 4 and expenditure relating to Steel Processing Unit
at Srinagar.
6) IISCO STEEL PLANT(ISP): Major portion of the outlay is
earmarked for Expansion of ISP (Rs.3100 crore).Provision
has also been made for Re-building of BFNo.2, Re-building of
COB-10, etc.

7) ALLOY STEEL PLANT: Outlay is for several completed and

ongoing schemes costing less than Rs.20 crore.

8) SALEM STEEL PLANT(SSP): Expansion of SSP

(Rs.1002crore) accounts for major portion of the total outlay
ofRs.1020 crore.
9) VISVESARIYA IRON LIMITED: Outlay covers small value
miscellaneous schemes and installation of single strand
Bloom Caster in SMS.

➢ National Aluminum Company Limited

➢ IOCL /HPCL/BPCL/IPCL
➢ GAIL
➢ ISRO
➢ Nevelli Lignite Corporation Limited
➢ Central Coalfields Limited, SECL, WCL
➢ Jindal Steel Limited
➢ Jharkhand State Electricity Board.
➢ Uttaranchal State Electricity Board
➢ Oil & Natural Gas Commission
➢ Neelachal Ispat Nigam Limited
➢ Indraprastha Gas Limited
➢ Hindustan Zinc Ltd.
➢ Hindustan Copper Limited
➢ Essar Steel Limited
➢ Bhusan Steel Limited
➢ Ordinance Factory Board
➢ New Note Press & Mint, GOI, Ministry of Finance
➢ KIOSCL
➢ Govt. of W.B.- PHD & Forestry Deptt.

CHAPTER – 4
 IMPORTANCE OF
WORKING CAPITAL

4.1 IMPORTANT THINGS ABOUT WORKING CAPITAL:

1. Working Capital can be negative. At that time, we add one

word “deficiency" in the back of working capital. It means if
Current Liabilities are more than current assets, it is known
as working capital deficiency or inverse working capital or
negative working capital.
2. Working capital can be easily adjusted, if Accounts manager
knows different techniques of managing working capital. He
can try to get short term loan or he can increase working
 capital by proper management of inventory and outstanding
incomes and debtors.
3. Working capital can also change by Changing in Cash
Conversion period. Cash conversion period is a period in
which company changes current assets into cash or bank.
4. Working capital can also positive by increasing growth rate of
company. If company does not invest more money and
increase profit, the same amount will increase in the cash
position of company and with cash company can increase
their working capital position.

4.2 IMPORTANCE OF WORKING CAPITAL:

➢ Some time, if creditors demand their money from company,

at this time company's high working capital saves company
from this situation. You know that selling of current assets is
easy in small period of time but Company can not sell their
fixed assets with in small period of time. So, if Company has
sufficient working capital, Company can easily pay off the
creditors and create his reputation in market. But if a
company has zero working capital and then company can not
pay creditors in emergency time and either company
becomes bankrupt or takes loan at higher rate of Interest. In
both condition, it is very dangerous and always Company's
Account Manager tries to keep some amount of working
capital for creating goodwill in market.
➢ Positive working capital enables also to pay day to day
expenses like wages, salaries, overheads and other operating
expenses. Because sufficient working capital can not only pay
maturity liabilities but also outstanding liabilities without any
more delay.

➢ One of advantages of positive working capital is that

Company can do every risky work without any tension of self
security.
➢ The adequate reserve of working capital ensures a steady
flow of raw materials to the production process.
➢ The adequate reserve of working capital indicates the good
solvency position of the concern and helps it to get loan from
the market at favorable terms.
➢ The adequate stock of working capital makes it possible for a
concern to purchase the trading goods in cash and cash
purchase always carries the benefit of getting cash discount.
➢ A strong working capital base is probably the only remedy to
overcome the odd situations like dull market conditions,
scarcity of raw materials and other components in case of
any emergency, sudden market fluctuations, etc.
➢ A business concern can exploit the market opportunities with
the help of adequate working capital.
➢ The regular flow of adequate working capital makes possible
efficient use of fixed assets, reduces wastage, ensures quick
replying of current assets, and establish a well- tuned
working environment.
➢ A quick rotation of working capital cycle and an efficient
management of working capital reduce cost and increases
production and sales. The combined effect of all these
favorably add to the profitability of the concern.

