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INTRODUCTION
“Working capital means the part of the total assets of the business that change
from one form to another form in the ordinary course of business operations.”
In a perfect world, there would be no necessity for current assets and liabilities
because there would be no uncertainty, no transaction costs, information search costs,
scheduling costs, or production and technology constraints. The unit cost of
production would not vary with the quantity produced. Borrowing and lending rates
shall be same. Capital, labour, and product market shall be perfectly competitive and
would reflect all available information, thus in such an environment, there would be
no advantage for investing in short term assets. However the world we live is not
perfect. It is characterized by considerable amount of uncertainty regarding the
demand, market price, quality and availability of own products and those of suppliers.
There are transaction costs for purchasing or selling goods or securities. Information
is costly to obtain and is not equally distributed. There are spreads between the
borrowings and lending rates for investments and financings of equal risks.
These real world circumstances introduce problem’s which require the
necessity of maintaining working capital. For example,, an organization may be faced
with an uncertainty regarding availability of sufficient quantity of crucial imputes in
future at reasonable price. This may necessitate the holding of inventory, current
assets. Similarly an organization may be faced with an uncertainty regarding the level
of its future cash flows and insufficient amount of cash may incur substantial costs.
This may necessitate the holding of reserve of short term marketable securities, again
a short term capital asset. In corporate financial management, the term Working
capital management” (net) represents the excess of current assets over current
liabilities.
1
1.2. NEED OF THE STUDY
To understand the concept of working capital management in a practical
environment.
To analyse the problem facing by the company which is related to working
capital.
To find the solution for the problem facing by the company.
To suggest the possible measures for the improvement of working capital and
financial position of an organization
.
2
1.3. OBJECTIVES OF THE STUDY:
Primary Objectives:
To study the working capital management of Cheyyar Co-Operative Sugar
mills LTD.
Secondary Objectives:
To study the optimum level of current assets and current Liabilities used by
the Company.
To study the liquidity position of the company through various working
capital related rations.
To estimate the working capital requirements of the cheyyar sugar mill.
To understand the procedures and techniques involved in financial aspects of a
concern.
To provide suggestion for the effective management of working capital.
3
1.4. SCOPE OF THE STUDY
The study is conducted at cheyyar Co-Operative sutar mills Ltd for 3 months
The study of working capital is based on the tools like ratio analysis, working
capital schedules, common size balance sheet and statistical tools.
The study of working capital management is purely based on secondary data
and all the information is available within the company itself in the form of
records.
Scope of the study is limited up to the availability of official records and
information provided by the employees.
The industry and competitors analysis were not considered while preparing the
project.
The study is supposed to be related to the periods of last five years.
4
3.5. LIMITATIONS:
The project has completed with annual report i.e., secondary date. There were
limitations for the primary date.
The project is based on five year annual reports of the company. It is difficult
to collect the data regarding competitor and their financial information.
The informations are confined only with Cheyyar Co-Operative sugar mill.
Hence it cannot be generalized to the entire sugar industry.
The economic and government policies etc., may affect the industry after the
study which is not taken into consideration.
The findings and suggestions of the study are based only on secondary data.
The study will be only a provisional one based on the data collected from the
report and accounts during the period and it is subject to refinement.
5
1.6. SUGAR INDUSTRY PROFILE
Originally, people chewed the cane raw to extract its sweetness. Indians
discovered how to crystallize sugar during the Gupta dynasty, around AD 350.
Sugarcane was originally from tropical South Asia and Southeast Asia. Different
species likely originated in different locations with sugar barberi originating in India
and sugar edule and sugar officinarum coming from New Guinea.
During the Muslim Agricultural Revolution, Arab entrepreneurs adopted the
techniques of sugar production from India and the refined and transformed them into
a large-scale industry. Arabs set up the first large scale sugar mills, refineries,
factories and plantations.
The 1390s saw the development of a better press, which doubled the juice
obtained from the cane. This permitted economic expansion of sugar plantations to
Andalucia and to the Algarve. The 1420s saw sugar production extended to Canary
Islands, Madeira and the Azores.
The Portuguese took sugar to Brazil. Hans Staden, published in 1555, writes
that by 1540 Santa Catarina Island had 800 sugar mills built before 1550 in the New
World created an unprecedented demand for cast iron gears, levers, axles and other
implements. Specialist trades in mold-making and iron-casting developed in Europe
due to the expansion of sugar production. Sugar mill construction developed
technological skills needed for a nascent industrial revolution in the early 17th century.
After 1625 the Dutch carried sugarcane from South America to the Caribbean
Islands where it became grown from Barbados to the Virgin Islands.
6
The years 1625 to 1750 saw sugar become worth its weight in gold. With the
European colonization of the Americas, the Caribbean became the world’s largest
source of sugar.
These Islands could supply sugarcane using slave labor and produce sugar at
prices vastly lower than those of cane sugar imported from the Ease.
During the eighteenth century, sugar became enormously popular and the
sugar market went through a series of booms. As Europeans established sugar
plantations on the larger Caribbean Islands, prices fell, especially in Britain.
By the eighteenth century all levels of society had become common
consumers of the former luxury product. At first most sugar in Britain went into tea,
but later confectionery and chocolates became extremely popular. Suppliers
commonly sold sugar in solid cones and consumers required a sugar nip, a pliers-like
tool, to break off pieces.
Beginning in the late 18th century, the production of sugar became increasingly
mechanized. The steam engine first powered a sugar mill in Jamaica in 1768, and
soon after, steam replaced direct firing as the source of process heat. During the same
century, Europeans began experimenting with sugar production from other crops.
Andreas Marggraf identified sucrose in beet root and his student Franz Achard
built a sugar beet processing factory in Silesia. However the beet-sugar industry really
took off during the Napoleonic Wars, when France and the continent were cut off
from Caribbean sugar. Today 30% of the world’s sugar is produced from beets.
Today, a large beet refinery producing around 1,500 tonnes of sugar a day
needs a permanent workforce of about 150 for 24-hour production.
7
TOP TEN SUGAR PRODUCERS
Below are the leading sugar producers for 2009-10. These producers
accounted for nearly 80% of the global sugar total of 150 million tons in 2005-06.
(The international sugar season runs from September to August.)
Brazil … 30 million tons (20% of global sugar production)
European Union … 22 million (14.7%)
India … 20 million (13.3%)
China … 10 million (6.6%)
United States … 7 million (4.6%)
Mexico … 6 million (4%)
South African Development Community (SADC) … 5.7 million (3.8%)
Australia … 5.4 million (3.6%)
Thailand … 5 million (3.3%)
Russia … 2.7 million (1.8%)
Top producers that also export the highest percentage of their sugar production
are Australia (76%), Brazil (59%), Thailand (52%) and the European Union (37%). In
contrast, India and Mexico each export just over 5% while China, U.S. and Russia do
not sell processed sugar to foreign markets.
Brazil and Thailand ship more white sugar onto world trade markets while the
WTO forces the European Union to cut it s sugar exports by over 80%.
Three quarters of the world’s sugar is made from sugar cane in tropical zones
located in the southern hemisphere. Leading sugar cane producers are Brazil, India,
China, Thailand, Pakistan and Mexico.
8
The remainder is processed from sugar beets grown in temperate zones of the
northern hemisphere. France, Germany, U.S., Russia Ukraine and Turkey produce the
most from sugar beets.
Not all sugar-producing countries sell their processed sugar on international
trade markets. Currently, 70% the world’s sugar is consumed in the country where
harvested. Only 30% is traded outside country of origin.
Global sugar consumption rises by about 2% per year, and has increased 17%
from 128 million tons in year 2000 to 150 million in 2006. The highest sugar
consumption per capita is found in Brazil (59 kilograms of sugar per year), Mexico
(53) and Australia (50).
TOP TEN SUGAR EXPORTERS
Below are the leading sugar exporters for 2009-10.
Brazil … 17.7 million tons (39% of global sugar exports)
European Union … 8.1 million (18%)
Australia … 4.1 million (9%)
Thailand … 2.6 million (5.8%)
SADC … 1.6 million (3.6%)
Guatemala … 1.5 million (3.3%)
India … 1.4 million (3.1)
Persian Gulf … 1.3 million (2.9%)
South Africa … 1.3 million (2.9%)
Cuba … 1.2 million (2.7%)
9
INTERNATIONAL SUGAR TRADE
Brazil continues to dominate international sugar markets, spurred on by
demand for sugar-based ethanol. In 2006-7, Thailand is expected to increase sugar
exports by almost 30% due to larger sugar cane crops. Although India has increased
its sugar production by 12%, the Indian government banned sugar exports until April
2007 as a way to constrain the rise of domestic sugar prices.
The European Union failed to meet its responsibilities under the Uruguay
Round Agreement on Agriculture. Consequently, the World Trade Organization
now restricts the European Union’s subsidized exports of sugar to about 1.4 million
tons per year.
Despite this dramatic decline in EU sugar exports, increased shipments from
Brazil, Thailand and India are expected to mitigate any adverse effects on
international sugar markets.
Around 160K metric tons of sugar are produced every year, with the largest producers
in Brazil, India and the European Union.The primary driver of sugar prices is
government regulation. Many governments heavily subsidize their sugar
manufacturers, to "dump" cheaply-priced sugar in the market, while the United States
government has tried to elevate prices within its borders by imposing import
restrictions. Since sugar is a good source for ethanol production, oil prices and the
demand for ethanol are also impact the international price of sugar; for example, in
the first half of 2008, sugar prices increased by more than 20% in response to rising
gasoline prices.
10
Production and Usage
Most commercial sugar is produced from two main sources: sugar beets and
sugarcane. Other minor commercial sources include the date palm, sorghum and the
sugar maple. Currently, 69% of the world's sugar is consumed in its country of
origin, while the rest is traded on international markets.
Brazil is the world's largest sugar producer, followed by India (which is the
world's largest consumer), the EU and China. In the 2007/08 season, Brazil produced
31.3 million tons, India produced 28.8 million tons, the EU produced 17.57 million
tons and China produced 14.6 million tons of sugar
The 2009/10 season has been particularly troubled by abnormal weather
patterns. Brazil has seen much higher levels of rainfall than average, while India
suffered its driest June in 83 years.
In the U.S., sugar beets are grown year-round and account for 60% of total
sugar production, while sugar canes are grown perennially and account for 40% of US
total production. Both production processes yield the same sugar product. Sugar
production in the United States generates $10B in economic activity annually, and the
sugar/corn sweetener industries generate $21.1B in economic activity.
Sugar is used in food products to sweeten and add texture and color. On
average, each American consumes 45 pounds of sugar, 45 pounds of high fructose
corn syrup (HFCS) and 2 pounds of honey/syrup yearly.] In total, Americans consume
10,000 tons of sugar every year. Sugar end products are raw cane sugar, wholesale
and retail refined sugar, cereal, candy, baed goods, and ethanol.
11
Pricing and Volume Trends
From 1994 to 2004, sugar prices dropped significantly as a result of increasing
supply. While supply depleted from 2004 to 2006, it has resurged since then, which is
reflected in the general drop in prices. Within the past year, however, concerns
regarding high fuel prices (see below) have pushed prices higher.
