02Working Capital Management - Navdeep Bajwa, SMS, Pbi Uni

7/29/2019 02Working Capital Management - Navdeep Bajwa, SMS, Pbi Uni.

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WORKING CAPITAL MANAGEMENT

OF

MILKFOOD LIMITED

A summer training report submitted in partial fulfillment of the requirement for

the degree of

MASTERS OF BUSINESS ADMINISTRATION

(2011-2013)

Submitted to: Submitted by:

Dr. Anju Puri NAVDEEP BAJWAAssistant Professor MBA 2

ndyear


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SCHOOL OF MANAGEMENT STUDIES

P U N J A B I U N I V E R S I T Y P A T I A L A

WORKING CAPITAL OF MANAGEMENT

Summer Training Report

Summer Training Report submitted as a partial requirement for the award of the two

year

MBA Programme.(2011-2013)


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MILKFOOD LIMITEDBAHADURGARH,

PATIALA

Submitted by:

Navdeep Bajwa MBA 2ndyear

Corporate Supervisor

Name: Mr. Dinesh Bhatia

Mobile:

E-mail:


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DECLARATION

I hereby certify that I, a Student of MBA 2011-2013 , have successfully

completed my internship with in the month of July, 2012 i.e. 4 June,

2012 to 19 July, 2012. This is also to certify that this report is an original

product and no unfair means like copying etc have been used for its

completion.

It has been done under the guidance of Mr. Dinesh Bhatia

Navdeep Bajwa

(Signature)

Dated: 19 July, 2012


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ACKNOWLEDGEMENT

No big thing in the world is achieved without the help and blessing of our

well wishers. I feel obliged to express my grateful thanks to all those persons who

rendered me all possible help in completion of this project.

I would like to thank Mr. Dinesh Bhatia for providing me with the valuable

opportunity to undertake summer project at Milkfood Ltd . I am grateful to him

who extended his wholehearted and unreserved help to me throughout this project

and enabled me to give the project its present shape. He provided me with valuable

suggestions and information related the project and really co-operated me a lot

during my project. He was deeply concerned and involved in my study and

research work.

I am immensely thankful to all the staff members of the Department for

helping me from time to time, and providing me their valuable suggestions.

.


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PREFACE

The present study is conducted with objectives of identifiying the

WORKINGCAPITAL MANAGEMENT

from the balance sheets provided by the MILKFOOD LIMITED.

The first chapter deals with the introduction , where the information is

briefed about dairy industry.

The second chapter discuss the need of the study, the methodology used and

limitation thereof.

The third chapter deals with the organization profile in detailed.

The forth chapter deals with the literature review of the study.

The fifth chapter deals with analysis and interpretation.

The sixth chapter findings, suggestions, conclusions and Bibliographyregarding the study with the help of last four years balance sheets.


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CONTENTS

CHAPTER-1 INTRODUCTION TO WORKING CAPITAL

MANAGEMENT

Nature of working capital management

Methodology

Objective of study

Significant of the study

Limitations of the study

CHAPTER-2 INDUSTRY PROFILE COMPANY PROFILE

CHAPTER-3 THEORETICAL FRAMEWORK OF WORKING

CAPITAL

CHAPTER-4 ANALYSIS AND INTREPRETATION

CHAPTER-5 FINIDING&SUGGESTIONS

REFERENCES & BIBLIOGRAPHY


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CHAPTER-1

INTRODUCTION TO WORKING CAPITAL

MANAGEMENT.

NATURE OF WORKING CAPITAL MANAGEMENT.

OBJECTIVE OF THE STUDY.

SIGNIFICANCE OF THE STUDY.

METHODOLOGY.

Limitations of the study


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INTRODUCTION

Working capital management is significant in financial management. It plays a

vital role in keeping the wheel of the business running. Every business

requires capital ,without it cant be promoted. Investment decisions is concerned

with investment in current assets and fixed assets .working capital plays a key role

in a business enterprise just as the role of heart in human body . it acts as grease

to run the wheels of fixed assets .its effective provision can ensure the success

of business while its inefficient management can lead not only to loss but

also to the ultimate downfall of what otherwise might be considered as a

promising concern . Efficiency of a business enterprise depends largely on its

ability to its working capital .working capital management is one of the

important facts of affirms overall financial management

For increasing shareholders wealth a firm has to analyze the effect of fixedassets and current assets on its return and risk.working capital management of

current assets . the management of current assets on the basis of the following

points:

1. current assets are for short period while fixed assets are for more than one year

2. The large holding of current assets ,especially cash, strengthens liquidity

position but also reduce overall profitability ,and to maintain an optimal level of

liquidity and profitability , risk return trade off is involved holding current assets

3. Only current assets can be adjusted with sales fluctuating in the short run. thus

the firm has greater degree of flexibility in managing current assets. The

management of current assets help affirm in building a good market reputation

regarding its business and economic conditions.


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Now first let us discuss the paradigms of working capital management.

CONCEPT OF WORKING CAPITAL:

The concept of working capital includes current assets and current liabilities both.

There are two of working capital of working capital they are gross and net

working capital.

1.Gross working capital: Gross working capital refers to the firms

investment in current assets .current assets are the assets, which can be converted

into cash within an accounting year or operating cycle. It includes cash, short term

securities ,debtors (account receivables or book debts),bills receivables and stock

(inventory).

2.Net working capital: net working capital refers to the difference between

current assets and liabilities are those claims of outsiders, which are expected to

mature for payment within an accounting year. It includes creditors or accounts

payables bills payable and outstanding expenses. Net working copulate can be

positive or negative. A positive working capital will arise when current assets

exceed current liabilities and vice versa.

NATURE OF WORKING CAPITAL

Working capital management is concerned with the problems that arise

in attempting to manage the current assets ,the current liabilities and the

inter relationship that exists between them. The term current refers to those

assets which in the ordinary course of business can be ,or will be converted

into cash within one year without undergoing a diminution in value and


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without disrupting the operation of the firm. the major current assets are

cash, marketable securities, accounts receivables and inventory. current

liabilities are those liabilities, which are intended at their inception ,to be paid

in the ordinary course of business, within a year out of the current or the

earning of the concern .The basic current liabilities are accounts payable

,bills payable ,bank overdrafts and outstanding expense. The goal of working

management is to manage the firms assets and liabilities in such a way that a

satisfactory level of working capital is maintain. This is because if the firms

cannot maintain a satisfactory level of working capital ,it is likely to become

insolvent and may even be forced into bankruptcy. The current assets should

be large enough to cover its current liabilities in order to ensure a reasonable

margin of safety. Each of the short term source of financing must be

continuously managed to ensure that they are obtained and used in the way.

Interaction between current liabilities is ,therefore the main theme of the ofmanagement of working capital.

METHODOLOGY

For the purpose of the study necessary information has been collected

through primary and secondary sources.

PRIMARY DATA:


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DEFINITION

The primary data are those which are collected a fresh and for the first time,

and thus happened to be original in character . primary data include the

information collected from the officials and existing company through

discussions

SECONDARY DATA :

DEFINITION

The secondary data ,on the other hand are those which have already been

collected by some one else and which have already been passed though the

stastical process.

The secondary data include the information from the company annual reports

which include financial statement like balance sheet and income statements

and such other information from text books of financial management ,journals

and magazine has also been collected.

OBJECTIVES OF THE STUDY

Working capital is the most widely used and powerful technique of financial

analysis .The main objective of the present study is to know the financial


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condition of the company.

To know the overall operational efficiently and performance of the sudha

agro oil and chemical industries limited.

To interpret the financial position of company of is appropriate (or) not.

To asses the long term financial viability of company .to know whether the

management is constantly concerned about the over all profitability of the

company (or) not.

To provide reliable financial information about economic resources and

obligation of a business enterprise.

To provide reliable financial information those add ,its in estimating the

potential of the enterprise.

