PROJECT REPORT ON TOTAL QUALITY MANAGEMENT

PROJECT REPORT ON TOTAL QUALITY MANAGEMENT

CONCEPTUALIZATION This is Total Quality Management Project Report. Human resource is the most important factor for any organization and success of any Organization is depending upon its resource .If human resource of organization is not happy with the organization. It will adversely affect the organization.

The higher degree of commitment toward work will improve productivity and will decrease rejection cause due to human factor.

So to make the people happy is the responsibility of the organization. So this study is helpful to measure the level of commitment toward work and to know the factor affecting the commitment level .

QUALITY:-1. Quality means fit ness for use.

2. Quality means productivity, competitive cost, and timely delivery, total customer satisfaction.

3. Quality means conformance to specification and standard.

4. Conformance to requirements.

5. Quality is what the customer says

6. Quality means getting every one to do what they have agreed to do and to do it right the first time and every time.

TOTAL QUALITY :-It means all the people of the organization are committed to product quality by doing right things right, first time, every time by employing organization resource to provide value to customer.

TOTAL QUALITY MANAGEMENT: -

It is the process designed to focus external/internal customer expectation preventing problems building ,commitment to quality in the workforce and promoting to open decision making.

TOTAL:Every one associated with the company is involved in continuous improvement, in all functional area, at all level.

QUALITY:Customer express and implied requirement is met fully.

MANAGEMENT:Executive are fully committed

Decision in a planned way.

To maintain existing lever of quality.

To improve existing lever of quality.

Effective utilization of resource.

PRINCIPLES OF TQM:-1.Delight the customer

2. Management by fact

3. People based management

4. Continuous improvement

5. Strong leadership

6. Quality system measure& record

7. Team work, Team accountable, correct problem

8. People oriented technology, speed.

FOUR CS OF TQM1. Commitment 2. Comptence

3. Communication 4. Continuous improvement

FACTOR AFFECTED THE COMMITMENT OF THE EMPLOYEES:-General worker attitude toward the company.

General worker attitude toward the supervisor.

Lever of satisfaction toward job standard.

The lever of consideration the supervisor shows to his subordination.

The workload & work pressure level.

The treatment of individual by the management

The lever of workers satisfaction with the salaries

The level of worker pride in the company and its activity

Worker reaction to the formal communication network in the organization.

Intrinsic job satisfaction level of the worker.

Worker attitude toward the fellow worker.

OPERATIONALISATION OF THE CONCEPT:-I have studied on impact of employees commitment toward. I have explained earlier.

In the company, they already have implemented TQM so through this study, I measured the degree of implementation in the organization and what are the factor that are affected the commitment lever and to check how much they are satisfaction with the TQM implement.

For this purpose, I have made the questionnaire which consisting of multiple-choice questions. I have collected the data from them and after that I have tabulated them and interpreted them and give the recommendation.

Focus of the problem:The main emphasis will be on to find out quality employees commitment toward their work as a result total quality implementation.

Review of Existing literature: Many people have work on this topic. They sum up various finding. They found that apply TQM has directly increased their morale; increase the satisfaction lever and commitment toward their work. These are the finding of various researchers.

Several articles have been published in different journals , magazines and newspaper such as HARVARD BUSINESS REVIEW,THE ECONOMIC TIMES,VIKALPA etc.

But the effect of TQM on employees commitment in the company has so far not undertaken. This project has been done first time in the company.

LIMITATION~Employees of the organization may hide the fact.~The management did not agree to disclose all the confidential data.~Number of respondents are very less, so clear conclusion cant be drawn.

OBJECTIVE OF THE STUDY:-The objectives of this study are:1.To find the degree of TQM implemented in the organization.

2.To study the level of commitment of employeestoward their work.

3. To find out factor influencing the commitment.

RESEARCH METHODOLOGYResearch methodology is a way to solve the research problem in a systematic manner. It may understand as a science of studying how the research is done significantly. The methodology may differ from problem to problem, yet the basic approach towards the research remains the same. The sequence or steps followed have been explained as under:

UNIVERSE AND SURVAY POPULATIONThe universe is the employee working at mill. I have selected 100 employee 40 FROM THE STAFF,60 FROM THE WORKER for the survey.

RESEARCH DESIGNThis research is of EXPLORATARY RESEARCH DESIGN .I have used the questionnaire method for collecting the data.

ANALYSIS PATTERNData collection: This data is primary data, which I have been collected with the help of questionnaire. I have prepared a questionnaire on the basis of the factors responsible for employees commitment in the organization. MACRO ANALYSIS (Inferences &Interpretation)The detailed analyses of the results are explained below:

MOST OF EMPLOYEES FEELS THAT:Most of the staff member and worker feel that organization is quality conscious toward the employees. This also increases their commitment toward the work and toward the organization.

Some of the employees feel that thy have proper information about the policies, practices followed in the organization. But some of employees feel that there is no proper communication.

Most of the facts related with the organization are hided by the management from the employees.

Most of the employees feel that they dont get rewarded for their good performance.

Most of the staffs member feel that their performance is properly measured in the organization.

RECCOMENDATIONSThe suggestions I have given for the betterment are explained below:

It is very important to provide the opportunity to the employees of the organization to express their ideas or whatever they want to express.

Management should clear their vision mission and goals towards the employees in the organization.

Management should involve the workers representatives in managerial activities so that the transparency could be maintained and through this they can win the confidence of the employees.

Management should give due importance to mental relaxation &social cultural development of an employees who strives hard for the company.

Reward or Praise/appreciation works as magic for an individual and motivates them for work.

Role clarity of each position should be defined and based on that individuals can plan their work accordingly.

Self-potential system should be encouraged.

There are regular review and comparison of current & past performance to detect gradual deterioration in the strategy.

Proper cooperation should be necessary in the company.

