Rajshekar Working Capital Managament Project New
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Transcript of Rajshekar Working Capital Managament Project New
EXECUTIVE SUMMARY
The project has been under taken under as the part of bachelor of business
administration course as per the direction of Karnataka university Dharwad. The 6 th sem
BBA students will take part in this project were the summer in plant project for the period
of one month and the project is related to finance and the topic of this project is “The study
of working capital management”
The Gadag co-operative textile mill ltd established in 1972 by late shri.K.H.Patil
at Hulkoti in Gadag district. It is producing main product as yarn. The company started with
a production cost of RS.220 lakhs.It is started producing yarn in the year 1973.
A G.C.T.M has an arrangement of different department of the dependent parts of
functions and their interrelation in the structure form to provide the necessary efforts of
groups of individuals will be directed towards a common objective. So as to identify the
problems of such a title and give suggestions and conclusions. In addition to this concept
studying the over all organization role of different department functions of their respective
departments, procedures and policies.
The project is mainly focuses on the industry profile, company profile, SWOT
analysis, annual report and about working capital and this project studies different
department at the Gadag co-operative textile mill ltd. The functions of each department and
the organization in the company along with it covers the duties and responsibilities of all
the staff members type of decision making followed by the mill and it also includes quality
policy export oriented unit etc of the mill.
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Introduction of the company
And its various department
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INTRODUCTION OF THE COMPANY
Textile industries are those, which deal with the manufacturing of woven fabrics. In
India first cotton mill was established at Fort Glister near Calcutta, with East India
Company. Later on the actual growth of this industry was started in 1854 with the starting
of a textile mill at Bombay.
The cotton industry has now spread itself over almost the entire inhabitable globe in
its great centers of population is one of the most potent factors the world has had in its
civilizing factor influence, and it had probably done much or even more in contributing to
the welfare of mankind and his progress as any of the great branches of industry.
Like all the important fact of our existence whether we deal with the formation of
universe or building up of a man’s character, we must be prepared to recognize in its
essentials that all pervading forces known as the Evolution. The cotton industry is no
exception in its methods of development to this mighty principle of the universe and in
tracing the history.
Gradually, the human being came to know about the use of cotton as a textile
material and that cotton as a fiber for the purpose of thread, which led to the successful
formation of yarn through spinning process and weaving is done for the purpose of cloth
making had for covering of their bodies.
As the human being came to know the uses of this textile material they were
used not only for covering but also for many other usefully purposes. The discovery of
modern sources of energy and machineries marked the beginning of what we call now
industrial revolution and since then revolutionary changes in cotton textile industry have
been taking place.
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INDUSTRY PROFILE
The Indian Textile Industry occupies an important place in the Economy of the
Country because of its contribution to the Industrial Output, Employment Generation and
Foreign Exchange Earnings. At present, the contribution of the textile Industry to GDP is
about 4 percent. The textile industry provides direct employment to about more than 35
million people and is the second largest employment provider in India next to agriculture.
The contribution of this industry to gross export earnings is about 31% of the country.
The Textile Industry is a self-reliant industry from the production of raw materials
to the delivery of final products with considerable value addition at each stage of
processing. The industry was delicensed in 1991 and under the current policy no prior
government approval is necessary to set up textile mills. The per capita cloth availability in
the country has increased from 24.1 square meters in 1991 to 30.7 square meters in 2000-
01.The textile sector including the garment sector has a continual increase in the FDI inflow
from Rs.80.99 million to Rs.234.73million.
From growing its own raw material (cotton, jute, silk and wool) to providing value
added products to consumers (fabrics and garments), the textile industry covers a wide
range of economic activities, including employment generation in both organized and
unorganized sectors. Manmade fibers account for around 40 per cent share in a cotton
dominated Indian textile industry. India accounts for 15% of world's total cotton crop
production. And it is the second largest employer after the agriculture sector in both rural
and urban areas. India has a large pool of skilled low-cost textile workers, experienced in
technical skills.
From 1st January 2005, all textile and clothing products would be traded
internationally without quota-restrictions. And this impending reality brings the issue of
competitiveness to the fore for all firms in the textile and clothing sectors, including those
in India. With the dismantling of quotas in 2004 under mandate from the Agreement in
Textile and Clothing of the WTO, the focus has clearly shifted to the future of the Indian
textile and clothing exports. It is imperative to understand the true competitiveness of
Indian textile and clothing firms in order to make an assessment of what lies over a period
of time.
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Table.No.1 COMPANY PROFILE
NameTHE GADAG CO-OPERATIVE TEXTILE MILL LTD.
HULKOTI – 582 205.
1. Year of
Establishment1972
2. StatusThis Co-operative Society registered under the Co-operatives
Societies Act of 1959
3. Location Karnataka state, Gadag Dist, Hulkoti
4. Chairman Shri D.R. Patil, Ex M.L.A. Gadag.
5. Vice
chairmanShri H.M.Soppin
6. Managing
DirectorShri T.Shantavirappa
7. Export placesMaharastra, New-Delhi, Vietnam, South Korea, China and
Couple of European countries
8. Nature
of BusinessProduction and sale of YARN
9. No of Board
of Directors
Elected members – 18
Ex – office members – 1
Nominated by Govt – 3
10. Paid up
Capital817.71 Lakhs
11. Project cost 220 Lakhs
12. No Of
departments
8 [Eight] Departments
13. Number
Of employees
750
14. Phone No (08372)289042,289056
15. Registered
office Hulkoti, Tq & dist:Gadag
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BACKGROUND AND INCEPTION OF THE COMPANY
The village Hulkoti has a population of 10,000 comprising of various sections of
people and since long it has been the cradle of co-operative movement in having the first
primary Credit Co-operative Society established in the erstwhile Bombay State. The
occupation of the village is mainly agriculture. The main crops grown around Houlkoti are
Jowar, Cotton, Groundnut, Chilly and other pulses. Since there are no major irrigation
projects, dry land cultivation is the only way for the farming community.. It is at this
juncture, realizing the need for upliftment of much neglected farmers community and to
improve the lot of rural area, late Shri K.H. Patil, a son of soil and veteran Co-operator
devoted his time fully for the establishment of a Co-operative network around Hulkoti.
It is with this ideal background The Gadag Co-operative Textile Mill was established
in the year 1972 with a Project cost of Rs. 220 Lakhs and commenced its trial production in
April 1973. We have a feather in the cap for having installed 25,000 spindles capacity mill
in a record time in the entire country.
Objectives of the company
To satisfy customers by integrating their needs in the mill yarn.
To sustain a mill of able and committed employees and provide opportunities for
growth and development.
To improve the process of managing mill affairs through proper planning, timely
improvement of plan and performance review.
To faster culture innovation with the application of new ideas and methods to solve the
business problems.
To provide the employment opportunities to Men& women of rural area
To know the organizational hierarchy and responsibility ties with their designation
To set exposed to the cotton textile and global trends.
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VISION AND MISSION
VISION: To be a premier textile company with a clear focus to become globally
competitive, through growth and technology up gradation committed to excellence in
quality service and co-operatives
MISSION: To purchase the creation of values for all its customers, share holders,
employees and society at large
QUALITY POLICY
The company will give main importance to the satisfaction of the customers by
producing good quality yarn and produce yarn to meet with the market position the company
will not see with the quality of raw material. The company is also having a quality control
department to check out the yarn quality in overall stages to take any corrections required
immediately.
COMPETITORS INFORMATION
Banhatti co-operative spinning mill. Banhatti.
Raitara sahakari noolina girani. Rannebennur.
The farmer’s co-operative spinning mill ltd. Hulkoti.
Sangoola mills solapur.
INFRASTRUCTURE FACILITY
Head office: The head office of G.C.T.M is located in hulkoti the function of finance,
marketing and raw material procurement are carried by head office only it doesn’t have its
branch.
Land: The mill is established in the rural area near gadag at village hulkoti with approval
of the site selection committee. The total area covered is of 90528.25 sq ft out of which
build up area is 643.45 sq mt. there is the beautiful garden plantations pollution free and
healthy environment in the mill area.
Other facilities: The mill has provided an quarters facilities to the workers and there is an
rest room for workers and drinking water facility and also cultural activities.