To disclose to the extent possible other information related to the financial

statements users.

NEED OF THE STUDY

During the postliberalization are the worlds assail as economic indias

scenario has shown a great progress and is growing with increased phase this has

necessitated the complex and efficient ways of management .thinking practically

the main concern is of the influence of external environment on business providing

a modern dimension to business to management .they find solution for manyproblems in the aspect of financial analysis .financial establishes inter relationship

that exists among. The different items appeared in the financial statements, which

are effectively helpful to describe the company should monitor key indication of

operating performance and where possible must compare, itself with the

competitors in the industry.


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A systematic financial analysis of accounting figure

helps to analysis the probable caused relationship among different items after

analyzing scrutinizing the past result which helps the management to prepare

budgets ,to formulate company policy and to prepare future plan of action. It

focuses on companys relative performance in sales growth margins and assetsmanagement .It is a simple tool where by a company can make its internal audit to

evaluate internal strengths and weakness of the part of the strategic planning.

LIMITATIONS OF THE STUDY

The study conducted and done is analytical ,subject to the following limitations

1)The study is mainly carried out based on the secondary data provided in the

financial statements .

2)this study is based on the historical data and information provided in the annual

reports therefore it may not be a future indicator .

3)There may be some fractional differences in the calculated ratios.

As the study was for short span of 8 weeks and due to lack of time other areas

could not be well focused.


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CHAPTER -2

INDUSTRY PROFILE

COMPANY PROFILE

INDUSTRY PROFILE

Today, India is 'The Oyster' of the global dairy industry. It offers opportunitiesgalore to entrepreneurs worldwide, who wish to capitalize on one of the world'slargest and fastest growing markets for milk and milk products. A bagful of 'pearls'awaits the international dairy processor in India. The Indian dairy industry is


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India is the leading producer of milk in the world followed by USA. The milkproduction in 1999-00 is estimated at 78mn MT as compared to 74.5mn MT in theprevious year. This production is expected to increase to 81mn MT by 2000-01. Ofthis total produce of 78mn cows' milk constitute 36mn MT while rest is from othercattle.

While world milk production declined by 2 per cent in the last three years,according to FAO estimates, Indian production has increased by 4 per cent. Themilk production in India accounts for more than 13% of the total world output and57% of total Asia's production. The top five milk producing nations in the worldare India ,USA, Russia, Germany and France.

Although milk production has grown at a fast pace during the last threedecades(courtesy: Operation Flood), milk yield per animal is very low. The main

reasons for the low yield are

Lack of use of scientific practices in milching. Inadequate availability of fodder in all seasons. Unavailability of veterinary health services.

Milk Yield comparison:

Country Milk Yield(Kgs per

year)

USA 7002

UK 5417

Canada 5348

New Zealand 2976Pakistan 1052

India 795

World (Average) 2021

Source: Export prospects for agro-based industries, World Trade Centre, Mumbai.


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Production of milk in India

YearProduction in million

MT

1988-89 48.41989-90 51.4

1990-91 53.7

1991-92 56.3

1992-93 58.6

1993-94 61.2

1994-95 63.5

1995-96 65

1996-97 68.5

1997-98 70.8

1998-99 74.7

1999-00(E)

78.1

2000-01(T)

81.0

E= estimatedT= target / expected

Source: DFPI, Annual Report-1999-2000

World's major milk producers

(Million MTs)

Country 1997-981998-99 (

Approx.)

India 71 74.5

USA 71 71


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Russia 34 33

Germany 27 27

France 24 24

Pakistan 21 22

Brazil 21 27

UK 14 14

Ukraine 15 14

Poland 12 12

NewZealand

11 12

Netherlands 11 11

Italy 10 10Australia 9 10

Operation Flood

The transition of the Indian milk industry from a situation of net import to that of

surplus has been led by the efforts of National Dairy Development Board'sOperation Flood. programme under the aegis of the former Chairman of the boardDr. Kurien.

Launched in 1970, Operation Flood has led to the modernization of India's dairysector and created a strong network for procurement processing and distribution ofmilk by the co-operative sector. Per capita availability of milk has increased from132 gm per day in 1950 to over 220 gm per day in 1998. The main thrust ofOperation Flood was to organize dairy cooperatives in the milkshed areas of thevillage, and to link them to the four Metro cities, which are the main markets formilk. The efforts undertaken by NDDB have not only led to enhanced production,improvement in methods of processing and development of a strong marketingnetwork, but have also led to the emergence of dairying as an important source ofemployment and income generation in the rural areas. It has also led to animprovement in yields, longer lactation periods, shorter calving intervals, etcthrough the use of modern breeding techniques. Establishment of milk collection


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centers, and chilling centers has enhanced life of raw milk and enabledminimization of wastage due to spoilage of milk. Operation Flood has been one ofthe world's largest dairy development programme and looking at the successachieved in India by adopting the co-operative route, a few other countries havealso replicated the model of India's White Revolution.

Per Capita availability of milk

Year gm/day

1950 132

1960 127

1968 1131973 111

1980* 128

1990 178

1992 192

1996 198

1997 200

1998 2021999 203

2000 212

2001E 225

2002P 250

E= Estimated

P= Provisional

* Operation flood was launched in 1970

Fresh Milk


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Over 50% of the milk produced in India is buffalo milk, and 45% is cow milk.The buffalo milk contribution to total milk produce is expected to be 54% in2000. Buffalo milk has 3.6% protein, 7.4% fat, 5.5% milk sugar, 0.8% ash and82.7% water whereas cow milk has 3.5% protein, 3.7% fat, 4.9% milk sugar,

0.7% ash and 87% water. While presently (for the year 2000) the price ofBuffalo milk is ruling at $261-313 per MT that of cow is ruling at $170-267 perMT. Fresh pasteurized milk is available in packaged form. However, a largepart of milk consumed in India is not pasteurized, and is sold in loose form byvendors. Sterilized milk is scarcely available in India.

Packaged milk can be divided according to fat content as follows,

Whole (full cream) milk - 6% fat

Standardized (toned) milk - 4.5% fat

Doubled toned (low fat) milk - 3% fat

Another category of milk, which has a small market is flavoured milk.

The Indian Market - A Pyramid

Consumer Habits And Practices

Milk has been an integral part of Indian food for centuries. The per capitaavailability of milk in India has grown from 172 gm per person per day in 1972 to182gm in 1992 and 203 gm in 1998-99.This is expected to increase to 212gms for1999-00. However a large part of the population cannot afford milk. At this percapita consumption it is below the world average of 285 gm and even less than 220gm recommended by the Nutritional Advisory Committee of the Indian Council ofMedical Research.

There are regional disparities in production and consumption also. The per capitaavailability in the north is 278 gm, west 174 gm, south 148 gm and in the east only

93 gm per person per day. This disparity is due to concentration of milk productionin some pockets and high cost of transportation. Also the output of milk in cerealgrowing areas is much higher than elsewhere which can be attributed to abundantavailability of fodder, crop residues, etc which have a high food value for milchanimals.


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In India about 46 per cent of the total milk produced is consumed in liquid formand 47 per cent is converted into traditional products like cottage butter, ghee,

paneer, khoya, curd, malai, etc. Only 7 per cent of the milk goes into theproduction of western products like milk powders, processed butter and processedcheese. The remaining 54% is utilized for conversion to milk products. Among themilk products manufactured by the organized sector some of the prominent onesare ghee, butter, cheese, ice creams, milk powders, malted milk food, condensedmilk infants foods etc. Of these ghee alone accounts for 85%.

It is estimated that around 20% of the total milk produced in the country isconsumed at producer-household level and remaining is marketed through variouscooperatives, private dairies and vendors. Also of the total produce more than 50%is procured by cooperatives and other private dairies.

While for cooperatives of the total milk procured 60% is consumed in fluid formand rest is used for manufacturing processed value added dairy products; forprivate dairies only 45% is marketed in fluid form and rest is processed into valueadded dairy products like ghee, makhan etc.

