516 Chapter 12

TABLE OF CONTENTChapterParticularsPage no.

1) Introduction

2) Review of Literature

3) Objective of Study

4) Research Methodology

5) Data Analysis & interpretation

6) Result & Finding

7) Suggestion

8) Conclusion

Bibliography

Annexure(Questionnaire)

INTRODUCTION

Capital required for a business can be classified under two main categories via,

1)Fixed Capital

2)Working Capital

Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as land, building, furniture, etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the purchase of raw material, payment of wages and other day-to-day expenses etc.

These funds are known as working capital. In simple words, working capital refers to that part of the firms capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1.Gross working capital

2.Net working capital

The gross working capital is the capital invested in the total current assets of the enterprises current assets are those

Assets which can convert in to cash within a short period normally one accounting year.

CONSTITUENTS OF CURRENT ASSETS

1)Cash in hand and cash at bank

2)Bills receivables

3)Sundry debtors

4)Short term loans and advances.

5)Inventories of stock as:

a.Raw material

b.Work in process

c.Stores and spares

d.Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the networking. Net working capital is the excess of current assets over current liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.

Net working capital can be positive or negative. When the current assets exceeds the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1.Accrued or outstanding expenses.

2.Short term loans, advances and deposits.

3.Dividends payable.

4.Bank overdraft.

5.Provision for taxation, if it does not amt. to app. Of profit.

6.Bills payable.

7.Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometimes preferred to the concept of working capital for the following reasons:

1.It enables the enterprise to provide correct amount of working capital at correct time.

2.Every management is more interested in total current assets with which it has to operate then the source from where it is made available.

3.It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital.

4.This concept is also useful in determining the rate of return on investments in working capital. The net working capital concept, however, is also important for following reasons:

It is qualitative concept, which indicates the firms ability to meet to its operating expenses and short-term liabilities.

IT indicates the margin of protection available to the short term creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital requirement out of the permanent sources of funds.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways:

On the basis of concept.

On the basis of time.

On the basis of concept working capital can be classified as gross working capital and net working capital. On the basis of time, working capital may be classified as:

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of raw material, work- in-process, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital as this part of working is permanently blocked in current assets. As the business grow the requirements of working capital also increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal need of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing for conducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

Solvency of The Business:Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production.

Goodwill:Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill.

Easy loans:Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favourable terms.

Cash Discounts:Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material:Sufficient working capital ensures regular supply of raw material and continuous production. Regular Payment of Salaries, Wages and Other Day to Day Commitments. It leads to the satisfaction of the employees and raises the morale of its employees, increases their efficiency, reduces wastage and costs and enhances production and profits.

Exploitation of Favourable MarketConditions: If a firm is having adequate working capital then it can exploit the favourable market conditions such as purchasing its requirements in bulk when the prices are lower and holdings its inventories for higher prices.

Ability to Face Crises:A concern can face the situation during the depression.

Quick And Regular Return On Investments:Sufficient working capital enables a concern to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise more funds in future.

High Morale:Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business.

Excess or Inadequate Working Capital

Every business concern should have adequate amount of working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortages of working capital. Both excess as well as short working capital positions are bad for any business. However, it is the inadequate working capital which is more dangerous from the point of view of the firm.

Disadvantages of Redundant or Excessive Working Capital

1.Excessive working capital means ideal funds which earn no profit for the firm and business cannot earn the required rate of return on its investments.

2.Redundant working capital leads to unnecessary purchasing and accumulation of inventories.

3.Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts.

4.It may reduce the overall efficiency of the business.

5.If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained.

6.Due to lower rate of return n investments, the values of shares may also fall.

7.The redundant working capital gives rise to speculative transactions

Disadvantages of Inadequate Working Capital

Every business needs some amounts of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries

To incur day-to-day expenses and overload costs such as office expenses.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock.

For studying the need of working capital in a business, one has to study the business under varying circumstances such as a new concern requires a lot of funds to meet its initial requirements such as promotion and formation etc. These expenses are called preliminary expenses and are capitalized. The amount needed for working capital depends upon the size of the company and ambitions of its promoters. Greater the size of the business unit, generally larger will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the growth and expensing of the business till it gains maturity. At maturity the amount of working capital required is called normal working capital.