The adequate amount of working capital and its quick rotation

increases profit. The rate of dividend of the shareholders also
increases as a result of such increase in profit. Sufficient working
capital helps in research and development to face the present era
of cut throat competition and quick technological advance

4.3 TYPES OF WORKING CAPITAL

TYPES OF WORKING CAPITAL

 ON THE BASIS OF CONCEPT ON THE BASIS OF TIME

GROSS WORKING CAPITAL REGULAR WORKING TEMPORARY

NET WORKING CAPITAL CAPITAL WORKING CAP

SEASONAL WORKING CAPITAL

SPECIFIC WORKING C

Diagrammatic representation of the concept of working

capital

FIXED/PERMANENT WORKING CAPITAL

To carry on business, a certain level of working capital is

necessary on a continuous and uninterrupted basis, for all
practical purpose, the requirement has to be met as with other
fixed assets. Permanent working capital represents the minimum
level of raw materials, work-in-progress, finished goods, stores,
accounts receivables and cash which are in circulation to ensure
continuity of production. Permanent working capital is again
divided into two parts:
• regular working capital
• reserve working capital
The portion of fixed working capital which is utilized to carry out
the cyclical operation of current assets in the form of conversion
of liquid cash into raw materials, raw materials into finished
goods, finished goods into debtors and debtors into liquid cash in
a continuous manner is known as regular working capital. On the
other hand, the portion of fixed working capital, which is
preserved for meeting uncertain and emergent working needs
(like sudden price hike, abnormal scarcity in times of war, natural
calamity, etc) is known as reserve working capital.

VARIABLE/TEMPORARY WORKING CAPITAL

Besides fixed working capital, a business may need additional

working capital to meet the growing demands of busy seasons at
stated intervals. If the demand for the products of the business
goes up at any time it needs additional funds to pay for more
materials, labor and other expenses and to meet the requirement
of cash balance to be maintained in the changed situation. This
additional working capital needed to feed the operating cycle in
busy business periods is known as variable or temporary working
capital. It is called variable or temporary because the business
does not need it always but it is required according to the need of
the situation.
Generally the importance of variable working capital is more
acute in business concern having seasonal market demands.
Variable or temporary working capital may be further sub- divided
into
(a) seasonal working capital
(b) special working capital.
The additional working capital required by a concern to carry out
its operating activities in busy seasons of high market demands is
known as seasonal working capital. Businesses which mostly have
seasonal demands of their products like ice- cream, cold drinks,
wool and likely products manufacturing concern may need huge
amount of seasonal working capital. In other business concerns
too the market may rise to the peak in some particular time
period. So in all types of business a portion of working capital may
be preserved for meeting seasonal needs. On the other hand, the
portion of working capital that is needed by a concern to meet the
extraordinary requirements of special situations is known as
special working capital. This is called special working capital
because it is needed in special situations and not in normal
circumstances.
Factors determining working capital requirements
• Nature of business:

Working capital requirements of a firm or company are

basically influenced by the nature of business. Trading and
financial firms have a very small investment in fixed asset but
require a large sum of money to be invested in working
capital. Some manufacturing and construction firms also have
to invest substantially in working capital and a nominal
account in fixed assets. The working capital requirements are
nominal because they have only cash sales and supply
services and not products.

Mecon is basically a service providing company so it may only

need a nominal amount of working capital for carrying out its
functioning.

• Market and demand condition:

 Sales of product & services are the important factor in
determining the working capital needs of a firm. Generally a
substantial amount of current assets have to be employed
before growth takes place to support enlarge scale of
operations. But the sales depend on the demand conditions.
Firms may experience seasonal & cyclic fluctuations in the
demand for their products & services. These business
variations affect the working capital requirements of the firm,
especially the temporary working capital requirements.

Mecon has experienced ups and downs in the demand of its

services, so it adopts different strategies for determining the
working capital requirements in the boom period or during the
upswing of the demand, the firm generally resorts to
substantial borrowing. On the other hand when there is a
decline in the level of inventories then debtors will also fall.

Most of the firms thus follow a policy of “level of

production” irrespective of the seasonal changes in demand
order to utilize its resources to the full extent. This is also
called as “variable production policy”.

