Working Capital Management

Study of Working Capital Management

Study of Working Capital Management

A Project Report Download the original attachmentOn

A Study of Working Capital managementAt

Perfect Circle India Limited Nasik.Submitted byMr. Nitin D. FegadeProject GuideProf. Mrs. Smita Dhande.GIMR, Jalgaon.In Part & Partial Fulfillment of the Requirement

For the award of degree of

Master of Business Administration

Year-2007-2009

GODAVARI INSTITUTE OF MANAGEMENT & RESEARCH

Affiliated to

NORTH MAHARASHTRA UNIVERSITY, JALGAON.

ACKNOWLEDGEMENT

I am very thankful to our Director Mr. Prashant Warke Sir, for giving us a great opportunity of preparing a project report on our specialization (Finance), which will really improve our skill & will give us practical knowledge.

I am very thankful to our Prof. Mrs. Smita Dhande who has giving me a change to study & select the subject of project according to my interest & I also thank her for giving the valuable knowledge & support about project & helping me in all the way to complete my project in systematic manner.

I wish to thank the Financial Controller of Perfect Circle India Ltd. Nasik Mr. Mayur Bumb who has me by giving information regarding Project Report. I would also like to thanks Mr. J .V. Shule & Mr. S. R. Borole for helping me in project report. I wish to thank all those who have helped me directly & indirectly to complete this project report.

NITIN D. FEGADE

INDEX

Sr. No.ContentPage No.

1. Introduction of Study 4

2.Company Profile 7

3. A Study of Working Capital 16

4. Ratio Analysis 31

5. Comparative Study of FinancialStatement 42

6. Statistical Analysis of FinancialData 47

7. Conclusion 53

8. Recommendation and Suggestions 54

9. Bibliography 56

1. Introduction of study.

1. Objectives of the study2. Methodology

3. Scope of Study

4. Limitation of Study1. Objective of the study

1. To Study the working capital management.

2. To know the present financial position of the company.

3. To know the working capital performance of the company over the last 4 Years.

4. To draw the financial position of company with the help of Graph.

2. MethodologyThe methodology of this study is analysis of the financial data for past 4 years. The data is collect from the company records supplied in the form of financial accounts daily audited.

The present study is aimed at to analyze the working capital performance of the company by covering purely financial data & in the form of ratio & statements.3. Scope Of StudyThe study was wider scope in terms of bank financing, liquidity & profitability of the company, return on investment & risk etc. The study provides the necessary information related to current asset & current liabilities of the company. The study provides the information that how much amount a company level of working capital, which can serve the company a desired profit.

4.Limitation Of Study

1. Perfect Circle India is a large automotive company with a turnover of more than Rs. 50 million. Working capital statement prepare for entire organization as a whole this is almost impossible to study the working capital management of big organization in a project period of 2 months.

2. Due to absence of segment profitability it was very difficult to analyze the segmental working capital benefits.

3. Presently no project is going on regarding its financial management, so this project report is converted into a study project rather than work project.

2. Company Profile.1. About Company.2. Corporate profile.3. Financial Highlights.4. Company Highlights.5. Product Introduction.6. Social Responsibility.7. Awards.1. About Companya. Name of companyPerfect Circle India Limited.b. Corporate Offices 1, Sri Aurobindo Marg,

New Delhi-110016.

Magnet House. N.M. Marg,

Ballard Estate.

Mumbai-400038. c. Registered & Administrative office.20, MIDC Estate,

Satpur, Nashik-42007.

Maharashtra.

Tel: (0253) 2202800.

d. Manufacturing Facilities.

1. Piston Ring Division.

20, MIDC Estate.


2. Casting Division.

E-34, MIDC Estate.


3. Ductile Plant.

19, MIDC Estate.


e. Board of Directors.

K. N. SubramaniamChairman

C. S. PatelPadmini Khare KaickerRanjit Barthakur

Gurdeep Singh

A. K. Agrawal.f. Financial Controller.Mayur Bumb

g. Company Secretary.Anshul Bhargava

h. Bankers.1. Union Bank of India.

2. Standard Chartered Bank. i. Auditors.Price Waterhouse & Co.

Chartered Accounts,

Mumbai.

j. Solicitors.Udwadia & Udeshi,

Mumbai.

2. Corporate Profile.

Perfect Circle India Limited, a very well known name in India auto component industry, started manufacturing of piston ring & casting in 1976 at its manufacturing facilities at Nasik. These facilities are state-of-the-art foundry for regular iron castings & a machining plant.

The Company manufactures Piston Ring for application in Passenger Car, Jeep, Light / Heavy Commercial vehicles, Tractor & stationary engines. Piston Rings are self tensioned circular metal pieces, which are installed in piston grooves to provide the movable seal between the combustion chamber & the crankcase. Ring are critical component of the engine since they provide an effective seal to the combustion gases & prevent lubrication oil from reaching the combustion chamber.

Its products are sold under the world-renowned brand name of Perfect circle piston rings, have established strong presence both in domestic as well as overseas market & are considered to be at the top end of the automotive component industry.

The company has financial cum technical collaboration with Dana Corporation, USA. A fortune 500 company and a world leader in these product technologies. Certified for both QS 9000 & ISO 9002, the company was the first in India its product category to receive the ISO certification as far as back as 1993. The company also has certification for ISO 14001 & OHSAS 18001 from Bureau VERITAS Quality International, UK for environment management & health & safety respective.