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MANAGINGDIRECTOR
GENERAL MANAGER
CIVIL ENGINEER
P.R.D SECRETARY
SPINNING MASTER
A.DTRANSPO
RTLOANS,
ACT AND OPERATI
OS
SALESPURCH
ASE
E.S.T. AND
ADMIN
ASSIT. SPINNING MASTER
ELECTRICAL
ENGINEER
LABOUR OFFICER
WORKSHOP TIME OFFICE
Note: G.M. and secretary shall be the invitees in subcommittee/ Board meeting G.B. (S.G.B) as per buy law provision
MAINTENANCE
ENGINEER
STORES S.Q.C SECURITY
CHAIRMAN
Chart No.1
ORGANIZATION CHART
P.R.D – Public Relation Department
S.Q.C – Statistical Quality Control
A.D – Administration Department
Production Department
Production is a main function of company. Production is a process of converting
raw material into final products. The Gadag Co-operative Mill is going to receive the
ginned cotton. (Cotton fibers are separated from the seeds) from the above mentioned
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suppliers. Before going to production of yarn they classified the cotton on the basis of
staple length of cotton, fiber and decide what count can be spun out of the cotton received
People: There are 36 employees are working under this department.
Hierarchy:
Chart No.2 Production Department
Production Manager
Shift in Charge
Section Supervisor
PROCESS OF PRODUTION
Mixing: Bales of different counts are mixed along with usable wastes, on different
percentage in the mixing bins, cotton bales of different quality are opened and stacked,
called stock mixing, 24 hours for conditioning before it is process further.
Blow room: Cotton in losses form is spending on mixing bale openers and taken further of
different cleaning points where the cotton is beaten and trash is extracted.
Carding: Lap form blow room feed to cards where the cotton is converted from lap form to
sliver form. During this process trash, short fibers and other impurities are extracted the
different cleaning points, like licker in, flats section units.
Preparatory: Cards sliver is drawn through different drafting rollers and the sliver is
elongated and increasingly the length of the sliver and radiating in the cross section by
passing through different drafting rollers .
Spinning: The bobbins from the preparatory process are feed to the drafting rollers as final
treatment to the material and further increasing the length and reduction the cross section of
the material.
Cone winding: Here the yarn spun is cleaned by passing through cleaning devise called slub
catcher and would through suitable package of required length and weight in the form of a
cone.
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Doubling: Here two yarn of the same count are doubled by giving necessary twist in the
form of package called bobbins.
Reeling: Here single yarn or doubled yarn are wound on the swifting of the machine called
reel in the form of hank and are make in the form of knots. There are two types, a plain or
cross reel.
Bundling & baling: Here the number of knots plain or cross is in a press depending
On the count and weight of the boundless are as per requirements. Bundles are pressed in
The form of bale depending on the count, plain or cross as per the requirement from the
Market.
Packing: Here number of cones or cheeses is bagged depending on the count of the
Yarn number of cones and weight of the cones. Depending on the requirement of the
Market.
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Finance Department
Finance Department is a vital department of a organization. Finance is concerned with
providing and using cash and credit for carrying on business correctly.
People: There are 6 employees are working under this department.
Hierarchy:
The finance department of G.C.T.M consists of following person
Chart No.3 Finance Department
General Manager
Manager (Account)
Assistant Manager
Office & Staff
POLICIES
Finance department looks after the finance & prepare the accounts of G.C.T.M.
Finance department taken up functions like investment decisions, Finance decisions,
& capital building working capital management etc.
It borrows loans from national co-operative development corporation
(N.C.D.C.), Government of Karnataka, Banks from share holders, money lenders.
It consists at share capital, secured and unsecured loans
After starting of mill after the 18 years the mill has been modernized at cost of Rs.
429 lakhs the leading institutions has sanctioned of Rs.236.69 lakhs and remaining balance
of Rs.192.31 is from the mill itself and 2nd time modernization has done of Rs 920 lakhs
which the amount is given by the N.C.D.C.( national co-operative development cooperation)
and government of Karnataka as the part N.C.D.C has sanctioned Rs.736 lakhs and 136
lakhs by govt of Karnataka and rest of amount Rs. 46 lakhs is from members of society.
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Human Resource Department
The main objective of the personal department is to select right person for right join, for
right place & also for right time to train them, it also aims in solving misunderstanding
between workers and management.
People: There are 8 employees are working under this department.
Hierarchy:
Chart No.4 Human Resource Department
MANAGING
DIRECTOR
GENERAL
MANAGER
HR MANAGER
LABOUR OFFICER
ASSISTANT
MANAGER
The human resource department of the mill is recruiting, selecting seeing
welfare of the employees and providing necessary facilities for the workers. Were as in the
Gadag co-operative textile mill there are 744 workers here 85 are staff members, 650
workers and 9 are securities
The facilities for the worker are transportation, medical, canteen, provident fund,
gratuity There are 3types of workers are there first selected (fresh) workers will be taken as
a trainee and in trainee there are two stages first stage trainee and second stage trainee and
after trainee they will be treated as badli and then as permit.
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Purchase Department
The purchasing of cotton is made through the conducting business Committee
meeting were as the purchasing of cotton is made on every weekly of 500 to 600 bales were
as every one bale consists of 165 kgs the mill purchases different Variety of cotton
such as NH44, J34, MBCH, BHARAMA, 26MM, and 28MM.
The purchase of cotton is made from local which is at open auction market by the
Gadag co-op cotton sale society, T.A.P.C.S.M of annigeri were as these local cotton is
graded by the A.P.M.C authority. The purchases are also made from CCI (cotton co-
operation of India, maharastra co-operative federation, shanthi textile Mumbai, baradia
cotton company Mumbai and B.M. kollar from gokak.
The price for the local is more of Rs.100-150 than the market rates and were as
the department purchase right material, right quality, and right quantity of cotton for the
mill and the mill collects the sample and makes the laboratory test and make sure of quality
which they requires and make business committee meeting and gives order of purchasing
and the payment of purchased material is made after 30 days of purchasing to the suppliers.
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Store Department
Objectives of the Stores Department :
Concentrating towards smooth running of the production process.
Facilitating all required equipments on time .
Reduction of Inventory equipments on time .
Working like a traffic signal to signalize to all equipments.
Proper maintenance of all equipments.
The mills storage has divided in 2 sub department which one is of material store and
general stores and there are 11000 items are maintained in these department and the mill
has an 7500 metric ton of storage capacity and stock of 2000 metric ton of capacity in
godown. The store department’s construction costs of Rs 13.18 crores and the department is
using two ledgers one is material receipt ledger and material issued ledger.
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Quality Control Department
Quality Control Department is the key factor to producing the quality products.
Quality Control Department plays a vital role in controlling and increasing the quality of
the product.
People: There are 4 employees are working under this department.
Hierarchy:
Chart No.5 Quality Control Department
MANAGING
DIRECTOR
GENERAL
MANAGER
MAINTAINANCE
ENGINEER
ASSISTANT
ENGINEER
This is the department which checks out the quality of the cotton and the produced
yarn in the mill. The department which checks quality before purchasing of cotton by
taking sample from supplier. the G.C.T.M has its laboratory for testing of the cotton and
the lab has installed of 1.25 crore worth of machines which is of computerized machines
the quality control also helps in minimizing cost and improves in working condition it also
helps the G.C.T.M to know the cost of there product.
The cotton testing is having some steps of testing of cotton. The cotton testing is
made on H.V.I (high volume instrument) the testing of material is made out of one bale half
kg will be taken testing is made of its length, strength (grass per tex), informative ratio,
maturity ratio the mill is using 26mm type of cotton for coarser, 28mm for 30s, 34s, and
40s yarn, and 31mm for 60s and above.
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Marketing Department
Marketing department is a vital department of organization. Marketing has
developed the long relationship with customer from purchasing and selling products.
Marketing is a social and managerial function which by individual and group obtained want
and need and want through creating exchange products and value with other”
People: There are 6 employees are working under this department.