Still, several consumers in urban areas prefer to buy loose milk from vendors dueto the strong perception that loose milk is fresh. Also, the current level of

processing and packaging capacity limits the availability of packaged milk.

The preferred dairy animal in India is buffalo unlike the majority of the world

market, which is dominated by cow milk. As high as 98% of milk is produced inrural India, which caters to 72% of the total population, whereas the urban sectorwith 28% population consumes 56% of total milk produced. Even in urban India,as high as 83% of the consumed milk comes from the unorganized traditionalsector.

Presently only 12% of the milk market is represented by packaged and brandedpasteurized milk, valued at about Rs. 8,000 crores. Quality of milk sold byunorganized sector however is inconsistent and so is the price across the season inlocal areas. Also these vendors add water and caustic soda, which makes the milkunhygienic.

India's dairy market is multi-layered. It's shaped like a pyramid with the base madeup of a vast market for low-cost milk. The bulk of the demand for milk is amongthe poor in urban areas whose individual requirement is small, maybe a glassful foruse as whitener for their tea and coffee. Nevertheless, it adds up to a sizablevolume - millions of litres per day. In the major cities lies an immense growth


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potential for the modern sector. Presently, barely 778 out of 3,700 cities and townsare served by its milk distribution network, dispensing hygienically packedwholesome, quality pasteurized milk. According to one estimate, the packed milksegment would double in the next five years, giving both strength and volume tothe modern sector. The narrow tip at the top is a small but affluent market forwestern type milk products.

Growing Volumes

The effective milk market is largely confined to urban areas, inhabited by over 25per cent of the country's population. An estimated 50 per cent of the total milkproduced is consumed here. By the end of the twentieth century, the urbanpopulation is expected to increase by more than 100 million to touch 364 million in2000 a growth of about 40 per cent. The expected rise in urban population would

be a boon to Indian dairying. Presently, the organized sector both cooperative andprivate and the traditional sector cater to this market.

The consumer access has become easier with the information revolution. Thenumber of households with TV has increased from 23 million in 1989 to 45 millionin 1995. About 34 per cent of these households in urban India have access tosatellite television channel.

Potential for further growth

Of the three A's of marketing - availability, acceptability and affordability,Indian dairying is already endowed with the first two. People in India love todrink milk. Hence no efforts are needed to make it acceptable. Its availability isnot a limitation either, because of the ample scope for increasing milk production,given the prevailing low yields from dairy cattle. It leaves the third vital marketingfactor affordability. How to make milk affordable for the large majority withlimited purchasing power? That is essence of the challenge. One practical way is to

pack milk in small quantities of 250 ml or less in polythene sachets. Already, theglass bottle for retailing milk has given way to single-use sachets which are moreeconomical. Another viable alternative is to sell small quantities of milk powder inmini-sachets, adequate for two cups of tea or coffee.


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2.4kg pa as compared to over 20kg in USA. The lower penetration is due topeculiar food habits, relatively expensive products and also non-availability inmany parts of the country. Butter, margarine and cheese products are mainlymanufactured by organized sector.

Similarly, penetration of ghee is highest in medium sized towns at 37.2%compared to 31.7% in all urban areas and 21.3% in all rural areas. The all India

penetration of ghee is 24.1%. In relative terms, penetration of ghee is significantlyhigher in North and West, which are milk surplus regions. North accounts for 57%of ghee consumption and West for 23%, South & East together account for the

balance 20%. A large part of ghee is made at home and by small/ cottage industryfrom milk. The relative share of branded products in this category is very low ataround 1-2%.

Milk powder and condensed milk have not been able to garner any significantconsumer acceptance in India as indicated by a very low 4.7% penetration. Thepenetration is higher at 8.1% in urban areas and lower at 3.5% in rural areas.Within urban areas, it is relatively higher in medium sized towns at 8.5% comparedto 7.7% in a large metros.

Market Size And Growth

Market size for milk (sold in loose/ packaged form) is estimated to be 36mn MTvalued at Rs470bn. The market is currently growing at round 4% pa in volume

terms. The milk surplus states in India are Uttar Pradesh, Punjab, Haryana,Rajasthan, Gujarat, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. Themanufacturing of milk products is concentrated in these milk surplus States. Thetop 6 states viz. Uttar Pradesh, Punjab, Madhya Pradesh, Rajasthan, Tamil Naduand Gujarat together account for 58% of national production.

Milk production grew by a mere 1% pa between 1947 and 1970. Since the early70's, under Operation Flood, production growth increased significantly averagingover 5% pa.

About 75% of milk is consumed at the household level which is not a part ofcommercial dairy industry. Loose milk has a larger market in India as it is

perceived to be fresh by most consumers. In reality however, it poses a higher riskof adulteration and contamination.


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The production of milk products, i.e. milk products including infant milk food,malted food, condensed milk & cheese stood at 3.07 lakh MT in 1999. Productionof milk powder including infant milk-food has risen to 2.25 lakh MT in 1999,whereas that of malted food is at 65000 MT. Cheese and condensed milk

production stands at 5000 and 11000 MT respectively in the same year.

(Source: Annual Report 1999-2000, DFPI)

Major Players

The packaged milk segment is dominated by the dairy cooperatives. Gujarat Co-operative Milk Marketing Federation (GCMMF) is the largest player. All otherlocal dairy cooperatives have their local brands (For e.g. Gokul, Warana inMaharashtra, Saras in Rajasthan, Verka in Punjab, Vijaya in Andhra Pradesh,

Aavin in Tamil Nadu, etc). Other private players include J K Dairy, HeritageFoods, Indiana Dairy, Dairy Specialties, etc. Amrut Industries, once a leading

player in the sector has turned bankrupt and is facing liquidation.

Packaging Technology

Milk was initially sold door-to-door by the local milkman. When the dairy co-operatives initially started marketing branded milk, it was sold in glass bottlessealed with foil. Over the years, several developments in packaging media havetaken place. In the early 80's, plastic pouches replaced the bottles. Plastic pouches

made transportation and storage very convenient, besides reducing costs. Milkpacked in plastic pouches/bottles have a shelf life of just 1-2 days , that too only ifrefrigerated. In 1996, Tetra Packs were introduced in India. Tetra Packs are asepticlaminate packs made of aluminum, paper, board and plastic. Milk stored in tetra

packs and treated under Ultra High Temperature (UHT) technique can be storedfor four months without refrigeration. Most of the dairy co-operatives in AndhraPradesh, Tamil Nadu, Punjab and Rajasthan sell milk in tetra packs. However tetra

packed milk is costlier by Rs5-7 compared to plastic pouches. In 1999-00 Nestlelaunched its UHT milk. Amul too re-launched its Amul Taaza brand of UHT milk.

The UHT milk market is expected to grow at a rate of more than 10-12% incoming years.

Export Potential

India has the potential to become one of the leading players in milk and milkproduct exports. Locational advantage : India is located amidst major milk deficit


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countries in Asia and Africa. Major importers of milkand milk products are Bangladesh,China, Hong Kong, Singapore, Thailand, Malaysia, Philippines, Japan, UAE,Oman and other gulf countries, all located close to India.

Low Cost Of Production : Milk production is scale insensitive and labourintensive. Due to low labour cost, cost of production of milk is significantly lowerin India.

Concerns in export competitiveness areQuality : Significant investment has to be made in milk procurement, equipments,chilling and refrigeration facilities. Also, training has to be imparted to improve thequality to bring it up to international standards.

Productivity : To have an exportable surplus in the long-term and also to maintain

cost competitiveness, it is imperative to improve productivity of Indian cattle.

