sai agro industries

8/7/2019 sai agro industries

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Working Capital Management

CHAPTER 1

INTRODUCTION OF THE STUDYFinance is regarded as the life blood of a business enterprise. This is because

money oriented economy finance is one of the basic foundations of all kinds of economic

activities. It is the master key which provides access to all the sources for being employed

in manufacturing and merchandising activities. It has rightly been said that business

needs money to make more money. However, it is properly managed. Hence, efficient

management of every business enterprise is closely linked with efficient management of

its finances. This can be termed as Financial Management.

Financial Management is concerned with the management decisions that results in

the acquisition and financing of Long term and short-term credits for the firm. As such it

deals with the situations that require selection of specific assets or combination of

liabilities as well as the problem of size and growth of an enterprise. The analysis of these

decisions is based on the expected inflows and outflows of funds and their effects upon

managerial objectives.

OBJECTIVES OF FINANCIAL MANAGEMENT

Maintenance of adequate liquid assets

Maximization of Profit

Maximization of share holders wealth

SSMRV DEGREE COLLEGE, Bangalore 1


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In modern world, concept of financial management changed due to technological

improvements, widened marketing operations, development of a strong corporate

structure, keen and healthy business competition, which made the management to make

optimum use of available financial resources for continued survival. Today, Financial

management involves four broad decision areas. They are:

Funds requirement decision:This is the most important decision taken by the Finance manager. A careful

estimate has to be made about the total funds required by the enterprise taking

into Account both fixed and working capital requirements. This is done by

forecasting the physical activities of the enterprise.

Financing decision:Provision of funds required at the proper time is one of the primary tasks of

the finance manager. Every business activity require funs and hence every

financial manager is confronted with this problem. He has to identify the sources

from which the funds can be raised, the amount that can be raised, the amount that

can be raised from each source and cost and other consequences involved. A

proper balance has to be kept between the fixed and non-fixed cost bearing

securities.

Investment Decision:This comprises decisions relating to investment in both capital and current

assets. The finance manager has to evaluate different capital investment proposals



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and select the best keeping in view the overall objective of the enterprise. This

would involve fixing the criteria for evaluating different investment proposals,

fixing priorities, committing funds for them etc.

The investment in current assets will depend on the credit and inventory

policies pursued by the enterprise. The credit policy is determined keeping in

view the need of growth in sales and the availability of finance. Similarly, the

inventory policy will be setup taking into account the requirement of production,

the market trend of the price of raw materials and the availability of funds.

Dividend Decision :The establishment of dividend policy is another important function of finance

manager. The dividend decision involves the determination of the percentage of

profits earned by the enterprise, which is to be paid to its shareholders.

For any enterprise, it will have two types of capital requirement for its

operations.

1) Fixed Capital requirements

2) Working capital requirements

Fixed Capital:

Fixed capital is the funds required for the acquisition of those assets that are to be

used over and over for a long period. It is the capital which is meant for meeting the

permanent or long term needs of the business.



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Management of Fixed Capital is concerned with the raising of required fixed

capital at minimum cost and its effective utilization.

Working Capital:

Working capital is the capital required for day to day operations of a business

enterprise particularly to complete the operating cycle.

WORKING CAPITAL1.2 Meaning / What is working Capital ?

Working capital refers to that part of total capital which is available and used

for carrying out the regular business operations. Thus the capital required for purchasing

raw materials, payments of direct and indirect expenses for carrying out production,

investment in stocks and stores receivable and to be maintained in the form of cash is

generally know as working capital.

In other words the capital received for day to day expects for organization in

Working capital

For running an industry or a concern, two types of capital are required ,

viz

Fixed Capital



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Working Capital

Every business needs funds for two purposes for its establishment and to carry out its

day-to-day operations.

Long term funds

Short term funds.

Long term funds are required to create production facilities through purchase of

fixed assets such as plant and machinery, buildings, land, furniture etc. investment in

these assets represents that part of firms capital, which is blocked on a permanent or

fixed basis is called Fixed assets.

Funds are also needed for short-term purposes for the purchases of raw materials,

payments of salaries, wages, power charges etc., and also for financing the interval

between the supply of goods and the receipts of payments thereafter. In other words

the working capital is the finance, required meeting the costs involved during the

operating cycle or the working capital cycle. Working capital refers to that part of the

firms capital which is required for financing short term or current assets such as

cash, marketable securities, debtors and inventories.

1.3 CONCEPTS OF WORKING CAPITAL:

The important concepts of working capital are:



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Gross Working capital refers to the firms investment in current assets, currents

assets are the assets which can be converted into cash within an accounting year [or

operating cycle] and include cash, short-term securities, debtors [accounts receivables

or book debts], bills receivables and stock [inventories]

Net working capital refers to 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 [accounts

payable], bills payable and outstanding expenses. Net Working capital can be

negative or positive. A positive Working capital arises will arises when the current

assets exceed the current liabilities and a negative working capital will arises when

current liabilities exceed current assets.