3 . Financial Highlights

Sr.No.Particular2003 -042004 -052005 -062006 -072007-08

1Sales (Rs. Million)621716.3692.2787839.6

2Profit before dep. & Interest(Rs. Million)114.2147.874.3(30.1)82.8

3Profit Before Tax5091.112.7(121.3)(23.2)

(Rs. Million)

4Profit After Tax3656.42.2(113.7)(24.4)

(Rs. Million)

5PBDIT as % to sales18.420.610.7(3.8)9.8

6PBT as % to sales812.71.8(15.4)(2.7)

7PAT as % to sales5.87.90.3(14.4)(2.8)

8Return on Net worth %8.912.80.01(36.5)(8.5)

9Face Value per share81111.0

10Net Worth per share9813.3139.38.6

11Earnings per share8.61.70.07(3.4)(0.7)

12Dividend per share40.60.6--

13Dividend cover2.22.80.1--

( Times)

4 . Company Highlights.1. 2007 -2008.1. Sales up by 6.7%

2. Export Sales Rs. 380.7 Million

3. 45.3% Export to Total Sale4. Plate Exports Rs.90.6 Million2. 2006 -2007.1. Sales up by 13.7%

2. Export Sales Rs. 387 Million

3. 49% Export to Total Sale

3. 2005-20061. Export sales Rs. 293.6 Million (42.4% of sale).

2. New addition in product Portfolio Shims & Plates, Ductile Castings.

3. Sale from Casting EOU commenced.

4. 2004-2005.1. 15% Overall business Growth.

2. 72% Growth in Exports, 43% of sales.

3. Rs. 1.7 Earnings per share.

5 . Product Introduction.1. Piston Ring.

Piston rings are self-tensioned circular metal pieces which are installed in 7 piston grooves to provide a movable seal between the combustion chamber & the crankcase.

Function of piston rings.

1. Sealing of Combustion chamber.

2. Controlling oil consumption.

3. Heat Transfer.

Types of Piston Ring.

1. Compression Rings.

2. Oil Rings. 6 . Social Responsibilities

A part from its business activities, the company believes in contributing to the betterment of the society at large. Being leading manufacturer of automotive components & systems, it has always been the ethos of Anand Group of companies to promote community welfare. With this aim, Anand Group has set up its welfare wing-SNS foundation in 1976.This NGO has established its welfare centers throughout the country where its facilities are located. These centers focus on education, health, sustainable live hood & natural resource management with governance & social justice as cross cutting agenda. The programmers also focus on empowering women through activities such as vocational training life skills & academic education.

Government of India has given due recognition to this welfare wing by granting 50% tax exemption under section 80G of the Income Tax Act, 1961.7 . Awards.In recognition of the sharp focus by the company on value-added exports, Perfect Circle India Ltd. received an Award from the Engineering Exports, Promotion Council of India, and western region for its performance in achieving highest exports. Exporters of automotive components, spare parts & accessories.

The National Productivity Council has awarded the company for the second time a Certificate of Merit in the Light Engineering sector for its performance in productivity.

Perfect Circle India limited is the first Indian Company to achieve the various type certifications for quality system, Standard for environment & Standard for Safety & Health.

1. OHSAA 18001: 1999 - Standard for Safety & Health.

2. ISO14001: 2004 - Standard for environment

3. IOS/TS 16949 - Quality system

4. Nation Productivity Award - 1995, 96, 98.

5. ACMA award for productivity 1997, 98.

6. Golden peacock National Quality Award 1998.

7. NIMA Excellence Award 2001.

8. Excellence Award for highest growth in exports - 1996-97.

Perfect circle India Ltd. Company is certified by Bureau Veritas Quality International (BVQI) UK.

3. A Study of Working Capital

1. Introduction

2. Meaning. 3. Principal of working capital. 4. Importance of working capital.

5. Factors affecting the working capital6. Sources of working capital. 7. Managing Debtors / Creditors / Inventory.1. Introduction.Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities & the inter-relationship that exist between them. Working capital is nothing but the difference between the current assets & current liabilities. The term current assets refers to those assets which in ordinary course of business can be, or will be turned into cash within one year without disrupting the operations of the firm. The major current assets are cash, marketable securities, accounts receivable & inventory.

Capital required for the business can be classified into two main categories.

1. Fixed Capital.

2. Working Capital.

In case of manufacturing units, Current assets comprises of raw materials, semi finished goods, receivables, cash, etc. These assets go through the operating cycle of the business units & based on the operating cycle requirements / quantum for working capital is decided.

In case of trading concerns current assets comprises of stocks, debtors / receivables & advance paid to supplier of stocks where as in service activity current assets comprises of expenses on wages, rent, electricity etc.

2. Meaning.

Working capital is the capital required to carry out day-to-day activates of a firm. According to Gene Stenberg, Working capital means current assets of a company that are chafed in the ordinary course of business from one from to another as for example, from cash to inventories, inventories to receivables, receivables into cash. The goal of working capital management is to manage the firms current assets & current liabilities in such a way that a satisfactory level of working capital is maintained.