The US is the second largest net sugar importer. Other key players in the
world sugar market are the European Union (EU), Brazil and India. The EU, like the
US, has implemented policies that artificially inflate sugar prices. Brazil, on the other
hand, heavily subsidizes its sugar farmers to support its sugar-ethanol program.
World Sugar Production (1000 metric tons)
Year 2008 2007 2006
US 7,362 7,614 7,663
EU 16,814 17,740 17,757
Brazil 33,700 32,100 31,450
India 24,830 28,930 30,780
World 161,712 165,384 164,183
12
Between January 2009 and August 2009, the price of sugar nearly doubled due
to poor harvests in India and Brazil. Indian yields were threatened as key sugar
growing regions were threatened by dry spells, causing India to become a net sugar
importer for the second time in history.
Combined with the inability of Brazilian sugar mills to secure financing to
expand operations, a particularly wet season in Brazil slowed harvests and reduced
outputs. USDA officials have stated that production of sugar beet and cane in the US
will negate the drop in foreign supply; however, food manufacturers remain fearful
that sugar will remain at elevated levels.
Sugar Imports/Exports in North America, South America, and Asia
Region Year Total Production Total Imports Total Exports Total Use
North America 2007/2008 13374 4019 938 163242008/2009 12136 4455 1132 166902009/2010 12498 4360 913 16166
South America 2007/2008 39,117 1,488 20,959 18,5682008/2009 39,576 1,605 23,255 19,0882009/2010 43,830 1,393 26,052 19,218
Asia 2007/2008 69,097 13,731 16,153 63,5742008/2009 52,724 15,740 10,879 64,9142009/2010 54,906 19,383 11,161 64,916
INDIAN SUGAR INDUSTRY
13
India is the largest producer of sugar in the world. In terms of sugarcane
production, India and Brazil are almost equally placed. In Brazil, out of the total cane
available for crushing, 45% goes for sugar production and 55% for the production of
ethanol directly from sugarcane juice. This gives the sugar industry in Brazil an
additional flexibility to adjust its sugar production keeping in view the sugar price in
the international market as nearly 40% of the sugar output is exported.
The annual projected growth rate in the area under sugarcane at 1.5% per
annum has doubled during the last five years. This is because it is considered to be an
assured cash crop with good returns to the farmers vis-a-vis other competing crops.
India is currently passing through a glut situation with closing stocks at the end of the
year of over 100 lakh tons since 1999-2000. Correspondingly, molasses production
has also increased. Of course, there are also other agro routes available to produce
ethanol.
According to MPNG, 5% ethanol blends on an all-India basis would require
500 million liters. The current availability of molasses and alcohol would be adequate
to meet this requirement after fully meeting the requirement of the chemical industry
and potable sectors.
India is the world’s largest sugar producer and consumer. The Indian sugar
industry is highly fragmented as a result of strict government controls on licensing
and distribution of sugar mills, and on the pricing of sugar. Earlier, the Indian
government had discouraged the setting up of large sugar mills through its licensing
policy, administered prices, and high government quota levels on production.
Sugar industry in India, which is the world's second largest producer of the
sweetner, is headed for a rough patch during the current sugar year ending September
14
30, 2009. Cane production is projected to decline. As cane farmers shift to growing
more lucrative crops, the acreage under cane could drop. Lower cane production
would compel millers to hike procurement prices.
According to the food ministry, sugar production for the year ending
September 30, 2009 may shrink to 20 million tonnes against 26.4 mt in the previous
year. As a result, sugar export may fall to 2 mt from 4.6mt. Preliminary estimates by
the Indian Sugar Mills Association (ISMA) foresee an import of about 5 million
tonnes of sugar, in the worst case scenario.
The expected shortage in the supply of cane and its high price, which is
determined by each cane producing state government under the state advised price
(SAP) regime, are likely to create difficulties for sugar manufacturers. The state
governments, in an attempt to please cane farmers, especially at the time of elections,
often announce higher SAPs than the minimum support prices (MSP) recommended
by the centre.
Higher cane prices generates higher incomes for cane growers (generous
voters for the ruling party) and encourage other farmers engaged in growing other
crops to switch over to cane. But at the same time, a high cane price directly poses a
threat to the profit margins of sugar producers. To overcome this, sugar mills are left
with no option but to raise sugar prices.
INDIAN SUGAR INDUSTRY – OVERVIEW
15
Sugar cane production 350 million tons
Sugar production 23.5 million tons (2008-09)
Alcohol production 2000 million liters approx.
Power production 750MW present (potential – 5000MW)
Total turnover Rs. 410 billion
Number of formers 50 million
Employment 0.5 million direct and indirect to many
SUGAR PRODUCTION IN STATES
The following table shows level of sugar production ( In Lakh Tonnes ) in
Indian States.
State 2006-07 2007-08 2008-09
Uttar Pradesh 58.74 46.08 50.32
Maharashtra 61.64 31.99 22.29
Karnataka 17.98 11.57 13
Tamil Nadu 17.04 11.9 9.84
Andhra Pradesh 11.88 8.81 9.75
Gujarat 12.38 10.77 8.32
Haryana 5.99 5.86 4.03
Uttaranchal 4.59 3.93 3.82
Punjab 5.11 3.88 3.37
Bihar 4.21 2.77 2.77
Madhya Pradesh 0.85 0.94 0.85
Other 0.91 1.09 1.58
STATISTICS ON SUGAR PRODUCTION
16
As to the statistics there were a total number of 571 sugar factories in India as
on March 31, 2005 compared to 138 during 1950-51. These 571 sugar mills produce a
total quantity of 19.2 million tones (MT). Sugar production in India increased from
15.5 MT in 1998-99 to 20.1 MT in 2002-03.
Department of Agriculture and Co-operation, sugarcane production in 2004-05
is estimated at 232.3 MT from 237.3 MT in 2003-04. Sugarcane production is
expected to reach 257.7 MT in 2005-06.
SUGAR PRICING
Government of India fixes Statutory Minimum Price (SMP) for sugarcane
according to Clause 3 of the Sugarcane Order. This statutory Minimum Price is
designed through the consent of Commission for Agricultural Coast and Prices
(CACP) and respective state Governments. For the year 2004-05, the rate was fixed at
Rs. 74.50 per quintal with a basic recovery of 8.5%.
INDIAN GOVERNMENT ON SUGAR INDUSTRY
The following policy initiatives are taken to boost the Sugar industry:
Government declared the new policy on August 20, 1998 with regards to
licenses for new factories, which shows that there will be no sugar factory in a
radius of 15 km.
Setting up of Indian Institute of Sugar Technology at Kanpur is meant for
improving efficiency in the industry.
In the year 1982, the sugar development fund was set up with a view to avail
loans for modernization of the industry.
1.7. COMPANY PROFILE
17
The Cheyyar Co-operative Sugar Mills Ltd being a Co-operative Society
registered on 05.05.1988 under the Tamilnadu Co-operative Societies Act 1983 with
the object of manufacture of sugar from sugar cane and sale of sugar along with the
by-products to the best advantage of the share holding members.
The Cheyyar Co-operative Sugar Mill is located at Anakkavour-
Thentandalam village at Cheyyar in Thiruvannamalai District. The Honorable Prime
minister Thiru. Rajiv Gandhi opened the mill.
The area of operation of the Society shall confined to entire Cheyyar and
Vandavasi Taluks in Thiruvannamalai District and Tindivanam Taluk in Villupuram
District. The total area of Factory and Quarters is 129.62 acres. The Mill started its
business on 15 .02.1991. The capacity of the Mill is 2500 TCD (Tones Can Day).
The main product of the Cheyyar Co-operative Society is sugar and the by-
products are sugar, Molasses, and power from begasse. This year the sugar mill
planned to produce Ethanol. Under non-conventional energy scheme, the Cheyyar Co-
operative Sugar Mill has established Co-Generation plant the first of its kind in Asia
by using the by using the baggasse as its raw material. The total project cost of the
Co-Generation plant is Rs. 625.14 lakhs.
The Mill has co-generation unit of 7.5MW capacity. Out of which 2.5MW is
being consumed for own use and 5MW is being exported to the Tamilnadu Electricity
Board at a cost of Rs.3.15 per unit.
The power exported to TNEB grid during 2008-09 is 43.72 lakhs units and
revenue earned from this export is Rs.134.96 lakhs. The Cheyyar Co-operative Sugar
Mill has been awarded for the best performance of Co-Generation plant at National
Level during 1996-97.
18
Since the period of inception of the mill, it has been running successfully for
the development of its member and farmers. The mill provides a lot of direct
employment opportunities. They select the employees through employment office.
The purchase of items is bases on the indents received from the needy
departments and finalizing the purchases through purchase committee meeting headed
over by the Chief Executive of the Mill after following all the purchase procedures
and transparency in purchasing at lowest price.
In general, there is a dual pricing policy for the Sugar cane. They are Statutory
Minimum Price (SMP) fixed by Central Government and State Advised Price (SAP)
fixed by the State Government.
The Cheyyar Co-operative sugar mill is adopting the policy of the S.A.Price of
Rs. 1150.40 per MT which is given at a regular interval of 14 days as per the Sugar
Cane Control Order of 1966. There are around 9000 members supplying the sugar
cane to the Cheyyar co-operative sugar mill.
The mill bears the transport cost of the distance exceeding 10 Kms for
transporting cane from the fields. The commitment on these transport cost comes
around Rs.201.48 lakhs per annum.
The Sugar production in the year 2007-08 is 510020 quintal from the Cane
crushing of 533437 MT. The total turnover is around Rs.51.94 crores in the year
2007-08.
A sale is being executed on receipt of allotment order from the Ministry of
Food, Government of India, New Delhi. It is obligatory on the part of the mills to give
levy sugar from the production for distribution under Public Distribution system.
19
The mill is following two type of price for the sale of sugar. They are levy
price and free price. The government purchases the sugar at levy price for distribution
of sugar under public distribution system. At present the levy price is Rs.1335.40.
And the free price in based on tender quoted by the sugar purchasers. At present the
free price is approximately Rs.3000.
The mill has two sugar godowns with a capacity of stocking 360000 quintals
of sugar. And also has three steel tanks for storage of molasses with the total capacity
of 12000 MT.
In short, the Cheyyar Co-operative Sugar Mill has not only concentrated in
commercial activities and also devoting the activities for the upliftment of the society.
OBJECTIVES OF CHEYYAR CO-OPERATIVE SUGAR MILL.
The object of the society shall be manufacture of white sugar from sugarcane and
the sale of the sugar so manufactured a long with the by products to the best
advantage of the members
To raise share capital and deposits from members.
To invest monies of the society in such investments or securities as may be
through expedient by the committee of the society.
To pay for any property or right acquired by the society either in cash or fully or
partly paid up shares.
To provide for the welfare of the persons employed by the society.
20
MEMBERS AND SHARE CAPITAL
The authorized share capital of the society shall be Rs.10 Crores divided into
5,00,000 shares of Rs.200/- each.
The liability of the members for the debts of the society on its liquidation shall
be limited to the share capital subscribed by them.