Cash Working Capital refers to the one that is calculated form the terms appearing

in the profit and loss account. It shows the real flow of money or value at a particular

approach in working capital. It is the basic of the operation cycle concept. Which has

assumed a great in financial management in recent years. The reason is that the cash

working capital indicates the adequacy of the cash flow, which is an essential pre-

requisite of a business.

1.4 OPERATING CYCLE/WORKING CAPITAL CYCLE

This process involved in the utilization of working capital is a cyclic one. What

is at one stage a raw material, gets converted into goods in process in the next stage



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and then into finished goods, then book debts and the cash and then back again into

the stage of raw material.

In respect of trading concerns, operating cycle represents the period involved

from the time the goods and services are purchased and the same are sold and

realized.

In the case of manufacturing concerns, it is the time involved in the purchasing

of raw materials, converting them into finished goods and the same are finally sold

and proceeds are realized.

Fig: Operating cycle/ Working capital cycle.

Cash

Receivable

Raw Materials/Stores

Expenses

The total working capital requirement for industrial units will depend upon the

blocking period of assets and the operating of the cycle.

SSMRV DEGREE COLLEGE, Bangalore

Finished goods Stock in proce

7


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As the regards the operating cycle, the duration of each stage of process cycle is first

decided upon having regards to the function it is suppose to perform. The conversion

of raw materials into finished goods depends upon the technical requirements and

manufacturing facilities available similarly, the turnover of finished products and

their transformation into book debts, bills or cash could be related to factors like

delivery schedule, business customs and competition. Thus, the working capital cycle

of a manufacturing activity starts with the acquisition of raw materials and ends with

the realization of cash for finished goods.

The cycle is long in some cases and short in others, depending upon the nature of

business. Cycle is fast in consumer goods industries and slow in capital goods

industries. Cycle is short in case of perishable such as food articles, beverages, fruits,

fish, etc. cycle is long in the case of tobacco, distilling, timber etc. seasonal industries

like manufacturers of umbrella, woolen fabrics, fan etc, require higher stocks in some

months and bare minimum, in remaining months.

During the cycle funds are blocked in various stages of current assets viz., cash itself,

inventory [consisting of raw materials, stock in process, finished goods] and

receivables. These require finance. Finance involves costs. Quicker the cycle, more is

the turnover normally and longer the cycle, the less is the turnover. Stagnation in any

area affects turnover and profitability.



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Factors which affect working capital cycle are a) the concerns efficiency b) the

concerns policy, c) Inventory management d) technical process involved / adopted e)

trade practice f) government policy and economic conditions.

1.5 THE NEED OR OBJECTIVE OF WORKING CAPITAL

The objective of a firm is to earn sufficient returns from its operations for earning

a steady amount and profit there should be successful sales activity. The firm has to

invest enough funds in current assets for the success.

Every business needs some amount of working capital. The need of working

capital arises due to the time gap between production and realizations of cash from sales.

There are time gaps in purchase of raw materials and production; production and sales;

and sales and realization of cash.

Thus working capital is needed for the following reasons;

For the purchase of raw materials, components and spares.

To pay wages and salaries.

To incur day to day expenses and overhead costs such as fuel, power and office

expenses etc.

To meet the selling costs as packing, advertising etc.

To provide credit facilities to the customers.



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To maintain the inventories of raw materials, work in progress stores and spares and

finishes stocks.

To meet all incidental expenses related to production.

To carry the finished goods till sales are made.

The funds would be needed to carry the receivables also as sales done to

convert into cash instantaneously.

1.6 WORKING CAPITAL MANAGEMENT

Working capital in general refers to the excess of current assets over

current liabilities. Management of working capital therefore is concerned with the

problems that arises in attempting to manage the current assets, the current liabilities and

the inter relationship between them.

The basic goal of working capital management is to manage the current assets and

current liabilities of a firm in such a way that a satisfactory level of working capital is

maintained, that is, it is neither inadequate nor excessive.

Management of working capital means the management of current assets, current

liabilities and Net working capital.

1.7 Current Liabilities:

Current liabilities are short-term liabilities, which are repayable within a year.

They are normally raised for meeting the working capital needs and to acquire current



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assets. Current liabilities are the main source of finance for working capital and are

normally identified with the operating cycle of the business.

Current liabilities normally consists of:

Industry borrowings for working capital

Sundry creditors Trade

Other current liabilities and provisions

1.8 Current Assets:

Current assets are also called convertible assets, liquid assets or floating assets.

They change their form every now and then and ultimately are converted into cash.

Current assets in the form of finished goods are meant for sale and conversion in to cash

in a period not exceeding one year. They indicate short-term deployment of funds and

form gross working capital.

Current assets consist of:

Cash

Stock in trade consisting of raw materials, stock in process, finished goods, stores,

packing materials.

Book debts, and

Other loan and advances etc,



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This study of working capital management attempts to find out the trade and how

efficient system and to re-continued the remedial measures it needed.