Hierarchy:
Chart No.6 Marketing Department
MANAGING DIRECTIOR
GENERAL MANAGER
SALES MANAGER
Sales Places:
1) National Handloom Development Corporation
2) Karnataka Hand look Development Corporation
3) Depot
Coimbatore
Solapur
Ichalkaranji
Malegaon
The Mill manufactures 10s, 14s 20s, 30s, 34s, 40s, 60s, 80s, 100s, 2/20s, 2/40s, 2/60s, etc.,
in the form of Hanks as well as Cones as per the prevailing market demand.
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SECRETARY
Administration Department
Administrative department play very important role in the organization for its smooth
running of the business and success of this company is mainly depending on the efficient
administration of the G.C.T.M.
This department looks after administrative functions such as payment of salaries,
arrangement of meetings, and formation of policies etc, the general functions of this
department are as follows.
Maintenance of files, records etc. up to date, collecting and presenting data in the
form of useful information from the records.
Implementing the organization systems, procedures and policies in a coordinated
manner.
Ensuring smooth running of the office buy interfacing with the eternal agencies as
required. For ex-payment of telephone bills, electricity, water supply bills etc.
Maintenance of the office premises.
Providing required facilities.
The administration department which decides on giving yearly bonus and to
provide the finance to all department and the department which conducts the meeting,
implementing the polices, controlling of different department and finally it is a department
which controls over all the activity of the mill.
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Section-2
Introduction to the study
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Working Capital
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Working Capital Management
Introduction:
Generally the term “Working Capital” stands for that part of capital, which is
required for the financing of working or current needs of the company.
The management of fixed and current assets, however, differ in three
important ways.
Firstly: In managing fixed assets, time is a very important factor, consequently
discounting &compounding techniques play a significant role in capital budgeting& a
minor one in the management of current assets.
Second: The large holding of current assets,especially cash, strengthens the firms liquidity
position (and reduces risk ness) but also reduces the overall profitability.
Third: levels of fixed as well as current assets depends upon expected sales, but it is only
current assets which can be adjusted with sales fluctuation in the short run.
Meaning:
Working capital is the amount of funds which a company has to finance its day to
day operations it can be regards as the part of capitals which the capitals is basically
classified into fixed and working.
Fixed capital is normally invested in fixed assets and working capital in current
assets. It is used in day to day operations. These are the funds that are invested in current
assets. The form of these current assets keeps on changing. Ex: Raw material to work in
progress to finished product. , so it is also called circulating capital.
A study of working capital is of major part of the external and internal analysis
because of its close relationship with the current day to day operation of the business.
Working capital consists of broadly for that the assets of a business that are used at related
current operation and is represented by raw material, stores, work in progress, and finished
goods merchandise, bills receivable.
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Definition:
According to Gerestenberg
“Working capital means current assets of company that are changed in the
ordinary course of business from one form to another, ex: from cash to inventories,
inventories to receivables, receivables into cash”
According to J. smith
“The sum of the current assets is the working capital of the business”
’’Working Capital = Current Assets – Current Liability”
OBJECTIVES OF THE STUDY
To study the working capital management.
To know the sources of working capital.
To study the different components of working capital of the company.
To calculate the operating cycle of an organization.
To calculate the working capital of an organization.
METHODALOGY
The data related to working capital is collected though the primary& secondary data.
PRIMARY DATA: The primary data includes information collected from personal
Interaction with manager and other staffs.
SECONDARY DATA: The secondary data are collected from annual report , balance
Sheets, P&L account, debtors register etc
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CONCEPT OF WORKING CAPITAL
There are two concepts of working capital that are:
1) Balance sheet concept
2) Operating cycle concept.
1) Balance sheet concept:
Working capital as per this defined in terms of current assets and current
liabilities. Balance sheet concept further classifies working capital into a) Gross and b) Net
working capital.
Gross working capital:
It refers to total investment made in current assets. It is also called circulating
rotating from one head to another. Ex. Cash to raw material, raw material to finished
products, finished products to debtors, and debtors to cash.
Net Working capital:
As per this concept working capital is the difference between current assets and
current liabilities. This concept stresses on quality aspect of working capital. The difference
between current assets highlights on liquidity aspect and quality of current assets. A firm
that has excess of current assets over liabilities is said to possess adequate liquidity
2) Operating cycle concept:
Operating Cycle or Working Capital Cycle indicates the length of time between
affirms paying for raw materials entering into finished stock and receiving cash on the sales
of such Finished Stock.
This operating cycle differs from firm to firm. Longer the operating cycle greater will
be the amount of Working Capital required and vice versa. Thus it plays an important role
in determining the Working Capital needs of a firm
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Cash Raw Materials
Work In Process
Finished goodSales
Debtors
OPERATING CYCLE CHART
Chart No.7
Operating Cycle is the time duration required to convert sales, after the conversion
of resources into inventories, into cash. The operating cycle of a G.C.T.M involves three
phases.
Acquisition of resources such as raw material, labour, power and
Fuel etc.
Manufacture of the product which includes conversion of raw
material into work-In- progress into finished goods.
Sales of the product either for cash or on credit. Credit sales creates book Debts for
collection.
In the THE GADAG CO-OPERATIVE TEXTILE MILL LTD (manufacturing concern),
the working capital operating cycle starts with the purchase of raw materials and ends with
the realization of cash from the sale of finished products. It is also called as cash
conversion cycle, production cycle etc. It involves the purchase of raw materials and stores,
its into stocks of finished goods through the work-in-Progress with the progressive
increment of labor and service costs, conversion of finished goods (Yarn Products) into
sales, Debtors and receivables and ultimately realization of cash and this cycle continuous
again from cash to purchases of raw material and so on.
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CLASSIFICATION OF WORKING CAPITAL
Working capital can be classified on the basis of concept and on the basis of time. Various
types of working capital are as follows
ChartNo.8 CLASSIFICATION OF WORKING CAPITAL
1) On the basis of concept:
Working capital on this basis of concept is classified into
Gross working capital: It refers to total investment made in current asset. Current
assets are the asset which can be converted into cash within a short period of an
accounting year. Current assets include cash, debtors, bills receivables and short
term securities etc.
Net working capital: It is the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors,. Net working
capital can be positive or negative. Positive net working capital will arise when
current asset exceeds current liabilities. A negative net working capital occurs when
current liabilities are in excess of current assets.
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KINDS OF WORKING CAPITAL
1. ON THE BASIS OF CONCEPT
GROSS WORKING CAPITAL
NET WORKING CAPITAL
2. ON THE BASIS OF TIME
PERMANENT OR FIXED
REGULAR
RESERVE
TEMPORARY OR VARIABLE
SEASONAL
2) On the basis of time :
Permanent: Some portion of working capital always remain permanent or fixed.
This refers to minimum investment a firm has to make and keep in certain current
assets.
Such permanent working capital is further classified into
Regular and
Reserve
Regular: regular permanent working capital is used in
routine business operations.
Reserve: reserve working capital refers to some portion of working capital that is
kept as reserve to meet any contingency.
3) Temporary working capital: Required of such capital varies or fluctuates depending
on season. Its requirement is not continuous it is normally finance through short term
sources, like overdraft, cash credit and other short term liabilities.
Temporary working capital is further classified into:
Seasonal working capital: requirement of working capital is based on particular
seasons.
Ex; winter, summer or festival seasons etc during these seasons there will be
additional demand for the products.
Special working capital: requirement of such working capital is necessitated to meet
demands of special occasion’s ex. Occasion of world cup cricket, Olympics, kumba
mela, elections.
Needs for Working Capital
The need for working capital to run the day-to-day business activities cannot be
overemphasized. We will hardly find a business firm which does not required any amount
of working capital.
To meet the cost of inventories including total of raw materials purchased parts,
operating, Supplies, work in progress, finished goods.
To pay wages, salaries, for indirect labor, clerical staff, managerial and supervision
staff.
To meet overhead costs, including those of maintenance services activities, fuel
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. IMPORTANCE OF WORKING CAPITAL
Even though the skills for maintaining the working capital are somewhat unique,
the goals are the same-viz. to make an efficient use of funds for minimizing the risk of
loss to attain profit objectives.The adequate of working capital contributes a lot in
raising the credit-standing of a corporation in terms of favorable rates of interest on
bank loan, better terms on goods purchased, reduced cost of production on account of
the receipt of cash discounts, etc. Thus, working capital is regarded as one of the
conditioning factors in the long run operations of the firm, which is often inclined to
treat it as an issue of short run analysis and decision making.
