FINANCING OF WORKING CAPITAL LOAN AND ADVANCE MANAGEMENT

KAAV INTERNATIONAL JOURNAL OF ECONOMICS,COMMERCE & BUSINESS MANAGEMENT FINANCING OF WORKING CAPITAL LOAN AND ADVANCE MANAGEMENT P. R. HALANI ASSISTANT PROFESSOR (M.COM, B.ED, M.PHIL. GSET, ) SHRI M. P. SHAH COMMERCE COLLEGE SURENDRANAGAR ABSTRACT The justification for this short of financing should be relinquished when the asset is expected to be relinquished. Using long term financing for short term assets expensive since it would involve payment of interest during the period the funds are not utilised. Similarly, financing permanent current assets with short term sources is inconvenient and costly since arrangements for the new short term financing will have to made on a continuing basis. It may at times prove risky. At times, the firm may not be able to raise funds and its operations may be disrupted or else, to save disruption, it may have to borrow funds at very inconvenient rates. Thus, short term financing is less costly than long-term financing but the former is more risky than the later. For use ratio analysis for accounting tools and statistical tools for getting results like as average, S.D. C.V. Maximum and Minimum and used One way ANOVA test. Key Words : Companies Loan and Advance management, financing of working Capital, paper INTRODUCTION One of the important tasks of financial manager is to select an assortment of appropriate sources of finance the current assets. According to S. S. Sahay: The total working capital requirements of a business are financed by the various components of its current liabilities and a part of the permanent funds in the business. Maintenance of operational efficiency as well as reduction in the cost of financing should be the guiding criteria in the choice of the funds of financing. Normally, the current assets of a firm are supported by a combination of long term and short term sources of financing. 93

S. S. Sahaya is of the view: The important sources of long term financing are shares, debentures, retained earnings and loans from specialised financial institutions. The long term finance provide support for a small part of current asses requirement, which is called the working capital margin. Pointing out the various source of short term finances. The sources of short term financing are short term bank loan, overdrafts, referred to also as current liabilities. Provide the major support for current assets. In the present chapter researcher used loan and advance for the testing hypothesis. MEANING OF LOANS AND ADVANCES The term loan refers to the amount borrowed by one person from another. The amount is in the nature of loan and refers to the sum paid to the borrower. Thus, from the view point of borrower, it is borrowing and from the view point of companies, it is lending. Loan may be regarded as credit granted where the money is disbursed and its recovery is made on a later date. It is a debt for the borrower. While granting loans, credit is given for a definite purpose and for a predetermined period. Interest is charged on the loan at agreed rate and intervals of payment. Advance on the other hand, is a credit facility granted by the companies. Companies grant advances largely for short-term purposes, such as purchase of goods traded in and meeting other short-term trading liabilities. There is a sense of debt in loan, whereas an advance is a facility being availed of by the borrower. However, like loans, advances are also to be repaid. Thus a credit facility- repayable in instalments over a period is termed as loan while a credit facility repayable within one year may be known as advances. However, in the present lesson these two ratio terms are used interchangeably. TITLE OF THE PROBLEM FINANCING OF WORKING CAPITAL LOAN AND ADVANCE MANAGEMENT UTILITY OF LOANS AND ADVANCES Loans and advances granted by commercial companies are highly beneficial to individuals, firms, companies and industrial concerns. The growth and diversification of business activities are effected to a large extent through companies financing. Loans and advances granted by companies help in meeting short-term and long term financial needs of business enterprises. We can discuss the role played by companies in the business world by way of loans and advances as follows:- Loans and advances can be arranged from companies in keeping with the flexibility in business operations. Traders may borrow money for day to day financial needs availing of the facility of cash credit, companies overdraft and discounting of bills. The amount raised as loan may be repaid within a short period to suit the convenience of the borrower. Thus business may be run efficiently with borrowed funds from companies for financing its working capital requirements. 94