There are others factors also influence the need of working capital in a business.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1.NATURE OF BUSINESS:The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments.

2.SIZE OF THE BUSINESS:Greater the size of the business, greater is the requirement of working capital.

3.PRODUCTION POLICY:If the policy is to keep production steady by accumulating inventories it will require higher working capital.

4.LENTH OF PRDUCTION CYCLE:The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progressive increment of labour and service costs before the final product is obtained. So working capital is directly proportional to the length of the manufacturing process.

5.SEASONALS VARIATIONS:Generally, during the busy season, a firm requires larger working capital than in slack season.

6.WORKING CAPITAL CYCLE:The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital.

7.RATE OF STOCK TURNOVER:There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will needs lower amt. of working capital as compared to a firm having a low rate of turnover.

8. CREDIT POLICY:A concern that purchases its requirements on credit and sales its product / services on cash requires lesser amt. of working capital and vice-versa.

9.BUSINESS CYCLE:In period of boom, when the business is prosperous, there is need for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital.

10.RATE OF GROWTH OF BUSINESS:In faster growing concern, we shall require large amt. of working capital.

11.EARNING CAPACITY AND DIVIDEND POLICY:Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend.

12.PRICE LEVEL CHANGES:Changes in the price level also affect the working capital requirements. Generally rise in prices leads to increase in working capital.

Others factors includes:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labour.

Banking facilities, etc.

MANAGEMENT OF WORKING CAPITALManagement of working capital is concerned with the problem that arises in attempting to manage the current assets, current liabilities. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as both the situations are bad for any firm. There should be no shortage of funds and also no working capital should be ideal.

Working Capital Management Polices of a firm has a great on its probability, liquidity and structural health of the organization. So working capital management is three dimensional in nature as

1.It concerned with the formulation of policies with regard to profitability, liquidity and risk.

2.It is concerned with the decision about the composition and level of current assets.

3.It is concerned with the decision about the composition and level of current liabilities.

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management of working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.

The analysis of working capital can be conducted through a number of devices, such as:

1.Ratio analysis.

2.Fund flow analysis.

3.Budgeting.

RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. The following ratios can be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

2.FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from which additional funds were derived and the use to which these sources were put. The fund flow analysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.

It is an effective management tool to study the changes in financial position (working capital) business enterprise between beginning and ending of the financial dates.

3.WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices to be pursued in the future period time. Working capital budget as a part of the total budge ting process of a business is prepared estimating future long term and short term working capital needs and sources to finance them, and then comparing the budgeted figures with actual performance for calculating the variances, if any, so that corrective actions may be taken in future. He objective working capital budget is to ensure availability of funds as and needed, and to ensure effective utilization of these resources. The successful implementation of working capital budget involves the preparing of separate budget for each element of working capital, such as, cash, inventories and receivables etc.

REVIEW OF LITERATURE

Extensive research works on working capital management have been done in both public and private sectors including multinational companies in India. Sayaduzzaman (2012) in his article on Working Capital Management: A study on American Bank mentions that the efficiency of working capital management of British American Tobacco Company Ltd. is highly satisfactory due to the positive cash inflows and planned approach in managing the major elements of working capital. He found that working capital management helps to maintain all around efficiency in operations.

In the article Liquidity-Profitability Tradeoff: An Empirical Investigation in an Emerging Market, Eljelly(2012) examined the relation between profitability and liquidity by using correlation and regression analyses and found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio that affects profitability.Raheman (2011) studied the effect of different variables of working capital management including the Average Collection Period, Inventory Turnover in Days, Average Payable Period, Cash Conversion Cycle and Current Ratio on the Net Operating Profitability of Indian Firms.

By using Pearsons correlation and regression analysis he found that there was a strong negative relationship between variables of Working Capital Management and Profitability. He also finds that as the cash conversion cycle increases, it leads to decrease in profitability of the firm and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level.