NOTE: THIS QUESTIONNAIRE IS PURELY FOR ACADEMIC PURPOSES.ALL THE INFORMATION PROVIDED WOULD BE KEPT CONFIDENTIAL.Do you think the organization is quality conscious toward employees?YES NODoes the organization have the certification of ISO 9000?YES NOIs the organization providing quality assurance system & operation?YES NODoes the organization have quality circle?YES NOHow many people are involved in quality circle?Below 10 above 10 above 15 cant sayHow frequently the organizations have the meeting of quality circle?Weekly biweekly monthly yearlyDo you about the agenda of information or any other information?YES NO

Are the organization is going for the quality audit?YES NO cant sayDoes your organization have quality information system?YES NO cant sayAre the information system is regularly updated?YES NO cant sayDo you think the organization used bench marking, if any, please tell me the name of the benchmark organization?YES NO cant sayIf yes, then Org. Areaa. b.Does the organization is going for the brain storming session?YES NO dontknowAre you practicing the 5s Japanese philosophy ?YES NODoes the organization have the certification of ISO 14000 or any other, if any please mention?YES NO dontknowAre you practicing the six sigma for the error control?YES NO dontknowA formal career planning process exist in the organizationStrongly Agree Strongly disagree Dont know Agree DisagreeThere is a shared vision of where your business is growing?Strongly Agree Strongly disagree Dont know Agree DisagreeEmployees are kept updated with changes in job skills & job designs?Strongly Agree Strongly disagree Dont know Agree DisagreeFormal or informal method is followed for employees feedback and acting on that feedback?Strongly Agree Strongly disagree Dont know Agree DisagreeDoes the organization provide right environment to apply your knowledge from new programs to the job?Very much Some whatLittle Not at allDo you feel that the organization is a good place to work?Yes No SometimesDo you feel comfortable with rules and policy of the organization?Yes No Sometimes What types of relations are you having with your superior, peers and subordinates?Good Average Poor If bad then why it is so? They are not cooperating. Their behavior is not good There is no proper communication. All aboveDo you feel that you can get ahead in the org. if you make an effort?Yes No SometimesDo you get any reward on your good performance?Yes No SometimesDo you find that your performance is properly measured in the organization?Yes No SometimesDo you find that your job makes the best use of your abilities?Yes No Some TimesThank you for your kind co-operation.

Find the Next Chapter - objective_wise_analysis of total quality management ..............Project Report on Total Quality Management [TQM] OBJECTIVE WISE ANALYSIS(Micro Analysis)The analysis according to the objectives are explained below:

Do you think that this organization is QUALITY conscious toward employees?A. Yes B. NoStaff %Workers %

A8765

B1325

This shows that about 87% staff and 65% worker agreed that organization is quality conscious toward employees.

Does the organization have the certification of ISO 9000?A. YesB. NoStaff %Worker %

A.10067

B.033

This shows that 100% staff and 70% worker said that the organization have the certification of ISO 9000.

Is the organization provide quality assurance system& operationA. YesB. NoStaff %Worker %

A.8058

B.2042

This shows that 80% staff& app.65% worker think that organization providing quality assurance system &operation.

Does the organization have the quality circle?A. YesB. NoStaff %Worker %

A.8746

B.1354

It shows that app.90% staff & 46% worker agreed with the statement . 54% workers said they dont know about this.How many people are involved in the quality circle?A. Below 10 B.Above 10 C. Above 15 D. Cant sayStaff %Worker%

A.2236

B.5428

C.1422

D.1014

It shows that about 54% staff says there are above 10 member in the quality circle.How frequently the organization have the meeting of quality circle ?A. Weekly B. Biweekly C. Monthly D. YearlyStaff %Worker%

A.1735

B.5742

C.2623

D.00

It shows that app.60 % staff & 42% worker says organization have the biweekly meeting of quality circle.Do you know about the agenda of information or any other information?A. YesB. NoStaff %Worker %

A.6014

B.4086

Above graph shows that 60% staff say thatthey know about the agenda of the information but 86% worker say they dont know about this.Are the organization s going for the quality audit?A. YesB. NoC. Cant sayStaff %Worker %

A.8526

B.1024

C550

Above shows that 85% staff &26% worker says that organization is going for quality audit but 50% worker says they dont know about the quality audit.

Does the organization s have quality information system?A. YesB. NoC. Cant sayStaff %Worker %

A.9515

B.031

C554

Above shows that 95% staff says that organization have quality information system &54 % worker says they dont know about this.

Are the information system is regularly updated?A. YesB. NoC. Cant sayStaff %Worker %

A.6955

B.1111

C2034

About 70 % staff & 55% worker says that organization regularly updated.

Do you think the organization s used benchmarking?D. YesE. NoF. Cant sayStaff %Worker %

A.308

B.250

C4592

This shows that 95%staff says that organization have quality information system but 54% worker say they dont know about this.

Does the organization s is going for brain storming session?A. YesB. NoC. Dont knowStaff %Worker %

A.703

B.130

C1797

Above table shows that 70%staff agreed with the statement.but 97% worker say they dont know about this.

Are the organization is practicing the 5s Japanese philosophy?A. YesB. NoStaff %Worker %

A.9026

B.1074

It shows that about the 90% staff and 26% worker says they are practicing this but 74% workers dont know about this.Does the organization has the certification of ISO 14000 ?A. YesB. NoC. Dont knowStaff %Worker %

A.10053

B.016

C031

It shows that all of the respondent of staff & most of the worker category says that organization have ISO 14000. A formal planning process exist in the organization? A. Strongly agreeB. Strongly disagreeC. Dont knowD. AgreeE. DisagreeStaff %Workers %

A187

B1230

C2046

D307

E2010

It shows that about 50% of the respondent are agree with the statement but in worker category most of them are either disagree or dont know.