Loans and advances are utilized for making payment of current liabilities, wage and salaries of employees, and also the tax liability of business. Loans and advances from companies are found to be economical for traders and businessmen, because companies charge a reasonable rate of interest on such loans/advances. For loans from money lenders, the rate of interest charged is very high. The interest charged by commercial companies is regulated by the Reserve Companies of India. Companies generally do not interfere with the use, management and control of the borrowed money. But it takes care to ensure that the money lent is used only for business purposes. Companies loans and advances are found to be convenient as far as its repayment is concerned. This facilitates planning for future and timely repayment of loans. Otherwise business activities would have come to a halt. Loans and advances by companies generally carry element of secrecy with it. Companies are duty-bound to maintain secrecy of their transactions with the customers. This enhances people s faith in the companies system. REVIEW OF LITERATURE "G. S. Panda," G. S. Panda studied the working capital problems of small manufacturing companies confined to the state of orissa. The study covered the problems of adequacy, the choice, sources and problems of rising working capital. The study was based on a sample of fifty small manufacturing companies. However, the sample was further reduced to twenty six companies due to (a) Incomplete data (b) Non-manufacturing and (d) Habitual defaulters. Some of the issues, which were examined in the study, are (1) Current investments in the small firms lead to low current rations. (2) Small firms depend mainly on short-term credit because the accessibility to acquire long-term funds in relatively limited. (3) Small firms at growth stage characteristically hold a high proportion of total investment in current form. (4) The expanding sales firms and the need for financing current assets have close and direct relationship. (5) Higher funds generating ability determine current position of firms. and (6) Bank loans bridge a greater part of working capital gap in the firms. Lastly he concludes that one important reason for low performance is imprudent management of working capital. "K. Rajeswara Rao".Rajeswara Rao throughly examined the managerial aspects of inventories, receivables and advances and cash of certain central public enterprises in India. The study revealed that the inventories formed a major proportion of total current assets investment, which recorded 63% in 1971-72 and 66% by 1976-77 in the public sector. The inventory of finished goods proportion had been increasing year after year. He pointed out that the policies of public enterprises for achieving the working capital objectives were not clearly defined. His impression is that the prudent management of working capital shall be recognised as an important area for the enterprises studies. "Eljelly, A. 2004." Eljelly elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the 95

risk of inability to meet due short-term obligations and avoids excessive investment in these assets. The relation between profitability and liquidity was examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability. The size variable was found to have significant effect on profitability at the industry level. The results were stable and had important implications for liquidity management in various Saudi companies. First, It was clear that there was a negative relationship between profitability and liquidity indicators such as current ratio and cash gap in the Saudi sample examined. Second, the study also revealed that there was great variation among industries with respect to the significant measure of liquidity. RESEARCH METHODOLOGY The study was preliminary based on the published accounts and annual report of all the selected paper companies under review. Out of which selected companies were in the public sector and private sector. PERIOD OF THE STUDY The present study was undertaken by the researcher for the period of seven (7) Accounting years from 2005-2006 to 2011-12. The researcher had selected the base year 2005-2006 because this year was normal for the present research of analysis and evaluation. SAMPLE OF THE STUDY By the researcher following companies were had been selected for the purpose of the present research. 1. International Andhra Pradesh Paper Mills Limited 2. Ballarpur Paper Mills Limited 3. JK Paper Mills Limited 4. Orient Paper and Industries Limited 5. Seshasayee Paper and Boards Limited 6. Sirpur Paper Mills Limited 7. South India Paper Mills Limited 8. Star Paper Mills Limited 9. T. N. Newsprint Paper Mills Limited 10. West Coast Paper Mill METHOD OF DATA COLLECTION The main source of data used for the study was secondary drown from the annual profit and loss account and balance sheet figures as found in the annual reports of the selected paper companies. The selected data was complemented through selected paper companies web site and capital line software. METHODS OF ANALYSIS AND INTERPRETATION OF DATA 96