2.2 Scope of the Study

Working capital forms a sizeable investment in every manufacturing industry. This study

times to cover the significance of working capital in a manufacturing industry. Which, is

specific to that study unit and not available to others. This study focus on the efficiency

of inventory management, receivable management and cash management. This study tries

to analysis operating cycle and how stores management receivables management & cash

management affect it.

2.3 Objective of the study

To analyze the Balance Sheets and profit and loss accounts of Sai Agro Industries

a. To compare the methods of assessments of working capital of the Industry for

the past years with the help of ratios concerned with working capital and Turnover

To identify liquidity position and profitability position of Sai Agro Industries

To find the collection time for loans and advance and turnover in terms.

2.4 Research Methodology

An Exploratory Research Design is used for the above mentioned objective. This

type of Research Design is identified as applicable for this study.

This particular study is a combination of both quantitative and qualitative aspects.



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Plan for this study broadly included.

A through review of literature available in this line a combination of both classical

text books and topical articles from different magazines to understand industrial

sector, operations of normal new and emerging activities.

Inferences were drawn for almost every objective mentioned in the study and these

were included in analysis part of the project

Finally a certain recommendation were drawn and presented to the industry by the

researcher. It is hoped in all good faith that these recommendations would be

beneficial to the sponsoring industry.

2.5 Data need and collection

This study makes extensive use of secondary data collection in forms of annual

reports and the industries working capital manual.

There was also use of primary data in the case of financing working capital

through paper work and discussion held with the concerned industrial officials from

various departments.

2.6 Data collection

The data collected for this research can be classified as follows:



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Nature:- The nature of the data collected was both qualitative and quantitative.

Considering the above plan, research plan for this study is essentially a combination of

qualitative and quantitative aspects.

Primary:- This data was generated in the investigation according to the needs of the

problem in hand.

Secondary:- This type of data can be defined as data collected by someone else for a

purpose other than solving the problem being investigated.

2.7 SOURCES OF DATA

Secondary SourcesThe secondary sources of data can be divided into mainly two parts:-

Internal - accounting section

- Finance section

- HRD department

- Miscellaneous records

External:- Information from published materials, for example, Annual Reports of SAI

AGRO INDUSTRIES, Sai Agro Industries working capital manual, Magazines etc.

Primary SourcesThe primary data was obtained through survey method ie., personal interview

method.



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RESEARCH MEASURING INSTRUMENTS:Five year Balance sheet and profit and loss account stated in annual reports were

used for analysis. Working capital and concerned ratios were used as a tool of analysis.

Based upon this analysis of the industries financial position, performance was evaluated

and suggestions were made. Regarding financial of working capital, methods were

evaluated by extracting information from Balancesheet for five years, then best

alternative was chosen based on which the companys position regarding financing of

working capital was known.

SAMPLINGThe entire unit, Sai Agro Industries is considered as a sample bearing no

connection with other units of the industries. Further emphasis has been given only to

assessment of working capital and ratios connected with it in finance department.

This sampling enabled the researcher to concentrate her attention upon a

relatively small number of people and hence, to devote more energy to ensure that the

information collected from them is accurate.

The researcher used a Non-probability sampling method, where no particular

method for selecting the units of the sample is adopted. The basis of selection was simply

opportunity, convenience and purpose.



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Review of Literature :This included:

a) Annual report of Industry

b) Published text books

c) Financial management theory and practice by prasanna Chandra, Tata McGraw-

Hill Publishing 4th edition 1998.

d) Financial management by I.M Pandey, Vikas Publishing House private limited 8th

Edition.

e) Financial management and policy by James C.Van Horne, prentice hall of India

Ltd, New Delhi, 10th Edition

Other Standard Magazines and Newspapers include:

1. Economic Times

2. Business World

ANALYSIS:Use of different types of ratios for analysis purpose and drawings conclusions.

LIMITATIONS OF THE STUDYAs there is no universally accepted formula for ratios linked with working capital

difference of opinion arises with different people.

The methods given by the industry working capital Policies for financing working

capital is based on pure discussion had with concerned officers. Any changes made

by the industry regarding the methods will make these methods invalid.



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The process of structuring, restricting and reviewing the organizational

framework is an ongoing process. This largely depends on the environmental changes,

growth in business and branch network, national economic objective. Governments

policy directions and felt needs of the community. The model structures evolved from

time to time confine to the above factors and the two main guiding principles viz.,

Principle of unity of objectives where the structure facilitates the contribution by

individuals and groups in the attainment of institutional objectives.

Principle of efficiency where the structure facilitates accomplishment of objectives by

people working with least cost, with individual and group satisfactions with clear-cut

lines of authority and allows appropriate participation at all levels.

3.2 Main Objectives of the Sai Agro Industries

The Main objects of the industries, as embodied in the memorandum and articles of

association of the industries are:

1. To purchase edible oils directly from Refineries and Repack the same in to

packing of different capacities and market the same to the consumers through

commission Agents/ stockists.