There is a shared vision of where the business is growing?A. Strongly agreeB. Strongly disagreeC. Dont knowD. AgreeE. DisagreeStaff %Workers %

A227

B513

C2540

D4513

E327

It shows that about 50% staff of the respondent are agree with the statement but in worker category app.60% disagree with the statement.Employees are keep updating with change in the job skill & job design? A. Strongly agreeB. Strongly disagreeC. Dont knowD. AgreeE. DisagreeStaff %Workers %

A103

B515

C1013

D5545

E2024

It shows that app. 70% respondents are agree with the statement .Formal& informal method is followed for employees feedback & acting on that feedback?A. Strongly agree B. Strongly disagree C. Dont knowD.Agree E. DisagreeStaff %Workers %

A152

B521

C07

D7040

E1030

Above table shows that app. 80% respondents of the staff and 45% from worker said that there are proper feedback system. are agree with the statement .Does the organization provide right environment to apply knowledge from new programs to the job?A. Strongly agree B.Strongly disagree C. Dont knowD. Agree E. DisagreeStaff %Workers %

A55

B7528

C1013

D746

E38

Above table shows that 75% staff and 50% from worker said that organization provide the right environment to apply knowledge to the job Proper feedback system. are agree with the statement .

Do you feel that this organization is a good place to work?A. Yes B. NoC. Cant sayStaff %Workers %

A8058

B536

C158

It shows that 80% staff&58% worker agreed with the statement.

Do you feel comfortable with the rules and policies of the organization?A. YesB. NoC. Some timesStaff %Worker %

A.5547

B.2040

C.2513

It shows that the employees of the staff category are more satisfied with the rules and policies of the organization then employees from the workers category. What type of relations are you having with your superiors, peers and subordinates?A. GoodB. Average C. PoorStaffWorkers

A.9034

B.1050

C.016

It shows that most of the employees from the staff category are having good relationships with their superiors. But most of the workers are having only satisfactory relationships. If bad, then why it is so?A. They are not co-operating with youB. There behavior is not goodC. There is not proper communication.D. All of the above Workers

A.10

B.27

C.18

D.45

It shows that most of the worker take misbehaviour from their superior.Do you feel that you can get ahead in the organization if you make efforts?A. Yes B. No C. SometimesStaffWorkers

A.4524

B.2572

C.304

This shows that most of the workers feels that they cant get ahead in the organization if they work hard but the attitude of employees of staff is just opposite. Do you get reward on your good performance?A. YesB. NoC. SometimesStaff %Workers %

A.3022

B.6568

C.510

This shows that most of the staff members or workers have not get reward in the organization on their good performance.Do you feel that your performance is measured properly in the organization?A. YesB. NoC. SometimesStaff %Workers %

A.4526

B.4067

C.157

Most of the staff members thinks that their performance is properly measured in the organization but the workers feels just opposite of it

Do you find that your job makes the best use of your abilities?(For Managers)A. YesB. NoC. Sometimes Staff

A.55

B.30

C.15

It shows that most of the staff members are feels that their job makes the best use of their abilities.

Objective of Project Report : The main objective of the Project Report is Find the Ratio Analysis of company. And sub objectives of this report is understand the Meaning of Ratio, Pure Ratio or Simple Ratio, Advantages of Ratio Analysis, Limitations of Ratio Analysis, classification of Ratio, Liquidity Ratio, Profitability Ratio or Income Ratio, Activity & Turnover Ratio, Return on Capital Employed

RATIO ANALYSISMeaning of Ratio:- A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions.According to Accountants Handbook by Wixon, Kell and Bedford, a ratio is an expression of the quantitative relationship between two numbers.Ratio Analysis:- Ratio analysis is the process of determining and presenting the relationship of items and group of items in the statements. According to Batty J. Management Accounting Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication.It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is helpful tool to aid in applying judgement, otherwise complex situations. Ratio analysis can represent following three methods.Ratio may be expressed in the following three ways : 1. Pure Ratio or Simple Ratio :- It is expressed by the simple division of one number by another. For example , if the current assets of a business are Rs. 200000 and its current liabilities are Rs. 100000, the ratio of Current assets to current liabilities will be 2:1.2. Rate or So Many Times :- In this type , it is calculated how many times a figure is, in comparison to another figure. For example , if a firms credit sales during the year are Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors Turnover Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison to debtors. 3. Percentage :- In this type, the relation between two figures is expressed in hundredth. For example, if a firms capital is Rs.1000000 and its profit is Rs.200000 the ratio of profit capital, in term of percentage, is 200000/1000000*100 = 20%ADVANTAGE OF RATIO ANALYSIS1. Helpful in analysis of Financial Statements.2. Helpful in comparative Study.3. Helpful in locating the weak spots of the business.4. Helpful in Forecasting. 5. Estimate about the trend of the business.6. Fixation of ideal Standards.7. Effective Control.8. Study of Financial Soundness.LIMITATIONS OF RATIO ANALYSIS1. Comparison not possible if different firms adopt different accounting policies.2. Ratio analysis becomes less effective due to price level changes.3. Ratio may be misleading in the absence of absolute data.4. Limited use of a single data.5. Lack of proper standards.6. False accounting data gives false ratio.7. Ratios alone are not adequate for proper conclusions.8. Effect of personal ability and bias of the analyst.CLASSIFICATION OF RATIO