• Technology & production policy:

Non-manufacturing firms, service and financial enterprises do

not have a manufacturing cycle or inventory conversion cycle.
A firm may adopt a variable production policy, thereby varying
its production schedules in accordance with changing
demands. The production policy will differ from company to
company depending on the circumstances of the individual
company.

• Credit policy:
 The credit policy of the firm affects the working capital by
influencing the level of debtors. A liberal credit policy without
rating the credit worthiness of customers will be detrimental to
the firm and create a problem.

A high collection period will create a problem of : slack

condition will prompt everyone of tying of large funds in
debtors.

• Availability of credit from suppliers:

The supplier’s credit when used to finance the firm’s inventory

reduces the cash conversion cycle. In absence of suppliers the
firms generally borrow from the banks. Thus the availability of
credit at reasonable costs from the bank is crucial.

• Operating efficiency:

The efficiency in controlling the operating costs and utilizing

fixed and current assets leads to operating efficiency.

Thus, the better utilization of resources improves profitability

and thus helps in releasing the pressure on working capital.

BANK FINANCE FOR WORKING CAPITAL

Banks are the main institutional sources of working capital

finance. A bank considers a firm’s sales and production plans and
the desired levels of current assets in determine its working
capital requirements. The approved by the banks for the firm’s
working capital is called CREDIT LIMIT. Credit limit is the
maximum funds which a company can obtain from the banking
system. In case of firms with seasonal businesses, bank may fix
separate limits for the peak level credit requirement and normal
non-peak level credit requirement.

✔ Maximum Permissible Bank Finance (MPBF)

The tendon committee suggested the following three methods

of determining the permissible level of bank borrowings for
financing working capital gaps.

In the first method, the borrower will contribute 25% of the

working capital gap; the remaining 75% can be financed from
the bank borrowings. This method will give a current rate
of1;1.

In the second method, the borrower will contribute 25% of the

total current assets. The remaining of the working capital (i.e.
the working capital gap less the borrower’s contribution) can
be bridged from the bank borrowings. This method will give a
current ratio of 1.3:1.

In the third method, borrower will contribute 100% of the core

assets, as defined, and 25% of the balance of the current
assets. The remaining of the working capital gaps can be met
from the borrowings. This method will further strengthen the
current ratio.
 CHAPTER – 5

ANALYSIS OF WORKING
CAPITAL MANAGEMENT
ANALYSIS OF WORKING CAPITAL

Working-Capital-Analysis is not a technique likely to be used

frequently. This analysis can prove invaluable in cases where
credit risk is unusually high, or the amount of credit requested is
very large. Working capital is defined as the excess of current
assets over current liabilities. When similar amounts are added to
or subtracted from both current assets and current liabilities
[such as occurs with the purchase of inventory on open-account
terms] the amount of working capital does not change although
the activity does change the working capital ratio.

The purpose of working-capital-analysis is to identify the factors

that cause changes in the actual amount of a firm's working
capital, and these factors are always to be found below the
"current" line on either side of the balance sheet. Moreover, they
can always be listed in one of three basic categories:

1. Changes in net worth. Any net increase in net worth from

one reporting period to the next is a source of funds increasing
working capital, and any net decrease is an application of funds
decreasing working capital.

2. Changes in long-term debt. Any increase in long-term debt

from one reporting period to the next is a source of funds
increasing working capital, and any net decrease is an application
of funds decreasing working capital.

3. Changes in non-current assets. Any net decrease in non-

current assets from one reporting period to the next is a source of
funds for increasing working capita. Conversely, any net increase
is an application of funds decreasing working capital.

5.1 Changes in Net Worth

The major changes affecting working capital usually involve

changes in net worth. If working capital increases, the most
common source is an increase in net worth- especially an increase
resulting from profitable operations. If working capital declines,
the most common and most worrisome cause is a decline in net
worth resulting from operating losses. On occasion, a credit
analyst will also find changes in the amount of a firm's working
capital caused by net worth changes that are the result of factors
other than operational profits or losses. Working capital may
increase, for example, because of refunds on prior years' taxes,
profits from the sale of fixed assets, or other profits which do not
appear on the income statement (such as profits of a non-
recurring nature or those earned from operations in previous
years). Working capital may be reduced by certain additional
debits to surplus, such as assessments on prior years' taxes.