CO-RELATION BETWEEN CURRENT ASSETS AND
WORKING CAPITAL
The working capital is in simple terms is the amount of funds which
company must have to finance its day to day operations. The interaction between
current assets and current liability is main theme of theory of working capital. In
general terms working capital means the difference between current assets and current
liabilities.
The current assets are the main source of working capital. It refers to those
assets, which can be converted in to cash within a year. The current assets are
inventories, cash and bank balance, sundry debtors, loans and advances
A study of working capital is major part of external and internal analysis.
Because, of its close relationship with current day to day operations of business.
Working capital consists broadly the assets of business that are used at current
operations which are represented by raw materials, stores, WIP, and finished goods,
merchandise, bills receivable.ETC.
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Components of Working Capital
There are two components of Working Capital
Current Assets
Current Liabilities
Current Assets
An assets is termed current assets when it is acquired either for the purpose
of selling or disposing of after taking some required benefits through the process
manufacturing of which constantly changes in from and contributes to transactions take
place with the operation of the business although such assets dose continue for long in
the same form.
Components of Current Assets are as follows:
Cash & Bank Balance
Stock of Raw Material at cost- work in process and Finished
Goods.
Advanced Recoverable in Cash or kind or kind or for value to
be received.
Deposits under the company scheme.
Advanced payment of income takes credit certificates..
Outstanding debts for a period exceeding six months.
7 Balance with central excise authorities.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 27
Current Liabilities:
Components of Current Liabilities are as follows:
Sundry Creditors for the goods and expenses.
Income tax deducted at sources from contractors.
Expenses Payable.
Unclaimed Dividend.
Security Deposits.
Liabilities for bills discounted.
Bank Overdraft Acceptance
Working Capital Management concerned with the following aspects
1. Cash Management:
Cash is the important current asset for the operation of the business. cash is the
basic input needed to keep the business running on a continuous basis; it is also the ultimate
output expected to be realized by selling the service or product manufactured by the firm.
The firm should keep sufficient cash, neither more nor less.
Cash is the liquid form of an asset. It is the ready money available in the firm or
with the business, essential for its operations. A firm needs the cash for the following three
purposes:
The Transaction Motive:
The Precautionary Motive:
The Speculative Motive:
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 28
2. Receivables Management:
Receivable represents amounts owed to the firm as a result of sale of goods or
services on the ordinary course of business. These are claims of the firm against its
customers and form part of its current assets. These receivables are carried for the
customers. The period of credit and extent of receivables depends upon the credit
policy followed by the firm. The main purpose of maintaining or investing in
receivables is to meet competitors, to increase sales, and to maintain a cordial
relationship with the clients.
3.Inventory management:
Every enterprise needs inventory for smooth running of its activities. It
serves as a link between production and distribution process. There is, generally a time
lag between the recognition of a need and its fulfillment. The greater the time lag, the
higher the requirements for inventory. The unforeseen fluctuations in demand and
supply of goods necessitate the need for inventory. Moreover, it provides a cushion for
future price fluctuations.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 29
Assessment of working capital
Analysis of the company through Working Capital Ratio’s
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 30
Assessment of working capital
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 31
Statement of changes in working capital 2006 and 2007
Particulars
As @
31/3/06
As @
31/3/07
Effect
of WC
Increas
e
Decrease
A. Current assets
Cash on hand
Cash at bank
F.D with bank
Deposits
Sundry debtors
Pre university college
Loan to FCSM
Advances
Other receivables
Closing stock
Total current assets
B. Current liabilities
Current liabilities
Bonus provision payable
Other payables
Total current liability
Net working capital(A-B)
Decrease in working
capital
Total working capital
15143
5027449
16051822
4628150
35371142
255296
8500000
1616172
633633
52948390
125047200
40050746
1254248
2090328
43395322
81651878
81651878
41550
4634497
246822
4630150
51579031
255296
8500000
4062468
631633
53043163
127624611
49098335
1280042
2713579
53091956
74532655
7119223
81651878
26407
2000
16207888
2446296
94773
18777364
7119223
25896588
392952
15805000
2000
9047589
25794
623252
25896587
25896588
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 32
Statement of changes in working capital 2007 and 2008
Particulars
As @
31/3/07
As @
31/3/08
Effect
of WC
Increas
e
Decrease
A. Current assets
Cash on hand
Cash at bank
F.D with bank
Deposits
Sundry debtors
Pre university college
Loan to FCSM ltd
Advances
Other receivables
Closing stock
Total current assets
B. Current liabilities
Current liabilities
Bonus provision payable
Other payables
Total current liability
Net working capital(A-B)
Increase in working
capital
Total working capital
41550
4634497
246822
4630150
51579031
255296
8500000
4062468
631633
53043163
127624611
49098335
1280042
2713579
. 53091956
74532655
10082999
84615654
20530
18446450
265078
4630150
47320434
255297
8500000
5151421
500000
62356456
147445816
58462247
1395879
2972036
62830162
84615654
84615654
13811952
18256
1088953
9313293
24232454
24232454
21020
4258597
131633
9363912
115837
258457
14149456
10082999
24232454
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 33
Statement of changes in working capital 2008 and 2009
Particulars
As @
31/3/08
As @
31/3/09
Effect
of WC
Increas
e
Decrease
A. Current assets
Cash on hand
Cash at bank
Fd with bank
Deposits
Sundry debtors
Pre university college
Loan to fcsm ltd hulkoti
Advances
Other receivables
Closing stock
Recvd from NCDC
Total current assets
B. Current liabilities
Current liabilities
Bonus provision payable
Other payables
NCDC payable
Total current liability
Net current assets(A-B)
Increase in working capital
Total working capital
20530
18446450
265078
4630150
47320434
255297
8500000
5151421
500000
62356456
-------------
147445816
58462247
1395879
2972036
--------------
62830162
84615654
6991114
91606768
40460
16228726
275078
4431466
51709943
255297
8500000
5687379
535374
5807175
1319412
147054890
49593596
1564000
2971114
1319412
55448122
91606768
91606768
19930
10000
4389509
---------
---------
535958
35374
1319412
8868651
922
15179756
15179756
2217724
198684
---------
---------
4284700
168121
1319412
8188641
6991114
15179756
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 34
Statement of changes in working capital 2009 and 2010
Particulars
As @
31/3/09
As @
31/3/10
Effect
of WC
Increas
e
decrease
A. Current assets
Cash on hand
Cash at bank
Fd with bank
Deposits
Sundry debtors
Pre university college
Loan to fcsm ltd hulkoti
Advances
Other receivables
Closing stock
Recvd from NCDC
Total current assets
B. Current liabilities
Current liabilities
Bonus provision payable
Other payables
NCDC payable
Total current liability
Net working capital (A-B)
Decrease in working
capital
Total working capital
40460
16228726
275078
4431466
51709943
255297
850000
5687379
535374
58071755
1319412
147054890
49593596
1564000
2971114
1319412
55448122
91606768
91606768
27094
19346310
275078
4052950
51003132
255297
8500000
4858428
1021508
46289123
-----------
135628920
52486226
1227535
4744789
58458550
77170370
14436398
91606768
3117584
486134
336465
1319412
5259595
14436398
19695992
13366
378516
706810
828951
11782632
1319412
2892630
1773675
19695992
19695992
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 35
INTERPRETATION
The statement shows that the changes in working capital in the year 2005-06 and
2006-07. It shows how the current assets and current liabilities are changes in two years the
different between current asset and current liabilities i.e. net working capital of two years
2005-06 and 2006-07 . it shows the working capital decreases in 2006-07 which compare
to 2005-06. Here due to decrease the firm is not satisfactory with its working capital
In the year 2006-07 and 2007-08. it shows the current assets and current liabilities i.e
net working capital of two years is 2006-07 and 2007-08. It shows the working capital
increases in the year 2007-08 compare to 2006-07 by increasing the firm is satisfactory
with its working capital.