Ratio may be classified into the four categories as follows:A. Liquidity Ratioa. Current Ratiob. Quick Ratio or Acid Test RatioB. Leverage or Capital Structure Ratioa. Debt Equity Ratiob. Debt to Total Fund Ratioc. Proprietary Ratiod. Fixed Assets to Proprietors Fund Ratioe. Capital Gearing Ratiof. Interest Coverage RatioC. Activity Ratio or Turnover Ratioa. Stock Turnover Ratiob. Debtors or Receivables Turnover Ratioc. Average Collection Periodd. Creditors or Payables Turnover Ratioe. Average Payment Periodf. Fixed Assets Turnover Ratiog. Working Capital Turnover RatioD. Profitability Ratio or Income Ratio(A) Profitability Ratio based on Sales :a. Gross Profit Ratiob. Net Profit Ratioc. Operating Ratiod. Expenses Ratio(B) Profitability Ratio Based on Investment : I. Return on Capital Employed II. Return on Shareholders Funds :a. Return on Total Shareholders Fundsb. Return on Equity Shareholders Fundsc. Earning Per Shared. Dividend Per Sharee. Dividend Payout Ratiof. Earning and Dividend Yieldg. Price Earning RatioLIQUIDITY RATIO(A) Liquidity Ratio:- It refers to the ability of the firm to meet its current liabilities. The liquidity ratio, therefore, are also called Short-term Solvency Ratio. These ratio are used to assess the short-term financial position of the concern. They indicate the firms ability to meet its current obligation out of current resources.In the words of Saloman J. Flink, Liquidity is the ability of the firms to meet its current obligations as they fall due.Liquidity ratio include two ratio :-a. Current Ratiob. Quick Ratio or Acid Test Ratioa. Current Ratio:- This ratio explains the relationship between current assets and current liabilities of a business. Formula: Current Ratio = Current Assets/

Current Liabilities

Current Assets:-Current assets includes those assets which can be converted into cash with in a years time.Current Assets = Cash in Hand + Cash at Bank + B/R + Short Term Investment + Debtors(Debtors Provision) + Stock(Stock of Finished Goods + Stock of Raw Material + Work in Progress) + Prepaid Expenses.Current Liabilities :- Current liabilities include those liabilities which are repayable in a years time. Current Liabilities = Bank Overdraft + B/P + Creditors + Provision for Taxation + Proposed Dividend + Unclaimed Dividends + Outstanding Expenses + Loans Payable with in a Year.Significance :- According to accounting principles, a current ratio of 2:1 is supposed to be an ideal ratio.It means that current assets of a business should, at least , be twice of its current liabilities. The higher ratio indicates the better liquidity position, the firm will be able to pay its current liabilities more easily. If the ratio is less than 2:1, it indicate lack of liquidity and shortage of working capital.The biggest drawback of the current ratio is that it is susceptible to window dressing. This ratio can be improved by an equal decrease in both current assets and current liabilities.b. Quick Ratio:- Quick ratio indicates whether the firm is in a position to pay its current liabilities with in a month or immediately.Formula:Quick Ratio = Liquid Assets/ Current Liabilities

Liquid Assets means those assets, which will yield cash very shortly.Liquid Assets = Current Assets Stock Prepaid ExpensesSignificance :- An ideal quick ratio is said to be 1:1. If it is more, it is considered to be better. This ratio is a better test of short-term financial position of the company.LEVERAGE OR CAPITAL STRUCTURE RATIO(B) Leverage or Capital Structure Ratio :- This ratio disclose the firms ability to meet the interest costs regularly and Long term indebtedness at maturity. These ratio include the following ratios :a. Debt Equity Ratio:- This ratio can be expressed in two ways: First Approach : According to this approach, this ratio expresses the relationship between long term debts and shareholders fund.Formula:Debt Equity Ratio=Long term Loans/Shareholders Funds or Net Worth

Long Term Loans:- These refer to long term liabilities which mature after one year. These include Debentures, Mortgage Loan, Bank Loan, Loan from Financial institutions and Public Deposits etc.Shareholders Funds :- These include Equity Share Capital, Preference Share Capital, Share Premium, General Reserve, Capital Reserve, Other Reserve and Credit Balance of Profit & Loss Account.Second Approach : According to this approach the ratio is calculated as follows:-Formula:Debt Equity Ratio=External Equities/internal Equities

Debt equity ratio is calculated for using second approach.Significance :- This Ratio is calculated to assess the ability of the firm to meet its long term liabilities. Generally, debt equity ratio of is considered safe.If the debt equity ratio is more than that, it shows a rather risky financial position from the long-term point of view, as it indicates that more and more funds invested in the business are provided by long-term lenders.The lower this ratio, the better it is for long-term lenders because they are more secure in that case. Lower than 2:1 debt equity ratio provides sufficient protection to long-term lenders.b. Debt to Total Funds Ratio : This Ratio is a variation of the debt equity ratio and gives the same indication as the debt equity ratio. In the ratio, debt is expressed in relation to total funds, i.e., both equity and debt.Formula:Debt to Total Funds Ratio = Long-term Loans/Shareholders funds + Long-term Loans

Significance :- Generally, debt to total funds ratio of 0.67:1 (or 67%) is considered satisfactory. In other words, the proportion of long term loans should not be more than 67% of total funds.A higher ratio indicates a burden of payment of large amount of interest charges periodically and the repayment of large amount of loans at maturity. Payment of interest may become difficult if profit is reduced. Hence, good concerns keep the debt to total funds ratio below 67%. The lower ratio is better from the long-term solvency point of view.c. Proprietary Ratio:- This ratio indicates the proportion of total funds provide by owners or shareholders.Formula:Proprietary Ratio = Shareholders Funds/Shareholders Funds + Long term loans

Significance :- This ratio should be 33% or more than that. In other words, the proportion of shareholders funds to total funds should be 33% or more. A higher proprietary ratio is generally treated an indicator of sound financial position from long-term point of view, because it means that the firm is less dependent on external sources of finance.If the ratio is low it indicates that long-term loans are less secured and they face the risk of losing their money.d. Fixed Assets to Proprietors Fund Ratio :- This ratio is also know as fixed assets to net worth ratio.Formula:Fixed Asset to Proprietors Fund Ratio = Fixed Assets/Proprietors Funds (i.e., Net Worth)

Significance :- The ratio indicates the extent to which proprietors (Shareholders) funds are sunk into fixed assets. Normally , the purchase of fixed assets should be financed by proprietors funds. If this ratio is less than 100%, it would mean that proprietors fund are more than fixed assets and a part of working capital is provided by the proprietors. This will indicate the long-term financial soundness of business.e. Capital Gearing Ratio:- This ratio establishes a relationship between equity capital (including all reserves and undistributed profits) and fixed cost bearing capital.Formula:Capital Gearing Ratio = Equity Share Capital+ Reserves + P&L Balance/ Fixed cost Bearing Capital

