INTRODUCTION:

Working capital means the funds that are necessary for the daily disposal of the company needs [1]. In other context it refers to that bit of the company’s capital which is necessary for financing current assets such as cash, marketable securities, debtors and inventories. As a result working capital is a very significant aspect of financial management [2]. Every business establishment should have adequate working capital to run its operations smoothly. It has to be noted that the firm shouldn’t have neither excess working capital nor inadequate working capital because both have effects on company’s profitability and liquidity positions [3]. So business establishments should maintain adequate working capital. The main objective of working capital is to manage the company’s current assets and current liabilities in such a way that a necessary levelof working capital should be maintained [4].As a result the working capital should be handled in such a way that will ensure higher profitability and proper liquidity to the business establishments [5].

Working capital is a financial scale which suggests the operating liquidity available to business, organization or other entity including government entity. The fixed assets such as plant and equipment, working capital is also considered a part of operating capital [6]. If the working capital is positive then it will ensure that a company is able to continue its operations and also funds to satisfy both maturing short-term debt and upcoming operational expenses [8]. The working capital generally deals in managing inventories, amount receivable and payable, and cash [10]. The working capital deals between the company’s short term assets and its liabilities. Working capital is concerned with all the aspects of both current assets and current liabilities, such that to minimize the risk involved and maximizing the return on assets [12]. The main aim of working capital is to ensure that a company is able to continue its operations and is able to satisfy both maturing short term debt and upcoming operational expenses [21]. The working capital management addresses two basic issues as to how much of current assets should an organization hold and also how to finance such investment in current assets [23]. The firm which could tackle these two issues are said to withstand liquidity problems comparatively more efficient.

OBJECTIVE OF STUDY:

The main objective of this project is to ensure smooth operating cycle of the business, to optimize the level of working capital and minimize the cost of such funds. The superior objective of financial management is wealth maximization and that can be gained by profit maximization accompanied with sustainable growth and development.

· To determine the actual requirement of project expenditure from initial stage of the project.

· To anticipate the requirement of expenditure before execution of work.

· To optimize the level of working capital and minimize the cost of Project.

DATA COLLECTION AND ANALYSIS:

CONCEPT OF PROJECT IDENTIFICATION

The process of project selection is starts with the generation of project ideas. In order to select the most promising project, the entrepreneur needs to generate a few ideas about the possible project one can undertake. The project ideas as a process of identification of a project begin with an analytical survey of the economy (also known as pre-investment surveys). The surveys and studies will give us ideas. The process of project selection consists of following stages:

Figure 1: Identification of Typical Construction Sector

Three different projects have been selected based on construction period and different type execution mode. Various historical data on projects with the same contract type in India collected through various database were analysed to determine the factors that influence the WC and the range of these factors’ percentages of the overall contract value.

Project A - Typical Infrastructure Water Supply Project

Project B - Typical Industrial Building Project

Project C - Typical Residential Building Project

TYPICAL WATER SUPPLY PROJECT

This project is mainly deals about infrastructure works such as Water Supply Distribution through pipeline by gravity system. The two major components of this project one is supply and laying of various pipes and other one is Construction of Over Head Service Reservoir (OHSR) of capacity 10 Lakhs Litres and 8 lakhs Litres respectively in different locations.