TABLE SHOWING THE MEMBER AND SHARE CAPITAL
S.NONO.OF SHARE HOLDERS SHARE CAPITAL (Rs. In Lakhs)
State Govt. Growers Total State Govt. Growers Total
1 1 26683 26684 745.78 987.54 1733.32
PROJECT COST OF THE PLANT
Rs. In lakhs
Land and site Development 33.97
Buildings 622.95
Plant and Machinery 1912.96
Miscellaneous Fixed Assets 116.37
2686.25
SOURCES OF FINANCE FOR THE PROJECT
(Rs. In Lakhs)
Loan from ICICI & IDBI 1360.00
Government Share 727.00
Share Capital 228.60
Govt.Share Capital for Godown 18.79
NCDC Loan for construction of Godown 37.58
Loan from other Co-op Sugar Mills 314.28
2686.25
21
The mill has one primary school started on 31.10.1995 with a view to give
quality education to the children of the employees and growers. The school has
classes from LKG to 5th standard with a total strength of 287 students along with 9
teaching staff for the benefit of the children of growers and employees. They are
charging very minimum fees as compared with the market.
There are around ten departments working under the administrative
department. They are Establishment, Purchase, Sales, Stores, Sugar godown, Time
office, Security, Dispensary, Mills Primary school, Canteen etc., the staffing position
are as follows.
STAFFING POSITION
Sl.No. NAME OF THE POST REGULAR SEASONAL TOTAL
1 ADMINISTRATION 53 4 10
2 ACCOUNTS 19 0 2
3 CANE 80 5 3
4 ENGINEERING 63 105 36
5 MANUFACTURING 17 25 3
TOTAL 232 139 371
ACHIEVEMENTS
S.NO Awards and Prizes Description/Remarks
1 ISO 9001:2000 Certificate obtained for Quality Management system
2 Safety Award-2003-04 1st Place
3 Efficiency Award 2003-04
2nd Place for Financial Management in
other Recovery
4 Safety Award-2004-05 1st Place
22
1.8. PRODUCT PROFILE
SUGAR
The main product of Sugar Industry is raw sugar. A typical raw cane sugar
contains sucrose (97.5%) reducing sugar (0.86%) other organic compound (0.46%)
ash (0.43%) and water (0.75%).
Sugar Cane contains 11 to 15% sucrose out of which only 8 to 11% is
crystalizable. The remaining sucrose goes into by product along with other sugars
viz. Glucose and Fructose.
BAGGASE
Baggase is the first by-product of cane sugar production. The fibrous residual
matter left out after extraction of sugar cane juice is known as Baggase. It contains
about 48.50% moisture, 48.0% fibre and 2.40% sugar and other minor constituents. It
has been mainly used as fuel in Boiler to raise steam. Nowadays it can be used for
paper production.
MOLASSES
Molasses is the one of the important by-products, its production depends on
the total quantity of cane crushed as well as quality which varies from region to
region. The increases in the percentage of sucrose in molasses greatly affect the final
quantity of sugar.
Molasses is the final effluent obtained in the preparation of sugar by repeated
crystallization. It is the heavy viscous liquid from which no further sugar can be
crystallized by the usual methods.
23
BLACKSTRAP MOLASSES
Molasses is called as blackstrap molasses because of its dark brown viscous
nature. It must not contain less than 40% of total sugar as invert.
The components of molasses include:
1. Major components ( water, sugar ,non-sugars )
2. Minor components ( Trace elements, vitamins, growth substance)
WATER:
Commercial molasses have an average water content of 20%. The original
end-products in the factory contain 12-17 % water. The principal sugar present in the
molasses is sucrose, glucose and fructose the later two making up the major portion of
the reducing sugars.
The alkaline degradation of sucrose leads not only to glucose and fructose but
also to Psicose and other carbohydrates. Molasses sometimes contain another non-
reducing sugars namely the trisaccharide ketose.
CO-GENERATION PROJECT
Co-generation means sequential production of heat and power by way of
producing the steam from Boiler by using bagasse (Sugar Cane Residue) as the fuel.
Heat energy is converted into Electrical Energy through turbin for the mills own use
and surplus power exported to the Tamil Nadu Electricity Board Grid. Balance heat
available is used to produce the sugar at processing/manufacturing area.
24
2.1. THEORETICAL FRAMEWORK
MEANING OF WORKING CAPITAL:-
In simple words working capital means that which is issued to carry out the
day to day operations of a business. Capital required for a business can be classified
under two main categories
Fixed capital
Working capital
Every business needs funds for two purposes, for its establishment and to
carry on its day to day operations. Long term funds are required to create production
facilities through purchase of fixed assets such as plant and machinery, land, building,
furniture etc.
Investment in these assets represents that part of firm capital, which is blocked
on a permanent or fixed basis called fixed capital. Funds are also needed for short
term purposes i.e. for the purchase of raw material, payment of wages and other day
to day operations of business. These funds are known as working capital.
In other words, working capital refers to that firm’s Capital, which is required
for short – term assets or current assets. Funds thus invested in current assets keep
revolving last and being constantly converted into cash and this cash flow is again
converted into other current assts. Hence it is known as circulating or short – term
capital.
25
CONCEPT OF WORKING CAPITAL:
Gross Working Capital
It is simply called working capital refers to the firm’s investment in current
assets so the total current assets of the firm are known as gross working capital.
Net Working Capital
It represents the difference between current assets and current liabilities. Net
working capital may be positive or negative. Positive net working capital is that when
current assets are more than current liabilities. But when current liabilities become
more than current assets than it is negative working capital.
In brief we can say that working capital is too much necessary for the smooth
functioning and proper utilization of fixed assets.
TYPES OF WORKING CAPITAL:
1. Permanent Working Capital:
As the operating cycle is a continuous process so the need for working capital
also arises continuously. But the magnitude of current assets needed is not always
same; it increases and decreases over time. However there is always a minimum level
of current assets. This level is known as permanent or fixed working capital.
26
2. Temporary Working Capital:
The extra working capital needed to support the changing production and sales
activities, is called variable or functioning or temporary working capital. This can be shown in the following diagram:-
Amount of Working
Capital Temporary capital
Permanent Capital
Time
NEED FOR WORKING CAPITAL
The need for working capital cannot be overemphasized. The need of working
capital arises due to the time gap between production and realization of cash from
sales. So the working capital or investment in current assets becomes necessary need
for working capital. It arises due to following reasons:-
OPERATING CYCLE
“Operating cycle is the time duration requires for converting sales into cash after
the conversion of resources into inventories.”
First of all a firm purchase Raw Material, then after some processing it is
converted into work–in–progress and after this further processing is done to convert
work–in–progress in finished goods.
27
After the raw material is converted into finished goods, sales are made. Sales
are no always full cash sales; there are credit sales also. These credit sales after some
period are converted into cash. So the whole process takes the time. This time taken is
known as the length of operating cycle. So operating cycles includes:-
1. Raw Material conversion period (RMCP)
2. Work–in – progress conversion period (WIPCP)
3. Finished goods conversion period (FCP)
4. Debtors Conversion period (DCP)
So operating cycle can be known as following:-
Sales
If the length of the operating cycle has short length period then less working
capital is required. So working capital requirement is directly related with operating
cycle.
28
Raw Material
Work in Progress
Cash Collection from Debtors
Finished Goods
Credit Sales Cash Sales
Operating cycle may be of two types
1. Gross Operating cycle
2. Net operating cycle
1. Gross Operating cycle
Gross Operating cycle is the total time period from the conversion of Raw
Material into finished goods and finished goods into sales and then sales into cash.
GOC =RMCP + WIPCP + FCP + DCP
2. Net Operating Cycle
As we provide period to debtors for the payments, our creditors also provide
period to us for payment to them. So this reduces our requirement of working capital.
This also affects the operating cycle. Operating cycle’s length reduces with so many
days as provided by the creditors to us. The difference between gross operating cycle
and period allowed by the creditors for payment is known as net operating cycle.
NOC = GOC – CPP
WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS
FOR FUTURE:-
These needs may be of Raw Material or Finished Goods. Sometimes because
of non-availability of Raw Material or due to seasonal availability of Raw Material
some advances stock of Raw Material becomes necessary for company. In the similar
way due to sudden arise of demand of finished goods in future more finished goods
are kept in stock. For both reasons more working capital is required because funds
will be involve in these safeties stocks
29
DETERMINENTS OF WORKING CAPITAL:
Followings are the main determinants of working capital.
1. Nature and Size of Business:
The working capital of a firm basically depends upon nature of its business for
e.g. Public utility undertakings like electricity; water supply needs very less working
capital because offer only cash sales whereas trading & financial firms have a very
less investment in fixed assets but require a large sum of money invested in working
capital.
The size of business also determines working capital requirement and it may
be measured in terms of scale of operations. Greater the size of operation, larger will
be requirement of working capital.
2. Manufacturing Cycle:
The manufacturing cycle also creates the need of working capital.
Manufacturing cyclele starts with the purchase and use of Raw Material and
completes with the production of finished goods. If the manufacturing cycle will be
longer more working capital will be required or vice versa.
3. Seasonal variation:
In certain industries like VTM raw material is not available throughout the
year. They have to buy raw material in bulk during the season to ensure an
uninterrupted flow and process them during the year. Generally, during the busy
season, a firm requires large working capital than in the slack season.
30
4. Production Policy:
Production policy also determines the working capital level of a firm. If the
firm has steady production policy, it may require need of continuous working capital.
But if the firms adopt a fluctuating production policy means to produce more during
the lead demand season then the more working capital may require at that time but not
in other period during a financial year. So the different productions policy arises
different type of need of working capital.
5. Firm’s Credit Policy:
The firm’s credit policy directly affects the working capital requirement. If the
firm has liberal credit policy, hence the more credit period will be provided to the
debtors so this will lead to more working capital requirement. With the liberal credit
policy operating cycle length increases and vice versa.
6. Sales Growth:
Working capital requirement is directly related with sales growth. If the sales
are growing, more working capital will be needed due to arises need of more Raw
Material, finished goods and credit sales.
7. Business Cycle:
Business cycle refers to alternate expansion and contraction in general
business. In a period of boom, larger amount of working capital is required where as
in a period of depression lesser amount of working capital is required.
31
8. Earning Capacity & Dividend Policy:
If the firm has enough earnings and it is not paying dividend then it will not be
in need of external borrowings. If firm wants to increase its earning power then more
working capital will be required also to pay more dividend more profits are needed
which give rise to more working capital. Company is paying 42% dividend to its
shareholder.
9. Price Level Changes:
Changes in the price level also effects the working capital requirements.
Generally, the rising prices will require the firm to maintain larger amount of
working capital as more funds will be required to maintain the same current assets.
10. Condition of Supply:
The inventory of raw material, spares and stores depends on the condition of
supply. If the supply is prompt the firm can manage with small inventory. However if
the supply is unpredictable then the firm to ensure continuity of production, should
acquire stocks as and when they are available and have to carry larger inventory on an
average.
11. Other Factors:
Certain other factors such as operating efficiency, management ability,
irregularities of supply, import policy, asset structure, importance of labour, banking
facilities, time lag, etc,. also influence the requirement of working capital.
So these are the main determinants of working capital. The importance of
influence of these determinants on working capital may differ from firm to firm.