5.2 Changes in Long-Term Debt

When performing working capital analysis, it is important to guard

against the assumption that anything that increases working
capital is good. The creation or increase of long-term debt is a
source of funds for working capital, but may not be as desirable
as equity investments. There are several reasons for this:
1. The payments that will have to be made to reduce the debt
must come from future earnings.
2. Some of the firm's assets may be pledged as security for the
debt.
3. Even if the loan is unsecured, it represents an additional
liability
4. The more debt a company has the smaller the recovery to
unsecured creditors is likely to be if the company fails.
5. The existence of the debt reduces the availability of short-term
financing to the company - and increases the cost of any
financing that can be obtained.

5.3 Changes in Non-Current Assets

Working capital is reduced by any increase in non-current assets,

particularly in fixed assets. If a credit professional learns that a
prospective credit customer is enlarging or modernizing plant
facilities, he or she should find out if the undertaking is
adequately financed. If there is enough working capital, the out of
pocket costs may come out of these funds and there will still be
enough left over to pay other current liabilities. Otherwise, the
expansion will have to be financed either by obtaining additional
equity capital or by negotiating a long-term loan.

A reduction in fixed assets, which results in an increase in working

capital, is usually the result of depreciation charges made during
the year. Occasionally, an analyst may find the working capital
has been increased by the sale of fixed assets, but normally this
is not a major source of cash. Other important changes to look for
include:
• Large increases in investments in a subsidiary or affiliated
concerns,
• The growth of loans to officers evidenced by an increase in
notes receivable from officers, and
• Increases in such intangible assets as research and
development expenses, patents, and goodwill.
5.4 Analysis of Working Capital Composition

Understanding factors that have caused changes in the amount of

a firm's working capital from one period to another in no way
diminishes the need to know the changes that have occurred in
working capital composition. The adequacy of any company's
working capital depends on the proportion of current assets to
current liabilities-not on the dollar amount of working capital.

To discover changes in composition, credit analysts must shift

their attention above the Current line of the balance sheet and try
to answer such questions as the following:

• To what extent has any increase in receivables or

inventories been financed by growth of working capital and
to what extent by growth of current debt?
• What has been the form of any important increases in
current debt? Accounts payable?
• Notes payable to the bank?
• What about current maturity on long-term debt?
• Has any decrease in receivables and inventories been
accompanied by a like decrease in current debts and by a
growth of the cash balance?
• Has any decrease in receivables and inventories been
accompanied by continued heavy current debt and by
shrinkage in working capital?

The analysis of working capital can be conducted through

a number of devices, such as:
• Ratio analysis.
• Fund flow analysis.
• Budgeting.
1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to
another. The technique of ratio analysis can be employed for
measuring short-term liquidity or working capital position of a
firm. The following ratios can be calculated for these purposes:
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study
the source from which additional funds were derived and the use
to which these sources were put. The fund flow analysis consists
of:
• Preparing schedule of changes of working capital
• Statement of sources and application of funds.
It is an effective management tool to study the changes in
financial position (working capital) business enterprise between
beginning and ending of the financial dates.
3. WORKING CAPITAL BUDGET
A budget is a financial and / or quantitative expression of
business plans and polices to be pursued in the future period
time. Working capital budget as a part of the total budgeting
process of a business is prepared estimating future long term and
short term working capital needs and sources to finance them,
and then comparing the budgeted figures with actual
performance for calculating the variances, if any, so that
corrective actions may be taken in future. He objective working
capital budget is to ensure availability of funds as and needed,
and to ensure effective utilization of these resources. The
successful implementation of working capital budget involves the
preparing of separate budget for each element of working capital,
such as, cash, inventories and receivables.

CHAPTER – 6
MECON- THE WORKING
CAPITAL MANAGEMENT

MECON – THE WORKING CAPITAL MANAGEMENT

6.1 ANALYSIS OF WORKING CAPITAL : By Ratio Analysis

Technique:
As we know working capital is the life blood and the centre of a
business. Adequate amount of working capital is very much
essential for the smooth running of the business. And the most
important part is the efficient management of working capital in
right time. The liquidity position of the firm is totally effected by
the management of working capital. So, a study of changes in the
uses and sources of working capital is necessary to evaluate the
efficiency with which the working capital is employed in a
business. This involves the need of working capital analysis.
Some important ratios have been calculated for the last ten (10) financial years of
MECON LIMITED as shown in Table-1 below.
The analysis of working capital can be conducted through a
number of devices, such as:
1. Ratio analysis.
2. Fund flow analysis.
 3. Budgeting.
Ratio Analysis:
Ratio Analysis is the most commonly used technique for working
capital analysis which deals practically with each and every
aspect of working capital analysis. In this technique, for each
aspect of analysis certain rations are computed and then results
are drawn on the basis of trends shown by them against those
fixed as guide post
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.