2. To engage in all types of sizing, dyeing and connected processing in the

Repacking of edible oil.



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3. To manufacture prepare, buy, sell, supply, distribute, store, stock maintain and

handle, deal in and carry on industries in all kinds and varieties of raw material,

edible oils and all other related products.

3.3 Sai Agro Industries Judgment of all customs, Excise and Gold(control) Appellate

Tribunal [CEGAT]

Sai Agro Industries purchase edible vegetable oil from the open market. On the

oil purchased by them excise duty has been paid by the manufacturer. The Appellants

subject this oil to certain processes for the purposes of refining the oil. After refining the

oil, the Appellants sell the refined edible oil in the market. The appellants filed, on 1 st

September 1990 a classification list in respect of the refined oil sought to be cleared from

the factory. It was mentioned therein that since no manufacturing activity was involved,

no duty was payable on their clearances on 17 th September, 1990 the superintendent of

Central Excise returned the classification list and called upon the Appellants to clear the

goods on payment of excise duty at the rate of Rs.100/- per Metric Ton and special excise

duty at 5% of the Basic excise duty. The appellants field civil write petition NO 3215 of

1990, in the Rajasthan high court contenting that since there was no manufacture excise

duty was not payable on 23rd October, 1980 Rajasthan High court passed an interim order

Permitting the Appellants to clear the refined oil from its factory subject to the Appellants

furnishing a solvent security at the rate of Rs.105 per Metric Ton. This interim order was

confirmed on 5th February 1992.



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When raw groundnut oil is converted in the refined oil, there is no doubt

processing, but this consists merely in removing from raw groundnut oil that constituent

part of the raw oil which is not really oil. The elements removed in the refining process

consist of free fatty acids, phosphotides and unsaponifiable matter. After the removal of

this non-oleic matter therefore, the oil continues to be groundnut oil and nothing more.

The matter removed from the raw groundnut oil not being oil cannot be used, after

separation, as oil or far any purpose far which oil could be used. In other words, the

processing consists in the non-oily content of the raw oil being separate and removed,

rendering the oily content of the oil 100 percent for this reason refined oil continues to be

groundnut oil within the meaning of rules 5(1)(K) and 18(2) not withstanding that such

oil does not possess the characteristic colour, or taste, odour etc of the raw groundnut oil

The factory has made spectacular progress during years, its production has grown

in bottle volume and variety. While the inspiration for establishing the industry came

from Sir. M.Vishweshwaraiah, the man who actually established this industry was Sir

G.V.Murthy, the credit for evolving the progress for the products of Sai Agro Industries

should go entirely to Sir.G.V Murthy an enterprising & imaginative scientist in memory

of department in named after this immorted man.

The promise for Indias Industries lies in recognizing the need for a substantial

increase in production of Repacking of Edible oils. Presently oils products fetch

relatively higher price that liquid oil and this has directly boosted the out put of value

added products. Further the indigenous oil preparation enjoy higher demand and better



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prices than the western products. However, the importance of liquid milk and its

influence in the market cannot be underplayed since it meets a basic need.

Price the development of any activity a rational pricing policy is vital. This is

more so in case of daring where a positive price policy acts as a catalyst for growth by

motivating the farmer the argument oil production. In this, four key determining factors

are. The price farmers should receive for oil, the profitability of computing non-firm

enterprises, the input cost oil production and the price consumption response of the

market.

3.4 Promoters and directors

Managing Director : MR. Arun kumar

Whole time Director : Mr. Anand Kumar.A

Whole time Director : Mr. Murthy

Director : Mr. Imtiaaz

Director : Mr. Renukaanand

Executive Director : Mr. Ravikumar

Sales Manger : Mr. Madhukar

Partners[key person] : Mr. Bhaskar, T.Swamy

3.5 Auditors

Present Auditors of the Industry is Mr. Sanaulla



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PRODUCT PROFILE OF SAI AGRO INDUSTRIESSai Agro Industries is manufacturing wide variety of products by using edible

oils, other consumables like plastics, pouches, containers, Tins Cartons etc. the main

products of the Industries are

EDIBLE OIL

BASMATHI RICE

ATTA

MAIDA

RAVA

PRICING OF SAI AGRO INDUSTRIESSpecific guidelines are not given by the government. But is the Federation wants

to enhance the price, a proposal is put down to the Government stating the operational

overheads, raw material procurement prices and the required price to be levied to the

product. Then the Government gave the permission and in turn industries may increase or

decrease the price K the decision is taken the Board.

PROMOTION OF SAI AGRO INDUSTRIESAdvertising:



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NEW PRODUCT DECISIONS:

Production of New products like repacking of Mango Drink, juices, Mineral water

is being stated in Sai Agro Industry. The production of repacking of Mango Drink and

Mineral water was started during the current year.

M/S SAI AGRO INDUSTRIES

PROJECT HIGHLIGHTS

1. Name of the Firm : M/s Sai Agro Industries

# 195, H.M.T Layout, Nalagadharanahalli

Main Road, Nagasandra post,

Bangalore -73.