Whereas, Fixed Cost Bearing Capital = Preference Share Capital + Debentures + Long Term LoanSignificance:- If the amount of fixed cost bearing capital is more than the equity share capital including reserves an undistributed profits), it will be called high capital gearing and if it is less, it will be called low capital gearing.The high gearing will be beneficial to equity shareholders when the rate of interest/dividend payable on fixed cost bearing capital is lower than the rate of return on investment in business.Thus, the main objective of using fixed cost bearing capital is to maximize the profits available to equity shareholders.f. Interest Coverage Ratio:- This ratio is also termed as Debt Service Ratio. This ratio is calculated as follows:Formula:Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed Interest Charges

Significance :- This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges.This ratio measures the margin of safety for long-term lenders.This higher the ratio, more secure the lenders is in respect of payment of interest regularly. If profit just equals interest, it is an unsafe position for the lender as well as for the company also , as nothing will be left for shareholders.An interest coverage ratio of 6 or 7 times is considered appropriate.ACTIVITY RATIO OR TURNOVER RATIO(C) Activity Ratio or Turnover Ratio :- These ratio are calculated on the bases of cost of sales or sales, therefore, these ratio are also called as Turnover Ratio. Turnover indicates the speed or number of times the capital employed has been rotated in the process of doing business. Higher turnover ratio indicates the better use of capital or resources and in turn lead to higher profitability. It includes the following :a. Stock Turnover Ratio:- This ratio indicates the relationship between the cost of goods during the year and average stock kept during that year.Formula: Stock Turnover Ratio = Cost of Goods Sold / Average Stock

Here, Cost of goods sold = Net Sales Gross ProfitAverage Stock = Opening Stock + Closing Stock/2Significance:- This ratio indicates whether stock has been used or not. It shows the speed with which the stock is rotated into sales or the number of times the stock is turned into sales during the year.The higher the ratio, the better it is, since it indicates that stock is selling quickly. In a business where stock turnover ratio is high, goods can be sold at a low margin of profit and even than the profitability may be quit high.b. Debtors Turnover Ratio :- This ratio indicates the relationship between credit sales and average debtors during the year :Formula: Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R

While calculating this ratio, provision for bad and doubtful debts is not deducted from the debtors, so that it may not give a false impression that debtors are collected quickly.Significance :- This ratio indicates the speed with which the amount is collected from debtors. The higher the ratio, the better it is, since it indicates that amount from debtors is being collected more quickly. The more quickly the debtors pay, the less the risk from bad- debts, and so the lower the expenses of collection and increase in the liquidity of the firm.By comparing the debtors turnover ratio of the current year with the previous year, it may be assessed whether the sales policy of the management is efficient or not.c. Average Collection Period :- This ratio indicates the time with in which the amount is collected from debtors and bills receivables.Formula:Average Collection Period = Debtors + Bills Receivable / Credit Sales per day

Here, Credit Sales per day = Net Credit Sales of the year / 365Second Formula :- Average Collection Period = Average Debtors *365 / Net Credit Sales

Average collection period can also be calculated on the bases of Debtors Turnover Ratio. The formula will be:Average Collection Period = 12 months or 365 days / Debtors Turnover Ratio

Significance :- This ratio shows the time in which the customers are paying for credit sales. A higher debt collection period is thus, an indicates of the inefficiency and negligency on the part of management. On the other hand, if there is decrease in debt collection period, it indicates prompt payment by debtors which reduces the chance of bad debts.d. Creditors Turnover Ratio :- This ratio indicates the relationship between credit purchases and average creditors during the year .Formula:-Creditors Turnover Ratio = Net credit Purchases / Average Creditors + Average B/P

Note :- If the amount of credit purchase is not given in the question, the ratio may be calculated on the bases of total purchase.Significance :- This ratio indicates the speed with which the amount is being paid to creditors. The higher the ratio, the better it is, since it will indicate that the creditors are being paid more quickly which increases the credit worthiness of the firm.d. Average Payment Period :- This ratio indicates the period which is normally taken by the firm to make payment to its creditors. Formula:-Average Payment Period = Creditors + B/P/ Credit Purchase per day

This ratio may also be calculated as follows :Average Payment Period = 12 months or 365 days / Creditors Turnover Ratio

Significance :- The lower the ratio, the better it is, because a shorter payment period implies that the creditors are being paid rapidly.d. Fixed Assets Turnover Ratio :- This ratio reveals how efficiently the fixed assets are being utilized.Formula:-Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets

Here, Net Fixed Assets = Fixed Assets DepreciationSignificance:- This ratio is particular importance in manufacturing concerns where the investment in fixed asset is quit high. Compared with the previous year, if there is increase in this ratio, it will indicate that there is better utilization of fixed assets. If there is a fall in this ratio, it will show that fixed assets have not been used as efficiently, as they had been used in the previous year.e. Working Capital Turnover Ratio :- This ratio reveals how efficiently working capital has been utilized in making sales.Formula :- Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital

Here, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing StockWorking Capital = Current Assets Current LiabilitiesSignificance :- This ratio is of particular importance in non-manufacturing concerns where current assets play a major role in generating sales. It shows the number of times working capital has been rotated in producing sales.A high working capital turnover ratio shows efficient use of working capital and quick turnover of current assets like stock and debtors.A low working capital turnover ratio indicates under-utilisation of working capital.Profitability Ratios or Income Ratios(D) Profitability Ratios or Income Ratios:- The main object of every business concern is to earn profits. A business must be able to earn adequate profits in relation to the risk and capital invested in it. The efficiency and the success of a business can be measured with the help of profitability ratio.Profitability ratios are calculated to provide answers to the following questions: i. Is the firm earning adequate profits? ii. What is the rate of gross profit and net profit on sales? iii. What is the rate of return on capital employed in the firm? iv. What is the rate of return on proprietors (shareholders) funds? v. What is the earning per share?Profitability ratio can be determined on the basis of either sales or investment into business.(A) Profitability Ratio Based on Sales :a) Gross Profit Ratio : This ratio shows the relationship between gross profit and sales. Formula :Gross Profit Ratio = Gross Profit / Net Sales *100