Islam & Rahman (2013) conducted a study on working capital trends of enterprises. They find that optimum working capital enables a business to have its credit standing and permits the debts payments on maturity date and helps to keep itself fairly in liquid position which enables the business to attract borrowing from the banks.Deloof (2013) surveyed on Belgian Firms to find out whether the working capital management affects profitability. He found that most firms had a large amount of cash invested in working capital. It can be expected that the way in which working capital is managed, will have a significant impact on the profitability of those firms. Using correlation and regression tests he found a significant negative relationship between corporate profitability and number of days accounts receivable, inventories and accounts payable of Belgian firms. On the basis of these he suggested that manager could increase corporate profitability by reducing the number of days accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills.Padachi (2012) find in his research study that a firm is required to maintain a balance between liquidity and profitability while conducting its day to day operations. The manager of a business entity is in a dilemma of achieving desired trade-off between liquidity and profitability in order to maximize the value of a firm.Lazaridis and Tryfonidis (2012) investigated relationship between working capital management and corporate profitability of listed companies in the Athens Stock Exchange. The results of the article showed that there was a statistically significant relationship between profitability and cash conversion cycle. Moreover managers could create profits for their companies by handling correctly the cash conversion cycle and keeping each different components (accounts receivables, accounts payables, inventory) to an optimum level.

Ganesand (2012) suggest that efficient working capital management increases firms free cash flow, which in turn increases the firms growth opportunities and return to shareholders.Chowdhury and Amin (2012) have written an article on Working Capital Management Practices in Pharmaceutical Companies Listed in DSE. Among all the problems of financial management, the problems of working capital management have probably been recognized as the most crucial one. It is because of the fact that working capital always helps a business concern to gain vitality and life strength and to maximize profit.Shin and Soenen (1913) suggested that efficient working capital management was very important for creating value for the shareholders. The way working capital was managed had significant impact on both profitability and liquidity. Using correlation and regression analysis they justified the relationship between the length of net trading cycle, corporate profitability and risk adjusted stock return. They found a strong negative relationship between lengths of the firms net trading cycle and its profitability. In addition, they also found that shorter net trade cycles were associated with higher risk adjusted stock returns.

OBJECTIVES OF STUDYThe major objective of the present study is to examine and evaluate the correlation between Working Capital Management and Profitability in Cethar Vessels Ltd over a period of three years from 2010 to 2012. The specific objectives of the study are as followsi. To examine the profitability position of the Cethar Vessels Ltd.

ii. To examine the management of cash, inventory and accounts receivable of Cethar Vessels Ltd

iii. To assess the current liability positions and the efficiency with which the overall working capital is being managed.

iv. To assess the relationship between working capital management and profitability.

v. To suggest some measures for improvement in working capital management.

RESEARCH METHDOLGY

Research methodology is a way to systematically solve the research problem. Research Methodology comprises of two words, research and methodology.

Research is defined as human activity based on intellectual application in the investigation of matter. The primary purpose for applied research is discovering, interpreting, and the development of methods and systems for the advancement of human knowledge on a wide variety of scientific matters of our world and the universe.

Research may be defined as a careful investigation or inquiry especially through search of new facts in any branch of knowledge. In short, it comprises defining a refined problem's, formulating hypothesis or suggested solution; collecting, organizing and evaluating data; making deductions and research conclusions; and lastly carefully testing the conclusion to determine whether they fit the hypothesisResearch Methodology

The methodology, I have adopted for my study is the various tools, which basically analyses critically financial position of to the organization:

COMMON-SIZE P/L A/C

COMMON-SIZE BALANCE SHEET

COMPARTIVE P/L A/C

COMPARTIVE BALANCE SHEET

TREND ANALYSIS

RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With the evaluation of each component, the financial position from different angles is tried to be presented in well and systematic manner. By critical analysis with the help of different tools, it becomes clear how the financial manager handles the finance matters in profitable manner in the critical challenging atmosphere, the recommendation are made which would suggest the organization in formulation of a healthy and strong position financially with proper management system.