2. Name of the Key person : Mr. Bhaskaran.T.Swamy [Partner]

over 20 year Business/Market experience,

3 years experience in running similar unit.

3. Nature of Business : Repacking of Edible oil [presently into sunflower

oil, groundnut oil and palm oil]

4. Brand Name : SURAJ Brand.

5. Market : Initially all over Karnataka with special emphasize

on Bangalore & other cities. Later on to be

expanded into other states.



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easily procured need based.

CHAPTER 4

ANALYSIS AND INTERPRETATION OF WORKINGCAPTIAL IN SAI AGRO INDUSTRIES

There are several tools of analysis of the working capital of a concern. The important of

them are as follows:-

a) Working capital ratios

b) Statement of changes in working capital

WORKING CAPITAL RATIOS:Ratio analysis occupies a place of importance ratios are complied and studies for

profitability, assessment of the financial position, efficiency of working, strategy pursued

by the short term and long term solvency and liquidity



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I would deal with some of the predominant ratios more relevantly applicable in

working capital management studies.

Ratios are relationships expressed in mathematical terms between figures which

are connected with each other in some manner. Obviously, no purpose will be served by

comparing two sets of figures which are not at all connected with each other. Moreover,

absolute figures are also unit for comparison.

Ratio can be expressed in two ways:

1. Times: when one value is divided by another, the unit used to express the quotient

is termed as Time

2. Percentage: If the quotient obtained is multiplied by 100, the unit of expression is

termed as percentage

Ratio is a statistical yardstick that provides a measures of the

relationship between variables or figures.

CLASSIFICATION OF RATIOS:

Ratios can be classified in to different categories depending upon the basis of

classification:

i) Profitability ratios

ii) Coverage ratios

iii) Turnover ratios

iv) Financial ratios : a) Liquidity ratios

b) Stability ratios



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Accounting Ratios

Traditional Functional

P/L a/c Balance sheet Composite Profitability

Ratio ratio ratioCoverage ratio

Turnover ratioFinancial ratio

(i) Stability

(ii) Liquidity

1.Current Ratio

The ratio is an indicator of the firms commitment to meet its short term

liabilities. An ideal current ratio is 2. the ratio of 2 is considered as a safe margin of

solvency due to that if the current assets are reduced to 1 instead of 2, then also the

creditors will be able to get their payment in full. A very high current ratio is also not

desirable since it means less efficiency use of funds

FORMULA

Current AssetCurrent Ratio = ___________

Current Liabilities

Table -4.1 Amount in Rs

Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Current 19,55,679 24,08,649 30,99,532 40,79,482 54,16,882



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Assets

Current

Liabilities

75,00,000 8,00,000 9,50,000 1,10,000 12,50,000

Ratio 2.61 3.01 3.26 3.71 4.33

Source : Annual reports of Sai Agro Industries

From the table 4.1 the current ratio was found to be higher than standard throughout the

study period 2:1 is considered as a standard ratio. Higher the ratio reflects excess

investment in current assets, which should be reduced in the coming periods. Because of

keeping more inventory and unable to collect debt in proper time so that their current

ratio is more. To reduce they have to collect their debts with in 30 days and also they

have to maintain minimum inventory in godawn.



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Ratio analysis occupies a place of importance ratios are complied and studies for

profitability, assessment of the financial position, efficiency of working, strategy pursued

by the short term and long term solvency and liquidity

I would deal with some of the predominant ratios more relevantly applicable in

working capital management studies.

Ratios are relationships expressed in mathematical terms between figures which

are connected with each other in some manner. Obviously, no purpose will be served by

comparing two sets of figures which are not at all connected with each other. Moreover,

absolute figures are also unit for comparison.

Ratio can be expressed in two ways:

3. Times: when one value is divided by another, the unit used to express the quotient

is termed as Time

4. Percentage: If the quotient obtained is multiplied by 100, the unit of expression is

termed as percentage

Ratio is a statistical yardstick that provides a measures of the

relationship between variables or figures.

CLASSIFICATION OF RATIOS:

Ratios can be classified in to different categories depending upon the basis of

classification:

v) Profitability ratios

vi) Coverage ratios



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vii) Turnover ratios

viii) Financial ratios : a) Liquidity ratios

b) Stability ratios

Accounting Ratios

Traditional Functional

P/L a/c Balance sheet Composite Profitability

Ratio ratio ratio

Coverage ratio

Turnover ratio

Financial ratio(i) Stability

(ii) Liquidity

1.Current Ratio

The ratio is an indicator of the firms commitment to meet its short term

liabilities. An ideal current ratio is 2. the ratio of 2 is considered as a safe margin of

solvency due to that if the current assets are reduced to 1 instead of 2, then also the

creditors will be able to get their payment in full. A very high current ratio is also not

desirable since it means less efficiency use of funds

FORMULA

Current AssetCurrent Ratio = ___________



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3. Quick Ratio:

Quick ratio is also known as liquid ratio or Acid test. It is more rigorous test of liquidity

than the current ratio. The term liquidity refers to the ability of a firm to pay it short term

obligations as and when they become due inventories and prepaid expenses are excluded

from the current assets. The ideal liquid ratio is 1:1. Higher o indicates sound financial

position of the concern and lower the ratio indicates financial difficulties.



