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CHAPTER-I
INTRODUCTION
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As we all know working capital Management is one of the important decision
in financing. So it is very necessary to know the working capital & its cycle. Working
Capital refers to the cash a business requires for the daytoday operations or more
specifically for financing the conversions of raw materials into finished goods! which
the corporation sells for payment. "n other words #Working Capital$ is the money the
business process consumes. %he longer the process takes! the more money is
consumed. Working Capital is calculated by deducting current assets from current
liabilities. Current Assets are resources! which are in cash or soon be converted into
cash. Whereas Current liabilities are commitments! which will soon require cash
settlement in the ordinary course of business.
Working Capital can also be defined with an approach that encompasses all
the processes surrounding accounts payable! accounts receivables and inventory and
one begins to understand the potential knockon impacts of a change in working
capital practice or policy. When looking in detail at any of these three core areas! it
soon becomes clear that Working Capital Management touch all the firm buys! makes
and sells.
%he diagram below demonstrates how a #total$ approach to working capital
covers all the corporation$s activities relating to the vendor! the customer and the
products.
SIGNIFICANCE OF THE STUDY
2
ayments&
"nvestments
urchase
Sales
Collectionlanning &'udgeting
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Working capital is the life blood and nerve centre of a business. (ust as
circulation of blood is essential in the human body for maintaining life! working capital
is essential to maintain the smooth running of business. )o business can run
successfully without an adequate amount of working capital. *n one hand! inadequacy
of working capital pose a danger to the short term liquidity and solvency position of the
business and on the other hand e+cess working capital leads to blockage of firm$s
funds in current assets! which reduced the profitability of the organi,ation. %hus there
is a need to maintain a tradeoff between the above aspects -i.e. liquidity! solvency
and profitability aspects so that the short term funds of the corporation can be utili,ed
in most effective manner.
/eeping the above in mind! the present study analy,ed the various aspects of
working capital management of 0ood Corporation of "ndia and pinpoints on weak
areas and suggests corrective action to manage the working capital effectively. %he
study is useful for the different stakeholders in understanding the working capital
position of the corporation. %he study would also help the future researcher for their
research in the organi,ation.
CONCEPTUALISATION
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%he need of working capital is to run the daytoday business activities. %here is
hardly any firm! which does not require any amount of working capital. 0irms may differ in
their requirement of working capital but it is necessary for all firms to maintain the working
capital. %he working capital is the lifeblood for any corporation! as a person cannot live
without blood! as it is any firm cannot survive without working capital. Working capital is
necessary for all type of companies$ whether it is a small corporation or large corporation.
1very corporation maintains the working capital to pay the shortterm e+penses as creditors!
shortterm loans! daily wage other e+penses. "t is very important to run a business effectively.
"t is a part of total investing capital. "t does not give any return opposite of longterm
investment -fi+ed capital. 'ut it is helpful in earning profit from the longterm capital.
Meaning of working cai!a"# -
Working capital is also known as the shortterm investment of capital. Working capital
is that capital which is capture in the business as in the form of cash or cash equivalents to
run the rut ion activities of business. Mainly it is known as the difference between the current
assets and current liabilities but in other sense it is known as the sum of all current assets. "t
is also known as the capital! which is used to operate the business$s routine work. "t is the
shortterm capital investment in the business. %he working capital includes those assets!
which are converted into cash within an accounting year and the current liabilities are include
in working capital which are payable within an accounting year. %here are two concept of
working capital as follows.
Gro$$ %orking Cai!a"# -
4
%orking cai!a"
2ross Working
Capital
)et Working
Capital
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2ross Working Capital refers to the firm$s investment in the current assets. Current
assets are those assets which can be converted into cash within an accounting period -or
operating cycle.current assets include the debtors-account receivables ! cash ! short term
investment! bills receivables! stock-inventories !prepaid e+penses and accrued interest.
Ne! %orking Cai!a"# -
)et Working Capital refers to the difference between the current assets and current
liabilities. Current assets are those assets! which can be converted into cash within an
accounting year -or operating cycle. Current assets include the debtors -account
receivables! cash! short term investment! bills receivables! stock -inventories! prepaid
e+penses and accrued interest. And current liabilities are those claims of outsiders which are
e+pected to mature for payment within an accounting year and include creditors -accounts
payable! bills payables! out e+penses -as standing salaries! outstanding rent! outstanding
wages! short term loans and bank overdraft. )et working capital can be positive or negative.
A positive net working capital will arise when the current assets e+ceed current liabilities. A
negative net working capital occurs when current liabilities are in e+cess of current assets.
%here is two other type of working capital on the %ime basis are as follows
Per&anen! working cai!a"# -
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"t is also called fi+ed working capital. ermanent working capital is a certain level of
working capital on a continuous and uninterrupted basis.
Amount ermanent working capital
%ime
'aria("e working cai!a"# -
"t is also known as %emporary or 0luctuating working capital. 3ariable working
capital is the working capital needed to meet seasonal as well as unforeseen requirements. "t
is fluctuating with in accounting year and cannot live fi+ed as shown in the figure.
3ariable working capital
Amount
%ime
FOCUS OF THE PRO)LEM
%he study is based on the premise that an efficient and effective management
of working capital enhances the profitability of the corporation and utili,es the
corporation$s fund in most optimum manner. %hus the present study entitled 4Working
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LIMITATIONS OF THE STUDY
%he study is based on secondary data which may incorporate the limitations of
the same.
%he study is restricted to the period of four years -67786779
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CHAPTER-II
RE'IE% OF E,ISTING LITERATURE
:eview of e+isting literature means review or readout the present available
information that is collecting before the study by any other person. %he e+isting literature is
very important in the study of any topic because the e+isting literature give the basic idea
about the study. "t does the work as the secondary data in the preparation of the study report.
Without e+isting data it is difficult to start the study because we don$t have any clue about our
study so the review of e+isting data is necessary for every researcher. "n the study of working
capital management it is very necessary to study the information available of the past
studies.
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+ Fre. %e$!onfinds the some main important function of the financial manager in
the aspects of working capital management. 4%ime! working capital management requires
much of financial manager$s time. "nvestment! working capital represents a large portion of
the total investment in assets. Criticality! working capital management has great significance
for all the firms but it is very critical for the small firms. 2rowth! the need for working capital is
directly related to the firm$s growth.5 0rom the above study it is clear that the working capital
management must have the long time and it is related to the firm$s growth directly and it is a
large part of the total investment in the assets.
According to the :'"$s report on the study of working capital management!
investment in the current assets represents a very significant portion of the total investment in
the assets. "n large companies like ';1
may be high as! say! =7 percent.
E % %a"kergives the suggestion after his study on working capital management
that the financial manager should determine the optimum level of the current assets so that
the wealth of shareholders is ma+imi,ed.
S!arr an. / Mar!inhas done study on the topic working capital management and
the find that the inventory management is more important in the management of the working
capital and they told the motive of inventory holding.
0irst! %ransaction Motive emphasi,es the need to maintain inventories to
facilities smooth production and sales operations.
Second! recautionary Motive necessitates holding of inventories to guard
against the risk of unpredictable changes in demand and supply forces and
other factors.
%hird! Speculative motive influences the decision to increase or reduce
inventory level to take advantage of price fluctuations.
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/'S&i!0give his view about working capital management after his study that
working capital management is concerned with the problems that arise in attempting to
manage the current assets! current liabilities and the inter relationship that e+ists between
them.
So we have study the allavailable e+isting literature and it is very helpful in the study
of working capital management at 0ood Corporation of "ndia. 'ecause it provides the base
for the further study and also help in the analy,ing about the corporation$s financial position.
RESEARCH METHODOLOGY
NATURE OF RESEARCH# -
%he research is of analytical as well as descriptive in nature! where the
problem has been analy,ed with help of financial information available with the
corporation.
DATA COLLECTION * DATA SOURCE# -
>ue to the nature of study! study is primarily based on the secondary data.
%he secondary data is collected through anne+ure! schedules! other pertinent details
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from various sources in the corporation and references books. Annual reports and
records of the corporation have been used for the purpose of study.
TOOLS * TECHNI1UES OF ANALYSIS# -
"n order to analy,e the problem and to arrive on a fair view #:atio Analysis$!
"nterview Methods & different techniques related to inventory management! cash
management! receivable management & payable management have been
incorporated. Some of them are as follows?
1stimation of components of working capital method
ercentage of sales approach
*perating cycle approach
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CHAPTER-III
INDUSTRY PROFILE
Agric2"!2re In.2$!r3 a! a G"ance#-
Industry Overview
%he "ndian Agriculture "ndustry is on the brink of a revolution that will moderni,e the
entire food chain! as the total food production in "ndia is likely to double in the ne+tten years.
As per recent studies the turnover of the total food market is appro+imately
:s.687777 crores -@S B.D billion out of which valueadded food products
comprise :s.97777 crores -@S 66.6 billion. %he 2overnment of "ndia has also
approved proposals for Eoint ventures! foreign collaborations! industrial licenses and
F77G e+port oriented units envisaging an investment of :s.FF77 crores -@S D.97
billion out of which foreign investment is over :s. F77 crores -@S F9.6 'illion.%he agricultural food industry also assumes significance owing to "ndiaHs si,able
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agrarian economy! which accounts for over I8G of 2> and employs around B8 per
cent of the population. 'oth in terms of foreign investment and number of Eoint
ventures J foreign collaborations! the consumer food segment has the top priority.