Fund Flow Analysis:

Fund flow analysis is a technical device designated to the study
the source from which additional funds were derived and the use
to which these sources were put. The fund flow analysis consists
of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.
It is an effective management tool to study the changes in
financial position (working capital) business enterprise between
beginning and ending of the financial dates.
Working Capital Budget:
A budget is a financial and / or quantitative expression of
business plans and polices to be pursued in the future period
time. Working capital budget as a part of the total budgeting
process of a business is prepared estimating future long term and
short term working capital needs and sources to finance them,
and then comparing the budgeted figures with actual
performance for calculating the variances, if any, so that
corrective actions may be taken in future. He objective working
capital budget is to ensure availability of funds as and needed,
and to ensure effective utilization of these resources. The
successful implementation of working capital budget involves the
preparing of separate budget for each element of working capital,
such as, cash, inventories and receivables etc.

ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST

OF LIQUIDITY
The short –term creditors of a company such as suppliers of goods
of credit and commercial banks short-term loans are primarily
interested to know the ability of a firm to meet its obligations in
time. The short term obligations of a firm can be met in time only
when it is having sufficient liquid assets. So to with the confidence
of investors, creditors, the smooth functioning of the firm and the
efficient use of fixed assets the liquid position of the firm must be
strong. But a very high degree of liquidity of the firm being tied –
up in current assets. Therefore, it is important proper balance in
regard to the liquidity of the firm. Two types of ratios can be
calculated for measuring short-term financial position or short-
term solvency position of the firm.
✔ Liquidity ratios.
✔ Current assets movements ‘ratios

1. LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current
obligations as and when these become due. The short-term
obligations are met by realizing amounts from current, floating or
circulating assts. The current assets should either be liquid or
near about liquidity. These should be convertible in cash for
paying obligations of short-term nature. The sufficiency or
insufficiency of current assets should be assessed by comparing
them with short-term liabilities. If current assets can pay off the
current liabilities then the liquidity position is satisfactory. On the
other hand, if the current liabilities cannot be met out of the
current assets then the liquidity position is bad. To measure the
liquidity of a firm, the following ratios can be calculated:
• CURRENT RATIO
• QUICK RATIO
• ABSOLUTE LIQUID RATIO

1.1 CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of
general liquidity and its most widely used to make the analysis of
short-term financial position or liquidity of a firm. It is defined as
the relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITES
The two components of this ratio are:
• Current Assets
• Current Liabilities
Current assets include cash, marketable securities, bill
receivables, sundry debtors, inventories and work-in-progresses.
Current liabilities include outstanding expenses, bill payable,
dividend payable etc.
A relatively high current ratio is an indication that the firm is
liquid and has the ability to pay its current obligations in time. On
the hand a low current ratio represents that the liquidity position
of the firm is not good and the firm shall not be able to pay its
current liabilities in time. A ratio equal or near to the rule of
thumb of 2:1 i.e. current assets double the current liabilities is
considered to be satisfactory.
1.2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio.
Quick ratio may be defined as the relationship between
quick/liquid assets and current or liquid liabilities. An asset is said
to be liquid if it can be converted into cash with a short period
without loss of value. It measures the firms’ capacity to pay off
current obligations immediately.
QUICK RATIO = QUICK ASSET / CURRENT LIABILITES
Where Quick Assets are:
• Marketable Securities
• Cash in hand and Cash at bank.
W0RKING CAPITAL: RATIO ANALYSIS OF MECON
LIMITED

TABLE -
1

WORKING CAPITAL: RATIO ANALYSIS OF MECON

LIMITED

PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

25,379.0
Turnover 8 36,561.56 46,621.37 55,244.31 60,477.53

Inventories 81.89 104.01 83.73 123.55 118.53

Job-in-Progress 383.65 918.03 998.43 1,577.35 919.08
Sundry Debtors 7895.86 7694.49 9,127.85 14,270.93 16,314.56
Cash & Bank 12831.91 16,004.24 32,920.07 47,485.59 48,694.99
Other Current Assets 511.07 705.14 7,545.16 3,115.75 8,683.34
Loan & Advances 4140.1 5638.92 10,564.07 9,963.04 6,334.82