There is a vast market for the export of traditional milk products such as ghee,paneer, shrikhand, rasgolas and other ethnic sweets to the large number of Indiansscattered all over the world

India's exports of milk products

Description

(Quantity, M T.:

Value, Rs. million)

1995-96 1996-97 1997-98

Quantity Value QuantityValueQuantity ValueSkimmed milk

powder4,638.62 3,35.32 282.70 19.64 5.00 0.375

Milk and Milk Foodfor babies

8.27 2.019 111.37 4.27 11.00 2.02

Milk cream 332.23 28.04 1.00 0.084 - -

Sweetenedcondensed milk

41.73 2.84 9.22 0.97 60.39 7.22

Whey 78.46 3.75 11.50 1.01 6.00 0.342Ghee/Butter/Butter

oil7,895.08 431.1 299.97 19.2 4,352.08 2,38.95

Cheese

(a) Fresh 0.10 0.013 - - - -

(b) Processed 5.67 1.20 2.1 0.375 22.10 2.19


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(c) Other 66.64 8.35 36.78 0.69 24.84 4.55

TOTAL - 8,72.7 - 52.4 - 2,55.6

What does the Indian Dairy Industry has to Offer to Foreign

Investors?

India is a land of opportunity for investors looking for new and expanding markets.Dairy food processing holds immense potential for high returns. Growth prospectsin the dairy food sector are termed healthy, according to various studies on thesubject.

The basic infrastructural elements for a successful enterprise are in place.

Key elements of free market system raw material (milk) availability an established infrastructure of technology supporting manpower

An entrepreneur's participation is likely to provide attractive returns on theinvestment in a fast growing market such as India, along with an export potential inthe Middle East, Singapore, Malaysia, Indonesia, Korea, Thailand, Hong Kong and

other countries in the region.

Among several areas of potential participation by NRIs and foreign investors, thefollowing list outlines a few promising opportunities:

Biotechnology:

Dairy cattle breeding of the finest buffaloes and hybrid cows Milk yield increase with recombinant somatotropin Recombinant chymosin, acceptable to vegetarian consumers Dairy cultures, probiotics, dairy biologics, enzymes and coloring materials

for food processing Fermentation derived foods and industrial products alcohol, citric acid,

lysine, flavor preparations, etc. Biopreservative ingredients based on dairy fermentation, viz., Nisin,

pediococcin, acidophilin, bulgarican contained in dairy powders.


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Dairy/food processing equipment:

Potential exists for manufacturing and marketing of cost competitive foodprocessing machinery of world-class quality.

Food packaging equipment:

Opportunities lie in the manufacturing of both machinery and packaging materialsthat help develop brand loyalty and a clear edge in the marketing of dairy foods.

Distribution channels:

For refrigerated and frozen food distribution, a world class cold chain would helpin providing quality assurance to the consumers around the region.

Retailing:

There is scope for standardizing and upgrading food retailing in majormetropolitan cities to meet the shopping needs of a vast middle class. This areaincludes grocery stores of European and North American quality, warehousing anddistribution.

Product development:

Dairy foods can be manufactured and packaged for export to countrieswhere Indian food enjoys basic acceptance. The manufacturing may becarried out in contract plants in India. An option to market the products incollaboration with local establishments or entrepreneurs can also beexplored. Products exhibiting potential include typical indigenous dairyfoods either not available in foreign countries or products whose authenticitymay be questionable. Gulabjamuns, Burfi, Peda, Rasagollas, and a host ofother Indian sweets have good business prospects.

Products typically foreign to India but indigenous to other countries couldalso be developed for export. Such products can be manufactured in retail

package sizes and could be produced from milk of sheep, goats and camel.Certain products are characteristically produced from milk of a particularspecies. For example, Feta cheese is used in significant tonnage, in Iran.Sheep milk is traditionally used for authentic Feta cheese. Accordingly,


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Butter

Most Indians prefer to use home made white butter (makkhan) for reasons of tasteand affordability. Most of the branded butter is sold in the towns and cities. Themajor brands are Amul, Vijaya, Sagar, Nandini and Aarey. Amul is the leadingnational brand while the other players have greater shares in their local markets.The latest entrant in the butter market has been Britannia. Britannia has theadvantages of a wide distribution reach and a strong brand recall. Priced at par withthe Amul brand, it is expected to give stiff competition to the existing players. In1999-00 the butter production is estimated at 4 lakh MT of this only 45K MT is inthe white form used for table purposes rest all is in the yellow form.

Cheese

The present market for cheese in India is estimated at about 9,000 tonnes and isgrowing at the rate of about 15% per annum. Cheese is mainly consumed in theurban areas. The four metro cities alone account for more than 50% ofconsumption . Mumbai is the largest market (accounting for 30% of cheese sold inthe country), followed by Delhi (20%). Calcutta (7%) and Chennai (6%). Mumbaihas a larger number of domestic consumers, compared to Delhi where the bulkinstitutional segment (mainly hotels) is larger.

Demand for various types of cheese in the Indian market

Type of cheese % of total consumption

Processed 50

Cheese spread 30

Mozzarella 10

Flavoured/Spiced 5

Others 5

The major players are Amul, Britannia, and Dabon International dominating themarket. Other major brands were Vijaya, Verka and Nandini (all brands of variousregional dairy cooperatives) and Vadilal. The heavy advertising and promotions


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being undertaken by these new entrants is expected to lead tostrong 20% growth inthe segment. Amul has also become more aggressive with launch of new variantssuch as Mozzarella cheese (used in Pizza), cheese powder, etc.

The entry of new players and increased marketing activity is expected to expandthe market. All the major players are expanding their capacities

Capacity expansion in Cheese

Company Brands State Capacity

Dynamix Group Manufactures forBritannia

Maharashtra 35 tonsper day

GCMMF Amul Gujarat 20 tonsper day

APDDCF Vijaya AndhraPradesh

10 tonsper day

Milk Powder

Milk powder are mainly of 2 types

Whole milk powder Skimmed milk powder

Whole milk powder contains fat, as distinguished from skimmed milk powder,which is produced by removing fat from milk solids. Skimmed milk powder is

preferred by diet conscious consumers. Dairy whiteners contain more fat thanskimmed milk powder but less compared to whole milk powder. Dairy whitenersare popular milk substitute for making tea, coffee etc. The penetration of these

products in milk abundant regions is driven by convenience and non perishablenature (longer shelf life) of the product.

Dairy sector of advanced nations export milk products with a subsidy of $ 1000 pertonne with a level of subsidy more than 60 % of the price of milk powder producedin India, this has led to large scale imports of milk powder both in whole andskimmed form. To protect the domestic sector from these subsidized imports the


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Some of the major dairy products manufacturers in the country:

Company Brands Major Products

Nestle India

Limited

Milkmaid,Cerelac,

Lactogen, Milo,Everyday

Sweetened condensed milk,

malted foods, milk powderand Dairy whitener

MilkfoodLimited

Milkfood Ghee, ice cream, and othermilk products

SmithKlineBeechamLimited

Horlicks, Maltova,Viva

Malted Milkfood, ghee,butter, powdered milk, milkfluid and other milk basedbaby foods.

Indodan

IndustriesLimited

Indana Condensed milk, skimmed

milk powder, whole milkpowder, dairy milkwhitener, chilled andprocessed milk

Gujarat Co-operativemilkMarketingFederation

Limited

Amul Butter, cheese and othermilk products

H.J. HeinzLimited

Farex, Complan,Glactose, Bonniemix,Vitamilk

Infant Milkfood, maltedMilkfood

Britannia Milkman Flavoured milk, cheese, MilkPowder, Ghee

Cadbury Bournvita Malted food

Future Prospects

India is the world's highest milk producer and all set to become the world's largestfood factory. In celebration, Indian Dairy sector is now ready to invite NRIs andForeign investors to find this country a place for the mammoth investment projects.


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Be it investors, researchers, entrepreneurs, or the merely curiousIndian Dairysector has something for everyone.