%he other attractive features of the "ndian agro industry that have the capacity to lure
foreigners with promising benefits are the deep sea fishing! aqua culture! milk and
milk products.
1+cellent e+port prospects! competitive pricing of agricultural products and standards
that are internationally comparable has created trade opportunities in the agro
industry. %his further has enabled the "ndian Agriculture "ndustry ortal to serve as a
means by which every e+porter and importer of "ndia and abroad! can fulfill their
requirements and avail the benefits of agro related buy sell trade leads and other
business opportunities.
%his "ndian agro industry revolution brings along the opportunities of profitable
investment and agricultureindustryindia.com provides you the '6' platform with
agro related trade leads! e+porters & importers directoryetc. that help you make
your way to profit easy.
%o lead yourself to the destination of profit through the "ndian Agriculture "ndustry!
know ma+imum about the 1K"M policy! programs & schemes! price policy! seed
policyand statisticsat the "ndian agro portal and harvest benefits from "ndia! worldHs
second largest producer of food and a country with a billion people. 0rom canned!
dairy! processed! fro,en food to fisheries! meat! poultry! food grains! alcoholic
beverages & soft drinks! the "ndian agro industry has dainty areas to choose for
business.
STATISTICAL DATA OF AGRICULTURE INDUSTRY#-
Import and Export of Agriculture Commodities vis-a-vis Total National Imports
and Exports during 199-91 to !"-#
'a"2e 4R2ee$ in crore$5
YearAgric2"!2re I&or!$
To!a"Na!iona"I&or!$
6ageAgric2"!2reI&or!$ !o
To!a"Na!iona"I&or!$
Agric2"!2re E7or!$
To!a"Na!iona"E7or!$
6ageAgric2"!2reE7or!$ !o
To!a" Na!iona"E7or!$
F7F
F678.9B DIF=7.96 6.= B7F6.=B I686=.69 F9.D
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http://www.agriculture-industry-india.com/agro-trade-leads/http://www.agriculture-industry-india.com/export-import-directory/http://www.agriculture-industry-india.com/export-import-policies/http://www.agriculture-industry-india.com/agro-programme-schemes/http://www.agriculture-industry-india.com/agricultural-price-policy/http://www.agriculture-industry-india.com/national-seeds-policy/http://www.agriculture-industry-india.com/national-seeds-policy/http://www.agriculture-industry-india.com/india-agro-statistics/http://www.agriculture-industry-india.com/export-import-directory/http://www.agriculture-industry-india.com/export-import-policies/http://www.agriculture-industry-india.com/agro-programme-schemes/http://www.agriculture-industry-india.com/agricultural-price-policy/http://www.agriculture-industry-india.com/national-seeds-policy/http://www.agriculture-industry-india.com/national-seeds-policy/http://www.agriculture-industry-india.com/india-agro-statistics/http://www.agriculture-industry-india.com/agro-trade-leads/ -
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FF6
FD=9.6= D=987.9D I.7 =9I9.FI DD7DF.9F F=.97
F6I
69=B.68 BII=D.86 D.8D 7D7.I7 8IB99.6B FB.9D
FI
D 6I6=.II =IF7F.7F I.F9 F689B.88 B=D9.98 F9.78FD8
8I=.6F 9=7.=7 B.B7 FI666.=B 96B=I.D7 F8.
F8B
897.F7 F66B=9.FD D.97 67I=.=D F7BI8I.I8 F.F9
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F=9
9=9D.F F8DF=B.6 8.=7 6D9DI.D8 FI7F77.BD F.F7
F9
FD8BB.D9 F=9IIF.B 9.F= 688F7.BD FI=8F.== F9.68
F77
FB7BB.=I 6F8869.8I =.D8 68IFI.BB F878.67 F8.F
677B7=
F67I7.IB 66B==I.D= 8.IF 697.I7 67687.=B FD.69
677=79
IFF.88 FDF9.B9 B.8B FB68D.6 FF8=B6.78 FD.7D
$A%O& A'&IC()T(&E *&O+(CT, IN .IC. /CI +EA),?
0eat
With a production reaching ten times in past five years! "ndia is
today the second largestw0ea! ro.2cerin the whole world.
3arious studies and researches show that wheat and w0ea!
f"o2rplay an increasingly important role in the management of
"ndia$s food economy.
Wheat production is about =7 million tonnes per year in "ndia and counts for
appro+imately F6 per cent of world production. 'eing the second largest in
population! it is also the second largest in wheat consumption after China! with a
huge and growing wheat demand.
Pro.2c!ion Area
MaEor wheat growing states in "ndia are @ttar radesh! unEab! ;aryana! :aEasthan!
Madhya radesh! 2uEarat and 'ihar. All of north is replenished with wheat
cultivation. Wheat has a narrow geographic land base of production as compared to
rice or pulses. Wheat is a temperate crop requiring low temperatures and most of thecountry is tropical.
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&ice
In!ro.2c!ion%hroughout history ricehas been one of manHs most important
foods. %oday! this unique grain helps sustain two thirds of theworldHs population. Archeological evidence suggests that ricehas been feeding mankind for more than 8!777 years. %oday!agriculture is the backbone of "ndia$s economy! providing directemployment to about =7G of working people in the country. "t forms the basis ofmany premier industries of "ndia! including the te+tile! Eute! and sugar industries.Agriculture contributes about IFG to 2>L about 68G of "ndiaHs e+ports areagricultural products.
RicePro.2c!ion Area
%he maEor rice growing area in "ndia are West 'engal! @ttar radesh! Madhyaradesh! *rissa! 'ihar! Andhra radesh! Assam! %amil )adu! unEab! Maharashtra!/arnataka! ;aryana! 2uEarat! /erala! (ammu /ashmir! %ripura! Meghalaya!Manipur! :aEasthan! )agaland! Arunanchal radesh! ;imachal radesh! Mi,oram!2oa! ondicherry! Sikkim! A & ) "sland and > & ) ;aveli.
arley
In!ro.2c!ion
'arley is from the lands of the ancient 1gyptians! 2rown in mudfrom the )ile :iver and held in pottery! was believed to be thefirst cereal crop by many ancient religions. "n the recent year-F 6777 the estimate of barley production is D!IB7!777metric tonnes.
Pro.2c!ion Area'arley is a hearty plant! able to withstand many different growing conditions.;owever! barley is least tolerant of hot! humid conditions! which makes it unsuitablefor the subtropical regions. "n "ndia! :aEasthan has the ma+imum growth of (ar"e3grainbesides Madhya radesh! Andhra radesh! *rissa! 2uEarat etc.
,ome important fact related to Agriculture
Agriculture
Agriculture is the process of producing food! feed! fiber and other desired productsby the cultivation of certain plants and the raising of domesticated animals-livestock. %he practice of agriculture is also known as farming! while scientists!inventors and others devoted to improving farming methods and implements are alsosaid to be engaged in agriculture. More people in the world are involved in
agriculture as their primary economic activity than in any other! yet it only accountsfor four percent of the worldHs 2>.
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/ood processing
0ood processing is the methods and techniques used to transform raw ingredientsinto food for human consumption. 0ood processing takes clean! harvested orslaughtered and butchered components and uses them to produce marketable food
products. %here are several different ways in which food can be produced.
One Off Pro.2c!ion %his method is used when customers make an order forsomething to be made to their own specifications! for e+ample a wedding cake. %hemaking of *ne off roducts could take days depending on how intricate the design isand also the ability of the chef making the product. %oday...
)a!c0 Pro.2c!ion%his method is used when the si,e of the market for a product isnot clear! and where there is a range within a product line. A certain number of thesame goods will be produced to make up a batch or run! for e+ample at 2regg$s'akery they will bake a certain number of chicken bakes. %his method involvesestimating the amount of customers that will want to buy that product.
Ma$$ ro.2c!ion%his method is used when there is a mass market for a largenumber of identical products! for e+ample! chocolate bars! ready meals and cannedfood. %he product passes from one stage of production to another along a productionline.
+2$! In Ti&e%his method of production is mainly used in sandwich bars such asSubway! it is when all the components of the product are there and the customerchooses what they want in their product and it is made for them fresh in front of
them.
0olesale and distri2ution
A vast global transportation network is required by the food industry in order toconnect its numerous parts. %hese include suppliers! manufacturers! warehousing!retailers and the end consumers. %here are also those companies that! during thefood processing process! add vitamins! minerals! and other necessary requirementsusually lost during preparation. Wholesale markets for fresh food products havetended to decline in importance in *1C>countries as well as in istribution centers run moreefficiently! throughput can be increased! costs can be lowered! and manpower betterutili,ed if the proper steps are taken when setting up a material handling system in awarehouse.