In the year 2007-08 and 2008-09 it shows how the current assets and current liabilities
are changes in the two years the difference between current assets and current liabilities i.e.
net working capital of the two years is 2007-08 and 2008-09 .It shows the working capital
increases in the year 2008-09 compare to 2007-08 by the increase in the net working capital
firm is satisfactory with its working capital
In the year 2008-09 and 2009-10 it shows how the current assets and current liabilities
are changes in the two years the difference between current assets and current liabilities i.e.
net working capital of the two years 2008-09 and 2009-10.it shows the decreasing in the
year 2009-10 which compare to 2008-09 by decreasing in net working capital the firm is
not satisfactory with its working capital
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 36
CALCULATION OF OPERATING CYCLE OF THE G.C.T.M. LTD
Investment in working capital is influenced by four key events in the production and
sales cycle of the G.C.T.M
Purchases of raw materials
Payment of raw materials
Sale of finished goods
Collection of cash for sale
The firm begins with the purchase of raw material which are paid for after a delay
which represent the account payable period. The firm converts the raw material into
finished goods and then sells the same. The time lag between the purchase of raw materials
and sale of finished goods is the inventory period customers pay their bills some time after
the sales. The period that elapses between the date of sales and date of collection of
receivable is the accounts payable period.
The time that elapses between the purchase of raw materials and the collection of
cash for sales is referred to as the operating cycle. Where as the time length between the
payment for raw material purchases and the collection of cash for sales is referred to as the
cash cycle. The operating cycle is the sum of the inventory period and the accounts
receivable period, whereas the cash cycle is equal to the operating cycle less the accounts
payable period.
From the financial statement of the firm we can estimate the inventory period, the
accounts receivable period and accounts payable period.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 37
THE FORMULA TO CALCULATE THE OPERATING CYCLE
Average inventory
INVENTORY PERIOD=
Annual cost of goods sold/365
Average accounts receivable
AVERAGE RECEIVABLE PERIOD=
Annual sales
Average accounts payable
ACCCOUNTS PAYABLE PERIOD=
Annual cost of goods sold/365
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 38
Financial information of THE G.C.T.M. Ltd 2006-2007
Table No 2
Particulars P&L a/c data Particular Beginning Ending
Sales
Cost of goods
sold
231390442
206149519
Inventory
A/c receivable
A/c payable
46919052
633633
1254248
46274537
631633
1280042
Sales = sales + yarn sales + other sales
= 228943400 + 700864 + 1746178
= 231390442
Table No: 3
Average inventory
Inventory period =
Annual cost of goods sold/365
46596794
= --------------------
206149519/365
46596794
= = 82.50
564793
Average accounts receivable
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 39
Cost of production
Add: opening stock of finished goods
Less: closing stock of finished goods
Cost of goods sold
210628618
20107336
---------------
230735954
---------------
24586435
206149519
Average receivable period = -------------------------------------------
Annual sales
632633
= ----------------------------
231390442/365
632633
= = 0.99
633946
Average accounts payable
Accounts payable period =
Annual cost of goods sold/365
1267145
=
206149519/365
1267145
= = 2.24
56479320
Operating cycle = inventory period + accounts receivable period
= 82.50 + 0.99 = 83.49 Days
Cash cycle = operating cycle – accounts payable period
= 83.49 – 2.24 = 83.49 Days
Financial information of THE G.C.T.M. Ltd 2007-2008
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 40
Table No 4
Particulars P&La/c data Particular Beginning Ending
Sales
Cost of goods
sold
254655866
215192439
Inventory
A/c receivable
A/c payable
46274537
631633
1280042
50785141
500000
2972036
Sales = sales + yarn sales + other sales
3484623 + 250490529 + 680714
= 254655866
Table No:5
Cost of production
Add: opening stock of finished goods
Less: closing stock of finished goods
Cost of goods sold
220852642
24586435
-----------------
245439077
-----------------
30246638
215192439
Average inventory
Inventory period =
Annual cost of goods sold/365
48529839
=
21519439/365
48529839
= = 82.31
589568
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 41
Average accounts receivable
Average receivable period =
Annual s
565816
=
254655866/365
565816
= = 0.81
697687
Average accounts payable
Accounts payable period =
Annual cost of goods sold
2126039
=
215192439/365
2126039
= = 3.60
589568
Operating cycle = inventory period + accounts receivable period
= 82.31 +0.81
= 83.12 Days
Cash cycle = operating cycle – accounts payable period
= 83.12 – 3.60
= 79.52 Days
Financial information of THE G.C.T.M. Ltd 2008-2009
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 42
Table No: 6
Particulars P&La/c data Particular Beginning Ending
Sales
Cost of goods
sold
274253348
244014252
Inventory
A/c Receivable
A/c Payable
55889767
500000
2972036
50785141
1854786
4290526
Sales = sales + yarn sales + other sales
262156033 + 1131833 + 10965481
= 274253348
Table No: 7
Average inventory
Inventory period =
Annual cost of goods sold/365
106674908/2
=
244014252/365
53337454
= = 79.78
668532
Average accounts receivable
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 43
Cost of production
Add: opening stock of finished goods
Less: closing stock of finished goods
Cost of goods sold
235780335
30246638
---------------
266026973
----------------
22012721
244014252
Average receivable period =
Annual sales
2354786/2
=
274253348/365
1177393
= = 1.56
751379
Average accounts payable
Accounts payable period =
Annual cost of goods sold/365
7262562/2
=
244014252/365
3631281
= = 5.43
668532
Operating cycle = inventory period + accounts receivable period
= 79.78 + 1.56
= 81.34 Days
Cash cycle = operating cycle – accounts payable period
= 81.34 – 5.43
= 75.91 Day
Financial information of THE G.C.T.M. Ltd 2009-2010
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 44
Table No :8
Particulars P&l a/c data Particular Beginning Ending
Sales
Cost of goods
sold
256739185
231802183
Inventory
A/c receivable
A/c payable
50785141
1854786
4290526
39186088
1021508
5972323
Sales = sales + yarn sales + other sales
13609228 + 242486231 + 643726
= 256739185
Table No 9
Average inventory
Inventory period = -------------------------------------------------
Annual cost of goods sold/365
89971229/2
= ---------------------
231802183/365
44985614
= ---------------- = 70.83
635074
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 45
Cost of production
Add: opening stock of finished goods
233038800
22012721
------------------
255051521
------------------
Less: closing stock of finished goods
Cost of goods sold
23249338
231802183
Average accounts receivable
Average receivable period = --------------------------------------
Annual sales
2876294/2
= ------------------------------------
256739185/365
1438147
= ----------------------------- = 2.04
703395
average accounts payable
Accounts payable period = ----------------------------------------
Annual cost of goods sold/365
10262849/2
= ---------------------
231802183/365
5131424
= ------------------ = 8.08
635074
Operating cycle = inventory period + accounts receivable period
= 70.83 + 2.04 = 72.87 Days
Cash cycle = operating cycle – accounts payable period
= 72.87 – 8.08 = 64.79 Days
Table No : 10
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 46
Operating cycle
6668707274767880828486
2006-07 2007-08 2008-09 2009-10
years
D ay s
Years Inventory
period
Account
receivable
period
Account
payable
period
Operating cycle Cash cycle
2006-07 82.50 0.99 2.24 83.49 81.25
2007-08 82.31 0.81 3.60 83.12 79.52
2008-09 79.78 1.56 5.43 81.34 75.91
2009-10 70.83 2.04 8.08 72.87 64.79
Graph No:1
Graphical representation of operating cycle:
INTERPRETATION:
Here the firm’s operating cycle has continuously decreased from 83 days during 2006-07 to
73 days during 2009-10. The operating cycle of the firm is satisfactory because it has come
down by 10 days. The firm’s cash cycle is also satisfactory as it has decreased from 82 days
to 65 days during 2006-07 to 2009-10. However it is also observed that the debtor’s
collection period has increased from 0.99 days to 2.08 days during the same time period.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 47
Analysis of the company through
Working Capital Ratio’s
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 48
RATIO ANALYSIS
INTRODUCTION
The ratio analysis is one of the most important and powerful tools of financial analysis. It is
the process of establishing and interpreting various ratios. It is with the help of ratios that
the financial statement can be analyzed more clearly and decisions made from such
analysis.