Milk production is relatively efficient way of converting vegetable material intoanimal food. Dairy cows buffaloes goats and sheep can eat fodder and crop by

products which are not eaten by humans. Yet the loss of nutrients energy andequipment required in milk handling inevitably make milk comparativelyexpensive food. Also if dairying is to play its part in rural development policies ,the price to milk producers has to be remunerative. In a situation of increasedinternational prices, low availabilities of food aid and foreign exchange constraints,large scale subsidization of milk conception will be difficult in the majority ofdeveloping countries.

Hence in the foreseeable future, in most of developing countries milk and milk

products

will not play the same roll in nutrition as in the affluent societies of developedcountries. Effective demand will come mainly from middle and high incomeconsumers in urban areas.

There are ways to mitigate the effects of unequal distribution of incomes. In Cubawhere the Government attaches high priority to milk in its food and nutrition

policy, all pre-school children receive a daily ration of almost a litre of milk fat thereduced price. Cheap milk and milk products are made available to certain other

vulnerable groups, by milk products outside the rationing system are sold pricewhich is well above the cost level. Until recently, most fresh milk in the big citiesof China was a reserved for infants and hospitals, but with the increase in supply,rationing has been relaxed.

In other countries dairy industries have attempted to reach lower incomeconsumers by variation of compositional quality or packaging and distributionmethods or blending milk in vegetable ingredients in formula foods for vulnerablegroups. For instance, pricing of products rich in butter fat or in more luxury

packaging above cost level so as to enable sales of high protein milk products at asome what a reduced price has been widely practiced in developing countries. This

policies need to be brought in Indian Dairyscenario.


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COMPANY PROFILE

HISTORY OF THE COMPANY:-

Milkfood Limited was set up in the year 1973 with the first Plant at Bahadurgarh,on the Rajpura Patiala Road in the State of Punjab. The company is promoted byKaramjit Jaiswal. The Jaiswal family are also promoters of Jagatjit Industries

Limited, which has interests in Alcoholic Beverages (AC Black, AristocratPremium, ACP , Bonnie Scot) , Malted Foods, Plastic and Glass Bottling and RealEstate. The Group has a Gross Turnover in excess of INR 5500 Million.

The company manufactures Pure Ghee, Skimmed Milk Powder , Whole MilkPowder, and Dairy Whitener . From the intial installed capacity of 80 MT of milk

processing per day at Patiala during 1974 the Company at has enhanced theprocessing capacity from time to time and the present milk processing capacity ofall Plants is 1500 MT per day.

In the year 1987 the company commissioned its second plant at Gurgoan in theState of Haryana for the manufacture of Cultured Desserts like Long LifeYoghurts, UHT Milk , Juices etc. and Frozen Desserts Yoghurts like Ice Creams.The Ice Cream brand 'Milkfood 100% Ice cream' still conjurs up memories evenears after it's sale to Hindustan Lever.

The company has taken on lease a Dairy Plant in 2003 at Hamira, Distt.Kapurthala, in the State of Punjab to supplement the production capacities by 200MT of milk processing per day. The capacity has since been enhanced to 500 MT

of Milk Processing per day.

In 2005, the company has taken expansion plans further to the State of UttarPradesh where a fully modernised facility has been set up at Village Agwanpur,Tehsil Moradabad to add capacity of 500 MT of milk processing per day. The planthas commenced production in November 2005.


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Further expansion plans for manufacture of Export Oriented and Value addedproducts like Casein , Demineralised Whey Powder , Whey Protien Concentrateshas been initiated at the Bahadurgarh facility, which is likely to be commissioned

by end of 2006. Capacity expansion will enable the Bahadurgarh plant to process700 MT of milk per day.

Milkfood has three plants:

Patiala Plant- The plant has facilities to manufacture Anhydrous Milk Fat (Ghee) ,Milk powders (Skimmed Milk Powder, Whole Milk Powder). The plant is beingupgraded to manufacture value added products like Casein, Demineralised Whey

powder, Lactose and Whey Protein Concentrate powders of different percentages.

Hanira Plant- The plant has facilities to manufacture Anhydrous Milk Fat (Pure

Ghee) , Milk Powders (Skimmed Milk Powder , Whole Milk Powder, DairyWhitener & Infant Foods). The plant has facility to produce powder with disc andnozzle atomization resulting into powders of low or high density. A Three stagespray drying system with facility of Lecithination helps in production of instant

powders. A separate facility for production of malted food is available.

Moradabad Plant- The plant has facilities to manufacture Anhydrous Milk Fat(Pure Ghee), Milk Powders (Skimmed Milk powder, Whole Milk Powder).Amongthe private sector corporations in India the company is one of the largest supplierfor Milk Powders to the institutions i.e Glaxo Smithkline , Cadburys, Nestle ,

Mother Dairy , Metro Dairy , Lotus Chocolate.

The company also exports Skimmed Milk Powder and Whole Milk Powder to theSouth Asian countries of Pakistan, Bangladesh , Nepal, Sri Lanka , Afghanistanand Myanamar.

For distribution of products, Redistribution depots are established at Gurgoan ,Delhi , Kolkatta , Chandigarh and Mumbai apart from Agents spread over almostall states.

Products manufactured by the company include:

Pure Ghee Skimmed Milk Powder Whole Milk Powder Dairy Creamer


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Dairy Whitener

Future plans

A 100% Export Oriented Unit is being set up at the existing facilities atBahadurgarh, Patiala to manufacture Casein which commands a premium price inExport markets of USA, Europe and Japan. India being the largest and cheapest

producer of Milk holds comparative price advantage in the product which hasvaried applications from Food Products, Pharma to Technology products.Demineralised Whey Powder is a by product which has both a Domestic andExport market.

PROMOTORS OF THE COMPANY:-

BOARD OF DIRECTORS

S.No Name Designation

1 Mr. Amarjeet Kapoor Executive Non Independent

2 Mrs. Asha GadiNon Executive Independent

Director

3 Mr. Suresh AlipuriaNon Executive Independent

Director

4 Mr. Kewal Krishan KohliNon Executive Independent

Director


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Senior ManagementS.No Name Designation

1 Dr. Umesh Saxena President

2 Mr. Sudhir Avasthi Finance Director3 Mr. Amar Baljeet Singh Head Patiala Plant

..................................................................................................

AUDITORS:-

Madan & Associates

Chartered Accountants

New Delhi

BANKERS :-

STATE BANK OF INDIA

Canara Bank

REGISTERED OFFICE

Bahadurgarh

Distt. Patiala 147021

(Punjab)


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WORKS

Bahadurgarh

Distt. Patiala 147021

(Punjab)

Village Agwanpur

Kanth Road,

Moradabad 244001

(Uttar Pradesh)

HEAD OFFICE

Bhandari House

91, Nehru Place

New Delhi 110019


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HAMIRA PLANT

The plant is located approximately 30 Kms north of Jullundur on G.T. Road, between Jullundur and Amr

Plant is on lease from Jagatjit Industries Ltd and has a capacity to process 500 MT of Milk

The plant has facilities to manufacture Anhydrous Milk Fat (Pure Ghee) , Milk Powders (Milk Powder , Whole Milk Powder, Dairy Whitener & Infant Foods). The plant has facili

produce powder with disc and nozzle atomization resulting into powders of low or high dThree stage spray drying system with facility of Lecithination helps in production of insta

powders. A separate facility for production of malted food is available.

MORADABAD

PLANT


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e plant is located approximately 200 Kms from New Delhi at Mugalpur urf Agwanpur Mustakam oradabadKanth Road. The Plant is set up in an area of 17 Acres and is capable of handling 500 M

nnes of Milk per day. The plant commenced production In November 2005.

e plant has facilities to manufacture Anhydrous Milk Fat (Pure Ghee) , Milk Powders (Skimmed Mwder, Whole Milk Powder).