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http://en.wikipedia.org/wiki/Wholesale_marketinghttp://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/Supermarketshttp://en.wikipedia.org/wiki/Wholesale_marketinghttp://en.wikipedia.org/wiki/OECDhttp://en.wikipedia.org/wiki/Supermarkets -
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&etail
With populations around the world concentrating in urban areas! food buying isincreasingly removed from all aspects food production. %his is a relatively recentdevelopment! taking place mainly over the last 87 years. %he supermarket is a
defining retail element of the food industry! where tens of thousands of products aregathered in one location! in continuous! yearround supply.
0ood preparation is another area where change in recent decades has beendramatic. %oday! two food industry sectors are in apparent competition for the retailfood dollar. %he grocery industry sells fresh and largely raw products for consumersto use as ingredients in home cooking. %he food service industry offers preparedfood! either as finished products! or as partially prepared components for finalassembly.
/ood Industry Tec0nologiesSophisticated technologies define modern food production. %hey include manyareas. Agricultural machinery! originally led by the tractor! has practically eliminatedhuman labor in many areas of production. 'iotechnology is driving much change! inareas as diverse as agrochemicals! plant breeding and food processing. Many otherareas of technology are also involved! to the point where it is hard to find an areathat does not have a direct impact on the food industry. Computer technology is alsoa central force! with computer networks and speciali,ed software providing thesupport infrastructure to allow global movement of the myriad components involved.
$ar3eting
As consumers grow increasingly removed from food production! the role of productcreation! advertising! publicity become the primary vehicles for information aboutfood. With processed food as the dominant category! marketers have almost infinitepossibilities in product creation.
$edia 4 $ar3eting
A key tool for 0MC2 marketing managers targeting the supermarket industryincludes national titles like The Grocerin the @./.! Checkoutin "reland! ProgressiveGrocerin the @.S. and Private Label Europefor the entire of the 1uropean @nion.
)a2our and Education
@ntil the last F77 years! agriculture was labor intensive. 0arming was a commonoccupation. 0ood production flowed from millions of farms. 0armers! largely trainedfrom generation to generation! carried on the family business. %hat situation haschanged dramatically. "n )orth America! over 87G of the population was farmfamilies only a few decades agoL now! that figure is around F6G! and some 97G ofthe population lives in cities. %he food industry as a comple+ whole requires an
incredibly wide range of skills. Several hundred occupation types e+ist within thefood industry.
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http://en.wikipedia.org/wiki/Food_servicehttp://en.wikipedia.org/wiki/Food_service -
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&esearc0 and +evelopment
:esearch in agricultural and food processing technologies happens in great part inuniversity research environments. roEects are often funded by companies from thefood industry. %here is therefore a direct relationship between the academic and
commercial sectors! as far as scientific research.
*rominent /ood Companies
)estlN is the worldHs largest food and beverage company. epsiCo is thelargest @.S. based food and beverage company. @nileveris an Anglo>utchcompany that owns many of the worldHs consumer product brands in foodsand beverages.
>uont and Monsanto Company are the leading producers of pesticide!seeds! and other farming products.
'oth Archer >aniels Midlandand Cargill process grain into animal feed and adiverse group of products. A>M also provides agricultural storage andtransportation services! while Cargill operates a finance wing.
'ungeis a global soybean e+porter and is also involved in food processing!grain trading! and fertili,er.
>ole 0ood Company is the worldHs largest fruit company. Chiquita 'rands"nternational! another @S based fruit company! is the leading distributor ofbananas in the @nited States. Sunkist 2rowers! "ncorporatedis a @.S. based
grower$s cooperative.
('S S.A.is the world$s largest processor and marketer of chicken! beef! andpork. Smithfield 0oodsis the worldHs largest pork processor and hog producer.
Sysco Corporation! mainly catering to )orth America! is one of the worldHslargest food distributors.
FOOD INDUSTRY AT A GLANCE
Foo. In.2$!r3
%he foo. in.2$!r3 is the comple+! global collective of diverse businesses that
together supply much of the food energyconsumed by theworld population. *nly
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http://en.wikipedia.org/wiki/Nestl%C3%A9http://en.wikipedia.org/wiki/PepsiCohttp://en.wikipedia.org/wiki/Unileverhttp://en.wikipedia.org/wiki/DuPonthttp://en.wikipedia.org/wiki/Monsanto_Companyhttp://en.wikipedia.org/wiki/Archer_Daniels_Midlandhttp://en.wikipedia.org/wiki/Cargillhttp://en.wikipedia.org/wiki/Bungehttp://en.wikipedia.org/wiki/Dole_Food_Companyhttp://en.wikipedia.org/wiki/Chiquita_Brands_Internationalhttp://en.wikipedia.org/wiki/Chiquita_Brands_Internationalhttp://en.wikipedia.org/wiki/Sunkist_Growers,_Incorporatedhttp://en.wikipedia.org/wiki/Cooperativehttp://en.wikipedia.org/wiki/JBS_S.A.http://en.wikipedia.org/wiki/Smithfield_Foodshttp://en.wikipedia.org/wiki/Sysco_Corporationhttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Food_energyhttp://en.wikipedia.org/wiki/World_populationhttp://en.wikipedia.org/wiki/Nestl%C3%A9http://en.wikipedia.org/wiki/PepsiCohttp://en.wikipedia.org/wiki/Unileverhttp://en.wikipedia.org/wiki/DuPonthttp://en.wikipedia.org/wiki/Monsanto_Companyhttp://en.wikipedia.org/wiki/Archer_Daniels_Midlandhttp://en.wikipedia.org/wiki/Cargillhttp://en.wikipedia.org/wiki/Bungehttp://en.wikipedia.org/wiki/Dole_Food_Companyhttp://en.wikipedia.org/wiki/Chiquita_Brands_Internationalhttp://en.wikipedia.org/wiki/Chiquita_Brands_Internationalhttp://en.wikipedia.org/wiki/Sunkist_Growers,_Incorporatedhttp://en.wikipedia.org/wiki/Cooperativehttp://en.wikipedia.org/wiki/JBS_S.A.http://en.wikipedia.org/wiki/Smithfield_Foodshttp://en.wikipedia.org/wiki/Sysco_Corporationhttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Food_energyhttp://en.wikipedia.org/wiki/World_population -
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subsistence farmers! those who survive on what they grow! can be considered
outside of the scope of the modern foodindustry.
%he food industry includes?
Reg2"a!ion? local! regional! national and international rules and regulations
for food production and sale! including food quality and food safety! and
industry lobbyingactivities
E.2ca!ion? academic! vocational! consultancy
Re$earc0 an. .e8e"o&en!? food technology
Financia" $er8ice$insurance! credit
Man2fac!2ring? agrichemicals! seed! farm machinery and supplies!
agricultural construction! etc.
Agric2"!2re? raising of crops and livestock! seafood
Foo. roce$$ing? preparation of fresh products for market! manufacture ofprepared food products
Marke!ing? promotion of generic products -e.g. milk board! new products!
public opinion! through advertising! packaging! public relations!etc
%0o"e$a"ean. .i$!ri(2!ion? warehousing! transportation!logistics
Re!ai"? supermarketchains and independent food stores! directtoconsumer!
restaurant! food services
Con$2&er? 1nd user has one of the highest influences on the food industry
through things like preference.
%he "ndian food market is estimated at over @S F96 billion! and accounts for about
two thirds of the total "ndian retail market. 0urther! according to consultancy firm
Mc/insey & Co! the retail food sector in "ndia is likely to grow from around @S =7
billion in 6779 to @S F87 billion by 6768! accounting for a large chunk of the world
food industry! which would grow to @S D77 billion from @S F=8 billion by 6768.
E7or!$
1+ports of agricultural products from "ndia are e+pected to more than double to top
@S 67.B billion in the ne+t five years! according to the commerce ministry.
According to estimates by the Agricultural and rocessed 0ood roducts 1+port
>evelopment Authority -A1>A! the share of "ndiaHs farm product e+ports in the
global trade will grow from 6 per cent now to over 8 per cent.
1+ports of fresh and processed vegetables! fruits! livestock and cereals rose F7 per
cent to @S 9.B= billion in 67797.