Table 1: Project Technical Details of Olari Sump

1	Name of the Project	:	REHABILITATION OF GRAVITY MAIN TO OLARI SUMP AND AUGMENTATION OF DISTRIBUTION SYSTEM- THRISSUR CORPORATION
2	Location	:	Thrissur, Kerala
3	Contract Agreement No and Date	:	CA NO.ABHIRAM/CO/Thrissur/043 dated:01.09.2012
4	Contract Value	:	Rs.23,73,73,425/-
5	Package No	:	TSR-WS-02
6	Budget Value	:	Rs.21,80,78,851/-
7	Name of the Client	:	Kerala Water Authority
8	Name of the Consultant	:	WAPCOSKerala Sustainable Urban Development Project
9	Name of the Main Contractor	:	M/s. Abhiram Infra Projects Pvt. Limited
10	Name of the Sub-contractor	:	M/s The India Cements LimitedNo: 827, Dhun Building,Anna Salai,Chennai – 600002
11	Duration	:	18 Months
12	Date of Start	:	23-08-2012
13	Actual date of Completion	:	22-12-2014
14	Scope of Work	:	10.00LL and8.00LL Capacity Over Head Service Reservoir.700mm dia DI -3.293Km ,500mm dia DI-2.383Km, 315mm HDPE0.600Km , 225mm HDPE-1.692Km
15	Contract Conditions:-
a	Performance Bank Guarantee (PBG)	:	5% of the Contract value in the form of an unconditional bank guarantees to be provided before commencement of work.
b	Mobilization Bank Guarantee (MBG)	:	i) 10% of the Contract value and the 1^st installment shall be paid to the contractor not later than 21 days after the submission of the required Bank Guarantee. The advance amount would be paid in two equal installments. The contractor will claim the 2^nd installment after writing to the Employer on details of Mobilization at site. ii) The advance amount shall be recovered at the rate of 10% of the amount of advance payment from the first and every subsequent bill until the full advance paid has been recovered.
c	Retention Money	:	i) 10% from the first and the following payment certificates would be deducted and retained as Retention Money, subject to a maximum retention of 5% of the Contract value. ii) Upon the issue of a Certificate of Completion of the works by the Employer, in accordance with conditions, half the total amount retained shall be repaid to the Contractor and half when the Defects Liability Period has passed and the Employer has certified that all Defects notified by the Employer to the contractor before end of this period have been corrected. The contractor may substitute retention money with an “on demand” Bank Guarantee.
d	Taxes	:	The following Taxes shall be deducted from each bill i) WCT TDS @ 4.0% ii) IT TDS @ 2.08% iii) KCWWF @ 1.0%
e	Defects Liability Period	:	12 Months from the date of completion.
f	Material Advance	:	70% of invoice value or market value whichever is less shall paid on Cement and Steel only.
g	Payment Certificates	:	The Contractor shall submit monthly statement of the estimate value of work done.

WORKING CAPITAL ANALYSIS OF OLARI SUMP

The systematic assessment of working capital requirement in construction projects deals with the analysis of various quantitative and qualitative factors in which information is subjective and based on uncertainty. The estimation of working capital requirement is an important aspect of working capital management. The following data have been considered for calculating the requirement of Working Capital.

· Monthly achievement (Work done)

· Mobilization Advance received from Client

· Gross Certified Bills

· Deductions like Tax, Retention, Labor Cess etc.,

· Direct Expenditure, Indirect Expenditure and Net Collection.

Project Duration in Months

Figure 2: Working Capital Requirements for Olari Sump

METHOD OF BILLING CYCLE FOR OLARI SUMP

Progress payments shall be made on the basis of a duly certified and approved billing or estimate of the work performed and the materials supplied during the preceding thirty day billing cycle, or such other billing cycle as stated in the construction contract. In this project a billing cycle period of nearly minimum 23 Days is required to claim the amount from Client for previous month work doneand the details are given in table below,

Table 2:Method of Billing Cycle for Olari Sump

Sl.No	Description	Jan‘13	Feb ‘13	Mar ‘13	Apr ‘13
1	Work done	213.53	197.61	199.23	208.40
2	RA Bill No	-	1	2	3
3	Submitted Amount in Lakhs	-	213.53	197.61	199.23
4	Date of Submission	-	05.02.2013	05.03.2013	05.04.2013
5	Certified Amount in Lakhs	-	213.53	197.61	199.23
6	Date of Certification	-	20.02.2013	20.03.2013	20.04.2013
7	Net Amount After Deductions in Lakhs	-	157.73	144.53	145.87
8	Date of Receipt	-	23.02.2013	23.03.2013	23.04.2013

2.3 TYPICAL INDUSTRIAL BUILDING PROJECT

This project is mainly deals about industrial building works and consists of one building as High bay building along with Low bay structure. The height of the building is almost 12 mts from the ground level. The project duration is 15 Months including monsoon period. This is a prestigious project for the contractor since the contractor qualifies in ISRO all type of contracts. It is low value project but the project was awarded to contractor with high competition.