Total Current 25,844.4

Assets 8 31,064.83 61,239.31 76,536.31 81,065.52

Less: Current 22,861.3

Liabilities 1 25,078.82 44,861.38 44,519.38 45,669.61
Provisions 3,885.27 4,421.92 7,342.67 17,661.38 17,481.82

Total Current 26,746.5

Liabilities 8 29,500.74 52,204.05 62,180.76 63,151.43

Net Working Capital -902.10 1,564.09 9,035.26 14,355.45 17,914.09

35,616.3
Total Assets 8 39,489.55 69,042.79 84,544.24 89,098.69

25,378.9
Quick Assets 4 30,042.79 60,157.15 74,835.31 80,027.71

Current Assets to 72.56% 78.67% 88.72% 90.53% 90.98%

Total Assets

Current Assets to
Current Liabilities 96.63% 105.30% 117.31% 123.09% 128.37%
Quick Assets to
Current Liabilities 94.89% 101.84% 115.23% 120.35% 126.72%

Working Capital as a
% of Turnover -3.55% 4.28% 19.38% 25.99% 29.62%

Working Capital
Turnover Ratio -28.13 23.28 5.16 3.85% 3.38
Sundry Debtors and Turnover

TABLE -
2

SUNDRY DEBTORS AND

DEBTORS (in lakhs)
% of
% of
Considere Doubtful
Financial Considere Total Total
d Turnover Debts to
Year d Good Debts Debts to
Doubtful Total
Turnover
Debts

2005-06 7,895.86 556.31 8,452.17 25,379.08 33.30% 6.58%

2006-07 7,694.49 844.53 8,539.02 36,561.56 23.36% 9.89%

2007-08 9,127.85 1,146.68 10,274.53 46,621.37 22.04% 11.16%

2008-09 14,270.93 1,486.07 15,757.00 55,244.31 28.52% 9.43%

2009-10 16,314.56 504.45 16,819.01 60,477.53 27.81% 3.00%

Sundry Debtors to turnover:

Doubtful Debts to Total Debts:

INTERPRETATION:
After studying the above table we find that the turnover is
increasing every year after a dip in 2004-05. The increase is very
encouraging as the job procurement is more and execution of the
job is in time and its is the overall result of the work culture and
diversification made by the company but the overall position of
sundry debtors is not good as it is again rising and is around 150
crores which should be checked and controlled and proper steps
should be taken to realize the outstanding dues because the
turnover is rising.

Current Ratio
The ratio of current assets to current liabilities is known as current
or working capital ratio. It is an index of solvency of the concern
or enterprise. It shows the extent of which the current assets
may diminish in value carrying any losses in respect of payment
to short term creditors. Thus, it is an indication of the ability of an
enterprise with regards to meeting its current liabilities. This ratio
shows the number of times current assets will pay off current
liabilities.

TABLE - 3
CURRENT RATIO

FINANCIAL TOTAL CURRENT TOTAL CURRENT CURRENT

YEAR ASSETS LIABILITIES RATIO

2005-06 25,844.48 26,746.58 0.97

2006-07 31,064.83 29,500.74 1.05

2007-08 61,239.31 52,204.05 1.17

2008-09 76,536.21 62,180.76 1.23

2009-10 81,065.52 63,151.43 1.28

INTERPRETATION:

A current ratio of 2:1 is considered generally satisfactory for

reference level and is better to have in between 1 to 2 for
manufacturing organizations. In case of MECON LIMITED, it is
more than one with increasing trend which may be due to
effective utilization of working capital. After studying the above
table we find that the current ratio is increasing every year. The
increase is very encouraging with increase in turnover and its is
the overall result of the work culture and efficient working capital
management

Quick Ratio or Acid Test:

The current ratio doesn’t throw a light on the liquidity position of
a concern, and therefore, on the solvency position. It is possible
that there may exist a good current ratio but the company may
not have funds for meeting its immediate obligation leading to a
situation of business failure. It is therefore, the quick or the acid
test ratio which is used to tell the liquid position of an enterprise.
The quick ratio is the ratio of quick assets to current liabilities.
The quick assets are like assets and represent all current assets
other than inventory.