CONCEPT OF RATIO
A ratio is a simple arithmetical expression of the relationship of one number to another. It
may be defined as the indicated quotient of two mathematical expressions. According to
Accountant’s handbook by Wixonkell and Bedford, a ratio “is an expression of the
quantitative relationship between two numbers”.
RATIO ANALYSIS
Ratio analysis is the technique of calculation of number of accounting ratios from the data
found in the financial statements, the comparison of the accounting ratios with those of the
previous years or with those of other concerns engaged in similar line of activities or with
those of standard ratios and the interpretation of the comparison.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 49
INVENTORY TURNOVER RATIO
Inventory turnover ratio is the ratio, which indicates the number of times the stock is
turned over i.e., sold during the year. In other words, it is the ratio between the cost of
goods sold and closing stock. This ratio can be calculated as follows.
Cost of goods sold
Inventory turnover =
Average inventory
Table No :11 Inventory Turnover Ratio
Sl.no Years Cost of
goods sold
Average
Inventory
Ratio
1 2005-06 256843587 46438421 5.53
2 2006-07 206149519 46596794 4.42
3 2007-08 215192439 51082152 4.21
4 2008-09 244014252 53337454 4.57
5 2009-10 231802183 44985614 5.15
Graph No 1
Graphical Representation of Inventory Turnover Ratio
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 50
2005-06 2006-07 2007-08 2008-09 2009-100
1
2
3
4
5
6
inventory turnover ratio
Series1
years
rati
o
INTERPRETATION:
The inventory turnover ratio shows how the inventory is turning into receivables
through sales. In the year 2005-2006 the inventory turnover ratio is 5.53 which indicates
efficient utilization of inventories in this year, in the year 2006-2007 inventory ratio has
been decreased by 25% i.e.4.42 times this is due to increase in inventories by 0.35% and
due to decrease in sales by 16.6% hence it indicates in efficient management of inventories
compared to the previous year, in the year 2007-2008 the inventories turnover has been
decreased to 5 % i.e. 4.21 times this is due to increase in inventories by 9 % hence it
indicates inventories are managed inefficiently by the company, in the year 2008-2009
inventory ratio has been increased to 8% this is due to increase in cost of goods sold by 12
% and increase in inventories by 4.2% hence it indicates though there is increase in both
sales and inventories but there is in increase in inventory turnover ratio but there is efficient
management of inventories in this year compared to the previous two years and in the year
2009-2010 the inventory turnover ratio has been increased to 11.26% i.e. 5.21 times this is
due to decrease in inventories by 18% it indicates efficient utilization of inventories
compared to the previous 3 years.
From the above data we can come to know that 2005-2006 to 2009-2010 there is
high inventory turnover ratio in the year 2005-2006 and in the year 2009-2010. Hence it
indicates the firm has failed to manage it inventories hence it is advisable to the company to
adopt better inventory techniques
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 51
CURRENT RATIO
The current ratio of a unit measures firm’s short-term solvency, that is, its ability to
meet short-term obligations. It is the ratio of total current assets to total current liabilities.
The current ratio measures the ability of the firm to meet its current liabilities-
current assets get converted into cash in the operating cycle of the firm and provide the
funds needed to pay current liabilities.
It is calculated by dividing total current assets by total current liabilities:
Current ratio = current assets / current liabilities
Table No: 12 Current Ratio
Sl.no Years Current
assets
Current
liability
Current ratio
1 2005-06 125047200 43395322 2.88
2 2006-07 127624611 53091956 2.40
3 2007-08 147445816 62830162 2.34
4 2008-09 147054890 55448122 2.65
5 2009-10 135628920 58458550 2.32
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 52
Current ratio
0
0.5
1
1.5
2
2.5
3
3.5
2005-06
2006-07
2007-08
2008-09
2009-10
Years
R at io Series1
Graph No 2
Graphical Representation of Current Ratio
INTERPRETATION:
The standard for current ratio is 2:1 is satisfactory. In the year 2005-2006 the current
ratio is 2.88 times which is satisfactory it indicates efficient utilization of current assets in
proportion to its liabilities, in the year 2006-2007 the current ratio has been decreased by
20% due to increase in debtors by 3 % this indicates the inefficient management of debtors
compared to the previous year 2005-2006 as these debtors are slow moving debtors, in the
year 2007-2008 the current ratio has been decreased by 2.5% i.e. 2.34 times this is due to
increase in debtors by 32% it indicates in efficient management of bad debtors by the
company compared to the previous year 2006-2007 and in the year 2008-2009 the current
ratio has been increased to 11.6% i.e. 2.65 times this is due to decrease in debtors by 8%
and cash at bank by 13% hence it indicates current assets are managed smoothly in this year
and in the year 2009-2010 the current ratio has been decreased by 14 % due to decrease in
current assets i.e. debtors by 2 % and cash in hand to 49% it indicates efficient management
of debtors compared to the previous three years.
From the above data we can come to know that the current ratio is satisfactory only in the
year 2009-2010.Hence it is advisable for the maintain the current assets in proportion to its
liabilities.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 53
QUICK RATIO
This ratio is also termed as Acid-test ratio. A Quick ratio is concerned with,
the relationship between quick assets and current liabilities.
It is a measure of liquidity calculated dividing current assets minus inventory and prepaid
expenses by current liabilities.
The Quick Ratio is the ratio between quick current assets and current liabilities.
It is calculated by dividing the Quick Current Assets by the Current Liabilities.
Quick ratio = quick assets/quick liabilities
Quick asset = current assets –inventory, prepaid expenses
Quick liability = current liability – bank overdraft
Table No: 12 Quick Ratio
Sl.no Years Quick assets Quick
liability
Quick ratio
1 2005-06 72098810 30847985 2.33
2 2006-07 74581448 53091956 1.40
3 2007-08 85089360 62830162 1.35
4 2008-09 88983135 55448122 1.60
5 2009-10 89339797 58458550 1.52
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 54
Quick Ratio
0
0.5
1
1.5
2
2.5
2005-06
2006-07
2007-08
2008-09
2009-10
years
R at io Series1
Graph No 3
Graphical Representation of Quick Ratio:
:
INTERPRETATION:
As the conventional rule of quick ratio 1 to 1 is satisfactory. In the year 2005-2006 the
quick ratio is 2.33 which is due to excess of current assets it indicates inefficient
management of debtors, in the year 2006-2007 the quick ratio has been decreased by 67%
i.e. 1.40 times due to increase in quick liabilities by 41.89% it indicates the quick assets are
managed efficiently in proportion to current liabilities compared to the previous year 2005-
2006, in the year 2007-2008 the quick ratio has been decreased to 3.7% i.e. 1.40 times this
is due to increase in assets by 12% and increase in inventories by 14 % it indicates the
inventories are managed relatively good compared to the previous year, in the year 2008-
2009 the quick ratio has been increased to 16% i.e. 1.60 times this is due to increase in
quick assets by 4.37% this is due to increase in debtors by 8.5% this indicates in efficient
management of debtors, in the year 2009-2010 the quick ratio has been decreased by 5.2%
i.e. 1.52 times this is due to increase in both by quick assets and quick liabilities by an
average of 6 % . It indicates the inefficient management of debtors and liabilities.
From the year 2005-2006 the quick ratio of Gctl is not satisfactory hence it is advisable for
the company to manage the current assets by managing debtors properly in proportion to
creditors to pay off its debt.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 55
GROSS PROFIT RATIO
The gross profit ratio reflects the efficiency with which management produces each
unit of product. This ratio indicates the average spread between the cost of goods sold and
the sales revenue
Gross profit ratio = gross profit /sales
Table No:13 Gross Profit Ratio
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 56
Sl.no Years GROSS
PROFIT
SALES RATIO
1 2005-06 2536378 269932512 0.93
2 2006-07 15767888 231390442 6.81
3 2007-08 27291869 254655866 10.71
4 2008-09 10816537 274253348 3.94
5 2009-10 4049865 256739185 1.57
RATIO
0
2
4
6
8
10
12
2005-06
2006-07
2007-08
2008-09
2009-10
YEARS
R A TI
O S = RATIO
Graph No 5
Graphical Representation of Gross Profit Ratio
INTERPRETATION
In the year 2005-2006 the gross profit ratio is 0.93 this may be due to decrease in sales this
is due to fall in prices of the textiles, in the year 2006-2007 the gross profit ratio has been
increased to 86 % due to increase in gross profit by 83% hence it indicates the increase in
gross profit compared to the previous year, in the year 2007-2008 the gross profit ratio has
been increased to 36% this is due to increase in gross profit to 42% and increase in sales by
9%, in the year 2008-2009 the gross profit ratio has been decreased to 39% i.e. 3.94 this is
due to decrease in gross profit by 152% compared to the previous year 2007-2008 and in
the year 2009-2010 the gross profit ratio has been decreased to 150% i.e. 1.57 this is due to
decrease in gross profit by 167% compared to the previous year.