Table 3: Project Technical Details of New Chemical Building

1	Name of the Project	:	CONSTRUCTION OF BUILDING FOR NEW CHEMICAL VAPOUR INFILTRATION FURNACE AT CMSE, VATTIYOOTKAVU, TRIVANDRUM (CIVIL, PH and MECH WORKS)
2	Location	:	Vattiyoorkavu, Trivandrum, Kerala
3	Contract Agreement No and Date	:	49 dt : 31.12.2013
4	Work Order No and Date	:	VSSC/CMG/CPH/2(1361)/925dt : 18.12.2013
5	Contract Value	:	Rs.1,97,46,833/-
6	Budget Value	:	Rs.1,75,25,906/-
7	Name of the Client	:	Indian Space Research Organisation (ISRO), VSSC
8	Name of the Consultant	:	NIL
9	Name of the Main Contractor	:	M/s The India Cements Limited No: 827, Dhun Building, Anna Salai, Chennai - 600002
10	Name of the Sub-contractor	:	M/s. Ajith Engineering Works
11	Duration	:	15 Months
12	Date of Start	:	03-01-2014
13	Actual date of Completion	:	01-04-2015
14	Scope of Work	:	1. New Chemical Vapour Infiltration Furnace Facility, G+4 building, with High Bay of height - 12.0, Processing Bay of height - 6.0m 2. DG Shed and Electrical Panel Room Facility with Metal Sheet Roofing with chain link fencing and Cable Trenches. 3. Construction of Sump, PH Works, Fire Fighting and Storm Water Trench for the above facilities.
15	Contract Conditions:-
a	Performance Bank Guarantee (PBG)	:	5% of the Contract value in the form of an unconditional bank guarantees to be provided before commencement of work.
b	Mobilization Bank Guarantee (MBG)	:	Not Applicable, since the contract value less than Rs. 2.0 Crs
c	Retention Money	:	5% unless the contractor pays security deposit in the form of Government securities (Release after 12months after issue of certificate of final or after certification of final bill whichever is later.)
d	Taxes	:	The following Taxes shall be deducted from each bill i) WCT TDS @ 4.0% ii) IT TDS @ 2.2% iii) Retention @ 5.0%
e	Defects Liability Period	:	12 Months from the date of completion.
f	Material Advance	:	90% of the assessed value of non-perishable, non-fragile and non-combustible material. No secured advance on ordinary glass, sand, petrol, diesel etc.
g	Payment Certificates	:	The Contractor shall submit monthly computerised measurement with financial value of work done on every month.
h	Escalation	:	a) Increase of prices of material and labour shall be compensated as per Whole sale price indices b) Cement - 10%, Steel - 16%, Materials-49%, Labour-25%
i	Deviations/Variations/Extra Items	:	a) The additional cost of the altered, additional or substituted work, bears to the original tendered value plus b) 25% of the time calculated in (i). c) Within 15 days of receipt of order or occurrence of the items, claim rates with proper analysis for the work to be submitted to the Engineer In-charge. The Engineer In-charge shall within one month of the receipt of the claims after giving consideration to the analysis of the rates submitted by the contractor, determine the rates on the basis of the market rates and the contractor shall be paid in accordance with the rates so determined.

WORKING CAPITAL ANALYSIS OF NEW CHEMICAL BUILDING

The systematic assessment of working capital requirement in construction projects deals with the analysis of various quantitative and qualitative factors in which information is subjective and based on uncertainty. This project does not any mobilization advance. The following data have been considered for the requirement of Working Capital.

· Monthly achievement (work done)

· Gross Certified Bills

· Deductions like Tax, Retention, Labor Cess etc.,

· Direct Expenditure, Indirect Expenditure.

· Net Cash Flow.

· Peak Working Capital.

· Project Profit Margin

Project Duration in Months

Figure 3: Working Capital Requirements for New Chemical Building

METHOD OF BILLING CYCLE FOR NEW CHEMICAL BUILDING

Table 4: Method of Billing Cycle for New Chemical Building

Sl.No	Description	Mar ‘14	Apr ‘14	May ‘14	Jun ‘14
1	Work done	7.09	11.09	11.99	13.56
2	RA Bill No	1	2	3	4
3	Submitted Amount in Lakhs	7.32	7.09	11.09	11.99
4	Date of Submission	05.03.2014	05.04.2014	05.05.2014	05.06.2014
5	Certified Amount in Lakhs	7.32	7.09	11.09	11.99
6	Date of Certification	20.03.2014	20.04.2014	20.05.2014	20.06.2014
7	Net Amount After Deductions in Lakhs	6.43	6.23	9.74	10.53
8	Date of Receipt	23.03.2014	23.04.2014	23.05.2014	23.06.2014

TYPICAL RESIDENTIAL BUILDING PROJECT

This project is located at Uppilipalayam, Coimbatore and covered with land area of 2.51 Acres. The project is mainly deals about residential building works and contains 64 Apartments in 1 Block and 36 Villaments in 5 Blocks including amenities like Club house, Swimming Pool, Sewage Treatment Plant, Water Treatment Plant, Children’s Play area etc., located at Coimbatore. The height of the building is almost 15 mts (Stilt+4 Floors) from the ground level.