I sincerely hope, through the evaluation of various percentage, ratios and comparative analysis, the organization would be able to conquer its in efficiencies and makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistent accounting procedure to convey an under-standing of some financial aspects of a business firm. It may show position at a moment in time, as in the case of balance sheet or may reveal a series of activities over a given period of time, as in the case of an income statement. Thus, the term financial statements generally refers to the two statements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.Research DesignResearch design can be thought of as the structure of research -- it is the "glue" that holds all of the elements in a research project together. We often describe a design using a concise notation that enables us to summarize a complex design structure efficiently. Considering the objectives of the study, sample survey was conducted and accordingly analysis of information was made. Exploratory research design is used in present study.

Data CollectionBoth primary and secondary data had been used in present study.

Primary Data collected through personal interview in the form of questionnaire.

Secondary Data was collected from various journals, books, magazines and internet.

Sampling PlanIn carrying out a survey relating to research, first select the problem and study its implication in different areas. Selection of the research problem should be in line with the researchers interest, chain of thinking and existing research in the same area and should have some direct utilities. The topic should have the practical feasibility to study feasibility, what is important to prepare a preliminary questionnaire on research topic.Sampling Design

A sample design is definite plan for obtaining a sample from a given population. It refers to the technique or the procedure the researcher would adopt in selecting items for the sample.The selection of employee was done on the basis of convenience sampling.

DATA ANALYSIS AND FINDINGSAnalysis Of Short Term Financial Position Or Test Of Liquidity

The short term creditors of a company such as suppliers of goods of credit and commercial banks short-term loans are primarily interested to know the ability of a firm to meet its obligations in time. The short term obligations of a firm can be met in time only when it is having sufficient liquid assets. So to with the confidence of investors, creditors, the smooth functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be strong. But a very high degree of liquidity of the firm being tied up in current assets. Therefore, it is important proper balance in regard to the liquidity of the firm. Two types of ratios can be calculated for measuring short-term financial position or short-term solvency position of the firm.

1. Liquidity ratios.

2. Current assets movements ratios. LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assts. The current assets should either be liquid or near about liquidity. These should be convertible in cash for paying obligations of short-term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. If current assets can pay off the current liabilities then the liquidity position is satisfactory. On the other hand, if the current liabilities cannot be met out of the current assets then the liquidity position is bad.

To measure the liquidity of a firm, the following ratios can be calculated:

1. CURRENT RATIO

2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

1.CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of general liquidity and its most widely used to make the analysis of short-term financial position or liquidity of a firm. It is defined as the relation between current assets and current liabilities. Thus,

CURRENT RATIO =CURRENT ASSETS

CURRENT LIABILITES

The two components of this ratio are:

1)CURRENT ASSETS

2)CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry debtors, inventories and work-in-progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. On the hand a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is considered to be satisfactory.

1. Calculation of Current RatioYear201020112012

Current Assets81.2983.1213,6.57

Current Liabilities27.4220.5833.48

Current Ratio2.96:14.03:14.08:1

(Rupees in crore)

Interpretation:-As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company for last three years it has increased from 2010 to 2012. The current ratio of company is more than the ideal ratio. This depicts that companys liquidity position is sound. Its current assets are more than its current liabilities.

2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash with a short period without loss of value. It measures the firms capacity to pay off current obligations immediately.

QUICK RATIO =QUICK ASSETS

CURRENT LIABILITES

Where Quick Assets are:

1)Marketable Securities

2)Cash in hand and Cash at bank.

3)Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand a low quick ratio represents that the firms liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal to the current liabilities then the concern may be able to meet its short-term obligations. However, a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors. On the other hand, a firm having a low liquidity position if it has fast moving inventories.

CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)

Year201020112012

Quick Assets44.1447.4361.55

Current Liabilities27.4220.5833.48

Quick Ratio1.6 : 12.3 : 11.8 : 1

Interpretation :A quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more than ideal ratio. This shows company has no liquidity problem.