Milkfood Products

lk Powder

mmed Milk Powder and Whole Milk Powder are of institutional Grade supplied either to companiere it is used as a raw material for their end products (Malted Food , Food Supplements, ChocolateCreams, Biscuits , Sweets etc.) or it is used in the milk dry areas of the country to be reconstituted

uid milk . The Powder is packed in Food Grade Polyliners and 25 Kg. Kraft Paper Bags packs and Kg. Polypacks. The product is ISI Graded for Export.

mong the private sector corporations in India the company is one of the largest supplier for Milkwders to the institutions i.e Glaxo Smithkline , Cadburys, Nestle , Mother Dairy , Metro Dairy , Lotocolate.

e company also exports Skimmed Milk Powder and Whole Milk Powder to the South Asian countr

Pakistan, Bangladesh , Nepal, Sri Lanka , Afghanistan and Myanamar.

ee


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Working capital means current assets.

ACCORDING TO WESTON AND BRIGHAM:

Working capital refers to a firm investment in short term assets,

cash, short term securities, accounts receivable and inventories.

CONCEPT OF WORKING CAPITAL:-

There are 2 concepts of working capital : gross and net.

The term gross working capital also referred to as a working capital, means

the total current assets.

The term net working capital can be defined in 2 ways.

1. The most common definition of net working capital is the different between

current assets and current liabilities2. Alternate definition of net working capital is that portion of current assets

which is financed with long term funds.

The task of the financial manager in managing working capital efficiency is

to ensure sufficient liquidity in the operation of the enterprise. The liquidity

of a business firm is measured by its ability to satisfy short term obligations

as they become due. The three basics measure of a firms overall liquidity

are

1. The acid test ratio

2. The net working capital

3. The current ratio

In brief , they are useful in inter firm comparison of liquidity . net working capital

as a measure of liquidity, is not very useful for comparing the performance of


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different firms, but it is quite useful for internal control. The net working capital

helps in comparing the same firm over time.

NEED FOR WORKING CAPITAL:-

In order earn sufficient profits, a firm has to depend on its sales activities

apart from others. We know that sales are not analysis converted into cash

immediately. i.e, there is a time lack between the sale of a product and the

realization of cash so, an adequate amount of working capital is required by a firm

in the form of different current assets for its activities to continue un interrupted

and to tackle the problem that may arise because of the time lay. Practically this

happens simply owing to the operating cycle(or) cash cycle, involves the

following steps.

(a)Conversion of cash into inventory.

(b)Conversion of inventory into receivables.

(c)Conversion of receivables into cash.

NATURE OF WORKING CAPITAL:-

The term working capital refers to current assets which may be defined as

(1)Those which are convertible in to cash or equivalents with in a period of

one year and

(2)Those which are required to meet day operations.


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3. What should be the relative proportion of different sources to financial

the working capital requirements?

Thus the working capital management may be defined as the management of

firms sources and uses of working capital in order to maximize the wealth of the

share holders. The proper working capital management requires both the medium

term planning (say up to 3 years) and the immediate to changes arising due to

fluctuation in operating levels of the firm.

THE OPERTING CYCLE AND THE WORKING CAPITAL NEEDS:-

The working capital requirement of a firm depends, to a great extent up on

the operating cycle of the firm. The operating cycle may defined as the duration

from the procurement of goods or raw materials and ending with sales realization.

The length and nature of the operating cycle may differ from one firm to another

depending up or the size and nature of the firm.

In a treading concern there is a serious of activities starting from

procurement of goods ending with realization of sales revenue. Similarly in case

manufacturing concern . This serious start form procurement of raw material and

ending with the sales realization of finished foods. In both the cases however there

is a time gap between the happening of the first event and the happening of last

event . this time gap is called operating cycle. Thus the operating cycle of a firmconsists of time required for the completion of chronological sequence of some or

all of the following.

1. Procurement of raw material and services

2. Conversion of raw material in the work in progress.


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3. Conversion of work in progress in to finished goods.

4. Sales of finished goods. (cash or credit).

5. Conversion of receivable into cash.

The firm is after required to extend credit facilities to customers. The finished

goods must be kept in store to take care of the orders and minimum cash balance

must be maintained. It must also have minimum of raw material to have smooth

and uninterrupted production process. So in order to have a proper and smooth

running of the business activities, the firm must make investment in all these

current assets. This requirement of funds depend up on the operating cycle period

of the fiem and also denoted as the working capital needs of the firm.

OPERATING CYCLE PERIOD:-

The length or time duration of the operating cycle of any firm can be

defined as the sum of its inventory conversion period and the receivable

conversion period.

(1)INVENTORY CONVERSION PERIOD:-

It is the time required for the conversion of raw material in to finished

goods sales. In a manufacturing concern the ICP is consisting of raw materials

conversion period(RMCP), work in progress conversion period (WPCP), and the

finished goods conversion period (FGCP). The RMCP refers to the period for

which the raw material is generally kept in store before is issued to the production

department. The WPCP refers to the period for which the raw material remain in

the production process before it is taken out as a finished unit. The FGCP refers to

the period for which finished units remain in stores before being sold to the

customers.

(2)RECEIVABLES CONVERSION PERIOD: (RCP)

It is the time required to convert the credit sales in to cash realization. It refers

to the period between the occurrence of credit sales and collection of debtors.


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The total of ICP and RCP is also known as total operating cycle period

(TOCP). The firm might be getting some credit facilities from the supplier of raw

material wag earners etc. this period for which the payment it these parties are

deferred or delayed is known as deferral period. The net operating cycle of a firm

is arrived at by deducting the deferral period from total operating cycle period.Thus

NOC = TOCP-D = ICP+RCP- DP.

OPERATING CYCLE

The duration of time required for completing the following sequencies of events

in case of manufacturing firm s called the operating cycle.

1. Conversion of cash into raw material.

2. Convertion of raw material into work in progress.

3. Conversion of work inprogress into finished goods.4. Conversion of finished goods into debtors & bills receivable through sale.

5. Conversion of debtors & bills receivable into cash.

CASH

ACCOUNTS

RECIEVABLE

RAW MATERIAL

FINISHED GOODS WORK IN

PROGRESS


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It is represents the additional assets which are required at different

times during the operating year additional inventory, extra cash etc., seasonal

working capital is the additional amount of current assets particularly cash,

receivables and inventory which is required during the more active business

seasons of the year.

5. BALANCE SHEET WORKING CAPITAL:The balance sheet working capital is one which calculated from the items

appearing in the balance sheet. Gross working capital which is represented by the

excess of current assets, and net working capital which is represented by the excess

of current assets over current liabilities are examples of balance sheet working

capital.

6. CASH WORKING CAPITAl:Cash working capital is one which is calculated from the appearing in the

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

time and is considered to be the most realistic approach in working capital

management. It is the basis of the operating cycle concept which has assumed a

great importance in financial management in recent years. The reason is the

working capital indicates the adequacy of the cash flow. Which is an essential pre-

requisite of a business.

7. NEGATIVE WORKING capital:Numbers working capital emerges when current liabilities exceed current

assets. Such a situation is not absolutely theoretical, and occurs when a firm is

nearing a crisis of some magnitude.

DETERMINANTS OF WORKING CAPITAL:-

Numbers of rules are formulated to determine the working capital

requirement of the firm. a large number of factors influence the working capital

needs of the firm. All these factors have different importance, also the importance


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of the factor change for a firm over time. Therefore analysis of the relevant factor

should be made in order to determine the total investment in working capital

requirements of the firm.

1.Nature and size of business

2. Seasonality of operation

3. Production policy

4. Marketing conditions

5. Business cycle fluctuation

6. Credit policy

7. Conditions of supply

8. Working capital policy

9. Current assets in relation to sales

NATURE OF BUSINESS:-

The working capital requirement of a firm is closing related to the nature

of its business. A service firm like an electricity. A service firm like an electricity

undertaking of a transport corporation, which has short operating cycle and sells oncash basis, has modest working capital requirement. On the other hand

manufacturing concern like machine tools units which has long operating cycle and

which sells largely on credit had varied substantial working capital management.