From the year 2005-2006 to 2009-2010 in all these five years there is high gross profit by
10.71 times it indicates the high gross profit in remaining five years. Hence it is advisable
for the company to increase its gross profit by increasing its sales and managing its debtors
properly.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 57
CURRENT ASSET TURNOVER RATIO
This ratio reveals the relation between cost of goods sold & current assets. The
higher ratio, the better is the condition of the firm in utilizing its current assets. The higher
ratio, the better is the condition of the firm in utilizing its current assets. The lower ratio
indicates that the investment in the current asset has not bought commensurate gain to the
firm.
Current Asset Turnover Ratio=Sales/Net Current Assets
Table No: 14 CURRENT ASSET TURNOVER RATIOSl. No Years Sales Net current
assets
current asset turnover ratio
1 2005-06 269932512 81651878 3.30
2 2006-07 231390442 74532655 3.10
3 2007-08 254655866 84615654 3.00
4 2008-09 274253348 91606768 2.99
5 2009-10 256739185 77170370 3.32
Graph No 6
Graphical Representation of working capital Turnover ratio
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 58
2005-06 2006-07 2007-08 2008-09 2009-102.8
2.9
3
3.1
3.2
3.3
3.4
CURRENT ASSET TURNOVER RATIO
CURRENT ASSET TURNOVER RATIO
INTERPRETATION:
in the year 2005-2006 the is 3.30 current asset turnover ratio this indicates efficient
utilization of working capital for the whole year in proportion to sales, in the year 2006-
2007 the h current asset turnover ratioas been decreased by 6 % i.e. 3.10 this is due to
decrease in sales by 16.6% and current assets by 9.5% this indicates the current asset
utilization has been decreased compared to the previous year 2005-2006 due to improper
management of current assets with proportion to current assets, in the year 2007-2008 the
working capital turnover ratio has been decreased by 0.3% due to increase in sales to 12%
and current assets to 9% it indicates the inefficient management of current assets i.e.
debtors, in the year 2008-2009 the current asset turnover ratiois 2.99 times this is due to
increase in current assets by 9 % this indicates there is inefficient management of debtors
compared to the previous year 2007-2008 and in the year 2009-2010 the working capital
turnover has been increased to 9 % i.e. 3.32 times this is due to decrease in current assets by
18% this indicates the firm has utilized its current asset efficiently compared to the previous
three years.from the above data we can know that the current asset has been utilized
efficiently only in the year 2005-06 & 2009-2010 this indicates current assets are efficiently
managed only in these two years. hence it is advisable to the company to employ better
techniques to manage the current assets properly.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 59
DEBTORS TURNOVER RATIO
A concern may sell goods on cash as well as on credit. Credit is one of the important
elements of sales promotion. The volume of sales can be increased by following a liberal
credit policy. Debtor’s turnover ratio or accounts receivable turnover ratio indicates the
velocity of debt collection of a firm. In simple words it indicates the number of times
average debtors (receivable) are turned over during a year. The two basic components of
accounts receivable turnover ratio are net credit annual sales and average trade debtors. The
trade debtors for the purpose of this ratio include the amount of Trade Debtors & Bills
Receivables. The average receivables are found by adding the opening receivables and
closing balance of receivables and dividing the total by two. But when the information
about opening and closing balances of trade debtors and credit sales is not available, then
the debtor’s turnover ratio can be calculated by dividing the total sales by the balance of
debtors (inclusive of bills receivables) given. And formula can be written as follows.
Debtors Turnover Ratio = Total Sales / Debtors
Table No:15 Debtors Turnover Ratio
Sl. No Years Sales Debtors Debtor Turnover Ratio
1 2005-06 269932512 35371142 7.6
2 2006-07 231390442 51579031 4.46
3 2007-08 254655866 47320434 5.38
4 2008-09 274253348 51709943 5.30
5 2009-10 256739185 51003132 5.10
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 60
INTERPRETATION
In the year 2005-2006 the debtor turnover ratio is 7.6 times it indicates the debtors has been
managed by the company sufficiently, in the year 2006-20007 the debtors turnover ratio has
been decreased by 40.3% i.e. 4.46 times this is due to increase in debtors to 4% and
decrease in sales by 16.6%. hence it indicates the debtors are not managed properly in this
year, in the year 2007-2008 the debtors turnover ratio has been increased to 20% i.e. 5.38
times this is due to increase in sales to 9% and decrease in debtors by 8.9% , in the year
2008-2009 the debtors turnover ratio has been decreased by 3% i.e. 5.30 times this is due to
Decrease in sales by 7.14% and increase in debtors to 8.4%, in the year 2009-2010 the
debtors turnover ratio has been decreased 4% i.e. 5.10 times this is due to decrease in sales
by 7% and increase in debtors to 1.3% . Hence it indicates the debtors are managed
insufficiently by the company compared to the previous 4 years.
From the above data we can come to know that from the year 2006-2007 to 2009-2010 the
debtors turnover ratio has been decreasing the debtors turnover ratio is high only in the year
2005-2006. It indicates the debtors are not managed properly as these debtors are long
duration outstanding debtors. Hence it is advisable to the company to manage its debtors
properly by revising its credit policy.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 61
Debtors’ Collection Period
This particular ratio is designed to show how long, on average, it takes the company to
collect debts owed by customers. Customers who are granted credit are called debtors. The
formula for this ratio is
Debtor collection period = 360
Debtors Turnover
Often the figure for credit sales is not actually provided on the profit and loss account. In
this case the sales/turnover figure should be substituted and used instead.
Table No: 16 Debtors collection Period
Sl. No Years No of Days in
a Year
Debtors
Turnover
Ratio
Debtors collection period
1 2005-06 365 7.6 48.02
2 2006-07 365 4.46 81.83
3 2007-08 365 5.38 67.8
4 2008-09 365 5.30 68.8
5 2009-10 365 5.10 71.5
INTERPRETATION
In the year 2005-2006 the debtors collection period is 48 days which indicates the debtors
collection period is high for the company this is due to long-duration outstanding debtors,
in the year 2006-2007 the debtors collection period has been increased to 23.14% i.e. 81
days this is due to increase in debtors by 31.4% compared to the previous year, in the year
2007-2008 the debtors collection period has been decreased by 17% i.e. 68 days this is due
to decrease in debtors by 9% compared to the previous year 2006-2007, in the year 2008-
2009 the debtors collection period has been increased to 2% i.e. 69 days this is due to
increase in debtors by 8% it indicates the debtors are not managed properly, in the year
2009-2010 the debtors collection period has been increased by 4% i.e. 72 days this is due to
increase in debtors by 2% compared to the previous year 2008-2009.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 62
From the above data we can come to know that the debtor’s collection period has been
increasing from the previous 4 years this is due to its long duration and slow moving
debtors. Hence it is advisable for the company to adopt a better credit policy so that there
will be decrease in its collection period so that debtors are converted in short interval of
time
Fixed Assets Turnover Ratio
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Fixed assets turnover ratio is also known as sales to fixed assets ratio. This ratio measures
the efficiency and profit earning capacity of the concern. Higher the ratio, greater is the
intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets. It
also indicates pricing strategy: companies with low profit margins tend to have high asset
turnover, while those with high profit margins have low asset turnover. The total asset
turnover ratio measures the ability of a company to use its assets to generate sales. The total
asset turnover ratio considers all assets including fixed assets, like plant and equipment, as
well as inventory and accounts receivables.