21
http://en.wikipedia.org/wiki/Subsistence_farminghttp://en.wikipedia.org/wiki/Foodhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Regulationhttp://en.wikipedia.org/wiki/Food_qualityhttp://en.wikipedia.org/wiki/Food_safetyhttp://en.wikipedia.org/wiki/Lobbyinghttp://en.wikipedia.org/wiki/Educationhttp://en.wikipedia.org/wiki/Academichttp://en.wikipedia.org/wiki/Vocationalhttp://en.wikipedia.org/wiki/Consultancyhttp://en.wikipedia.org/wiki/Research_and_developmenthttp://en.wikipedia.org/wiki/Food_technologyhttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Credit_(finance)http://en.wikipedia.org/wiki/Manufacturinghttp://en.wikipedia.org/wiki/Agrichemicalshttp://en.wikipedia.org/wiki/Agrichemicalshttp://en.wikipedia.org/wiki/Seedhttp://en.wikipedia.org/wiki/Farm_machineryhttp://en.wikipedia.org/wiki/Constructionhttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Seafoodhttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Marketinghttp://en.wikipedia.org/wiki/Advertisinghttp://en.wikipedia.org/wiki/Packaginghttp://en.wikipedia.org/wiki/Public_relationshttp://en.wikipedia.org/wiki/Wholesalehttp://en.wikipedia.org/wiki/Food_distributionhttp://en.wikipedia.org/wiki/Transportationhttp://en.wikipedia.org/wiki/Transportationhttp://en.wikipedia.org/wiki/Logisticshttp://en.wikipedia.org/wiki/Retailhttp://en.wikipedia.org/wiki/Supermarkethttp://en.wikipedia.org/wiki/Restauranthttp://en.wikipedia.org/wiki/Consumerhttp://en.wikipedia.org/wiki/Subsistence_farminghttp://en.wikipedia.org/wiki/Foodhttp://en.wikipedia.org/wiki/Industryhttp://en.wikipedia.org/wiki/Regulationhttp://en.wikipedia.org/wiki/Food_qualityhttp://en.wikipedia.org/wiki/Food_safetyhttp://en.wikipedia.org/wiki/Lobbyinghttp://en.wikipedia.org/wiki/Educationhttp://en.wikipedia.org/wiki/Academichttp://en.wikipedia.org/wiki/Vocationalhttp://en.wikipedia.org/wiki/Consultancyhttp://en.wikipedia.org/wiki/Research_and_developmenthttp://en.wikipedia.org/wiki/Food_technologyhttp://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Credit_(finance)http://en.wikipedia.org/wiki/Manufacturinghttp://en.wikipedia.org/wiki/Agrichemicalshttp://en.wikipedia.org/wiki/Seedhttp://en.wikipedia.org/wiki/Farm_machineryhttp://en.wikipedia.org/wiki/Constructionhttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Seafoodhttp://en.wikipedia.org/wiki/Food_processinghttp://en.wikipedia.org/wiki/Marketinghttp://en.wikipedia.org/wiki/Advertisinghttp://en.wikipedia.org/wiki/Packaginghttp://en.wikipedia.org/wiki/Public_relationshttp://en.wikipedia.org/wiki/Wholesalehttp://en.wikipedia.org/wiki/Food_distributionhttp://en.wikipedia.org/wiki/Transportationhttp://en.wikipedia.org/wiki/Logisticshttp://en.wikipedia.org/wiki/Retailhttp://en.wikipedia.org/wiki/Supermarkethttp://en.wikipedia.org/wiki/Restauranthttp://en.wikipedia.org/wiki/Consumer -
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Sice$
>espite a global slowdown! "ndian spice e+ports are growing. "ndia e+ported D=7!867
tonnes of spices valued at @S FF.B9 billionOan alltime highOin 67797.
>uring the 677=79! DDD!687 tonnes valued at @S FF.7F billion were e+ported.
Compared with 677=79! e+ports had shown an increase of F per cent in rupee
value and si+ per cent in dollar terms.
Foo. Proce$$ing
%he "ndian packaged processed foods industry is estimated at @S F7.9= billion P
@S FI.78 billion! including biscuits! chocolates! icecream! confectionery! snacks!
cheese and butter. 2rowing at a healthy FDF8 per cent over the past twothreeyears! maEor players in the sector include 'ritannia! )estle! Amul! "%C 0oods! arle!
/ellogg$s! 2la+oSmith/line! Wrigley and 0rito" totalling @S FDI.97 million in
677=79 against @S 8.=7 million in the previous fiscal. %he cumulative 0>" received
by the industry from April 6777August 677 stood at @S 9=9.I6 million.
;owever! "ndia$s share in e+ports of processed food in global trade is only F.8 per
centL whereas the si,e of the global processedfood market is estimated at @S I.6
trillion and nearly 97 per cent of agricultural products in the developed countries get
processed and packaged.
"n order to further grow the food processing industry! the government has formulated
a 3ision67F8 action plan under which specific targets have been set. %his includes
tripling the si,e of the food processing industry from around @S =7 billion to about
@S 6F7 billion! raising the level of processing of perishables from B per cent to 67
per cent! increasing value addition from 67 per cent to I8 per cent! and enhancing
"ndia$s share in global food trade from F.8 per cent to I per cent. %his would require
an investment of @S 67.B billion.
According to an 1rnst and Qoung -1&Q presentation! the food processing industry in
"ndia will grow I7D7 per cent as against the present F8 per cent in the ne+t F7
years.
rime Minister >r Manmohan Singh on *ctober B! 677 laid out a blueprint for rapid
growth in the country$s food processing sector. %he rime Minister said that this can
be achieved by simplifying the ta+ structure! formulating a )ational 0ood rocessing
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olicy and improving rural infrastructure.
Moreover! according to @nion Minister for 0ood rocessing "ndustries! Subodh /ant
Sahai the central government is envisaging an investment of @S 6F.87 billion in the
food processing industry over the ne+t five years! a maEor chunk of which it plans to
attract from the private sector and financial institutions.
Snack$ an. Confec!ioner3
%he "ndian market holds enormous growth potential for snack food! which is
estimated to be worth @S I billion! with the branded snack market estimated to be
around @S F.ID billion! growing at F867 per cent a year. While the growth rate of
the @S F.8B billion unorganised sector is =9 per cent.
Hea"!0 Foo.
:ecognising the growth potential of the branded health food sector in "ndia! fast
moving consumer goods -0MC2 maEors are foraying into this sector in a big way.
As ;industan
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0ood Corporation of "ndia -;indi? was setup on FDth (anuary FB8
under 0ood Corporation Act FBD with authorised capital of almost B77 million to
implement the national policy for price support operations! procurement! storage!
preservation! interstate movement and distribution operations.
"t operates through 8 ,onaloffices and a regional office in >elhi. 1ach year! the 0ood
Corporation purchases roughly F867 per cent of "ndiaHs wheat output and F6F8 per
cent of its rice output. %he losses suffered by 0C" are reimbursed by the @nion
government! to avoid capital erosion! and thus declared as a subsidyin the annual
budget. "n 677=! such food subsidies were met by government bonds worth almost
9 billion.
%he 0ood Corporation of "ndia was setup under the 0ood Corporation Act FBD!
in order to fulfill following obEectives of the 0ood olicy?
1ffective price support operations for safeguarding the interests of the
farmers.
>istribution of food grains throughout the country for public distribution system
L and
Maintaining satisfactory level of operational and buffer stocks of food grains to
ensure )ational 0ood Security.
"n its D8 years of service to the nation! 0C" has played a significant role in "ndiaHs
success in transforming the crisis management oriented food security into a stable
security system. Since its inception in FB8! having handled various situations of
plenty and scarcity! 0C" has successfully met the challenge of managing the
comple+ task of providing food security for the nation. A strong food security system
which has helped to sustain the high growth rate and maintain regular supply of
wheat and rice right through the year. %he efficiency with which 0C" tackled one of
the worst droughts of the century not only cemented its role as the premier
organi,ation in charge of food security in "ndia! but also brought it accolades from
international organi,ations.
%oday it can take credit for having contributed a great deal in transforming "ndiafrom a chronically food deficit country to one that is selfsufficient.
Cre.i! S3$!e& for FCI re$cri(e. (3 Go8! of In.ia
%he ministry of finance may allow regional rural banks -::'s to Eoin their sponsor
banks in financing food procurement e+ercise by 0ood Corporation of "ndia -0C".
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%he issue has been on the ministry$s platter for quite some time now. According to
sources close to the ministry! the final clearance is e+pected anytime. Although!
there is no regulatory hurdle on ::'s offering food credit! but such a step has never
been tried.
4We are e+pecting the finance minister to make an announcement to this end shortly.
%his would help ::'s a great deal by way of a new window for credit deployment!5
said All "ndia :egional :ural 'ank 1mployees Association -A"::'1A general
secretary! >ilip /umar MukherEee. "ncidentally! the request to allow ::'s offer food
credit was first made from A"::'1A latform.
0C" offers handsome returns to its lenders for credit. "t fi+es the rate by taking the
average of prime lending rates of the five largest banks. ::'s with unutili,ed funds
may use this avenue for assured returns without taking any risk.
At present! some 8F banks! including cooperative banks offer food credit. %he
government has fi+ed a bank loan limit of :s ID!D8 crore for 0C" for 677F7. As on
(une I7! 677! outstanding food credit to 0C" stood at :s 6F!69B crore.
4More than 87 ::'s have unutilised funds. Moreover! many of these banks have
e+hausted their agriculture credit limit! making fund deployment more difficult. "n this
light! we have requested the ministry to allow the same!5 Mr MukherEee said. %here
are 9D ::'s in the country with their F8!677odd branches spreading across 8I outof BF6 districts.
"ncidentally! it was a longtime demand from ::'s to participate in food credit
disbursement. Qet! these sets of banks were not in a position to handle such big
amounts till recently. )ow! following amalgamation of ::'s! many of them have
improved their scale of operation and are equipped to sanction bulk loans.
CORPORATE 'ISION
'i$ion 9:9:
%o aggressively promote >ecentrali,ed rocurement by State 2overnments
with special emphasis in nontraditional areas and commodities.