In order to analyze the present research work on FINANCING OF WORKING CAPITAL - LOAN AND ADVANCE MANAGEMENT various techniques of financial management like as ratio analysis and various statistical techniques used by the researcher as under:- A. Accounting Techniques 1) Ratio Analysis B. Statistical Techniques 1) Arithmetic Mean 2) The Standard Deviation: 3) Co-Efficient of Variation: 4) One-way Analysis of Variance Test (ANOVA) TESTING OF HYPOTHESES Ho: Null Hypothesis: There is no significant difference in loan and advance to current assets ratio of selected paper companies of India. There is no significant difference in loan and advance to working capital ratio of selected paper companies of India. H1: Alternative Hypothesis: There is significant difference in loan and advance to current assets ratio of selected paper companies of India. There is significant difference in loan and advance to working capital ratio of selected paper companies of India. LOAN AND ADVANCE TO CURRENT ASSETS RATIO It may define as the ratio of loan and advance to current assets is representing the advance by the company to its customers and employees. This ratio is calculated as under this formula. This ratio is show in percentages. How many pays loan and advance to as compare current assets in the selected paper companies? Loan and advance finance by the companies can be expected to take the steps necessary to ensure that the liquidation value of the current assets is maintained at a level sufficient to cover the amount of the loan and advance. The loan and advance to current asset ratio in the selected paper companies in India, is stated below table no 1.1. Table :- 9.1 Loan and Advance to Current Assets Ratio In % from 2005 06 to 2011 12 97

YEAR COMPANY NAME IAPPM BILT JKPM OPIL SPBL 2005-2006 25.93 19.63 39.98 25.29 12.56 45.72 14.88 55.93 31.99 21.03 2006-2007 25.65 24.18 45.89 27.02 17.27 41.64 17.04 23.57 23.70 19.16 2007-2008 25.13 53.40 32.28 23.53 14.63 39.99 19.16 23.96 31.15 14.70 2008-2009 23.34 74.86 38.56 24.11 14.39 24.86 18.33 24.29 27.24 23.30 2009-2010 29.11 47.97 40.22 21.59 18.77 31.87 25.59 20.33 34.67 35.72 2010-2011 31.68 43.62 39.21 23.10 65.68 30.63 22.49 23.88 42.56 39.40 2011-2012 11.48 41.07 25.31 12.70 39.41 18.76 14.35 24.25 21.59 6.52 Average 24.62 43.53 37.35 22.48 26.10 33.35 18.84 28.03 30.42 22.83 S.D. 6.42 18.49 6.63 4.64 19.70 9.66 4.05 12.38 7.09 11.47 C.V. 26.08 42.46 17.75 20.63 75.46 28.97 21.49 44.17 23.32 50.25 Min 11.48 19.63 25.31 12.70 12.56 18.76 14.35 20.33 21.59 6.52 Max 31.68 74.86 45.89 27.02 65.68 45.72 25.59 55.93 42.56 39.40 SPML SIPL SPM Ltd TNNPL WCPML The above mentioned Table No- 1.1 and below Graph No- 1.1 show the indicated a fluctuating trends of the Loan and advance to current assets ratio of selected paper companies in India from 2005-2006 to 2011-2012. 98