TABLE - 4
QUICK RATIO
 TOTAL
FINANCIAL TOTAL QUICK
CURRENT QUICK RATIO
YEAR ASSETS
LIABILITIES

2005-06 25,378.94 26,746.58 0.95

2006-07 30,042.79 29,500.74 1.02

2007-08 60,157 52,204.05 1.15

2008-09 74,835.31 62,180.76 1.2

2009-10 80,027.71 63,151.43 1.27

INTERPRETATION:
A quick ratio of 1:1 is considered a fair indication of the good
current financial condition of a business enterprise. Quick
ratio for MECON LIMITED has always greater than one which is
an indication of better liquidity position.

Current Assets Turnover Ratio

It reflects efficiency in generating Sales by Current Assets.
Higher the ratiobetter is the efficiency. The Current Assets
Turnover Ratio of MECON LIMITED is shown in Table-7 as under.

TABLE - 5
CURRENT ASSETS TURNOVER RATIO

FINANCIAL TOTAL CURRENT TURNOVER /

TURNOVER
YEAR ASSETS CURRENT ASSETS

2005-06 25,844.48 25,379.08 0.98

 2006-07 31,064.83 36,561.56 1.18

2007-08 61,239.31 46,621.37 0.76

2008-09 76,536.21 55,244.31 0.72

2009-10 81,065.52 60,477.53 0.75

INTERPRETATION:
The Current Assets Turnover shows a fluctuating trend from
FY 2003-04 to FY 2009-10. The ratio was highest in the FY
2006-07 and lowest in the year 2004-05. However, this ratio
is far from satisfactory. It needs improvement.

Current Assets to Total Assets

In addition to efficiency & liquidity of working capital, the
structure health is also equally important for finding the state of
affairs relating to the administration of working capital. One of
these ratios is current asset to total assets ratio, which is in
increasing trend. This ratio has gone up from 0.68 in 2003-2004
to 0.91 in 2009-2010.
TABLE - 6
CURRENT ASSETS TO TOTAL ASSETS

CURRENT
FINANCIAL TOTAL CURENT
TOTAL ASSETS ASSETS /
YEAR ASSETS
TOTAL ASSETS

2005-06 25,844.48 35,616.38 0.73

2006-07 31,064.83 39,489.55 0.79

2007-08 61,239.31 69,024.66 0.89

2008-09 76,536.21 84,544.25 0.91

 2009-10 81,065.52 89,098.69 0.91

Working Capital
The working capital of MECON LIMITED is the Net of Current
Assets and Current Liabilities. The Current Assets represents,
Inventories, Jobs-in-Progress, Sundry Debtors, Cash & Bank
Balances, Other Current Assets and Loans & Advances. The
Current Liabilities represents Current Liabilities and Provisions.
The various components of working capital is shown in Table-9 as
under.
 TABLE
-7
WORKING CAPITAL: BY RATIO ANALYSIS
METHOD
(in lakhs)
PARTICULARS 2005-06 2006-07 2007-08 2008-09 2009-10

Inventories 81.89 104.01 83.73 123.55 118.73

Job-in-progress 383.65 918.03 998.43 1,577.35 919.08
Sundy Debtors 7,895.86 7,694.49 9,127.85 14,270.93 16,314.56
Cash & Bank 12,831.91 16,004.24 32,920.07 47,485.59 48,694.99
Other Current
Assets 511.07 705.14 7,545.16 3,115.75 8,683.34
Loan &
Advances 4,140.10 5,683.92 10,564.07 9,963.04 6,334.82

Total Current 25.844.4 31,064.8 61,239.3 76,536.2 81,065.5

Assets 8 3 1 1 2

LESS: Current
Liabiliies 22,861.31 25,078.82 44,861.38 44,519.38 45,669.61
Provision
s 3,885.27 4,421.92 7,342.67 17,661.38 17,481.82

Total Current 26,746.5 29,500.7 52,204.0 62,180.7 63,151.4

Liabilities 8 4 5 6 3

Net Working 14,355.4 17,914.0

Capital -902.10 1,564.09 9,035.26 5 9

CHAPTER – 7
 CONCLUSIONS AND
RECOMMENDATIONS

CONCLUSIONS AND RECOMMENDATIONS

The objective of this study was to find out how the working capital
in MECON is being managed and the scope of improving the
same, if possible. An attempt has also been made to compare the
management of working capital in manufacturing industries vis-à-
vis in consultancy organization. Ratios analysis technique has
been employed in analysis of working capital management by
using the secondary data as available in the annual reports of the
company. Following are the conclusion and recommendations to
improve the Working Capital Management in MECON.