%o initiate procurement of nonMS governed commodities on commercial
principles.
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%o ensure adequate buffer for meeting requirements under %>S & *ther
Welfare Schemes.
%o dispose of surplus and unstorage worthy godowns and introduce
concepts of mechani,ed handling in the conventional godowns.
%o undertake :&> for conversion of some of the e+isting capacity to bulk and
cost effective utili,ation of e+isting bulk capacity.
%o optimi,e monthly movement programme with e+isting state of art of
computeri,ation within the country at various locations as per corporate
policies and priorities.
Moderni,ation of Ruality Control equipments and systems for food
preservation in order to increase the shelf life of food grain.
%o venture in the fields of 0orward %rading and 1+ports of both surplus stocks
of food grains in Central ool and notraditional commodities.
%o introduce state of art of financial management in order to reduce the
dependency on the present banking system in the country.
%o initiate systems for settlement of storage loss and transit loss through
insurance coverage and revised inventory mechanism.
%o develop efficiency in human resource management both in staffJofficers
and workers with changed circumstances in the work approach of .S.@. s.
%o achieve state of art in computeri,ed communication between different
officesJ depots throughout the country.
NE% INITIATI'ES
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;aving been acknowledged a maEor player in food grain management within the
Country and abroad! 0C" is now endeavoring for
:esource mobilisation to reduce burden on food subsidy.
'etter financial & %reasury Management.
"mproved stock inventory management real time online system through a
recently launched ""S0M -"ntegrated "nformation System for 0ood grains
Managementin collaboration with )"C.
Creation of rofit Centers.
@p gradation of technology through interface with Agriculture
@niversitiesJManagement "nstitutes.
@se of $A$ %will te+ture gunny bags as against H'H %will bags as a proEect to
reduce losses in storage and transit.
Multimodal transportation system through riverine J container.
Micro level "nventory Management through focused weekly movement plans.
Sustained corporate communication for improving image perceptions
CORPORATE MISSION
While homemakers are busy making chapati! roti! and pooris! 0ood Corporation of
"ndia -0C" stays busy managing "ndiaHs grain supplies. 0C" buys and markets
wheat and rice for the "ndian government! purchasing both domestically grown and
imported grains! keeping the stockpiles in its own warehouses. %hrough periodic
sales! 0C" controls and manages the domestic grain supply! regulating the market
prices for those commodities. "t also provides some of its stores of grain to
governmentsubsidi,ed food programs! and it builds up buffer stocks to meet any
food crisis. *ne of AsiaHs largest companies! 0C" operates under the direction of
the "ndian governmentHs 0ood Ministry. "t was founded in FB8.
27
http://fciweb.nic.in/finanancial/integrated_information_system.htmhttp://fciweb.nic.in/finanancial/integrated_information_system.htmhttp://fciweb.nic.in/finanancial/integrated_information_system.htmhttp://fciweb.nic.in/finanancial/integrated_information_system.htmhttp://fciweb.nic.in/finanancial/integrated_information_system.htm -
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R@A
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Headquarters
Owned
760
Zonal Offices 5
Regional Offices 23
District Offices 166
Depots 1456
Hired
66
Organisational !tructure
!t "o#t
63
$%$
147
!%$
3&7
'#t(
CAPITAL STRUCTURE(As on 31st March 2006)
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CAPITAL STRUCTURE(As on 31st March 2006)
Bank Loans
(Rs. In Crore)
Bonds
(Rs. In Crore)
2002-03 9 NIL
2003-04 79 NIL
2004-05 61 4024
2005-06 44 8605
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)! O* 31(03(2007
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%or+ers
System FCI Depots Strength
Depart,ental 162 22253
Direct 'a-,ent !-ste, 226 34023
*o wor+ *o 'a-. 13 13&7
/ree ,e,er co,,ittee
/otal 401 57663
$oop !ocieties.'ri#ate $ontractors 74 112000)ppro(
"rand /otal 1224 170246
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!torage $apacit- utilisation
8n la+ 9/s
)s on 01(06(2007
Owned Hired
$o#ered 12(4362 $%$ 14(2 &
Open $)' 22(5 15 !%$ 65(32 &1
!tate "o#t( 5(11&7
'#t( 'arties 6(&3&3
Open $)' 3(76100
/otal 152(0255 /otal
"rand /otal
5(22&3
247(2 66
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:oodgrain !toc+s;uffer !toc+ing *or, < )#ailailit-
(In million tonnes)
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=le,ents of !usid-2006-07 (BE)
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=le,ents of !usid-2006-07 (RE)
(Rs. Cr)
E!"!nts Rs( $r(
=cess of 9!' o#er $8' &544 32(5
!tatutor- < Oligator- $arges 4&17 1&(4
>aour < /ransportation costs at 9andies 670 2(5
!torage interest ad,inistrati#e carges < guarantee fees
paid to !tate )gencies
5&1 2(2
:reigt $osts 3413 13(0
Handling $osts 1731 6(6
!torage $osts 1366 5(2
8nterest on :$8 operations 1330 5(18nterest on outstanding of $redit !ales 232 (1
)d,inistrati#e O#ereads 31 3(5
!ortages 331 1(3
$arr- O#er $arges paid to !tate )gencies 15 0(6
/otal 26265 100
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20062007
'rocure,ent 9o#e,ent !torage
$apacit-2(6 ,illion
tonnes
0(7 ,illion
tonnes
31(5 ,illion
tonnes
0(6 ,illion
tonnes
2&( ,illion
tonnes
165166
25(2 ,illion
tonnes
Distriution
&(2 ,illion
tonnes
"rowt of Operations
33( ,illion
tonnes
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3015
621214
25
155
25
36
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9o#e,ent
30 ,illion tonnes annual
,o#e,ent
4000 ags andled per ra+e
0 ,o#e,ent - Rail
&5 ,o#e,ent e *ort
)#erage lead 1500 +,s
)#erage annual freigt
pa-,ent Rs( 2500 $r
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'osition as on 31st 9arc of eac -ear
#1.0$
%%.3&
30.%1
17.63
$.0#
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P'na-62*+ ,arana-2$*+
Uttar Pra!sh-6*+
Maha Pra!sh-2* /Raasthan-1*
(a0. o ast thr!! !ars)
h!at 4!5c5t Stat!s- 23
9a?or %0eat 'rocuring !tates
,OT Analysis of /ood Corporation of India
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S!reng!0 of FCI# -
0acilitator for food security
o
rovider of price & market assurance to the farmero 1nsuring steady food grain supplies to 8 istribution System to cover FDF million Above overty
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After nearly four decades of varied e+perience in food management! 0C" can
play a wider role in being a food advisor to the CentralJState 2ovts.
%he corporation can also play a more proactive role in the sphere of
commercial ventures. %o diversify into nontraditional commodities J activities.
T0rea!$ for FCI#-
Widespread negative image perception of 0C"$s role & functions.
>espite its gigantic achievements! considered to be overstaffed! inefficient!
slow! lacking dynamism! vision & burden on the e+chequer despite the fact
that appro+. 98G of its e+penses are statutory & beyond its control & its own
administrative overheads restricted to below 6G of 1conomic cost. >espite the criticality of its role particularly on the face of unprecedented
natural calamities! periodically its very e+istence is questioned demoralising
its workforce.
CORPORATE SETUP
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%he 2eneral Superintendence! >irections and Management of the affairs andbusiness of the Corporation vests with the 'oard of >irectors
'oard of >irectors as per section =-F of the 0ood Corporation Act shall be?
Chairman
Managing >irector
Managing >irector! Central Warehousing Corporation -1+*fficio
2overnment :epresentatives ?
%hree >irectors to represent respectively the Ministries of the Central
2overnment dealing with ?
". 0ood
"". 0inance
""". CooperationL and
Si+ other >irectors -out of which four-D are nonofficial >irectors
*'(1C%"31S *0 0C"
%o provide farmers remunerative prices
%o make food grains available at reasonable prices! particularly to vulnerable
section of the society
%o maintain buffer stocks as measure of 0ood Security
%o intervene in market for price stabili,ation
SIGNIFICANT ACCOUNTING POLICIES
OFFOOD CORPORATION OF INDIA
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%he accounting of cash and bank transactions including "nteroffice
remittances is made as per the books maintained by the Corporation. %he
differences in the banking transaction between the figures of the Corporation
and those appearing in the bank accounts are reflected in the bank
reconciliation statement.
= INCOME>E,PENSES RELATING TO PRE'ISOUS YEARS
"tems of incomeJe+penses for each claimJbill pertaining to the previous years
above :s.68777J which arise in the current period as a result of errors or
omissions are accounted for under the head 4AdEustment relating to previous
years. 4 %he chargesJ credits arising on the outcome of a contingency which
at the time o f occurrence could not be estimated accurately do not constitute
an error but a change in estimate. Such an item is not treated as prior item.
? PRO'ISION OF LIA)ILTIES
-A rovision for accrued e+penses @ to IFstMarch! irrespective of amount of
each billJclaim is made in the accounts.
-' All undisputed ta+es! levies i.e. Central Sales ta+! purchase ta+! Market fee!