Table 5: Project Technical Details of Coromandel Enclave

1	Name of the Project	:	PROPOSED CONSTRUCTION OF RESIDENTIAL PROJECT “COROMANDEL ENCLAVE” AT COIMBATORE
2	Location	:	Uppilipalayam, Coimbatore, Tamilnadu
3	Contract Agreement No and Date	:	19447 dated 30-08-2014
5	Contract Value	:	Rs.26,24,91,776/-
6	Budget Value	:	Rs.23,43,67,657/-
7	Name of the Client	:	M/s Trishul Concrete Products Limited Chennai
8	Name of the Architect	:	M/s Nataraj andVenket Associates Chennai
9	Name of the Contractor	:	M/s The India Cements Infrastructures Limited, No: 827, Dhun Building, Anna Salai, Chennai - 600002
10	Duration	:	24 Months
11	Date of Start	:	01-04-2015
12	Actual date of Completion	:	30-03-2017
14	Contract Conditions:-
a	Performance Bank Guarantee (PBG)	:	5% of the Contract value in the form of an unconditional bank guarantees to be provided before commencement of work.
b	Mobilization Bank Guarantee (MBG)	:	i) 10% of tendered value in two or more installments against BG. ii) Recovery of mobilization amount will be done 10% of the advance payment from First and every subsequent RA Bill.
c	Retention Money	:	5% unless the contractor pays security deposit in the form of Government securities (Release after 12months after issue of certificate of final or after certification of final bill whichever is later.)
d	Taxes	:	The following Taxes shall be deducted from each bill i) WCT TDS @ 4.0% ii) IT TDS @ 2.0% iii) Labour Welfare Fund @ 1.0%
e	Defects Liability Period	:	12 Months from the date of completion.
f	Material Advance	:	90% of the assessed value of non-perishable, non-fragile and non-combustible material. No secured advance on ordinary glass, sand, petrol, diesel etc.
g	Payment Certificates	:	The Contractor shall submit monthly computerised of work done on every month.
h	Escalation	:	a) Increase of prices of material and labour shall be compensated as per Whole sale price indices b) Cement - 8%, Steel - 17%, Materials-50%, Labour – 25% as specified in contract document and mutually agreed.

WORKING CAPITAL ANALYSIS OF COROMANDEL ENCLAVE

The systematic assessment of working capital requirement in construction projects deals with the analysis of various quantitative and qualitative factors in which information is subjective and based on uncertainty. The requirement of Working Capital for the project has been shown in Appendix 3 for the total project duration in month wise. The cash flow statement has been made as per Construction Schedule as shown in Appendix 6. The following data have been considered for the requirement of Working Capital.

· Monthly achievement

· Mobilization advance received from Client

· Gross Certified Bills

· Deductions like Tax, Retention, Labor Cess etc.,

· Direct Expenditure and Indirect Expenditure

· Net Cash Flow.

· Peak Working Capital.

· Project Profit Margin

· Month wise Cash Flow Requirement

Figure4: Working Capital Requirements for Coromandel Enclave

METHOD OF BILLING CYCLE FOR COROMANDEL ENCLAVE

Table 6: Method of Billing Cycle for Coromandel Enclave

Sl.No	Description	Jun ‘15	Jul ‘15	Aug ‘15	Sep ‘15
1	Work done	18.37	24.18	32.40	34.19
2	RA Bill No	1	2	3	4
3	Submitted Amount in Lakhs	6.53	18.37	24.18	32.40
4	Date of Submission	05.06.2015	05.07.2015	05.08.2015	05.09.2015
5	Certified Amount in Lakhs	6.53	18.37	24.18	32.40
6	Date of Certification	20.06.2015	20.07.2015	20.08.2015	20.09.2015
7	Net Amount After Deductions in Lakhs	5.10	14.33	18.86	25.27
8	Date of Receipt	23.06.2015	23.07.2015	23.08.2015	23.09.2015

CONCLUSION AND RECOMMENDATIONS

GENERAL
There are three objectives of this project which have been analysed. The first objective was to determine the actual requirement of working capital from the initial stage, anticipate the requirement of expenditure and to optimize the level of working capital for the project.