32
MEANING AND NATURE OF WORKING CAPITAL MANAGEMENT
The management of working capital is concerned with two problems that arise
in attempting to manage the current assets, current liabilities and the inter relationship
that asserts between them. The basic goal of working capital management is to
manage current assets and current liabilities of a firm in such a way that a satisfactory
of optimum level of working capital is maintained i.e. it is neither inadequate nor
excessive. This is so because both inadequate as well as excessive working capital
position is bad for business
Factors requiring consideration while estimating working capital.
The average credit period expected to be allowed by suppliers.
Total costs incurred on material, wages.
The length of time for which raw material are to remain in stores before they
are issued for production.
The length of the production cycle (or) work in process.
The length of sales cycle during which finished goods are to be kept waiting
for sales.
The average period of credit allowed to customers
The amount of cash required to make advance payment
ADVANTAGES OF ADEQUATE WORKING CAPITAL.
Increase in production inefficiency
Exploitation of favorable opportunities
Meeting contingencies adverse changes:
Available cash discount
Solvency and efficiency fixed assets.
Attractive dividend to shareholders
33
DANGERS OF INADEQUATE WORKING CAPITAL
Loss of goodwill and creditworthiness
Firm can’t make use of favorable opportunities
Adverse effects of credit opportunities
Operational inefficiencies
Effects on financial capacity
Non achievement of profit target
DANGERS OF REDUNDANT WORKING CAPITAL
Low rate of return on capital
Decline in capital and efficiency
Loss of goodwill and confidence.
Evils of over capitalization
Destruction of turnover ratio
CURRENT ASSETS IN RELATION TO SALES:-
If the firm can forecast accurately the factors, which effect the working
capital, the investment in current assets, can be designed uniquely. In case of
uncertainty, the outlay on current assets should consist of base component meant to
meet normal requirement and a safety component meant to cope with unusual
requirement. The safety component depends upon low conservative or aggressive in
the current assets policy of a firm. If the firm purchases a very conservative current
asset policy it would carry a high level of current assets in relation to sales. If a firm
adopts a moderate current assets policy it would carry moderate level of current assets
in relation to sales, finally is a firm follows a highly aggressive current assets policy,
it would carry a low level of current assets in relation to sales.
34
DETERMINING A SHORT TERM AND LONG TERM FINANCING MIX
FOR FINANCING OF CURRENT ASSETS:-
There are three approaches in this regard, which are discussed below:
HEDGING APPROACH
This approach is also called matching approach. In this approach there is a
proper matching of expected life of asset with the duration of fund. Usually,
according to this approach long-term sources are used for financing permanent current
assets and fixed assets & short-term sources are used for financing temporary current
assets.
Term financing
Fixed Assets
Time
35
Permanent current assets
Temporary current assetsShort term financing
Long term financing
ASSETS
CONSERVATIVE APPROACH
In this approach there is more reliance on long-term financing in comparison
to short-term financing. Even some part of the temporary current comparison to long-
term sources of finance because long-term sources are less risky in comparison to
short-term sources.
Temporary Current Assets
Short-term
financing
Permanent Current Assets Long-term financing
Fixed Assets
Time
AGGRESSIVE APPROACH
In this approach there is more reliance on short term financing and even a part
of permanent current assets is financed from short-term finance.
Temporary current assets Short term financing
Permanent current assets Long term financing
Fixed Assets
Time
36
ASSETS
ASSETS
2.2. LITERATURE SURVEY
Impact of Working Capital Management Policies on Corporate Performance—
An Empirical Study
Sushma Vishnani, Bhupesh Kr. Shah (2007)
It is felt that there is the need to study the role of working capital management
policies on profitability of a company. Conventionally, it has been seen that if a
company desires to take a greater risk for bigger profits and losses, it reduces the size
of its working capital in relation to its sales. If it is interested in improving its
liquidity, it increases the level of its working capital.
However, this policy is likely to result in a reduction of the sales volume,
therefore of profitability. Hence, a company should strike a balance between liquidity
and profitability. In this paper an effort has been made to make an empirical study of
Indian Consumer Electronics Industry for assessing the impact of working capital
policies & practices on profitability during the period 1994–95 to 2004–05.
The impact of working capital policies on profitability has been examined by
computing coefficient of correlation and regression analysis between profitability
ratio and some key working capital policy indicator ratios.
37
Working Capital Management: A Study on British American
Tobacco Bangladesh Company Ltd.
Md. Sayaduzzaman (2007)
The efficiency of working capital management of British American Tobacco
Bangladesh Company Ltd. is highly satisfactory due to the positive cash inflows,
planned approach in managing the major elements of working capital.
Applications of multi-dimensional models of current assets mix may have
positive impact on the continuous growth & development of this multinational
enterprise. This depends on co-operation of the stakeholders and business
environment in the context of globalization.
The Effect of Working Capital Management on Firm Profitability: Evidence
from Turkey
F. Samiloglu and K. Demirgunes (2008)
The aim of this study is to analyze the effect of working capital management
on firm profitability. In accordance with this aim, to consider statistically significant
relationships between firm profitability and the components of cash conversion cycle
at length, a sample consisting of Istanbul Stock Exchange (ISE) listed manufacturing
firms for the period of 1998- 2007 has been analyzed under a multiple regression
model.
Empirical findings of the study show that accounts receivables period,
inventory period and leverage affect firm profitability negatively; while growth (in
sales) affects firm profitability positively.
38
Working Capital Management, Growth and Performance of New Public
Companies
By Beneda, Nancy, Zhang, Yilei (2008)
The current study contributes to the literature by examining impact of working
capitalmanagement on the operating performance and growth of new public
companies. The study also sheds light on the relationship of working capital with debt
level, firm risk, and industry.
Using a sample of initial public offerings (IPO's), the study finds a significant
positive association between higher levels of accounts receivable and operating
performance. The study further finds that maintaining control (i.e. lower amounts)
over levels of cash and ecurities, inventory, fixed assets, and accounts payables
appears to be associated with higher operating performance, as well. We find that IPO
firms which are experiencing unusually high growth tend not to perform as well as
those with low to moderate growth.
Further firms which are experiencing high growth tend to hold higher levels of
cash and securities, inventory, fixed assets, and accounts payables. These findings
tend to suggest that firms are willing to sacrifice performance (accept low or negative
operating returns) to increase their growth levels. The higher level of growth is also
associated with higher operating and financial risk. The findings of this study suggest
that perhaps IPO firms should stay more focused on their operating performance than
on maintaining high growth levels.
39
Working Capital and Financial Management Practices in the Small Firm Sector
Michael J. Peel ,Nicholas Wilson (2008)
MICHAELJ. PEEL IS A LECTURER IN accountancy and finance at Cardiff
Business School, University of Wales, and Nicholas Wilson is Professor of Credit
Management at the University of Bradford, England. Very little research has been
conducted on the capital budgeting and working capital practices of small firms.
The purpose of this paper is to present the results of a preliminary study on the
working capital and financial management practices of a sample of small firms
located in the north of England.
In general, the results of the survey indicated that a relatively high proportion
of small firms in the sample claimed to use quantitative capital budgeting and
working capital techniques and to review various aspects of their companies' working
capital. In addition, the firms which claimed to use the more sophisticated discounted
cash flow capital budgeting techniques, or which had been active in terms of reducing
stock levels or the debtors' credit period, on average tended to be more active in
respect of working capital management practices.
It is hoped that the issues raised will stimulate further theoretical and
empirical contributions on this neglected and important area of small business
research.
40
3.1. RESEARCH METHODOLOGY:
To recognize the various type of information which are necessary for the study
of working capital management.
Collection of data from various department of Cheyayr sugar mill to analyze
the working capital management of Cheyyar sugar mill.
With the help of various techniques like:
- Ratio Analysis
- Common size statement
- Schedule of changes in working capital
- Hypothesis(t – test) and correlation
The overall position of Cheyyar Co-Operative sugar mill is studied and
analyzed
Suggestions are given on the basis of findings for better understanding of
working capital management.
HYPOTHESIS OF THE STUDY
1. There is no significant relationship between sales and net profit
2. There is no significant relationship between profitability and working capital
3.2. RESEARCH DESIGN:
The research design used in this study is historical research design. Historical
research design involves collection and evaluation of data related to past events that
are used to describe causes, effects and trends that may explain present or future
events.
41
3.3. DATA COLLECTION METHODS
For this study the data collected from the secondary sources. Secondary data is
one which already exists. It includes the following.
Annual reports of the company
Audit reports
Brochures mainly from balance sheet and
Profit and loss account
3.4. TOOLS USED FOR DATA ANALYSIS
In order to extract meaningful information from the data collected the data
analysis is carried out. The data analysis can be conducted using analytical tools.
The tools used for data analysis are as follows:
Ratio Analysis
Schedule of changes in working capital
Common Size Balance sheet and Income statement
Hypothesis and correlation.
Ratio Analysis:
Ratios are relationships expressed in mathematical terms between figures
which are connected with each other in some manner. Ratio analysis is the process of
identifying the financial strength and weaknesses of the firm by properly establishing
relationship between the items of the balance sheet and profit and loss account.
42
Schedule of Changes in Working Capital:
Schedule of changes in net working capital is a statement prepared to ascertain
the net change (increase or decrease) in working capital over period of time. An
increase in working capital is shown as a use of funds, while a decrease is shown as a
source of fund in the fund flow statement.
Hypothesis:
A hypothesis is a tentative statement that proposes a possible explanation to
some phenomenon or event. A useful hypothesis is a testable statement which may
include a prediction. A hypothesis should not be confused with a theory. Theories are
general explanations based on a large amount of data. For example, the theory of
evolution applies to all living things and is based on wide range of observations.
Common Size Balance sheet and income statement:
A company balance sheet and income statement that displays all items
as percentages of a common base figure. This type of financial statement can be used
to allow for easy analysis between companies or between time periods of a company.
A common size balance sheet is the same as a regular balance sheet. In a
common size balance sheet values are listed as a percentage of total assets. Knowing
the accounting equation assets-liabilities=owner's equity, makes reading the common
size balance sheet much easier. If you want to know if a company is thriving, the
common size balance sheet makes for easy analysis when comparing one company to
another.
Correlation:
The correlation is one of the most common and most useful statistics. A correlation is
a single number that describes the degree of relationship between two variables.
43
4. ANALYSIS AND INTERPRETATION
1. FINISHED GOODS INVENTORY TURNOVER RATIO:
This ratio is also called velocity of finished goods inventory. Inventory forms
a significant portion of current assets. If the ratio is fl at or falling it may indicate an
inherent conflict between the finance and marketing functions. The former tries to
reduce the stock level (so as to reduce the cost), while the latter tries to stock more
and more, so as to meet all demand. This ratio also draws attention to the lack of
synchronisation between the productive and distributive functions of the enterprise.