3. Principal of working capital.a . Principal of risk variation.Risk refers to the inability of the firm to meet its obligations as & when this becomes due. There is a definite relationship between the degree of risk & profitability. A conservative management prefers to minimize risk by maintaining a high level of current assets while a liberal management assumes greater risk by reducing working capital. However the goal of the management should be to establish a suitable trade of between profitability & risk.

b . Principal of cost of capital.This says that a sound working capital management should try to achieve a proper balance between costs of capital & degree of risk involved in raising that capital.

c . Principal of Overdraft Equity Position.According to this principal working capital adjusted in each component of current assets should be adequately justified by a firms equity position.

d . Principal of Maturity of Payment.According to this principal, a firm should make every effort to relate maturities of payment to its flows of internally generated funds.

4. Importance of working capital.

Working capital is the life blood & nerve center of a business. Just as circulation of blood is essential for maintaining human life, working capital is very essential to maintain the smooth running for a business. The advantages are as follows.

a . Solvency of the business.

Adequate working capital helps in maintaining solvency of the business by enabling uninterrupted flow of production.

b . Good will.

Sufficient working capital enables a business concern to make prompt payments, thereby creating & marinating goodwill.

c . Easy loans.

A concern having adequate working capital high solvency & good credit standing can arrange loans from bank & others on easy & favorable terms.

d . Cash Discounts.

Adequate working capital also enables a concern to avail cash discount on purchase, thus reducing production cost.

e . Regular Supply of Raw Materials.

Sufficient working capital ensures this & hence continuous production.

f . Regular Payment of Salary & Wages.A company which has ample working capital can make regular payment of salaries, wages & other day to day commitments. This raises level of efficiency, reduces wastages & minimizes cost while simultaneously enhancing production & profits.

g . Exploitation of Favorable Market conditions.

This can be done by exploiting favorable market condition such as purchasing requirements in bulk when the prices are lower & there by hedging inventories against higher procurement costs.

h . Ability to Face Crisis.

Working Capital helps to face business crisis in emergencies, such as depressions, because during such periods there generally an increased pressure on working capital.

i . Quick & Regular Returns on Investments.

Sufficiency of working capital enables a concern to pay quick & regular dividend to its investors, as there may not be much pressure to plough back profits.

j . High Morale.Adequacy of working capital creates an environment of security, confidence, high morale & overall efficiency in a business.

5. Factors Affecting on Working Capital.

Following are the factors that affecting the working capital. These factors also can be called as the determinants of the working capital.

a . Nature of business.In some business organizations, the sales are mostly on cash basis & the operating cycle is very short. In these concerns the working capital requirement is comparatively less. Mostly service giving companies come in this category. In manufacturing concerns, usually the operating cycle is very long & a firm has to give credit to customer improving sales. In such cases the requirement for working capital is more.

b . Market conditions.Due to competition in the market, the demands for working capital fluctuate. In a competitive environment, a business firm has to give liberal credit to the customer. Similarly it will also have to maintain a large inventory of finished goods to services the customers promptly. In t his situation, larger amount of working capital will be needed.

On the other hand, when a firm is in the sellers market, it can be made on cash basis & there will be no need to maintain large inventory of finished goods because customers can be serviced with delay.

c . Production Policy.Working capital policy also fluctuates according to the production policy. Some products have a seasonal demand but in order to eliminate the fluctuations in the working capital, the manufacture plans the production in a steady flow through out the year. This policy will even out the fluctuations in working capital.

d . Seasonal Fluctuations.A firm who is producing products with seasonal demands requires more working capital during peak seasons while the demand for working capital will go down during the slack seasons.

e . Growth & Expansion activities.The working capital needs of the firm increase as it terms of sates or fixes assets. A growing firm may need to invest fund in fixed assets in order to sustain its growth production & sales. This will in turn increase investment in current assets which will result in increase in working capital needs.

f . Operating Efficiency.The operating efficiency of the firm relates to the optimum utilization of resources at minimum cost. The firm will be effectively contributing to its working capital if it is efficient in controlling operating costs. The working capital is utilized & cash cycle is reduced which decreases working capital needs.

g. Credit Policy.The working capital requirements of a firm depend to a greater on the credit policy followed by a firm or its debtors. A liberal credit policy followed by a firm will result in huge fund blocked in debtors which will enhance the need for working capital. This situation will be further deteriorating if the collection procedure is also slack. If a liberal credit policy is followed without inquiring into the credit policy is followed without inquiring into the collection procedure is also slack. If a liberal credit policy is followed without inquiring into the credit worthiness of customers, there can be a problem of recovery in future will further push up the working capital requirements.

The working capital is also affected by the credit policy followed by the firms creditors. If the creditors are ready to supply materials & goods on liberal credits working capital requirements are substantially reduced. On the other hand, if purchases are mainly for cash working capitals go up. While planning the working capital due attention should be given to word the credit policies followed by the firm & its creditors.

h . Dividend Policy.A company has to pay dividends in cash as per the company Act, 1956. If a liberal policy is followed for dividends more working capital will be required. The needs for the working capital will be substantially reduced if dividend policy is conservative.

i . Sales Growth.As the sales grow, the working capital need also go up. Actually it is very difficult to establish an exact production of increase in current assets, as a result of increase in sales. Advance planning of working capital become essential because current assets will have to be employed even before growth in sales take place.