3. ABSOLUTE LIQUID RATIOAlthough receivables, debtors and bills receivable are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. So absolute liquid ratio should be calculated together with current ratio and acid test ratio so as to exclude even receivables from the current assets and find out the absolute liquid assets. Absolute Liquid Assets includes :

ABSOLUTE LIQUID RATIO=ABSOLUTE LIQUID ASSETSCURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.e.g. (Rupees in Crore)

Year201020112012

Absolute Liquid Assets4.691.795.06

Current Liabilities27.4220.5833.48

Absolute Liquid Ratio.17 : 1.09 : 1.15 : 1

Interpretation:

These ratio shows that company carries a small amount of cash. But there is nothing to be worried about the lack of cash because company has reserve, borrowing power & long term investment. In India, firms have credit limits sanctioned from banks and can easily draw cash.

B) CURRENT ASSETS MOVEMENT RATIOSFunds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, large is the amount of sales and profits. Current assets movement ratios measure the efficiency with which a firm manages its resources. These ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Depending upon the purpose, a number of turnover ratios can be calculated. These are:

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high amount of debtors due to slow credit collections and moreover if the assets include high amount of slow moving inventories.

As both the ratios ignore the movement of current assets, it is important to calculate the turnover ratio.1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO:

Every firm has to maintain a certain amount of inventory of finished goods so as to meet the requirements of the business. But the level of inventory should neither be too high nor too low. Because it is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in it. It will therefore be advisable to dispose the inventory as soon as possible.

INVENTORY TURNOVER RATIO=COST OF GOOD SOLD AVERAGE INVENTORYInventory turnover ratio measures the speed with which the stock is converted into sales. Usually a high inventory ratio indicates an efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory. Whereas low inventory turnover ratio indicates the inefficient management of inventory. A low inventory turnover implies over investment in inventories, dull business, poor quality of goods, stock accumulations and slow moving goods and low profits as compared to total investment.

AVERAGE STOCK=OPENING STOCK + CLOSING STOCK2(Rupees in Crore)

Year201020102012

Cost of Goods sold110.6103.296.8

Average Stock73.5936.4255.35

Inventory Turnover Ratio1.5 times2.8 times1.75 times

Interpretation:These ratio shows how rapidly the inventory is turning into receivable through sales. In 2011 the company has high inventory turnover ratio but in 2012 it has reduced to 1.75 times. This shows that the companys inventory management technique is less efficient as compare to last year.

Inventory conversion period:

Inventory conversion period=365 (net working days)

Inventory turnover ratio

e.g.

Year201020102012

Days365365365

Inventory Turnover Ratio1.52.81.8

Inventory Conversion Period243 days130 days202 days

Interpretation:Inventory conversion period shows that how many days inventories takes to convert from raw material to finished goods. In the company inventory conversion period is decreasing. This shows the efficiency of management to convert the inventory into cash.

2. DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are expected to be converted into cash within a short period and are included in current assets. So liquidity position of a concern also depends upon the quality of trade debtors. Two types of ratio can be calculated to evaluate the quality of debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

Debtors turnover ratio =

total sales (credit)

Average debtors

Debtors velocity indicates the number of times the debtors are turned over during a year. Generally higher the value of debtors turnover ratio the more efficient is the management of debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor management of debtors/sales and less liquid debtors. This ratio should be compared with ratios of other firms doing the same business and a trend may be found to make a better interpretation of the ratio.

AVERAGE DEBTORS=OPENING DEBTOR+CLOSING DEBTOR

e.g.

Year201020112012

Sales166.0151.5169.5

Average Debtors17.3318.1922.50

Debtor Turnover Ratio9.6 times8.3 times7.5 times

Interpretation:

This ratio indicates the speed with which debtors are being converted or turnover into sales. The higher the values or turnover into sales. The higher the values of debtors turnover, the more efficient is the management of credit. But in the company the debtor turnover ratio is decreasing year to year. This shows that company is not utilizing its debtors efficiency. Now their credit policy become liberal as compare to previous year.

Average Collection Period =No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average number of days for which a firm has to wait before its receivables are converted into cash. It measures the quality of debtors. Generally, shorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors and vice-versa.

Year201020112012

Days365365365

Debtor Turnover Ratio9.68.37.5

Average Collection Period38 days44 days49 days

Interpretation:

The average collection period measures the quality of debtors and it helps in analysing the efficiency of collection efforts. It also helps to analysis the credit policy adopted by company. In the firm average collection period increasing year to year. It shows that the firm has Liberal Credit policy. These changes in policy are due to competitors credit policy.

3. WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of the year. This ratio measures the efficiency with which the working capital is used by the firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover is not a good situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

Working Capital Turnover =Sales

Networking Capital

e.g.

Year201020112012

Sales166.0151.5169.5

Networking Capital53.8762.52103.09

Working Capital Turnover3.082.41.64

Interpretation:

This ratio indicates low much net working capital requires for sales. In 2012, the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 60 paisa as working capital. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale.

INVENTORIES

(Rs. in Crores)

Year2009-20102010-20112011-2012

Inventories37.1535.6975.01

Interpretation:

Inventories is a major part of current assets. If any company wants to manage its working capital efficiency, it has to manage its inventories efficiently. The graph shows that inventory in 2009-2010 is 45%, in 2010-2011 is 43% and in 2011-2012 is 54% of their current assets. The company should try to reduce the inventory upto 10% or 20% of current assets.

CASH BANK BALANCE :

(Rs. in Crores)

Year2009-20102010-20112011-2012

Cash Bank Balance4.691.795.05

Interpretation:

Cash is basic input or component of working capital. Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to meet various requirements. The above graph is indicate that in 2010 the cash is 4.69 crores but in 2011 it has decrease to 1.79. The result of that it disturb the firms manufacturing operations. In 2012, it is increased up to approx. 5.1% cash balance. So in 2012, the company has no problem for meeting its requirement as compare to 2011.

DEBTORS:

(Rs. in Crores)

Year2009-20102010-20112011-2012

Debtors17.3319.0525.94

Interpretation:

Debtors constitute a substantial portion of total current assets. In India it constitute one third of current assets. The above graph is depict that there is increase in debtors. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit policy.

CURRENT ASSETS:

(Rs. in Crores)

Year2009-20102010-20112011-2012

Current Assets81.2983.15136.57

Interpretation:

This graph shows that there is 64% increase in current assets in 2012. This increase is arise because there is approx. 50% increase in inventories. Increase in current assets shows the liquidity soundness of company.

CURRENT LIABILITY:

(Rs. in Crores)

Year2009-20102010-20112011-2012

Current Liability27.4220.5833.48

Interpretation :

Current liabilities shows company short term debts pay to outsiders. In 2012 the current liabilities of the company increased. But still increase in current assets are more than its current liabilities.

NET WOKRING CAPITAL:

(Rs. in Crores)

Year2009-20102010-20112011-2012

Net Working Capital53.8762.53103.09

Interpretation:

Working capital is required to finance day to day operations of a firm. There should be an optimum level of working capital. It should not be too less or not too excess. In the company there is increase in working capital. The increase in working capital arises because the company has expanded its business.

ConclusionConsidering the coefficients and their significance level, it can be concluded that in Cethar Vessels Ltd, the nature of working capital policy, financing of working capital, inventory holding period (Inventory Turnover in Days), Accounts Receivable Collection Period (Accounts Receivable Turnover in Days), Accounts Payable Period (Accounts Payable Turnover in Days), and Cash Conversion Cycle in Days play an important role in determining overall profitability Return on Total Assets (ROTA).

From the profitability ratios it is clear that the performance of the selected textiles under the study period is satisfactory. On the other hand, from the working capital ratios it is clear that the working capital position is also satisfactory. From the regression and correlation analysis it can be concluded that the proper management of working capital is one of the important causes for good performance of the selected company under the study period.

BIBLIOGRAPHY

Aswathappa k., Human Recourse & Management, 2012, Pg (244 to 245)

Anis Kavar .V., Capital management, 2006, Pg (132 to 134)

Gupta K. Shashi & Joshi Rosy, Human Recourse Management, 2008, Pg (20.9 to 20.17)

Rao Subba P., Essential of HRM & Industrial Relationships, 2010, Pg (480 to 482)

Brown, Forde, "Changes in HRM and Capital Management, 19982004: evidence from the Workplace Employment Relations Survey", Human Resource Management Journal, Vol. 18, Issue-2, 2008, Pg (97195)http://www3.interscience.wiley.com/journal/120086933/abstract

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