*ctroi! 1ntry ta+! )irashrit ta+! 1+cise J Custom duty etc. which are legally
payable and paid within the stipulated period are accounted for on accrual
basis.
-C roperty ta+es and other leviesJ service charges etc. *n the godownsbelonging to the Corporation charged by the local authorityJ administration
and which are legally payable shall be accounted for on accrual basis.
-> "nterest due on loans or borrowings or advances from public 0inancial
"nstitutionsJ Scheduled 'anks up to IFst March and paid on or before
finali,ation of Accounts or by the specified date for filing of :eturn of "ncome
whichever is earlier! is accounted for on accrual basis.
-1 Where the arbitration award is against the Corporation and the Corporation
has not challenged the award within the period of I months from the date of
pronouncement of award or the appeal to set aside the award has been
reEectedJdismissed by the court! liabilities are provided for on accrual basis.
-0 repaid e+penses @p to :s.F7!777J in each case are charged to revenue.
-2 Contingent liabilities -claims against the Corporation not acknowledged as
debts are disclosed in each case! above :s.68!777J
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-" %he accounting of e+penditure towards reimbursement of ;ill %ransport
subsidy and :oad %ransport charges is made upon receipt of claims as per
prescribed procedure! from concerned state 2overnments.
-( ayment under 3oluntary :etirement Scheme e+cepting onefifth of the
amount so paid! are treated as >eferred :evenue 1+penditure and equallyclaimed as e+penditure in succeeding four years.
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4A5 Inco&e
-F Claims against CentralJState 2overnments and their agenciesJ'anks
which are prima facie under dispute.
-6 :efunds including rebateJinterest thereon! due on account of ta+es and
levies.
-I Claims on duty drawback on e+ports.
-D Claims on :ailways for freight on missing wagons! disputed
demurrages and compensation for shortagesJ damages.
-8 "nterest on advances to the State 2overnmentsJAgenciesJStaff and on
delayed reali,ation of sales.
-B Claims on shipping agents for short
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Commercial 'orrowing -'onds :s. 9B78 Crores
:ate of "nterest on 'ank 'orrowing w.e.f.7F.7I.6779
F7.F8 G p.a. -Monthly Compounding
:ate of "nterest on 'onds =.IFGp.a.-Annually ayable
E2i!3 Re"ea$e. for P"an Sc0e&e$ an. %orking Cai!a" 4a$ on
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Acco2n!ing Year-%i$e oening S!ock a.2$!e. weig0!e. Econo&ic Co$!
-:s.Jqtl.
Qear Status Wheat :ice
677F76 Audited 986.D F7=.B
67767I Audited 99D.77 FFB8.7I
677I7D Audited F9.B F6IB.7
677D78 Audited F7F.7F FI7I.8
67787B @naudited F7DF.98 FII.B677B7=-rov rov. 1stimates F6FD.I FDFF.B7
677=79-:1 :ev. 1stimates FID9.B F8=F.IB
67797-'1 'udget 1stimates FD89.9I FB9.7
Foo. S2($i.3 Re"ea$e. !o FCI an. Inc2rre. (3 FCI 4R$ Cr5
0ood subsidy released to 0C" 0ood Subsidy "ncurred by 0C"
Qear %otal
Against
1arlier
years
0or the
Qear
Subsidy "ncurred
during the year
Status of
Accounts
677F76FB6=D.7
7. FB6=D.77 F9778.77 Audited
67767I66B=I.=
6. 66B=I.=6 68I66.77 Audited
677I7D6ID=D.7
DD8D8.9B F969.F9 6F89=.77 Audited
677D786I697.7
7D77.I FF9.BF 67==I.77 Audited
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67787BF9=F.7
7D=I.I6 FI=.B9 6FIDD.77 @nAudited
677B7=67=9B.6
F
FDFF.79 FI=8.FI 6D989.77rov.1stimate
s
677=796==8.B
986F9.=8 668D7.I IF9F=.77
:ev.1stimate
s
67797
-@pto
I7J7DJ79
8D77.7D . 8D77.7D . .
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CHAPTER-I'
THEORETICAL FRAME%OR/ OF %OR/ING CAPITAL
MANAGEMENT
%orking Cai!a" C3c"e
Working capital is vital to a business. %hey have to have funds available to
pay their daytoday bills! wages and so on. %he working capital is made up of the
current assets net of the current liabilities. "t is very important to a corporation to
manage its working capital carefully. %his is particularly true where there is a
substantial time lag between making the product and receiving the money for it. "n this
situation the corporation has paid out all the costs associated with making the product
-labor! raw materials and so on but not yet got any money for it. %hey must therefore
ensure they have enough cashto do this.
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%he way working capital moves around the business is modeled by the working capital
cycle. %his shows the cash coming into the business! what happens to it while the
business has it and then where it goes. A simple working capital cycle may look
something like?
'etween each stage of this working capital cycle there is a time delay. 0or
some businesses this will be very long where it takes them a long time to make and
sell the product. %hey will need a substantial amount of working capital to survive.
*thers though may receive their cash very quickly after paying out for raw materials
etc. -erhaps even before theyHve paid their bills %hey will need less working capital.
0or all businesses though they need to plan how much cash they are going to have.
Proce$$ f"ow of Ca$0 "anning * )2.ge!ing
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"nput information received from all units firm for the first week & tentativefor the 6nd! Ird! Dthweek for raw material! sales! manufacturing e+p. 1tc. on
the basis of debtors & inventory aging reports etc.
lan firmed up after discussion and modified withreference to inflows & outflows on unit basis.
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No
Yes
1+planation of above?
Cash is the lifeblood of every business organi,ation. 1very organi,ation
needs to have adequate flow of cash to meet its all requirement whether short term or
long term. "n any organi,ations before starting any business activity proper planning of
cash inflow & outflow is required to be made. So! on the basis of receivable period
cash inflow is planned for the beginning of each month and accordingly outflow that is
to be made is also planned as to when payment is to be made.
P2ro$e of rearing ca$0 f"ow
Cash flow is concerned with the movement of money in and out of a business.
More importantly! it is concerned with the time at which the movement of the money
takes place. Qou might even say the concept of cash flow is more in line with reality.
"t is being identified in which unit the outflow is greater than the inflow! &
where there is discrepancy between the 'udgeted & Actual inflow & outflow.
"n this format on daily basis cash inflow & outflow is entered under respective
heads. %his is done in all the units of 0ood Corporation of "ndia then at the end of the
day cash balance remaining with all banks are also added & it is found whether the
cash balance reduced between two consecutive days are equivalent to the net of cash
flow or not "f not! then any discrepancy is there & that is tried to found out. "t alsohelps in finding out the item wise e+penditure of the firm & help in knowing the
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lan met
Monitored & reviewed on daily basis including followup collection Jfundsintransit.
Carried to ne+tmonth
Month closed
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surplusJdeficit generated in each unit & also helps in finding out the reason for
difference between the inflow & outflow of various units.
%orking Cai!a" Manage&en!
Components of Working Capital?
:eceivable Management
"nventory Management
ayable Management
Cash Management
Recei8a("e$ Manage&en!
%he term receivable is defined as 4debt owed to the firm by customers arising
from sale of goods in the ordinary course of business5. %he credit sales are generally
made on open account in the sense that there are no formal obligations through a
financial instrument. ;owever e+tension of credit involves risk and cost. Management
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with steps that have to be initiated to collect the over dues are
components of such type of costs.
D. >efault cost?
When firms are unable to recover the over dues because of the inability
of the customer! the debts are treated as bad debts to be written of as
they cannot be reali,ed! such costs are known as default costs.
Recei8a("e Manage&en! in Foo. Corora!ion of In.ia
%hese sales are made against invoice. :eceivable management is beyond
credit control.
"n 0ood Corporation of "ndia Sales ledger debtors$ day collection is prepared
to calculate on a consistent basis throughout the corporation and for each unit! the
number of day$s sales represented by customer debts.
>epartment involved in receivable management
F. Accounts & 0inance department
6. Sales & marketing department
Credit terms followed
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All sales made are credit sales.
F. "t has different payment terms with different customers and it is mutually
agreed which is shown on the * -purchase order made with each customer.
6. "n general credit offer to most of the customers is for I7D8 days! and to few
customers it is B7 days.
I. Advance payment is received in case of foreign customer & the customer who
are one time purchaser or whose credit worthiness is not checked.
Credit policy?
"n credit policy as credit standards & credit analysis is done. 'ut in 0ood
Corporation of "ndia there is no written credit policy as such. )o credit analysis is done
before selling goods to them. )o documents are being filled by the customer & their
financial performance is also not Eudged. Sometime they Eust refer to their balance
sheet. )o information is collected either internally or e+ternally.
Collection policy?
%here is distinct credit collection policy in 0ood Corporation of "ndia because no credit
sales are allowed in 0C" and that is 0C" not having any uniform collection policy.
"nventory management
"nventories are stock of the product! a corporation is manufacturing for sale.
"nventories can e+ist in the form of raw material! workinprogress! finished goods!
components and supplies! whereas motive for holding inventories can be transaction
motive! precautionary motive and speculative motive.