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0

1

2

3

4

5

6

2,50,000 3,00,000 3,50,000 4,00,000 4,50,000

9,92,617 12,54,871 14,38,091 19,19,609 24,26,289

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Ratio in times

Ratio in times

3. Fixed assets Turnover ratio:



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4.Current assets ove

r total assets:

The formula given to find out the current assets over total asset is



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Formula

Current assets

CA/.TA = ----------------- X 100

Total assets

Table 4.4 (2)

Years 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Current Assets 19,55,679 24,08,649 30,99,532 40,79,482 54,16,882

Total Assets 30,88,179 34,58,399 40,90,507 50,20,580 63,30,530

Current Assets/Total assets [%]

63.32 69.64 75.77 81.25 85.56

Source: Annual Reports of Sai Agro Industries

Table 4.4 the position of current asset to total asset has increased form 63.32% in

1999-2000 tp 85.56 in 2003-2004. this shows that the amount of current assets locked,

these by giving room for high element of risk care should be taken to see where the

division really requires such as high amount of current assets.



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This ratio indicates the efficient or inefficient utilization of the working capital

of an enterprise. There is no standard or ideal working capital turnover ratio. The higher

the working capital turnover ratio the greater is efficiency.

Formula

Net SalesWorking Capital turnover ration = -----------

Working capital

Table 4.5

Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Net Sales 38145750 45774900 54929880 65915856 79099027

Working

capital

1205679 1608649 2149532 2979482 4166882

Working

capitalTurnover

ratio

31.63 28.45 25.55 22.12 18.98

Source : Annual reports of Sai Agro Industries

Table 4.5 Shows if high working capital turnover ratio means over trading & a very low

working capital turnover ratio means under trading. The variations in these ratio reveals

that there is an increase in sales from 1999-2000 to 2003-2004 and decrease in working

capital turnover ratio



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0

5

1 0

1 5

2 0

2 5

3 0

3 5

W T O

Y e a r1 9 9 9 -

2 0 0 0

2 0 0 0 -

2 0 0 1

2 0 0 1 -

2 0 0 2

2 0 0 2 -

2 0 0 3

2 0 0 3 -

2 0 0 4

Y E A

C o l u m n S h o w in g W

T u r n o v e r R a t io

S e r i e

S e r i e



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includes near cash assets such as marketable securities and time deposits with banks

such securities or deposits can immediately be sold or converted into cash if the

circumstances require. The term cash management is generally used for management of

both cash and near assets.

Motives for Holding cash : A distinguish features of cash as an asset, irrespective ofthe firm in which it is held, is that it does not earn any substantial return for the business.

In spite of this fact cash in held by the firm with the following motives.

1. Transaction motive: A firm enters into a variety of business transaction resulting

in both inflows and outflows of cash. At times the cash outflows may exceed the

cash inflows. In order to meet the business obligations in such situations, it is

necessary to maintain adequate cash balance. Thus, cash balance is kept by the

firms with the motive of meeting routine business payments.

2. Precautionary motive: A firm keeps cash balance to meet unexpected cash needs

arising out of unexpected contingencies such as floods, strikes, presentment of

bills for payment earlier than the expect date, unexpected slowing down of

collection of accounts receivable. Sharp increases in prices of raw materials, etc.

the more is the possibility of such contingencies, the more is the amount of cash

kept by the firm for meeting them.

3. Speculative motive: A firm also keeps cash balance to take advantage of

unexpected opportunities, typically outside the normal course of the business.

Such motive is, therefore, of purely a speculative nature.



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Cash budget as cash forecast is the most significant derive which the Sai Agro

Industry uses for efficient planning and controlling of cash uses.

The divisions takes sales budget as the back to prepare material budget which

in turn facilitates the preparation of expenditure budget while forecasting the expenditure

budget, the division takes direct material requirements, indirect material requirement ,

payment to subcontractors, payments to its employees, Also it extends to cover the

aspects like to sales tax and excise duty. This expenditure budget also gives tolerance

measures for future charges in government policies towards the aspects of business.

Taking into consideration the order book figures, the decision plans its receipts

also, receipts from debtors, export incentives advances received from customers are

included in forecasting the inflows.

Management of Inflows:The division emphasis on cash sales rather than credit sales. In co-operation

with the commercial department, the division insists on the advance from the non-

government customers to the extent of 10% to 80%. On the receipts of materials at the

customer end. Thus has accelerated the cash inflow for the division.

The division does not have to rule that it alone should collect the payment for

the sales. Infact, the corporate office co-ordinates the collection in such a way that the

nearest sai agro unit where the customer is placed collects on the behalf of this division

and deposits the same into corporate offices account on behalf of this division.