WATER SUPPLY PROJECT

Analysis of water supply project for the requirement of working capital, less risk is involved because the project is having 10% of Project value as Mobilization advance i.e. Rs. 193.28 Lakhs. As per the analysis done with various calculation, the project can run with their own fund up to Dec ’12 starting from Sep ’12, the project require fund from Jan ’13 to May ‘13 and Oct ’13 to Dec’13, whereas the fund surplus from Jun ’13 to Sep ‘13. From the analysis, it is clearly shows that the project to be funded for few months only and balance duration, the particular project can run on its own fund.

In cash flow statement the peak working capital in obtained as Rs. 103.38 Lakhs in the month of Nov ’13. The total requirement of working capital for this project is Rs. 518.67 Lakhs which is around 23.79% of project value. After receipt of all retention money from Client at the end of the project of Rs. 101.25 Lakhs, the overall project profit margin works out to 11.92%.

INDUSTRIAL BUILDING PROJECT

Analysis of industrial building project for the requirement of working capital, more risk is involved because the project does not have any Mobilization advance. As per the analysis done with various calculations, the project cannot run with their own fund, it needs funds for the overall project. From the analysis, it is clearly shows that the project may stable only at the completion stage.

In cash flow statement the peak working capital requirement is Rs. 17.13 Lakhs in the month of Feb ’15. The total requirement of working capital for this project is Rs. 69.31 Lakhs which is around 57.16% of project value. After receipt of all retention money from Client at the end of the project of Rs. 8.76 Lakhs, the overall project profit margin work out to 8.80%

RESIDENTIAL BUILDING PROJECT

Analysis of residential building project for the requirement of working capital, moderate risk is involved because the project is having 10% of Project value as Mobilization advance i.e. Rs. 234.37 Lakhs. As per the analysis done with various calculation, the project can run with their own fund up to May ’16 starting from Apr ’15, the project require fund from Jun ’16 to Jan ’17. From the analysis, it is clearly shows that the project to be funded for few months only, and balance duration, the particular project can run on its own fund.

In cash flow statement the peak working capital in obtained as Rs. 55.32 Lakhs in the month of Sep ’16. The total requirement of working capital for this project is Rs. 242.36 Lakhs which is around 10.34% of project value. After receipt of all retention money from Client at the end of the project is Rs. 117.18 Lakhs, the overall project profit margin works out to 7.97%.

RECOMMENDATIONS

The result of all the three projects were analysed and studied for the requirement of working capital for the projects, it is clearly recognize that if the project having mobilization advance of at least 10% of project value that will be stable to run the project with minimum or least working capital. If the project does not have any of mobilization or secured advance, it will be difficult to run, otherwise the requirement of working capital at initial will be more for entire duration of project. The following parameter to be considered while taking the project

· Working Capital will be more if the project needs to purchase all asset requirements like shuttering and scaffolding material, equipment and machinery for the particular project.

· There will be chance of reducing Working Capital if the project utilize own asset from their other project because depreciation cost only will be considered for Working Capital.

· The tax deducted by Client like, WCT TDS and IT TDS will be the part of money taking back from the project.

· Interest bearing Mobilization advance will be the burden for contractor.

· From the cash flow and working capital statement for all projects, it is clearly shows that only few month project required funds.

· To avoid peak working capital or maximum requirement of funds for execution, well planning to be done to buy the material.

· Excess purchasing or one time purchasing also will increase the cash flow burden to contractor, sometime it may save the money also.

· Material Procurement Plan to be made for each project to reduce the working capital usage.

· Construction Schedule to be prepared by considering the availability of material, manpower, climatic condition etc., and proper cash flow forecasting is required.

REFERENCES:

1. Bansal (2001) “Working Capital Management of Profit-Making Undertakings (A Case Study of Himachal Pradesh Agro Industries Corporation Ltd)”, Deep and Deep Publication Pvt. Ltd. New Delhi, pp. 76-84

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Received on 06.11.2015 Accepted on 16.12.2015

Int. J. Tech. 5(2): July-Dec., 2015; Page 105-112

DOI: 10.5958/2231-3915.2015.00005.X