Cost of goods soldFinished Goods Inventory Turnover Ratio = -------------------------------------
Finished goods Inventory
4.1. TABLE SHOWING FINISHED GOODS INVENTORY TURNOVER RATIO
Year Cost of goods sold
Finished goods inventory
FG inventory turnover ratio
2004-05 355034416 183775308 1.932
2005-06 265364615 151990330 1.746
2006-07 625849835 357001439 1.753
2007-08 454487557 490219561 0.927
2008-09 795313278 548763562 1.449
44
4.1. CHART SHOWING FINISHED GOODS INVENTORY TURNOVER
RATIO:
Finished goods inventory turnover ratio
0.000
0.500
1.000
1.500
2.000
2.500
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Val
ues Finished goods
inventory turnoverratio
INTERPRETATION:
Finished goods inventory turnover ratio is very low in all the five
years. It shows the overstocking of finished goods. So, cheyyar sugar mill should try
to reduce the stock of finished goods.
45
2. DEBTORS TURNOVER RATIO:
This ratio is also called velocity of debtors. Debtors often form a signifi cant
portion of the current assets. This ratio reflects the changes in the level of debtors due
to changes in the level of sales. A decline in this ratio could be due to the failure of
the collection machinery or due to extended lines of credit granted.
Credit SalesDebtors Turnover Ratio = ------------------------------
Trade Debtors
4.2. TABLE SHOWING DEBTORS TURNOVER RATIO:
Year Credit sales Trade Debtors
Debtors turnover
ratio
Debtors collection
period2004-05 520576746 5071565 102.646 3.556
2005-06 409920400 1173552 349.299 1.045
2006-07 743339794 21627267 34.370 10.620
2007-08 519405425 7464340 69.585 5.245
2008-09 1045611684 1580407 661.609 0.552
46
4.2. CHART SHOWING DEBTORS TURNOVER RATIO
Debtors turnover ratio
0.000
100.000
200.000
300.000
400.000
500.000
600.000
700.000
2004-05 2005-06 2006-07 2007-08 2008-09
Years
valu
es
Debtorsturnover ratio
INTERPRETATION:
The debtors collection period is very less in the years. It shows Cheyyar sugar
mill collect its debt within 10 days. The credit period allowed to its customers is very
less. This low collection period is very helpful to the mill for the use of funds in the
day to day operation of the sugar mill.
47
3. CREDITORS TURNOVER RATIO:
This ratio reflects the purchase and payment policy of the firm; its
market standing; and the cash flow position. Lower the ratio, higher is the dependence
on creditors. It is similar to Debtor’ Turnover Ratio. It indicates the speed with which
the payments for credit purchases are made to the creditors.
Credit PurchaseCreditors Turnover Ratio = -----------------------------------
Trade Creditors
4.3. TABLE SHOWING CREDITORS TURNOVER RATIO
Year Credit purchases
Trade creditors
Creditors turnover
ratio
Creditors payment period
2004-05 214777826 37535749 5.722 63.789
2005-06 289958443 38726520 7.487 48.749
2006-07 479836735 45768636 10.484 34.815
2007-08 629593943 51758666 12.164 30.007
2008-09 495053595 42986250 11.517 31.694
48
4.3. CHART SHOWING CREDITORS TURNOVER RATIO:
Creditors turnover ratio
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
2004-05 2005-06 2006-07 2007-08 2008-09
Years
valu
es
Creditorsturnover ratio
INTERPRETATION:
This ratio is very high in first two years. But it is reduced in next three years.
So, the dependence on creditors is reduced. It shows the ability of Cheyyar sugar mill
in paying its debts within two months.
49
4. MARKET COMMAND RATIO:
This ratio measures the command of the enterprise in both the supply and sales
market. A market command ratio of 3, enables an enterprise to operate efficiently
even with zero net working capital, without endangering the liquidity of the business.
Debtors Turnover RatioMarket Command Ratio = ----------------------------------------
Creditors Turnover Ratio
4.4. TABLE SHOWING MARKET COMMAND RATIO:
Year Debtors turnover ratio
creditors turnover ratio
Market command Ratio
2004-05 102.646 5.722 17.939
2005-06 349.299 7.487 46.654
2006-07 34.370 10.484 3.278
2007-08 69.585 12.164 5.721
2008-09 661.609 11.517 57.446
50
4.4. CHART SHOWING MARKET COMMAND RATIO:
Market command Ratio
0.000
10.000
20.000
30.000
40.000
50.000
60.000
70.000
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Valu
es
Marketcommand Ratio
INTERPRETATION:
The market command ratio should be minimum three to operate in a zero net
working capital. In this case the market command ratio of cheyyar sugar mill is above
3 in all the years. It is very high, because the creditors turnover ratio is very low than
the debtors turnover ratio.
51
5. WORKING CAPITAL PERFORMANCE RATIO:
This ratio is primarily used for monitoring the performance of autonomous
divisions of an enterprise. Often minimum and maximum values of the ratio are
prescribed to lessen the dependence of divisions on financing from headquarters and
to check uncontrolled expansion of credit sales.
Trade DebtorsWorking Capital Performance Ratio= ---------------------------------
Trade Creditors
4.5. TABLE SHOWING WORKING CAPITAL PERFORMANCE RATIO
Years Trade Debtors Trade Creditorsworking capital
Performance Ratio
2004-05 5071565 37535749 0.135
2005-06 1173552 38726520 0.030
2006-07 21627267 45768636 0.473
2007-08 7464340 51758666 0.144
2008-09 1580407 42986250 0.037
52
4.5. CHART SHOWING WORKING CAPITAL PERFORMANCE RATIO:
working capital Performance Ratio
0.000
0.050
0.100
0.150
0.200
0.250
0.300
0.350
0.400
0.450
0.500
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Val
ues working capital
Performance Ratio
INTERPRETATION:
This ratio indicates the mode of financing of debtors. It is used more to control
working capital of the product or functional division of an enterprise. The division
may be asked to self finance its current operations, meaning thereby that the ratio
should be at least 1.
53
4.6. CASH TURNOVER RATIO
This ratio focuses on the cash holding policy of the firm. A decline in this ratio
indicates higher levels of idle cash. In India, due to the existence of the cash credit
system of working capital financing, many of the problems related to cash
management are not encountered. This ratio should normally be very high in Indian
enterprises.
Cash Operating ExpensesCash Turnover Ratio = ---------------------------------------------
Cash and Bank Balance
4.6. TABLE SHOWING CASH TURNOVER RATIO:
Year Cash operating Expenses
Cash and Bank balance
Cash Turnover Ratio
2004-05 71552261 669847 106.819
2005-06 95795944 37120037 2.581
2006-07 123049599 18824880 6.537
2007-08 141389248 5376747 26.296
2008-09 138838921 17145217 8.098
4.6. CHART SHOWING CASH TURNOVER RATIO:
54
Cash Turnover Ratio
0.000
20.000
40.000
60.000
80.000
100.000
120.000
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Val
ues
Cash TurnoverRatio
INTERPRETATION:
The cash turn over ratio of sugar mill is very high in first year. But it is
declining in the following years. It shows the higher level of idle cash. So, the
management should spend idle cash for financing of day to day expenses, and also for
the further improvement.
4.7. OVERTRADING RATIO
55
This ratio relates sales expansion with the net working capital base of the
enterprise. A low ratio indicates that the enterprise is engaged in overtrading. On the
contrary, a high value of this ratio indicates under trading, which results from under
utilisation of the sales generation ‘capacity of capital’.
Net Working CapitalOvertrading Ratio = -------------------------------
Credit Sales
4.7. TABLE SHOWING OVER TRADING RATIO:
Year Net working capital Credit sales Overtrading ratio
2004-05 91523562 520576746 0.176
2005-06 180206280 409920400 0.440
2006-07 273350714 743339794 0.368
2007-08 235445147 519405425 0.453
2008-09 145903196 1045611684 0.140
4.7. CHART SHOWING OVERTRADING RATIO
56
Overtrading ratio
0.000
0.050
0.100
0.150
0.200
0.250
0.300
0.350
0.400
0.450
0.500
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Val
ues
Overtradingratio
INTERPRETATION
Overtrading ratio is very low in all the five years. It shows the increase in
credit sales. That is lower ratio indicates the overtrading. It shows the under utilisation
of capacity of capital.
4.8. CREDIT STRENGTH RATIO
57
This ratio, also called the short term debt equity ratio, is widely used by firms
to maintain financial discipline. A very high value indicates overdependence on
current liabilities, which could be dangerous if it is not backed by a high asset margin
ratio.
Current LiabilitiesCredit Strength Ratio = -----------------------------------
Net Worth
4.8. TABLE SHOWING CREDIT STRENGTH RATIO:
Year Current Liabilities Net worth Credit Strength ratio
2004-05 172951865 459509074 0.376
2005-06 197683842 463516075 0.426
2006-07 193960970 471041008 0.412
2007-08 562969060 477877103 1.178
2008-09 241937722 481340111 0.503
58
4.8. CHART SHOWING CREDIT STRENGTH RATIO:
Credit Strength ratio
0.000
0.200
0.400
0.600
0.800
1.000
1.200
1.400
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Val
ues Credit Strength
ratio
INTERPRETATION
The credit strength ratio is good in first four years. In fifth year it is opposite.
Current liability should not go beyond the net worth value. It show the over
dependence on creditors.
59
4.9. CURRENT RATIO:
The current ratio is measure of the firm’s short-term solvency. It indicates the
availability of current assets in rupees for every one rupee of current liability.
A ratio of greater than one means that the firm has more current assts than
current claims against them.
Current AssetsCurrent Ratio = ---------------------------
Current Liabilities
4.9. TABLE SHOWING CURRENT RATIO:
Year Current Assets Current liabilities Current Ratio
2004-05 553158146 172951865 3.198
2005-06 471034556 197683842 2.383
2006-07 429406118 193960970 2.214
2007-08 708872256 562969060 1.259
2008-09 520987157 241937722 2.153
60
4.9. CHART SHOWING CURRENT RATIO:
Current Ratio
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Valu
es
CurrentRatio
INTERPRETATION:
The standard current ratio should be 2:1. first three years and fifth year the
current ratio of the sugar mill is in good positon .The current ratio of the firm is more
than 1 in all the years. In 2008 the ratio is very less compared to other years, this is
because of the ethanol project of the sugar mill. Ethanol project increased the value of
current liabilities.
10. QUICK RATIO
61
This ratio is also termed as ‘acid test ratio’ or ‘liquidity ratio’. This ratio is
ascertained by comparing the liquid assets (i.e., assets which are immediately
convertible into cash without much loss) to current liabilities.
Liquid Assets
Quick Ratio = -------------------------- Current liabilities
4.10. TABLE SHOWING THE LIQUID RATIO
Year Liquid Assets Current liabilities Quick Ratio
2004-05 25964085 172951865 0.150
2005-06 60622181 197683842 0.307
2006-07 68612639 193960970 0.354
2007-08 40820209 562969060 0.073
2008-09 44508234 241937722 0.184
4.10. CHART SHOWING THE LIQUID RATIO
62
Liquid Ratio
0.000
0.050
0.100
0.150
0.200
0.250
0.300
0.350
0.400
2004-05 2005-06 2006-07 2007-08 2008-09
years
Rat
io QuickRatio
INTERPRETATION
The above chart shows the liquidity position of the company. The liquidity of
the company is very less in all the years. The liquid ratio in 2008 is 0.073. It is very
less compared to other years. The liquid asset out of current assets is very less because
of over stocking of inventories
63
11. WORKING CAPITAL TURNOVER RATIO
This is also known as Working Capital Leverage Ratio. This ratio indicates
whether or not working capital has been effectively utilized in making sales.