'ut many companies can$t operate under this model. %hose that sell timesensitive
items have to have materials! if not finished products! on hand to satisfy the
e+pectations of the customer who needs an order right away. )owadays many large
manufacturers operate on a Eustintime -("% basis whereby all the components to be
assembled on a particular day! arrive at the factory early that morning! no earlier no
later. %his helps to minimi,e manufacturing costs as ("% stocks take up little space!
minimi,e stock holding and virtually eliminate the risk of obsolete or damaged stock!
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because ("% manufacturers hold stock for a very short time! they are able to conserve
substantial cash.
"nventory Management P *bEective
%he basic obEective of inventory management is twofold. 0irst is the avoidance of over
or under investment in inventories and second is to provide the right quantity of
material to the production department at right time. %he key issue for a business is to
identify the fast and slow stock movers with the obEective of establishing optimum
stock levels for each category and! thereby! minimi,e the cash tied up in stocks.
0actors to be considered when determining optimum stock levels are?
%he proEected sales of each product.
Availability of raw materials! components etc.
>elivery time by the suppliers
Can one remove slow movers from one$s product range without compromising best
sellers
"nventory Management %echniques
An inventory management technique includes the following?
1ffective and efficient purchasing! storage and issuing procedures.
Settings of various levels like ma+imum! minimum! recorder level etc.
0i+ation of economic order quantity.
1stablishment of inventory budgets.
@se of perpetual inventory system.
Minma+ plan.
*rder cycling system.
A'C analysis.
31> analysis.
KQT analysis.
@se of inventory ratios.
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Aging schedule of inventories.
"nventory Management in 0ood Corporation of "ndia.
"n 0ood Corporation of "ndia inventory management is done as various types of
inventory are required to be kept & valuation of inventory is done.
%ypes of "nventory
F. :AW MA%1:"Aevelopment material? "t is the inventory that is being developed for new order
until the sample is being finali,ed.
/ey material? "t is the raw material of keys
lastic material? "t is the inventory of plastic material that is used for covering
the keys.
(ob Work -I
rd
party :M ? "t is the inventory that is being used by third party forproducing our goods. %his stock is in a way the stock of 0ood Corporation of
"ndia only.
6. Workinprogress ? "t is the inventory of semifinished goods.
/ey section ? "t includes following?
/ey blank ? "t is the inventory of plain key material.
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When supply is received then check is done at the gate of the wherehouse & it is
checked whether the material is supplied as per the invoice. "f satisfied then M::
-material received receipt is issued at the gate. Material is then sent to the receiving
department! there the quantity of material is checked to know whether it is as per the
order or not After checking it is then passed on to the quality store for the qualitycheck i.e. whether the quality is as per the order requirement or not %hen the material
is finally stored in the store from where it is issued to the production department
through the issue slip. Material is issued using 0"0* -first in first out method! where
the material that comes first is issued first for the production. %hey use the practice in
which material is kept in racks in such a way that material coming first will be used
first.
("% method?
"n 0ood Corporation of "ndia ("% system of inventory management is used. "t
is the method in which inventory is ordered only when demand comes. As in 0ood
Corporation of "ndia the production schedule is followed. When & how much quantity
of purchase & sale is to be made is know beforehand. %hat$s why no e+cess inventory
is maintained.
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$"teri"l receied is stored (one d"+
inentor+ is m"int"ined)
,"il"-ilit+ o! stoc is checed
&roduction schedule is checed
,ccordinl+ /rder is l"ced ith
suliersendors
$"teri"l is issued !or roduction
usin I/ method
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'in card system?
"n case of this technique! each item of inventory is kept in bin. %he bin
contains such quantity of inventory! which is sufficient to meet the consumption
requirements till the ne+t date order is placed. A card for each bin is maintained in
which total inventory received in quantity! inventory used! purpose of issue is
mentioned. 1ach time new inventory is received it is entered in the card.
Aging schedule of inventories?
"nventory aging is done where on the basis of period of stock holding inventory is
divided into four categories?
I7B7days ? 0ast Moving
B77 days Slow Moving
7F67 days
F67 above ? )onMoving
Continued "nventory aging is done to know the status of inventory. Analysis is done so
as to control & reduce the slow moving inventory.
)onmoving inventory are removed either by selling it as scrap or by making some
modification in it through Eob work and then using it again! if possible.
Which type of inventory is higher in different months :emedial action can be taken
against the inventory. With the help of chart comparison becomes easy.
ayable Management
Creditors are a vital part of effective cash a management and should be managed
carefully to enhance the cash position. urchasing initiates cash outflows and an over
,ealous purchasing function can create liquidity problems. "ronically! some companies
looking to take working capital off the balance sheet nurture slow! inefficient or even
obstructive AJ processes. "t$s one case where negligence can improve financial
performance. 'ut squee,ing the vendors is a shortsighted policy. A better strategy is
to shrink the vendor base radically! then use one$s clout to negotiate longer terms with
the vendors. 3endor rationali,ation is a process that can pay off in a big way. Apart
from the question that who should authori,e purchasing in the corporation should it be
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Methodology of payment
"n 0ood Corporation of "ndia the complete data base of the vendors is made in which
each & every information & bank detail of the suppliers is available.
F. 0or making the payment every time it become due! the suppliers$ liability is
checked on the basis of their credit period and amount that is due for the
respective period is found out and it is being tallied with the ledger of that supplier.
6. "f the amount in ledger doesn$t tally with the ledger of supplier then balance
confirmation is asked from the respective supplier to know the due amount.
I. %hen the amount due is recorded in the database & it is checked that through
which medium payment is to be made. "f amount is more than 4one lack5 then
payment is made through :%2S otherwise through )10%! and if bank detail is not
available or the supplier whose bank is not registered with :'" then in that case
payment is made through account payee cheque.
D. 0ood Corporation of "ndia has recently started the service of outsourcing cheque
payment from ;S'C bank! whereby! now only the details of supplier & the amount
to be paid will be sent to the bank & bank will make the cheque & payment on its
behalf this will save the time & efforts of the employees & the process will also get
fastened.
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term or long term. "n any manufacturing organi,ations before starting any business
activity proper planning of cash inflow & outflow is required to be made. So! on the
basis of receivable period cash inflow is planned for the beginning of each month and
accordingly outflow that is to be made is also planned! as to when payment is to be
made.
*n daily basis unit wise cash flow is prepared as discussed above & the
position is monitored. "t is being identified in which unit the outflow is greater than the
inflow! & where there is discrepancy between the 'udgeted & Actual inflow & outflow.
ayment is received on 6nd! 9th! F9th 66ndof each month! accordingly payment is made
on 6nd! 9th! & 66ndof each month.
:eceivable & payable of the organi,ation are so managed that the cash limit
available with the 'anks are minimally used.
0ood Corporation of "ndia has maintained the accounts with many banks but
maEor ones are S'" 'A)/! ">'" 'A)/ and AK"S 'A)/.
'ank provides the facility of WC>< -working capital draw down limit.it is the
limit available with the bank for meeting the short term cash requirement of the firm.
>ifferent bank charges differed rate of interest for the service. As WC>< is the ,ero
balance schemes where firm can use the credit limit of the bank up to certain e+tent as
agreed upon by them.
WC>< -working capital draw down limit is of two types?
S0or!-!er& "oan5 -"t is the shortterm loan facility that the firm can avail with the bank
it is having F8 days roll over period i.e. after using for F8 days this facility gets rolled
for ne+t F8 days.
CC 4Ca$0 Cre.i!5 "i&i!# -"t is the facility similar to credit card facility available with the
bank. %he organi,ation can avail up to certain e+tent the credit facility of bank. "n case
of standard chartered bank it is 877 Crores.
%o know the position of WC>< used with the banks daily bank statements are checked
of all the three banks! this is done because there is always difference between the our
bank book & books maintain by bank! so to get an accurate picture of cash bank
statements are checked. "t is identified on daily basis that whether the firm is having
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fund with bank or it is using bank$s fund i.e. 'ank$s CC limit. %his is done to know the
cash position of firm at the end of each day so that decision could be taken on time
regarding Sweep to other unit or regarding investing the surplus fund.
Chart is prepared to show the WC>< utili,ation position. "n the ne+t page WC>< is shown.
0.00
%00.00
1000.00
1%00.00
2000.00
1 2 3 & % 6 7 # $ 10 11 12 13 1& 1% 16 17 1# 1$ 20 21 22 23 2& 2% 26 27 2# 2$ 30 31
!eries1
As per this chart WC>< utili,ation increases on F6 thPF9thof every month as
payment is being made to supplier$s between these days in ma+imum number of units
of 0ood Corporation of "ndia. %he utili,ation is minimum on 9 th& 66ndof every month
as payment is received on these days from customer.
"n the ne+t chart WC>< utili,ation position from MA:$79 to (@)1$79 is given.
Comparison is made and it is found that although WC>< utili,ation has not smoothen
in the (@)1 month but as compared to other months the fluctuations in utili,ation is
less.