LOAN AND ADVANCE TO CURRENT ASSETS RATIO The Loan and Advance to Current Assets Ratio of selected paper companies during the study period has been shown an average 28.76%. During the study period the International Andhra Pradesh Paper Mills Limited was shown an average Loan and Advance to Current Assets Ratio of 24.62%, Ballarpur Paper Mills Limited was shown an average Loan and Advance to Current Assets Ratio of 43.53%, JK Paper Mills Limited was shown an average Loan and Advance to Current Assets Ratio of 37.35%, Orient Paper and Industries Limited was shown an average Loan and Advance to Current Assets Ratio of 22.48%, Seshasayee Paper and Boards Limited was shown an average Loan and Advance to Current Assets Ratio of 26.10%, Sirpur Paper Mills Limited was shown an average Loan and Advance to Current Assets Ratio of 33.35%, South India Paper Mills Limited was shown an average Loan and Advance to Current Assets Ratio of 18.84%, Star Paper Mills Limited was shown an average Loan and Advance to Current Assets Ratio of 20.03%, T. N. Newsprint Paper Mills Limited was shown an average Loan and Advance to Current Assets Ratio of 30.42%, West Coast Paper Mills Limited was shown an average Loan and Advance to Current Assets Ratio of 22.83%. Maximum Loan and Advance to Current Assets Ratio was 74.86% in Ballarpur Paper Mills Limited in the year 2008 09 and minimum Loan and Advance to Current Assets Ratio was 1.38% in West Coast Paper Mills Limited in the year 2011 12. ANOVA TEST OF LOAN AND ADVANCE TO CURRENT ASSETS RATIO Ho: Null Hypothesis: There is no significant difference in loan and advance to current assets ratio of selected paper companies of India. H1: Alternative Hypothesis: There is significant difference in loan and advance to current assets ratio of selected paper companies of India. Level of Significance: 5% Table :- 1.1.1 Loan and Advance to Current Assets Ratio - ANOVA: Single Factor SUMMARY Groups Count Sum Average Variance IAPPM 7 172.3074154 24.615345 41.22373 BILT 7 304.7267057 43.532387 341.7273 JKPM 7 261.4485127 37.349788 43.96378 OPIL 7 157.3533151 22.479045 21.51427 SPBL 7 182.7182345 26.102605 387.9318 SPML 7 233.4844975 33.354928 93.38514 SIPL 7 131.8541175 18.836302 16.38304 SPM Ltd 7 196.2027893 28.02897 153.2542 TNNPL 7 212.9094927 30.415642 50.29359 WCPML 7 159.8223587 22.831766 131.6379 99

Table 1.1.2 ANOVA ( F- Test Result) of Loan and Advance to Current Assets Ratio Source of Variation SS D.F. MS F P-value F crit Between Groups 3595.973746 9 399.55264 3.1183 0.003845 2.0401 Within Groups 7687.888586 60 128.13148 Total 11283.86233 69 Degree of freedom = 70-1= 69 Table Value of F =2.0401 Calculate Value of F = 3.1183 F calculate > F table 3.1183 > 2.0401 F calculate > F table Table No-1.1.2 indicates the calculate value of F is 3.1183 and the table value of F at 5% level of significance is 2.0401 so, the calculate value of F which is greater than the table value. It indicates that the Null Hypothesis is rejected and Alternate Hypothesis is accepted. It indicates that there is significant in loan and advance to current assets ratio of selected paper companies of India. LOAN AND ADVANCE TO WORKING CAPITAL RATIO It may define as the ratio of loan and advance to working capital is representing the advance by the company to its customers and employees. This ratio is calculated as under this formula. This ratio is show in percentages. How many pays loan and advance to as compare working capital in the selected paper companies? Loan and advance finance by the companies can be expected to take the steps necessary to ensure that the liquidation value of the working capital is maintained at a level sufficient to cover the amount of the loan and advance. It is to provide information on all financing activity of paper companies and provide financial resources of operation and other sources. The loan and advance to current asset ratio in the selected paper companies in India, is stated below table no 1.2. YEAR Table:- 1.2 Loan and Advance to Working Capital Ratio in % From 2005 06 to 2011 12 COMPANY NAME 100

IAPPM BILT JKPM OPIL SPBL SPML SIPL SPM Ltd TNNPL WCPML 2005-2006 362.58 26.88 62.03 52.92 43.16 18173.08 26.60-628.88 76.11 42.70 2006-2007 83.17 35.97 85.15 58.11 49.53 240.60 28.52 118.98 79.56 31.28 2007-2008 63.82 70.54 55.57 51.40 49.86-531.45 31.58 105.25 151.99 22.36 2008-2009 70.37 102.55 60.59 81.50 32.43 145.64 26.77 96.26 69.91 35.07 2009-2010 60.27 110.32 74.56 58.71 35.16 137.28 37.65 1463.63 79.23 60.44 2010-2011 63.19 96.77 73.54 54.67 93.86 406.57 32.54 252.09 99.61 60.43 2011-2012 639.19 326.75 108.57-554.30 838.18-168.43 31.14-43.11-43.68-19.66 Average 191.80 109.97 74.29-28.14 163.17 2629.04 30.69 194.89 73.25 33.23 S.D. 225.86 100.96 18.17 232.23 298.35 6861.14 3.87 628.72 58.68 27.36 C.V. 117.76 91.81 24.47-825.25 182.85 260.98 12.60 322.60 80.12 82.34 Min 60.27 26.88 55.57-554.30 32.43-531.45 26.60-628.88-43.68-19.66 Max 639.19 326.75 108.57 81.50 838.18 18173.08 37.65 1463.63 151.99 60.44 The below mentioned Table No- 1.2 and Graph No- 1.2 show the indicated a fluctuating trends of the Loan and advance to working capital ratio of selected paper companies in India from 2005-2006 to 2011-2012. 101