In case a company can achieve higher volume of sales with relatively small
amount of working capital, it is an indication of the operating efficiency of the
company.
Net SalesWorking Capital Turnover Ratio = -------------------------------
Working Capital
4.11. TABLE SHOWING WORKING CAPITAL TURNOVER RATIO:
Year Net Sales Working Capital WC Turnover Ratio
2004-05 520576746 180206280 2.889
2005-06 409920400 273350714 1.500
2006-07 743339794 235445147 3.157
2007-08 519405425 145903196 3.560
2008-09 1045611684 279049435 3.747
64
4.11. CHART SHOWING WORKING CAPITAL TURNOVER RATIO:
WC Turnover Ratio
0
0.5
1
1.5
2
2.5
3
3.5
4
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Val
ues WC Turnover
Ratio
INTERPRETATION
The Working Capital Turnover ratio is very good condition in the year 2007,
2008 and 2009. This condition shows the management efficiency in effective
utilization of working capital in making sales. But it is totally it is low in 2005 and
2006. This is because of decrease in sales and increase in cash and bank balance.
65
4.12. Net profit Ratio
Net profit is obtained when operating expenses, interest and taxes are
subtracted from the gross profit.
Net profit ratio establishes the relationship between net profit and sales and
indicates management’s efficiency in manufacturing, administering and selling the
product.
Net Operating Profit
Net Profit Ratio = ----------------------------- * 100 Net Sales
4.12. TABLE SHOWING THE NET PROFIT RATIO
Year Net profit Net sales NP ratio (%)
2004-05 57199492 520576746 10.9877
2005-06 39279363 409920400 9.5822
2006-07 Nil 743339794 0.0000
2007-08 Nil 519405425 0.0000
2008-09
77850291 1045611684 7.4454
66
4.12. CHART SHOWING THE NET PROFIT RATIO
Net Profit Ratio
0
2
4
6
8
10
12
2004-05 2005-06 2006-07 2007-08 2008-09
year
valu
es NP ratio(% )
INFERENCE
The net profit is 10.98 in the year 2005. But it is reduced to 9.46% and 9.56%
in the years 2004 and 2006 respectively. In the years 2007 and 2008 there is no net
profit because the company faced the loss in these two years. This loss is because of
over operating expenses and increase in cost of raw material.
67
4.13. TABLE SHOWING THE INCREASE AND DECREASE IN WOKING
CAPITAL
years working capitalIncrease in
working capital
Decrease in working capital
2004-05 180206280 88682719 -2005-06 273350714 93144433 -2006-07 235445147 - 37905566
2007-08 145903196 - 89541952
2008-09 279049435 133146239 -
4.13. CHART SHOWING THE WORKING CAPITAL FROM THE YEAR
2005 TO 2009
working capital
0
50000000
100000000
150000000
200000000
250000000
300000000
2004-05 2005-06 2006-07 2007-08 2008-09
Years
wor
king
cap
ital
workingcapital
INTERPRETATION:
The working capital of the sugar mill is very high in the year 2009. But it is
very low in the year 2007-08. It is due to increase in creditors and decrease in debtors
and cash and bank balance.
68
4.14. SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR
2004-05.
Particulars 2004 2005 Increase Decrease
Current Assets:
Inventories 386106580 327194061 - 58912519
Sundry Debtors. 5704167 5071565 - 632602
Cash and Bank balance 778899 669847 - 109052
Loans and Advances 18024686 20222673 2197987 -
Total Current Assets (A) 410614331 353158146
Current Liabilities:
Creditors 315102261 167819091 147283171 -
Provisions 3988508 5132774 - 1144266
Total Current Liabilities (B) 319090769 172951865
Net Working Capital (A-B) 91523562 180206280 149481158 60798439
Increase in Working Capital 88682719 - - 88682719
180206280 180206280 149481158 149481158
INTERPRETATION:
The above table shows result of increase in working capital. The working
capital increased from Rs.9152562 to 180206280. This increase mainly due to
decrease in creditors
69
4.15. SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR
2005-06.
Particulars 2005 2006 Increase Decrease
Current Assets:
Inventories 327194061 410412375 83218314 -
Sundry Debtors. 5071565 1173552 - 3898013
Cash and Bank balance 669847 37120037 36450190 -
Loans and Advances 20222673 22328592 2105919 -
Total Current Assets (A) 353158146 471034556
Current Liabilities:
Creditors 167819091 192688188 - 24869097
Provisions 5132774 4995654 137120 -
Total Current Liabilities (B) 172951865 197683842
Net Working Capital (A-B) 180206280 273350714 121911543 28767110
Increase in Working Capital 93144434 - - 93144433
273350714 273350714 121911543 121911543
INTERPRETATION:
The above table shows result of increase in working capital. The working
capital increased from Rs.180206280 to 273350714. This wide increase in working
capital is mainly due to increase in inventory and cash and bank balance.
70
4.16. SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR
2006-07
Particulars 2006 2007 Increase Decrease
Current Assets:
Inventories 410412375 360793479 - 49618896
Sundry Debtors. 1173552 21627267 20453715 -
Cash and Bank balance 37120037 18824880 - 18295157
Loans and Advances 22328592 28160492 5831900 -
Total Current Assets (A) 471034556 429406118
Current Liabilities:
Creditors 192688188 189262755 3425433 -
Provisions 4995654 4698215 297439 -
Total Current Liabilities (B) 197683842 193960970
Net Working Capital (A-B) 273350714 235445147 30008487 67914053
Decrease in Working Capital - 37905566 37905566 -
273350714 273350714 67914053 67914053
INTERPRETATION:
The above table shows result of decrease in working capital. The working
capital decreased from Rs.273350714 to 235445147. This wide decrease in working
capital is mainly due to decrease in inventory and cash and bank balance
71
4.17. SCHEDULE OF CHANGES IN WORKING CAPITAL
Particulars 2007 2008 Increase Decrease
Current Assets:
Inventories 360793479 668051047 307257568 -
Sundry Debtors. 21627267 7464340 - 14162927
Cash and Bank balance 18824880 5376747 - 13448133
Loans and Advances 28160492 27980122 - 180370
Total Current Assets (A) 429406118 708872256
Current Liabilities:
Creditors 189262755 558347938 - 369085183
Provisions 4698215 4621122 77093 -
Total Current Liabilities (B) 193960970 562969060
Net Working Capital (A-B) 235445147 145903196 307334661 396876613
Decrease in Working Capital - 89541952 89541952 -
235445147 235445147 396876613 396876613
INTERPRETATION:
The above table shows result of decrease in working capital. The working
capital decreased from Rs. 235445147 to Rs.145903196. This decrease in working
capital is due to increase in creditors.
72
4.18. SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEAR
2008-09
Particulars 2008 2009 Increase Decrease
Current Assets:
Inventories 668051047 476478923 - 191572124
Sundry Debtors. 7464340 1580407 - 5883933
Cash and Bank balance 5376747 17145217 11768470 -
Loans and Advances 27980122 25782610 - 2197512
Total Current Assets (A) 708872256 520987157
Current Liabilities:
Creditors 558347938 237349711 320998227 -
Provisions 4621122 4588011 33111 -
Total Current Liabilities (B) 562969060 241937722
Net Working Capital (A-B) 145903196 279049435 332799808 199653569
Decrease in Working Capital 133146239 - - 133146239
279049435 279049435 332799808 332799808
INTERPRETATION:
The above table shows result of increase in working capital. The working
capital increased from Rs.145903196 to Rs.279049435. This increase in working
capital is due to decrease in creditors and increase in cash and bank balance.
73
4.19. COMMON SIZE BALANCE SHEET FOR THE YEAR 2005 AND 2006
Particulars 2005 % 2006 %
SHARE HOLDERS FUND
Share Capital 166187000 33.19 166461600 29.93
Share Deposit 3786418 0.76 7469304 1.34
Reserves & Surplus 289535656 57.82 289585172 52.07
Total Share Holders Fund (A) 459509074 91.77 463516076 83.35
Loan Funds:
Secured Loan 35397000 7.07 41711500 7.50
Unsecured Loan 5826802 1.16 50893235 9.15
Total Loan Funds (B) 41223802 8.23 92604735 16.65
Total Liabilities (A+B) 500732876 100.00 556120810 100.00
Fixed Assets:
Gross Block 367253261 73.34 374635248 67.37
Less:Accumulated Depreciation 304029119 60.72 310249104 55.75
Net Block 63224142 12.63 64386144 11.58
Capital Work in Progress 696865 0.14 696865 0.13
Total Fixed Assets (A) 63921007 12.76 65083009 11.70
Investments & Deposits (B) 941935 0.19 1302799 0.23
Current Assets:
Inventories 327194061 65.34 410412375 73.80
Debtors 5071565 1.01 1173552 0.21
Cash and Bank balance 669847 0.13 37120037 6.67
Loans and Advances 20222673 4.04 22328592 4.02
Total Current Assets 353158146 70.53 471034556 84.70
Less: current Liabilities & Provisions 172951865 34.54 197683842 35.55
Net Current Assets (C ) 180206280 36.00 273350714 49.15
Profit & Loss Account (D) -255663654 51.06 -216384288 38.91
Total Assets (A+B+C+D) 5007328756 100.00 556120810 100.00
74
4.20. COMMOM-SIZE BALANCE SHEET FOR THE YEAR 2007 AND 2008
Particulars 2007 % 2008 %
SHARE HOLDERS FUND
Share Capital 170466600 30.72 173332000 30.91
Share Deposit 10967496 1.98 14938191 2.66
Reserves & Surplus 289606912 52.19 289606912 51.65
Total Share Holders Fund (A) 471041008 84.89 477877103 85.23
Loan Funds:
Secured Loan 4240500 0.76 3469500 0.62
Unsecured Loan 79616100 14.35 79327200 14.51
Total Loan Funds (B) 83856600 15.11 82796700 14.77
Total Liabilities (A+B) 554897608 100.00 560673803 100.00
Fixed Assets:
Gross Block 386747724 69.70 395810623 70.60
Less:Accumulated Depreciation 316386045 57.02 322852607 57.58
Net Block 70361679 12.68 72958015 13.01
Capital Work in Progress 696865 0.13 696865 0.12
Total Fixed Assets (A) 71058544 12.81 73654880 13.13
Investments & Deposits (B) 1443808 0.26 1365581 0.24
Current Assets:
Inventories 360793479 65.02 668051047 119.15
Debtors 21627267 3.90 7464340 1.33
Cash and Bank balance 18824880 3.39 5376747 1.00
Loans and Advances 28160492 5.07 27980122 4.99
Total Current Assets 429406118 77.38 708872256 126.73
Less: current Liabilities & Provisions 193960970 34.95 562969060 100.40
Net Current Assets (C ) 235445147 42.43 145903196 26.03
Profit & Loss Account (D) -246950109 44.50 -339750147 60.6
Total Assets (A+B+C+D) 554897608 100.00 560673803 100.00
75
4.21. COMMOM-SIZE BALANCE SHEET FOR THE YEAR 2009
Particulars 2009 %
SHARE HOLDERS FUND
Share Capital 173319400 27.69
Share Deposit 18413799 2.94
Reserves & Surplus 289606912 46.28
Total Share Holders Fund (A) 481340111 76.92
Loan Funds:
Secured Loan 6679500 10.67
Unsecured Loan 77640800 12.41
Total Loan Funds (B) 144435300 23.08
Total Liabilities (A+B) 625775411 100
Fixed Assets:
Gross Block 401500935 64.16
Less:Accumulated Depreciation 328557408 52.51
Net Block 72943527 11.66
Capital Work in Progress 1189884 0.19
Total Fixed Assets (A) 74133410 11.85
Investments & Deposits (B) 10490108 1.68
Current Assets:
Inventories 476478923 76.14
Debtors 1580407 0.25
Cash and Bank balance 17145217 2.74
Loans and Advances 25782610 4.12
Total Current Assets 520987157 83.25
Less: current Liabilities & Provisions 241937722 38.66
Net Current Assets (C ) 279049435 44.59
Profit & Loss Account (D) 261899856 41.85
Total Assets (A+B+C+D) 625775411 100.00
76
4.22. COMMOM-SIZE BALANCE SHEET FOR FIVE YEARS(2005 to 2009)
Particulars 2005 2006 2007 2008 2009
SHARE HOLDERS FUND
Share Capital 33.19 29.93 30.72 30.91 27.69
Share Deposit 0.76 1.34 1.98 2.66 2.94
Reserves & Surplus 57.82 52.07 52.19 51.65 46.28
Total Share Holders Fund (A) 91.77 83.35 84.89 85.23 76.92
Loan Funds:
Secured Loan 7.07 7.5 0.76 0.62 10.67
Unsecured Loan 1.16 9.15 14.35 14.51 12.41
Total Loan Funds (B) 8.23 16.65 15.11 14.77 23.08
Total Liabilities (A+B) 100.00 100.00 100.00 100.00 100.00.