Here, Net Sales = Sales Sales ReturnSignificance:- This ratio measures the margin of profit available on sales. The higher the gross profit ratio, the better it is. No ideal standard is fixed for this ratio, but the gross profit ratio should be adequate enough not only to cover the operating expenses but also to provide for deprecation, interest on loans, dividends and creation of reserves.b) Net Profit Ratio:- This ratio shows the relationship between net profit and sales. It may be calculated by two methods:Formula: Net Profit Ratio = Net Profit / Net sales *100Operating Net Profit = Operating Net Profit / Net Sales *100

Here, Operating Net Profit = Gross Profit Operating Expenses such as Office and Administrative Expenses, Selling and Distribution Expenses, Discount, Bad Debts, Interest on short-term debts etc.Significance :- This ratio measures the rate of net profit earned on sales. It helps in determining the overall efficiency of the business operations. An increase in the ratio over the previous year shows improvement in the overall efficiency and profitability of the business.(c) Operating Ratio:- This ratio measures the proportion of an enterprise cost of sales and operating expenses in comparison to its sales.Formula:Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100

Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing Stock Operating Expenses = Office and Administration Exp. + Selling and Distribution Exp. + Discount + Bad Debts + Interest on Short- term loans. Operating Ratio and Operating Net Profit Ratio are inter-related. Total of both these ratios will be 100.Significance:- Operating Ratio is a measurement of the efficiency and profitability of the business enterprise. The ratio indicates the extent of sales that is absorbed by the cost of goods sold and operating expenses. Lower the operating ratio is better, because it will leave higher margin of profit on sales.(d) Expenses Ratio:- These ratio indicate the relationship between expenses and sales. Although the operating ratio reveals the ratio of total operating expenses in relation to sales but some of the expenses include in operating ratio may be increasing while some may be decreasing. Hence, specific expenses ratio are computed by dividing each type of expense with the net sales to analyse the causes of variation in each type of expense.The ratio may be calculated as :(a) Material Consumed Ratio = Material Consumed/Net Sales*100 (b) Direct Labour cost Ratio = Direct labour cost / Net sales*100(c) Factory Expenses Ratio = Factory Expenses / Net Sales *100(a), (b) and (c) mentioned above will be jointly called cost of goods sold ratio. It may be calculated as:Cost of Goods Sold Ratio = Cost of Goods Sold / Net Sales*100(d) Office and Administrative Expenses Ratio= Office and Administrative Exp./ Net Sales*100(e) Selling Expenses Ratio = Selling Expenses / Net Sales *100(f) Non- Operating Expenses Ratio = Non-Operating Exp./Net sales*100Significance:- Various expenses ratio when compared with the same ratios of the previous year give a very important indication whether these expenses in relation to sales are increasing, decreasing or remain stationary. If the expenses ratio is lower, the profitability will be greater and if the expenses ratio is higher, the profitability will be lower.(B) Profitability Ratio Based on Investment in the Business:-These ratio reflect the true capacity of the resources employed in the enterprise. Sometimes the profitability ratio based on sales are high whereas profitability ratio based on investment are low. Since the capital is employed to earn profit, these ratios are the real measure of the success of the business and managerial efficiency.These ratio may be calculated into two categories:I. Return on Capital EmployedII. Return on Shareholders fundsI. Return on Capital Employed :- This ratio reflects the overall profitability of the business. It is calculated by comparing the profit earned and the capital employed to earn it. This ratio is usually in percentage and is also known as Rate of Return or Yield on Capital.Formula:Return on Capital Employed = Profit before interest, tax and dividends/

Capital Employed *100

Where, Capital Employed = Equity Share Capital + Preference Share Capital + All Reserves + P&L Balance +Long-Term Loans- Fictitious Assets (Such as Preliminary Expenses OR etc.) Non-Operating Assets like Investment made outside the business.Capital Employed = Fixed Assets + Working Capital Advantages of Return on Capital Employed:- Since profit is the overall objective of a business enterprise, this ratio is a barometer of the overall performance of the enterprise. It measures how efficiently the capital employed in the business is being used. Even the performance of two dissimilar firms may be compared with the help of this ratio. The ratio can be used to judge the borrowing policy of the enterprise. This ratio helps in taking decisions regarding capital investment in new projects. The new projects will be commenced only if the rate of return on capital employed in such projects is expected to be more than the rate of borrowing. This ratio helps in affecting the necessary changes in the financial policies of the firm. Lenders like bankers and financial institution will be determine whether the enterprise is viable for giving credit or extending loans or not. With the help of this ratio, shareholders can also find out whether they will receive regular and higher dividend or not.II. Return on Shareholders Funds :- Return on Capital Employed Shows the overall profitability of the funds supplied by long term lenders and shareholders taken together. Whereas, Return on shareholders funds measures only the profitability of the funds invested by shareholders. These are several measures to calculate the return on shareholders funds:(a) Return on total Shareholders Funds :-For calculating this ratio Net Profit after Interest and Tax is divided by total shareholders funds.Formula:Return on Total Shareholders Funds = Net Profit after Interest and Tax / Total Shareholders Funds

Where, Total Shareholders Funds = Equity Share Capital + Preference Share Capital + All Reserves + P&L A/c Balance Fictitious Assets Significance:- This ratio reveals how profitably the proprietors funds have been utilized by the firm. A comparison of this ratio with that of similar firms will throw light on the relative profitability and strength of the firm.(b) Return on Equity Shareholders Funds:-Equity Shareholders of a company are more interested in knowing the earning capacity of their funds in the business. As such, this ratio measures the profitability of the funds belonging to the equity shareholders.Formula:Return on Equity Shareholders Funds = Net Profit (after int., tax & preference dividend) / Equity Shareholders Funds *100