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Cash to current asset = ------------ X 100

Current assetsTable 4.6

Years 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Cash 122914 216227 198719 296362 278392

Current

Asset

1955679 2408649 3099532 4079482 5416882

Ratio [in

times]

6.2 8.9 6.4 7.2 8.8

Source:AnnualReports of Sai Agro Industries.

Table 4.6 shows cash to current asset ratio. In the study period, the ratio was

found to be accepted standard of 5 percent to 10 percent. This leads to the influence that

the ratio was satisfactory because the cash balance was increase at a faster rate than the

growth of current assets. This reflects high risk high profitability of the industry at the

cost of high liquidity.



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Management of Receivable

Trade credit is considered to be an important manufactures tool for blocking of

the firms funds. As such receivables, which are created out of credit sales constitute a

substantial portion of current assets in most of the business. The objective of receivables

management is to promote sales and profit until the optimum point is reached where the

return on investment in further funding of receivables is less than the cost of funds raised



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to finance that additional credit. The customers from whom receivables or book debts

have to be collected in further are called debtors and represents the firms claim on asset.

Debtors Turnover Ratio:

Debtors turnover ratio indicates the velocity of debt collection of firm. In

simple words, it indicates the number of times average debtors or turned over during

year. The higher the value of debtors turnover the more efficient is the management of

debtors similarly, low debtors turnover implies inefficient management of debtors.

Formula

Debtors turnover ration = Net Credit Sales

-------------------

Average Trade Debtors

Average trade debtors = Opening debtors + Closing debtors-----------------------------

2

Table 4.7



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44

45

4647

48

49

50

51

52

53

54

55

D T O

1 9 9 9 -

2 0 0 0

2 0 0 0 -

2 0 0 1

2 0 0 1 -

2 0 0 2

2 0 0 2 -

2 0 0 3

2 0 0 3 -

2 0 0 4

YEAR

D e b to r tu r n o v e r

Ra tio [ in t im



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Management of Inventory

Inventories constitute the most significant part of current assets of a large

majority companies in India. Inventories are approximately 60 percent of current assets

in public limited companies in India.

Inventory management plays a vital role in managing finance, profit planning

and the over all working of every business enterprises. Any organization unable to

manage inventory in an efficient manner at optimum level in the long run process. Every

business enterprises should, therefore, manage its inventory at a optimum level.

Nature of inventories

1. Raw materials

2. Work in progress

3. Finished goods



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Need to hold inventories

There are three general motives for holding inventories

1. The transaction motives

2. The precautionary motives

3. The speculative motives.

Objective of Inventory Management

The firm is faced with problem of meeting two conflicting needs.

1. To maintain a large size of inventory for efficient and smooth production and

sales operations.

2. To maintain a minimum investment in inventories to maximize profitability.

Stock Turnover Ratio:

The stock turnover ratio reveals the number of times the stock in trade is turned

over in business during a particular period. High turnover indicates the quick turnover of

finished goods. It enables the firms judge the adequacy of current ratio. However, a

relatively high turnover ratio indicates a very low level of inventory and frequent stock

outs.



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Formula:

Cost of Goods sold

Stock Turnover = ----------------------

Average inventory

No of working days

Average Stock turnover = --------------------Stock turnover ratio

Collection periodStock in the beginning + Stock in the hand

Average inventory = -------------------------------------------------2

Table 4.9

Inventory Turnover Ratio

YearCost of good

sold

Average

InventoryRatio Avg STR

2005-2006 3,51,51,750 9,63,062 36.49 9.86

2006-2007 4,21,12,908 10,58,420 39.75 9.05

2007-2008 5,05,35,490 14,07,610 35.90 10.032008-2009 6,06,42,588 19,10,658 31.73 11.34

2009-2010 7,27,71,105 25,75,233 28.25 12.74




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Sundry Creditor to Inventory :

Inventory ratio reveals the extent to which inventories are procured through

credit purchase inventories here is said to include raw materials, stores, spare parts and

finished goods. This shows the extent to which inventories are obtained through credit



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purchase and also explains the extent of inventory procured through cash purchase. If the

ratio is more than one it denote that the entire inventory is purchased on credit

FORMULA

Sundry CreditorsSundry Creditors to inventory = -------------------

Inventory

Table 4.10

Years 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

SundryCreditors

2,50,000 3,00,000 3,50,000 4,00,000 4,50,000

Inventory 9,63,062, 11,53,778 16,61,441 21,59,873 29,90,593

Ratio [in

times]

0.25 0.26 0.21 0.18 0.15


Table 4.10 represents the ratio of sundry creditors to average inventory. This ratio was

less than one in all years of the study period. It denotes that entire inventory was not

purchases in credit basis.