Fixed Assets:
Gross Block 73.34 67.37 69.7 70.6 64.16
Less: Accumulated Depreciation 60.72 55.75 57.02 57.58 52.51
Net Block 12.63 11.58 12.68 13.01 11.66
Capital Work in Progress 0.14 0.13 0.13 0.12 0.19
Total Fixed Assets (A) 12.76 11.7 12.81 13.13 11.85
Investments & Deposits (B) 0.19 0.23 0.26 0.24 1.68
Current Assets:
Inventories 65.34 73.8 65.02 119.15 76.14
Debtors 1.01 0.21 3.90 1.33 0.25
Cash and Bank balance 0.13 6.67 3.39 1.00 2.74
Loans and Advances 4.04 4.02 5.07 4.99 4.12
Total Current Assets 70.53 84.7 77.38 126.73 83.25
Less: current Liabilities & Provisions 34.54 35.55 34.95 100.4 38.66
Net Current Assets (C ) 36.00 49.15 42.43 26.03 44.59
Profit & Loss Account (D) 51.06 38.91 44.50 60.60 41.85
Total Assets (A+B+C+D) 100.00 100.00 100.00 100.00 100.00
77
INTERPRETATION
Total share holder fund decreased from 91.77% to 76%. It shows the decrease
in share of growers. Loan fund increased from 8.23% to 23.08. This wide increase in
loan funds is due to ethanol project of the sugar mill.
There is no wide fluctuation in total fixed assets. Profit and loss account is in
declining position. It shows the company is started to earn profit. The closing
inventory is very high in the year 2008 compared with other four years. This is
because of overstocking of finished goods.
Debtors are very low in the year 2009. This is because of the company is
reducing the credit sales. And it allows only short credit period to his customers.
Current liability of the company is very high in the year 2008. it is due to
ethanol project of the sugar mill.
78
4.23. COMMON SIZE INCOME STATEMENT FOR THE YEAR 2005-2006
Particulars 2005 % 2006 %
INCOME
Sales 520576746 100.00 409920400 100.00
Other Income 7287989 1.40 6766100 1.65
Non-trading Income 884207 0.17 765226 0.19
Release of Reserve & Provisions 76680 0.01 229520 0.06
Total 528825622 101.58 417681246 101.90
EXPENSES
Raw Material 273463034 52.53 327976257 80.01
Power, Fuel & Lubricants 4369910 0.84 4420108 1.08
Water Charges 546024 0.1 524768 0.13
Process Materials 2686665 0.52 3907930 0.95
Packing Expenses 9591132 1.84 11850404 2.89
Other Manufacturing Expenses 1122487 0.22 1399315 0.34
Salary and Wages 40374812 7.76 44567248 10.87
Repaire and Maintenance 7792850 1.50 15367600 3.75
Administrative Salaries 10462880 2.00 10564645 2.58
Administrative Overheads 8241885 1.58 9277780 2.26
Interest and Finance Charges 7508602 1.44 2110476 0.51
Excise Duty 34193287 6.57 24304352 5.95
Selling & Distribution Expenses 507492 0.10 335632 0.01
Depreciation 6351026 1.22 6419486 1.57
Reserve and Provision 1158880 0.22 90049 0.02
Increase / Decrease in Stock 63255164 12.15 -84714167 -20.67
Total Expenses 471626130 90.59 378401883 92.31
PROFIT (+) / LOSS(-) 57199494 10.99 39279365 9.58
79
4.24. COMMON SIZE INCOME STATEMENT FOR THE YEAR 2007-2008
Particulars 2007 % 2008 %
INCOME
Sales 743339794 100.00 519405425 100.00
Other Income 8626049 1.16 12845798 2.47
Non-trading Income 995119 0.13 390325 0.08
Release of Reserve & Provisions 312278 0.04 87164 0.02
Total 753273240 101.33 532728712 102.57
EXPENSES
Raw Material 543774887 73.15 717273373 138.1
Power, Fuel & Lubricants 5409740 0.73 5690396 1.1
Water Charges 660868 0.09 765645 0.15
Process Materials 6157975 0.83 10159195 1.96
Packing Expenses 19693010 2.65 24311172 4.68
Other Manufacturing Expenses 1455160 0.2 3054961 0.59
Salary and Wages 55255443 7.43 58609763 11.28
Repaire and Maintenance 15865632 2.13 18871248 3.63
Administrative Salaries 12922314 1.74 13213053 2.54
Administrative Overheads 10950888 1.47 11085917 2.13
Interest and Finance Charges 9294832 1.25 25602561 4.93
Excise Duty 46406933 6.24 35087556 6.76
Selling & Distribution Expenses 981677 0.13 2094461 0.4
Depreciation 6303108 0.85 6466563 1.24
Reserve and Provision 8399 0.001 10071 0.001
Increase / Decrease in Stock 48698195 6.55 -306767185 -59.06
Total Expenses 783839061 105.43 625528750 120.43
PROFIT (+) / LOSS(-) -30565821 -4.11 -92800038 -17.87
80
COMMON SIZE INCOME STATEMENT FOR THE YEAR 2009
Particulars 2009 %
INCOME
Sales 1045611684 100.00
Other Income 13394547 1.28
Non-trading Income 68899 0.007
Release of Reserve & Provisions 179953 0.02
Total 1059255083 101.3
EXPENSES
Raw Material 569528222 54.47
Power, Fuel & Lubricants 4956775 0.47
Water Charges 634534 0.06
Process Materials 10070805 0.96
Packing Expenses 17730207 1.70
Other Manufacturing Expenses 2803731 0.27
Salary and Wages 61484251 5.88
Repaire and Maintenance 20882729 2.00
Administrative Salaries 14674530 1.40
Administrative Overheads 8749164 0.84
Interest and Finance Charges 22767564 2.18
Excise Duty 49122490 4.69
Selling & Distribution Expenses 2557145 0.24
Depreciation 5704950 0.55
Reserve and Provision 146692 0.01
Increase / Decrease in Stock 189589003 18.13
Total Expenses 981404792 93.85
PROFIT (+) / LOSS(-) 77850291 7.45
81
4.26. COMMON SIZE INCOME STATEMENT FOR FIVE YEARS(2005 to 2009)
Particulars 2005 2006 2007 2008 2009
INCOME
Sales 100.00 100.00 100.00 100.00 100.00
Other Income 1.40 1.65 1.16 2.47 1.28
Non-trading Income 0.17 0.19 0.13 0.08 0.007
Release of Reserve & Provisions 0.01 0.06 0.04 0.02 0.02
Total 101.58 101.90 101.33 102.57 101.30
EXPENSES
Raw Material 52.53 80.01 73.15 138.10 54.47
Power, Fuel & Lubricants 0.84 1.08 0.73 1.10 0.47
Water Charges 0.10 0.13 0.09 0.15 0.06
Process Materials 0.52 0.95 0.83 1.96 0.96
Packing Expenses 1.84 2.89 2.65 4.68 1.70
Other Manufacturing Expenses 0.22 0.34 0.20 0.59 0.27
Salary and Wages 7.76 10.87 7.43 11.28 5.88
Repaire and Maintenance 1.50 3.75 2.13 3.63 2.00
Administrative Salaries 2.00 2.58 1.74 2.54 1.40
Administrative Overheads 1.58 2.26 1.47 2.13 0.84
Interest and Finance Charges 1.44 0.51 1.25 4.93 2.18
Excise Duty 6.57 5.95 6.24 6.76 4.69
Selling & Distribution Expenses 0.10 0.01 0.13 0.40 0.24
Depreciation 1.22 1.57 0.85 1.24 0.55
Reserve and Provision 0.22 0.02 0.001 0.001 0.01
Increase / Decrease in Stock 12.15 -20.67 6.55 -59.06 18.13
Total Expenses 90.59 92.31 105.43 120.43 93.85
PROFIT (+) / LOSS(-) 10.99 9.58 -4.11 -17.87 7.45
82
INTERPRETATION
There is no wide fluctuation in gross profit. But the net profit is fluctuating
year to year. In 2007 and 2008 the company was facing loss. It is due to over
operating expenses and increase in cost of raw material.
Packing expenses and salary and wages is also very high in the year 2008.
Cost of raw material is the main reason for this two year loss. In 2009 the company is
started to earn profit by reduction in cost of raw material and other manufacturing and
operating expenses.
83
HYPOTHESIS SETTINGS
Hypothesis settings for analyse the relationship between sales and net profit.
1. Null Hypothesis:
There is no significant relationship between Sales and Net Profit.
2. Alternative Hypothesis:
There is a significant relationship between Sales and Net Profit.
The following table shows the Shows the sales and profit of sugar mill for the
past five years.