LOAN AND ADVANCE TO WORKING CAPITAL RATIO The Loan and Advance to Working Capital Ratio of selected paper companies during the study period has been shown an average 347.22%. During the study period the International Andhra Pradesh Paper Mills Limited was shown an average Loan and Advance to Working Capital Ratio of 191.80%, Ballarpur Paper Mills Limited was shown an average Loan and Advance to Working Capital Ratio of 109.97%, JK Paper Mills Limited was shown an average Loan and Advance to Working Capital Ratio of 74.29%, Orient Paper and Industries Limited was shown an average Loan and Advance to Working Capital Ratio of - 28.14%, Seshasayee Paper and Boards Limited was shown an average Loan and Advance to Working Capital Ratio of 163.17%, Sirpur Paper Mills Limited was shown an average Loan and Advance to Working Capital Ratio of 2629.04%, South India Paper Mills Limited was shown an average Loan and Advance to Working Capital Ratio of 30.69%, Star Paper Mills Limited was shown an average Loan and Advance to Working Capital Ratio of 194.89%, T. N. Newsprint Paper Mills Limited was shown an average Loan and Advance to Working Capital Ratio of 72.25%, West Coast Paper Mills Limited was shown an average Loan and Advance to Working Capital Ratio of 33.23%. Maximum Loan and Advance to Working Capital Ratio was 18173.08% in, Sirpur Paper Mills Limited in the year 2005 06 and minimum Loan and Advance to Working Capital Ratio was -628.88% in Star Paper Mills Limited in the year 2005 06. ANOVA TEST OF LOAN AND ADVANCE TO WORKING CAPITAL RATIO Ho: Null Hypothesis: There is no significant difference in loan and advance to working capital ratio of selected paper companies of India. H1: Alternative Hypothesis: There is significant difference in loan and advance to working capital ratio of selected paper companies of India. Level of Significance: 5% Table 1.2.1 Loan and Advance to Working Capital Ratio - ANOVA: Single Factor SUMMARY Groups Count Sum Average Variance IAPPM 7 1342.59 191.799 51014.4 BILT 7 769.778 109.968 10192.8 JKPM 7 520.002 74.2861 330.312 OPIL 7-196.99-28.141 53933 SPBL 7 1142.18 163.169 89013.3 SPML 7 18403.3 2629.04 4.707 SIPL 7 214.799 30.6856 14.9531 SPM Ltd 7 1364.23 194.89 395289 TNNPL 7 512.729 73.247 3443.69 WCPML 7 232.617 33.231 748.751 102