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0

0.05

0.1

0.15

0.2

0.25

0.3

9,63,062, 11,53,778 16,61,441 21,59,873 29,90,593

2,50,000 3,00,000 3,50,000 4,00,000 4,50,000

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Ratio [in times]

Ratio [in times]

Inventory to Net working Capital :

Inventory to working capital ratio indicates the relationship between

inventory and working capital. A reduction in inventory results in small percentage of



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FINDINGS

1. As per the current ratio and quick ratio the liquidity position of the organization is

very high because both the ratio ratio more than the standard ratio.

2. Evidence from the fixed assets turnover ratio utilization of fixed assets is good.i.e.

more than the standard.

3. As per the working capital ratio the organization is not utilizing the working

capital properly it indicates under trading.

4. As per the cash to current assets ratio the proportion of cash in current assets is

more than the standard that indicates company is not having idle cash, this is good

for organization.

5. As per the debtors turnover ratio and Average collection period it can be

concluded that the quality of debtors is suitable for credit management and also it

indicates this is a strict credit policy towards bills receivable.

6. As per inventory turnover ratio the ratios are more than the standard ratio i.e 8

times. This indicates that more sales are affected that is business is expanding

and as such this is effecting inventory management.



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SUGGESTIONS

Sai Agro Industries is one of manufactures of Repacking of Edible oil. A study of

working capital management is of prime importance to internal and external analysis.

Hence the study is undertaken to analyze the working capital management of Sai Agro

Industries. This chapter has been designed to recapitulate the key findings of the study as

well as to make suitable suggestions if any to improve the working capital performance

of the industries.

Key Ratios

Management of cash ratio

Management of Receivable ratio

Management of Inventory ratio

Sai Agro Industries current ratio was found to be higher. Higher the ratio reflects

an excess investment in current assets. To reduce they have to collect their debts with

in 30 days and also they have to maintain minimum inventory.

Quick ratio is in increasing trend because they maintained more debts, more

deposit and advance, to reduce they have to called their debt in proper time.

Debt equity ratio and share holders funds are not properly leveraged because

outside liabilities is increasing gradually. Which may in future affect liquidity

position of the company. So management should control with a limited investment.



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CONCLUSION

From the over all study of the Sai Agro Industry for the past 5 year on the working capital

management adopted by the industry. It is concluded that the industry is doing their best.

As the Standard ratio of current ratio is 2:1 but the industry is maintaining more

than the ideal ratio i.e., 4:33:1 in the year 2003-2004.

Quick ratio of the Sai Agro industries is not satisfactory because they maintained

more debts.

The long term solvency position of the industry is not sound since the debt equity

ratio and share holders find are not properly leveraged because outsiders funds is

more than share holders fund.

Fixed Turnover ratio is constant increases in ratio of Industry it seems to be good

Cash to current asset was satisfactory because the cash balance was increase at a

faster rate than the growth of current assets.

Debtors Turnover Ratio indicates the efficient management of debtors and

collection period was shorter. It implies quick payment by debtors.



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Stock & Inventory

Sundary Debtors

Deposits,Advances,& others

Cash & Bank

Total Current assets:

Total Assets

9,63,062

7,94,703

75,000

1,22,914

19,55,679

30,88,179

11,53,778

9,53,644

85,000

2,16,227

24,08,649

34,58,399

16,61,441

11,44,373

95,000

1,98,719

30,99,532

40,90,507

21,59,873

13,73,247

2,50,000

2,96,362

40,79,482

50,20580

29,90,593

15,47,896

4,00,000

4,78,392

54,16,882

63,30,530

Comparative Statement of working capital for the year ended 2005-2006

and 2006-2007

Particulars 2005-2006 2006-2007 Increase in

W.Cap

Decrease

in

W.Cap

Current assets:

Stock and inventory

Sundry Drs

Deposits

Cash & Bank

Total Current assets [A]

Current Liabilities

Creditors payable

Total Current Liabilities [B]

Increase in Working capital

9,63,062

7,94,703

75,000

1,22,914

19,55,679

2,50,000

2,50,000

11,53,778

9,53,644

85,000

2,16,227

24,08,649

3,00,000

3,00,000

1,90,716

1,58,941

10,000

93,313

50,000

4,02,970



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4,52,970 4,52.970

Comparative Statement of working capital for the year ended 2006-2007

and 2007-2008

Particulars 2006-2007 2007-2008 Increase in

W.Cap

Decrease

in

W.Cap

Current assets:

Stock and inventory

Sundry Drs

Deposits

11,53,778

9,53,644

85,000

16,61,411

11,44,373

95,000

5,07,663

1,90,729

10,000



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Current assets:

Stock and inventory

Sundry Drs

Deposits

Cash & Bank

Total Current assets [A]

Current Liabilities

Creditors payable

Total Current Liabilities [B]

Increase in Working capital

21,59,873

13,73,247

2,50,000

2,96,362

40,79,482

4,00,000

4,00,000

29,90,593

15,47,896

4,00,000

4,78,392

54,16,882

4,50,000

4,50,000

8,30,720

1,74,649

1,50,000

1,82,030

50,000

12,87,399

13,37,399

13,37,399 13,37,399

sai agro industries

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