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SEASONALITY OF OPERATION:-

Firms which have market seasonally in their operation usually have highly

function working capital requirement. For a sugar industry the raw material i.e.,

sugar cane is available in particular season only. So sugar industry mainly dependsupon seasonality of operations.

PRODUCTION POLICY

A firm marked by pronounced seasonal fluctuations in its sales many pursue

a production policy which many reduce the shape variation is working capital

requirement.

MARKETING CONDITIONS:

In view of competitive conditions prevailing in the firm may have to offer

liberal credit terms, to customs resulting in higher debtors, even large inventories

many be maintain to serve an order as and when received. Thus the working capital

tends to be high as a result of investors in inventions & receivable.

BUSINESS CYCLE FLUCTUATIONS:-

Different phases of business cycle i.e boom, recession, recovery etc,

also effect working capital requirement. In case of born conditions inflationary

pressure appear and business activities expand. As a result the overall need for


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3. If the term follows highly aggressive current assets policy. It would carry a

low level of current assets in relation of sales.

A conservative current assets policy trends to reduce risk. The surplus current

assets under the policy enable firm to copy rather easily with variations in sales.54&55 An aggressive current assets policy seeking to minimize the investment

in current assets exposes the firm to greater risk.

RATIO OF SHORT TERM FINANCING TO LONG TERM FINANCING:-

What would be the relative proportions of short-term bank financing on

one hand and long-term sources of finance and the other hand. The board policy

alternatives in the respect are:

1. A conservative current assets financing policy.2. An aggressive current assets financing policy. A conservative current assets

financing policy refills less on short-term bank financing and more long on

term sources like debentures. An aggressive current financing policy relies

heavily on short-term bank finance and seek to reduce dependants on long

term financing.

CHOOSING THE WORKING CAPITAL POLICY:-

The overall working capital policy adopted by the firm may broadly:-

1. Conservative

2. Moderate

3. Aggressive

CONSERVATIVE


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A conservative overall working capital policy means that the firm chooses

conservative current assets policy along with conservative current assets financing

policy.

MODERATE:

A moderate overall working capital policy reflects a combination of a

conservative current assets policy and aggressive current assets financing policy or

a combination of an aggressive current assets policy and conservative current

assets financing policy.

AGGRESSIVE:

An aggressive overall working capital consists of an aggressive current assets

policy and aggressive current assets financing policy.

FINANCING OF WORKING CAPITAL:-

Normally, financing arrangements are planned for a combination of needs

including capital expenditure and working capital investment the assessment of

sources of funds from a package and rarely will be possible to concept upto a

particular shows to a specific application or use at the same time financing

manager does make an assessment of the investment needs as well as current assets

and decider an a proper mix of long and short term funds. Taking note of theinternal generation of funds for 56 &57 the period in question be decisions on the

extent to which the firm would resort to issue of share or long short-term

borrowing to mobile the required sources.

Typically the current assets of a firm are supported by the combination of

long term and short term sources of financing long term sources of finance are

equity, preference term loans and debentures which primarily are fixed assets and

secondarily provide working capital margin.

Where the commitments are certain but cash flows are not clearly

predictable, it would wise to cut down drastically the number and extent of short

term debts to manageable levels and prefer longer maturity schedules for debts.


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2. The bankers should finance only the genuine production needs of the

borrower. The borrower should maintain the reasonable levels of the

investor and receivable. He should hold just enough to carry on his targets

production. Efficient management of resources should, therefore, be

ensured to eliminate slow moving and flabby inventories.

3. The working capital needs of the borrower cannot be entirely financed by

the bankers. They will finance only a reasonable part for the remaining

borrower should depend upon his own funds, generated internally and

externally.

CHORE COMMITTEE RECOMMENDATIONS:-

1. Borrowers should submit quarterly projection of cash credit banks.

2. The banks while assessing the credit requirements from borrowers should fix

separate limits where as feasible.

3. As far as possible the borrowers should be discouraged for approaching the

bank frequently limitation in excess of sanction limits.

4. Suitable provision should be made for charging of pena rate of interest in

even of any defaults in the timely repayment of working capital loan.

CHANGES IN WORKING CAPITAL:-

The working capital of a concern is subject to changes due to several

reasons. As we know that the gross working capital is equal to current assets. But

net working capital we mean the excess of current assets over current liabilities.

The net working capital is therefore, affected by the following transactions.

1. Which increase the current but not the current liabilities.

2. Which decrease the current assets and current liabilities both increase in the

same direction by a transaction it does not bring any change in the net


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CHAPTER-4

ANALYSIS AND INTERPRETATION.

CHANGES IN WORKING CAPITAL.

RATIO ANALYSIS.

STATEMENTS OF MILKFOOD LTD.

INDUSTRIES LIMITED FOR THE YEAR 2009-10

PARTICULARS 2009-10 PERCENTAGE

CURRENT ASSETS,

LOANS AND ADVANCES

Inventory

Sundry Debtors

Cash & Bank Balance

Loans and advances

51.52

9.39

4.88

10.78

67.28

12.96

6.37

14.07

Gross working capital

(A)

76.57 100.00

CURRENT LIABILITIES

&PROVISION

Current liabilities

Provision

56.99

0.01

99.99

0.01


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Total current liabilities

and provisions(B) 57.00 100.00

Net working capital(A-

B)

19.57

STATEMENTS OF MILKFOOD LTD.

INDUSTRIES LIMITED FOR THE YEAR 2010-11

PARTICULARS 2010-11 PERCENTAGE

CURRENT ASSETS,

LOANS AND ADVANCES

Inventory

Sundry Debtors

Cash & Bank Balance

Loans and advances

43.24

7.27

1.75

22.73

57.67

9.69

2.33

30.31

Gross working capital

(A)

74.99 100.00

CURRENT LIABILITIES

&PROVISION

Current liabilities

Provision

31.82

0.02

99.94

0.06


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Total current liabilities

and provisions(B)

31.84 100.00

Net working capital(A-

B)

43.15

RATIO ANALYSIS

Several ratios calculated from the accounting date, can be grouped into

various classes according to financial activity or function to be evaluated. As

stated earlier, the parties interested in financial analysis are short and short and

long-term creditors, owners and management.

Short-term creditors main interest is in liquidity position ortheshort-term solvency of the firm. Long-term creditors, on the other hand, and more

interested in the long-term solvency and profitability of the firm. Similarly, owners

concentrate on the firms profitability and financial conditions. Management is

interested on in evaluating every aspect of the firms performance. They have to

protect the interests of all parties and see that the firm grows profitably. In view of

the requirements of the various users of ratio, we may classify them into the

following four important categories.

TYPES OF RATIO:-

Liquidity ratios

Leverage ratios

Activity ratios

Profitability ratios


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Liquidity ratio:-

The liquidity refers to the maintenance of cash, bank balance and those assets,

which are easily convertible into cash in order to meet the liabilities as and when

arising. So, the ratios study the firms short-term solvency and its ability to pay offthe liabilities.

Current ratio:-

Current ratio is the ratio of current and current liabilities. Current assets

are assets which can be converted into cash within one year and include cash in

hand and at bank, bills receivable, net sundry debtors, stock of raw materials,

finished goods and work in progress, prepaid expenses, outstanding and occurred

incomes, and short term or temporary investments. Current liabilities are liabilities,

which are to be repaid with in a period of 1 year and include bills payable, sundry

creditors, bank over drafts, and outstanding expenses, Income received in

advanced, proposed dividend, provision for taxation, unclaimed dividends and

short term loans and advances repayable within 1 year

Current assets

Current Ratio= -----------------------------------------------

Current liabilities

A current ratio 2:1 is considered as ideal: if a business has an undertaking

with its bankers to meet its working capital requirements short notices, a current

ratio of is adequate.