RATIO ANALYSIS Where, Equity Shareholders Funds = Equity Share Capital + All Reserves + P&L A/c Balance Fictitious AssetsSignificance:- This ratio measures how efficiently the equity shareholders funds are being used in the business. It is a true measure of the efficiency of the management since it shows what the earning capacity of the equity shareholders funds. If the ratio is high, it is better, because in such a case equity shareholders may be given a higher dividend.(c) Earning Per Share (E.P.S.) :- This ratio measure the profit available to the equity shareholders on a per share basis. All profit left after payment of tax and preference dividend are available to equity shareholders.Formula:Earning Per Share = Net Profit Dividend on Preference Shares / No. of Equity Shares

Significance:- This ratio helpful in the determining of the market price of the equity share of the company. The ratio is also helpful in estimating the capacity of the company to declare dividends on equity shares.(d) Dividend Per Share (D.P.S.):- Profits remaining after payment of tax and preference dividend are available to equity shareholders.But of these are not distributed among them as dividend . Out of these profits is retained in the business and the remaining is distributed among equity shareholders as dividend. D.P.S. is the dividend distributed to equity shareholders divided by the number of equity shares.Formula:D.P.S. = Dividend paid to Equity Shareholders / No. of Equity Shares *100

(e) Dividend Payout Ratio or D.P. :- It measures the relationship between the earning available to equity shareholders and the dividend distributed among them.Formula:D.P. = Dividend paid to Equity Shareholders/ Total Net Profit belonging to Equity Shareholders*100 ORD.P. = D.P.S. / E.P.S. *100

(f) Earning and Dividend Yield :- This ratio is closely related to E.P.S. and D.P.S. While the E.P.S. and D.P.S. are calculated on the basis of the book value of shares, this ratio is calculated on the basis of the market value of share(g) Price Earning (P.E.) Ratio:- Price earning ratio is the ratio between market price per equity share & earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company & is widely used by investors to decide whether or not to buy shares in a particular company.Significance :- This ratio shows how much is to be invested in the market in this companys shares to get each rupee of earning on its shares. This ratio is used to measure whether the market price of a share is high or low.

HomeProject Report - Working Capital Management

WORKING CAPITAL - Meaning of Working CapitalCapital required for a business can be classified under two main categories via,

1) Fixed Capital2) 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 p&m, 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 assts 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 CAPITALThere are two concepts of working capital:

1. Gross working capital2. 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 ASSETS1) Cash in hand and cash at bank2) Bills receivables3) Sundry debtors4) Short term loans and advances.5) Inventories of stock as:a. Raw materialb. Work in processc. Stores and spares d. Finished goods6. 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 net working. 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 assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES1. 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 CAPITALWorking capital may be classified in to ways:

o On the basis of concept.

o 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 CAPITALPermanent 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 assts 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 CAPITALTemporary 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.

And some special al is the amount of working capital which is required to meet the seasonal sets. 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 favorable 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 Favorable MarketConditions: If a firm is having adequate working capital then it can exploit the favorable 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 CAPITALEvery 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 CAPITAL1. 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 transactionsDISADVANTAGES OF INADEQUATE WORKING CAPITALEvery 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 REQUIREMENTS1. 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 labor 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.

DEBTORSCASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

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 wuill 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: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

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 ANALYSISAs 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.

1. RATIO ANALYSISA 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 ANALYSISFund 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 capitalb. 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 BUDGETA 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.

ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST OF LIQUIDITYThe 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.

A) LIQUIDITY RATIOSLiquidity 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 RATIO2. QUICK RATIO3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIOCurrent 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 ASSETS2) CURRENT LIABILITESCurrent 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.

CALCULATION OF CURRENT RATIO (Rupees in crore)

e.g.

Year200620072008

Current Assets81.2983.1213,6.57

Current Liabilities27.4220.5833.48

Current Ratio2.96:14.03:14.08:1

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 2006 to 2008. 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 RATIOQuick 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 Securities2) 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 RATIOe.g. (Rupees in Crore)

Year200620072008

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 ratio Although 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 assets CURRENT LIABILITES

Absolute liquid assets = cash & bank balances. e.g. (Rupees in Crore)

Year200620072008

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 Ratio2. Debtors Turnover Ratio3. Creditors Turnover Ratio4. Working Capital Turnover RatioThe 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. Where as 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 stock 2(Rupees in Crore)

Year200620072008

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 2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.75 times. This shows that the companys inventory management technique is less efficient as compare to last year.

2. Inventory conversion period:Inventory conversion period = 365 (net working days) inventory turnover ratioe.g.

Year200620072008

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.

3. 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 DebtorsDebtors 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 2

e.g.

Year200620072008

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.

4. average collection period :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.

Average Collection Period = 365 (Net Working Days) Debtors Turnover Ratio

Year200620072008

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 analyzing 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.

5. 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.

Year200620072008

Sales166.0151.5169.5

Networking Capital53.8762.52103.09

Working Capital Turnover3.08 2.41.64

Interpretation : This ratio indicates low much net working capital requires for sales. In 2008, 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)Year2005-20062006-20072007-2008

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 2005-2006 is 45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their current assets. The company should try to reduce the inventory upto 10% or 20% of current assets.

Cash bnak balance :(Rs. in Crores)Year2005-20062006-20072007-2008

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 2006 the cash is 4.69 crores but in 2007 it has decrease to 1.79. The result of that it disturb the firms manufacturing operations. In 2008, it is increased upto approx. 5.1% cash balance. So in 2008, the company has no problem for meeting its requirement as compare to 2007.

debtors :(Rs. in Crores)Year2005-20062006-20072007-2008

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)Year2005-20062006-20072007-2008

Current Assets81.2983.15136.57

Interpretation : This graph shows that there is 64% increase in current assets in 2008. 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)Year2005-20062006-20072007-2008

Current Liability27.4220.5833.48

Interpretation : Current liabilities shows company short term debts pay to outsiders. In 2008 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)Year2005-20062006-20072007-2008

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.