Once sales start increasing, they must be sustained, for this a firm will have to expand its production facilities which will require more investments in fixed assets. This will in turn result in more requirements of current assets which will increase working capital needs.

6. Sources of Working Capital.Cheapest & best sources of cash exist as working capital right with in business. Good management of working capital will generate cash will help improve profits & reduce risks. Bear in mind that the cost of cash flows in a cycle in to around & out of a business. It is the business life blood & every managers primary task is to help keep it flowing & to use the cash flows to generate profits. If a business is operating profitably, then it should in theory generate cash surpluses. If it doesnt generate surpluses the business will eventually run out of cash & expire about the vital distribution between profit & cash flows.

The faster a business expands the more cash it will need for working capital & investment. The providing credit to customers & holding stocks can represent a substantial proportion of a first total profit.

There are two elements in the business cycles that absorb cash Inventory (Stocks & work in progress) & Receivables (Debtors owing you money); the main sauces of cash are Payables (Your creditors & Equity & loans)

It can be tempting to pay cash if available for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash remember that this is now longer available for working capital. Therefore if cash is tight, consider other ways, of financing capital investment loans, equity, leasing etc. Similarly, if you pay dividends or increase drawing, these are cash outflows & like water flowing down a plough whole they remove liquidity from the business.

a . Additional sources of working capital.

1. Existing cash reserves.

2. Profits (when you secure it as cash)

3. Payables (credit from suppliers)

4. New equity or loans from share holders.

5. Bank overdrafts or lines of credit.

6. Long-term loans.

b . Early Warning sings include.

1. Pressure on existing cash

2. Exceptional cash generating activities e.g. offering high discounts for early cash payment.

3. Bank overdraft exceeds authorized limit.

4. Seeking greater overdrafts or other creditors.

5. Part paying suppliers or other creditors.

6. Paying bills in cash to secure additional supplies.

7. Management pre-occupation with surviving rather than managing.

8. Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque)

c . Working Capital Cycle.

7. Managing Debtors/Creditors/Inventory.

a . Managing Debtors.

Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know. Who owes them money.? How much is owed.... For what it is owed.

Slow payment has a crippling effect on business in particular on small businesses that can being to manage debtors, they will being to manage your business as you will gradually lose control due to reduced cash flow & of coerce you could experience an increased incidence of bad debt. The following measures will help manages your debtors.

1. Have the right mental attitude to the control of credit & make sure that it gets the priority it deserves.

2. Establish clear credit practices as a matter of company policy.

3. Make sure that these practices are clearly under stood by staff suppliers & customers.

4. Be professional when accepting new accounts, & especially larger ones.

5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc.

6. Establish credit limits for each customer. & stick to them.

7. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector.

8. Keep very close to your large customers.

9. Invoice promptly & clearly.

10. Consider charging penalties on overdue accounts.

11. Consider accepting credit/ debit cards as a payment option.

12. Monitor your debtor balances & ageing schedules & dont let any debts get too large or too old.

Recognize that the linger someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects.

Weak credit judgment.

1. Poor collection procedures.

2. Lax enforcement of credit terms.

3. Slow issue of invoices or statements.

4. Errors in invoices or statements.

5. Customer dissatisfaction.

Debtors sue over 90 days (unless within agreed credit term) should generally demand immediate attention. Look for the warring sings of a future bad debt. For example

1. Longer credit terms taken with approval particularly for smaller orders.

2. Use of post-dated checks by debtors who normally settle within agreed terms.

3. Evidence of customers switching to additional suppliers for the same goods.

4. New customers who are reluctant to give credit reference receiving part payments from debtors.

The act of collecting money is one, which most people dislike for many reasons & therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now.

There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer. Here are a few ideas that may help you in collecting money from debtors.

1. Develop appropriate procedures for handling late payments.

2. Track & pursue late payers.

3. Get external help if your own efforts fail.

4. Dont feel guilty asking until you get some satisfaction.

5. In difficult circumstances, take what you can now & agree terms for the remainder. It lessens the problem.

6. Make that call now & keep asking until you get some satisfaction.

7 .When asking for your money is hard on the issue but soft on the

person. Dont give the debtor any excuses for not paying.

8. Make it your objective is to get the money not to score points or get even.

b. Managing Creditors (Payables)

Creditors are a vital part of effective cash management & should be managed carefully to enhance the cash position.

Purchasing initiates cash outflows & an over-zealous purchasing function can create liquidity problems. Consider the following.

1. Who authorize purchasing in your company is it tightly managed or spread among a number of people?

2. Are purchase quantities geared to demand fore casts?

3. Do you use order quantities which take account of stock holding & purchasing costs?

4. Do you know the cost to the company of carrying stock?

5. Do you have alternative sources of supply? If not get quotes from major suppliers & shop around for the best discounts, credit terms, & reduce dependence on a single supplier.

6. How many of your suppliers have a returns policy?

7. Are you in a position to pass on cost increases quickly through price increases to your customers?

8. If a supplier of goods or services lets you down can you charge back the cost of the delay?

9. Can you arrange (with confidence) to have delivery of supplies staggered or on a just in time basis?

There is an old adage in business that if you can buy well then you can sell well. Management of you creditors & supplies is just as important as the management of your debtors. It is important to look after your creditors slow payment by you may create ill feeling & can signal that your company is inefficient (or in trouble)

Remember a good supplier is some one who will work with you to enhance the future viability & profitability of your company.

c. Managing Inventory.

Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales delays for customers etc.

The key is to know how quickly your overall stock is moving or put another way, how long each item of stock sit on shelves before being sold. Obviously, average stock holding periods will be influenced by the nature of the business. For example a fresh vegetable shop might turn over its entire stock every few days while a motor factor would be much slower as it may carry a wide range of rarely-used spare parts in case somebody needs them.

Now a day, many large manufactures operate on a just-in-time (JIT) basis where by all the components to be assembled on a particular today, arrive at the factory early that morning no earlier, no later. This helps to minimize manufacturing costs as JIT stocks take up little space minimize manufacturing costs as JIT stocks take up little space minimize stock holding & virtually eliminate the risks of obsolete or damaged stock. Because JIT manufactures hold stock for a very short time, they are able to conserve substantial cash. JIT is a good model to strive for as it embraces all the principles of prudent stock management.

The key issue for a business is to identify the fast & slow stock moves with the objectives of establishing optimum stock levels for each category & there by minimize the cash tied up in stocks. Factors to be considered when determining optimum stock levels in clued.

What are the projected sales of each product?

1. How widely available are raw materials, components etc.?

2. How long does it take for delivery by suppliers?

3. Can you remove slow movers from your product range with out compromising best sellers?

4. Remember that stock sitting on shelves for long periods of time ties up money, which is not working for you. For better stock control try the following.

5. Review the effectiveness of existing purchasing & inventory systems.

6. Know the stock turn for all major items of inventory.

7. Apply tight controls to the significant few items & simplify controls for the trivial many.

8. Sell off out dated or slow moving merchandise it gets more difficult to sell the longer you keep it.

9. Consider having part of your product outsourced to another manufacture rater than make it yourself.

10. Review your security procedures to ensure that no stock is going out the back door

Higher than necessary stock levels tie up cash & cost more in insurance, accommodation costs & interest charges.

4. Ratio Analysis1. Definition2. Significance of Ratio Analysis3. Types of Ratio Analysis4. Limitation of Ratio Analysis

1. DefinitionRatio is a statistical yardstick that provides a measure of relationship between two accounting figures. Ratio analysis of financial statements stands for the process of determining & presenting the relationship of it & group of items in the statements. Ratio analysis can be need both in the trend analysis & static analysis.2. Significance of Ratio AnalysisThe significance or importance off financial ratio analysis can be judged from the following facts.

a . A useful tool in hands of analysis.

Ratio are exceptionally useful tools with which one can infer the financial performance of the enterprise over a period of time with the help of ratio analysis conclusion can be drawn regarding several aspects such as financial health profitability & operational efficiency of the under taking. The financial health of the concern can be known with the help of different short term obligation & long term solvency. They indicate strengths & weakness of the firm in this respect.

Ratio can also pinpoint the operating efficiency of the firm i.e. whether the management has utilized the firms assets correctly to increase the investors wealth Ratio are also indicative of overall profitability of the concern. Thus, ratio is useful tools in the hands of management & the other concerned to evaluate the firms performance over a period of time by comparing the presents ratio with past once.

b. Inter firm comparison.

Ratio analysis provides inter firm comparison or comparison with industry averages by comparison or comparison with industry averages by comparing the firms relative position & its competitors. If comparison shows a variance the possible reasons of variations may be identified & if results are negative the corrective actions may be initiated immediately, to bring them in line it is also helpful in for warning he corporate sickness & helps the management to take corrective actions.

C. Trend Analysis.Ratio analysis enables a firm to take time dimension into account. In other words, it facilitated the management to know whether the financial position is improving or deteriorating or is constant even the years by setting a trend with the help of ratios. The analyst with the help of ratio analysis can know the direction of movement whether favorable or unfavorable. An analysis of trend of strategic ratios may help the management in the task of planning forecasting controlling.

Thus ratio analysis plays a very important role in the interpretation of the financial statements correctly & to make the figures comparable & more meaningful.

3. Type of Ratios.

A. Financial Ratio. B. Profitability Ratio. C. Turnover Ratio.A. Financial Ratios.

1. Current ratio.2. Acid test ratio.3. Proprietary ratio.4. Debt-Equity ratio.1. Current ratio.

The current ratio of measures its short term solvency, that is its ability to meet short term obligation. As a measure of short terms / current financial liquidity it indicates the rupees of current assets available for each rupee of current liability / obligation. The higher is the current ratio, the larger is the amount of rupees available per rupee of current liability, & the more is the firms ability to meet current obligations, & the greater is the safety of short term creditors. Thus current ratio in a way is a measure of margin of safety to the creditors.

It is however, important to note important to note that a very high ration of current assets to current liabilities may be indicative of slack management practices, as it might signal excessive inventories for the current requirement & poor credit management in terms of overextended accounts receivables. At the same time the firm a may not be making full use of its current borrowings capacity. There fore a firm should have a reasonable current ratio.