Fixed Assets Turnover Ratio=Net Sales/Fixed Assets
Table No:17 Fixed Asset Turnover Ratio
Sl. No Years Sales Fixed Assets Fixed assets Turnover Ratio
1 2005-06 269932512 179219995 1.5
2 2006-07 231390442 172689456 1.3
3 2007-08 254655866 180401907 1.4
4 2008-09 274253348 180915756 1.5
5 2009-10 256739185 181211834 1.4
INTERPRETATION
In the year 2005-20006 the fixed asset turnover ratio is 1.5 which is too low it indicates bad
management of current assets i.e. debtors, in the year 2006-2007 the fixed asset turnover
ratio has been decreased by 13% i.e. 1.3 times this is due to decrease in sales by 16%
increase in current assets i.e. debtors has been increased to 31.4 , in the year 2007-20008
the fixed asset turnover ratio has been increased to 7% i.e. 1.4 times this is due to decrease
in debtors by 8% ,in the year 2008-2009 the fixed asset turnover ratio has been increased to
8% i.e. 1.5 times this is due to decrease in debtors by 8.4% and cash at bank by 12%, in the
year 2009-2010 the fixed asset turnover ratio has been decreased by 7% i.e. 1.4 times this is
due to increase in cash at bank by 19% and debtors by 1.3%. hence it indicates the assets of
the company are not managed properly.
From the year 2005-2006 the fixed asset turnover ratio has been following the same trend.
Hence it is advisable for the company to manage its current assets properly so that the
company can meet its short term obligations.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 64
WORKING CAPITAL TURNOVER RATIO
Working capital turnover ratio indicates the velocity of the utilization of net working
capital. This ratio represents the number of times the working capital is turned over in the
course of year. The two components of the ratio are cost of sales and the net working
capital. If the information about cost of sales is not available the figure of sales may be
taken as the numerator. Net working capital is found by deduction from the total of the
current assets the total of the current liabilities.
Sl. No Years Sales Net working
capital
Working capital turnover ratio
1 2005-06 269932512 81651878 3.3
2 2006-07 231390442 74532655 3.1
3 2007-08 254655866 84615654 3.0
4 2008-09 274253348 91606768 2.9
5 2009-10 256739185 91606768 2.8
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 65
Sales Net Working Capital
INTERPRETATION
In the year 2005-2006 the working capital turnover ratio us 3.3 which indicates the working
capital has been not utilized properly in proportion to the sales, in the year 2006-2007 the
working capital turnover ratio has been decreased by 6% i.e. 3.1 times this is due to
increase in its debtors to 31.4% and increase in its current liabilities to 16%, in the year
2007-2008 the working capital turnover ratio has been decreased to 3% i.e. 3.0 times this is
due to increase in its current liabilities to 14% compared to the previous year this indicates
the current liabilities has been increased in excess in this year, in the year 2008-2009 the
working capital turnover ratio has been decreased by 3% i.e. 2.9 times this is due to
increase in its debtors to 8% compared to the previous year, in the year 2009-2010 same
trend has been followed as in the previous year with the decrease in its working capital
turnover ratio by 3% i.e. 2.9 times this is due to increase in its current liabilities to 4.47% it
indicates there is insufficient management of current assets in proportion to its sales.
From the above data we can come to know that the working capital turnover ratio has been
decreasing in the recent years, hence it is advisable for the company to manage current
assets properly by adopting a better credit policy by the company and increase its sales.
Balance Sheet
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Particulars 2006 2007 2008 2009 2010
Liabilities :
Share Capital 81770000 81771000 81772700 81773300 81773300
Reserve Fund 12945560 12945560 12945560 12945560 12945560
Other Funds 166883025 173122980 177234868 180562312 183233870
Long Term Loans 80857337 68310000 66940000 66940000 63050000
Current Lib. 58128988 67576971 77335112 69425371 72678933
Total 400584910 403726511 416228240 411646544 413681663
Fixed Assets 179219995 172689456 180401907 180915756 181211834
Current Assets :
Cash In Hand 15143 41550 20530 40460 27094
Cash At Bank 5027450 4634497 18446450 16228726 19346310
Sundry Debtors 35371142 51579031 47320434 51709945 51003132
Advances 1616172 4062468 5151421 5687379 4858428
Other Receivables 633633 631633 500000 1854786 1021508
Fixed Deposits 20679972 4876972 4895227 4706543 4328027
Closing Stock 52948390 53043163 62356456 58071755 46289122
Previous Year Loss 96339414 104073012
Loss For The Year 7733598 128728 96880517 92431193 105596206
Total 400584910 403726511 416228240 411646544 413681663
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 67
Section- 4Finding, Suggestions and Conclusion
FINDINGS
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 68
The changes in working capital of 2005-06 and 2006-07 are 81651878 and 74532655
respectively. It shows working capital decreased to 7119223 in 2006-07 which
compared to 2005-06 has decreased the net working capital of firm may not satisfactory
with its working capital.
The changes of working capital of the year 2006-07 is 74532655 and is increased to
10082999 and has been increased to 84615654 in 2008-09 and is increased to
699114.The firm is satisfied with its working capital.
The changes in working capital of 2008-09 and 2009-10 is 91606768 and 77170370
respectively it shows the working capital decreased of 14436398 in the year 2009-010
compare to 2008-09. By decreasing net working capital the firm is satisfactory with its
working capital.
The firm’s operating cycle has continuously decreased. The operating cycle of the firm
is satisfactory because it has come down by 10 days. The firm’s cash cycle is also
satisfactory as it has decreased from 82 days to 65 days during 2006-07 to 2009-10.
However it is also observed that the debtor’s collection period has increased from 0.99
days to 2.08 days during the same time period
Inventory turnover ratio is satisfactory because from the year 2005-06 it is go on
decreasing but in the year 2009-10 it increased to 5.15 from 4.57 in the year 2008-09 so
this ratio is satisfactory. The highest ratio 5.53 recorded in the year 2005-06 and lowest
is 4.21 recorded in the year 2007-08.
The gross profit ratio is not stable it is fluctuating widely by year by year from the year
2005-06 to 2009-10. the highest ratio is 10.71 and the lowest ratio is 0.93 here the firm
has higher the sales in 2007-08 so the ratio is high and due to lower the sales or higher
the cost of good so in the year 2005-06 it is low because of more amount of expenses.
Working capital turnover ratio indicates that of high working capital turnover and low
net working capital here in the firm there is an continuous decrease for 4 years but in
2009-10 year it has been increased in working capital turnover ratio. The firm is
satisfactory with its 2009-10 turnover ratio. The firm has to maintain in increasing the
working capital turnover ratio.
Suggestions
Company should improve its marketing techniques and adopt new marketing
strategies.
OXFORD COLLEGE OF BUSINESS ADMINISTRATION HUBLI Page 69
Effective and strict supervision should be maintained in order to minimize the
wastage of finished goods.
During the year 2006 and 2007 the companies working capital is decreased due to
less current assets and more liability so it has to make proper use of its current assets
and to make improve.
During the year 2009 and 2010 the companies’ working capital again decreased so
the firm has to concentrate on its current assets to maintain the business transaction.
To improve the current ratio and quick ratio the company needs to concentrate on
current assets by utilizing available resources in the current assets of the company
which may improve its current ratio and quick ratio. The gross profit ratio is not
satisfactory in the year 2009-10.
Conclusion
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This study helps to know that the companies financial position. The sale of the
company is decline in the year 2010. There is an increases cost in some years so it
needs to reduce its costs. As the study helps to know that the changes in financial
statements i.e. increase or decrease in the assets and liabilities. By the ratio analysis
we come to know that the companies solvency. The company has to take some
measures to control the costs. By working capital we come to know its working
capital management.
This study helps us to know that the companies’ financial position is not
appreciable because there is loss in the year 2010 due to high expenses. So it has to
control the costs.
By the analysis of financial statements I conclude that, overall financial
performance of the company is not satisfactory. The company can try to take some
measures to increase profit i.e. proper utilization of available resources. .
BIBLIOGRAPHY
Khan & Jain-Financial management.
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I.M.Pandey-Financial management.
Balance sheet and P&L Account for the year 2006-2010
Company projects
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