Sales(Rs.in crore) X1: 52.06 40.99 74.33 51.94 104.56
Profit(Rs.in crore) X2: 5.72 3.93 -3.07 -9.28 7.78
4.27. Calculation of Relationship between Sales and Profit
x1 x2 _
x1-x1 _
x2-x2 (x1-x1)2 (x2-x2)2
52.06 5.72 -12.72 4.70 161.80 22.10
40.99 3.93 -23.78 2.91 565.49 8.46
74.33 -3.07 9.56 -4.08 91.32 16.61
51.94 -9.28 -12.84 -10.30 164.84 100.07
104.56 7.785 39.78 6.77 1582.69 45.78
323.89 5.10 2566.13 199.02
∑X1 323.89 ∑X2 5.10X1 = ------- = ------------ = 64.778, X2 = ---------- = ---------- = 1.019
n 5 n 5
∑X1 = 323.89
∑X2 = 5.096 _∑ (X1-X1)2 = 2566.13
∑ (X2-X2)2 = 199.02
84
∑ (X1-X1)2 + ∑ (X2-X2)2
SX1X2 = ------------------------------------------------------------------- n1 + n2 - 2
2566.13 + 199.02= ----------------------------
5 + 5 – 2
2765.15= ----------------
8
= 345.644
64.778 – 1.019
t = ---------------------------- _________________ √ 138.258(1/5 + 1/5)
63.759= ---------------------
11.758
= 5.422
Critical Value at 5 % level for 10-2 degrees of freedom is 2.306.
INFERENCE
Calculate statistical t value is greater than the critical value (5.422 > 2.306).
So, I reject null hypothesis and accept alternative hypothesis. I concluded that there is
a significant relationship between sales and net profit.
85
Hypothesis setting for analyse the relationship between profitability and working
capital.
1. Null Hypothesis:
There is no significant relationship between Profitability and Working capital
2. Alternative Hypothesis:
There is a significant relationship between Profitability and Working capital.
The following table shows the Shows the net profit ratio and working capital
ratio of sugar mill for the past five years.
Net Profit (X1): 10.98 9.58 -0.04 -0.18 7.45
Working Capital (X2): 2.88 1.49 3.16 3.56 3.75
4.28. Calculation of Relationship between Working Capital and Profit
x1 x2 _
x1-x1 _
x2-x2 _
(x1-x1)2 _
(x2-x2)2
10.98 2.88 5.38 -0.09 28.94 0.008
9.58 1.49 3.98 -1.48 15.84 2.19
-0.04 3.16 -5.60 0.19 31.36 0.04
-0.18 3.56 -5.60 0.59 31.36 0.35
7.45 3.75 1.85 0.78 3.42 0.61
28.01 14.84 110.92 3.20
_ ∑X1 28.01 ∑X2 14.84X1 = ------- = ---------- = 5.60, X2 = ---------- = ---------- = 2.97
n 5 n 5
∑X1 = 28.01
∑X2 = 14.84 _∑ (X1-X1)2 = 110.92 _∑ (X2-X2)2 = 3.2
86
∑ (X1-X1)2 + ∑ (X2-X2)2
SX1X2 = ------------------------------------------------------------------- n1 + n2 - 2
110.92 + 3.20= ----------------------------
5 + 5 – 2
114.12= ----------------
8
= 14.265
5.6 – 2.97
t = ---------------------------- _________________ √ 14.265(1/5 + 1/5)
2.63= ---------------------
2.389
= 1.101
Critical Value at 5 % level for 10-2 degrees of freedom is 2.306.
INFERENCE
Calculated statistical t value is less than the critical value (1.101<2.306). So, I
accept null hypothesis and reject alternative hypothesis. I concluded that there is no
significant relationship between net profit and working capital.
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CORRELATION COEFFICIENT:
Calculation of Correlation Co-efficient between net profit and net sales.
The following table shows the Shows the sales and profit of sugar mill for the
past five years.
Sales(Rs.in crore) X: 52.06 40.99 74.33 51.94 104.56
Profit(Rs.in crore) Y: 5.72 3.93 -3.07 -9.28 7.78
4.29. Calculation of Correlation Co-efficient between Sales and Profit
X Y
XY
X2 Y2
52.06 5.72 297.77 2710.04 32.72
40.99 3.93 161.04 1680.84 15.43
74.33 -3.07 -227.24 5525.54 9.35
51.94 -9.28 -482.01 2697.87 86.12
104.56 7.79 814.00 10933.00 60.61
323.89 5.10 563.57 23547.28 204.22
∑X = 323.89
∑Y = 5.10 ∑ XY = 563.57 ∑X2 = 323547.28
∑Y2 = 204.22
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5(563.57) – (323.89) (5.10) = ----------------------------------------------------- ______________________________________ √ 5(23547.28) - (323.89) 2 * 5(204.22) – (5.10) 2
2817.85 – 1651.84 = ----------------------------------------------------
_____________________________________ √ (117736.40- 104904.73) * (1021.10 – 26.01)
1166.01 = -------------------------------- ___________________ √ 12831.67 * 995.09
1166.01
= -------------------- ____________ √ 12768666.5
1166.01 = --------------
3573.33
= 0.326
Critical Value at 5 % level for 5-2 degrees of freedom is 0.878.
INFERENCE
The calculated r value is less than the critical value. So, I accept null
hypothesis and reject alternative hypothesis. I concluded that the correlation is not
statistically significant.
CORRELATION COEFFICIENT:
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Calculation of Correlation Co-efficient between Working capital and profitability.
The following table shows the Shows the profitability and working capital
ratio of the mill for the past five years.
Net Profit (X): 10.98 9.58 -0.04 -0.18 7.45
Working Capital (Y): 2.88 1.49 3.16 3.56 3.75
4.30. Calculation of Correlation Co-efficient between profitability and working capital.
X Y
XY
X2 Y2
10.98 2.88 31.62 120.56 8.29
9.58 1.49 14.27 91.78 2.22
-0.04 3.16 -0.13 0.0002 9.99
-0.18 3.56 -0.64 0.03 12.67
7.45 3.75 27.94 55.53 14.06
27.79 14.84 73.07 267.87 47.24
∑X = 27.79
∑Y = 14.84 ∑ XY = 73.07 ∑X2 = 267.87
∑Y2 = 47.24
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5(73.068) – (27.79) (14.84) = ----------------------------------------------------- _____________________________________ √ 5(267.871) - (27.79) 2 * 5(47.237) – (14.84) 2
365.34 – 412.40 = ----------------------------------------------------
___________________________________ √ (1339.355 – 772.28) * (236.185 – 220.226)
- 47.06 = ------------------------ _______________ √ 567.075 * 15.959
- 47.06
= -------------- ________ √9049.949
- 47.06 = --------------
95.13
= - 0.495
Critical Value at 5 % level for 5-2 degrees of freedom is 0.878.
INFERENCE:
The calculated r value is less than the critical value. So, I accept null
hypothesis and reject alternative hypothesis. I concluded that the correlation is not
statistically significant.
5.1. FINDINGS
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The finished goods turnover ratio is reduced from 1.932 to 1.144. It is
reducing year by year.
Debtors turnover ratio is 102.646 in the year 2005. But it is totally opposite in
the year 2009. i.e., the ratio is 661.609.
The creditors turnover ratio is increasing from 5.72 to 11.517. Creditors
payment period is reducing from two month to one month.
The market command ratio is fluctuation. In 2005, the ratio is 17.939. But in
the last year it is 57.446. In 2007 it is verys low compared to other four years.
There is no great fluctuation in the working capital performance ratio. It is
very low in all the five years.
The cash turnover ratio is not constant. In 2005, the ratio is 106.819 but in the
year 2006 it is 2.58. It shows wide variation in the cash operating expenses.
Overtrading ratio is very low in all the five years. There is no wide fluctuation
in this ratio.
Credit strength ratio is also constant. But in 2008 it is increase to 1.172. It
shows the current liability is higher than the net worth.
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The standard current ratio is 2:1. In this case the current ratio is above 2 in the
four year periods. But in 2008 it is below 2 because of increase in liabilities.
Working capital turnover ratio is very low in the year 2006 i.e., the ratio is 1.5.
It is because of decrease in sales.
The net profit ratio is very high in the first two years. But in the next two years
there was no profit, the company was facing loss. In 2009 again the company
started to earn a profit.
In the year 2004 the working capital was Rs.9152562 but it is increased to
Rs.180206280 in the year 2005.The net increase in working capital is Rs.
88682719
In the year 2005 the working capital was Rs.180206280 but it is increased to
Rs. 273350714 in the year 2006. The net increase in working capital is Rs.
93144433.
The net decrease in working capital is Rs.37905566, in 2006 the working
capital was Rs. 273350714 but in 2007 the working capital was Rs.
235445147
In the year 2007 the working capital was Rs.235445147 but it was decreased
to Rs.145903196 in the year 2008. The net decrease in working capital is Rs.
89541952.
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In 2009 the company was started to increase its working capital. The net
increase in working capital is Rs.133146239
In 2007 and 2008 the company was facing loss, but in 2009 the company was
earned 7.44% as the profit.
The total expense of the sugar mill is 93.85% in the year 2009. It is low
compared to previous year. In 2008 the expenses was 120.43%.
Investments and deposits of the Sugar mill is increased in the year 2009. It is
high when compared to previous years.
Inventory, debtors and current liabilities is in decreasing level. Secured loan is
increased in the year 2009.
The overall performance of the company in the year 2009-10 is good than
previous two years, because in the previous two years the company was facing
loss. In 200-10 the sugar mill has earned profit.
The working capital of the Cheyyar co-operative society is in satisfactory level
to meet its day to day expenses.
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5.2. SUGGESTIONS
Management should make the proper use of inventory control
techniques like fixation of minimum, maximum and ordering levels for all the
items for less blockage of money.
The company should also adopt proper control on finished goods and
other inverntory. Due to competition, prices are market driven and for earning
more margin company should give the more concentration on cost reduction
by improving its efficiency.
The company should reduce the cash operating expenses. The higher
cash operating expenses affects the profit of the company.
.
The cost of good sold should be in declining position. The cost of
goods sold is increasing year by year. So, the management should take
necessary steps to reduce it.
The company can increase the profit by reducing its overall expenses
especially manufacturing expenses.
It is necessary to control the Over stocking of finished goods that is
overstocking of sugar and molasses should be avoided.
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5.3. CONCLUSION
By conducting the study about working capital management it is found out
that the working capital management of Cheyyar Co-Operative Sugar Mill is good.
The overall financial position of the mill is in satisfactory level. Cheyyar sugar mill
has sufficient funds to meet its current obligation every time which is due to efficient
management of Cheyyar sugar mill.
This conclusion was drawn out by keeping in view the profitability and
solvency position of the sugar mill based on the authenticated and audited report of
the sugar mill.
The non-financial performance of the sugar mill has been impressive in terms
of capacity creation, production, utilization of resources and efficiencies. On the other
hand the percentage of recovery of sugar from sugarcane is very low. It implies the
need for the technological upgradation.
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BIBLIOGRAPHY
1. I.M. Pandey, Financial Management (Vikas Publishing House Pvt. Ltd., New
Delhi).
2. S.P. Gupta, Management Accounting (Sahitya Bhaven, Agra).
3. T.S. Reddy & Hari Prasad Reddy, Financial and management Accounting
(Margham Publications, Chennai).
4. Prasanna Chandra, Fundamentals of Financial Management (Tata Mc Graw-
Hill Publishing Company, New Delhi).
5. S.N. Maheshwari, Management Accounting (Sultan Chand & Sons, New
Delhi).
Websites:
1. www.google.com
2. www.Yahoo.com
3. www.cheyyarcosugars.net.in .
4. www.scribd.com
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