Although there is no hard & fast rule, conventionally a current ratio of 2:1 is considered satisfactory. The logic underlying the conventional rule is that even with a drop out of 50% in the value of current assets, a firm can meet its obligations. That is a 50% margin of safety is assumed to be sufficient to wards off the worst situations. The rule of thumb (a current ratio 2:1) cannot, however be applied mechanically. What is a satisfactory ratio will different funds to finance current assets, the nature of industry & so on.

2. Acid Test Ratio

It is a rigorous measure of a firms ability to service sort term liabilities. The usefulness of the ratio lies in the fact that it is widely accepted as the best available test of liquidity position of a firm. The ratio provides, in a sense a check on the liquidity position of a firm as shown by its current ratio. The quick ratio is more rigorous & penetrating test of the liquidity position of a firm. Yet it is not a conclusive test. Both the current & quick ratio should be considered in relation to the industry average to infer whether the firms short term financial position is satisfactory or not.

3. Proprietary ratio.

It is primarily the ratio between proprietors funds & total assets. It indicates the strength of the funding of the company. As a very rough measure, it may be suggested that 2/3 to 3/4 of the total assets should be financed by proprietors funds. However, the optimum ratio is different in different lines of business. A high ratio will definitely indicate high financial strength but a very high ratio will indicate inadequate utilization of external equities.

4. Debt-Equity ratio.This ratio is calculated to measure the comparative proportions of outsiders funds & shareholders funds invested in the company. The Debt-Equity ratio indicates how many rupees have come from borrowings for every rupee of shareholders funds.

Shareholders funds consist of equity share capital, preference share capital & reserves & surplus. A low ratio will indicate that the management of the firm is following a conservative policy which is quite satisfactory from creditors angle. But a very conservative policy may not be very much satisfactory for shareholder because the company is sacrificing the benefits of trading on equity in this case. On the other hand, a very high ratio will indicate a risky situation as proportion of borrowed funds is quite high.

FORMULA:-

Current Assets1. Current Ratio = __________________

Current Liabilities

Quick Assets

2. Quick Ratio = _______________

Current Assets

Proprietors funds

3. Proprietary Ratio= _______________

Total assets

B. Profitability Ratios.

1. Operating Net Profit Ratio2. Operating Ratio3. Gross Profit Ratio4. Net Profit Ratio

1. Operating Net Profit Ratio

This ratio establishes the relationship between operating net profit & sales. The concept of operating net Profit is different from the concept of net profit. Operating net profit = Net profit + Non operating expenses (-) non operating income. Alternatively this profit can be also be calculated by deducting only operating expenses from gross profits.

2. Operating RatioThis ratio is reciprocal to the operating net profit to sales ratio. The cost of the good sold + operating expenses are compared to net sales. Non operating expenses & non operating incomes are excluded from this ratio. The higher this ratio, the lower is the margin of operating profit. The ratio can be further analyzed to find out the percentage of each type of expense to sales.

3. Gross Profit Ratio

The gross profit is the difference between net sales & cost of goods sold. This ratio shows the margin left after meeting the manufacturing costs. It measures the efficiency of production as well as pricing. A high gross profit ratio means a high margin for covering other expenses, other than cost of goods sold. Therefore, higher the ratio the better it is. It is also important for a business to maintain this ratio on a higher side; otherwise it will be difficult to cover other expenses.

4. Net Profit Ratio

This ratio shows the earnings left for shareholders (equity & preference) as a percentage of net sales. It measures the overall efficiency of all the functions of a business firm like production, administration, selling, financing, pricing, tax management etc. This ratio is very useful for prospective investors because it reveals the overall profitability of the concern. Higher the ratio, the better it gives idea of improved efficiency of the concern.

FORMULA

Operating net profit

1. Operating Net Profit Ratio =___________________ X 100

Sales

Cost of goods sold + operating expense

2. Operating Ratio = __________________________________ X 100

Net sales

Gross profit

3. Gross profit ratio= ___________ X 100

Sales

Net profit

4. Net profit ratio= __________ X100

Sales

C. Turnover Ratio.

1. Working capital turnover ratio2. Debtors turnover ratio3. Creditors turnover ratio4. Inventory turnover ratio5. Fixed assets turnover ratio1. Working capital turnover ratio

This ratio compares the net sales with net working capital. The indication given by this ratio is the number of times working capital is turned around in a particular period.

The higher the ratio, the better is the utilization of working capital as well as lowers the investment in working capital. However a very high working capital turnover ratio is a sign of overtrading & a firm may face shortage of working capital.

2. Debtors turnover ratioThis ratio indicates the credit policy followed by a business firm. The higher the ratio, lower is the collection period. While low ratio indicates higher collection period. An average collection period which is shorter than the credit period allowed by the firm needs to be analyzed carefully. It may mean efficient credit management or excessive conservatism in credit granting that may result in loss of some desirable sales.

3. Creditors turnover ratioThis ratio indicates the credit period allowed by the creditors. A high turnover ratio indicates that payment to creditors is quite prompt but it also implies the full advantage of credit allowed by creditors is not taken. A low ratio indicates that payment to creditors is not quite prompt & it needs to be improved.