7.1 CONCLUSIONS

Till few years back, the working capital in MECON was not
treated very seriously. After liberalization started in 1990
and market forces started their dominance over the
economy through various means and the whole country
came into its grip. MECON too started facing small operation
cash crunches and subsequent misbalance in cash inflows
and outflows. Many times it had to defer its capital
procurement schemes to meet its urgent obligations. The
probable reason for not accorded the WCM its due weight
age could be due to inherent difficulties of being in service
sector and may be due to it natural resistance for change.
Moreover, since the company has the ample reserve and the
working capital is about one-fourth of the volume of the
business.

Some of the point in the working capital management as follows:

1. The basic problem in working capital management is to
synchronize the cash receipts and payments. Here in
MECON, the payments are almost without delay; however,
the receipts are delayed quite for longer period. The
company kept the target of lead time between raising the
invoices and receipts as more than five months. This seems
too high and should be reduced considerably.
2. The component of working capital is having a wide gap. As
this observed that since last few years, the volume of
working capital is increasing with increase in business.
 However, the ratio of current assets to current liabilities is
increasing. This is a good sign for any organization.
3. Cash planning in the organization is not been its due as can
be seen from erratic cash flow position. This can only be
rectified by a full-fledged cash planning department.
4. One major are of neglect is sources of funds. It is evident
that the company is using only banks as source of fund as
well as to keep the surplus funds. Company has never tried
the other sources of funds paying less interest and also
other financial instrument to keep the surplus funds for
better return.
5. It observed that MECON is still following the traditional
structure for handling its finance and accounts department.
This is no longer generating a direction but only kept the
organization moving with flow. This requires proper thrust
better positions towards achieving the goal of organization.

7.2 RECOMMENDATIONS
Considering all the above observations and with the change in
Indian industrial scenario, it is felt that the company also must
reorient its philosophy for betterment. Those days are gone when
the company used to have a lot of jobs on cost plus basis with
almost a monopoly market in the iron and steel sector.
Nowadays, the company has to compete in the open market with
all other private competitors and with the multinationals. Hence,
the company must also act like business organization, its every
action must be business oriented. Few specific suggestions based
on the findings of this study are mentioned below:

• Lead time and cash flow monitoring

The lead time may be brought down to about 90 days. In
addition to this, a continuous monitoring of collection must
be looked after by the project coordinators to improve the
cash inflows.
• Collection of Sundry Debts
To avoid liquidity crisis in near future, the collection of debts
must be given immediate attention. Top management can
review the position in this regards for better collection of
debts.

• Realistic Budgeting
Budgeting system should be change to obtain a realistic
budget for optimum control over financial resources. The
provision of revision for budget may be removed to stress
the importance on the original budget. The budget
preparation time may also be changed to December-January
instead of present practice of August-September. By this we
can have more realistic estimate of future year.
• Sources of Funds
In today’s market economy there are many sources of fund,
which could be considered for reducing the interest burden
on company.

• Organization Structure
To attend the financial activities as well as planning in the
complex situation, there is a need for a full time Director,
Finance.

8.3 SCOPE FOR FURTHER RESEARCH

The review of the past studies and the experience from this
present study made the researcher offer the following areas for
further study in this field.
• Study may be conducted among the Strategic Business
Units (SBUs) of MECON LIMITED, and comparison can be
made between or among these SBUs. This will bring out the
SBUs, needing effective working capital management.
• A further study may be helpful for identifying the forces that
govern this chronic nature of inefficiency present in the
company in the matter of working capital management.
• Econometrics can be applied to remove the influence of
extraneous factors on the performance of the company.
This will enable accurate measurement of the impact made
on the analysis of working capital.

It is hoped that the present study will be an inspiration for

pursuing research in any of the above areas in the future.
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