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C4L Ut55sat5on- Mar 0# - 'n! 0#
0
500
1000
1500
2000
2500
3000
1 2 3 4 5 6 7 & 10 11 12 13 14 15 16 17 1& 1 20 21 22 23 24 25 26 27 2& 2 30 31
4as
A"o'nt 9ar0&
)pr0&
9a-0&
@un0&
STATEMENT SHO%S %OR/ING CAPITAL POSITION OF FOOD CORPORATION OF
INDIA
A$ on
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Ne! working cai!a" 4A-)5 IF86.6
%OR/ING CAPITAL PERFORMANCE USING RATIO ANALYSIS
:A%"* A)A
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T0e &ain 2ro$e$ of working cai!a" ra!io ana"3$i$ are# -
%o indicate working capital Management erformance
%o assist in identifying areas requiring closer Management.
T0e fo""owing ra!io$ are of in!ere$! !o !0o$e &anaging working cai!a" # -
F. Working capital ratio
6. Cash ratio
I. Ruick ratio
D. Working capital ratio
8. >ebtor turnover ratio
B. Creditor turnover ratio
=. "nventory turnover ratio
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C2rren! Ra!io
Current :atio U Current AssetsJCurrent
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immediately or in time. ;ence! it is necessary that the absolute liquid ratio should also
be calculated together with current ratio and acid test ratio so as to e+clude even
receivables from the current assets and find out the absolute liquid assets
Qear ending Cash & bank Vshort term securities
Current
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677= F987D.I IF86.6 7.89
6779 -rovisional 67777.77 ID777.77 7.89
A higher ratio indicates the efficient utili,ation of working capital and low ratio
otherwise. "n case of 0ood Corporation of "ndia Working Capital ratio indicate
inefficient utili,ation of working capital.
DE)TOR TURNO'ER RATIO
>ebtors %urnover :atioU SalesJ>ebtors
Average Collection eriodUIB7J>ebtor %urnover :atio
%his ratio indicates the speed with which >ebtorsJAccounts receivables are
being collected. "t shows how quickly debtors or receivables are being converted into
cash. A turnover ratio of = shows that debtors are converted into cash = times in a
year. A collection period of D shows that debtors on an average are collected in D
days the higher the turnover ratio and lower the average collection period the better
the trade credit management. ebtors -inCr.
Sales -in Cr. >ebtor %urnoverratio
AverageCollection
6778 6DDFD.66 6DII.=D F.7F I8B
677B II7B=.D9 66=B.I F.87 6D7
677= 679DI.6= F987D.I F.FF I6D
6779 -rovisio 6D777.77 67777.77 F.67 I77
A turnover ratio of F.67 shows that debtors are converted into cash F.67 times
in a year. A collection period of I78 shows that debtors on an average are collected in
I78 days the lower the turnover ratio and higher the average collection period the
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"nventory turnover ratio U Cost of 2oods SoldJAverage "nventory
"nventory Conversion eriod U >ays in a yearJinventory %urnover :atio
"nventory %urnover :atio indicates the speed at which inventory convert into
finished sales. @sually! a high inventory turnoverJ Stock velocity indicates efficient
management of inventory because more frequently the stocks are sold! the lesser
amount of money is required to finance the inventory. A low in inventory turnover ratio
indicates an inefficient management of inventory. A low inventory turnover implies
overinvestment in inventories! dull business! poor quality of goods! stock
accumulation of obsolete and slow moving goods and low profits as compared to total
investments.
Qear ending C*2S -"n Cr. "nventory -inCr.
"nventory%urnover :atio
"nventoryConversion
eriod
6778 D79=F.FB F66.8D I.FB FFD
677B IB7.76 F69=.BD I.78 FF9
677= I9F=7.6F FIIB.I8 6.=D FIF
6779 D7777.77 F8777.77 6.BB FI8
A too high turnover of inventory may not necessarily imply higher profits. %he
profits may be low due to e+cessive cost incurred in replacing stocks in small lots!
stock out problems selling inventory at lower price. "n 0ood Corporation of "ndia
"nventory position is satisfactory. "nventory turnover 6.7 shows it takes F6I days to
convert.
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Percen!age of Sa"e$ Me!0o.
%he ercentage of Sales Method is a 0inancial 0orecasting approach which is basedon the premise that most 'alance Sheet and "ncome Statement Accounts vary with
sales. %herefore! the key driver of this method is the Sales 0orecast and based uponthis! ro0orma 0inancial Statements -i.e.! forecasted can be constructed and thefirms needs for e+ternal financing can be identified. %he calculations illustrated onthis page will refer to the 'alance Sheet and "ncome Statement which follow. %heforecasted Sales growth rate in this e+ample is 68G
Percen!age-of-$a"e$ &e!0o. (2$ine$$ * &one3 .efini!ion
1. 2eneral? Method of estimating cash requirements by e+pressing revenues
and e+penses as percentages of sales! and using these percentages to
constructa pro formaincome statement.
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http://www.businessdictionary.com/definition/method.htmlhttp://www.businessdictionary.com/definition/estimating.htmlhttp://www.businessdictionary.com/definition/cash.htmlhttp://www.businessdictionary.com/definition/requirements.htmlhttp://www.businessdictionary.com/definition/revenue.htmlhttp://www.businessdictionary.com/definition/expense.htmlhttp://www.businessdictionary.com/definition/percentage.htmlhttp://www.businessdictionary.com/definition/sales.htmlhttp://www.businessdictionary.com/definition/construct.htmlhttp://www.businessdictionary.com/definition/pro-forma.htmlhttp://www.businessdictionary.com/definition/income-statement.htmlhttp://www.businessdictionary.com/definition/method.htmlhttp://www.businessdictionary.com/definition/estimating.htmlhttp://www.businessdictionary.com/definition/cash.htmlhttp://www.businessdictionary.com/definition/requirements.htmlhttp://www.businessdictionary.com/definition/revenue.htmlhttp://www.businessdictionary.com/definition/expense.htmlhttp://www.businessdictionary.com/definition/percentage.htmlhttp://www.businessdictionary.com/definition/sales.htmlhttp://www.businessdictionary.com/definition/construct.htmlhttp://www.businessdictionary.com/definition/pro-forma.htmlhttp://www.businessdictionary.com/definition/income-statement.html -
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2. Advertising? Advertising e+pense budgetingmethod based on allocating a
fi+ed percentage -say 8 percent of the anticipated sales revenue to
advertising. "t is based on the erroneous assumption that sales cause
advertising whereas the reality is Eust the opposite -advertising causes sales.
See also adaptive control method! affordable method! competitive paritymethod! and obEectives and task method.
F. A widely used method of establishing an advertising budget based on apercentage of past! current! or future sales or profits. 0or e+ample! a productproducing F8G of sales would receive F8G of the advertising budget.
6. roEecting financial statements on the basis that many of the variables willremain at a fi+ed percentage of sales. 0or e+ample! if sales are e+pected toincrease F7G during the ne+t year! the firm will have an additional F7G ininventories! receivables! and accounts payable.
rocedure used to set advertising budgets! based on a predetermined percentage ofpast sales or a forecast of future sales. %his method of budget allocation is popularwith advertisers because of its simplicity and its ability to relate advertisinge+penditures directly to sales. Management usually determines the budgetHspercentage figure! which is based on the industry average or the companyHshistorical or previous yearHs advertising spending. 0or e+ample! a firm e+pecting todo :upees87 million worth of business ne+t year and choosing to allocate 8G oftheir sales to the advertising budget! would propose a :upees6.8 million advertisingbudget. A similar decision may be based on market share! with :upees6 millionbeing allocated for every share point a brand holds. Many advertisers! however!shun this method because it is based on the theory that advertising results fromsales! while the converse is true! that is! that sales result from advertising. "n otherwords! advertisers feel that advertising communicates to prospective buyers thefeatures and benefits of a product that are necessary to generate sales. "n addition!the method does not recogni,e that as conditions change! advertising e+pendituresshould change with them. 0inally! using this method may erroneously lead toe+cessive spending for large established brands and inadequate budgeting forproducts that may profit from additional advertising! such as new or repositionedbrands.
)a"ance S0ee! 4R2ee$ in Crore$5A$$e!$ 9:: Lia(i"i!ie$ an.
Owner$ E2i!39::
C2rren! A$$e!$ C2rren! Lia(i"i!ie$ Cash 677 Accounts ayable D77Accounts :eceivable D77 )otes ayable D77"nventory B77 Total Current )ia2ilities 977Total Current Assets F677 Long-Ter& Lia(i"i!ie$
ebt 877Fi7e. A$$e!$ %otal
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Total Owners6 E7uity =77Total Assets 6777 Total )ia28 and Owners6
E7uity6777
Percen!age$ of Sa"e$
%he first step is to e+press the 'alance Sheet and "ncome Statement accounts whichvary directly with Sales as percentages of Sales. %his is done by dividing the balancefor these accounts for the current year -677= by sales revenue for the current year.
%he 'alance Sheet accounts which generally vary closely with Sales are Cash!Accounts :eceivable! "nventory! and Accounts ayable. 0i+ed Assets are also oftentied closely to Sales! unless there is e+cess capacity. -%he issue of e+cess capacitywill be addressed in 1+ternal 0inancing )eede