4. Inventory turnover ratio

This ratio establishes relationship between cost of goods sold during a given period & the average amount of inventory held during that period. The indication given by this ratio is the number of times finished stock is turned over during a given accounting period. Higher the ratio, the better it is because it shows rapid turnover of stock. A low turnover ratio is indicative of slow moving stock.5. Fixed assets turnover ratio

This ratio indicates the number of times fixed assets are being turned over during a particular period. It is one of the indications of efficiency of using fixed assets in the business. For manufacturing concerns, this ratio is very important. The reason is that like current assets, fixed assets also contribute towards making sales. A high while low ratio indicates that fixed assets are not being used efficiently.FORMULA Net Sales

1. Working capital turnover ratio= ______________

Working capital

Credit sales

2. Debtors turnover ratio= ___________________

Debtors + Bills Receivable

Credit Purchases

3. Creditors turnover ratio= ________________________

Creditors + Bills Payable

Cost of goods sold

4. Inventory turnover ratio= ______________________

Average stock Inventory Net Sales

5. Fixed assets turnover ratio= ______________

Net fixed assets5. Comparative Study of FinancialStatements

1. Balance sheet for last 4 Years.2. Profit & Loss A/C for 4 Years.

1. Balance sheet for last 4 Years.(Fig. in, 000)Particulars31/03/200531/03/200631/03/200731/03/2008

Sources of fund

Shareholders' Funds

Share Capital3,33,373,33,373,33,373,33,37

Reserves & Surplus40,88,6939,20,3627,81,4325,36,97

Loan Funds

Secured Loans10,39,1933,70,3841,68,0135,34,83

Unsecured Loans11,63,9111,46,9118,95,9616,97,58

Deferred Tax4,08,393,94,952,43,942,32,96

Liability (Net)

Total70,33,5591,65,9794,22,7183,35,70

Application of

Funds

Fixed Assets

Net Block22,64,0934,91,2951,41,9047,74,22

Capital Work-in-4,71,3811,80,621,14,647,16

progress

Total27,35,4746,71,9152,56,5447,81,38

Current Assets,

Loans, Advances

Inventories8,62,519,89,0910,87,269,99,02

Sundry Debtors10,37,0414,69,8214,70,9815,71,23

Cash and Bank11,78,425,86,091,30,501,28,61

Balances

Loans and25,94,0630,64,7431,07,5926,45,92

Advances

Less: Current

Liabilities &

Provisions

Current Liabilities11,43,7614,07,9215,29,2316,90,95

Provisions2,30,192,17,761,00,9399,50

Net Current42,98,0844,94,0641,66,1735,54,33

Assets

Miscellaneous----------------

Expenditure

Total70,33,5591,65,9794,22,7183,35,71

2. Profit & Loss Account A/c(Fig. in, 000)Particulars31/03/ 200531/03/ 200631/03/ 200731/03/ 2008

Income

Sales Net65,99,5363,91,3471,70,4376,97,29

Other Income3,64,772,85,342,06,942,01,03

Total69,64,3066,76,6873,77,3773,77,37

Expenditure

Cost of Materials16,36,4917,65,5521,38,09217372

Personnel Expenses8,98,7710,13,8713,31,56130297

Other Expenses29,51,7031,53,1242,08,24359346

Depreciation3,65,703,94,045,29,7857796

Finance Charges2,00,622,22,173,82,6348184

Total60,53,2865,49,7585,90,30812995

Profit/(Loss) for the year Before Tax9,11,021,26,93(12,12,93)(2,31,63)

Provision for Tax

Current Tax3,75,0058,00-

Deferred Tax(70,15)(13,44)(1,51,01)(10,98)

Fringe Benefit Tax-35,0075,0613,50

Total6,06,1747,37(11,36,98)(2,34,15)

Short Provision for tax in respect of earlier years(Net)42,3025,37-8,36

Profit/(Loss) after Tax5,63,8722,00(11,36,98)(2,42,51)

Profit and Loss Account Balance Brought Forward from last Balance Sheet5,88,1313,86,3812,16,1179,13

Add: Transfer from Debenture Redemption Reserve5,75,69

Profit Available for Appropriation17,27,6914,08,3879,13(1,63,38)

Appropriations

Transfer to General Reserve1,14,002,21--

Interim Dividend-Equity83,3483,34--

Tax on Interim Dividend10,9311,69--

Proposed Dividend -Equity1,16,6883,34--

Tax on Proposed Dividend16,3611,69--

Balance carried to Balance Sheet13,86,3812,16,1179,13(1,63,38)

Earnings per Share (In Rs.) Basic & Diluted of face value of Re.11.690.07-3.41-0.73

6. Statistical Analysis of Financial Data

1. Current Ratio

2. Gross Profit Ratio

3. Net Profit Ratio4. Working Capital Turnover Ratio

5. Fixed Assets Turnover Ratio

6. Pie Chart of Distribution of Income at last Year.

1. Current Ratio.

Current Assets

1. Current Ratio = _________________

Current Liabilities

(Fig. in, 000)Particular2005200620072008

Current Assets46,57,6742,98,0844,94,0641,66,17

Current Liabilities13,73,6613,73,9516,15,6816,30,16

Ratio3.43.12.82.6

Interpretation:

Current ratio of company come down to 3.1, 2.8 & 2.6 as on years 2005, 2006 & 2007 respectively as against 3.4 as on 2004 as result of loss incurred during years. However after giving treatment of slow moving stocks as on current assets and implement revival measures it is expected to improve ratio.2. Gross Profit Ratio. Gross Profit