RESEARCH METHODOLOGYThe methodology, I have adopted for my study is the various tools, which basically analyze critically financial position of to the organization: I. COMMON-SIZE P/L A/C II. COMMON-SIZE BALANCE SHEET III. COMPARTIVE P/L A/C IV. COMPARTIVE BALANCE SHEET V. TREND ANALYSIS VI. RATIO ANALYSISThe 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.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -

1. To provide reliable financial information about economic resources and obligation of a business firm.

2. To provide other needed information about charges in such economic resources and obligation.

3. To provide reliable information about change in net resources (recourses less obligations) missing out of business activities.

4. To provide financial information that assets in estimating the learning potential of the business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final picture a final picture of a concern. The utility of these statements is dependent upon a number of factors. The analysis and interpretation of these statements must be done carefully otherwise misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given in these statements is only approximate. The actual value can only be determined when the business is sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generally one year, during the life of a concern. The costs and incomes are apportioned to different periods with a view to determine profits etc. The allocation of expenses and income depends upon the personal judgment of the accountant. The existence of contingent assets and liabilities also make the statements imprecise. So financial statement are at the most interim reports rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to give final and accurate position. The value of fixed assets in the balance sheet neither represent the value for which fixed assets can be sold nor the amount which will be required to replace these assets. The balance sheet is prepared on the presumption of a going concern. The concern is expected to continue in future. So fixed assets are shown at cost less accumulated deprecation. Moreover, there are certain assets in the balance sheet which will realize nothing at the time of liquidation but they are shown in the balance sheets.

4. The financial statements are prepared on the basis of historical costs Or original costs. The value of assets decreases with the passage of time current price changes are not taken into account. The statement are not prepared with the keeping in view the economic conditions. the balance sheet loses the significance of being an index of current economics realities. Similarly, the profitability shown by the income statements may be represent the earning capacity of the concern.

5. There are certain factors which have a bearing on the financial position and operating result of the business but they do not become a part of these statements because they cannot be measured in monetary terms. The basic limitation of the traditional financial statements comprising the balance sheet, profit & loss A/c is that they do not give all the information regarding the financial operation of the firm. Nevertheless, they provide some extremely useful information to the extent the balance sheet mirrors the financial position on a particular data in lines of the structure of assets, liabilities etc. and the profit & loss A/c shows the result of operation during a certain period in terms revenue obtained and cost incurred during the year. Thus, the financial position and operation of the firm.

FINANCIAL STATEMENT ANALYSISIt is the process of identifying the financial strength and weakness of a firm from the available accounting data and financial statements. The analysis is done CALCULATIONS OF RATIOSRatios are relationship expressed in mathematical terms between figures, which are connected with each other in some manner.

CLASSIFICATION OF RATIOSRatios can be classified in to different categories depending upon the basis of classification

The traditional classification has been on the basis of the financial statement to which the determination of ratios belongs.

These are:- Profit & Loss account ratios Balance Sheet ratios Composite ratios Project Description :Title : Working Capital Management of ____________

Pages : 73

Category : Project Report for MBA

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TABLE OF CONTENTS INTRODUCTION TO BANKING SECTOR OBJECTIVES OF THE STUDY RESEARCH METHODOLOGY ANALYSIS AND INTERPRETATION FINDINGS RECOMMENDATIONS LIMITATIONS CONCLUSION BIBLIOGRAPHY ANNEXUREOBJECTIVES OF THE STUDY Primary Objective: To know the various HR implications in private banks.Secondary Objective: To know whether employees are satisfied with their jobs or not. To know the various retention practices used in banks? To know the motivational factors used by the banks? To know whether training and development programs are conducted b the banks or not To know the cause of their problems related with :1. Their Health Problem2. DissatisfactionProject Report - Training Need / Identification and Importance of Training for Employees

TRAINING EFFECTIVENESS - 5p/TrainingThe game of economic competition has new rules. Firms should be fast and responsive. This requires responding to customers' needs for quality, variety, customization, convenience and timeliness. Meeting these new standards requires a workforce that is technically trained in all respects. It requires people who are capable of analyzing and solving job related problems, working cooperatively in teams and 'changing hats' and shifting from job to job as well. Training has increased in importance in today's environment where jobs are complex and change. Rapidly. Companies that pay lip-service to the need for training, by lazily setting aside a few hours a year, will soon find themselves at the receiving end when talented employees leave in frustration and other employees find it difficult to beat rivals with new products, sophisticated designs and improved ways of selling. To survive and flourish in the present day corporate-jungle, companies should invest time and money in upgrading the knowledge and skills of their employees constantly. For, any company that stops injecting itself with intelligence is going to die. The purpose of this chapter is make the student understand the basic principles, areas, and methods of training currently in use in the corporate circles.

Need for TrainingAfter employees have been selected for various positions in an organization, training them for the specific tasks to which they have been assigned assumes great importance. It is true in many organizations that before an employee is fitted into a harmonious working relationship with other employees, he is given adequate training. Training is the act of increasing the knowledge and skills of an employee for performing a particular job. The major outcome of training is learning. A trainee learns new habits, refined skills and useful knowledge during the training that helps him improve performance. Training enables an employee to do his present job more efficiently and prepare himself for a higher-level job. The essential features of training may be stated thus:

Increases knowledge and skills for doing a particular job; it bridges the gap between job needs and employee skills, knowledge and behaviors

Focuses attention on the current job; it is job specific and addresses particular performance deficits or problems

Concentrates on individual employees; changing what employees know, how they work, their attitudes toward their work or their interactions with their co-workers or supervisors

Tends to be more narrowly focused and oriented toward short-term