2) Quick Ratio:-

Quick assets

Quick ratio = --------------------------------------------------

Quick liabilities

A quick ratio of 1 is considered as ideal. A quick ratio of less than 1 is

indicated of inadequate liquidity of the business. A very high ratio is also not

available as funds can be profitability employed.


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(1) TOTAL DEBT RATIO:-Total debt will include short and long-term borrowing from financial

institution debentures bonds. Capital employed will include total debt and net

worth.The firm may be interested in knowing the proportion of the interest bearing

debt in the capital structure by calculating total debt ratio. A highly debt burdened

firm difficulty in raising funds from creditors and owners in future. Creditors treat

the owners equities as a margin of safety.

Total Debt

Total Ratio= ------------------------------------------------

Capital Employed

(2) DEBT -EQUITY RATIO:-It reflects the relative claims of creditors and shareholders against the assets

of the business. Debt, usually, refers to long-term liabilities. Equity include

preference share capital and reserves.

The relationship describing the lenders contribution for each refers of the

owners contribution is called debt equity ratio.

A high ratio shows a large share of financing by the creditors relative to the

owners and therefore, large claim against the assets of the firm.

A low ratio implies a smaller claim of creditors. The equity indicates the

margin of satisfy to the creditors so, there is no doubt the Beth high and low debt

equity ratios are not desirable. What is needed is a ratio, which strikes a proper

balance between debt and equity.


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Cost of goods sold = sales gross profit

Average stock = (opening stock and closing stock 1\2)

In case, information regarding cost goods sold is not known. Sales may be

taken in the numerator. Similarly, if average stock cant be calculated, closingstock should be taken in the denominator.

A stock turnover ratio of 8 is considered ideal. A high stock turnover ratio

indicates that the stocks are fast moving and get converted into sales quickly.

However, it may also be on account of holding low amount of stocks and

replenishing stocks in larger number of installments.

Iv) PROFITABILITY RATIO:-

It measure the overall performance and effective of the firm. Poor

operational performance may indicate poor sales and hence poor profits. A lower

profitability may arise due to the lack of control over the expenses. Bankers,

financial institutions and other creditors look at the profitabilitys. ratio as an

indicator whether or not the firm earns substantially more than it pays interest for

the use of borrowed funds and weather the ultimate repayment of their debt appear

reasonably certain owner are interest to know the profitability as it indicates thereturn which they can get on this instruments.

Profitability ratios measure the profitability of a concern generally. They

are calculated either in relation to sales or in relation to investment.

1)NET PROFIT RATIOIt indicates the result of the overall operation of the firm.

The higher the ratio, per profitable is the business. The net profit ratio isreassured by dividing net profit ratio indicates management efficiency in

manufacturing administration and selling the products. This ratio is the overall

firms ability to turn each rupee of sale into net profit. If the profit margin is

inadequate, the firm fails to achieve satisfactory return on share holders funds.

Profit after tax


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Net profit ratio = ----------------------------------

Net sales

A firm with high net profit margin can make better use of favorable

conditions. Such as rising selling prices, falling cost of products or increasingdemand for the product. Such a firm will be able to accelerate its profits at a faster

rate than a firm with a low net profit margin. This ratio also indicates the firm

capacity to withstand adverse economic conditions.

3. RETURN ON NET WORTH RATIO :-

It indicates the return, which the shareholders are earning on their resources

invested in the business.

Profit after tax

Return on net worth ratio = ------------------------------------------

Net worth

Net worth = share holders funds = equity share capital + preference share

capital + Reservesfactious assets.

The higher the ratio, the better it is for the share holders. However, inter

firm comparisons should be made to ascertain if the returns from the company are

adequate. A trend analysis of the ratio over the past few years much is done to find

out the growth or deterioration in the profitability of the business.

2)RETURN ON ASSETS RATIO :-Profit after tax

Return on assets ratio = ------------------------------------------

Total assets


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Total assets do not include fictitious assets. The higher the ratio, the better

it is.

3)EARNINGS PER SHARE RATIO:-Earnings per share are the net profit after tax and preferences dividend,

which is earned on the capital representative of one equity share. It calculated as :-

Profit after tax available to equity holders

Earnings per share ratio = -----------------------------------------------------------------

Number of ordinary share

ADVANTAGE OF RATIOS

Useful of evaluation performance in terms of profitability and

financial stability.

Useful for intra & inter firm comparison.

Useful forecasting and budgeting.

It is just in tabular form over a period of years indicated the trend of

business.


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Smile to understand rather than the reading but the figures of

financial statement.

Key tool in the hand of modern financial management.

Enable outside parties to assess the strength and weakness of the

firm.

Ratio analysis is very useful for ranking management decisions and

also highlights the performance in the area of profitability financial

stability and operational efficiency.

LIMITATIONS OF FINANCIAL RATIOS

The ratio analysis is widely used of technique to evaluate the financial position and

performance of business. But there are certain problems in using ratios.

The analyst should be aware of these problems the following are some of the

limitations of ratio analysis.

It is difficult to decide on the proper basis of comparison.

The comparison is rendered difficult because of differences in

situations of two companies or of one company over years.


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The price level changes make the interpretation of ratios invalid. the

differences in the definitions of items in the balance sheet and the profit

& loss statement make the interpretation of ratios difficult.

The ratios calculated at a point of time or less informative and

defective as they suffer from short term changes.

Difference in accounting policies and accounting period make the

accounting data of firms non comparable as also the accounting ratios.

It is very difficult to generalize weather a particular ratio is good or

bad.

For ex: a low current ratio may be said bad from the point of view of low

liquidity. But a high current ratio may not be good. As this may results

from in efficient working capital management.

LIQUIDITY RATIO

A)Current ratioCurrent ratio= Current Assets

Current liabilities


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Year Current assets Current liabilities Ratio

2009-10 76.57 57.00 1.34

2010-11 74.99 31.84 2.35

1.34

2.35

0

0.5

1

1.5

2

2.5

2009-2010 2010-2011


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B) Quick Ratio:

Quick Ratio = Quick Assets

Current liabilities

year Quick assets Current liabilities Ratio

2009-10 25.05 57.00 0.43

2010-11 31.75 31.84 0.99


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(C) Absolute liquid ratio

Absolute liquid ratio = Cash

Current liabilities

year cash current liability Ratio

2009-10 4.88 57.00 0.08

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2009-2010 2010-2011

Chart Title


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2010-11 1.75 31.84 0.05

CHAPTER-5

o FINDINGS & SUGGESSIONS

o REFERECE & BIBLIOGRAPHY

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

2009-2010 2010-2011


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FINDINGS

With reference to the working capital study of Milkfood Industries

Ltd. quantity of working capital is contributed by short source of

finance .

In this gross working capital of the firm, a major part is occupied by

inventory and sundry debtors.

The minimum current ratio maintained by the company is 1.34, the

company has exceeded minimum current ratio at all the years

statement.

The minimum quick asset ratio maintained by the company is 0.43

The minimum absolute liquid ratio maintained by company is 0.05

In order to achieve to the goals of the organization as whole and

achievement of performance appraisal technique is very useful .

The company has been maintaining sufficient amount of working

capital in all the years.


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SUGGESTIONS

1)Suggested the company should follow the present working capital.

2)The company spends reasonable amount on inventory so that itshould be followed.

3)The current ratio is maintained at a satisfied level. So that companyperuses this much of current assets to meet the objective of the firm.

4)Company is maintaining high quick assets to overcome currentliabilities for better results.

5)For better results company has to maintain cash inflows to overcomecurrent liabilities of the firm.

6)To gain good profits company has to improve the sales throughinventory management.

7)The company b should try to reduce external liabilities, having payhigh EPS & DPS.

8)The company should make arrangement of receivables and cash.


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Documents

02Working Capital Management - Navdeep Bajwa, SMS, Pbi Uni