Gross Profit ratio =____________ X 100

Sales


Gross Profit4,99,949,11,021,26,93- 12,12,93

Sales55,61,6065,99,5363,91,3471,70,43

Ratio9.013.62.0- 16.9

Interpretation:

As compared to last three years gross profit ratio like 9.0, 13.6 & 2.0 there is loss in the year in 2007 as ratio -16.9 due to less profitability.3. Net Profit Ratio. Net profit

Net profit ratio= ___________X 100

Sales


Net Profit3,60,065,63,8722,00-11,36,98

Sales55,61,6065,99,5363,91,3471,70,43

Ratio (%)6.58.50.34-15.8

Interpretation:

Figures shown in table are declining as compared to previous years i.e. in year 2007 ratio is -15.8 as compared to year 2004 ratio is 6.5 from that it shows that company bears loss.

4. Working Capital turnover ratio. Net sales

Working Capital turnover ratio = __________________

Working capital(Fig. in, 000)Particular2005200620072008

Net Sales55,61,6065,99,5363,91,3471,70,43

Working Capital46,57,6742,98,0844,94,0641,66,17

Ratio1.21.61.41.7

Interpretation:

A high working capital turnover ratio indicates that capacity of the organization to achieve to maximum sales with the minimum investment in debtors and inventory. It indicates that gross working capital is turned over in the form of sales more number of times.5. Fixed assets turnover ratio. Net Sales

Fixed assets turnover ratio= ________________

Net fixed assets


Net Sales55,61,6065,99,5363,91,3471,70,43

Net Fixed Assets24,80,0527,35,4746,71,9152,56,54

Ratio2.242.411.361.36

Interpretation:

This needs improvement by way of increasing the sales and maximizing capacity. Fixed asset turnover ratio of 1.36 is less than the standard ratio 1.66.6. Pie Chart of Distribution of Income at last Year.(Fig. in, %)1.Material Cost26.5

2.Finance Charges4.7

3.Excise Duty8.7

4.Income Tax0.9

5.Dividend0.0

6.Depreciation6.6

7.Retained Earnings- 14.1

8.Personnel Expenses16.5

9.Other Expenses52.1

7.CONCLUSION#. Working capital management states to maintain low level of investment in current asset. Company is maintaining very low percentage i.e. 28% of current assets and also trying to reduce it further.

#.Working capital management states to maintain a high proportion of current liability to total liability and the company are trying to achieve the same. In 2004-05 the current liability was 29% which is further increasing during the later years.

#.Lowering level of investments in current assets, would lead to an increase in the firms return on total assets and the use of short term debt is likely to result in higher profit because debt will be paid off during period when it is not needed. Accordingly company is maintaining reasonably decent current ratios. So company need to improve its current ratio to some extent during future years.#.Remaining ratios were less than median value due to less profitability.#.Company follows aggressive policy to finance its current assets because it uses high proportion of short term financing to financed its current assets. Company proves that the company which follows conservative policy of maintains high level of current assets should be in better position to utilize short term financing.#.Company is more concentrating on gross working capital, because company is utilizing its working capital facility to substantial extent.8.RECOMMENDATION AND SUGGESTIONS1. From the conclusion part it is clear that company should increase its current ratio, which should cover its current liabilities at least more than two times , during the future years.

2. Company should change its policy to determining optimal level of current assets. Presently company prefers more liquidity & follows conservative policy.

3. Due to decrease in current asset, the liquidity position is going up for the company; as a result companys finance cost is also decreasing.

4. Companys sales are increasing at the same time its investment in current asset is decreasing every year. This is pure positive sign for bottom line.

5. Company should try to follow the median value of the entire ratio because presently the ratios are leading towards lesser median value.

6. If company decreases its investment in current asset then it should also decreases its level of current liability. in order to maintain a proper current ratio & company should keep the level of current liability below 50% of the current asset presently its percentage is leading towards higher side.

SUGGESTIONS1. Company should decrease the level of bank borrowings & sundry creditors. Excess of bank borrowing increase the expense of the company in terms of interest & if company takes the advance from its creditors & in the absence of services & repayment due to some reasons afterwards, it will decrease the goodwill of the company & the company may be bound to pay interest on credit amount so, company should avoid this situation.

2. Company should not increase its level of fixed assets because there is still untapped potential to increase the capacity with the existing investment.

3. To concentrate on gross working capital company should look on the level of current asset financing needed to support current asset rather than difference of current assets & current liabilities.

4. Aggressiveness is the present competitive market demand so company should adopt aggressiveness in determining the level of current asset & continue with the aggressiveness in the short term financing. Aggressiveness involves risk but it creates high profit.

9. BIBLOGRAPHYFinancial Management - I. M. PANDEY.

Financial Management - KHAN & JAIN.

Annual report of company:

2004-05


2005-06


2006-07


2007-08G.I.M.R., Jalgaon56

_1294752160.xlsChart1

26.5

4.7

8.7

0.9

0

6.6

-14.1

16.1

52.1

Distribution of Income

Sheet1

Distribution of Income

Material cost26.5

Finance charges4.7

Excise duty8.7

Income Tax0.9

Divident0

Depritiation6.6

Retained Earnings-14.1

Personal Expences16.1

Other Expences52.1

Working Capital Management

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