Table :- 1.2.2 ANOVA ( F- Test Result) of Loan and Advance to Working Capital Ratio Source of Variation SS D.F. MS F P-value F crit Between Groups 40834240 9 4537138 0.9516 0.48846 2.0401 Within Groups 286075661 60 4767928 Total 326909902 69 Degree of freedom = 70-1= 69 Table Value of F =2.0401 Calculate Value of F = 0.9516 F calculate < F table 0.9516 < 2.0401 F calculate < F table Table No-1.2.2 indicates the calculate value of F is 0.9516and the table value of F at 5% level of significance is 2.0401 so, the calculate value of F which is less than the table value. It indicates that the Null Hypothesis is accepted and Alternate Hypothesis is rejected. It indicates that there is no significant in loan and advance to working capital ratio of selected paper companies of India. SUGGESTION The Loan and Advance to Current Assets Ratio of selected paper companies in India shown an average 28.76%, so researcher suggested that International Andhra Pradesh Paper Mills Limited, Orient Paper and Industries Limited, Seshasayee Paper and Boards Limited, South India Paper Mills Limited, Star Paper Mills Limited and West Coast Paper Mills Limited should decrease their current assets and increased loan and advance as possible as. The Loan and Advance to Working Capital Ratio of selected paper companies in India shown an average as 347.22%. Sirpur Paper Mills Limited loan and advance to working capital ratio was very high so researcher suggested that the company should try to increase current liabilities and decreased current as early as. LIMITATIONS OF THE STUDY The study is based on secondary data taken from published annual report of selected paper companies in India its findings depend entirely on the accuracy of such data. The study should be based on 10 companies belong to only are listed on Bombay stock exchange. The study is largely based on the financial tool of ratio analysis, which has its own limitations that also applies to the study. 103

SCOPE FOR THE FURTHER RESEARCH This is FINANCING OF WORKING CAPITAL - LOAN AND ADVANCE MANAGEMENT. It is expected that the present study would encourage and provide further research on various aspects of loan and advance management. A few recommendations are given for further studies are as follows. The coverage of the present study is confined to only seven years and ten paper companies of India. This can further be increased in order to broaden up the scope of the present stud Separate in depth studies can be made for each aspect of loan and advance management of foreign paper companies in order to compare the working capital management of Indian paper companies. Specific study can be carried out to compare loan and advance management of paper companies with other capital intensive companies in India. The present study can be further compared with the loan and advance management of pre-liberalization period of paper companies in India and pre-liberalization loan and advance management and liquidity & profitability should also be measured. REFERENCES 1. S. S. Sahay, Financial Management of Public Enterprises (New Delhi : S. Chand and Company ltd., 1984) p. 138 2. Wessel H. Robert, Principles of Financial Analysis A Study of Financial Management, (New York : MacMillan Co., 1961) p. 95. 3. Ibid 4. Prasanna Chandra, Financial Management theory and Practice (New Delhi; Tata McGraw Hill publishing Company Ltd. 1987) p. 236. 5. Prasanna Chandra, op.cit. pp.338. 6. J. Fred Weston and F. Brigham, Managerial Finance VI ed., (Hinsdale Illinois : The Dryden Press: 1977) pp. 176. 7. Ezar Solomon and John J. Pringle. An Introduction to Financial Management, (New Delhi: Prentice Hall of India Pvt. Ltd., 1977) p. 164. 8. R. M.. Srivastava, Essentials of Business Finance, (Bombay: Himalaya Publishing House, 1986) p. 349. 9. J. Fred Weston, A Guide to Financial Management, (Homewood, Illinois : Learning Systems Company, 1982) p. 59 10. Brealey and Myers, short-term and working capital finance from (2002), pp. 622 626 and Owen et al. (1986), pp. 92 98. 11. Annual report of The Andhra Pradesh Paper Mills Limited from 2005 06 to 2011 12 and www.andhrapaper.com 12. Annual report of Ballarpur Industries Limited from 2005 06 to 2011 12 and www.bilt.com 104

13. Annual report of J. K. Paper mills limited from 2005 06 to 2011 12 and http://www.jkpaper.com 14. Annual report of Orient Paper and Industries from 2005 06 to 2011 12 and http://www.orientpaperindia.com 15. Annual report of Seshasayee Paper and Boards from 2005 06 to 2011 12 and http://www.spbltd.com 16. Annual report of Sirpur Paper Mills from 2005 06 to 2011 12 and http://www.sirpurpaper.com 17. Annual report of South India Paper Mills from 2005 06 to 2011 12 and http://www.sipaper.com 18. Annual report of Star Paper Mills from 2005 06 to 2011 12 and httpw://ww.starpapers.com 19. Annual report of Tamil Nadu Newsprint and Papers from 2005 06 to 2011 12 and http://www.tnpl.com 20. Annual report of West Coast Paper Mills from 2005 06 to 2011 12 and http://www.westcoastpaper.com 105